A Closer Look at ‘Giving Season’ in the Market

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Whitney Tilson’s email to investors discussing a closer look at ‘giving season’ in the market; a risk-free offer to try Empire Elite Trader; Texas’ GDP is larger than Mexico’s; GDP trivia.

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Q2 2021 hedge fund letters, conferences and more

1) Following up on my market and macro overview in my September 2 e-mail, I wanted to share another reason why I'm constructive on the market, courtesy of my colleague Enrique Abeyta.

Here's an excerpt from his missive yesterday to subscribers of his Empire Elite Trader newsletter...

A Closer Look at 'Giving Season' in the Market

Soon after launching Empire Elite Trader in 2019, my team and I wrote about one of our favorite subjects in the stock market – seasonality. As we discussed back in November that year...

As much as it goes against the efficient-market hypothesis – the idea that asset prices reflect all information available, making timing the market impossible – "seasonality" can play a huge role in the short-term movement of stock prices.

Even with the rise of "passive" investing, still more than half of assets in stocks are in actively managed funds (funds managed by people).

These funds are compensated based on their performance. For mutual funds, this performance is typically based on how much they outperformed or underperformed a certain index. For hedge funds, it's usually calculated on an absolute basis.

There's a weird quirk around these calculations of performance, though: They're all geared to end at the end of the calendar year.

If you step back and think about this, it really doesn't make any sense...

For instance, a manager could have a flat performance all year, then be up 15% in December and then get crushed in January, and he'll still collect a fat bonus.

Because managers are compensated based on the "mark" at the end of the year, they're highly incentivized to do whatever they can at the end of the year to create positive performance.

Our discussion focused on the extreme incentives that managers have at year-end to drive positive performance. Given that the benchmark S&P 500 Index is currently up more than 20% year to date, we suspect we will be revisiting this concept later this year.

While managers' strongest incentives are limited to just a few months of the year, there are still significant incentives for the four months between now and December.

Beyond the incentives, though, the more powerful factor is the psychological effect that positive performance has on volatility and risk management among managers.

The concept is very simple. If you are a money manager and your year-to-date performance is near flat or negative, you will generally be quite risk-averse.

You will be most risk-averse when your performance is flat because of a big psychological desire to mask negative performance of any kind... but you will also be risk-averse when you are down big.

With the U.S. stock market indexes up 15% to 20% year to date, though, the vast majority of money managers are positive on the year.

Maybe they aren't beating the market, but most of them are sitting on double-digit returns.

This has an incredible psychological effect on their trading.

Most objective observers would agree that we're in a positive period for the economy and stock market. While there are clearly challenges and risks, we have good economic growth, broad stability, and incredible monetary and fiscal liquidity.

We can always argue about risks, but most managers would agree that the market is pretty "good" right now – at least compared to a recession.

However, given the upward momentum in the stock market indexes – and drops in volatility – we are vulnerable to market corrections... and these can be fierce.

If most managers were flat on the year, they would be more likely to sell or "risk manage" into those corrections, which would exacerbate the downward volatility.

But since most managers are up nicely, they are much more likely to buy into any dips. This means that any corrections may prove short-lived and the upward bias in the market is likely to continue.

We have considerable data to prove this point. Just take a look at this table showing the 15 historical instances in the past 50 years (as well as this year's move) when the S&P 500 was up at least 15% through the end of August...

As you can see, the S&P 500 finished higher an amazing 86% of the time.

In fact, there was only one time the market got hit really bad – in 1987, with the major stock market crash.

Even including that year, the S&P 500 finishes up 5% on average... and if we remove that year from our calculations, it finishes up almost 7%.

Now, past performance is no true indicator of future performance and – as we learned with the incredible events surrounding COVID-19 in 2020 – anything can happen... but these are powerful factors, and we like the odds of the stock market continuing to move higher through year-end.

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Texas' GDP Is Larger Than Mexico's

2) Following up on yesterday's e-mail, Texas' GDP, at $1.9 trillion, is more than 50% larger than Mexico's $1.3 trillion... so my guess that Mexico's was 20% larger was quite far off.

Here's some other GDP trivia:

  • Among states, Texas' GDP trails only California's $3.2 trillion.
  • If Texas were an independent country (which many Texans would like, if bumper stickers are to be believed!), it would have the world's ninth-largest economy.
  • If California were independent, its GDP would rank fifth in the world, trailing only the U.S., China, Japan, and Germany, and ahead of the others in the top 10: the U.K., France, India, Italy, Brazil, and Canada.
  • To get a sense of how rich we are, Americans last year spent a record $49 billion on video games – and amount that exceeds the GDP of roughly half of the world's countries (specifically, it would rank 91st – just ahead of Azerbaijan, Bolivia, Jordan, and Paraguay).

Best regards,


P.S. I welcome your feedback at [email protected].