Submitted by QTR's Fringe Finance
One of my favorite investors that I love reading and following, Harris Kupperman, has offered up his thoughts on one commodity that could be poised for a breakout.
Harris is the founder of Praetorian Capital, a hedge fund focused on using macro trends to guide stock selection. Mr. Kupperman is also the chief adventurer at Adventures in Capitalism, a website that details his investments and travels.
Harris is one of my favorite follows and I find his opinions - especially on macro and commodities - to be extremely resourceful. I’m certain my readers will find the same. I was excited when he offered up his latest thoughts, published below.
On Breakouts II
In my prior article about breakouts, I missed out on a chance to speak about the recent change in market structure, and what it means for all of us as investors.
Let’s go back in time a few decades. When I think about back then it felt like, most investors bought stocks, collected their dividends, and let things play out over multiple years. Of course, there were story stocks, stocks that moved rapidly and captured investor attention, but most stocks were boring and prosaic. As a result, most investors took a long-term view of things, buying shares and sort of forgetting about them.
As investor timeframes have condensed, investing became more aggressive in my view. No longer could you buy something cheap and wait for someone to notice. Instead, you had to buy something that would go up, and go up immediately. A valuation-based market evolved into a momentum-based one, and price suddenly meant everything. As an institutional investor, you had to keep up with your competitors. This was then accentuated by passive investing, which periodically re-weights indices, often based on market cap—hence companies that are appreciating in price tend to be the ones that receive endless waves of passive buying. Finally, the 24-hour financial news media would latch onto whatever stock that was making new highs and spin stories about why it would go higher, bringing in droves of retail investors, who were not only valuation-insensitive, but seemed to prefer buying new highs.
I believe this creates a highly reflexive and Pavlovian feedback loop, and the rules are increasingly simple: buy stuff that’s going up, don’t ask questions about valuation, and instead focus on narratives. Can the media spin this?? Will the story run out of runway?? Is there enough blue sky to make investors dream?? If the narrative can run, then you can rest assured that as it makes new highs, others will be forced to buy shares, while passive keeps re-allocating to whatever is going up fastest.
I’m not going to say that buying new highs didn’t work a century ago, in fact, it worked quite well. That’s simply how human psychology and markets have always functioned. However, I’m going to posit that new highs didn’t rocket a share-price with quite the same intensity as they do today. Instead, there was more of a give-and-take on the way higher, and the process played out over years, instead of months.
The converse of a momentum driven market is that downside momentum keeps feeding on itself. Of course, Paul Tudor Jones had this all figured out decades ago, but it’s always been a bitter pill to swallow for us value guys. I actually remember a time when something got so cheap that you could buy a downtrend and with some patience, you’d get paid for your analysis. Sure, it might take a few quarters, but valuation mattered. I increasingly think it matters less. There just isn’t a mechanism in place to arrest a share price in decline. To start with, passive is simply spraying the screen with shares as it re-weights to buy more of what’s going up. Then, you have all of the funds who’ve been preconditioned not to buy new lows. That strategy hasn’t worked in over a decade, and anyone who’s tried to buy new lows has been shredded, hence who’s going to buy?? If anything, active investors are going to keep selling new lows.
Of course, the company can buy back shares, and we’ve seen massive buybacks in companies trading for mid-single digit earnings multiples, but that’s a slow process that plays out over years. In the past, something that was cheap would attract investors and put a floor under the valuation, but as most investors stopped caring about value and instead became fixated on price momentum..(CONTINUE READING HERE).
