I’m sure like everyone else after yesterday’s (6/13/2018) approval of AT&T’s takeover of Time Warner I started to not only think about the decision’s impact on proposed deals still waiting for approval, but also for the flurry of deals that are likely to follow. Admittedly, these are rare events (only 0.5% of companies are actual targets), which is why I’m fortunate enough to work with a fantastic quantitative team that has already developed leading edge tools using Big Data and Machine Learning models to help focus the investment debate around those companies that have an increased likelihood of being the next takeover candidates. Their Systematic Merger & Acquisition Prediction model (Multi-Dimensional Alpha: Machine Learning Takeovers and SMAP Screen) is a great means to help identify potential targets and is particularly useful in side stepping takeovers on the short side.
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Utilities are once again flirting with decade long support as internals signal near-term capitulation by the bears. We’ve been here a few times since the sector peaked in November only to see each oversold rally fizzle out - there’s little consolation on a relative basis as utilities underperformance accelerates. The longer we languish at these levels, unable to exhibit meaningful momentum off of this crucial longer-term support level, the more likely we are to eventually break below in a violent fashion. Due to positioning and the consensus nature of the trade, I’ve been admittedly reluctant to buy into the end of 36-year bull market for bonds, but the longer this bond surrogate trades in this listless fashion, the more I question my conviction.
With growth severely outpacing its value counterpart by nearly 1000 basis points year to date (Russell 3000 Growth +9.2% vs. 3000 Value -1%), is it time to fade this recent strength? While the longer-term technical structure continues to favor growth, a few signs are developing that point to some shorter-term mean reversion within the context of the trends already in place. On a relative basis, growth has gone vertical and is now signaling a similar message to that which materialized before the sharp style rotation in mid-March. Historically, there’s been a solid relationship between the direction of the yield curve and growth vs. value, with the aggressive flattening of the past 18-months providing a strong tailwind for growth. I mention this because it looks like the curve is attempting to carve out an intermediate low.
I wanted to flag the note that my colleagues on the QES team published earlier this morning (Luo's QES Research - Stock Selection Models), where they introduced their new - Enhanced Systematic Insider Alpha Strategy (SIAS). While investors have focused on insider transactions for years, hoping to glean a sense of insider sentiment, their findings suggest that not all insider transactions are equally informative. The SIAS model incorporates both a fundamental and behavioral overlay, which helps to identify those “high conviction” trades that are predictive of future performance. As the charts below highlight, the results have been particularly compelling.
Maybe it’s my slight case of OCD (yes, I happen to place my black socks to the left of my blue socks in the drawer because “bla” comes before “blu” alphabetically – c’mon it just makes sense), but I like it when things lineup and grow apprehensive when they don’t. I mention this because while headline equity indices have generally looked past the latest headline coming out of Europe, Emerging Markets or D.C., credit markets are becoming increasingly uneasy. As the charts below highlight, this growing divergence is most pronounced between small caps and high yield. While I have preferred small caps for a multitude of reasons I'm also cognizant that they are more susceptible to tightening liquidity than their large cap brethren. Puzzled to say the least. Maybe I’ll go long HYG and short IWM while trying to figure out a better system for my sock drawer.
Chris Senyek had his latest “Earnings Quality” report out this morning (5/24/2018) (Avoiding Stock Blow-Ups - Earnings Quality (EQ) Refresh), and I always find it extremely helpful in identifying compelling shorts. Earlier this month it provided us with Middleby (A Toxic Combo - Bad Accounting Mixed with Poor Technicals) among other attractive short opportunities. The charts for Hannesbrands (HBI), Dominion Energy (D), Envision Healthcare (EVHC), Revlon (REV) and Kratos Defense & Security Solutions (KTOS) line up nicely with his accounting concerns.
Something just doesn’t feel right with global financials. Banks in particular remain under considerable pressure and seem to be sniffing out growing risk in the system. Whether it’s in emerging markets, Europe, or Australia, banks look increasingly distributive, as many well-known franchises trace out significant tops. Yes, it’s better in the U.S., but one has to question why relative performance has been peeling off recently even as the bulls finally got their long awaited breakout in yields through 3%. Small has been much firmer than large, as bellwethers such as Goldman and Citigroup look trace out tops, but on a relative basis, the struggles across the capitalization spectrum remain. Let’s hope my mounting anxieties are simply misplaced – I just wish credit wasn’t starting to come my way
Wolfe’s 11th Annual Global Transportation Conference kicks off tomorrow (05/22/18) (Wolfe Transport Conference Agenda), and I thought that it would be helpful to provide a little technical color on each of the presenting companies. Overall trends for the Transportation index remain constructive, but when I dig beneath the headline index, it becomes abundantly clear that the strength is not ubiquitous. The rails remain clear standouts, accelerating to all-time highs – strength that is currently being confirmed by fresh relative highs as well. Trucking along with Air Freight & Logistics are exhibiting solid momentum off of support; unfortunately, the same cannot be said for the airlines as they continue to languish, unable to generate any semblance of upward momentum. With multiple names hugging their respective support levels, will management’s commentary in the days ahead provide a much needed spark?
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