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14 November 2020
Big Picture Long-Term video 13th 2020
Eoin Treacy’s view
A link to this week’s Big Picture Long-Term Video is posted in the Subscriber’s Area.
Quant Shock That ‘Never Could Happen’ Hits Wall Street Models
This article by Justina Lee for Bloomberg may be of interest to subscribers. Here is a section:
As money managers rushed to price in stronger economic growth, factor investors who dissect stocks by how much they’ve risen or fallen saw this strategy, known as momentum, crash on Monday like never before. Equities more sensitive to the economic cycle like value and small-cap names skyrocketed.
So while the S&P 500 is just shy of its record high, it’s been a wild week for quants even by the standards of this wild year, with many enduring violent moves rather than capitalizing on the risk-on mood.
All this recalls long-standing worries that freakish cross-asset gyrations are getting more common thanks to cheap money and investor crowding.
Quigley’s estimate for the odds of this week’s shock is in part tongue-in-cheek, based on a rule of thumb for a normal distribution of statistical data. Asset moves are not known to reliably obey this convention that says 98% of all data points occur within three standard deviations of the mean.
But even with the knowledge that market prices are more prone to outlier moves, a rotation of the magnitude seen this week was still a shock to risk models.
Eoin Treacy’s view
Quantitative strategies are designed to take advantage of relative small moves between asset classes that take place every day. They make money be sizing their positions according to the “normal” volatility in the ratios they monitor. 98% efficiency means that on any given day there is a 2% chance of a volatility event leading to unexpected losses. That’s acceptable for the vast majority of investors provided the incidence of outsized events remains low. The reason the credit crisis killed off so many fixed income macro strategies is because the dispersion in the returns broke out and stayed that way for a prolonged period.
Japan’s Biggest Profit Beat in Years Seen Boosting Stock Appeal
This article by Kurt Schussler for Bloomberg may be of interest to subscribers. Here is a section:
“The number of positive surprises in first-half results has been greater than expected, so gains in earnings revision should accelerate and we expect more funds to flow in from overseas,” strategists led by Masashi Akutsu said in a note this week.
Eoin Treacy’s view
Japan has come through the pandemic better than most other developed countries. That’s a particularly admirable result considering the large numbers of elderly people in the population. The prospect of a return to growth for the export-oriented portion of the economy has helped to spur interest in the Nikkei-225 over other domestic indices.
Brexit Talks Hit Make-Your-Mind-Up Time as Deadlines Pass
This article by Ian Wishart, Alberto Nardelli and Dara Doyle for Bloomberg may be of interest to subscribers. Here is a section:
The exit of one of Johnson’s top aide less than 50 days before the U.K. is due to leave the single market, and the planned departure of another, has injected fresh uncertainty into the process. EU officials have been left speculating whether the departure of two of the most senior figures from the Leave campaign increases or reduces the likelihood that the prime minister will walk away without a deal.
“I see what is happening now in Downing Street and see this as quite a chaotic situation,” Manfred Weber, leader of the largest group in the European Parliament and an ally of German Chancellor Angela Merkel, told BBC Radio on Friday. “We need a clear idea from Boris Johnson now, and I think it’s now time for leadership.”
In the negotiating room, there was little movement this week on the three key issues that have bedeviled the talks for the past eight months — the level playing field for business, access to U.K. fishing waters, and how any accord is enforced.
Progress on the first has been hampered by the U.K.’s reluctance to make specific commitments to abide by any future changes in the bloc’s rules, EU officials said. While both sides are inching closer to agreement on how any deal will be enforced, the U.K. is resisting EU calls for disagreements over the level playing field and fisheries to be included in any wider dispute-resolution system.
Eoin Treacy’s view
Dominic Cummings departure opens up the door for Boris Johnson to compromise on the Brexit deal. With the timing of the decision it is hard to reach any other conclusion. It also raises the question of how committed the UK will be to its ambitious program of investment in R&D or is Cummings perhaps leaving Whitehall for a well-compensated role as head up that organization?
Can Marijuana Help Biden Heal a Divided Nation?
This article by Tara Lachapelle for Bloomberg may be of interest to subscribers. Here is a section:
What’s more notable is that unlike in the past, all of this happened without much of a public uproar. To be fair, there have been bigger concerns on Americans’ minds these days. But this is the moment that cannabis companies and their investors have been waiting for: to be considered a legitimate industry rather than a hot voting issue. From here, the goal is to make weed every bit as normal as junk food, wine and other vices long found in stores across America.
In order for the industry to flourish it needs the federal government’s help, and the prospects of that are suddenly looking better. Two-thirds of U.S. adults are in favor of marijuana legalization — 91% if you include those who support it at a minimum for medicinal purposes, according to Pew Research Center. That’s more than the number of Americans who support abortion rights or who think human activity contributes to climate change.
Eoin Treacy’s view
President Trump was adamant in his opposition to easing restrictions on sales of cannabis. That contributed to a significant rationalization of the sector over the last couple of years where supply overwhelmed consumption. A number of the early winners in the sector went bust and the expansion plans of the some of the largest companies were heavily cut back. As new administration in the USA takes shape, enthusiasm at the prospect of a reclassification is gaining ground.
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