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According to Bloomberg the worlds top tech stocks have gained $1.7T in value in the beginning of the year…….


Elon Musk Versus the Haters

Before jumping on a plane to London later this evening this article popped into my feed – Elon Musk Versus The Haters

Mark Spiegel likes to think of himself as a car guy. That’s why he began shorting the stock of Tesla Inc., the electric-car maker that is part of CEO Elon Musk’s mission to save the planet, starting with the auto industry. “I’m a total car nut; cars fascinate me,” says Spiegel. That said, he has never driven a Tesla. It just doesn’t interest him. “I’m more into sports cars,” he explains. As for the environmental benefits Tesla promises, he says, “I am agnostic on that.”

But the 56-year-old hedge fund manager has an opinion on Tesla’s high-flying stock — and it’s bad. Dressed in khakis and a baby-blue polo shirt when we met recently for drinks at the Pierre hotel’s art deco cocktail lounge in midtown Manhattan, Spiegel is a wiry ball of energy who explains how selling commercial real estate to guys running garbage and garment companies in the Bronx and Queens taught him that business is “sharklike.” He’s jazzed up on two Diet Cokes and talks almost nonstop about Tesla’s financial woes, ranting about what he calls the deceptiveness of Musk, the man whose supporters believe is the reigning visionary of Silicon Valley following the death of Apple co-founder Steve Jobs.

“Tesla is a zero,” Spiegel declares, reiterating the theme of his short presentation at the Robin Hood investment conference last November — a thesis that boils down to the fact that Tesla has been burning through cash and losing hundreds of millions of dollars a quarter, and will face a slew of electric-car competitors over the next few years. These include rivals like Porsche, which is what he drives. “Tesla is losing a massive amount of money with no competition, and yet massive competition is coming,” he says.

Spiegel has become something of a zealot on Tesla. His small hedge fund, Stanphyl Capital Management, runs a mere $8.5 million, given that it was down 20 percent this year through August. That’s largely due to his short of Tesla, which had gained 74 percent this year, making it the worst-performing short of the year through September 20, according to S3 Analytics, a firm that tracks short sales. Tesla is also the biggest short in the U.S. market; about 27 percent of Tesla’ free float is short, for a value as high as $10 billion. Even so, Spiegel says he has gotten a “lot shorter” as the stock has soared; it’s now 25 percent of his fund. “The bigger the position gets, especially when it’s going against you, the more it tends to focus your mind,” he says.

This first section is extremely instructive and a terrific lesson in what not to do. My first comment would be a rather churlish one – $8.5M is not a hedge fund, its a personal  account and given that the fund has a concentration bet on TSLA going down one could say it is perhaps not the most savvy fund going around. Nor is it surprising that it is only $8.5M. However, what is interesting is the degree of obsessiveness displayed by Speigel with regard to TSLA and particularly Elon Musk. Musk is a polarising figure – particularly for short sells of all sizes who seem to be fixated on him. This fixation is intriguing because it is a form of displacement – this displacement to an external agent is used to generally allay anxiety in the face of some form of calamity. In simple terms it is easier to blame someone else than to take responsibility for your own actions.

…..Einhorn, too, is losing money shorting Tesla as part of what he calls his “bubble basket,” as is renowned short-seller James Chanos of Kynikos Associates, who has been railing against Tesla for at least two years on CNBC and at numerous conferences. He has gone so far as to call Tesla a cult.

“If you wouldn’t short a $65 billion company with negative free cash flow, questionable accounting, an executive exodus, in a soon-to-be-competitive industry, what would you short?” Chanos said in a September 20 interview with Institutional Investor, telescoping a litany of the short sellers’ complaints.

Tesla may have briefly surpassed General Motors Co. in terms of market capitalization, but it is swimming in red ink. Its cumulative losses have hit $3.7 billion, and negative free cash flow was $1.8 billion as of June 30. Both numbers are expected to get worse before they get better. Negative free cash flow could hit $4.7 billion this year, for an unprecedented total cash burn of $10.6 billion, says Sanford C. Bernstein analyst Toni Sacconaghi.

Small wonder everyone who’s anyone in Wall Street’s small and clubby world of short sellers has been short Tesla at one point or another. Citron Research’s Andrew Left, famous for his bomb-throwing short research, was one of the first to publicly attack Tesla, in September 2013, three years after it went public, when it was trading around $180. He warned investors that “the stock is perched at a level of extreme unsustainability.” He reiterated his short arguments this summer, when it was trading at $327. Another Tesla basher is retired short-seller David Rocker, who says Tesla “is one of the most incredulous divorces between facts and dreams” he’s seen in a 50-year career of investing. Rocker has 2 percent of his net worth short Tesla, and he also has become an investor in Stanphyl Capital……

As they say misery loves company – what is interesting is that traders with the same narrative tend to cluster around. Confirmation bias is a large problem in trading because traders dont want to hear a differing opinion they want to hear their opinion mirrored back to them as if it were correct. Such traders will keep asking people for their opinion until they get the same opinion as theirs. All other opinions are discarded and then their own opinion is reinforced.

You notice to how the narrative is simply a story that someone has created and the more desperate the situation becomes the more the narrative is clung to as fact. Poor traders never realise that their narrative is simply a story it is not fact – the fact is that TSLA is up 72% this year and in the first half of the year made a continual series of new 52 week highs. These are the facts and you they do not alter whether they are believed or not. Price has no capacity at all to absorb anyone’s narrative, therefore it doesn’t care because there is no way to enforce a narrative on price. You may get lucky and price and narrative may briefly align but then this is just luck it has nothing to do with idiosyncratic notions of personal ability. With regard to the future of TSLA – I have no idea and nor does anyone else. It may go to zero or it may go to the moon.

The Joy Of Looking Backwards

The other day whilst pulling into my gym I hit a magpie. Not a brilliant start to the workout since my favourite alarm clock is the sound of magpies singing and I have made friends with all the magpies in my area – obviously not the one I ran over. I only knew I had hit it because I saw it in my rear vision mirror, anything that literally runs under a car cannot be seen in advance, you only know after the event. The reason I bring up this tale of ornithological genocide is that whilst having a glance at what markets had done over night a news item popped up in the corner of the screen boldly claiming alarm at the level of margin debt that is powering particularly the US  stockmarket. My initial thought was so what, as was my second thought but I used to occasionally look at margin debt and the cost of seat sales on the NYSE just as something to look at. So I thought I would take a look and being too lazy to generate my own chart I found someone else’S. The chart below comes from Advisors Perspective and it shows the level of margin debt compared to the S&P500.

Margin Debt

As you can see the level of margin debt is at a higher level than at any point in history and you can also see that peaks in margin debt seem to be positively correlated with market peaks. However, my initial thought still stands….so what. The reason I have such an opinion can be found in my rather one sided run in with a magpie. I only knew I had hit it by looking in the rear vision mirror – looking backwards post an event tells you a lot about the event after the fact. It tells you nothing about the actual occurrence of the event since you were blind to that. This is true of indicators such as margin debt, forward PE’s, the VIX and any other host of things that seem at fist blush to be correlated with or predictive of the market. But we can only see that margin debt and market peaks might be correlated by looking back and trying to find a pattern.

The notion that margin debt is at a record high is largely an irrelevancy since it has been at record levels since late 2013 and since that time the market has advanced almost 25%. If you had taken margin debt as a forward or leading indicator then you would have exited the market three years ago. Back in the day when I first started this journey it was almost impossible to get closing prices from overseas – the information was obviously available just not transmittable. Now the information is not only available it is available in torrents of noise and this sort of data is part of the noise. There is very little signal involved and someday margin debt might still be at a record level and markets turn south but it will still only be something you see in your rear vision mirror.

Volatility and Stuff

With the situation on the Korean Peninsula threatening to give us another 9 years of MASH and with our own politician desperately trying to find relevance on the world stage by injecting themselves into the crisis I thought it might be interesting to see how markets viewed what was going on. Markets traditionally respond to uncertainty with a lift in volatility – this lift reflects not only the uncertainty but also the need to be compensated for the risk associated with this uncertainty. If things are really bad then markets lift volatility across the board. So to see if this was happening I took a small snapshot of major markets, looked at their 30 day historical volatility and then compared that with their long term average volatility.  I have marked those markets that are currently experiencing relatively low volatility in blue. The results of my straw poll can be seen in the table below.

HV Comp

Intriguingly the worlds largest market doesn’t seem to think much of the crisis, nor does gold which is usually seen as a barometer of such things. As to what these means I have no idea and historical precedents are not much help since it offers a slightly different picture. At the outbreak of the original conflict in 1950 volatility went through the roof  but during the Cuban missile Crisis which our idiot politicians are trying to compare it to only had an increase in volatility after the crisis ended and markets were recovering.

So what does it all mean? I have no idea but since it is only observational and not predictive it doesn’t really matter.



S&P 500 Panic Attacks


ETF’s that ate the world

Interesting graphic from the Investment Company Institute showing the flows of cash into index ETF’s and out of actively managed funds.


A Century of Evidence on Trend Following

AQR recently updated its paper A Century of Evidence on Trend Following and whilst the updated hasn’t changed the basic conclusion of earlier versions it is worth unpacking some of the main point of the paper.

The paper in its introduction makes an immensely important point that is lost on most –

As an investment style, trend following has existed for a very long time. Some 200 years ago, the classical economist David Ricardo’s imperative to “cut short your losses” and “let your profits run on” suggests an attention to trends. A century later, the legendary trader Jesse Livermore stated explicitly that the “big money was not in the individual fluctuations but in … sizing up the entire market and its trend.”

The thing I always find fascinating about trading, markets and people is that everyone is trying to reinvent the wheel. I understand this compulsion after all a new wheel sells but the basic technology of trend following and trading in general is as seen above centuries old. Yet these simple ideas somehow go by the wayside. Granted our own psychology gets in the way of following Ricardo’s simple missive of letting our profits run and cutting our losses short as we find being in the action more compelling than actually trading correctly. But even professionals have trouble following this rule as evidenced by the number of institutions who hold stocks as they grind their way into the ground.

In assembling the material for this paper AQR looked at the monthly returns for some 67 markets which were made up of four major asset classes – 29 commodities, 11 equity indices, 15 bond markets and 12 currency pairs. Which is no mean feat when you are going back a century. The results of this analysis can be summed up in few charts. To test the notion of trend following they adopted a simple strategy consisting of a 1- month, 3-month, and 12-month momentum strategy for each market. In this instance momentum does not refer to an indicator but rather price movement.  A long position was taken if the pat return over the look back period was positive, conversely a short position was taken if the return over the look back period was negative.

It’s a simple if it’s going up buy it, if it’s going down sell it strategy.

Position sizing was volatility based and the portfolios were rescaled monthly to make certain that the portfolio hit an annualised volatility target of 10%. Fees and charges were included in the testing.

Take home points

Trend following was profitable in every decade since 1880 as shown in the table below.

Exhibit 1

Trend following beats traditional 60/40 portfolios. The chart below looks at drawdowns during periods of financial stress. As can be seen trend following does very well during these periods. The authors posit that this occurs because of the simple ability of trend following to point themselves in the direction of the prevailing trend as dictated by Livermore’s dictum of deciding what the overall trend is.


Trend following produces outsized gains when markets are moving. In developing a trading system traders often simply look at the overall return of the system and if it is positive then they are happy. However, of equal importance is how those returns are derived. It has been my experience that the majority of returns are generated in a cluster of individual returns, that is the entire portfolio doesn’t do well but rather pockets of the portfolio do extremely well and drag the average up. In trading you want a strategy that produces outliers when the opportunity exists – you have to be a pig when the opportunity to be a pig presents itself.


The chart above illustrates this phenomena – the chart looks a little complex but it is only measuring two things. The performance of the US stock market on the horizontal axis and the performance of the momentum strategy on the vertical axis. The green line curving a path through the dots is known as a smile and it shows that trend following produces its best returns when markets are moving.  This harks back to the earlier point of being able to take advantage of market moves when they occur.

Trading is a simple profession since it can be summed up in three ideas. If it is trending up over the time frame you are trading you buy it.If it trending down over the time frame you are trading you sell it. Dont bet the farm. It is hardly rocket science yet despite this our very nature more often than not defeats us despite the evidence that it shouldn’t.

General Advice Warning

The Trading Game Pty Ltd (ACN: 099 576 253) is an AFSL holder (Licence no: 468163). This information is correct at the time of publishing and may not be reproduced without formal permission. It is of a general nature and does not take into account your objectives, financial situation or needs. Before acting on any of the information you should consider its appropriateness, having regard to your own objectives, financial situation and needs.