Excerpts from published notes, full archive available on Bloomberg at ENTX upon request

 

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‘Nearly every Wall Street strategist (having been 20% plus too bullish coming into 2022, because they underestimated the Fed inflation response) now expects the next few months to see new lows tested, down to 3000-3300 on the S&P 500 in several cases.  It never pays to be contrarian for its own sake, but the pain trade is clearly a squeeze higher. The obsession with these spurious index targets, based on a simplistic earnings multiple/equity risk premium framework, never ceases to amaze me – as with the assumptions fed into any model, the old adage of garbage in, garbage out applies. And of course, in markets, with their psychological component via benchmark performance anxiety and crowding (nowadays reflected in option as much as cash activity), a deluded consensus call can unwind violently.’ - Market Insight, January 5th 2023

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‘....with big tech cost cutting accelerating and much of the pandemic demand ‘pull forward’ (e.g. in ecommerce, where having overshot 5ppts in 2020/21 we are back to the long term trend online growth share), and valuation metrics back to 2018-19 average or below, all we need is a new growth narrative for the wider tech sector to hurt consensus u/w positioning, which the arrival of the AI ‘application layer' may provide.’   - Market Insight, January 30th 2023

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‘Many are now thinking that the pause will have to be at 5.5% or higher, as implied market expectations have flipped from behind to ahead of the Fed, but there is a growing disconnect between the micro and macro levels. While there was wide dispersion in the Q4 results, companies are not broadly reflecting an accelerating US inflation/tightening labour market narrative, quite the contrary. The S&P 500 remains stuck in a broad 5–600-point trading range since last summer, as reiterated in the 30th January note. Although technical analysts are now hyperventilating about downtrends and moving averages being broken to the upside, to see a rerating from a late teens multiple, we need to see a big shift in the equity risk premium driven either by an earnings reacceleration or much bigger bond rally.’ Market Insight, 28th February 2023

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‘…it’s important that it doesn’t distract the Fed from getting the job finished on inflation (i.e. the Arthur Burns 1970s error) – the same is even more true for CS and the ECB. The IB talking heads demanding an instant monetary policy pivot were doing the same for the UK last October...the view that it represents the tip of a systemic duration risk iceberg and a tipping point for deep recession looks overblown, as with the read across to Europe/Japan at an earlier stage of the policy/NIM cycle, the CS saga notwithstanding. After the endless series of crises, this is no Lehman shock, even if Swiss regulators finally put it out of its misery (we can only hope).’ - Market Insight, 16th March 2023

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'I took a sanguine ‘glass half full’ view at the beginning of the year because consensus expectations were exceptionally low for corporate earnings generally and large cap US tech specifically. A key point has been that while the equity risk premium was uncompelling and absolute equity/credit multiples in the historical top few percentiles ex EM/Europe, historically high global nominal GDP growth was a bullish tailwind for nominal corporate earnings. The consensus bearish stance was reflected in positioning, which began to get squeezed from February. The underweight in US equities (and reallocation to Europe) deepened through Q1, particularly among global value funds, and largely paid off in index terms but in terms of aggregate IBES bottom up earnings estimates for Q2, the US seems set to see the biggest relative upgrades.' Market Insight, 5th May 2023

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'For all the headline hype about highest (nominal) market level in 33 years, on a real and FX adjusted basis Japan has been a laggard with plenty of further room to play catchup in relative valuations. Foreign inflows have resumed after a strong reporting season, above consensus growth and a perception among US investors that Japan is now key both militarily and in terms of tech supply chains to China decoupling. Global funds remain underweight Japan and the recent six weeks of net buying has nowhere near offset the huge selling that persisted for most of last year. I’ve recommended an overweight stance focused on a high conviction list of undervalued deep IP moat names. Indeed, Japan is a disproportionate share of the thematic stock baskets. Over the past decade, these niche global dominance plays have delivered many spectacular large cap performers worthy of US SaaS (such as digital motor maker Nidec which delivered over 10x in the decade through 2021, by which time it had become a must own for foreign funds reached an Nvidia level PER and I took profits.' Market Insight, 25th May 2023

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‘I highlighted bullish bond convexity in the last note and added a TLT long, but it also applies to CTA equity exposure into year end. Now that the consensus has firmed on the hiking cycle’s end, a sustained rally into year-end will need bond volatility to normalize further. The VIX fell 30% last week, the ninth largest weekly decline in history, which will boost equity allocations given that equity volatility is a key input for many of these systematic funds, although MOVE probably matters more given the multi-asset focus on yields and the pass through to the ERP (which touched zero before last week’s rally).  If the US 10-yr settles in a 4-4.5% range into Q1, buy backs running at ~$5bn daily would trigger a CTA positioning reversal alongside the potential for HF re-leveraging, so there is equity upside right now in terms of positioning/flows, particularly in rate sensitive sectors. Overall, the macro picture is in line with a marked slowdown in momentum after a blockbuster Q3. An inflection point may have been reached last week making a test of 4% on the 10-yr more likely than a retest of 5 over the next few months...’ - Market Insight, 6th November 2023

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'A key question this year will be whether we are still early in the bubble inflation phase for AI as a market driver or about to get a reality check as it proves slow to monetize. We’re not in a bubble right now on any historical definition (and the biggest in 2020/21 was in sovereign debt), and a question worth pondering is whether we are in Japan 1985 or 1989, or Nasdaq 1997 or 1999? The S&P 500 trades at 20x forward/5% earnings yield, with the big 8 tech on 28x, but even that multiple is a fraction of the parabolic lunacy seen in 1999/2000 and the ‘biggest Nasdaq annual rise since 1999’ headlines are deceptive. We saw a mean reversion of 2022’s growth/quality factor losses and a key question is whether AI now does to the market over the next 12-18mths what the internet did 25 years ago and drives a climactic FOMO melt-up. That is feasible, particularly if the policy backdrop via liquidity/rates is supportive...'  Market Insight, 3rd January 2024

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