Man, Friday was ugly. The Nasdaq (NASDAQ:QQQ) got hit for a 3.5% loss, as tech stocks got punished. The S&P 500 (NYSEARCA:SPY) fell roughly 2%, while the Dow (NYSEARCA:DIA) managed a 1.5% loss, insulated by the defensive nature of many of its blue chip names.
The market has changed greatly over the past week. We're no longer tracking the price of oil (NYSEARCA:USO) or Chinese shares tick for tick anymore.
On Friday, oil was down somewhat, but it only sold off in the afternoon. By the time oil turned down, markets were already struggling badly, driven down by horrendous tech earnings. More on that in a second.
Biotech stocks (NYSEARCA:XBI) were down 4%. FANG stocks continue to get pounded. Amazon (NASDAQ:AMZN) broke $500, down 200 points from its recent peak. The 2015 playbook for generating alpha is badly misfiring this year.
The Matrix Is Malfunctioning
In recent Briefings, we've discussed how the market is beginning to look more and more like early 2000. In 1998 and 1999, storied investors such as Warren Buffett and Julian Robertson were decried as being too old and out of touch to understand the new economy.
During this time, tech stocks went to new heights on a weekly basis, while stodgy old economy stocks suffered. Value stocks were so badly out of favor that many funds in the area shut down.
Fast forward to 2014-15 and tech stocks were again flying. Generalist investors suddenly decided that biotech was the place to be. Cloud stocks took flight while mining, oil, and other earth-based industries were discarded.
It seems increasingly likely that the tide has turned. Consider the case of Matrix Capital Management. Here's what CNBC had to say about the firm in 2014:
Matrix Capital Management, which was founded in Waltham, Massachusetts, by one-time Tiger Management partner David Goel in 1999, is the second-highest ranked hedge fund this quarter, according to the research, thanks to strong technology picks like organizational software maker Tableau, the human resources application provider Workday and the professional network LinkedIn.
From "ruling the world" in CNBC's terms, Matrix has now fallen to the bottom of the heap. Courtesy of WhaleWisdom, check out Matrix' most recent holdings list:
It takes skill to own two different top holdings that both drop 40% on the same day. Let's survey the damage. Top holding Netflix (NASDAQ:NFLX):
NFLX data by YCharts
Here's Matrix' #2, Workday (NYSE:WDAY):
WDAY data by YCharts
Here's Tableau (NYSE:DATA), Matrix' (formerly) third largest position:
DATA data by YCharts
Stepping away from tech, Matrix managed to find another huge loser with Lion's Gate (NYSE:LGF), The Hunger Games film production company:
LGF data by YCharts
And finally, the coup de grace, LinkedIn (NYSE:LNKD):
LNKD data by YCharts
Those LinkedIn page hits recently from Matrix' office? They're probably analysts seeking new jobs - not them doing investment research.
What's the broader story here? That, like in all great booms, investment managers who ride the trend with sufficient concentration will occasionally look like geniuses for a time. But their stock picks often "work" because they hit a wave of market speculation rather than having any deep insight into the companies in question.
With Matrix' holdings, they were hugely correlated. Look at DATA, LGF, LNKD, and WDAY all collapsing on the same day. There's a difference between having high beta and having smart beta. Buying tech stocks and praying the Nasdaq keeps going up isn't a great investment strategy. Or as the market adage goes: "Don't confuse brains with a bull market."
Who's Working Overtime?
In a recent Briefing, we discussed demographic trends, particularly in Japan, that will make long-run economic growth difficult. Simply put, for investors with very long time horizons, it is hard to get excited about investing in countries where population is expected to decline over the course of your investment horizon.
Simplified greatly, GDP growth is productivity growth + population growth. So let's discuss one aspect on productivity growth; how many hours people work.
Productivity growth can come from either two sources, people working more hours, or people working more efficiently. Technology can aid efficiency; look at European economies with generally low hours worked but high rates of efficiency.
In emerging markets, people assume that productivity growth will come naturally as more capital is invested. However, there may be a side that people aren't considering. What happens if people earn more money and decide to work fewer hours? Consider the following chart:
Despite the reputation of the US as working very hard (some say too hard), as far as overtime goes, the US is actually in the middle of the pack. It trails other English-speaking nations including the UK and Australia, to speak nothing of other much more workaholic countries.
The general stereotype is true, in that Europeans are very unlikely to work overtime. Russia at 0.2% is a rather incredible figure in fact. If workers could profitably be deployed for more hours per week, there could be significant economic growth despite the country's rather alarming population shrinkage. Brazil stands out as another country with an underutilized workforce.
On the other hand, the Asian nations stand out as not having upside in this direction. Japan and South Korea see their workers at least twice as likely to work overtime as Americans, and nearly 4x as likely as most Europeans.
Given that Japan and South Korea also have very high levels of capital investments in their economy, and their workers are already working long hours, it is hard to see a constructive case for above average GDP growth from these nations, given their low birth rates.
Back in emerging markets, both Mexico and especially Turkey have very high rates of working overtime. Productivity gains in these economies would have to come from better use of capital to increase efficiency, rather than simply making their workers put in more hours.
Finally, as this column will never tire of pointing out, Latin American economies are very different. Look at the vast gulf between Mexico and Brazil. Mexicans - contrary to popular perception - work extremely hard. Brazilians, by contrast, are content with European levels of exertion. Is it any wonder that the Mexican economy will eventually overtake the Brazilian one in importance, despite the much smaller population base?
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.