Crowded Trades Are Unwinding And It's Time To Take Advantage (William Koldus)

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Includes: AAPL, AMZN, CAT, DB, DIA, FB, JPM, PG, QQQ, SHW, SPY, TLT
by: Brian Bain
Summary

Earlier in 2018, it was the crowded short volatility trade that unwound, which was sparked by higher long-term U.S. interest rates.

U.S. long-term interest rates have been in a slow unwind for a majority of this year.

Recently, we have seen the long large-cap technology trade unwind.

Long oil has been unwound too, and so has short natural gas.

What's next?

Background for the Interview:

William (Travis) and Brian discuss what the crowded trades appear to be in today's markets, what to be careful of, and what opportunities the market may currently be offering investors.

For those who prefer to read, my full interview notes are copied below.

Link to Travis Koldus's original article:

Crowded Trades Are Unwinding, With One Big One Left To Go

Interview notes:

  • 2017 was an unnatural market (SPY) (QQQ) (DIA) environment with minimal drawdowns. It also appears to have represented the peak of the enthusiasm for this bull market and things began to unwind in January 2018.

  • Travis is seeing a series of crowded trades unwinding during this time such as the "short volatility" trade, rising interest rates (20-Treasuries (TLT) have been down consistently this year), FANG trade (At one point all of them were below 200-day moving avg), and oil.

  • How much of this price decline is reduced liquidity and central banks pulling back? It's part of it, but not that simple. Low-interest rates have amplified market trends into unnatural "super" cycles. Popular investment strategies are now reversing directions as investors had adapted their behavior to the market and now the market is changing and investors need to adapt again.

  • Valuations today are in excess of 1999/2000. P/E does not look excessive but you have to adjust for profit margins benefiting from cheap labor and commodities (primary costs).

  • The overvaluation is on a broad market level. This is where lack of wage pressure and low commodities have really impacted and boosted earnings (ex: Caterpillar (CAT), Sherwin Williams (SHW), Proctor-Gamble(PG)). Wage pressure is now rising and they are all seeing input costs rise as well.

  • Conversely, tech names like Apple (AAPL), Amazon (AMZN), and Facebook (FB). The P/Es for these companies are not nearly as over-extended as in 1999.

  • In this environment, the great opportunity is to be found in quality value stocks. Passive investors have done really well in the US for a while and growth has done well, etc. There have also been clear losers such as commodity equities and International Equities. For an example, you need to look no further than JPMorgan (JPM) and Deutsche banks (DB). Their performance difference has been striking.

  • Markets have been fearful of a repeat of 2007-08 (deflationary) but that is probably not what the problem is going to be. The Fed and everyone are afraid to recreate 2007-08 and fearful of normalizing interest rates.

  • There has been a bubble in US equities but the correction will likely not be in a 2007-08 decline because everyone is looking for that. The path to normalized valuations could be a different path.

  • The coming unwinding could be an inflationary market that looks extended like in the 1970's.

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Disclaimer: This article is for information purposes only. There are risks involved with investing including loss of principal. Brian and Investor in the Family make no explicit or implicit guarantee with respect to performance or the outcome of any investment or projections made. There is no guarantee that the goals of the strategies discussed by Brian and Investor in the Family will be met.

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.