Topley’s Top Ten – November 26, 2019

Author

Matt Topley
November 26, 2019

1.New All-Time Highs in Equities Still Led by Large Cap.

When we examine theseareas of the broader market by way of the aggregated S&P 1500 Index, wefind that a total of 237 stocks (about 16%) within the index have moved to newall-time highs since October 1st. As shown in the chart below, we can see thatsome areas of the market are participating more in this rally than others.Large caps have led the way, not only by performance but also byheadcount, accounting for 116 of the 237 stocks (48.9%) moving to newhighs. Mid-caps are next in line with 94 stocks (39.6%), followed by smallcaps with 27 stocks (11.4%).

From Nasdaq Dorsey Wright  www.dorseywright.com

2.The Most and Least Heavily Shorted Stocks

Nov 25, 2019

The average stock in the large-capRussell 1,000 has 4.9% of its float sold short.  As shown below,Communication Services is the most heavily shorted sector, followed by ConsumerDiscretionary and Energy.  Utilities has the lowest short interest levelsalong with other relatively high yielding sectors like Financials and RealEstate.  For the Financials, it has been a big change since the CreditCrisis when the sector was one of the most heavily shorted areas of the market.

Below is a list of the most heavilyshorted individual stocks in the Russell 1,000.  Each of the stocks listedin the table have at least 20% of their float sold short.

Investors don’t believe in love at firstclick as online dating company Match Group (MTCH) is at the top of the listwith nearly 59% of its float sold short.  Cloud “Customer ExperienceManagement” company Medallia (MDLA) is the second most heavily shorted stockwith 46.6% of its float sold short, while home and business security companyADT ranks third at 37.5%.  Other notables on the list include retailersand other consumer discretionary names like Nordstrom (JWN), Dick’s (DKS),Macy’s (M), Mattel (MAT), Grubhub (GRUB), World Wrestling Entertainment (WWE)and of course, Tesla (TSLA).

Coincidentally, there are foursingle-letter stock tickers on the list of most heavily shorted stocks, andthree of them are W, X, and Z.  If only Alleghany (Y) had made it, we’dhave the last four letters of the alphabet covered!  That will be a longtime coming, though, because Alleghany (Y) is actually the 18th least shortedstock in the Russell 1,000 with just 0.77% of its float sold short.

Brown-Forman (BF/A) is the least shortedstock in the Russell 1,000 with just 0.20% of its float sold short.  Nike(NKE), Johnson & Johnson (JNJ), Philip Morris International (PM), PepsiCo(PEP), Altria (MO), Microsoft (MSFT), and Amazon (AMZN) are other notable nameson the list of least shorted stocks.  While tobacco companies like MO andPM certainly aren’t popular in the ESG space, their high dividend yields (which shortshave to pay) help keep the shorts away.

3.Biotech Breakout to All-Time Highs After 3 Years Sideways.

+22% Since October

4.History of November in Strong Years

AlmanacTrader notes “Going back to 1949 we are onpace for the 10th biggest year-to-date through November gains for the S&P500 – and it’s a healthy sign for the rest of the year and next. We crunchedthe numbers for the S&P 500 YTD gains as of the end of November. Average YTDNovember gains are 7.4%.”

Dave Lutz at Jones Trading

5.Defensive Assets Expensive-Bonds, REITS, GOLD.

Valuations: defensive assets are extremely expensive 

As I alluded to, based on myproprietary mix of valuation indicators the average valuations across thedefensive assets (treasuries, REITs, gold) is at the most expensive levelon record. Meanwhile the average across US equities, internationalequities, and commodities (growth assets) is still around quite reasonablelevels. Simply put: defensive assets are very expensive, and growth assetsare cheap. This is basically a market-based measure of a profound level offear, uncertainty, and pessimism on the economic outlook. 

6.Weed Takes Another Leg Down

‘CBD has the potential to harm you,’ FDA warns consumers

‘Number of questions regarding CBD’ssafety and there are real risks that need to be considered,’ official says aspot stocks fall in after-hours trading

Silvia Ascarelli/MarketWatch

CBD has been a popular additive to foods, cosmetics and more in the U.S.ByMAXA. CHERNEY

The U.S. Food and Drug Administration updated its stance on CBD late Monday, saying that the cannabis derivative may have the potential to harm users.Cannabidiol, or CBD, is a compound derived from the cannabis plant that is believed to be nonintoxicating. It has proliferated in drinks, cosmetics, foods and many other consumer products, even in states where marijuana is not recreationally or medically legal, including being sold in major retail chains such as CVS Health Corp . CVS, +1.69% , Walgreens Boots Alliance Inc. WBA, +0.12% and Rite Aid Corp. RAD, -0.73%.

Over the summer, the FDA warned that it waslooking into CBD and was concerned about its spread as the agency had onlyapproved one drug utilizing the compound — Epidiolex from GW PharmaceuticalsPLC GWPH, -3.69%. The regulatorupdated its summer warning to consumers on Monday evening with strongerlanguage, including a warning to Americans that “CBD has the potential to harmyou, and harm can happen even before you become aware of it.”

The FDA said that basedon a lack of scientific information, the regulator cannot conclude that CBD is“generally recognized as safe among qualified experts for use in human andanimal food.” The announcement also disclosed that 15 companies around the U.S.had been warned that they were illegally selling products containing CBD.

The compound “can cause” liver injury, affectother drugs, and when combined with alcohol or other depressants can increasethe risk of sedation or drowsiness, the revised consumer update reads.The FDA also detailed other potential side effects such as drowsiness,gastrointestinal distress and changes in mood.

Beyond the warnings,the FDA said that there were many aspects about CBD that remain unknown, suchas the effects of taking CBD daily for extended periods, on the developingbrain or how it interacts with herbs and botanicals. The agency responded to arequest for further information by pointing to tweets Monday evening fromPrincipal Deputy Commissioner Amy Abernethy.

Weed ETF

7. Kabbage Small Business Revenue Index  First Half of 2019 Trends:

8.The Private Equity Paradox

Small funds tend to deliver the bestreturns — but mega funds keep raking in capital.

Alicia McElhaneyNovember 05, 2019Henry Kravis, co-founder of KKR & Co. (Justin Chin/Bloomberg)

Institutionalinvestors continue to commit billions to massive private equity funds, despiteslowing deal flow and increasingly high levels of dry powder.  

Fiveprivate equity firms announced in as many days that they had raised anaggregate of roughly $42.2 billion to put to work in private equity. This isdespite data from groups like alternative asset manager Pantheon and data provider eFront thatshows that smaller firms and smaller buyout deals tend to deliver betterreturns for investors.

“Thereis an inherent tension in institutional investing,” Michael Rosen, chiefinvestment officer at Angeles Investment Advisors, said via email Tuesday. “Acritical mass of assets is necessary to attract and maintain sufficientresources to be able to identify superior investment ideas. But exceptionalinvestments are both scarce and capacity-constrained.” 

Public pension funds aresome of the major institutions deploying their capital into these mega-funds,meeting minutes show. And they have options: nearly 4,000 funds are in themarket, targeting fundraises of nearly $1 trillion, according to a July report from Preqin.  

“Asmall investment is hardly worth their effort, even if it is a greatinvestment, as it just won’t be big enough to have an impact on the largerportfolio,” Rosen said.   

Privateequity mainstay KKR & Co. announced Tuesday thatit had closed its largest-ever European fund with €5.8 billion ($6.4 billion),which it will primarily deploy in Western Europe. Investors included the Minnesota State Board of Investments,the California Public Employees’Retirement System, and New York City Employees’ RetirementSystem, among others, meeting minutes show.  

Alsoon Tuesday, a new private debt firm called Arcmont Asset Management,backed by Neuberger Berman’s Dyal Capital, announced that it had launched with€13 billion in assets under management.

“Peoplewill invest in these very big funds because they’re easy to invest in,” DavidLanchner, a spokesperson for private equity placement agent Triago, said byphone Tuesday. “Due diligence is easy, and you can invest a lot of money atonce.”  

Thisway, Lanchner said, investors can spend more time researching the smaller, moreniche strategies. “They get beta from the big funds and outperformance or alphafrom the smaller funds,” he added.  

Still,KKR and Arcmont weren’t the only funds to announce that they are raking in thedough this week.  

BrookfieldAsset Management said Monday that ithad closed its fifth private equity fund with $9 billion to deploy, exceedingits original $7 billion target. Investors included the South Carolina Retirement Investment Commission andthe New Jersey State Investment Council,meeting minutes show.  

Onthe same day, Altas Partners closed its second fundwith $3 billion to deploy. Investors included Louisiana State Employees RetirementSystem and a fewlocal county retirementsystems, according to meeting minutes.  

Inaddition, a November 1 Securities and Exchange Commissionfiling from Platinum Equity Capital Partners shows that it hasraised nearly $9.4 billion for its fifth fund. Investors include the Kansas Public Employees Retirement System andthe New Mexico State Investment Council. 

Therecan be attractive reasons to invest in mega-funds, according to Lanchner. Henoted that they have a small number of competitors when it comes to deals.“They would argue that they’re investing on a scale that other firms can’tinvest on,” Lanchner said.   

Andit’s not like these mega funds are just throwing money at any available deal.In fact, an August report fromEY showed that the number of deals completed by private equity firms in thesecond quarter declined by 11 percent year-over-year.  

Still,Rosen believes that the main function of these mega-funds is to help hugeinvestors deploy their capital.

“Themega-funds exist not to deliver exceptional performance, but to providecapacity for massive pools of capital seeking a home,” Rosen said. “If historyis a guide, and it is, most of these mega-funds will produce mediocre returns,which will (just) satisfy their investor base, and generate massive fees forthe GP. Win-win?” 

A previous version of thestory said that Arcmont had announced that it had raised €13 billion. This isnot the case. The firm spun out of another, and now manages €13 billion. II regretsthe error.

9.Billionaire Giving in 2018.

10.Surveys Are Mostly Bullshit

Posted November 12, 2019 by Michael Batnick

You’ve probably allexperienced something like this: You purchased something you never thoughtabout much, a Hyundai Santa Fe or a Yorkshire Terrier, for example, and now youcan’t stop seeing them everywhere. It’s almost like when Instagram startstargeting ads for you, only it happens in the real world and there are noalgorithms at work. This is known as the Baader-Meinhof phenomenon, morecommonly referred to as frequency illusion.

Mypersonal Baader-Meinhof are surveys. Before Animal Spirits became an anti-surveypodcast, I can’t remember paying attention to any of them. Now they’re all Isee. And the more I see, the stronger I feel about the fact that surveys aremostly bullshit.

Hereis Seth-Stephens Davidowitz on the matter in his excellent book, EverybodyLies:

Everybodylies. People lie about how many drinks they had on the way home. They lie abouthow often they go to the gym, how much those new shoes cost, whether they readthat book. They call i sick when they’re not. They say they’ll be in touch whenthey won’t. They say it’s not about you when it is. That say they love you whenthey don’t. They say they’re happy while they’re in the dumps. They say theylike women when they really like men. People lie to friends. They lie tobosses. They lie to kids. They lie to parents. They lie to doctors. They lie tohusbands. They lie to wives. They lie to themselves. And they damn surelie to surveys.

Why is this the case? In myestimation, a survey of one if you will, there are three main reasons whypeople don’t tell the truth, which I’ve pie-charted below.