Size Doesn't Matter, Does It?

The 'size' factor has been a popular, longstanding risk premia, first identified by Rolf Banz in 1981. The factor is simple to follow: mid- and small-cap stocks (<$10B market cap) generally outperform large-cap stocks (>$10B market cap). The thesis seems to be borne out by empirical evidence: 

Or does it? There have been criticism of the size factor in the past, but research from AQR shows convincingly the real dynamic at play: Quality (consistency of earnings, low debt/equity ratio,higher margins, etc.). 

AQR provides a lot of evidence that after you adjust for their higher market beta, small-caps stocks do not outperform large-cap stocks. Shown below from monthly regression (1990-2020) on market factor plus lag (to take into account greater illiquidity of small cap stocks): 

The smallest stocks have an average beta of 1.35 and negative alpha! No statistically significant SMB premia. 

But if you take into account quality (in a separate study)...higher quality small cap stocks do outperforms large cap stocks. Adjust for quality, then you'll reap the size premium.

Fox & Friends Rebuffs Trump...CNBC's Cramer Embarrasses Himself

Trump announces weekly time slot on Fox & Friends, Steve Doocey throws shade: "You may want that....but Fox has not committed to that"...whoa!...also invites Joe Biden to similarly spend 47 minutes on their show. Brian Kilmeade's bewildered reaction is priceless:

Over at CNBC, Jim Cramer kept it classy and 'accidentally' called Nancy Pelosi "Crazy Nancy" to her face...before quickly apologizing and blaming Trump for the slip:

The March of Productivity

Productivity is the key to economic growth, wealth and higher standards of living. The below charts shows hours worked have improved since 1870 in developed economies (as productivity increased):

40 hrs seems to be the trough for several countries. 

The chart below highlights how differences in productivity impact working hours in developed and developing countries:

 

The Trump Presidency is a Publishing Bonanza

Trump has been great not just for cable news, but also the publishing industry. More than 1,200 unique Trump-related titles-- memoirs and profiles from ex-aides, ex-government officials, supporters and critics. The public seems to have an inexhaustible thirst for Trump drama or hagiography (depending on your persuasion) as evidenced by the sheer volume of sales for many of these books--which helps keeps the cycle going. The NYT and TNR have good stories on this phenomena.  

The biggest book of all appears to be Mary Trump's tell-all book about her uncle, that Trump sued to stop. It sold a record 1.3M copies in its first week; more than the 1.1M copies Trump's own Art of the Deal has sold between 1987 and 2016. Other massive best-sellers are Michael Wolff's Fire and Fury, Woodward's Fear (and likely his new one, Rage), Comey's A Higher Loyalty...A list of other books, both pro and anti-Trump is here:

 

Trump's Love-Hate Relationship with the Media

Trump appreciates the value of publicity--both good and bad. And the media loves ratings. They are perfect for one another, enthusiastically giving and taking umbrage. It's quite a show...Trump skillfully playing a pliant media that obsequiously covers every tweet, insult and outrage ('..but we have to...he's the President!'). It's worth it...revenue and profits have been rising sharply at cable news networks since he was elected, according to the Pew Research Center. He'll be missed by both Fox News and MSNBC, if current numbers hold.

  

Best Team Ever: Sacchi's AC Milan or Guardiola's Barcelona?

The documentary Take the Ball, Pass the Ball is playing on Netflix. It's based on Graham Hunter's book analyzing Barcelona's domination of club football during coach Pep Guardiola's reign from 2008 to 2012. It's a delight and shows the beauty of Barcelona's possession-by-passing system developed by Johan Cryuff and elevated by Guardiola.

The film is filled with references to legendary teams of past eras, including AC Milan under Arrigo Sacchi from 1987-1991. Both teams are on many people's short list of the best club team ever. So which one is better? It's unfair to compare clubs of different periods, but fun nonetheless. In terms of hardware, Barcelona is the clear winner. Under Guardiola, Barcelona won 3 La Liga and 2 European Cup titles, as well as 7 other minor titles, some of which were not around in the 1980s and 1990s. Under Sacchi, Milan won Serie A once and two European Cups and 4 other minor titles. 

But as both Sacchi and Guardiola have said, greatness is more than just about statistics. With the passage of time, people focus not so much what you won, but how you played. And both teams undoubtedly changed the game for the better. So who would win if both teams played each other at their prime?

Hmm, both teams had an abundance of talent, in addition to two outstanding coaches. Milan had a 4-4-2 line-up, Barcelona 4-3-3. Milan's defense anchored around Baresi and Maldini, is stronger. Barcelona's midfield, with Xavi and Iniesta, is better. In attack, Gullit and Van Basten are a formidable partnership, but Messi is the best player of his generation (and one of the best ever). If anyone can break down Baresi, it'd be him. On balance, I think the edge goes to Barcelona. A more comprehensive analysis says Milan, but you can find ten others that would argue Barcelona. We'll never know and that's why it's so fun!  

 

Messi to Stay at Barca!

Messi and Barcelona have come to agreement and the best player in the world will continue to play for the Catalan club next year. Great! 

He'll start training under new coach Ronald Koeman Monday, forgoing a potential reunion with former coach Pep Guardiola at Manchester City...at least for a year.  

USC Poll: Biden Widens Lead to +11%

Sep 8: The daily USC Dornsife poll shows Biden back in a double-digit lead and the biggest since Aug 30:

FiveThirtyEight  has a snapshot of nine different national polls from Sep 2-8 here. All, except the Rasmussen poll (+2%), shows a healthy >6% lead for Biden. Crucially, Biden is holding on to his lead in the swing states needed to reach 270 electoral votes:

SPACs, SPACs, SPACs!

SPACs (special purpose acquisition company) or "blank check" companies are hot right now. More than $30B have been raised this year through 75 SPACs. Everyone seems to be getting involved, the expected (Bill Ackman, Chamath Palihapitya), the unexpected (Paul Ryan, Billy Beane) and in-between (Gary Cohn). Companies from Virgin Galactic to DraftKings have merged with a SPAC (Airbnb's rebuff of Ackman's Tontine was a notable exception).

SPACs have been used to raise money since the 1980s but, until recently, were used mainly by distressed companies that couldn't access the pubic markets. No more. These days they are becoming a viable alternative to the traditional IPO. In a nutshell, SPACs raise capital in an IPO with the goal of using of the money to acquire an unspecified company within a set period of time. The target company becomes public through the merger. (E.g., Ackman's Tontine raised $4B recently, presumably to acquire a mature unicorn, like Airbnb).

Knowledgeable people, like Benchmark's Gurley, believe SPACs could be an appealing third option for founders & early investors (like Gurley) seeking an exit. (A direct listing, like Spotify's or Slack's, being option #2). But why? Unlike an IPO, SPACs (and direct listings) don't raise needed capital for the company, it only provides liquidity to existing shareholders. That's why!

Founders and VCs have complained that IPOs are usually under priced leaving billions on the table and disproportionately benefiting the Wall St firms running the process. SPACs and direct listing minimizes the middleman and gives companies better control of the process. Better to negotiate directly with an Ackman or Palihapitya than go on endless roadshows with fee-sucking bankers, right?

IDK. IPOs tend to be under priced because institutional investors demand a discount for taking the risk of buying shares that may tank once it starts to trade. The discount (or money on the table from founders' and VCs' perspectives) is the buffer that gets the IPO done. Companies raise money and founders get to cash out in six months.

Not sure how you get around the discount in a SPAC. Investors put $4B with Ackman presumably because they believed he could get them a good deal. So Tontine will be expecting the same discount, if not more. Instead of dealing with many investors of different levels of expertise and knowledge, the target company will be dealing with one experienced activist investor; sure he can add value to the company, but that is not going to be free.

So, as long as it does not end up in a Robinhood-like situation and you have thousands of SPACs being raised, I don't think companies are going get piles of more money out it. The IPO will still offer the best exit premium.

Key Issues in the 2020 Election

Recent Pew Research poll of Trump and Biden supporters reveals the issues central to registered voters:

1. The Economy: Very important to both camps. The US lost more than 22M jobs in the spring due to Covid-19. These charts highlight how much the economy has recovered and the long road still ahead-- the next few % drop in unemployment will be harder than the last, particularly as permanent job losses rise. The nature of the recovery is also increasing the disparity between the haves and have-nots.

2. Health care: Important, but more so for Biden's (82%) supporters than Trump's (48%). Biden  proposes to build on the ACA which is popular, while Trump has tried to dismantle Obamacare without an alternative.

3. Supreme Court picks: About evenly important to both camps. One of the most polarizing issues. (Need for reform?)

4. Covid-19: Much more important to Biden supporters (82%) than Trump supporters (39%). But could be the most important factor in the 2020 Election. The IHME model has a baseline forecast of 2.8M global deaths by the end of 2020 with 410k US deaths, second only to India (610k). (The much cited IHME model is controversial and often wrong.)

Biden +9% But Really Only +5%

Biden maintains a steady lead with 60 days to go...but the popular vote is, of course, different from the electoral vote and Biden's true lead is likely smaller--around 5%--because of a tighter races in battle ground states (Florida, Arizona, Michigan and Wisconsin). But as long as he's up 3% or more in the national polls that should be good enough. Nate Silver crunches the popular/ electoral vote differentials here.

So, who is voting for who? Geographically, at least, there's no surprise. Cities and suburbs to go for Biden, small towns and rural areas for Trump. While rural areas cover 97% of America's land area, they contain only 20% of the population. The Electoral College does not reflect that.

Strife at FOX News Over President's Fallen Soldier Comments

Jeffery Goldberg's Atlantic report about President Trump's disparaging comments about dead US service members is currently the top story (and growing) in the news/ election cycle. Biden has seized on it. Trump has angrily denied the story, highlighting its potential impact.

The report gained further credibility after it was backed up by FOX News journalist Jennifer Griffin. The  President has called for her to be fired. All of which is causing a lot of confusion at Trump-friendly FOX News. FOX's opinion shows and news programs are downplaying the comments, even as colleagues defend Griffin.

Which has (predictability) led to intense speculation about the source of the bombshell story. The press is focusing on former CoS Gen John Kelly. Kelly's silence seeming to confirm the rumors. Generals Mattis, Dunford and Allen also declined to comment. 

Will it have an impact on the election results? Unlikely...battle lines have already been drawn. 

Biden Up +9% in Pioneering Poll

USC-Dornsife daily poll: 51.6% (B) vs 42.1% (T)

Biden has led consistently throughout by 8%-10% since the start of the poll on 8/17. Biggest lead was on 8/25 at +14%. Poll methodology here. 

What Shape is the Recovery: V, U, W, L, K, Swoosh, Inverted Square Root?

There has been much speculation about the strength and 'shape' of the economic recovery after the national shutdown in April. A good description of the different shapes/ narratives (from the last crisis) is here, but an even better discussion is here. 

While the stock market has rallied back in the form of a Swoosh or check mark, the real economy has been slower to get going. ADP's private sector job growth numbers for Aug was well below expectations. The Aug jobs report is out tomorrow and even if it meets expectations of 1.4mm job growth, it would still be a sharp deceleration from May and June. So far, only 50% of the 20mm jobs lost between March and April have been recovered.

So the best description of this recovery seems to be:

   The mirror-image/inverted square root.

Batman Waylaid by Covid

The Corona virus ups the Joker, Penguin, Bane, Ra's al Ghul, etc. 

Showtimes' Comey Rule looks good.

The new Bond trailer is out.

U.S. Election Most Expensive Event Risk Ever

Hedging against potentially volatility from contested US election results is very, very expensive. Based on VIX futures price, it's currently the most expensive event risk on record. 

Even though most polls show Biden still holding on to a healthy lead, markets are pricing in inconclusive results---across rates, credit and equity...certainly more so than any previous election. That means a clear victory (either by Biden or Trump) should spur a sharp rally on Nov 4.

If not, add Nancy Pelosi as acting President to the mix!

Zoom!

Zoom founder/ CEO Eric Yuan'a net worth increased by $5.2B today as the stock shot up 41% after smashing quarterly earnings estimates. He was worth $16.4B at the market close. 

Tech billionaires have seen their wealth grow by ~$500B during this pandemic. A list of all the richest people is here.

Walmart+ Not Quite Prime

Walmart was up 6% today as it announced the Sep 15 launch of Walmart+, its Amazon-rival membership program. For $98/ year you get unlimited free delivery for orders over $35. Prime, by comparison, charges $119/ year for free deliveries with no minimums and a bunch of extra goodies, like Amazon Video and Amazon Music. So, not quite the same value. MS predicts there may be 20mm subscribers, mainly in the heartland...mostly it's a bet that consumers will pay $8/ month to have Walmart deliver their groceries instead of picking it up curbside.

Stocks Have Best August in 34 Years, Post Record Highs

Stocks had a fantastic August--the best since 1984--with the Dow, the S&P 500 and the NASDAQ up 7.6%, 7% and 9.6%, respectively. Stocks have now erased all Covid-19 losses.

But beneath the surface, the rally worryingly lacks breadth. The five biggest stocks Alphabet, Apple, Amazon, Facebook and Microsoft make up 22% of the S&P 500. They were up over 35% through July. Take away the FAAAM stocks and the market is flat. At current valuations, FAAAM a 10% drop in FAAAM would require a 90% increase in the rest of the market to keep the S&P 500 level.

Looking ahead, history suggests a more muted September, usually the worst month of the year for stocks. Since 1950 stocks have been down 41 of 71 times, losing on average 0.6%.

The Fed has already stressed it will keep rates low for the foreseeable future. That means the biggest drivers for stocks in the near term will be a Covid-19 vaccine (there will likely be one, but will it be safe or effective?) and politics.