• Introduction: An Inadequate Note of Thanks
  • Valuation Update: A Dubious Dance with the Unknown
  • Crashes and Recoveries Sorted by Performance into Crash, Best to Worst

Introduction: An Inadequate Note of Thanks

Writing about equity markets amidst a global health pandemic feels wrong to your author. The severity of potential dangers, both current and future, are seemingly in constant dispute and subject to much speculation. Regardless of how the facts pan out, the individuals providing critical services have quietly tended to their duties in the face of frightening headlines. Kailash would like to thank the healthcare workers, those that support them and everyone in essential industries. For most alive today this is the most vivid reminder about the invaluable services provided by farmers, manufacturers and drivers who persist in getting essential food and supplies to hospitals and on store shelves and the scientists racing to develop a new generation of medical solutions.

Valuation Update: A Dubious Dance with the Unknown

Kailash decided to update readers on the violence of recent moves and where investors stand today. The chaotic news flow around infections, mortality rates and soaring unemployment collides with unprecedented levels of government intervention. These cross-currents have created unprecedented price movements over a mere few weeks of trading. In our original piece found here, Kailash highlighted how the market destroyed three years of returns for equity holders in just 23 trading days, with debt markets faring even worse. We continue to believe Energy stocks are of particular fundamental interest but recognize that speculative buying of the market’s lowest quality firms may persist as gambling venues are closed leaving stock promoters with a captive audience.

For new readers please see our January piece Why Market Neutral Now where we discussed the case for caution. The paper used Buffett’s valuation metric, market cap to GDP, which is updated through April 9th in Fig. 1 below. Due to the incredible speed at which wealth was destroyed and the stunning snap-back in prices the line is difficult to see. Holding GDP constant from the low on March 23rd until yesterday’s close, valuations have risen from 114% of GDP to 143% of GDP. Investors far wiser than ourselves have reasonably asserted that the current state of affairs will destroy $5 trillion in GDP. If that is the case the effect on valuations, as annotated by the dot in Fig. 1, is stunning. Adjusting for the potential loss in GDP could leave market cap to GDP at record levels even with markets trading roughly 17% below their 2/19/2020 peak.

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  1. As a reminder for our Financial Advisors: our models are available on a continuous basis, and most have been in production for over a decade.  If you are looking for simple, concentrated, low turnover, and tax efficient model portfolios we would like to talk with you.  KCR also offers a wide range of easy-to-use but sophisticated tools.  Our toolkits can help identify mispriced stocks with the best and worst risk/reward characteristics, estimate a stock’s duration and warn you when a company is engaging in low-quality accounting. Over the last 12 years, KCR has built and offers time-tested and class-leading products built by experienced and proven money managers for fixed to low prices.
  2. Kailash Capital’s sister company, L2 Asset Management, runs market neutral, long/short, large-cap, and mid-cap long-only portfolios with a value and quality bias.  L2 employs a highly disciplined investment process characterized by moderate concentration, low turnover, high tax efficiency, and low fees. While nobody can predict the future, we believe the recent resurgence in risk-adjusted returns seen across all products is the beginning of what may be a long period where speculation is punished, and prudence and patience rewarded.

Disclaimer

The information, data, analyses, and opinions presented herein (a) do not constitute investment advice, (b) are provided solely for informational purposes and therefore are not, individually or collectively, an offer to buy or sell a security, (c) are not warranted to be correct, complete or accurate, and (d) are subject to change without notice. Kailash Capital, LLC and its affiliates (collectively, “Kailash Capital”) shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information herein may not be reproduced or retransmitted in any manner without the prior written consent of Kailash Capital. In preparing the information, data, analyses, and opinions presented herein, Kailash Capital has obtained data, statistics, and information from sources it believes to be reliable. Kailash Capital, however, does not perform an audit or seeks independent verification of any of the data, statistics, and information it receives. Kailash Capital and its affiliates do not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only and is not intended to provide, and should not be relied on for tax, legal, or accounting advice. You should consult your tax, legal, and accounting advisors before engaging in any transaction. © 2021 Kailash Capital, LLC – All rights reserved.

Nothing herein shall limit or restrict the right of affiliates of Kailash Capital, LLC to perform investment management or advisory services for any other persons or entities. Furthermore, nothing herein shall limit or restrict affiliates of Kailash Capital, LLC from buying, selling or trading securities or other investments for their own accounts or for the accounts of their clients. Affiliates of Kailash Capital, LLC may at any time have, acquire, increase, decrease or dispose of the securities or other investments referenced in this publication. Kailash Capital, LLC shall have no obligation to recommend securities or investments in this publication as result of its affiliates’ investment activities for their own accounts or for the accounts of their clients.

April 15, 2020 |

Categories: White Papers

April 15, 2020

Categories: White Papers

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