Thoughts on Investing

December 31st, 2019 seems a disproportionately long time ago. When David McCullough and Ken Burns finally get together to decide just exactly what happened over the past six months, I doubt that the formation of Antrim Investment Research, LLC or the publication of my coverage initiation on Despegar.com will rank among the defining events of the first half of the year. Nor will I merit a musical number in Lin-Manuel Miranda's next production. Nevertheless, Antrim has taken over a tremendous amount of my energy and focus over the past six months, and the developments of the past few weeks have been significant milestones for myself, and for the company. In progress, then, is an update for my readers on where Antrim stands today, and where we're going (for now).

In June, I completed the process of registering Antrim as an Investment Advisory in the State of Virginia. Despite a growing number of blogs, newsletters and podcasts that disclaim, "nothing you read in these pages constitutes investment advice, even the investment advice," and despite that RobinHood "Snacks" has ushered in a new era of "broker-produced-blogs-not-research," (admittedly, they're not researched) I interpret that the ethics of my profession require me to call my content what it is, which is to say: I publish security recommendations, dated and timed to coincide with specific market events and meant to provide professional investors with actionable, diligently researched, and independently formulated ideas. Despite delays brought about by the novel coronavirus pandemic, the efforts of my attorneys and Virginia state regulators bore fruit early last month, and Antrim is now legally able to accept payment in exchange for my work. Prospective clients and subscribers can find Antrim's Form ADV part 2A and 2B "Brochure" as they sign up for my research (you're required to read it, actually, despite that it's boring) and linked in the footer of my website, next to the Privacy Policy disclosures.

In June, the broker research division of Refinitiv (formerly Thompson Reuters Financial & Risk division) approved Antrim Investment Research to distribute its work on the Refinitiv broker research platform, and on Friday, July 3rd, my coverage initiations for Michaels Companies (Nasdaq:MIK) and Despegar.com (NYSE:DESP) were published for subscribers to Refinitiv's research feed.

In June, I discovered that it was actually equally difficult to get Antrim set up with a merchant account and payment gateway so that I might accept credit card payments in exchange for research access for my subscribers. As it turns out, web-based subscription services with recurring credit card payments are considered the highest risk category of payments for payment processors, and Antrim's request for a new merchant account coincided with Fed Stress tests that indicated to a number of banks reviewing Antrim's application that they didn't have enough regulatory capital set aside to weather the ongoing economic impact of the coronavirus. Antrim's application for a merchant account was auto-denied by most.

It turns out that Stripe is an excellent solution for web-based start ups. Their prices are lower (at least in the high risk payments category I find myself in), they offer a useful dashboard for payments and subscriber analytics that's modern and intuitive, and their sales team and customer support people work on weekends. I learned all that because I needed them to get my application approved on the weekend of June 27-28, and the Stripe people came through. I've covered merchant acquirers in the past but I've never really seen the business from this angle. It was an illuminating process. But as a result, Antrim's payment gateway is live, as of the evening of June 30, and my subscription based equity research product is now LIVE, for $100/month, or an annual subscription of $1,000/year.

Currently, Antrim finds itself in something of a "soft launch" mode - currently accepting payment from subscribers, but also still in process of building out my coverage universe. Initiations on long positions: Michaels and Despegar have already been published. Initiations on Cabot Oil & Gas, AGNC Investment Corp., Annaly Capital Management, PNC Financial Services, and Lemonade Inc. are in process. Initiations of short positions in Kinsale Capital Group, Skyworks Solutions, Transdigm Group, Tesla, GSX, Restaurant Brands International, Micron, and Lancaster Colony are in process. I hope to publish many, or all, of those initiations for subscribers over the coming months.

So too are changes coming for the monthly newsletter, Idiosyncratic Risk. While it still comes out on the first of every month, and it's still offered for free, I do plan to start charging for Idiosyncratic Risk subscriptions. At some point in the fall/winter, IR will become a subscription based newsletter, offered at the price of $20/month or $200/year. Ultimately, the "Antrim Vision" is to provide, for $1,200 annually, a compelling investment newsletter PLUS ongoing institutional coverage of the ideas contained within its pages. Antrim seeks to differentiate its coverage by focusing on special situations and short idea generation, and all for less than the annual cost of a subscription to Grant's. (Don't cancel Grant's though, they're great, too.)

This post is intended to be somewhat of an announcement to my readers about where we are and where we're going. Also a bit of a celebration of what I've accomplished with Antrim over the past weeks and months. But it's also a reminder that I'm going to be very busy over the next few months, and that there's a lot of wood left to chop. For those of you that are interested, sign up on the equity research tab. For those of you who are curious, get in touch! I can be reached by email at ejensen@antrimresearch.com and I'm happy to talk stocks, talk Antrim, or just make new friends.

The first six months of 2020 have been interesting, to say the least. I'm an optimist at heart, and I'm excited, despite it all, for what the next six months could bring. If you've made it this far, thanks. If you're still here for radical common sense and thoughtful, independent stock analysis, like, share and subscribe!

If you are wondering what mental health theory and practice have to do with investment management, you’ve probably never managed client assets. I’ve spent nearly 11 years on the buy-side managing assets for individuals and institutional investors, and it took me all of that time and then some to begin realizing the full importance of recognizing and regulating my emotional response to the fluctuations of the market, or the relative success or failure of my recommendations. I won’t ever master it.

Of course, everyone is familiar with the concept of “Behavioral Finance.” Daniel Kahneman was awarded a Nobel Prize in 2002 for his work recognizing and quantifying the bounds of rationality for economic decision makers. But, while academic economists have been having a statistical debate about the bounds to rational decision making for decades, and mental health professionals have been honing their understanding of irregular emotional responses to stimuli for decades, investors (who are generally not practicing academic economists or mental health professionals) have too often reduced the tenets of behavioral finance to a set of trite and contradictory aphorisms and tautologies that substitute the appearance of profundity for practical, actionable advice.

Who isn’t familiar with Warren Buffet’s famous advice, “be fearful when others are greedy, and greedy when others are fearful.”? Behavioral finance would tell you that the Oracle of Omaha has done an exemplary job over a long and illustrious career at avoiding “herd instinct,” which is a rather obvious behavioral bias which stems from the evolution of human beings as social creatures, who frequently must use cooperation and the accumulated intelligence and instinct of the herd to survive when confronted with predators who are faster and stronger.

Behavioral finance would tell you that asset prices tend to over-value consensus thinking and undervalue data points that challenge the consensus, because on average, it’s too easy for market participants to give into their base instinct and follow the herd, rather than making a hyper-rational decision.

But behavioral finance would also tell you that investors frequently exhibit a dangerous overconfidence bias stemming from a self-serving mental heuristic which falsely attributes outcomes to your own analysis as opposed to market forces, or the illusion of superiority, which is evident in surveys that demonstrate the vast majority of market participants believe they exhibit above average skill (I shouldn’t have to explain how that could not be possible).

For most of my career I have dismissed the insights of behavioral finance because I’ve felt that there was a tenuous link between the theory and its practical application. Have courage in your conviction, but don’t be overconfident sounds more like something an emotionally overwhelmed parent tells a child heading off to college than something like useful advice for financial professionals. But I have discovered better tools to explore my emotional responses to market forces in the field of dialectical behavioral therapy.  

In dialectical behavioral therapy (“DBT”), therapists use the concept of a reasonable, emotional, and “wise” mind in order to guide patients towards more regulated decision making and consistent outcomes. In this framework, the reasonable mind is the home of rational thought. (Most investors think they live here all the time, but all Star Trek fans understand there are limits to the practical application of hyper-rationality) The emotional mind is the home of emotional responses, which provide our cerebral cortex with evolutionarily useful signals that may or may not be better suited to the Serengeti than the New York Stock Exchange. By recognizing both mind states for what they are, and sitting with both rational and emotional reactions, the patient is able to access a third mental state, the so called, “wise mind,” which represents a useful and productive reconciliation of the strengths and weaknesses of both other states.

The therapist’s subject is encouraged to map their thoughts and feelings onto a literal venn diagram – feelings go into the emotional mind circle, and data goes into the reasonable or rational mind circle. It is, perhaps the practice of writing things down, or maybe just the pause inherent in the study itself that allows the patient to sit with their feelings for a moment and recognize them for what they are. By taking time and inventory of emotional responses, the patient becomes able to differentiate useful signals from noise.

How is this any better than our starting point? I’ll give you two practical examples.

I’ve recently been publishing security analysis on Seeking Alpha, where commenters frequently weigh in on your work with their own opinions. Almost every time I receive a notification that a commenter has posted on my article, my heart rate quickens, my breath gets short, and I feel tension deep in my abdomen. It’s honestly terrifying. It’s a pure, physical expression of fear. My identity is wrapped up in the success or failure of my recommendations, and I perceive that the public’s perception of my abilities in the investment arena are relevant to my career and my ability to put food on the table. When you post that I’m an idiot on Seeking Alpha, I literally “feel” threatened. Of course I am not. But after recognizing this insight, it’s easier for me to differentiate between two commenters: One told me I was an idiot (he’s entitled to his opinion, but I retain courage in my convictions); another told me that I was wrong about the date Michaels’ Companies’ term loan matured (I was). In the second instance, I was able to recognize that the fear I felt was useful in motivating me both to correct my notes, but also to reevaluate my entire investment thesis given that I had previously been using incorrect information. That doesn’t mean I lack the courage of my conviction, it means that my fear response is useful professional motivation.

Another example: The markets have been extremely volatile. Michaels Companies’ reported strong May same store sales comps last Thursday, during a week when almost every highly levered business with substantial short interest was rallying, and the stock popped, like I had said it would. I thought to trim my position, and add to relative underperformers in my portfolio, and while I was logging into my brokerage account, I felt very calm. My posture was better than average, my breathing was slower. This comfort is overconfidence bias. It’s a form of self-attribution or illusory superiority.  Michaels’ hardly rallied any more than any other junk retailer last week, and I wasn’t making a profound adjustment to my portfolio construction by selling shares and buying something else, I was executing a simple rebalancing algorithm. I don’t do that as well or as often as a computer can, so, there’s that.

I ended up trimming anyway and I’m glad I did, because we were approaching a near term top in a market that had become overwhelmed by speculative fervor. But I think it’s important to notice here, I didn’t do anything profound, and I need to understand that the actions I’m taking aren’t profound. Am I taking profits after a successful recommendation and running a victory lap, or am I executing a simple portfolio rebalancing? If it’s the latter, is this the time to rebalance the portfolio, or am I only doing it because I feel as though it’s a victory lap?

Honestly, I can’t say for sure. But I can say that I have taken an inventory of the emotional responses I have to my trades, and I can reconcile that inventory with my own self assessments and the lessons of behavioral finance.

I’m not sure if I have a new appreciation for behavioral finance or not. But I’ve definitely arrived at an appreciation for dialectical behavioral therapy techniques. I’d recommend them to anyone challenged with frequent decision making in a professional capacity.  

Disclosure: I am long MIK. I do not have a business relationship with any company mentioned in this blog.

This will be a quick blog post insofar as it represents a departure from the intended purpose of this space, which is to discuss my investment philosophy and practice in a general, informative sense.

As the week has worn on, I've been increasingly focused on two particular news stories, both of which represent watershed moments for the capital markets. It is not surprising, if it is a little frustrating, that while neither has gone unnoticed, the headlines have been buried somewhat by the ongoing coverage of the Covid-19 pandemic, the U.S. Presidential twitter feed, and the literal, tragic watershed moment experienced by Michiganders on Wednesday. Candidly, I don't have all the answers, so I'll keep my editorial commentary and analysis brief, but I felt it would be well received if I call my readers' attention to a couple items that might loom much larger in retrospect than they seem to at present.

(1) Below the fold on page B1 of Thursday's Wall Street Journal: Bill Would Force China Firms to Cede Listings ... wait what?

On Wednesday, the Senate actually passed, UNANIMOUSLY, a bill co-authored by Sen. John Kennedy (R., La.), and Sen. Chris Van Hollen (D., Md.), which would require any firms listed (via American Depository Receipt or ordinary shares) on an American stock exchange to be audited by an auditor subject to the oversight of the Public Company Accounting Oversight Board. Since the U.S. Auditing firms are subject to such oversight already, and public companies are required to file audited financials, this might seem redundant, but it's not. It has become commonplace for Chinese companies to skirt their home country's restrictions on foreign direct investment in order to list shares on U.S. exchanges by creating Cayman Islands-based holding companies which maintain a variable interest in actual Chinese corporations through contractual obligations of questionable legal enforce-ability. These companies are universally audited by Chinese auditors or the Chinese branch of American big four auditing firms, which are NOT subject to PCAOB oversight, and fraudulent activity has run rampant (See: Luckin Coffee Inc., $LK).

There are numerous Chinese-company ADRs which present investors with a credibility question, to a greater or lesser degree. Fresh off their successful $LK expose, Muddy Waters Research (@MuddyWatersResearch on twitter) has put out a piece calling into question the veracity of GSX's revenue growth claims and financial reporting. One recent Cayman ADR-IPO, Kingsoft Cloud Holdings lists explicitly in its prospectus that investors should be aware that they assume the risk that financial statements are reviewed by an auditor who is not subject to PCAOB oversight, and that short sellers may attempt to discredit management or impugn the credibility of their financial statements, to the detriment of equity holders. But even the equity of extremely large, well known, and widely held companies like Alibaba ($BABA) fail to meet the criteria for exchange listing under the terms of the bill passed in the Senate yesterday. This represents a substantial risk to current shareholders of Chinese corporate equity in the form of ADRs listed on U.S. exchanges, and could put a damper on $1.8T of market cap currently listed in the U.S. that would theoretically be in violation of the law under this regime. To my knowledge, there is, as yet, no bill in the House of Representatives coinciding with the one passed by the Senate yesterday, so it's not clear that it will get any further down the road to becoming law. That said, the administration appears willing to engage in political fisticuffs with the Chinese political and socio-economic elites, and the bill that went to the Senate floor shared unanimous, bi-partisan support. Stay tuned.

https://www.wsj.com/articles/chinese-companies-could-be-forced-to-give-up-u-s-listings-under-senate-bill-11590015423

I came across this podcast by Quoth the Raven (@QTRResearch on twitter) wherein he interviews Carson Block of Muddy Waters on all things investing, short selling, and China (including China short selling): https://quoththeraven.podbean.com/e/quoth-the-raven-185-carson-block/ I will warn, the podcast is rated "M:Mature," primarily for profanity, which is a bit "off brand" for Antrim Research. But I would say I have a great deal of respect for the work Mr. Block has done on this space. His commentary about the impact of (potentially) de-listing Chinese equities starts shortly after the 1h 15m mark.

(2) On Monday, May 18th, German Chancellor Angela Merkel and French President Emmanuel Macron announced a joint plan to set up a $500B coronavirus pandemic relief fund to be administered by the ECB.

It doesn't require uniquely penetrating insight to understand that the European Union is a tenuous one. After all, Britain left on January 31st of this year (more than three years after the referendum that set Brexit in motion). I've long simplified (in my own mind) the complexities of Eurozone fiscal and monetary policy by interpreting almost everything through the lens of the central monetary disagreement in the region: Germany is a fiscally responsible, monetarily conservative government, overseeing a strong, export driven economy, fundamentally at odds with a number of fiscally irresponsible, monetarily undisciplined, democratic socialist countries with weaker economies, and a general inability to meet their fiscal obligations through tax revenue. Greece, for example, has been in technical default on its financial obligations for over 50% of the time it has existed as an independent country. It's hard to say how much better Potugal, Italy, and Spain are doing. And lest it be forgotten, there's a bit of lingering animosity between Germany and France.

All of that seems pretty self explanatory. Common sense would suggest that Germany, having been responsible with their policy decisions since World War 2, is loathe to bail out neighbors who they view as irresponsible younger siblings. BUT, Germany is an export driven economy, which implies that insofar as they benefit from a weak Euro relative to other global currencies, they've been stealth beneficiaries of the profligate spending by weaker Euro member nations. If that's an A-Ha! moment for you, it was for me too. They kinda WANT to bail out the little guys, they just want to moan about it for a bit while they do because they like a little inflation and a little irresponsible money printing and debt issuance, but if they don't continue to be the voice of reason, confidence in the whole region could collapse. It might appear to be a bit of a high-wire act if you look at it this way.

So what gives now, and why would they cooperate with the French? Well. (1) The pandemic is really, really, bad. Like, it's bad, and everyone, Germany included, knows it - and everyone, Germany included, knows the stimulus announced to date won't be enough, so let's get more stimulus. (2) The U.S. Fed has opened the checkbook in a BIG way. It's been enough that many analysts (your humble author included) have begun recommending investors to precious metals and warning of coming USD inflation. Well... that's not good for an Export Economy, which generally desires that US Dollars increase their purchasing power in Euro terms. (3) If the economic collapse is too severe for the weaker members of the Eurozone, the whole union could collapse, which would take away ALL the benefits Germany has enjoyed as a Euro member, overnight. So... the answer is simple - there's plenty of room to stimulate and bail out by issuing Euro debt and subsidizing weaker member nations. The $545B (US, 500B Euro) facility announced is a FRACTION of the fiscal and monetary stimulus offered in the United States. And, Germany definitely doesn't want deflation. And, Germany wants to instill confidence in the region.

What could instill more confidence in the authority of the ECB to govern the Eurozone through another economic crisis than cooperation between Germany and France on a bail out initiative operated by the ECB, and a bilateral willingness to accept the bank's policy decisions?

At the risk of overdosing on confirmation bias - I think this is a big moment for the Euro, which instills a level of post-Brexit confidence in the longevity of the Union that was by no means guaranteed heretofore. I think that it will prevent runaway deflation in the Euro, and that it represents yet another round of fiscal and/or monetary stimulus, globally, that can't help but provide support to precious metals prices. But I think it is unlikely to substantially weaken the currency vs. the U.S. Dollar. And lastly, I think it means that the European political elite is really, really, worried about the depth and duration of this economic crisis, and we should be too.

https://www.cnbc.com/2020/05/19/coronavirus-french-german-500-billion-euro-fund-a-big-deal-for-europe.html

I hope this was a welcome distraction from the ongoing twitter debate between Cliff Asness and Nassim Nicholas Taleb.

Disclosure: I am short GSX, and long the gold miners' ETF, GDX. This is but a humble blog post, and as such, is not intended as investment advice.