The End of The Low Volatility Regime?

Before I get into today’s post on volatility, I wanted to share a good Umair Haque piece where he asks ‘Is There Any Price Americans Won’t Ask Their Kids to Pay?’ The post begins with:

We ask five year olds in American schools to perform ‘active shooter drills’.

He concludes:

What has really happened here? Older Americans shifted every kind of cost possible to their kids — human, economic, social, cultural — no matter how much it traumatized, wounded, or scarred them. They just appeared totally indifferent to their own kids’ plight.

First, the costs of school shootings and distrust and unsafety. Then the costs of inadequate education and healthcare, of a failing democracy, of a broken economy, one by one, as they aged. Their elders simply said: “you pay for all this. Whether now with dollars — or later, with your quality and quantity of life.” And so young people are ending up bearing the many costs of social collapse disproportionately — which is itself happening because their parents refused to pay those costs to begin with.

It is up to America’s young to change all this — not continue it. Their lives are on the line. This is no game. Their elders have failed them terribly, shifting the costs of never fixing a broken society to them. It is their challenge to rebuild, reform, and reconstruct the institutions that incurred such terrible costs in the first place.

OK onward to the markets…

It would be great if America had the same $VIX (measure of volatility in markets) as Tuscany (which I have pegged at 8).

We got a taste of that Tuscany VIX in 2017, despite what seemed a media and political VIX of 4o each day.

We have now seen that 2018 will not be anything like 2017.

The research team at 13D has a good piece out on ‘The End of The Low Volatility Regime‘. Take a read.

The conclusion:

As with all corrections in history, the long-term implications of last week’s market moves mean far more than the short-term outcomes. QE gave birth to algorithmic strategies dependent on unnaturally low volatility, from equities to bonds. The firms that created the strategies ignored long-term threats in favor of short-term returns. Regulators, enamored with the market’s trajectory and intimidated by the technical complexity of algorithmic innovation, turned a blind eye.

Last week offered a glimpse of the downside power of the post-crisis algorithmic revolution. We are beginning to see regulators awaken to the threat. It’ll no doubt prove too little too late after a decade of algorithmic experimentation in a low volatility world. The new machinery will be tested and more pain appears inevitable.

A Turning Point on Guns?

This post titled ‘Fuck You, I Like Guns‘ was not what I was expecting from the title. It begins…

America, can we talk? Let’s just cut the shit for once and actually talk about what’s going on without blustering and pretending we’re actually doing a good job at adulting as a country right now. We’re not. We’re really screwing this whole society thing up, and we have to do better. We don’t have a choice. People are dying. At this rate, it’s not if your kids, or mine, are involved in a school shooting, it’s when. One of these happens every 60 hours on average in the US. If you think it can’t affect you, you’re wrong. Dead wrong. So let’s talk.

Later Anna writes:

As an avowed pacifist now, it turns my stomach to even type the above words, but can you refute them? I can’t. Every weapon that a US Army soldier uses has the express purpose of killing human beings. That is what they are made for. The choice rifle for years has been some variant of what civilians are sold as an AR-15. Whether it was an M-4 or an M-16 matters little. The function is the same, and so is the purpose. These are not deer rifles. They are not target rifles. They are people killing rifles. Let’s stop pretending they’re not.

With this in mind, is anybody surprised that nearly every mass shooter in recent US history has used an AR-15 to commit their crime? And why wouldn’t they? High capacity magazine, ease of loading and unloading, almost no recoil, really accurate even without a scope, but numerous scopes available for high precision, great from a distance or up close, easy to carry, and readily available. You can buy one at Wal-Mart, or just about any sports store, and since they’re long guns, I don’t believe you have to be any more than 18 years old with a valid ID. This rifle was made for the modern mass shooter, especially the young one. If he could custom design a weapon to suit his sinister purposes, he couldn’t do a better job than Armalite did with this one already.

This rifle is so deadly and so easy to use that no civilian should be able to get their hands on one. We simply don’t need these things in society at large.

I’m with Anna. Please share her post.

Tax Cuts and The Enterprise Stocks

I’ve been in New York all week with my partners Tom and Gary running from meeting to meeting.

I had a great time catching up with Ian – Stocktwits CEO. The numbers look great. I love hanging with the community and content team – Stefan, Mike and Scott (all millennials) – who love the markets and have such a unique take on content.

After the market chaos of last week it was good to just be glancing at the markets and letting the rally off the panic play itself out.

A few trends seem to be playing out post pax cuts.

I won’t argue about who is getting the money, but companies are doing ridiculous large buybacks. The people that own these stocks will benefit.

Money is pouring into enterprise stocks. Salesforce ($crm), Hubspot ($hubs), Okta ($okta), Zendesk ($zen), Workday ($wday), Mulesoft ($mule) are all at -all time highs.

If you follow me on Stocktwits you know I added $okta and $mule during the week and they both exploded to all-time highs). Ivan and I discussed $okta in depth before the breakout in our Momentum Monday Video on this blog Monday.

All these leaders provide tools (sales, support, marketing automation….) to corporate America.

It makes sense that hedge funds are speculating that the tax breaks not used by companies to juice their own stocks will be uses to upgrade software.

If the market holds this year, I expect this trend to lead to an explosion of acquisitions in the enterprise space with these companies getting bought themselves and/or these companies doing a lot of buying of smaller and private competitors.

Disclosure – Long $zen, $okta $mule

This is The Top

I was pitching a potential LP yesterday (family office) and the conversation was lively.

When it came to discussing a new investment in the portfolio, the investor interrupted and said ‘this is the top‘.

It was definitely the first time it has happened in all my years of pitching.

I laughed a little and just said maybe. It felt like I was in a scene from Seinfeld.

It must be fun to take meetings with early stage funds and just blurt out ‘this is the top’.

I wonder how many other seed stage fund managers get that type of comment as they present.

Last night I was at Josh Brown and Barry Ritholtz’s new wealth management office opening and I was telling Josh and Phil Pearlman about the pitch. They got a good chuckle. Phil said I need to start taping these pitches.

On my way out, Josh had me sign a poster for the office wall, and I of course doodled…

‘The Top’

I signed my name, dropped the Sharpie, grabbed my beer and left for some good Chinese food.

Back to the grind tomorrow.

The Death Of Retail Is The Birth of Retail …Update

Shopify reports earnings this week. The stock has been very good to me.

I bought it back in May of 201 in the 20’s (on this blog) and today it closed at $140.

Back in May 2016, I created my ‘Death of Retail is the Birth of Retail ETF which included just four companies Paypal, Amazon, Apple and Shopify.

I think the post and the links are worth rereading because not much has changed about the trends (other than the massive price appreciations of the stocks). Here is Steven Sinofsky’s piece ‘Disruption’s Long, Slow, Complex Journey

I continue to be long all 4 stocks though I have sold down most of my Paypal.

I am going to add a few names to my Death of Retail is the Birth of Retail ETF today.

1. Square
2. NIke
3. Lulu

I will dive deeper into the additions over the next few weeks but if you read this blog only Square is a new name and idea for me.

Secfi – A New Social Leverage Investment

Last year our fund – Social Leverage – led an investment in Secfi, whose vision is to help startup employees make sense of their stock options and equity.

Today, the website and product are live to the public (transactions have been happening the last six months while in stealth mode).

The company was founded by Wouter Witvoet . He was motivated to start the company from his own experiences at a fast growing startup. Here is his announcement.

Option exercise is broken

A computer science graduate, I’ve never really enjoyed working for a big corporation so since graduating Cambridge I’ve always worked in start-ups.

A few years ago I was working for a start-up which I so fortunately joined as fourth employee. The job came with an option package and together with a few bonuses here and there I had about a million options at the time. I still recall the share prices of the funding rounds quite vividly: $0.34 per share, $0.66 per share, $1.75 per share and later even $4.50 per share. A great start of my career, I thought, being 23 years old at the time.

How things changed when I wanted to leave…

I decided to leave the company because I was ready for something new. I figured I had my options and I would exercise them at some point, but never precisely understood how that works (who has the time to read all that legal anyway). As it turned out, I had about 90 days to exercise my options after leaving the company or would otherwise lose them. Not only that, I would also have to pay about $2.8M of income taxes.

Wait, what? Yes — I would have to pay $2.8M of income taxes on a security that I couldn’t sell and on income that I’ve definitely never seen in my bank account. I explored various avenues for getting this funded, but couldn’t find anyone who could help me and none of the banks would lend against private stock. I still left the company (life is too short to work somewhere you don’t love anymore) and lost the equity.

When I dug further, I found out that this is a much bigger problem in Silicon Valley.

So what does SecFi do?

Whereas traditional financial institutions only care about the currently wealthy, SecFi is building products for employees pre-wealth so they can take advantage of their financial opportunities. They do this by providing financing to employees of growth and late-stage private companies so they can exercise their stock options and to the shareholders who already own their stock. The key to their offering is that all financing comes without risk to the borrower – if the company goes under, there is no legal obligation on the borrower to pay anything back. In return, borrowers pay a compounding interest rate and share a portion of their equity when the company has a liquidity event. Using SecFi for financing has the following benefits:

Unlike selling, a Secfi financing defers capital gains taxes until exit and lets companies and employees keep their Qualified Small Business Stock (QSBS) tax treatment.

Financing against your shares lets you keep the upside compared to selling on the secondary market.
Avoid having all your wealth locked up in one company and keep your savings for what matters to you.

How does it work?

Employees and shareholders apply for financing on SecFi’s platform, which based on each individual’s personal and tax situation determines how much financing you are eligible for. Once an agreement is reached, SecFi pays the determined amount. SecFi’s structure works for all companies, too. They have ensured that their platform doesn’t violate any company’s restrictions so employees everywhere will have an opportunity to exercise their options when they want to. In instances where the employee doesn’t need financing, they can still use SecFi’s products to better understand the value of their equity/options, better plan for upcoming taxes and best prepare for a potential IPO or company tradesale.

SecFi’s Vision

SecFi’s ultimate goal is to be the financial advisor that helps employees and shareholders before they are wealthy and are bombarded by a plethora of “old school” financial advisors. We simply couldn’t find a technology solution that helps people in this process.

The vision and the solution line up very well with how we (Social Leverage) see financial services and the industry evolving.

Momentum Monday…Sex Is A Safe Haven and the Death of the Inconceivable Rally

Could it be we are at the end of the inconceivable stock market rally that began in March 2009?

Time will tell whether this sell-off is the beginning of something bigger or a panic and pause that refreshes.

The good news is there are many tea leaves to be read and the internets are awash in good content right now on the ‘unprecedented decline‘ in the US stock markets last week. In case you were sleeping:

On January 26th, 2018, the Dow Jones Industrial Average closed at an all-time high. On Thursday, nine days later, it closed more than 10% below those highs. This is the first time ever (going back to 1900) that the Dow closed at an all-time high and declined 10% over the next nine days (1928 saw an all-time high then declined 9% in nine days).

I checked my blog and I started calling this rally/boom ‘inconceivable’ in May of 2009. Because of the brutality of the financial crisis, I could not get my head straight at that time to let winners run. By 2010, it became easier.

Today I have 22 blog posts with the moniker.

By January of this year, with the help of Bitcoin, Robinhood, Coinbase and Netflix, the financial crisis of 2008 was that thing your idiot parents got caught up in. Coming into February, we had 14 straight months of S&P gains. It became so easy to just ‘set and forget’ that ‘BTFD’ was a financial internet meme.

Oh to be young and in January 2018 again….

To help get my head straight and hopefully yours, Ivanhoff (a dead ringer for Gary Shandling) and I whipped up a ‘Momentum Monday‘ to talk about the relative strength stocks and sectors that we are watching because if the ‘inconceivable rally’ resumes, I want to own the right stocks.

Elsewhere, read this from Charlie on the rise in yields and take a look at this chart which you will see 500 times if rates keep rising:

Charlie has another great post on what happens when stocks and bonds go down together.

This piece from ‘Wired’ on Facebook/Faceplant is really good too. They are starting to feel like Goldman, Sachs, Equifax, Comcast, United Airlines and Verizon wrapped up in one. Blech.

Having spent a week watching, reading about and digesting the selloff, my best guess for the selling is the possible trend change in yields.

PS – Sex is a safe haven! One of my 8-80 stocks – Match.com (Tinder) – hit all-time highs today. An amazing brand, rollup and spinoff from Barry Diller at Interactive Corp. It is no doubt related to the popularity of the app amongst athletes at the Olympics.

PSS – This college humor video on the media landscape is hilarious

The Shift to Decentralization

I had a fantastic weekend.

The weather in Phoenix has been fantastic. There has been no winter.

I am headed to New York this week so I tried to get the most of the Phoenix sun the last week. I put on a few hundred miles on the bike and played my first round of the year.

The buzzword of 2018 is going to be ‘decentralization‘.

This interview between Sean Park and Carlota Perez, discussing the breakdown in government and need for big changes, was very good.

Fred linked to this video on Blockchains and the shift to decentralization which is also very good.

Equifax is a joke. Facebook users are showing signs of revolt and who does not hate their cable company?

It is still very early to get in front of this wave.

Fear and Buying or Fear and Loathing…Preparation Matters

The great thing about fear in the markets is you do not need to get fancy to make money.

I got fancy last Monday and I paid.

I wish I had waited until Friday’s panic to make all my buys.

Friday afternoon I was buying and sharing on Stocktwits in real time.

I stuck to the boring S&P index and Amazon.

Here I mentioned that I was buying $SPY (1-30 pm est).

Here was my Amazon buy a little earlier.

Stocktwits tracks the price and time so you can see these were huge gains I captured in just a few hours.

I flipped out the S&P, but I held the Amazon for now.

Yes it is scary to buy stocks into a panic.

I dream of setups like Friday even though I rarely trade anymore. My losses on $XIV had me more in ‘fear and loathing’ mode than ‘fear and buying’ mode.

I don’t know if Friday marks a major bottom, but my favorite indicators were lined up for me…

The S&P was hitting it’s upward sloping 200-day moving average:

The percentage of stocks trading below their 50-day moving average was in the teens (green zone):

During panics, less is more. The markets do not give you do overs.

PS – Exxon had it’s worst week since the financial crisis. Ugly looking mega cap, but not quite General Electric.

Coyotes and Raccoons…Not Enough Meta Thinking

It was a nutty week in the markets. The Dow Jones travelled 22,000 points over just five days of trading.

I was asked hundreds of times via text and email (friends that do not want to publicly tweet at me) what I thought was happening.

I referred people back to these posts I did at the BEGINNING of January of this year.

The first was ‘2017 Made No Sense…Fasten Your Seat Belts‘.

The second ‘STFR – Sell The [email protected]#king Rip‘.

This week proved that the calm markets were just an illusion that helped the banks and brokers scheme up more products for the next Michael Lewis Movie.

The movie will star the guys in this hedge fund in Denver.

The Financial Times trumpets that Fidelity has banned ‘retail’ investors from trading short volatility products which I have been writing about all week.

It’s a bullshit headline.

What Fidelity has done is stopped these ridiculous Credit Suisse Cheese products from further destroying their customers. Fidelity is very aware that 99 percent of their customers will never read a prospectus cover to cover.

Right on cure of the volatility explosion in the markets, Ben Hunt has another excellent piece up titled ‘Too Clever By Half‘. It is a must read.

There are so many great anecdotes in the 5 minute read.

My favorite:

Financial innovation is always and in all ways one of two things — a new way of securitizing something or a new way of leveraging something.

Securitization is a ten-dollar word that means associating something in the real world (a cash flow from a debt, an ownership interest in a company, a deed on a property, a distributed ledger mathematical calculation, etc.) with a piece of paper that can be bought and sold separately from that real world thing.

Leverage is a ten-dollar word that means borrowed money.

That’s it. There’s nothing new under the sun. Finding new ways to trade things (securitization) or new ways to borrow money on things (leverage) is what financial innovation is all about, and there are vast riches awaiting the clever coyotes who can come up with a useful scheme on either.

The biggest market disasters happen when both leverage and securitization get mixed up with the same clever scheme, as when new ways of leveraging and securitizing U.S.

Something from page 10 in the news is about to become page 1. In the next few weeks (maybe months) we will see if these new lower stock prices have that news factored in. Whatever the news is it will be amplified by the products that started to blow up this week.