The Satori fund is managed to be an “all-weather” fund. The fund was profitable last year with the S&P down 19% but also this year with the S&P up 17% through 11/13. Despite the S&P being down each of the past 3 months (August, September, October) with a cumulative loss of 8% over that time, the fund has been profitable each of those three months.
Yesterday, the Satori fund had its best return day in over one and half years & beat the S&P which soared 1.9%.
Bullish Goldilocks Outlook through Year-End
In general, we are managing the portfolio on a day by day basis given the volatile daily moves in the stocks (like yesterday) that we expect to continue.
We are in the seasonally strongest 3 months of the year for the stock market which is November through January (avg up 4% over past 50/100 years) with these additional drivers:
We have a barbell strategy with $AMZN and $META of the Magnificent 7 on one end of the barbell…
We are increasingly looking for beaten up names with compelling valuations outside of the Magnificent 7 to drive returns through year-end.
Looking into 2024, we believe Goldilocks will meet the Three bears (not something we are worried about today)
Stock market valuations are high relative to where inflation is. When CPI has historically been between 3-4%, the S&P trailing valuation has been 17.5x versus 21x today.
The goal of the Satori Fund is to be an “all weather fund” that can protect capital or generate positive returns even during severe market declines. As such, I believe in good RISK ADJUSTED returns. This is one of the reasons why our Fund was able to produce positive returns in 2022. Additionally, and for the record, we are up this year (2023) including the months of August and September (month-to-date through 9/12) while the S&P 500 finished negative in August and is down again in September.
INTC - Intel
Our plan with all trims made to a position due to risk management reasons and NOT due to fundamental reasons, is to buy some of it back when it is no longer oversold and back at an interesting technical level. This is the case again with INTC which we trimmed yesterday.
ORCL - Oracle
We sold most of our ORCL position on 9/11 prior to them reporting earnings and hated doing it given our belief that it would be a beat and raise quarter (we were wrong.) But we try to stay disciplined to our risk management principles above which have served us well over the nearly 20 years of running the fund.
When ORCL, reported revenues a touch below consensus, we sold the rest of our position in the aftermarket down roughly 5%. This slight revenue miss was fundamentally NOT what we expected. Then on the conference call later that day they guided both revenue and EPS below expectations for the upcoming quarter and the stock went down further. Finally, yesterday (9/12) the stock closed down 13.5%.
Our risk management principles, though we hated doing it at the time, saved us from losing much of the substantial gains we had achieved. In investing, it is a batting average and over-time, our risk management principles have improved that average.
At this point, our plan is to do more research including data from ORCL CloudWorld next week before deciding what our next move will be on the stock. At a market PE of 20x, ORCL is appealing to us versus the 32x PE for Microsoft (MSFT) for what we still believe should be somewhat similar earnings growth over the next few years. We still believe that ORCL is becoming a credible #4 cloud provider behind Amazon ($AMZN), Microsoft ($MSFT) and Google ($GOOGL) but Oracle’s recent guidance below the street expectations for both revenue and EPS for their upcoming quarter does not fit well with that belief. In the technology industry especially, things are always changing and for us, facts always trump beliefs.
“When the facts change, I change my mind - what do you do, sir?”
― John Maynard Keynes
On August 18th, we posted how we were covering over half our shorts and expected a short-term bounce based on the bond market stabilizing. In fact the S&P did bottom on 8/18 at 4370 and 10 year yields peaked the next day at 4.34%. This past week saw a 4 day rally in the S&P through (8/30) after having no consecutive up days in the month of August.
The S&P is up 3% from its close on 8/18 with Nasdaq up 6% while 10 year yields have now dropped by 17 bps from 4.34% at their peak to 4.17%.
Jerome Powell’s speech on Friday 8/25 was marginally positive followed by data of a slowing labor market this past week while PCE readings were inline with expectations
Our favorite large cap technology names with an AI angle to them.
$NVDA beat revs by 10% in their April quarter and guided 53% above the street for their July quarter when they reported on May 24th. This was the fuel for a surge of 8% on the S&P from ~4200 to ~4400 from (5/24-8/23) with NVDA up 54% during that time and Nasdaq up 10%.
The AI optimism remains alive and well as NVDA on August 23rd beat revenue consensus for their April quarter by 21% and guided revenues 27% above the street for their October quarter. Since Nvidia’s latest results, the S&P has gained 2% from ~4400 to ~4500 from (8/23-9/1) with NVDA up 3% during that time and Nasdaq up 2%.
The good news is that Nvidia’s stock on a forward twelve months basis is actually ~15% below its average PE over the past 5-7 years as estimates have gone up faster than the stock. We still think we are in the early innings of the ramp in AI but obviously at some point in 2024, supply will catch up to demand and the double and triple ordering we are seeing from customers today will have to normalize.
But just because every technology company says AI 50 times on their earnings calls does not mean that all companies are going to benefit. “In the year of efficiency” to borrow a term from Mark Zuckerberg, spending on AI is in many cases coming out of spending in other areas. We would note that most big ad agencies have missed their revenue forecasts. Most big networking related companies (such as Juniper, Commscope, Nokia, Ericsson) have missed (with the exception of Arista.) Many big IT services vendors have missed like Accenture, IBM and Infosys. And now even software security seems to be feeling the pinch as seen by Fortinet results. Even in semiconductors, TSMC, the foundry for Nvidia, had to cut their numbers while AMD also saw an estimate cut. Even Microsoft which is a big shareholder in OpenAI which developed ChatGPT saw their Azure estimates get cut slightly. Market multiples are too high for stocks not to feel pressure if this continues.
We think our top AI picks will be able to withstand the economic pressure between now and year-end on discretionary spending
Inflation, the Fed, Bond Yields & Valuation
With solid US GDP growth, higher energy prices and a still solid labor market, inflation & therefore the Fed and 10 year treasury yields may remain higher than investors expect:
19x is the average multiple for the S&P over the past 70 years when headline CPI is between 2-3% vs a 21x multiple today with the CPI at 3%. So valuations are on the higher side.
We think Apple should be a good short-term trade due to historical precedent surrounding their upcoming iPhone product launch, but we would avoid it for long term investors due to its slow growth relative to its high valuation.
Short-term, Apple’s stock was oversold on a relative strength basis coming into 8/18/23. Since the early 2000s, Apple’s stock is also up nearly 70% of the time the month before a new product launch with an average return of over 3%. But the stock typically declines the day of the product launch. We expect the new iPhone launch event to be around 9/13.
Given the S&P return is only up slightly over this same month before a product launch, we are likely to pair our long Apple position with a short on the S&P. Given our fund is managed to be an “all weather fund” that is expected to generate positive returns regardless of market conditions, this fits in well with our style. Our net exposure is expected to be a low ~25% (% of assets long minus % of assets short) over time with minimal drawdowns even during severe market corrections. This is how the fund was up both last year with the S&P down nearly 20% and is up this year as well.
We also manage positions around high probability events to try and generate short-term profits even if it is in sharp contrast to our longer-term views. The long-term is made up of a series of short-term events. The data that comes in over the short-term will logically influence our view on the long-term.
This trading pattern for Apple worked well around their most recent product launch. Apple’s stock rallied 9% in the month prior to the introduction of their mixed reality headset on June 5th while the S&P rallied 5%. This is despite the headset likely being an immaterial 1% of revenues over the near-term. An optimistic 1M units sold at $3,499 is $3.5B in revs which compares to total company revs of $387B in CY 22.
My view remains that currently, Apple is the most over-valued mega-cap tech stock relative to its growth rate. Revs grew 2% last calendar year and the estimate is for 1% growth this year and Apple trades at a 28x CY23 PE. This compares to the S&P rev growth of 4% with a PE of 20x for CY23. If you look at rev growth in 2022/rev growth in 2023/ & CY23 PE for other mega-cap names that are comparable, MSFT is 10%/9%/30x; GOOGL is 10%/8%/23x and $META is -1%/14%/21x.
Apple just reported their third quarter in a row of negative y/y revenue growth and “guided” their September quarter revenues to be down y/y and below consensus as well. This follows Apple guiding down the June quarter revenue estimates relative to consensus after the March quarter was reported. The last time Apple had 4 consecutive quarters of y/y revenue decline was over 20 years ago in 2001.
From a longer-term perspective, this puts Apple’s growth back to pre-Covid levels. In FY19, prior to Covid super-charging revenue growth, Apple revs were down 2% y/y. Revenues were also down y/y for both the December quarter of 2018 and March quarter of 2019. For the industry, global smartphone demand was also down for four consecutive years prior to Covid. Covid supercharged smartphone sales as people were forced to live, play and learn from home.
From a valuation perspective, during the summer doldrums in August of 2019, after Apple had reported lackluster June quarter results of 1% revenue growth (though an improvement from the prior 2 quarters of -5% y/y each), the stock traded at an 18x trailing PE versus 29x today.
Looked at a different way, both revs and EPS for the just reported June quarter have declined back to similar levels of the June quarter of 2021 with revenue flat and EPS a bit lower (-3%). However, the stock on 8/18/21 was trading at $146 and appreciated to $174 this past Friday (8/18/23).
This multiple expansion for Apple has even less support when compared to the market multiple which has declined. On 8/18/21, the trailing PE for the S&P was 26x and declined to 21x by 8/18/23. Apple’s multiple remained constant at an inflated 29x despite no revenue growth over that time. By comparison, Google’s multiple has contracted from 34x to 26x while growing revs 21% in the June quarter of 2023 versus the June quarter of 2021. Meta’s multiple has contracted from 26x to 23x while growing revs at 10%. Microsoft’s multiple has contracted from 37x to 32x while growing revs at 22%.
Longer-term, we believe consumer demand for Apple products will be less than expected during the holiday quarter due to:
In summary, though we think Apple should be good for a short-term trade on their product cycle launch just based on historical trading patterns, we would avoid the stock on a longer-term basis.
Given our concerns about AWS following the $SNOW commentary on cloud demand, we posted about selling our $AMZN long position which was a significant 5% of the portfolio & shorting it on May 25th to hedge our $META long position. $META was already up strongly for the year & we wanted a comparable large cap technology name to hedge the position. Since then (5/25-7/12), $AMZN is +14% vs META +22%. While our short position in $AMZN did underperform $META, Amazon’s stock was still better than the Nasdaq which was up 10% over this time.
We run a hedge fund which means we have longs and shorts so relative performance & sizing of the positions determines profits. However, I would put the $AMZN short in the mistake category. In hindsight we would have been better off keeping the long position that we bought post their Q1 earnings when Amazon’s stock declined on the further AWS slowdown in Q1 results. We bought it given our optimism on their retail business, their biggest segment, potentially having turned the corner, especially on profitability. Clearly Prime Day results would indicate that this turn around in retail is picking up momentum.
When long standing trends turn at large companies, they have a tendency of continuing. Total revenues at $AMZN were up 44% y/y during the peak of the pandemic in Q4 of 2021 & Q1 of 2022. It grew just 9% y/y in their most recent quarter. Their online stores revenue grew nearly 50% during its peak and was down slightly in their most recent quarter and has been down in 5 of the last 6 quarters. However, $AMZN sold more than 375M items (expectations of 325-350M) during its just completed Prime Day event versus just selling more than 300M last year. This implies an increase of around 25% y/y. Leveraging the infrastructure put in place to handle the surge in e-commerce demand during Covid should enable the expansion in retail profits to be the next big driver for the stock. As a result, we bought the stock today.
Amazon in their retail business has only 1% global market share and 85% of retail sales is still done in the physical world. We continue to see more sales moving online and Amazon continuing to be the biggest beneficiary.
By Dan & Aidan Niles
I wanted to take a moment to break down the surgeon general's warning and give some perspective on why I believe we might be missing the wider problem when we discuss social media issues.
The primary argument made on the dangers of social media is that frequent use can lead adolescents and children, particularly between the ages of 10-19, to be more susceptible to "social pressures, peer opinions, and peer validation," increases their sensitivity to "social rewards and punishments, and results in decreased life satisfaction, especially for girls 11-13 and boys 14-15 (Page 5). Furthermore, the warning associates frequent or excessive social media use with increased depression, anxiety, body dysmorphia, poor attention span, and general life dissatisfaction, citing how the design of social media platforms "to maximize user engagement" causes them to "have the potential to encourage excessive use and behavioral dysregulation" (Page 9).
There are several things I want to address when we look at these points. Firstly is the general issue of social pressure and human interaction. Most of us learn to be aware of public perception and social expectations just from interacting with friends, family, teachers, and coworkers. We're herd animals by nature, so understanding what the herd thinks and how they perceive us is essential. What social media has done is shifted the scale of socialization to include hundreds and maybe thousands of people in that process.
This introduction of so many people is where I think the second issue of increased anxiety and general life dissatisfaction comes into play. What we see on social media is often a curated version of the best highlights of peoples' lives. It can be rough if that's all we see, especially when we compare these curated snapshots to our lives full of challenges and struggles. But like I often told my kids growing up, sometimes your life seems particularly hard because you have to live it. Other people may have their struggles, but you might never know because you aren't in their heads and walking in their shoes.
When we look at how these platforms maximize engagement, we need to take a step back and reframe how we discuss social media. The surgeon general's warning discusses how "nearly a third (31%) of social media use may be attributable to self-control challenges magnified by habit formation" and that excessive use can "overstimulate the reward center" and "trigger pathways comparable to addiction" in some individuals (Page 9). While these risks are certainly present, this statement still doesn't encapsulate the larger problem.
For most of us, social media is a form of entertainment, and we often miss that it is also a tool. Like any other tool, it comes with risks. Take your average kitchen knife, for example. If you aren't carefully using it, you risk cutting yourself or losing a finger. On the flip side, it's a powerful everyday tool that we use to prepare our food and makes cooking easier. The trick to safely using any tool is understanding how to use it properly to maximize its benefits while minimizing its risks.
Social media and the broader Internet will become more critical to understand and master as time passes. Businesses use social media for marketing and securing customers. The Internet makes reaching more people with products and ideas easier than ever before. Attention has become one of the most valuable currencies anyone can own. An ad in the Super Bowl was costly because of how many people it could reach simultaneously. With the Internet and the advent of social media, individuals can do the same thing, and we call them influencers. Platforms like Instagram, Twitch, and Youtube have become major hubs for companies to curate data and market their products to target audiences.
As a father of two boys who just graduated college and are heading into the workforce, I see just how vital social media and technology are. My eldest is working on a tech startup, and the other, who just graduated, speaks four languages. Even my son, who just graduated, is still getting his Google IT Certification. Looking at jobs online, we noticed growing technology requirements for jobs across the board, regardless of industry. Moreover, many jobs include managing social media presence and developing promotional and marketing materials as part of the job description.
Whether we like it or not, the world is becoming more technologically integrated and digitized. Social media has become a key player in securing and conducting business over the Internet and building networks of contacts and clients. The prevalent use of technology in everyday life means there is a growing digital divide between people who know how to use social media and internet technologies as tools and those who don't. If we don't equip our kids to handle technology to keep them safe, we put them at a disadvantage when it comes time to build careers and enter the workforce. Therefore, our focus should be on teaching our kids how to use social media as a tool to improve their lives as opposed to a venue to consume content mindlessly.
Whether you agree or disagree with my views or the surgeon general’s, as an investor I have to evaluate current events based on how they will impact my investments. The Surgeon General and medical science have warned consumers about tobacco product dangers for decades. However, these warnings have had minimal impact on the returns of tobacco product companies. For example, over ~43 yrs including dividends, Philip Morris ($MO), now known as Altria Group, is up 88,761% vs 10,071% for S&P, despite tobacco being a known cancer causing agent. Therefore, while the warning makes for an interesting conversation, I do not believe it will substantially impact the investment returns of social media companies.
Link to the Original Article:
Note: The views, opinions, and facts presented above based solely on research by both Dan and Aidan Niles. They are presented for your information and are not an offer or solicitation for investment in the Satori Funds nor are these views directly affiliated with STP Investment Partners, the Registered Advisor to the Satori Funds. For more information on STP Investment Partners please visit
https://adviserinfo.sec.gov/firm/summary/306086, for more information on our Satori Funds, which are private offerings, please click on the “Learn More” button on http://www.danniles.com/.
Our compliance department has approved disclosing the following. Our Satori Funds are private offerings. Our limited partners were up on both a gross and net basis in 2022 with the S&P down 19% and Nasdaq down 33% and were up year-to-date (5/19/23) on both a gross and net basis in 2023 as well. (For more information and actual returns for 2023 and years prior, please click on the “Learn More” button on our home page.)
On 4/12/23 we wrote “We have a bias towards a short-term rally. However, longer-term we see earnings cuts & Fed balance sheet shrinkage driving the market to new lows in the second half of 2023.”
We have certainly had the rally we expected and then some.
But the market has been much more resilient at these high levels than we expected despite:
The market has been supported in 2023 by:
We are focused on valuation given that determines the risk you are taking versus the potential reward. We made money in 2022 due to this same focus. EPS estimates for the S&P500 for 2023 peaked at $252 in June of last year and have now come down to $220. We believe they will bottom at about $200 which is the normal 20% decline seen during recessions.
Retail results this past week from Target, Walmart and Home Depot showed the consumer was under pressure as spending was shifting to consumer staples like groceries and away from discretionary and big ticket items. Pressure on the consumer was blamed on a combination of inflation sapping consumer buying power, poor weather and lower tax refunds. We also believe that rising credit card balances and falling excess savings from the pandemic peak will put the consumers under increasing pressure through the rest of the year.
We are negative on enterprise demand as the US economy slows down and credit gets tighter following the recent bank failures. We would note that orders continue to weaken. Last week Cisco reported that product orders fell by 23% y/y in their April quarter despite an 8% easier compare as product lead times were reduced 40% Q/Q. On a positive note, Cisco’s stock did close up 5% last week during a strong week for the market and technology stocks.
We believe the S&P being up in March & April despite three of the four largest bank failures in the US is due to the Fed balance sheet expansion by almost $400B in 3 weeks which reversed 5 months of balance sheet shrinkage. In 2020 during the onset of a global pandemic the S&P was up 16% (double the yearly average) due to the Fed balance sheet expanding by $3.2 trillion to $7.4 trillion. Or you believe a global pandemic is terrific.
The Fed balance sheet is now down $277B over the past 8 weeks as the Fed continues their fight against inflation but the balance sheet is still up 1% versus the lows prior to the SVB failure.
In general, we think this could play out like during the GFC. There was a 24% surge in the S&P over 6 weeks following the passage of TARP in October of 2008 after the failure of Lehman Brothers and then Washington Mutual. During the rally, the Fed Balance sheet expanded from $900B to $2.2T in less than 4 months by year-end 2008. The S&P then dropped 28% in 2 months starting in January 6th of 2009 to its ultimate lows in March of 2009. The Fed balance sheet dropped by $300B to $1.9T by early March of 2009 as corporate earnings estimates had to get adjusted lower during Q1 due to the fallout of the Global Financial Crisis.
Our outlook for the rest of the year is based on the expectations of a recession combined with no rate cuts by the Fed due to inflation falling but staying above 3% and the Fed’s 2% target. First there are more than 50% more jobs than people unemployed keeping wages high in the US and second the re-opening of China after a 3 year lockdown should keep commodity prices firm. We believe the Fed is done raising rates. But unlike the market expectations of 2-3 rate cuts later this year, we think the Fed will remain on hold. We do not see core PCE dropping below 3% this year versus the Fed target of 2%.
As a result, we are biased towards a decline in the S&P through the rest of the year driven by a recession in late 2023 driving lower earnings. Valuations as we saw with many stocks in 2021 do not matter until they do. We have been surprised by the expansion in multiples for seven of the largest technology companies this year driven in general by a common theme of Generative AI. Without these names, the S&P composed of 493 other stocks would be down for the year. On a risk to reward basis, we believe the worst case downside risk is to 3000 on the S&P ($200 in 2023 EPS vs $220 today at a 15x PE vs 19x today) versus minimal upside from current levels.
Stock Specific Thoughts
Q1 earnings from the mega cap technology companies was generally better than expected with EPS forecasts going higher for all the big tech giants (Google, Meta, Amazon and Microsoft) with the exception of Apple.
We bought Amazon after the decline following earnings results and are the most positive we have been on that name in over a year given estimates are finally going higher after a year of cuts. We believe the strength in their retail business is more important over the long-term than the slowing in Amazon Web Services growth. Amazon is now one of our largest positions. It is hedged with shorts in cloud computing software stocks that have rallied hard over earnings season.
We still like Meta especially given its valuation which is near a market multiple while Reels picks up share versus TikTok and their AI powered ad tool Advantage+ helps with monetization after the Apple privacy induced issues. META was a Top 5 Pick for us entering this year.
While we are encouraged by Google’s results and are not worried about much share loss versus Bing, we worry that the weakness we have seen in traditional advertising demand at names like Disney and Paramount will start showing up in online ad demand later this year. We believe Meta is better positioned to withstand an ad spending slow down. As a result, our Meta long position is now hedged with a small short position in Google. We initially bought Google after their slight stock decline on a solid quarter but with the recent rise in the stock, we have sold the position and shorted a small amount relative to our META long.
For Apple, March quarter results were better than expected but June quarter estimates were cut by 2-3% on both revs and EPS but surprisingly the stock was up 5% the day after earnings. We believe this has more to due with relief following results from TSM and Qualcomm and their comments on smartphone demand. The stickiness of the Apple ecosystem and view that their products are consumer staples has not been borne out with actual results. Services revenues were less than expected with just 5.5% y/y growth and was guided to roughly the same levels for June. At a 29x PE relative to the S&P at 19x, the risk to reward is not in your favor in owning Apple. As a reminder, smartphone units peaked in 2016 and were down for 4 years in a row prior to Covid supercharging upgrades & demand for work from home & learn from home. Apple revs were down 2% in FY19 prior to Covid accelerating that to a peak of 54% y/y in March of 2021 and now -3% y/y in March of 2023 with forecasts of -3% y/y in June as well and EPS down 1% y/y.
Microsoft had solid results with estimates also increasing going forward. However we worry about the optimism over ChatGPT that is reflected in its valuation of 31x versus the S&P at 19x especially given Google is only at 21x. On a positive note, we do believe the overall PC market bottomed in Q1 with a decline of roughly 30% y/y for the industry in Q1.
Intel should benefit from GMs bottoming, PC demand improving & Generative AI demand. We believe that gross margins bottomed out in the March quarter and have the potential for recovering faster than expected as the ramp in new process technologies reverse the startup costs that depressed margins in the March quarter. We believe Intel will also benefit from the rise in AI needing more powerful microprocessors that have many more cores. From a long-term perspective, we believe share losses versus AMD over the past 5 years are starting to slow as Intel benefits from going all in on EUV 2 years ago. While Intel is likely to lose server share through 2023, we believe this will stabilize in 2024 with introduction of new chips. Relative valuation for Intel is compelling within semis. Intel trades at a lower price to book value (1.2x) than Micron (1.5x) a commodity memory manufacturer with negative gross margins. We think the PC market at down ~30% y/y in Q1 for the industry will recover over the course of the next year.
In general, we believe semiconductor stocks related to PCs and smartphones are closer to a fundamental bottom given they have been going through an inventory correction for about one year now.
With China re-opening, we favor commodity linked names that were hit on fears of a global recession.
We like oil related stocks ($XOP $OIH) given the Strategic Petroleum Reserve is down to the lowest level since 1983 and demand should pick up in 2023 with China exiting their zero Covid policies after 3 years. In general, we like commodities that in general have come down over growth fears.
$URA remains our longer-term play on energy security and green energy. Since the disaster at Fukushima in 2011, nuclear as a source of energy production was significantly curtailed over the next decade. However, with Russia invading Ukraine, the world is looking again to nuclear for clean energy and as a means of gaining further energy independence from Russia. We expect Uranium related names to perform well and the $URA ETF is a great way to get diversified exposure to the space.
We like $DKNG given the sports-betting companies are now focused on profitability vs spending exorbitant amounts of money to acquire customers at all costs in 2021/22. Sports betting is one of the last big markets to go online and the two market share leaders, DraftKings and FanDuel owned by $FLTR.LN, should both turn EBITDA positive later this year. The tighter credit markets should also put increasing pressure on many of the smaller money losing players in this sector and enable the two leaders to gain even more share profitability. Scale is an advantage. Obviously, a recession will put pressure in the other direction but we believe these two factors should offset one another. $DKNG trades at just 4x EV/Sales but sales are expected to grow ~40% this year.
$XLV - No one wants to die and many of us (including myself) have put off going to the doctor since Covid. The healthcare sector typically outperforms during recessions. In 2022, when the S&P dropped 18%, the $XLV (the S&P Healthcare Sector ETF) lost 2%. In 2008, when the S&P dropped 37%, the $XLV lost only 23%. The rotation out of $XLV -3% to start the year has created some interesting opportunities.
We are balancing our longs with shorts where valuations remain high and estimates need to come lower. We are especially biased against high growth software, hardware & consulting names that are based on the number of employees employed at technology companies or the consumption of cloud resources.
As layoffs continue at high tech companies in the “year of efficiency,” these growth rates are likely to get revised lower. In addition, financial services companies are the second largest IT spenders at 11-12% of the $4.4 trillion IT spending market and only second to the tech companies themselves. We believe that the increase in spending on generative AI is not enough to offset the decrease in spending in other parts of their business.
Cash in risk free 3-month T-bills yielding 5.3% vs just 0.03% to start 2022 is a great investment alternative. While the singular focus of my fund is to maximize reward while minimizing risk by trading the market daily, not everybody can trade daily. Having a big cash reserve allows flexibility to reinvest if the S&P goes lower in 2023. Cash allows us to wait for the fundamentals to bottom and make calculated investments that maximize reward while minimizing risk. You are essentially being paid for your patience to wait until the risk to reward is in your favor.
It will take time for the cumulative impact of Fed rate increases and tighter lending standards following the recent bank failures to show up in the real economy.
Portfolio Construction & Goals
The goal of a hedge fund should be to first protect your capital and minimize losses, while also positioning for potential gains during key market shifts. Our goal is to provide consistent high single digit returns over time with high Alpha generation while maintaining a low correlation to the S&P. This has been accomplished by protecting assets during periods of severe stock market declines like in 2022. Our average net exposure is a very conservative 25% over the past 19 years.
We are a low volatility and high risk adjusted return portfolio. If you are looking for a high volatility and high absolute return portfolio, the thoughts above may not be appropriate for you. None of our stock positions (either long or short) should be looked at in isolation as it is part of a portfolio.
All the best in your investing,
Dan & the Satori Team
The S&P is at an inflection point. Both a sharp relief rally following bank earnings on 4/14 or the start of the next major decline driven by greater than expected deposit outflows are possible. The Fed balance sheet expansion of $400B in 3 weeks is a major positive near-term. We have a bias towards a short-term rally. However, longer-term we see earnings cuts & Fed balance sheet shrinkage driving the market to new lows in the second half of 2023.
A relief rally could start on 4/14 given $JPM $WFC $C should see deposit inflows in aggregate despite future EPS estimates having to get cut due to worse Net Interest Margins (NIM). We expect $JPM to have the least downside to EPS (<5%) and to see the largest deposit inflows by far. Both $WFC and $C have more risk to EPS (5-10%) and deposit levels do pose some downside tail risk for both .
However, the key to whether the next major market near-term move is up or down is likely to be $PNC results. $PNC also reports on 4/14 but does not have the benefit of being a systematically important bank. As a consequence, their results may be a better reference point for the health of the banking system.
We continue to expect more bank failures this year despite the implicit guarantee by the FDIC on depositor funds like we saw at SVB and Signature Bank. During the Global Financial Crisis, bankruptcies increased in 2009 despite the Troubled Asset Relief Program (TARP) being passed in October of 2008 as can be seen in the chart. In fact, it increased even further in 2010. To be clear, we believe there is still further downside risk to regional bank stocks as a whole even if we see a short-term relief rally.
Therefore, we plan to have minimal directional exposure & wait for results & stock reactions on 4/14 before committing more capital either long or short.
We are biased towards a short-term rally due to expansion of the Fed balance sheet from its near-term low of $8.340T on 3/1/23 to a high of $8.734T on 3/22/23. The balance sheet has dropped slightly since then to $8.632T on 4/5/23 but has still undone 5 months’ worth of declines in less than a month due to the banking crisis. For reference, $8.965T was the balance sheet peak on 4/13/22.
As a reminder, during the Global Financial Crisis, following the passage of the Troubled Asset Relief Program (TARP) in October 2008 and another temporary bottom in November 2008, the S&P rallied 24% in six weeks till January 6th of 2009. During this time, the Fed balance sheet expanded from $0.906T in early September 2008 prior to the Lehman failure to $2.24T by year-end.
Eventually earnings mattered as the S&P fell 28% in 2 months to its ultimate bottom in early March of 2009. We would also note, however, that the Fed balance sheet fell to $1.900T by early March before the Fed started to expand the balance sheet once again.
More recently, the S&P was up 16% in 2020 despite a global pandemic driven by the Fed expanding their balance sheet by $3.2T to $7.363T. The S&P was up 48% in total over 2020 and 2021 combined as the Fed expanded their balance by $4.6T to $8.757T. Either global pandemics are wonderful or easy money covers up a lot of problems over the short-term.
Longer-term, we still believe the lows are ahead for market in the second half of 2023 due to:
Dan Niles is founder and portfolio manager for the Satori Fund, a tech-focused hedge fund.