Praetorian Capital's commentary for the month of November 2024, titled "What’s Driving Stocks".
Friends,
Back in March, I wrote a piece about looking for deep value opportunities, driven by changes in market structure. At the time, I noted that pod shops were creating unusual mispricings in equities, as they were operating with a valuation agnostic framework, only chasing rate of change:
“In my realm of value investing, I’m genuinely amazed at how these pods will short high-quality, rapidly growing businesses at under five times cash flow—just because the next quarter will be weak. I don’t understand how that strategy makes money, except during highly truncated bear-raids, yet the pods keep playing at it as they fixate on short-term rates of change. Then right after the negative print, they often accelerate their short selling, pressuring the stock in the pre-market and further spooking the longs. They want to take a bad quarter and stampede things, so that they can cover. Even then, sometimes they don’t cover until the data stops inflecting negatively. Then they cover en masse.”
At the time, I attributed this incredible opportunity set partly to malice, with the belief that that pod shops were trying to spook long-only players and create selling, so that they could cover. What if there were an even simpler explanation to all of this?? What if there were also a quantitative answer??
Fortunately, my good friend, Kevin “The Macro Tourist” Muir, has given me permission to publish a recent paywalled piece of his, where he looks at why stocks tend to move randomly—totally divorced from valuation. (For the record, I think you guys should all subscribe as he publishes one of my favorite blogs).
As noted in my original posting, I believe that pods are one of the greatest sources of Alpha currently in the markets. I want to understand them better, so that I can abuse them more effectively. I want to reverse engineer their formulas, as I intend to use them as my pinatas. Kevin’s piece helps to distill why things seem to overshoot much further than in the past. Understanding this, should help me to improve my timing on position entry (I tend to be too early buying pullbacks), but also help me to dodge landmines along the way.
I think this piece was the missing link on my journey to understand why the market structure has changed so completely. Please read it twice. Enjoy…
Kuppy
Read the full article here.
