The Waiting

I've been off for a couple of weeks dealing with a host of real life things, and I have to say I've missed posting these. I hope you've missed reading them. As Tom Petty once said, the waiting is the hardest part. It's going to be a big week in many ways. I might even be the most important week of the year. The U.S. Presidential Election is on Tuesday, but that doesn't mean it will be decided by then. In fact, I wish I could take the over on whatever time they think it will take. I'm thinking somewhere in the hanging chad territory. Not to be outdone, the the craziest job in the world, but the Fed the announcement on Thursday. Plus we're still in the middle of earning season. Buckle up!!

Rather than create the chart of October's returns, I'm going to share this one from Callum Thomas . I like the classifications. Cash was the only winner.

Best of the Week/Month

Capital Decanted's latest episode on multi-strategy investment firms with Jenny Johnson (CEO of Franklin Templeton) and Jean Hynes (CEO of Wellington Management) is a gem. This one is a bit longer than my normal summary, but I found this to be a extremely important episode to dive into. The episode opens with a look back at the history of what is now Private Equity and a summary of the plethora of deals in the space. John then explains the real reason behind this combo of public and private asset management. Currently, research estimates 15-20% of the $150T industry is invested in private assets, but 50% of revenues come from this source. Christie then makes the huge point that size is the enemy of returns. These new modern forms of asset managers aim to take advantage of that. The discussion then adds in Jenny and Jean at about the 53 min mark and centers on the convergence of public and private markets. In this conversation, Johnson and Hynes explore the evolving landscape of investment, focusing on the blending of private and public offerings within multi-strategy investment firms. They discuss how the traditional lines between these markets are becoming increasingly blurred and why firms like Franklin Templeton and Wellington Management are evolving their strategies to adapt to this shift. Historically, public markets have been more accessible and transparent, while private markets have provided exclusive opportunities with potentially higher returns but less liquidity, but growing investor interest in diversification and unique assets drives convergence, as multi-strategy firms offer both public and private investment vehicles, catering to the need for flexibility and adaptability in portfolios. Johnson and Hynes explain that multi-strategy firms deploy various investment styles under one roof, offering better risk management and a balanced approach. These firms combine public equity, fixed income, private equity, and alternative assets allows firms to smooth volatility, aiming to provide steady returns despite market fluctuations. Today’s modern firms rely heavily on data analytics and artificial intelligence to assess risks and identify growth opportunities. The guests emphasize technology's role in bridging public and private markets, enabling more precise decision-making. New digital platforms and tools allow investors to participate in private offerings, which were previously available only to institutions or high-net-worth individuals.? Johnson highlights a trend where private markets, traditionally exclusive to institutional investors, are gradually opening up to retail investors. Firms are creating investment products that combine accessibility with growth potential. Hynes discusses how large institutional clients are increasingly blending public and private investments to optimize long-term growth and resilience in their portfolios. By integrating private assets, multi-strategy firms help investors better navigate downturns, given that private assets are typically less correlated with market fluctuations. The speakers discuss how access to early-stage private companies allows investors to capture growth that previously would have been out of reach. One of the hurdles of converging public and private assets is balancing liquidity, especially as private investments tend to be longer-term. The regulatory framework’s ability to evolve was another interesting topic. There needs to be some accommodation to increase retail participation in private markets, but that requires safeguards and transparency measures to protect smaller investors. They also discuss the Role of ESG in Public-Private Investments. They close on the topic of the future outlook. ?They predict that technology, evolving investor demands, and changing economic conditions will drive firms toward even more sophisticated multi-strategy approaches and continue blurring of the lines between public and private. This is my favorite podcast of the year so far. I cannot recommend this listen enough. Listen/Watch time: 101 minutes

Multi-Strategy Investment Firms—the Future Convergence of Public and Private Offerings with Jenny Johnson and Jean Hynes

Best of the Rest

One would think that analysts pay attention to the macro forecasts when looking at forecasting company earnings, but Joachim Klement highlights a report put out this summer from the Federal Reserve that says this might be otherwise. Essentially, the report shows that in the short term analysts do ok, but as you go out the GDP forecasts tend to have a larger impact. The report also states that investor can exploit the estimate errors, as there tends to be larger earnings surprises and a stronger price return when the macro model shows a large deviation from the analysts. One thing to keep in mind with this is that it is on an aggregate level. The report focuses on bottom up S&P 500 constituent analysis. This aligns somewhat with research from LSEG's Starmine team that shows analysts on the individual companies tend to be overly optimistic when forecasting the future levels of growth, especially in the longer term forecasts.

Analysts should pay more attention to macro forecasts

This article took me back to something I heard from Alister Hibbert, head of Blackrock's Strategic Equity team on The Bid. Alister notes that Blackrock looks at economic data, but also uses speaking to the companies that make up the economy gives them a sense of the overall macro environment. This helps them navigate cycles. His team is trying to identify extraordinary franchises. The search starts with thousands of companies to get down to about 50, looking for special businesses with brands, barriers to entry or high switching costs. The geopolitics and macro can be noise and they need to have patience and decipher if the issues are cyclical or not. Alister notes that the stock market is flawed because humans in the market are flawed. They choose to work with behavioral psychologists. Watch time: 20 minutes

The Case for Active Equity Investing: A Fund Manager's Perspective

Richard Ennis puts active managers on blast. He notes that pensions allocate 30% of their assets to alts, which is higher than what we heard in the CAIA episode above. He notes that these more expensive products have outperformed passive index benchmarks by 1.2% per annum since the GFC in 2008. Richard says that these results don't get much attention because the endowments using confusing benchmarks they come up with on their own. He then explains the differences between the needs for pensions and endowments and why they're so. His final words are that this is long enough and it's time for a change. He thinks like Meb Faber has argued many times to CalPERS that passive index investing would be more effective and much cheaper.

Are Institutional Investors Meeting Their Goals? Spotlight on Earnings Objectives

Another long one, but well worth your time from Michael Mauboussin & Dan Callahan, CFA . This report explores the competitive advantages, or moats. They analyze how companies sustain profitability over the long term and discuss five key types of moats: intangible assets, switching costs, network effects, cost advantages, and efficient scale. The report also provides frameworks for measuring each of those moats. This is a great framework for evaluating business and industries and they even provide an actual questionnaire to figure it out. If you're stuck for time and 65 pages is too much, go directly to the one page conclusion. There's one sentence that provides value on its own. "The decomposition of financial results shows that while industry and management are relevant, strategy is the most important determinant of long-term value creation."

Measuring the Moat: Assessing the Magnitude and Sustainability of Value Creation

Let's move away from the investment side and check in on the traders. A couple of weeks ago, the NYSE announced its plan to extend trading hours on the Arca venue to 22 hours on weekdays. Essentially, trading will be allowed from 1:30am to 11:30pm for normal weekdays. They're targeting a 2025 launch of this. Not to be outdone, retail broker, Charles Schwab announced its plans to move to 24 hour trading for stocks in major U.S. indices and many ETFs. As the Reuters article notes, Interactive Brokers and Robinhood have already launched overnight trading, and 24Exchange is awaiting approval for 24/7 trading of U.S. stocks. Seems the 24/7 trading of crypto has influenced equity investors need for more trading. I'll be talking about this topic around European stocks next week in London at LSEG's Equities Day with a few experts from the industry.

NYSE plans to extend daily trading to 22 hours on its Arca exchange

US broker Schwab to roll out broader overnight trading platform

Switching to bonds, Tradeweb will extend its trading hours on November 6th and offer overnight support on Election Day. The venue will also begin trading for European securities earlier on November 6th. Another story referenced in this article notes that many trading desks are prepping to add staff to handle higher than normal trading volumes on and around Election Day.

Tradeweb to extend trading hours the day after US election

It's not all the time that 10 year rates rise in a Fed cutting environment. Many are assuming this is inflation and/or a possible Trump re-election bid being priced in. The article notes that this isn't all that rare. The article points to two periods in the 1990s where Fed cuts were met with yield rising. But why? Well, the Fed wasn't coming late to the party and things weren't as bad as people thought. Essentially, the economy is doing better than expected and while not doing great, it's doing "less bad in absolute terms." The article notes that EM currencies and bond spreads are not as bad as they probably should be in Trump 2.0 is being priced in specifically.

Is the bond market throwing a Trump tantrum?

One for the Road

Usually an off topic article, but I wanted to share what protection of SPX puts look like going out in time. I choose the 25 delta puts. You can see dramatic drop into year end.

Thanks for reading. A reminder for those in the U.S. to breath. No matter what happens on Tuesday, or whenever it's final, we've been through worse and come out of it.