Dan Loeb’s latest letter to investors is out, and the Third Point surfer supremo presented FTAV with an interesting concept to sum up the current financial environment.
The 1982 non-narrative film “Koyaanisqatsi” takes its name from the Hopi word for “unbalanced life”. The prescient film juxtaposes striking images of nature with urban scenes illustrating the imbalances created by modern technology, set to a haunting soundtrack by Philip Glass. Forty years later, this film and soundtrack provide an appropriate backdrop for today’s investing environment. “Koyaanisqatsi” perfectly captures current market conditions which are, in many ways, a reaction to imbalances.
Of course, all hedge fund managers love metaphors and pseudo-philosophical references, especially if they are a little abstruse. But like somewhere that hosted Jamie Powell for four years, we can’t complain too much about people over-interpreting old movies that no one has heard of or cares about.
And the truth is, there are signs everywhere that a pretty deep market regime shift is upon us, and people are only just beginning to grapple with the implications. The Nasdaq has now given up all of its 2021 gains, and many – like Loeb — believe this is just the beginning of an epic upheaval, rather than the end.
Most vulnerable are the still not-for-profit companies that need the grace of equity or debt investors to stay alive. Loeb suggests that many of the more speculative companies that relied on stock options to attract talent may already be entering a death loop as their equity values wane – something on which Jamie wrote before leaving (sob).
Even after dramatic declines, it’s hard to call a bottom in the high-growth, high-value segment of the tech sector, especially since many of these companies relied on stock-based compensation and on controversial accounting and reporting techniques. It appears that many companies that have used this type of compensation to attract employees may have retention difficulties, leading to increased dilution for future stock awards or increased cash salaries, which could weigh on margins. analysts who rely on adjusted measures rather than old ones. Shaped GAAP. We fear that Soros’ theory of reflexivity will come into play if such a spiral ensues.
Marvel and be amused by this chart of Goldman Sachs’ unprofitable tech stock index over the past five years.
When even profit-shy Uber seems to think it needs to act, you know things are serious. Here’s an excerpt from an email CEO Dara Khosrowshahi sent troops earlier this week, courtesy of Bloomberg Deidre Bosa.
After my winnings, I spent several days meeting with investors in New York and Boston. It is clear that the market is experiencing a seismic shift and we need to respond accordingly. . . Channeling Jerry Maguire, we have to show them the money. We have made a ton of progress in terms of profitability. . . but the goal posts have changed. Now it’s free cash flow. We can (and must) get there quickly. There will be companies that stick their heads in the sand and are slow to pivot. The harsh truth is that many of them will not survive.
However, as of this writing, this is clearly no longer something that can be dismissed as a shitco calculation. IBM is the only big or big US tech stock to keep its head above water this year, gaining 3%.
Apple slightly outperformed the S&P 500, but with an 11.4% loss, there’s little to cry about. Only 12 of the 102 members of the Nasdaq 100 index (yes, we know that) have seen their stock prices rise this year.
The punishment meted out to heavyweights like Netflix, PayPal, Meta, and Nvidia is remarkably brutal. (Apologies for Refinitiv’s ugly screengrab, but our charting tool seems to struggle with this data as much as some growth jockeys.)
Something big is brewing. Over the weekend, Goldman Sachs’ chief global equity strategist, Peter Oppenheimer, released a report on the dawn of what he called “the postmodern cycle.”
For most of financial history, market cycles have been generally short and turbulent, but the past four decades have been characterized by lower inflation, an independent central bank, globalization, generally lower volatility , longer cycles and higher corporate profits. Oppenheimer calls this the “modern cycle”.
However, the coming postmodern market era is likely to be characterized by faster inflation, higher bond yields – both nominal and real – greater regionalization rather than globalization, lower labor costs and higher commodity prices and more militant governments, he argues.
Will the new era really be different from the previous one, at least economically? It is always tempting but often wrong to over-extrapolate the current configuration over the very long term. Yet the meaning of “Koyaanisqatsi” is unequivocal. De Loeb, with our emphasis below.
To be an investor is to constantly live at the intersection of history and uncertainty. We build our mental models, frameworks, and processes to try to accurately assess securities and overlay them with a story about the economic, geopolitical, and psychological factors that frame the context to value them. We create data-driven stories to explain our differentiated view of an imbalanced stock within its sector or asset class to justify a different perception that we believe will generate alpha.
Sometimes, however, investors can create a framework that looks solid only to discover that the method is actually no better than a system for “winning” at Russian Roulette. The key, of course, is to change your frame as the environment changes. Even the most sophisticated quantitative investors employing hundreds of mathematicians and physicists with PhDs find that their models can fail due to the ever-changing topography of the surface of relevant data.
Since I started Third Point 27 years ago, I’ve seen many investors (myself included) stumble after years of success because they didn’t adapt their models and frameworks quickly enough to as conditions changed. I’ve said before that they don’t sound when the rules of the game change, but if you listen carefully you can hear a dog whistle. It seems like such a time to listen to that high-pitched sound.
The markets are, for all their faults, quite good at tackling these problems quickly. But it’s impossible to say how much is already in the price, or yet to come. As a venture capitalist Bill Gurley recently noted“Previous all-time highs are completely irrelevant. It’s not “cheap” because it’s 70% off. Forget those prices that happened.
But FTAV feels on slightly safer ground saying the tech industry itself has been slower to grasp just how much things have changed. (Until recently this reminded me a bit of my visit to Dubai in late September 2008, and an enthusiastic developer told me that they were definitely building a skyscraper even taller than the Burj Khalifa, despite the recent collapse of Lehman. A year later, developer Nakheel needed a state bailout, and the site remains a sandbox to this day.)
Like Khosrowshahi’s letter and various Twitter Feeds show, the feeling changes quickly. Going forward, it’s going to be more about broad leads and making real profits, rather than fantasy TAMs and semi-annual Tiger-led funding rounds. This CB Insights chart is going to look a lot darker in Q2, and we suspect there will be more dreaded rounds and layoffs ahead.