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Weekly Update 1 August 2022

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This content is provided for information purposes only. It is not a recommendation to buy, sell or hold any security.

Stocks rose strongly in July driven by weak sentiment, low expectations for company earnings which key companies exceeded, and lower interest rates.
www.cnbc.com/2022/07/28/stock-market-news-updates-open-to-close-future.html

The problem we have with this rally is that inflation, the underlying cause of the market’s difficulties this year, has not gone away. If anything, inflation pressures have broadened in recent months.
fred.stlouisfed.org/series/PCETRIM1M158SFRBDAL tradingeconomics.com/united-states/core-pce-price-index-annual-change

As Bill Dudley, the former president of the Federal Reserve Bank of New York, argues: “Inflation is too high, the labor market is too tight and the Fed must respond — most likely by pushing the economy into an actual recession.”
www.bloomberg.com/opinion/articles/2022-08-01/a-pivot-won-t-help-the-fed-beat-inflation

However, this recession will be a late 2022/2023 story. Until economic data deteriorates further, markets can speculate that the worst has been avoided or that, even if there is going to be a recession, it is already in the price.

We have difficulty accepting this last statement, though. First, the outlook for company earnings continues to deteriorate.
twitter.com/MikaelSarwe/status/1554008688599482369
twitter.com/MrBlonde_macro/status/1553922088083283981

At the same time, following the strong rally in July, the $SPX500 at 4130 incorporates a “risk premium” of less than 300 basis points. The historical average is 350 basis points, and in recessions, good entry points have come when the risk premium has exceeded 450 basis points.
www.morganstanley.com/pub/content/dam/mscampaign/wealth-management/wmir-assets/gic-weekly.pdf

In Bank of America’s view, recession risks mean that the $SPX500 should be valued at 17.4x earnings. This could equate to a fair value for the index of between 3250 (Bank of America’s pessimistic scenario) and 4300 (if analyst consensus estimates are correct).
www.barrons.com/articles/sp500-stock-market-price-target-51657828573

We believe that the inflation problem is not solved and that as a result, the Federal Reserve will eventually have to increase interest rates more than the market expects, which will lead to a recession. At the same time, we find this is not being priced in by the market. For this reason, we continue to hold a defensive posture. The opportunity to turn more constructive should arrive in mid-2023, when we expect leading economic indicators to bottom.

𝟮𝟬𝟮𝟮 𝗽𝗲𝗿𝗳𝗼𝗿𝗺𝗮𝗻𝗰𝗲 𝗬𝗧𝗗
@triangulacapital -4.2%
$SWDA.L -14.1%

𝗣𝗼𝗿𝘁𝗳𝗼𝗹𝗶𝗼 𝗰𝗵𝗮𝗻𝗴𝗲𝘀
The portfolio was moved back to a defensive posture because of the worsening European natural gas situation. This meant that we missed last week’s rally. However, we are not interested in chasing the market from its current levels.

Copy Trading does not amount to investment advice. The value of your investments may go up or down. Your capital is at risk. Past performance is not an indication of future results.

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© Pietari Laurila 2024 | All rights reserved.

Disclosures

eToro is a multi-asset platform which offers both investing in stocks and cryptoassets, as well as trading CFD assets.

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 51% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work, and whether you can afford to take the high risk of losing your money.

eToro (Europe) Ltd., a Financial Services Company authorised and regulated by the Cyprus Securities Exchange Commission (CySEC) under the license # 109/10.

eToro (UK) Ltd. is authorised and regulated by the Financial Conduct Authority (FCA) under the license FRN 583263.

Your capital is at risk. Other fees may apply. For more information, visit etoro.com/trading/fees.

Pietari Laurila is not a registered investment advisor and does not offer investment advisory, fund management or wealth management services.

Triangula Capital is a brand name, not an incorporated entity.

This page is provided for information purposes only. It is not a recommendation to copy the Triangula Capital strategy or to buy, sell or hold any security.

2009-2020 performance figures are from Pietari’s personal Interactive Brokers account. They are time-weighted returns calculated in accordance with the Global Investment Performance Standards (GIPS).

From 2021, performance is calculated by eToro.

Past performance is not indicative of future results.

Track Record

It is often said that past performance is not a guarantee of future performance.

That is true. But there is also some evidence indicating that portfolios that performed better in the past, do perform better in the future.

“[…] top-decile prior-alpha funds produce annual future alphas of about 150 bps, net of fees” Source

Risk warning: That is only one study. In general, past performance is not indicative of future results.

Aligned Incentives

Pietari invests the majority of his net worth in the strategy. This ensures that his interests are aligned with investors who copy the strategy.

“Funds with high-incentive contracts deliver higher risk-adjusted return, and the superior performance remains persistent. The top incentive quintile of funds outperforms the bottom quintile by 2.70% per year” Source

Risk warning: Pietari holds accounts with multiple brokers and may therefore have a conflict of interest when deciding which accounts he should trade in first.

Unconstrained Investments

The strategy has fewer constraints on its investments than traditional mutual funds.

The strategy portfolio can be invested in stocks, bonds or cash and these allocations can vary over time.

Compared to traditional mutual funds, the strategy also:

  • holds fewer securities
  • trades more
  • avoids following the index

Each of these points has been shown to be an important predictor of portfolio performance.

“We […] find that portfolio concentration is directly related to risk-adjusted returns for institutional investors worldwide” Source

“A one-standard-deviation increase in turnover is associated with a 0.65% per year increase in performance for the typical fund” Source

“We find that truly active funds significantly outperform closet indexers. Further, we find that the truly active funds are able to outperform their benchmarks on average by 1.04% per year” Source

Risk warning: Concentrated portfolios with few positions can suffer large losses if bad news arrives about any of the companies in the portfolio.

Cheap Stocks in Cheap Sectors

The strategy invests in geographies and sectors where values have collapsed due to macroeconomic problems.

Within these geographies and sectors, the strategy overweights stocks that trade at low valuations on measures such as price-to-earnings or price-to-net asset value.

Every stock in the strategy portfolio must also be a good company, with no obvious red flags or long-term threats to its business model.

The aim of the strategy is to maximize returns, even if this means taking more risks than usual.

Risk warning: The strategy portfolio tends to be concentrated in risky stocks, which means that its losses in any market downturn will likely exceed those of the market index.