In this edition, I’ll describe my newfound interest in hedge fund holdings, and cover domestic stocks that might even benefit from U.S. tariffs. The diversion is (inevitably) Swiftie-focused, and we’ll look ahead to the important data points on the calendar.
Stock picks
Hedge fund holdings and jelly beans
A Goldman Sachs report made me change my mind about something this week. The subject is hedge fund equity holdings.
Goldman Sachs analyst Ben Snider published his monthly Hedge Fund Trend Monitor on Tuesday, analyzing the holdings of almost 700 hedge funds with US$3.0-trillion in equity exposure (US$1.1-trillion of that is in short positions).
Usually, I’d just delete this report from my inbox. Most hedge funds have historically underperformed their benchmarks so why should I care what they hold? The industry acts like a (very big) tax on wealthy investors. None of my business.
This time, I did happen to open the report and was taken aback by two data points in the first paragraph. One, long/short funds have so far this year returned 14 per cent on average – double the average return of the past 20 years. Two, Goldman Sachs’ Hedge Fund VIP list of the most common hedge fund equity holdings is up 30 per cent year to date.
The promise of long/short funds is strong risk-adjusted returns (Sharpe ratios seem to be the measuring stick du jour for risk but there are always a lot of them) that do not correlate with the overall equity market. The best returns in two decades implies there a lot of mangers fulfilling their mission, even if 14 per cent is 10 percentage points below the S&P 500’s year-to-date return.
News that the top hedge fund holdings have outperformed the S&P 500 is even more interesting. If it’s sustainable that a list of top positions weighted by the number of funds with the stock in their top 10 holdings in them outperforms the index, we need to know about that.
To explain why this might be important I’ll need to back up and explain one concept first. Columbia University finance professor and all-around polymath Michael Mauboussin did a relevant experiment every year to show the wisdom of crowds. He would ask each student to guess the number of jelly beans in a jar. Inevitably, no single guess would be close but the average of all guesses would be very accurate.
It’s possible that US$3-trillion and 700 fund managers are like Mr. Mauboussin’s students - individually not that good but accurate in aggregate with their high conviction picks. It’s at least possible enough that I will continue to open the hedge fund positioning reports.
For the record here are the top 25 stocks on the Hedge Fund VIP list but please be aware that positioning can change quickly: Amazon.com Inc., Meta Platforms Inc., Microsoft Corp., Alphabet lnc., NVlDIA Cогр., Apple Inc., Taiwan Semiconductor Manufacturing, NetfIix Inc., Hess Соrp., Visa Inc., Vistra Corp., Talen Епеrgy Corp., Ubег Technologies, Ароllo Global Management, Spotify Technology SA, Vertiv Holdings Со., Mastercard Inc., Salesforce Iпс., Berkshire Hathaway, Flutter Entertainment PLC., Kellanova, Liberty Broadband, CRH public limited Co., Broadcom Inc. and Smartsheet Inc.
Trump trading
Energy, insurance best positioned to weather tariffs
The main economic proposals of the imminent presidential administration are all negative for the Canadian economy, according to Jefferies equity analyst John Aiken. The U.S. is the destination for roughly 75 per cent of Canadian exports, so the imposition of tariffs is an obvious inconvenience. Importantly, Mr. Aiken believes that oil and gas will be exempt from new tariffs as part of U.S. energy security concerns.
Donald Trump has stridently proposed corporate tax cuts which, if implemented, would further underscore the tax advantage of operating in the U.S. versus Canada, and may result in domestic firms relocating operations southward.
The new president is also expected to deregulate U.S. industries, particularly finance, and this will make U.S. firms even more competitive relative to Canadian counterparts.
These America-first policy proposals have already resulted in a strengthening U.S. dollar, and Mr. Aiken sees no near-term end to the sliding loonie trend.
Mr. Jefferies suggests domestic energy stocks, likely exempt from tariffs and generating revenue in U.S. dollars, as promising investments for the next four years. Mr. Aiken mentioned the deceptively named Tourmaline Oil Corp. (TOU-T) and Strathcona Resources Ltd. (SCR-T) as specific opportunities.
The analyst also cited Sun-Life Financial Inc. (SLF-T), which generates 60 per cent of its revenue in greenbacks and will benefit from deregulation, as another domestic stock with a strong outlook.
Diversions
Why is Taylor Swift so popular?
I have nothing against Taylor Swift and don’t begrudge her for the gargantuan fortune she industriously earned. I even liked one of her songs, Invisible String, on Spotify before I knew it was her.
I do wonder, like Canadian music journalist Alan Cross, if there are reasons beyond music why Ms. Swift is arguably the biggest celebrity who has ever lived (thanks to technology, to a significant degree).
In Serious question: Why is Taylor Swift as big as she is? Mr. Cross posits a number of theories, including female empowerment, shrewd business sense and the extreme personal nature of her song lyrics, as reasons for the extraordinary levels of fame.
The essentials
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Globe Investor highlights
The Canadian inflation report on Tuesday was a tad hotter than expected. Here’s a look at how market bets and economist views for future BoC rate cuts have shifted.
David Rosenberg’s sudden switch to a (short-term) bond bear this week caught many of his clients off guard. Here’s how he’s defending himself.
Reuters columnist Mike Dolan explains why there may be no durable Trump trade.
Should retirees buy dividend stocks instead of bonds? Actuary Frederick Vettese crunches some long-term numbers to find out.
What’s up next
The domestic economic data calendar starts with Industrial Product Prices on Thursday where a month-over-month gain of 0.9 per cent for October is expected. Friday is more important – month over month retail sales numbers for October are out and a 0.4 per cent increase is expected both for the headline number and the ex-autos version.
For earnings, there’s really only Alimentation Couche-Tard next Monday to worry about for most investors. Profits of US$0.771 per share are expected.
The U.S. calendar is busier, as usual. The Leading Index of economic indicators, which hasn’t been very useful lately (it keeps showing an economic decline that doesn’t happen), is out Thursday and a decline of 0.3 per cent is forecast.
Annualized GDP will be released next Wednesday and a 2.8 per cent gain for the third quarter is the consensus guess. An advance look at durable goods orders for October (0.3 per cent increase expected), personal income for October ( 0.3 per cent) and personal spending for October (0.4 per cent) are also reported Wednesday.
For U.S. earnings we have Deere and Co. Thursday the 21st (US$3.869 per share expected). The 26th is a big day as Analog Devices Inc. (US$1.643), Dell Technologies Inc. (US$2.047), and network security provider Crowdstrike Holdings Inc. (US$0.813) all report.
See our full economic and earnings calendar here (You can bookmark the page - it gets updated weekly)