Preliminary Thoughts on Yandex (as a Long)

Yandex NV is Russia’s largest search engine company. Given recent market share losses to Google, as well as it being a Russian stock, it is down -54% in the last 12 months. My preliminary take: the stock’s current price/valuation does not offer sufficient compensation for the risks I see. Specifically:

What I don’t like:

  • The stock is down -55%, yet doesn’t look all that cheap (e.g. compare against Google – YNDX trades at 5.5x revenue versus Google’s 6.2x revenue) given the various risk factors.
  • High risk of being a ‘dead money’ stock, or worse, on its way to becoming a value trap
  • Russia risk – The known unknowns and unknown unknowns – from currency, to confiscation, to who knows what risk?
  • Market share has declined in recent years, even as Google market share has risen.

What I like:

    • Appears to be a dominant search engine, despite recent market share losses
    • The google anti-trust legal situation looks interesting
    • Management appears to be good/excellent
    • The business appears to be good/excellent

Other comments:

Russia is out of favor with investors for a variety of reasons, yet Yandex’s valuation does not reflect that to me… the decline in share price reflects that, but down is not cheap… nor is down equal to a buy. Also, the stock does not seem to be discounting for this google risk (though the legal actions yandex has taken is a bullish upside offset). So you have a company with a very negative macro backdrop and some anti-growth idiosyncratic risk factors… so why pay google-like multiples? Yes, it’s a smaller company, but see google’s recent growth.

Short Selling: Lies, Damned Lies, and Statistics

The Financial Times and the New York Times (coincidentally?) featured two articles yesterday, where both writers lament over the apparent loneliness/dearth of short sellers:

  • Shorters Needed by Dan McCrum (Financial Times)- “Dedicated short sellers are a rare breed which has become even rarer in the last five years.”
  • The Loneliness of the Short-Seller by Alexandra Stevenson (New York Times) – “Now, six years into a bull market run, with stocks in the United States smashing one record after another, these naysayers have all but lost their voice.” The title of this piece sounds more like a ballad about unrequited love then about financial markets.

While the primary assertions found in both articles are largely true (both authors did a fine job, despite poor data) – yes, dedicated short sellers have become rarer in recent years – one of the sources they cite is (at best) misleading/inaccurate/incomplete:

HFR Hedge Fund Industry Estimates, from FT

Rather than rigorously proving why (via an academic paper), here are two reasons the above “data” is (disturbingly) problematic:

  • Red Flag #1 – See 2012, 2013, and 2012 to 2013 y-o-y changes, per table above. Compare against what happened in the markets.
  • Red Flag #2 – Compare against the Barclay Hedge data

Additional Comments:

  • History Rhymes – Since 2013, I have been telling/warning some people that perhaps we are living through a period (for short-sellers) that resembles the 1990-1995 period… a period of (similarly) abysmal aggregate short-dedicated performance. And this period came immediately after the 1980s, a period where dedicated shorts were able to return 20-60% annualized returns, even in a rising market environment!
  • Structural Changes over the years – Hedge fund AUM is at all-time highs…and with that, there are significant dedicated short exposure unaccounted for by these ‘check the box’ data series. There are some large and very large hedge funds, not classified as “short-dedicated” with short-dedicated exposure. There are also these mutual fund “Long Short” vehicles and short “ETFs”. Both types of vehicles seem highly pathetic. And then there are the quantitative strategies.
  • The Real Bubble – The real bubble is not in equities – it’s in GOVERNMENT BONDS. Supposing I’m correct, the intellectual (and knee-jerk) temptation is to say that everything else declines, as government bond prices decline. Yet I don’t see this as an inevitability. Capital / marginal capital tends to have pro-cyclical tendencies, i.e. it flees what’s not working, and joins what is working…
  • Inflection Point 2015 (?) – 2014 and 2015 (so far) validated my theory I feared in 2013 (that short-dedicates were experiencing a period that resembled the early 90s)… that being said, I believe we are now at a critical inflection point. I believe that the prevailing patterns in coming years will not resemble the 2006-2008 period. Rather, we will probably start seeing market activity that more resembles that which occurred 50-150 years ago. The suppressed volatility – the hidden build-up of volatility over the last few years – will (finally) lead to some “inhuman volatility” in coming years (starting this 2nd half of 2015) in asset classes that have thus far been immune. The volatility observed in certain key currencies (e.g. euro, yen, USD) since 2013 has started percolating into the government bond markets… a friend of mine says “equity is always the last to know”. I don’t think this rise in volatility is to be interpreted as necessarily ‘bearish’ for equities. I think it’s going to get far more complicated than that in coming years, and starting very soon.

The S&P 500 versus China A Shares and the “Mr Pink” of Global Macro

The S&P 500 versus China A Shares

Since 2013 (use ANY POINT within 2013 as your starting point), guess which market has outperformed? The S&P 500, or the Shanghai Composite Index? My guess is that many Americans and Europeans would (incorrectly) guess “S&P 500”:

ycharts sse vs sandp level


Questions and Comments:

  • Note how the SSE underperformed the S&P500 for most of the 2013 – Present period… the ‘shift’ / ‘inversion’ from relative underperformance to extreme outperformance occurred fairly recently.
  • There’s only one person I know who was screaming and yelling (and positioning) Long China, Short USA equities since 2013…let’s call him Donald Duck. I think it’s fair to say he’s the “mr pink” of global macro…it may even be appropriate to call Dan Loeb the “Donald Duck” of event-driven investing. Donald Duck has been pounding the table on going short USD over the last 1-2 quarters. That trade has looked ‘stupid’ until recently. Donald Duck has gotten quite a few other major trades / turning points correct (as well as some very wrong). I don’t fully understand the Duck’s “sausage-making” process, but the result seems to be quite tasty.
  • I told Donald Duck back in 2013/2014 that I felt that the better way to express ‘long China” would be to hand-select a basket of US-listed (and potentially other foreign-listed) Chinese stocks, as the A shares, and mainland stocks would be ‘dead money’. That is, to go about “long China” via an Long/Short China approach, or maybe a long-only approach (but with extremely tight due diligence, careful security selection). Donald Duck, however, expressed his preference for the A shares / indices, (I think) given their lack of focus/expertise on individual company analysis/due diligence. Going long select US-listed Chinese stocks looked smarter in 2013 and through most of 2014 (especially if one avoided the NQ Mobile’s of the world, or even went concurrently short them!) versus going long A shares and/or mainland shares…until recently.
  • Why has the SSE outperformed the S&P500 within the last 1-2ish quarters? Why and how long might this trend persist? Why and how might this trade ‘unwind’ ? (I am, as I write this, considering a ‘trade first, analyze later’ approach, i.e. start building a short China, long USA pair trade)
  • What are some fund flow and other considerations between China main-land listed shares, versus China company shares listed elsewhere?
  •  If one doesn’t care about global macro, what might the implications be for single-stock picking, sector investing, etc.?

“Sweep streets so well that all the hosts of heaven and earth will have to pause and say: Here lived a great street sweeper who swept his job well.” MLK

“If it falls your lot to be a street sweeper, sweep streets like Michelangelo painted pictures, sweep streets like Beethoven composed music, sweep streets like Leontyne Price sings before the Metropolitan Opera. Sweep streets like Shakespeare wrote poetry. Sweep streets so well that all the hosts of heaven and earth will have to pause and say: Here lived a great street sweeper who swept his job well. If you can’t be a pine at the top of the hill, be a shrub in the valley. Be the best little shrub on the side of the hill. Be a bush if you can’t be a tree. If you can’t be a highway, just be a trail. If you can’t be a sun, be a star. For it isn’t by size that you win or fail. Be the best of whatever you are.” – Dr. Martin Luther King Jr.

“Inhuman Volatility”

A certain man with a healthy dose of mojo is believed to have coined/popularized the term ‘inhuman volatility’. The term seemed quite appropriate to describe recent action in oil land… then the Swiss Franch happened. Today. I’m writing this post for my own reference, and for posterity’s sake. I may followup and update this post with graphs/tables to illustrate the historical rarity of today’s move(s).

Considerations for 2015

Critique of my ‘Considerations for 2014’, as written originally here )

  • Consider sectors and strategies that were out of favor in 2013 – This was OKAY… I was cryptically referring to single name short selling as the out-of-favor strategy. It ended up being an OKAY strategy for 2014.
  • Gold and Miners – YES
  • Endogenous vs Exogeneous – YES (Ebola, Ferguson, HK protests, etc)
  • Go Long Active (vs. Passive) Management – OKAY… as a whole, active did poorly, but there were some notable alpha bright spots
  • Credit/Rates – OKAY
  • Bitcoin ImplicationsEARLY/WRONG
  • Russia? Turkey? – YES
  • War risk creeping – YES

Considerations for 2015

  • Volatility
  • Us equities market: chop-fest / consolidation
  • The bubble in formation is in bonds, not equities. “first thing I do when i see a bubble is I buy” – the palindrome
  • EURUSD parity is in sight within 24 month
  • Single-name short selling: 2013 was disastrous, 2014 was okay, 2015 okay/meh. The few years after a disastrous year tend to be okay (4/N)
  • Watching, but not sure what to make of for 2015: (1) Biotech (2) Shareholder activism (3) Mainland China (6/N)
  • Gold:2013, Oil:2014, ???:2015

“You can’t connect the dots looking forward you can only connect them looking backwards.” – Steve Jobs

Stanford Commencement Address 2005:

“You can’t connect the dots looking forward you can only connect them looking backwards. So you have to trust that the dots will somehow connect in your future. You have to trust in something: your gut, destiny, life, karma, whatever. Because believing that the dots will connect down the road will give you the confidence to follow your heart, even when it leads you off the well worn path. And that will make all the difference.” – Steve Jobs


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