In a time when shorts and bears are not only mocked, but relentlessly mauled by a market that over the past month has seen the biggest short squeeze in history, as funds with short positions are forced to liquidate and cover at any cost...
... contrarian views and opinions tend to disappear as bearish fund managers find they spend more time responding to redemption requests than writing opinion pieces.
Not so for Russell Clark, however, whose Horseman Global with net exposure of -45.29%, remains perhaps the world's most bearish hedge fund.
... Although, as Clark admits, not even he managed to avoid losses in May, when the fund lost 0.80% (still up 4.33% YTD), as "gains from the long book and bond book were overwhelmed by losses in the currency book and short book."
So what does a mega-bearish fund manager write in a time when the world's biggest shorts are soaring and crushing anyone in their path? Well, this month, the Horseman CIO lays out his underlying thinking on various topics and themes in the market "given we have had a couple of down months in a row"...
... and in attempting to prevent clients from fleeing and to be intellectually honest with his LPs, he reveals the rationale for the main investment themes he is pursuing.
From his latest letter to investors:
One of the most dangerous things to happen in financial markets is to be right for the wrong reasons. If you fail to recognize that you were lucky, then you will continue to make investment decisions based on faulty reasoning, and eventually your luck will run out.
To try and get around this problem, I tend to write Market Views, that lay out my thinking on various topics and themes in the market. Given we have had a couple of down months in a row, it seems like a good time to set out the rationale for the main themes of your fund.
- Dollar weakness: The base arguments that US NIIP is at record high and combined with a widening twin deficit still suggest dollar weakness. I have yet to see any change in these trends. My best explanation for recent dollar strength, was that there was record short interest in the USD earlier this year, which has now been reduced.
- Commodities: the trend for higher commodities has continued, and is beginning to spread to agricultural commodities. Supply in general remains constrained and the Chinese policy of restricting supply has been confirmed by a range of data this year. Chinese production of iron ore has now fallen 50%. Chinese exports of urea have also fallen by over 50%. Domestic steel, coking coal and cement prices have been maintained at a high level. The thesis on commodities still looks reasonable.
- Semiconductors: the argument here was falling demand from cryptocurrency mining and slowing smartphone sales coupled with increased supply from China would cause semiconductor prices to fall. Lately we have indeed seen falling prices of spot DRAM and NAND prices. However, the reaction of stocks has been far more volatile, with some semiconductor stocks weakening, and some strengthening. I like the dispersion in share price action, as dispersion tends to lead to a breakdown. Also, the semiconductor news from China continues to be negative, with Bitmain talking about moving its chip production from the cryptocurrency area to the artificial intelligence related area, with potential pricing far lower than current pricing. China has also signaled its policy intent, with the Chinese cartel bureau visiting the offices of Micron Technology.
- Computer Gaming: again, the thesis is that growth in battle royale style games and increased competition should be problematic for the old guard of gaming companies. Data that we take from Steam continues to show declining concurrent users for the incumbents. Furthermore China's second largest gaming company Netease, which is the Chinese distributor of games "World of Warcraft" and "Diablo" among others, is confirming a changing competitive environment, with its share price down 30% this year.
- Pharma: the FDA continues to approve more drugs so competition should force drug prices lower. The trends here continue to be encouraging to stay short.
- REITs: this is an area we have reduced somewhat, but the trend for an increased supply of commercial real estate pressuring rents continues to be apparent.
More exciting for me is to see a pattern emerge that I have seen before. Margins and valuations are high, while commodities and interest rates are rising. Momentum and ETFs are herding ever more money into winning strategies such as tech, even as the fundamentals begin to deteriorate. I am reminded so much of the market action in 2008, when the first half was dominated by emerging markets ("EM") and commodities. Many EM and commodity investors were up strongly in the first half of the year, only to the end the year down significantly.
While performance could have been better, I have learnt to look at my returns from a view of whether the market is working with me or against me. In general, this year, it has been working against me, and yet here we are, still up for the year, and with my bearish positioning still intact. In fact, we are so against consensus in so many areas, I am more excited, than worried at this point.
Your fund remains long commodities and bonds, short equities.