Truckin'

Discussion of learning, market participant behavior, and deteriorating economic data. "Keep Truckin' On"- Grateful Dead.

Apr 21, 2023

Highlights

Learn from mistakes, have no fear, and adapt.
Why are all the same people that are long AI also long Crypto and TSLA?
Philly Manufacturing Index to new cycle lows.

Learning something new every day has become one of my favorite aspects of my daily routine and process. Whether it be life changing or smaller useful pieces of information, size and scope does not matter. The desire to learn keeps me hungry, and developing an investment process requires constant adaptation. This is not to be confused with the development of a brand-new apartment complex that probably will not require to be renovated for the next five years. The evolving market participant may finish constructing an investment process only to begin adapting and improving inadequacies, flaws, or mistakes as soon as the following day. The game is not easy and should not be treated as such. Easy money and a decade’s worth of quantitative easing has perpetuated extraordinary risk taking and perhaps created a mentality for many market participants that making money in the markets is effortless. This era has potentially reached the twilight zone.

Risk managing hard earned capital during the bear market over the last year has been straightforward for most of the time. However, I have made many mistakes along the way. There were also moments and periods of time where it was more challenging to see the forest through the trees clearly and act accordingly. What can I expect, this is my first time building my own investment process and operating in one of the more challenging market environments throughout history. That is not an excuse and the background has allowed me to learn at an accelerated pace. I can always be better and it is important to, “keep truckin’ on”- Grateful Dead.

Errors that are referenced above came at the precipice of my own fear of being wrong. The fear of making a mistake. Even though I had done all the work and prepared myself, during some of the most challenging periods of time to my research, I could not help but question myself. Surely, I am not the only one, and there are a plethora of market participants that struggle with this even more than I have (even with more experience), which is why there are such violent swings in both directions during a bear market. Most people live in constant fear of missing out on the upside of market returns. Click here for link to Hedgeye Investment Summit with David Rosenberg and see a quote from him below. Following, I will also rattle off some stats that he cited during the conversation.

“What I find very interesting in this business that we are in Keith is that it is populated with optimists and bulls because you can be bullish and wrong and you’ll have your job to perpetuity. Everybody will forgive you”.

Historical Stats from David Rosenberg:

Yield curve inversion occurs 15% of the time; approximately a 1/7 event
Recessions happen 15% of the time
Expansions occur 85% of the time
Bear markets occur 15% of the time

With these statistics shown above, it is no shock to me that the constant fear of missing out (FOMO) is persistent in a market where the pavlovian response is to buy any time the market goes down because the Fed is always going to be there to save the day or just because the market “always will go up”. These statistics also demonstrate to me why it is so difficult to be bearish in a timely fashion. It is the road less traveled.

This past week, I had the pleasure of listening to the Hedgeye Investment Summit, which I referenced above. One of my favorite conversations was between Steph Pomboy and Keith McCullough (click here for the link to the discussion). Both are thought leaders within the space of financial markets and each have over 25 years of experience. The conversation was refreshing because they talked about their own personal evolution and process throughout time. Their current selves vs. their younger former selves. They expressed their mistakes that they have previously made running money and navigating markets. Summary is that it is easy to make mistakes as a younger and less experienced market participant and both expressed how they had questioned themselves at times in the past. Steph even stated about her younger self, “what if I am wrong”. Notably, this cycle both are calm, cool, and collected. This is not their first rodeo and they are just waiting for everything to fall into place. I share the same sentiment since I began this Substack space and have learned from the mistakes of my former self. Drinking my coffee and staying patient with my research along with my process.

Behavior

Last week (Friday 4/14/23), I was on a plane and had the pleasure of overhearing a conversation from two gentleman sitting behind me. Both were incredibly excited about AI technology and were discussing their favorite AI stock picks! Yes, I know that I have written about AI the past couple weeks. Cannot help myself given it is the latest market mania. I promise that this will be the last time that I mention it for a while, but I seriously cannot make this up and this was truly a treasure to have the opportunity to listen. Not surprising in the slightest that both were also huge fans of TSLA and even talked about their excitement for this quarter’s earnings report!

While talking about AI, I encourage readers to listen to the TSLA earnings call (click link here). Elon goes into depth about how autonomous vehicles will soon be cooking dinner in a home near you! (joking and not financial advice). In all seriousness, this was the first time in a year that I’ve listened to a management call that was behaviorally as poor as the Q1 2021 Carvana earnings call. Cannot find the link, but encourage readers to give that a listen as well for comparison. Not saying TSLA is Carvana by any means, but just noting the similarity in tones and both management team’s behavior.

Final detail that I will say about this conversation, is that both gentlemen were long crypto and loved to talk about how it is the “future”. There was really nothing material or substantial about why they thought that way, but they proceeded to rattle off their obscure illiquid alt coin ideas to one another. They were talking about how their portfolios have been up for a few months now and it has been great it has felt. Both overall were still down on their cost basis. When I stood up from my seat to grab a book from my backpack out of the storage bin, I was able to finally put faces to the voices. To my astonishment, both men were 40-50+ and I was totally expecting two people in their 20s. What is most interesting about the behavior that I have described above is that these people who are long AI are also long TSLA, and are also long crypto. This same category of investors all own the same assets and have the same investment ideas and “thesis”. Why are they all long the same things?

Data

Philly Fed Manufacturing Index came in yesterday at -31.3 (April) vs. -23.2 (March) and this is good for a new cycle low. The Philadelphia Fed Manufacturing Index is derived from The Business Outlook Survey that collects information from manufacturers in the Third Federal Reserve District. The survey covers various aspects of business activity such as employment, working hours, orders, shipments, inventories, delivery times, and prices. The index value greater than 0 indicates expansion in the factory sector, whereas a value less than 0 indicates a contraction.

United States Philadelphia Fed Manufacturing Index

Trading Economics

Here is another chart that I saw on Twitter from Randy Woodward. This takes into context large declines in the Philly Fed Manufacturing Index vs. periods of economic recession though out history.

Randy Woodward

Lastly, I will show recent earnings from a trucking company Knight Swift Transportation (KNX) and this is not financial advice. Just a good barometer of economic stress because if demand is strong, then there would be substantial growth in the transport sector due to the necessity to deliver goods. See the image below from their Q1 2023 earnings presentation.

KNX Presentation

Overall, KNX is seeing significant declines in revenues and earnings -10.4% and -48.8% on a year over year basis. Average revenue per trailers fell -9% year over year, while average number of trailers were up +11.5 year over year. In other words, the company did more work and earned less money. Similar trends are occurring throughout the truckin’ industry.

Today I discussed the challenges of building an investment process, interesting market participant behavior based on a random airplane conversation that I overheard, and went through economic data, which continues to deteriorate. A book that I have been reading recently is call “Made in America”, by Sam Walton (Founder of Walmart). Below is an excerpt from the book, which I feel is applicable to this discussion.

“Two things about Sam Walton that distinguish him from almost everyone that I know. First, he gets up every day bound and determined to improve something. Second, he is less afraid of being wrong that anyone I’ve ever known. And once he sees he’s wrong, he just shakes it off and heads in another direction”- David Glass.

While this quote can be applied to all aspects of life, building an investment process incorporates everything that is mentioned in the quote above. Constantly improving and learning something new every day. Have no fear of being wrong or making mistakes because it is important take the shots when they present themselves. Always be adaptable and able to change on a moment’s notice. Cannot fear the “what ifs”, because they will happen from time to time. What matters is the response to those negative moments and the ability to “keep truckin’ on”.

Happy Friday,

Aaron David Garfinkel

Resources

Truckin’- Grateful Dead