The Wooden Nickel is a collection of roughly a handful of recent topics that have caught our attention. Here you’ll find current, open-ended thoughts. We wish to use this piece as a way to think out loud in public rather than formal proclamations or projections.

1. What Efficient Markets?

In September of 2023, Arm Holdings went public. The IPO came 18 months after Nvidia failed to acquire the British company. As sometimes happens with IPOs, other companies bought into Arm’s IPO as an “anchor” investor, a label that intends to drum up interest in the offering and as a signal of confidence in the soon-to-be public company. Nvidia was one of the anchor investors in Arm’s IPO as was Intel and others. Their financial investment is more strategic in nature rather than as a means of generating earnings. Like most investors who get access to shares ahead of the public offering, anchor investors have their shares restricted from public sale for a period of time.

Arm’s stock has taken off for a number of reasons which we won’t get into.

Figure 1: Arm Holdings Plc, Source: Bloomberg

The move in the price of Arm’s shares has raised the value of Nvidia’s stake to over $100 million. Any institutional investor with assets over $100M has to file a 13F that details all of their holdings. It’s here that the comedy starts (as brought to people’s attention by well-known investor John Hempton).

One of the companies Nvidia has shares of is Nano-X Imaging, with a total investment of ~60,000 shares, approximately 1/10 of 1% of the outstanding market cap. Upon publication of the 13F, Nano-X (ticker NNOX) rose 50% as people assumed it was an endorsement by Nvidia, the current tech darling and third most valuable company in the world now. NNOX has about $8M in sales and -$800M in Operating Income for an Operating margin below -900%.

Figure 2: Nano-X Imaging Ltd, Source: Bloomberg

The funny thing is that Nvidia never directly invested in NNOX. Nano-X acquired a company that Nvidia held shares in (Zebra Medical Vision) and used their own shares as currency. In fact, Nvidia does not have control of the shares. The decision to sell NNOX rests with another party or agent.

If you’re wondering what stage of the bull market we’re in, let the above episode be one data point to inform you.

2. Macro Trades

There is often a tendency in the investing landscape to make too much out of one anecdote, one factoid, one headline or one image, either by reacting too quickly, too extreme, or appreciating the randomness and embedded complexity of financial markets.

Take the chart in Figure 3. It would be easy to take it at face value and say that throughout the early part of 2023 hedge funds had extremely large short positions in US Treasuries right before rates began a meteoric rise from just under 4% to 5% in short order.

Figure 3: Hedge Funds Short Treasury Futures….or were They? Source: Joseph Wang

The thing about hedge funds that play with macro trades is that their “trades” are not personified by a single asset or security. There’s just about always a pair of assets that are squared off against one another to capture or lock into a specific theme; trades are more often than not an expression of relative performance or trends rather than just absolute expressions. And always with leverage.

In the case of the Treasury trade above, it’s been a well-documented story (see here, here, and here for examples) that hedge funds offset their short positions in Treasury futures by taking the funds received from the short and buying Treasury bonds in the cash market. The result is a hedged position that arbitrages small price dislocations with leverage to make returns with no risk.

One picture is not necessarily the full picture. And that’s especially the case when it comes to trades based on derivatives or looking at the positioning of macro hedge funds, you never know how one position is being utilized within the full context of the portfolio.

3. Technicals

If you ask a fundamental analyst or investor how or if they incorporate technical analysis into their investment process, you are far more likely than not to get a reaction suggesting the question in and of itself is vile and repugnant. Yet you’d think with the number of fund managers who time and again underperform the broad market (80% on a 3-year basis) they’d want to incorporate as many complementary tools as possible.

After all, if the market is right more often than an informed stock picker then why not “listen” to the market?

Figure 4: Large Cap Stock Pickers Underperform for 13 Years in a Row, Source: S&P

Using technical analysis is akin to a doctor taking your temperature when you’re ill. It is not a diagnosis in and of itself. It is not the end all be all and it is not an exhaustive approach to selection and allocation; there is never just one chart or metric to utilize that defines what “technicals” are saying. It is one part of the process; one ingredient in a recipe. It’s not the foundation that portfolio management gets built on or the golden screw that completes a project. But in my experience, it does help with quite a few things:

What kind of market environment are we in?

  • Market environments are not binary propositions of bullish or bearish; they exist on a spectrum. A market led by utilities is not one I want to be taking lots of risk in.

 Is there confirmation across asset classes?

  • Diverging trends and stories across asset classes do not last long and their reversals can be quite painful. If stocks ascend while high yield spreads blow out, one of the two has it wrong.

 Is everyone on the same side? Are expectations and the “story” priced in?

  • “Trees don’t grow to the sky” as Buffett would say. A winning idea will eventually run out of steam. Seeing good news be greeted with a lack of enthusiasm can be a sign of a hot idea running out of oxygen

Investing is a hard enough endeavor already; why wouldn’t someone want as many tools in their belt to approach it? Being a zealot rarely pays. Just ask gold bugs. 

4. Recommended Reads and Listens

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