Hedge Fund Analyst Quiz–NG $3 The New Normal

Your boss runs into your office and slaps this report onto your desk: Don‘t Bet Against Innovation_Sub-$3 Is the New Normal

After reading the report and using your knowledge of how capital cycles work, what would you say to your boss about using the information in that report for investing?  IF you wanted to make an outstanding investment, then how might the report help you?   The video below might give you a hint.  Remember that the JP Morgan report goes to thousands of portfolio managers and analysts, so how can YOU use the information to have an edge? Or can you? Comments needed in order to keep your hedge fnd job.

Good luck!


8 responses to “Hedge Fund Analyst Quiz–NG $3 The New Normal

  1. I’ve actually done this in real life to my own profit: go long on gas, short on coal, and long on renewable energy.

    The video illustrates precisely what this blog is about: contrarian value investing. You go where others fear to tread. Thousands of managers see a report saying a negative outlook on oil/gas prices, so you do the opposite. Why? Because thousands will see that report, and you know they see that report, so their gut instinct is to sell gas companies. The gas companies prices depreciate as an irrational reaction by Mr. Market. This creates opportunities to buy up these gas companies on sale, because while the ultra-long term (10-20+ yrs) outlook of non-renewable energy isn’t sustainable for society or our environment, it’s still a vital resource for the globe. Even if you remove gas-guzzling cars and the heating of homes with solar and wind, Everything around you relies on gas – anything plastic is refined from oil. We likely will not be switching society from plastic dominance back to metal and glass. Coal does not have the same sort of societal reliance and application that gas does, so you can use the knowledge of the report to give you downside protection against this contrarian bet: and that’s by going long on renewable energy (solar and wind) and going short on coal. Short on coal agrees with the report, long on gas is contrarian to take advantage of mis-pricings in the market, and long on renewable energy is further downside protection that is essentially the antagonist pairing to shorting coal.

  2. Firstly that report is so long and based on so many variables that reading it makes no-one much wiser. Not even they know what they a doing if they have to decrease their estimate by 27% yoy.

    I doubt you can really use the report to much advantage unless you are absolutely certain, but then you don’t need the report anyway.

    Prices have proven very volatile and hard to predict. But if the prices go down, exploration will decrease which should eventually lead to a price increase. Isn’t that correct?

    Are there any authorative texts on the subject that you could recommend?

  3. This https://www.amazon.com/Capital-Returns-Investing-Through-Managers/dp/1137571640
    which I can send you via the Deep-Value group at Google groups (I assume you are on the list) If not, google DEEP-VALUE at google groups and sign up.

    I will respond in more depth in a few days to let others comment. This case study is important because it shows you how to make BIG money from this type of industry report–but not the way almost all use these reports. Most read the report, then go with the recommendations or they ignore the report altogether. A mistake.

    How might Michael Burry use the report. Hint: If you wanted to prove the report wrong–what research would you do to disprove their thesis!

  4. I came across a video on Youtube, and I thought of you:
    “Game of Thrones: Libertarian Edition”

    Frivolous, of course, but worth a chuckle.

  5. Thanks Mark:

    Since Libertarians believe in non-violence or non-interference (except to defend themselves) I have often wondered why the word “Libertarian” is controversial?

  6. I always find these posts somewhat cryptic, but here is an attempt. Morgan Stanley prediction has maybe a 50/50 chance of being right, so it is not sensible to simply say be contrarian and go long. I am going to assume they have done their homework and prices will stay lower for longer.

    I would start by process of elimination – who is unlikely to benefit from lower gas prices for longer.
    1) Drillers
    2) equipment suppliers – you don’t want to supply to an industry with weak pricing power and razor thin margins
    3) All other competitive downstream industries like chemicals – all will have equal benefit and therefore no benefit.

    Who will benefit
    1) industry workers
    2) and therefore the opiod industry and or truck sales

    Who will lose
    1) high cost oil producers and suppliers
    2) low cost oil producers if they have high reliance on oil profits to fund state programs.

    So I would short the offshore rig related stocks, ARAMCO, and the Saudi Riyal and related financials. Venezuela shows you the future of an oil state that runs out of money. Indonesia could be another flash point.

  7. Hi John,

    Was there a follow-up answer on this? I’m keen on understanding your POV.

  8. When you see those types of reports after several years of declining commodity prices, you are already starting to see price discounting. The big returns will not be made on DECLINING prices but the opposite.

    My answer was in the prior post–see http://csinvesting.org/2017/07/18/case-study-on-natural-gasshale-industry-buffett-reads/

    Long term predictions have almost never been correct.

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