Markets are off to a tumultuous start for the year, as many indices show1: the S&P (- 10.3%); the NASDAQ (-14.7%); the DAX (-18.5%); the NIKKEI (-17.4%); and the Shanghai Composite index (-21.9%). Last year’s darlings like Amazon (NASDAQ:AMZN) (-25.5%) and Netflix (NASDAQ:NFLX) (-24.5%) have fallen meaningfully in 2016, but hardest hit have been some companies seen as “value” stocks like Williams (NYSE:WMB) (-48.3%), Bank of America (NYSE:BAC) (-33.7%), and Morgan Stanley (NYSE:MS) (- 31.4%). We believe the indices’ drastic declines actually fail to capture the true carnage revealed when you take a closer look at the breadth of S&P companies experiencing massive losses. In some cases, these losses may represent permanent value destruction. The 2015 market we dubbed a “Haunted House” feels about as scary as the Disney (NYSE:DIS) kids’ ride “It’s a Small World” when compared to 2016.
Last August, we recognized that a global tidal shift in monetary policy and a reversal in central bank policy would likely cause fund flows out of many asset classes. We reduced our exposure to companies that were economically sensitive or tied to China or to commodity pricing while significantly increasing our short exposure. For the remainder of 2015, we generated profits on the short side but were hurt by our decision to seek safe haven in health care names and other companies we believed would remain sheltered from the new world order. We succeeded in avoiding calamitous losses in the portfolio and preserved our clients’ capital in 2015. Continue Reading »