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Gavin Baker+ Your Authors @GavinSBaker Husband, Becky Painter. CIO, Atreides Management. Former PM, Fidelity OTC fund. No investment advice, views all my own. Apr. 16, 2020 1 min read + Your Authors

1) Thought provoking chart from the best strategist:

When intra-sector valuation spreads are narrowing from really high levels - as they are now - estimate cuts haven't mattered. Dividend cuts have.

N is very low. Curious if the other instances came after a comparable rally.

2) My belief has been that we will not see a "true market price" until there are more accurate forward estimates.

Chart is a good reminder that there is no precedent for the current situation and it is good to keep an open mind given an exceptionally wide range of outcomes.

3) To the charts point, every single estimate cut so far has been bought aggressively. More than just a "transparency premium."

We will see if this persists post this rally. Really curious to see how the WFH names trade - what will be "good enough?"

4) Also likely that we see the greatest dispersion in fundamentals ever between WFH/Covid beneficiaries and those companies with revenues down 80 to 100%.

Even more so than 2000-2001 and 2008-2009 when the pain was somewhat localized to tech and financials vs. other recessions.

5) i.e. The valuation spreads might disappear once estimates are accurate.

Got an email this morning quoting Boiler Room: "Anybody that tells you earnings don't matter doesn't have any." 🤷‍♂️

6) Reaction to earnings aside, lots of cross currents.

Perhaps most worrisome are the second waves in Asia and the recent Harvard paper convincingly arguing that we will have varying degrees of social distancing until we have a vaccine, which may come before herd immunity.

7) Duration of social distancing is just one of many unknowns. Uncertainty is high.

The largest combined fiscal and monetary stimulus ever vs. the sharpest GDP decline ever.

Irresistible force vs. the immovable object.

8) As someone tweeted, hindsight will be 20/20 either way:

"How did you miss the epic rally given the massive stimulus and obvious fact that a vaccine would be developed?"

"How did you get destroyed by having too much length into the worst recession in 90 years?"

You can follow @GavinSBaker.


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