Hedge Funds Continue to Underperform – in Q3, hedge funds suffered their largest quarterly loss in assets since 2008 – a reminder that even hedge funds are not immune to downside volatility. According to Hedge Fund Research, the average fund lost 3.9% in the third quarter, driven by volatility in the equities markets and sliding commodities. The often lauded Bill Ackman’s Pershing Square has now fallen 12.6% for the year, while David Einhorn’s Greenlight Capital is down 17% year to date. Traditional asset managers look better and better each year.
Vroom Vroom!! Ferrari Goes Public – in a much-hyped Initial Public Offering (IPO), shares of Ferrari (ticker: RACE) opened trading this week with the company valued at just over $10 billion. In a commitment to exclusivity, only about 9% of Ferrari is being publicly traded, which could ultimately help the share price by limiting supply. The real question for investors interested in Ferrari, however, is: is it a luxury car maker or a luxury brand? The answer will ultimately serve as a guide for how fairly it’s valued. If you compare Ferrari’s 30+ times earnings valuation to Ford’s 19 times or GM’s 14 times, you’ll find the company wildly overvalued. But compare it to luxury brands like Hermes and Brunello Cucinelli, whose price-to-earnings stand at 37 and 32 times respectively, and you’ll find it right in line.
Earnings Watch: Alphabet (Google) Powers Ahead – Shares of Alphabet, Google’s new holding company, climbed well over 10% following very solid third-quarter results (after-hours), and it was joined by Amazon and Microsoft who both also posted above-estimate earnings. For Alphabet, they saw revenue climb some 15% to $15.1 billion in the third quarter, with profits of $7.35 a share – both better than expectations. Earnings have been mixed so far in the quarter, which is widely expected to be weak due to inventory shifts and seasonal weakness. Aggregate earnings for the S&P 500 will also likely be weighed down heavily by the Energy sector, which continues a dramatic decline. For Q3, we see S&P 500 earnings, excluding Energy, to be +1.7% higher on +0.7%; not gangbusters, but growth nonetheless.
China’s Soft(ish) Landing – Chinese officials announced this week that they still expect 6.9% year-on-year growth. This has raised eyebrows especially given material declines in domestic-demand growth and a slowing in factory output and fixed-asset investment. Data this week showed that factory output rose 5.7% in September (lower than the 6% estimate), while fixed-asset investment climbed 10.3% (below estimates of 10.8%). In response to slower growth and a cratering stock market (though October has been strong), officials have demonstrated a firm commitment to increased spending and easier monetary policy to stabilize the economy. In all likelihood, they’ll succeed.
The Brazilian Struggle is ‘Real’ – the Brazilian currency, the real, has fallen 30% this year as GDP growth has turned negative amidst soaring inflation and relatively high interest rates. The commodities slide has hit Brazil hard, and the Brazilian economy is expected to decline 3% in 2015 as a result. That puts the Brazilian Central Bank in a bind, because lowering the benchmark interest rate to help would mean potentially adding to the problem of near 10% inflation. Fears of a dreaded scenario of falling currency and rising inflation abound. I’m not sure there is an easy answer for Brazil – that is unless commodities prices strongly recover in the coming months and Brazil ousts Dilma Rouseff in favor of a more conservative, business friendly leader. Not sure either of those outcomes is in the cards at the moment.