SBAC - Three Ways The Herding Effect Is Rewarding And Punishing Investors Right Now

2023-11-27 09:30:15 ET

Summary

• The herding effect drives market direction and sector-level investment themes.
• The Nasdsaq-100 is in an AI-driven gold rush for the ages. Everyone wants a seat at the greatest poker table of the millennium.
• Investors have been synthetically playing the theme of declining costs in satellite launch and the rise of Starlink by shorting terrestrial telecom infrastructure. Traditional telecom providers have been crushed.
• The Natural Gas link with AI will be the greatest "picks and shovels" play that the market has ever overlooked. The AI revolution will be powered by Nat Gas.

Investors dream of capturing upside moves in the market, while avoiding bear markets. The herding effect drives market direction and sector-level investment themes. Algorithmically modeling the herding effect is key.

Rather than being counter-cyclical, Federal Reserve gambits to inject and to withdraw liquidity from the financial system exaggerate the natural herding effect.

Moreover, heavy-handed central bank moves to inject and to withdraw liquidity often overwhelm the effect of economic fundamentals on the financial markets.

Market participants focus on explicit Federal Reserve policy decisions. However, day-to-day open market operations, in which the Federal Reserve buys and sells bonds on the open market, are just as important.

These open market operations also create pro-cyclical trends, or serial autocorrelation, in the direction of asset classes. Trading by the Fed itself in the bond market further strengthens the herding effect. The Fed literally moves asset prices through heavy-handed buying and selling through the central bank's own trading desk.

In addition, primal narratives about technological progress and societal change also fuel the herding effect.

We saw that during the 90s tech boom-and-bust, the great financial crisis of 2008-2009, and the current market obsession of society-changing advances in AI.

Multi-year booms and busts are created by the power of societal narratives, further strengthening the herding effect in financial markets.

Over time, the interplay of these variables creates a massive herding effect.

For index investors, understanding whether the herding effect is creating a bull or a bear market determines the winners and the losers of the game.

Algorithmic methods can often sniff out important statistical footprints which allow us to identify when the herding effect is causing financial markets to rise or to fall.

The Zomma Directional Algorithm is designed to capitalize on trends that emerge from the investment flows caused by herding behavior.

Here's how to understand the visualization:

1. When line turns green, it signals a buy.

2. When the line turns red, it signals a sell and a move to cash.

Note: The algorithm is not designed to create short signals.

The algorithm takes advantage of trends created by the flow of investment dollars created by the herding effect.

The Nasdaq 100 ( QQQ ) ETF continues to leap higher, crushing the shorts. This is an AI-driven gold rush for the ages, in which market participants are undeterred by Federal Reserve interest rate intrigue, geopolitics, war in Europe and Israel, macro risks, or sky-high valuations. Everyone wants a seat at the greatest poker table of the millennium.

As I warned in late July, the drop in Verizon ( VZ ) and AT&T ( T ) is not just about lead. Investors are worried that Elon Musk will roll out a Starlink phone service. Since Space X/Starlink is not publicly-traded, investors have been synthetically playing the theme of declining costs in satellite launches and the rise of Starlink by shorting terrestrial telecom infrastructure. So far, they have been rewarded. This is a chart combining AT&T and Verizon shares. Timber.

Proof that this is a secular worry about a potential Starlink phone service is that the tower providers have been getting hit too. It has been brutal. If your phone service comes from a satellite, line-of-sight issues mean that cell towers will still be valuable in urban areas, but their value in rural areas will plummet. And again, investors have been synthetically playing the theme of declining costs in satellite launches and the rise of Starlink by shorting terrestrial telecom infrastructure. This synthetic short play will only end when business fundamentals meet point-blank valuations. This is a chart combining American Tower ( AMT ), Crown Castle ( CCI ), and SBA Communications ( SBAC ) shares. This is brutal.

Pipeline stocks ( AMLP ) had been dropping for years. Nat Gas is the backbone of power generation. Electricity powers AI. It might be time for the greatest "picks and shovels" play of the century. When you combine the AI theme with the fact that most electric cars are synthetically powered by the Nat Gas used to generate almost half of the electricity they store in their batteries, you get a mega theme for the next 50 years. Moreover, weaknesses in the electrical grid mean that data centers increasingly seek power directly from major natural gas pipelines to fuel the ravenous appetites of their AI clouds. For a given level of technological sophistication, the only limit to AI's reach is the electricity used to power it. Investors are only starting to get it, and Nat Gas pipeline stocks are behaving accordingly.

Black Stone Minerals ( BSM ) is a clever way to play the Nat Gas/electricity/AI trend/electric car trend without the contango drag of a long Nat Gas futures position. Picks and shovels plays always win in the end.

The herding effect continues to reward and to punish investors, and it continues to be the main driver of the markets and sector-level investment themes, as it has for centuries.

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