archaea annual report - 2013 & 2014 closing, reflection, and five bad trades to avoid next year

8/13/2019 Archaea Annual Report - 2013 & 2014 Closing, Reflection, And Five Bad Trades to Avoid Next Year

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Archaea Capital Research, Inc., 2013

ANNUAL REPORT COENTAR!

2013 & 2014: Closing, Reflection, and Five Bad Trades To Avoid Next ear

"ece#$er 12, 2013

T% %&r Clients an' In(est%rs,

O&r in(est#ent pr%cess c%ntin&es t% )%c&s %n )ilterin* hi*hl+ )a(%ra$le rear'-t%-ris %pp%rt&nities. !et the last

12 #%nths ha(e presente' an interestin* an%#al+. L%%in* $ac an' re)lectin* %n 2013, e )in' a +ear

in%r'inatel+ cl&ttere' ith apparent %pp%rt&nities that t&rne' %&t t% $e $a' tra'es. %re s%, in )act, than an+

%ther +ear e can re#e#$er. In 2013, avoiding bad trades contributed more alphat% an in(est#ent p%rt)%li% than

i'enti)+in* *reat %pp%rt&nities. N%t l%sin* as the ne innin*.

T%% #an+ in(est%rs, pr%''e' $+ the &nrelentin* #%netar+ /eit*eist %r their %n e#%ti%ns %r $%th, (%l&ntaril+

entere' these traps, at %ne ti#e %r an%ther, thr%&*h%&t the +ear. I'enti)+in* the $a' calls in a'(ance, an'

i#ple#entin* a $asic )ilter, sa(e' a *reat 'eal %) )inancial an' #ental capitalan' ept &s in the race. L%%in*

thr%&*h %&r *l%$al #acr% lens, e list s%#e %) these p%th%les in chr%n%l%*ical %r'er

4irst a#%n* the# as the &ni(ersal $elie) startin* ar%&n' 5612, an' lastin* ell int% 1613, that E#er*in* arets

ere *%in* t% $e the star per)%r#ers this +ear. Then $+ arch, the latest )ashi%n as t% sell the 7ritish P%&n' %n

c%#in* 'e(al&ati%n. %(in* int% April, C%pper an' aterials $eca#e a )a(%rite sh%rt t% 8pla+9 the Chinese

'%ntren'. :e(eral )a&lt+ asspti%ns $ehin' that l%*ic chain, t% $e s&re. 7+ late ;&ne, the ra*e as t% sh%rt

7%n's %n 8taper tal9. E#er*in* arets ere 'eclare' 'ea'. As ;&l+ ca#e, the "%llar as 8$reain* %&t9, an' as

a 8#&st-%n9. As :epte#$er appr%ache', ec%n%#ists ha' reache' near-&ni(ersal a*ree#ent %n an i##inent 4e'

taper. 4e $%there' t% listen t% hat the 4e' as act&all+ sa+in*, )%r the $etter part %) three #%nths then

pr%cee'e' t% $la#e the 4e' )%r p%%r c%##&nicati%n. 4%rt&natel+, e ha' the c%&ra*e t% a(%i' an' e(en )a'e

these 8t%p tra'es9.

Other p%cets %) )ren/ie' c%nsens&s, t% %&r s&rprise, #ana*e' t% h%l' &pan' in s%#e cases, $eca#e e(en #%re

#isali*ne'. The 80? %) the

+ear9s *ains ere cl%ce' in $+ late a+. Chal it &p t% r. aret9s c%n(incin* trics, an' in(est#ent #an'ates

here patience has $een c&t t% /er%. @a(in* l%n* $elie(e' patience t% $e c%rrelate' ith alpha, as e transiti%n

int% 2015, e cann%t en(isi%n a $etter ti#e t% eep a c%%l hea'.

In hin'si*ht, perhaps %ne %) the *reatest less%ns %) 2013 as the i#p%rtance %) ;apan t% the #acr% 'isc&ssi%n. T%

an+ #aret practiti%ner ec%n%#ists n%t incl&'e' h% has *lance' at a 0-+ear chart %) ;apanese EB&ities, the!en, an' U.:. 10-!ear Treas&r+ !iel's, e $elie(e these tren's happene' t%*ether )%r (er+ i#p%rtant,

fundamentally separate but systemically inter-related reasonsall %) hich are t%% i#p%rtant t% )it in a $rie)

re)lecti%n n%te. :&))ice t% sa+, i) an in(est%r thins that %ne %) these t% tren's ;apanU.:. Rates has t&rne' )%r a

peri%' rele(ant t% their ti#e h%ri/%n, the+ sh%&l' tae the ti#e t% st&'+ hat the )&n'a#ental an' s+ste#ic

i#plicati%ns are )%r the %ther. Apparentl+, #%st in(est%rs ha(e n%t.

Dith%&t )&rther 'ela+, let &s ret&rn t% the 'isc&ssi%n %n 'ecepti(e %pp%rt&nities that $ec%#e $a' tra'es, as e

p%n'er the c%#in* +ear.


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Five Bad Trades To Avoid Next ear

BA! TRA!" #1 For 2014: $gnoring %ean Reversion

The st%c #aret ha' a *reat +ear. :&pp%se'l+, hist%r+ )a(%rs a *%%' )%ll%-thr%&*h. De 'isa*ree. The chart

$el% sh%s the :=P9s ann&al ret&rns )%r the 20 +ears that )%ll%e' t% c%nsec&ti(e '%&$le-'i*it ann&al *ains in

the st%c #aret. O(er nearl+ a cent&r+, the thir' +ear p%ste' a si*ni)icantl+ s#aller ret&rn than the hist%rical#e'iana(era*e 84% less than the median return, and 6% less than the average return

@ere are the 20 th$nail charts %) th%se +ears )%r B&ic per&sal, in %r'er )r%# the per)%r#ance $ars a$%(e

13> -3? 1>3 -1>? 15F -12?

1>> -12? 2000 -10? 1G1 -10?


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13 ->? 10 ->? 2011 0?

1G5 H1? 1G> H2? 1F H3?

1F H? 12 H12? 155 H15?

11 H1F? 1 H20? 1G H2>?

15 H31? 1> H31?

Nearl+ e(er+ chart, ith the ecepti%n %) perhaps 15 an' 1>, )a(%re' #ean re(ersi%n. In sh%rt, $&+in* %n

;an&ar+ 2 an' h%l'in* J&st #a+ n%t c&t it in 2015. Th%se le(erin* )%r a repeat %) 2013 in U.:. EB&ities are liel+

alin* in t% a #eat *rin'er. As )%r the less%ns %) 2013 %n c&rrencies, c%##%'ities, an' e(en E#er*in* arets,

please rea' the )irst pa*e %) this n%te. Tren's ere )icle, an' e epect plent+ %) enc%res in the c%#in* +ear.

As a si'e n%te, the #%st $earish %&tc%#e )%r 2015 %&l' $e a *ra(it+-'e)+in* $i* ret&rn net %) the #ean-

re(ertin* sin*s e epect. 4r%# the ei*ht $est +ears a$%(e, three ca#e in 1>-1an' e n% hat

)%ll%e'. D%rse, ith%&t these three $&$$le +ears, the #e'ian ret&rn )alls t% 0?, an' the a(era*e t% -1.5?.


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BA! TRA!" #2 For 2014: 'ic'(flation)

This 'e$ate is als% relate' t% #ean re(ersi%n. 7el% is a 1-+ear chart %) U.:. CPI ith rele(ant Ec%n%#ist

#a*a/ine c%(ers #are' in (ertical lines t% the nearest #%nth. The c%(ers rea'

May !4, "### Ec%n%#+ Dars :tarrin* Alan


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I) the B&esti%n see#s %&tlan'ish, the $el% chart sh%s the last se(en U.:. Recessi%ns, an' C%re CPI hite

relati(e t% the sa#e 0-#%nth #%(in* a(era*e $l&e. The :=P is in +ell%. Peri%'s %) C%re CPI tren'in* a$%(e its

l%n*-ter# a(era*e all le' t% p%%r ec%n%#ic an' in(est#ent %&tc%#es

L%%in* t% +et an%ther ti#e )%r *&i'ance, in late 1G st%cs +ell% #a'e ne all-ti#e hi*hs J&st as C%re CPI

in)lati%n hite sta$ili/e' ar%&n' its l%n*-ter# a(era*e $l&ei'entical initial c%n'iti%ns %$ser(e' t%'a+.

In)lati%n then r%se )%r a +ear, hile st%cs ere p&t thr%&*h the #eat *rin'er )r%# :epte#$er 1G t% :epte#$er

10. Ulti#atel+ st%cs )ell 20? as recessi%n hit.

7el% e %(erla+ the U.:. 10-!ear Treas&r+ !iel' *reen a*ainst the sa#e C%re CPI hite )%r that peri%'. @ere,

+iel's r%se )%r a )e #%nths in tan'e# ith in)lati%n, $&t $+ +ear-en' 10 +iel's ere ri*ht $ac t% here the+

ha' starte'. ean-re(ersi%n at its )inest


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In a classic repeat %) hist%r+, 2015 c%&l' see a late c+cle last *asp rise in in)lati%n %) 0-100$ps, an' a 4e' %nce

a*ain l%%in* thr%&*h the rear(ie #irr%r %) a la**in* in'icat%r t% set p%lic+. As seen )r%# the pre(i%&s charts, this

al%ne %&l' present a h%le ne set %) pr%$le#s )%r asset prices. An' %) c%&rse, n% %ne %&l' see it c%#in*, as

the #a*a/ines alrea'+ s&**est.

As )%r interest rates, here are the sa#e #a*a/ine c%(ers place' %(er a chart %) the U.:. 10-!ear Treas&r+ !iel'. 7+

the en' %) 2015 the c&rrent 'e)lati%n scare #a+ l%% a $it sill+. Dhere 7%n' prices en' &p, an' h% the+ *et there,

re#ains t% $e seen. 7eteen n% an' then, there ill $e n% sh%rta*e %) ec%n%#ists ith c%nsens&s )%recaststr+

t% i*n%re the#.


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BA! TRA!" #3 For 2014: Forgetting *ate C+cle !+naics

In)lati%n isn9t the %nl+ late-c+cle the#e that has 'isappeare' )r%# the in(est#ent 'isc&ssi%n

(arge investors turn cold on commodities4inancial Ti#es, "ece#$er

MA)ter t% +ears at the hel# %) the %rl'9s %rst-per)%r#in* asset class, #ana*ers %) c%##%'ities )&n's c%&l' $e

)%r*i(en )%r )eelin* &nl%(e'. Dall :treet anal+sts, $i*-pict&re strate*ists an' p%er)&l c%ns&ltants ha(e t&rne' c%l'%n %il, #etals an' *rain )&t&res as a 'eca'e-l%n* rall+ peters %&t. An' in(est%rs are listenin*, ith #an+ n%

rel&ctant t% c%##it )&rther )&n's. :%#e are hea'in* )%r the eits.

) *ommodities +ally snt *arved in .toneDall :treet ;%&rnal, "ece#$er 2

MI) the #aret ha' its %n Ten C%##an'#ents, near the t%p %&l' $e Qth%& shalt re(ert t% the #eanQ%r, hat

*%es &p #&st c%#e '%n an' (ice (ersa. C%##%'ities $&lls $ettin* %n this li)tin* their )a(%rite in(est#ent %&t %)

its )&n nee' t% as the#sel(es here that #ean is, th%&*h. ... A$%(e all, in hist%rical ter#s, prices )%r c%pper, %il

an' *%l' arent e(en that cheapthe+ %nl+ l%% s% c%#pare' t% recent 'i//+ peas. :%#ehere in th%se

alternati(e c%##an'#ents is an%ther instr&cti%n )%r in(est%rs Th%& shalt n%t catch a )allin* ni)e.

Interest in the C%##%'ities space has $een pl$in* the 'epths thr%&*h%&t #%st %) the +earan' the #aret

as #eas&re' $+ the :=P


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BA! TRA!" #4 For 2014: Blind Fait' $n -olic+

arets $rea r&les. In(est#ent aph%ris#s that *ain en%&*h $elie(ers &s&all+ st%p %rin*ri*ht hen the+ are

c%&nte' 'epen'e' %n the #%st. On Pa*e 1 %) the #aret r&le $%% stan's, al%ne, M"%n9t )i*ht the 4e' ith a

n%' t% art+ Sei*h% pr%$a$l+ %&l' ha(e crin*e' at h% &$iB&it%&s the phrase has $ec%#ean' h% als%

sai' Mthe pr%$le# ith #%st pe%ple h% pla+ the #aret is that the+ are n%t )lei$le.

Central $an cre'i$ilit+ is lie an+ %ther asset. It sin*s in an' %&t %) )a(%r, in )airl+ pre'icta$le c+cles. The ti#e t%

*% l%n* 4e' cre'i$ilit+ as )i(e +ears a*%. I) e c%&l' sell *l%$al central $an cre'i$ilit+, e %&l' '% s% t%'a+

/here are no good options for late-cycle monetary policy. Central $an #an'ates ha(e an inherent str&ct&ral )la.

The+ are tase' ith c%ntr%llin* in)lati%n an' &ne#pl%+#ent, $%th %) hich la* the real ec%n%#+. That is, hen

$%th in)lati%n an' &ne#pl%+#ent are sta$le an' i#pr%(in*, an' p%lic+ is acc%##%'ati(e, M"%n9t )i*ht the 4e'

%rs rather $ea&ti)&ll+. :trai*ht lines %r %n'ers in ec%n%#ic #%'els. Un)%rt&natel+ at the t&rns, #%'el-

'ri(en p%lic+ ten's t% )all $ehin' the realit+ c&r(e. Lest e )%r*et, 200>-200G as a classic ea#ple. As the $el%

chart sh%s, acc%##%'ati(e p%lic+ 'i'n9t arrest the crash %) 200G, the tech $&st in 2000, the recessi%n an' $ear#aret %) 10-11, the '%&$le-'ip recessi%n %) 1G2, %r the crash %) 9>5. Perhaps 2015 ill see the 4e' 'i**in*

itsel) int% the sa#e late c+cle h%le, te#p%raril+ re'&cin* acc%##%'ati%n J&st as &ne#pl%+#ent tr%&*hs an'

in)lati%n pers &p. The #%'els %n9t lie thatan' e %rr+ )%r th%se )%ll%in* $lin'l+ at the t&rn.


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BA! TRA!" #. For 2014: Reac'ing for ield !/ring *ate C+cle

%%'+9s #aintains a han'+ hi*h-+iel' cre'it sprea' #%'el $ase' %n ratin* chan*es. 4%r the )irst ti#e in this -+ear

cre'it epansi%n c+cle, pre'icte' hi*h +iel' cre'it sprea's ha(e cr%sse' rather si*ni)icantl+ a$%(e act&al. It %re'

B&ite ell as a lea'in* in'icat%r '&rin* the crisis. O(erall, the hist%r+ %) these *aps '%es n%t $%'e ell )%r

s&staine' sprea' c%#pressi%n

The a$%(e als% s&**ests that placin* $lin' )aith in #%netar+ p%lic+ as e 'isc&sse' pre(i%&sl+, as the sole driver

)%r )&rther sprea' c%#pressi%n, #a+ &lti#atel+ 'isapp%int cre'it in(est%rs. I*n%rin* cre'it B&alit+ 'eteri%rati%n in

late c+cle is si#pl+ a $a' tra'e.


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A'' C%(enant Lite Iss&ance at F0? %) l%ans, )ar s&rpassin* the 200> hi*hs

An' PI iss&ance %)) the charts nearl+ a thir' t% pa+ 'i(i'en's

In $%th cases, e ha(e a pict&re %) in(est%rs h% '% n%t appear t% $e care)&ll+ anal+/in* in'i(i'&al cre'it ris.

4&rther, c%#panies are n%t le(erin* &p t% in(est in )&t&re *r%th, $&t t% )ee' their shareh%l'ers. Call it the

pilla*in* %) c%rp%rate $alance sheets, $+ the (er+ insi'ers char*e' ith steerin* the ship. Inci'entall+, J&st as the+

are in a**re*ate 'irectin* their c%#panies t% $&+ $ac shares an' pa+ 'i(i'en's c%&rtes+ %) sa(ers, pr%''e' $+

the 4e', %nl+ 1>? %) recent in'i(i'&al insi'er transacti%ns ha(e $een p&rchases. Acc%r'in* t% Pr%). NeJat :e+h&n

%) the Uni(ersit+ %) ichi*an, this is the l%est le(el since 10, hen his 'ata$ase $e*ins the a(era*e r&ns at

3G?. Dhat c%&l' p%ssi$l+ *% r%n*K


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As e enter a ne +ear, e than +%& )%r the %pp%rt&nit+ t% $e a part %) +%&r in(est#ent pr%cess. a+ e

t%*ether M)i*&re %&t the pieces %) the #aret p&//le. a+ 2015 $e rear'in* )%r the patient, 'ili*ent in(est%r.

As e lie t% sa+, Mi#a*inati%n, inn%(ati%n, &n'erstan'in*, an' acti%n are pillars share' $+ all s&ccess)&l

in(est%rs. Dhen s%#e %) the $est %pp%rt&nities c%#e )r%# '%in* n%thin*, the #aret9s #essa*e is %ne %) *reat

in)%r#ati%nal (al&e. The (al&e %) a(%i'in* $i* #istaes in 2015 #a+ $e *reater than e(er $e)%re. An' ith a l%n*

list %) p%tentiall+ $a' tra'es alrea'+ c%#petin* )%r in(est%rs9 attenti%n at the %penin* *ate, e ill prepare )%r thec%#in* +ear in care)&l st&'+ an' th%&*ht.

@app+ @%li'a+s an' %nt% 2015.

This c%p+ri*hte' rep%rt is p&$lishe' $+ Archaea Capital Research, Inc., an' is inten'e' s%lel+ )%r &se $+ 'esi*nate' recipients. Archaea Capital Research, Inc., speciali/es in #acr% in(est#ent

anal+sis )%r instit&ti%nal in(est%rs. Archaea Capital Research, Inc., e#pl%+s a 'iscipline' an' e(%l(in* c%#$inati%n %) pr%prietar+ *l%$al #acr%, asset all%cati%n, )&n'a#ental, B&antitati(e, an'

technical research #%'els t% pr%'&ce ec%n%#ic rep%rts, #% 'el p%rt)%li% chan*es, an' price )%recast s )%r eB&it+, rates, c&rrencies an' c%##%'ities #arets. Archaea Capital Research, Inc.9s

*l%$al clients incl&'e pensi%n )&n's, )a#il+ %))ices, he'*e )&n's, an' instit&ti%nal #%ne+ #ana*ers. 4%r inB&iries, e#ail in)%archaeacap.c%#.

This pr%prietar+ p&$licati%n is pr%tecte' $+ U.:. an' Internati%nal C%p+ri*ht las. All ri*hts reser(e'. N% license is *rante', ecept )%r the s&$scri$er9s pers%nal &se. N% part %) this p&$licati%n

%r its c%ntents #a+ $e c%pie', '%nl%a'e', st%re' in a retrie(al s+ste#, )&rther trans#itte', %r %therise repr%'&ce', st%re', 'is se#inate', trans)erre', %r &se', in an+ )%r# %r $+ an+ #eans,

ecept ith the pri%r ritten per#issi%n %) Archaea Capital Research, Inc. An+ )&rther 'iscl%s&re %r &se, 'istri$&ti%n, 'isse#inati%n %r c%p+in* %) this p&$licati%n, #essa*e %r an+ attach#ent is

strictl+ pr%hi$ite'. N% repr%'&cti%n, retrans#issi%n, %r %ther &se %) the in)%r#ati%n %r i#a*es is a&th%ri/e'.

This p&$licati%n c%ntains state#ents an' statistics that ha(e $een %$taine' )r%# s%&rces $elie(e' t% $e relia$le $&t are n%t *&arantee' as t% acc&rac+ %r c%#pleteness. Re)erences t% an+

speci)ic sec&rities %r in(est#ent a'(ice %) an+ in' '% n%t c%nstit&te an %))er t% $&+ %r sell s ec&rities. The past per)%r#ance %) an in(est#ent %r in(est#ent strate*+ cann%t *&arantee its

)&t&re per)%r#ance. It sh%&l' n%t $e ass e' that s&ch anal+sis, past %r )&t&re, ill $e pr%)ita$le %r ill eB&al past per)%r#ance %r *&arantee )&t&re per)%r#ance %r tren's. All tra'in* an'

in(est#ent 'ecisi%ns are the s%le resp%nsi$ilit+ %) the rea'er. Incl&si%n %) in)%r#ati%n a$%&t p%rt)%li% chan*es an' %ther in)%r#ati%n is n%t inten'e' as an+ t+pe %) rec%##en'ati%n, n%r

s%licitati%n.

LIITE" REE"IE: = LIA7ILIT!

IN NO EVENT :@ALL ARC@AEA CAPITAL RE:EARC@, INC., 7E LIA7LE 4OR AN! O4 T@E 4OLLODIN

archaea annual report - 2013 & 2014 closing, reflection, and five bad trades to avoid next year

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