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Market Commentary

The Late Stage

Lee Adaptive Strategies Update      

Monthly Commentary

June 2021

June was a pleasant month. In our neck of the woods the weather was warm, we mostly stopped wearing masks, and the Red Sox finished the month in first place. The S&P gained a tidy 2.33% in June, bringing it to a satisfying up 15.25% for the first half the year.

Market sentiment appears to be a mixture of summer doldrums and foreboding. To be fair, foreboding is almost always in the mix, but this time fears of the future are more specific than the usual background hum of angst brought on by new all-time highs. The phrase “late-stage capitalism” seems to be appearing rather a lot. It is usually used somewhat ironically, but there is a definite feeling that we have crossed over into some kind of decadent period at the end of the economic cycle.

On the last Monday in June Bloomberg published a story “Record Stock Sales From Money-Losing Firms Ring the Alarm Bells” about secondary equity offerings from unprofitable companies. It seems that the ratio of issues from money losers to issues from money makers is now as high as it ever has been. To be clear, money losing issuers regularly outnumber profitable ones, but the ratio is now higher than it has been since at least 1982 when the data begins. Moreover, since the size of the profitable company issues tends to be larger, it is rare for the dollar value of unprofitable secondaries to be larger than the dollar value of profitable secondaries. But it is the case now. The only other times post-1982 this has happened were 2000 and 2008.

That unprofitable companies find issuing stock to be attractive is hardly surprising. It is the logical obverse of the attraction that buying back shares has for healthy ones. What is remarkable is the ready market that these unprofitable companies are finding for their shares. The “meme” stocks such as Game Stop and AMC are extreme and high-profile examples, but according to Bloomberg no fewer than 750 different money losing firms have made secondary offerings in the past 12 months.

If the widespread purchase of newly minted shares from unprofitable companies does not inspire a the-end-is-near reaction, consider the case of edX. According to an email recently sent to MIT alumni, edX was a non-profit jointly launched in 2012 by MIT and Harvard “to offer the world an open-source online learning platform for university-level courses.” In this it was, apparently, modestly successful but fell behind other platforms amidst a boom in online learning last year. Not to worry, one of the more successful players in the field, publicly traded 2U, Inc., has agreed to purchase the non-profit for $800 million. As part of the deal, 2U is obligated to continue to offer edX’s services for free.

Credulously buying new shares in a company that does not currently make money, but has aspirations to do so in the future, is one thing. Shelling out the better part of a billion dollars for a firm that is unprofitable by design, and promising to keep it that way, is quite another thing. Surely this is some kind of sign of the times?

More concretely, June saw a modest amount of concern in the markets over hints from the Fed that maybe rates would have to be raised earlier than expected, maybe as soon as late next year. It is easy to exaggerate the level of concern. There was much discussion in the media, and a flutter of activity in the bond market, but stocks and 10-year Treasuries went up for the month. The potential raising of rates was conditional on higher than expected inflation, which the Fed has pronounced unlikely.

To us, worrying about the higher rates that might follow the appearance of stronger inflation is like worrying about the water damage the fire department might cause if your house catches on fire. If inflation becomes significant enough to scare the Fed off its course, higher rates will not be our biggest problem.

Is the end near? We do not know. There are reasons for concern, but when has that not been true? This may be the late stage of something, but we do not believe the economy follows a natural progression from one state to another. This would all be a lot easier if it did. In the meantime, let us hope the weather holds and that the Red Sox keep winning.

The Market Sentiment Framework

We use our Market Sentiment Framework to adapt the mechanics and weightings of our full quantitative models to changing market conditions.

The Sentiment Framework gauges the current state of market psychology on two dimensions. Efficiency measures the crowdedness of the market, the volume of participants seeking investment opportunities. Lower levels of efficiency imply more market mispricing. Optimism measures the willingness of investors to take on risk in exchange for distant and uncertain rewards. Higher levels of optimism imply a better outlook for risky asset classes.

June saw the Optimism level increase and the Efficiency level decrease, both modestly.

Optimism began the month at 0.39 and ended the month at 0.51. Although still relatively low in absolute terms, Optimism is above its pre-COVID level and near its post-COVID high of 0.70 seen in mid-April.

Efficiency fell slightly, starting the month at 0.66 and ending at 0.32. Efficiency continues to be comparatively low as compared to historical averages, which suggests a market that is still under stress.

Both measures are higher than where they were in early 2020. The current positioning of the Sentiment Framework implies a market that is functioning less than ideally, with marginally optimistic but fearful investors. This would imply a positive but challenging outlook for the market as a whole, but possibly an opening for value strategies to find opportunities.

PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS OR PROFITABILITY.

Definitions:

Lee Adaptive Large Cap Sector Composite (“LALCS Composite”).  A capital weighted performance composite of an investment strategy known as the Lee Adaptive Large Cap Sector strategy (the “LALCS Strategy”) that holds some combination of the U.S. large cap sector ETFs and/or cash, as determined by a proprietary quantitative model.   The LALCS Composite performance is based on actual trading profits/losses/expenses net of a management fee of 0.50%.  Actual expenses of operating the LALCS Strategy may vary, depending on the investment structure in which the Strategy is used, which could result in lower returns than those stated for the LALCS Composite. Such expenses may detract materially from the performance of the LALCS Strategy and, consequently, the results shown above may not be fully indicative of the actual performance results of the LALCS Strategy.

THE LALCS COMPOSITE IS BEING SHOWN FOR ILLUSTRATION PURPOSES ONLY AND SHOULD NOT BE RELIED UPON.  NO REPRESENTATION OR ASSURANCE IS MADE THAT ANY INVESTOR WILL OR IS LIKELY TO ACHIEVE RESULTS COMPARABLE TO THOSE SHOWN ABOVE OR WILL MAKE ANY PROFIT OR WILL BE ABLE TO AVOID INCURRING SUBSTANTIAL LOSSES.

PAST PERFORMANCE OF THE STRATEGY AND THE LALCS COMPOSITE ARE NOT INDICATIVE, OR A GUARANTEE, OF FUTURE RESULTS.  IT SHOULD NOT BE EXPECTED THAT THE LALCS STRATEGY’S ACTUAL RETURNS WILL REPLICATE THE RETURNS SHOWN IN THE PERFORMANCE MODEL.

Lee Adaptive Broad Market Composite (“LABMS Composite”).  A capital weighted performance composite of an investment strategy known as the Lee Adaptive Broad Market Strategy (the “LABMS Strategy”) that holds some combination of the U.S. large cap sector ETFs, a small cap ETF and/or cash, as determined by a proprietary quantitative model.   The LABMS Composite performance is based on actual trading profits/losses/expenses net of a management fee of 0.50%.  Actual expenses of operating the LABMS Strategy may vary, depending on the investment structure in which the Strategy is used, which could result in lower returns than those stated for the LAUSE Composite. Such expenses may detract materially from the performance of the LABMS Strategy and, consequently, the results shown above may not be fully indicative of the actual performance results of the LABMS Strategy.

THE LABMS COMPOSITE IS BEING SHOWN FOR ILLUSTRATION PURPOSES ONLY AND SHOULD NOT BE RELIED UPON.  NO REPRESENTATION OR ASSURANCE IS MADE THAT ANY INVESTOR WILL OR IS LIKELY TO ACHIEVE RESULTS COMPARABLE TO THOSE SHOWN ABOVE OR WILL MAKE ANY PROFIT OR WILL BE ABLE TO AVOID INCURRING SUBSTANTIAL LOSSES.

PAST PERFORMANCE OF THE STRATEGY AND THE LABMS COMPOSITE ARE NOT INDICATIVE, OR A GUARANTEE, OF FUTURE RESULTS.  IT SHOULD NOT BE EXPECTED THAT THE LABMS STRATEGY’S ACTUAL RETURNS WILL REPLICATE THE RETURNS SHOWN IN THE PERFORMANCE MODEL.

Lee Adaptive Global Equity (“LAGES Composite”).  A capital weighted performance composite of the of an investment strategy known as the Lee Adaptive Global Equity strategy (the “LAGES Strategy”).  The LAGES Composite performance is based on actual trading profits/losses/expenses net of a management fee of 0.50%.  Actual expenses of operating the LAGES Strategy may vary, depending on the investment structure in which the LAGES Strategy is used, which could result in lower returns than those stated for the LAGES Composite. Such expenses may detract materially from the performance of the LAGES Strategy and, consequently, the results shown above may not be fully indicative of the actual performance results of the LAGES Strategy.

THE LAGES COMPOSITE IS BEING SHOWN FOR ILLUSTRATION PURPOSES ONLY AND SHOULD NOT BE RELIED UPON.  NO REPRESENTATION OR ASSURANCE IS MADE THAT ANY INVESTOR WILL OR IS LIKELY TO ACHIEVE RESULTS COMPARABLE TO THOSE SHOWN ABOVE OR WILL MAKE ANY PROFIT OR WILL BE ABLE TO AVOID INCURRING SUBSTANTIAL LOSSES.

PAST PERFORMANCE OF THE LAGES STRATEGY AND THE LAGES COMPOSITE ARE NOT INDICATIVE, OR A GUARANTEE, OF FUTURE RESULTS.  IT SHOULD NOT BE EXPECTED THAT THE LAGES STRATEGY’S ACTUAL RETURNS WILL REPLICATE THE RETURNS SHOWN IN THE PERFORMANCE MODEL.

Lee Adaptive China Equity Composite (“LACS Composite”) Performance.  A capital weighted performance composite of the of an investment strategy known as the Lee Adaptive China strategy (the “LACS Strategy”).  The LACS Strategy is currently offered by LCM to certain qualified investors through certain accounts managed by LCM on a discretionary basis (“LACS Managed Accounts”).  The LACS Managed Accounts use the same investment program as the LACS Strategy.  The Composite performance is based on actual trading profits/losses/expenses net of a management fee of 0.35%.  Actual expenses of operating the LACS Strategy may vary, depending on the investment structure in which the LACS Strategy is used, which could result in lower returns than those stated for the LACS Composite. Such expenses may detract materially from the performance of the LACS Strategy and, consequently, the results shown above may not be fully indicative of the actual performance results of the LACS Strategy.

THE LACS COMPOSITE IS BEING SHOWN FOR ILLUSTRATION PURPOSES ONLY AND SHOULD NOT BE RELIED UPON.  NO REPRESENTATION OR ASSURANCE IS MADE THAT ANY INVESTOR WILL OR IS LIKELY TO ACHIEVE RESULTS COMPARABLE TO THOSE SHOWN ABOVE OR WILL MAKE ANY PROFIT OR WILL BE ABLE TO AVOID INCURRING SUBSTANTIAL LOSSES.

PAST PERFORMANCE OF THE LACS STRATEGY AND THE LACS COMPOSITE ARE NOT INDICATIVE, OR A GUARANTEE, OF FUTURE RESULTS.  IT SHOULD NOT BE EXPECTED THAT THE LACS STRATEGY’S ACTUAL RETURNS WILL REPLICATE THE RETURNS SHOWN IN THE PERFORMANCE MODEL.

S&P 500 Total Returns Index.  The returns for the S&P 500 index on a total return basis, that is, with dividends included and does not reflect the deduction of fees and expenses.  You cannot invest directly in this index. The returns for the S&P 500 Index are provided for comparison purposes only to show how the LALCS Composite compares to a broad-based index of securities.  The S&P 500 is comprised of a representative sample of 500 large-cap companies.  The index is an unmanaged, float-weighted index with each stock’s weight in the index in proportion to its float, as determined by Standard & Poors.  The index is one of the most widely used benchmarks of U.S. equity performance.  The index is not subject to any of the fees or expenses to which the LALCS Composite is subject.  It is not possible to invest in this index.  The index is used for comparison purposes only.  It should not be assumed that the LALCS Strategy will invest in any specific securities that comprise the index or that the investment program of the LALCS Strategy will track the index.  Consequently, the returns of the LALCS Composite may or may not be highly correlated with those of the index.

Russell 3000 Index. The Russell 3000 Index is a market-capitalization-weighted equity index maintained by FTSE Russell that seeks to be a benchmark of the entire U.S. stock market.  It measures the performance of the 3,000 largest publicly held companies incorporated in America as measured by total market capitalization and represents approximately 98% of the American public equity market. The returns for the Russell 3000 index are provided for comparison purposes only to show how the LABMS Composite compares to a broad-based index of securities.  The index is not subject to any of the fees or expenses to which the LABMS Composite is subject.  It is not possible to invest in this index.  It should not be assumed that the LABMS Strategy will invest in any specific securities that comprise the index or that the investment program of the LABMS Strategy will track the index.  Consequently, the returns of the LABMS Composite may or may not be highly correlated with those of the index.

MSCI All Country World Index. The returns for the MSCI All Country World Index (“ACWI”) on a total return basis, that is, with dividends included and does not reflect the deduction of fees and expenses. The returns for the index are provided for comparison purposes only to show how the above composite returns compare to a broad-based index of securities. The MSCI AC World Index is composed of large and mid-capitalization developed and emerging market equities. The index is one of the most widely used benchmarks for global equity performance. You cannot invest directly in this index. It should not be assumed that the strategies above will invest in any specific securities that comprise the index or that the investment program of the strategies above will track the index. Consequently, the returns of the composites above may or may not be highly correlated with those of the index.

MSCI China Index Net. The returns for the MSCI China Index Net on a total return basis, that is, with net dividend tax withholding and does not reflect the deduction of fees and expenses. The returns for the index are provided for comparison purposes only to show how the above composite returns compare to a broad-based index of securities. The MSCI China Index represents large and mid-capitalization across H shares, B shares, Red chips, P chips and foreign listings (e.g. ADRs). With 495 constituents, the index covers about 85% of this China equity universe. Currently, the index also includes Large Cap A shares represented at 5% of their free float adjusted market capitalization.  It should not be assumed that the LACS strategy will invest in any specific securities that comprise the index or that the investment program of the LACS strategy will track the index. Consequently, the returns of the composite above may or may not be highly correlated with those of the index.

Disclaimer:

PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS OR PROFITABILITY.

The above is the opinion of the author and should not be relied upon as investment advice or a forecast of the future. It is not a recommendation, offer or solicitation to buy or sell any securities or implement any investment strategy. It is for informational purposes only. The above statistics, data, anecdotes, and opinions of others are assumed to be true and accurate however 3D/L Capital Management does not warrant the accuracy of any of these. There is also no assurance that any of the above are all-inclusive or complete.  

3D/L does not approve or otherwise endorse the information contained in links to third-party sources. 3D/L is not affiliated with the providers of third-party information and is not responsible for the accuracy of the information contained therein.

Past performance is no guarantee of future results. None of the services offered by 3D/L Capital Management are insured by the FDIC and the reader is reminded that all investments contain risk. The opinions offered above are as of May 31, 2021 and are subject to change as influencing factors change.

More detail regarding 3D/L Capital Management, its products, services, personnel, fees, and investment methodologies are available in the firm’s Form ADV Part 2 which is available at https://files.adviserinfo.sec.gov/IAPD/Content/Common/crd_iapd_Brochure.aspx?BRCHR_VRSN_ID=669397 or by calling (860) 291-1998, option 2 or emailing sales@3dlfinancial.com or visiting 3D’s website at www.3dlfinancial.com