Longfin Corp (LFIN US) - When Bitcoin & Global Equities Collide

Japan TMT Analyst

Pelham Smithers

Market Intel on Asian Tech with a Japan focus

Pelham Smithers Associates

Founded in 2009, Pelham Smithers Associates (PSA) provides market intelligence on Asian technology, focusing in particular on Japan. The industries covered by our team of specialists are: consumer electronics, telecomms, pharmaceuticals, internet, electronic parts and materials, automotive technology, retail and capital goods. 

Research is provided by the following:
Pelham Smithers: Macro, consumer electronics, telecoms & pharma
Joel Scheiman: Electronics materials / components
Julie Boote: Autos
Will Nestuk: Capital goods, machinery & transportation equipment parts
Thao Nguyen: eCommerce, internet content, marketing & advertising

Thematic (Sector/Industry)

United states / Thematic (Sector/Industry)

1. The published profits of US quoted companies are likely to fall steeply in the next recession. Even more than usual, a soft landing is improbable. 2. The recession will be accompanied by a major decline in share prices. Non-financial corporations have for many years been the only major group of investors who are net purchasers of shares and they will stop buying when profits fall. 3. The published profits of quoted companies will continue to be much more volatile than those published in the national accounts, because it is in the interests of management to overstate profits when share prices rise and then heavily understate them in bear markets. 4. The volatility of both share buying and profits has the same cause. Both are driven by the interests of managements in maximising their pay. Until the perverse incentives of the bonus culture are brought to an end, both profits and corporate share buying will be subject to sudden dramatic changes. 5. Companies buy shares in rising markets and stop when they fall. They are therefore momentum rather than value investors. This has encouraged fund managers to pursue momentum strategies, thus reinforcing corporate driven volatility. 6. Equities exhibit both short-term positive serial correlation (momentum) and mean reversion to value through longer term negative serial correlation. The timing of the change from positive to negative is unpredictable, but in the past, the longer momentum has lasted, the sharper has been the subsequent adjustment. 7. Periods of low volatility with above average returns are found 91% of the time and periods of high volatility with negative real returns are found 9%. If this pattern continues, the recent period of exceptionally low volatility will be followed by a prolonged or exaggerated period of volatility and negative returns. 8. Unemployment has fallen to an historically low level; the Fed needs to halt the decline, before expectations of inflation pick up, by slowing growth through tighter monetary policy. If action is too strong or too weak, a recession will result. A recession delayed and amplified by a weak response currently seems the most likely outcome. This is particularly likely if tax cuts expand the fiscal deficit, to which the short-term response is likely to be an additional boost to share prices.

1. The published profits of US quoted companies are likely to fall steeply in the next recession. Even more than usual, a soft landing is improbable. 2. The recession will be accompanied by a major decline in share prices. Non-financial corporations have for many years been the only major group of investors who are net purchasers of shares and they will stop buying when profits fall. 3. The published profits of quoted companies will continue to be much more volatile than those published in the national accounts, because it is in the interests of management to overstate profits when share prices rise and then heavily understate them in bear markets. 4. The volatility of both share buying and profits has the same cause. Both are driven by the interests of managements in maximising their pay. Until the perverse incentives of the bonus culture are brought to an end, both profits and corporate share buying will be subject to sudden dramatic changes. 5. Companies buy shares in rising markets and stop when they fall. They are therefore momentum rather than value investors. This has encouraged fund managers to pursue momentum strategies, thus reinforcing corporate driven volatility. 6. Equities exhibit both short-term positive serial correlation (momentum) and mean reversion to value through longer term negative serial correlation. The timing of the change from positive to negative is unpredictable, but in the past, the longer momentum has lasted, the sharper has been the subsequent adjustment. 7. Periods of low volatility with above average returns are found 91% of the time and periods of high volatility with negative real returns are found 9%. If this pattern continues, the recent period of exceptionally low volatility will be followed by a prolonged or exaggerated period of volatility and negative returns. 8. Unemployment has fallen to an historically low level; the Fed needs to halt the decline, before expectations of inflation pick up, by slowing growth through tighter monetary policy. If action is too strong or too weak, a recession will result. A recession delayed and amplified by a weak response currently seems the most likely outcome. This is particularly likely if tax cuts expand the fiscal deficit, to which the short-term response is likely to be an additional boost to share prices. 

US Profits and the Coming Bear Market.