In an unexpected development, in his latest note the best market inflection point indicator alive, Dennis Gartman, has decided to pick on none other than billionaire Bill Ackman. This is the result:
We wish to talk once again about the incredible collapse of Valeant’s shares and the damage being wrought upon the reputation of those hedge fund managers still caught long of this company’s shares, with the leading example remaining the demise of the once sterling reputation of Mr. Bill Ackman of Pershing Square Capital. Here we have one of the true giants of the hedge fund industry; a gentleman once worth billions who ran billions more; a leader in the performance race for many years and now rather obviously a gentleman, who like Icarus of Greek mythology fame, flew too close to the sun and is now falling into oblivion.
Pershing Square’s assets are down 18.6% for the year as of the end of May we are told. We see no sense in being vindictive for there is nothing to be gained in being so; rather we wish simply to point out that the “Rules of Trade” are meant to be adhered to and that the “first among equal” of our rules of trading is the first: that one is never, ever, under any circumstance to average down into a trade. As our old friend, Paul Tudor Jones, says in this regard, “Losers average losers.”
When one averages down into a long position… or averages “up” into a short position… only one thing can be happening to the equity in one’s account: it must, by definition, be falling. If you buy a company’s stock at $25/share and it goes to $20/share, you are worth less than you were before. It cannot be otherwise. It is simple arithmetic. On the other hand, if you buy a company’s shares at $25/share and they go to $30/share your equity can only be larger. Why, we ask, would you wish for the former?
When a stock begins to fall there is no actual way of telling how far down it may fall before its weakness is stemmed. Enron’s shares fell relentlessly… inexorably… from $85/share to zero, and it was considered to be under-valued at every single penny lower as it fell. Buyers bought all the way down into bankruptcy. We watched as USAirways’ stock fell from $125/share all the way to zero, with some of the great minds in the business having owned it… and having bought it… all the way down into oblivion. We watched as sugar prices in the early 70’s fell from $1.25/lb. to $0.03/lb., with buyers all the way down, and over the past three decades we’ve watched as the coupon on the long bond here in the US has gone from 14.25% to where it is today in single digits.
The purpose for this exercise is to learn the lesson that Mr. Ackman is learning the very hardest of ways: that the market is wiser and larger and fiercer than are we. We are but small, imperiled cogs in a huge machine that can and will grind us into oblivion. The best that we can do is make certain that we have our trading positions in line with the market’s main trend; that we align ourselves with forces larger than are we and that we never, ever deviate from that intention. Mr. Ackman is heading toward investment oblivion. He is trapped in a trade that he cannot… and will not… get out of. His institutional clients will make the decision to get out for him as they demand that their remaining capital be returned and that as he raises that capital he is forced to sell his remaining shares in Valeant.
This is an enormous tragedy of huge proportions being played out here before our eyes. Mr. Ackman’s investors did not deserve this fate, but they are being forced to live it nonetheless. How truly sad. He averaged down… again… and again…and again… and again. His eventual demise is a lesson to us all. Would that we learn from it: This is Greek tragedy of the saddest kind. No one deserves this fate.
Here one can probably insert something about glass houses and stones. We eagerly await Ackman's retort, or maybe not.
Next, Gartman picks up on what we said back in September 2015, when bitcoin was trading at $230 and when we suggested that massive Chinese capital flight is about to send the digital currency much hgher. It is trading at $580 now, the highest level in two years. Here is Gartman's attempt to understand what is going on...
Regarding Bitcoin… which we rarely write about and which we truly do not and likely never shall truly understand… it has had a recent massive bullish run, predicated upon immense Chinese buying. We are quite certain that much of this buying in the past might have made its way into gold, but has been diverted in Bitcoin for a number of reasons not the least of which is the secrecy involved in transacting trades in it. Bitcoin is the Millennial’s answer to gold it seems and although we shall never understand that fact… just as we shall never really understand Millennials themselves… this is reality and we need to come to understand that.
That said, Bitcoin traded very poorly yesterday, peaking early in the day on a spike higher and then closing sharply lower and at or very near to the day’s lows. This is ominous then for holders of Bitcoin, but it may at the same time be supportive of gold in return. Time only shall tell.
... and failing.
Next, a quick update on how a "pleasantly long" Gartman is positioned:
[We are hedged] via a position in the derivatives market, sufficient to bring our net market position to one that is “pleasantly” but not materially long. We covered some of that position early yesterday as it appeared for a short while that the market was heading higher, but as the market “failed” late in the session we put back that which we had covered to effectively keep our “pleasant” net long position intact. We are, as of last night’s close, +2.6% for the year-to-date, out-performing our International index and just about equaling the return on the S&P itself, but from a “hedged” position.
Finally, today's trade of the day:
NEW RECOMMENDATION: We wish to sell the EUR and to buy the Swiss franc this morning upon receipt of this commentary. As we write, the cross is trading 1.0972:1 and we shall risk the trade only to 1.1045. Should the cross trade below 1.0940 we shall not hesitate but to add to the position, and our target as we move toward the British Referendum… and beyond… is to “parity” once again, knowing full well that the Swiss National Bank shall object to the trade.
You know what to do.