MAXIN GLOBAL FUND - USD is a Long / Short Directional hedge Fund incorporated in Luxembourg. It started trading on February,22 2022 and replaces MAXIN ADVISORS' MODEL PORTFOLIO which has been trading since January 1st 2014. At MAXIN ADVISORS, we manage FULLY TRANSPARENTLY and publish the transactions on a DAILY basis and the details of the portfolio on a WEEKLY basis.
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The Big Short
We are not Michael Bury and we do not make outsized bets on one single asset class or investments, but when we see a really big short, we act on it.
For the past few months, we have started taking a strong interest in the the Luxury segment of the market and the leading giants of the sector, and we see a significant disconnect between the predictions of analysts, the perception of investors and the reality of the underlying trends that drive their business model.
Let’s start by saying that sell-side analysts have a proven tendency to project into the future the trends observed in the immediate recent past.
If a stock has been rising and earnings have been good, they tend to raise their target prices and project optimistic results ahead. Conversely, when stocks decline and results are bad, they tend to project even lower outcomes ahead.
History shows that whether it is for currencies, commodities, asset classes or individual stocks and sectors, at any point in time their predictions are an extrapolation of the past and they usually fail to see big turning points coming, actually recommending to buy at the top and to sell at the bottom.
On the Buy side of the equation, the majority of portfolio managers and investors also work on the basis of the data available to them at the time of making their investment decisions. If they see stocks rising and companies delivering outsized returns, they will privilege those stocks in their portfolios at the detriment of companies that are faring less well. It is truly what makes bull markets and valuation expansion, the propensity of investors to buy what has been rising and delivering good results in the recent past.
The spectacular rise in Luxury goods stocks in recent weeks is a prime example of this phenomenon, as the companies have been reporting exceptional results in 2021 and the beginning of 2022.
By driving the stocks higher, analysts and investors also pull their valuations to higher levels, as they predict a continuation of the positive trends ahead.
The problem is that when establishing their revenues or profits expectations for analysts or their investment decisions for investors, they mostly work on the latest data publicly available for the companies.
And as we write, their analytical work on luxury good companies is based on data of the business and results of the summer of 2022 …
Today, analysts are bullish on luxury stocks and investors have been piling into them in the past few weeks in the belief that the exceptional results delivered over the past couple of years, truly outstanding when compared to the rest of the industrial sectors, will continue.
As a result, the most recent rally has pushed the stocks even higher than the bullish targets of analysts.
Luxury good stocks are now trading at the highest valuations in their history and at a significant premium to the rest of the market.
LVMH is trading at 30x earnings, RICHEMONT at 26x earnings and HERMES at almost 60x earnings, testifying of the bullishness of investors when it comes to their future earnings growth.
Unfortunately, market and business conditions have actually changed markedly since last summer …
Up until August 2022, even Central banks did not believe in the lasting nature of inflation. It really took until the Jackson Hole Symposium of August 19th to see a major regime change in the stance of monetary policies around the world and the FED engineered three jumbo rate hikes of 0.75 % since the summer, amounting to a major deterioration of liquidity conditions since then.
More over, up until the summer, most wealthy people did not see the first half fall in asset markets as lasting.
The summer rally that took place from June 16th to August 19th actually comforted them in the view that the felines were temporary and they had not started altering their consumption habits, spending large sums of money on lavish holidays and continuing their spending on luxury items.
The sharp fall in asset markets between August and October 13th shook investors confidence in the temporary nature of inflation, on the magnitude of the rise in interest rates and on the ability of asset markets to recover in a sustainable way.
Moreover, real estate prices really started declining in August as we pointed out then, interest rates are 20 times higher than a year ago and bound to go higher and 2022 proved to be the worst year for financial markets and global portfolios in decades.
Unfortunately, Investors optimism may soon hit the wall of a nasty reality as Luxury groups report their Q4 earrings and sales.
We are precisely at the juncture where the Q4 earnings of the luxury good companies may surprise negatively in a big way…
LVMH is expected to report on January 26th, and analysts are expecting an exceptional year and a bumper quarter, RICHEMONT will report on May 12th and has ALREADY disappointed last quarter, and HERMES will report on Feb 17th with another bumper year.
The reason why we expect negative surprises in the space are the following :
1. Luxury is the ultimate late cycle industrial sector
Luxury is by definition the “Non-Necessary” consumption item and a purely discretionary one as it relies on pure satisfaction and not necessity. It is therefore booming at the end of lasting economic growth cycles and asset appreciation cycles.
Consumers tend to spend more on luxury when they feel good, secure and wealthy. When their revenues grow and their wealth grows, they allocate more of their wallet to lavish holidays, sports cars, jewellery, watches and fashion items.
In economic terms, its actually one of the best indicator of the peak of economic cycles.
As we know, we are entering 2023 with the IMF predicting significant economic contraction for a large swath of the world economies, Adas we have highlighted many times before, we see a much deeper recession ahead than mots economists expect.
2 . Luxury is heavily impacted by the “Positive Wealth Effect” and is therefore extremely dependent oil the direction of asset prices and global liquidity with a lag
For the reasons detailed above, Luxury consumption and luxury good companies are a leveraged call on asset markets. When real estate and stock market rise, households feel richer and spend more on luxury items, de-multiplying the impact of the sales and revenues of luxury good makers.
The Positive Wealth effect has an outsized impact on luxury businesses and on their stock prices.
In every cycle in the past, Luxury company results exploded upwards as markets where in the late stage of their cyclical rises, in sync with the sharp appreciation of Art prices, high-end hospitality and high-end travel.
Conversely, when liquidity withdraws and asset markets start turning, the consumption of Luxury products tumbles much quicker than basic staples or bare necessity consumption, with the correlative negative impact on their margins.
Luxury good companies maintain very expensive showrooms and outlets worldwide with the personnel that goes with it, all being high fixed costs. When sales start falling, margins compress faster than in other businesses, especially as luxury group tend to spend more on advertising in downturns to try to gain market shares over their competitors.
In exactly the way margins and profits explode upwards in rising markets, their margins and profits dwindle in declining markets.
3. Investors are pinning their hopes on the recovery in China to compensate the downturn in European and American sales.
Over the past few years, luxury sales to China and Chinese customers have been flat as China was locked down and the Chinese could not travel. The numbers published over the past couple of years show that the entirety of the growth and exceptional results of 2020, 2021 and the first half of 2022 were coming from the American and European markets and these are the ones that will be severely affected by the above trends in 2023 and 2024.
Many analysts expect the return of the Chinese consumer to compensate for the decline in European and American sales, but we believe that those unsubstantiated hopes may be disappointed. China has changed considerably over the COVID years and since the decades of high growth and easy money in China.
The Chinese consumers are going into a much lower visibility of wealth, Common prosperity goes against individualism, and economic conditions are not as rosy as in the past decades.
4. The best leading indicator of what is to come is the secondary market for luxury watches.
Since the summer, the booming secondary market for luxury watches has collapsed. prices have fallen by 30 to 40 % and sales volumes halved, indicating that spending on luxury items took a big hit in the 4th quarter of 2022.
This is a sign that sales at the official outlets of the big brands have also fallen drastically since August as global liquidity is withdrawing and the appetite for luxury goods is waning.
5. The correlation between Luxury Stocks and the Tech bubble is high.
As the following charts show, luxury good stocks have followed the pattern of the main 2008 – 2021 rally.
What makes the Luxury segment THE BIG SHORT is precisely the recent attempt of the main luxury stocks at new highs when the underlying fundamental trends have already turned.
It is only normal for the late cycle stocks to make a last attempt at challenging their previous highs as they are the last segment to attract investors due to their exceptional results. But disappointment will cause significant reversals, failed breaks and double tops, indicating the a significant bear market is starting.
Finally, analysts and investors are incoherent when it comes to current valuations and future earnings..
As the following tables show, those stocks are trading at between 26x and 60 x current earnings, when the consensus of analysts itself predicts a sharp deceleration of growth into single digits in the five years ahead.
Paying 26, 30 or 60x earnings for companies that will barely deliver 10 % earnings growth in the coming years is a clear mismatch between investors expectations and the reality of the underlying businesses.
In situations of wide disconnect between reality and expectations, something has to give, and it is clearly not the underlying business that will explode upwards the stock prices that will adjust sharply to a more sober reality.
When looking at the short term, the main luxury stocks are the MOST OVER EXTENDED they have been, and are about to roll-over anytime soon.
LVMH results on January 26th may well be the catalysts for the beginning of the bear phase in the late – cycle luxury segment.
Today, we kept on taking profits in China in VIVA BIOTECH and our Chinext ETF while adding to our position in OFFCN EDUCATION in the domestic market.
in Europe, we took profits on our long position in GRIFOLS and our short position in ENGIE.
We took advantage of the Crypto currency squeeze to increase our short positions in Bitocins and ETHEREUMS.
Finally, we went Short Gold through the future contract after having done the same in Silver in the past few days, for a trade. We remain strategically positive on Precious Metals but see a reversal in the US dollar vary soon and a pullck in precious metals that deserves to be traded.
New Asset Allocation
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