Speaker 1: Hello, and welcome to What Goes Up, a weekly markets podcast.
Speaker 1: My name is Mike Reagan. I'm a senior editor at Bloomberg,
Speaker 1: and I'm aldowna higher across acid reporter with Bloomberg. This
Speaker 1: week on the show. While the headlines coming from the
Speaker 1: banking sector have been nothing short of terrifying this month,
Speaker 1: yet the stock market just keeps chugging along, especially the
Speaker 1: tech sector. In fact, the NASDAC one hundred index is
Speaker 1: about to snap a streak of four straight quarterly declines.
Speaker 1: That's its longest losing streak in more than twenty years.
Speaker 1: So what's going on? Is it just a return to
Speaker 1: the days when growth stocks would reliably outperform after value
Speaker 1: had its brief time in the sun, or is it
Speaker 1: something else going on. We're gonna get into it with
Speaker 1: a quant who also has some very interesting thoughts on
Speaker 1: a topic we hardly ever talk about around here, microcaps,
Speaker 1: which val Donna leads me to put you on the
Speaker 1: spot and ask what's your favorite microcap stock? My favorite
Speaker 1: micro Well, I was going to say, you missed an
Speaker 1: opportunity to make a great pun. You could have said,
Speaker 1: like a small topic, you know, good, Oh my gosh,
Speaker 1: what's my favorite microcap? Oh my gosh, you really are
Speaker 1: giving me on a spot I don't even know any
Speaker 1: I gotta admit I didn't know any I looked, I
Speaker 1: looked them up, and now I know what's your favorite?
Speaker 1: What's your favorite one? Well, I'm gonna not reveal that,
Speaker 1: but I will say it's it's a fascinating field and
Speaker 1: there's a bunch year to day that are up like
Speaker 1: two hundred percent if you look at the Russell microcap
Speaker 1: in next. So I'm glad we've got the perfect guest
Speaker 1: to break it down for us. Oh my gosh, is
Speaker 1: it a lot of like biotech? A lot of biotech? Yeah,
Speaker 1: a lot of biotech. Oh my gosh. Okay, well, then
Speaker 1: let's bring our guests in. It's Patrick McDonough Managing director
Speaker 1: at Pegum Quantitative Solutions. Thank you so much for joining us,
Speaker 1: Thanks for having me, glad to be here to talk.
Speaker 1: Before we got started with today's interview, you and I
Speaker 1: were chatting and you said you would keep equations to
Speaker 1: a minimum during our during our podcast recording, So I
Speaker 1: wanted to ask you to just lay out your role
Speaker 1: for us. Sure. Sure, I'm a portfolio manager on the
Speaker 1: Quantitative Equity Team, Impegium Quantitative Solutions. I know everybody loves
Speaker 1: to talk to to quant portfolio managers, those mats, all
Speaker 1: the all the regressions and interactions across factors, So I'll
Speaker 1: make sure to lay that awfully thick today. Absolutely well, Patrick,
Speaker 1: let's get started just with a sort of overview of
Speaker 1: what we've seen in the market so far this year.
Speaker 1: I mean, you know, I mentioned in the intro that
Speaker 1: strong rally and tech. I think the NAZAC one hundreds
Speaker 1: up like fourteen fifteen percent this year. What do you
Speaker 1: think's going on? Is it a growth value thing or
Speaker 1: is it you know, texts the best place to hide
Speaker 1: out from the troubles in the banking sector. How are
Speaker 1: you sort of explaining this action we've seen in the
Speaker 1: market this year. I think it looks like a value
Speaker 1: versus growth On the surface, you're seeing tech go do
Speaker 1: really well. You're seeing well, actually it almost happens inter
Speaker 1: day in some cases, but by and large, for the
Speaker 1: year to day period, we've seen tech do really well.
Speaker 1: We've seen a reversal of the cyclicals that drove value
Speaker 1: last year. So at first clients it's said nice simple
Speaker 1: value versus growth story with growth coming back. But I
Speaker 1: think if you peel that back a couple of layers,
Speaker 1: what you're actually seeing is fear or at least on certainty,
Speaker 1: driving the equity market, and that's being played out with
Speaker 1: these larger tech names that have done well in the past.
Speaker 1: But I don't necessarily think you're going to do all
Speaker 1: that well going forward in the space. So I actually
Speaker 1: think it's a little bit more of a size effect
Speaker 1: that we're seeing at this point rather than actual growth.
Speaker 1: And you believe the names that are doing it. You know,
Speaker 1: it's Apple, it's Microsoft, Salesforce, and these are really big companies.
Speaker 1: These are also really really expensive companies and videos more
Speaker 1: than fifty times forward earnings at this point. So it's
Speaker 1: hard to see how these are really growth companies. They've
Speaker 1: already come, they've already grown, they've been growing for you know.
Speaker 1: They you could argue that haven't really grown for half
Speaker 1: a decade at this point. They're just so big. If anything,
Speaker 1: they're very profitable companies at this point, but it's kind
Speaker 1: of hard to see them as actual growth companies. And
Speaker 1: from a factor, I can't help it. I'm a quanta.
Speaker 1: I have to From a factor perspective. These aren't really
Speaker 1: growth companies. If anything, they show up a size of
Speaker 1: course larger cap names even within say the SMP or
Speaker 1: the NASDAC or they show up as quality names. These
Speaker 1: are companies that are very, very consistent and persistent when
Speaker 1: it comes during an earnings perspective. Really not growth at
Speaker 1: this point. I think this is a place to hide
Speaker 1: for equity investors at this point. Yeah, just what we've
Speaker 1: forever considered growth have grown into becoming I guess the
Speaker 1: blue chip defensive stocks almost that you know, if you
Speaker 1: have to belong something, these are the names you go
Speaker 1: with exactly. In a lot of ways, this reminds me
Speaker 1: of sort of the two thousand and eight beginning of
Speaker 1: twenty nineteen period. So it's not two thousand and eight
Speaker 1: at least, which is a good thing. It's not a
Speaker 1: banking crisis. Governments around the world have really stepped up
Speaker 1: and put a floor under financials. But it is a
Speaker 1: little bit I think of the market hoping that the
Speaker 1: FED rising rates isn't going to last, and we're going
Speaker 1: to see a reversal of that in the short term.
Speaker 1: If you remember, going back to twenty eighteen, the FED
Speaker 1: started to raise rates, The market kind of freaked out
Speaker 1: a little bit. You saw sort of the re emergence
Speaker 1: of the fangs fangs two point zero at this point
Speaker 1: coming back, and everything else in the market maybe discovered
Speaker 1: there or rolled over a little bit. COVID put an
Speaker 1: end to that particular trade at this point, but it
Speaker 1: was a last gasp of what had been almost a
Speaker 1: ten year bull rally at that point. People looking for
Speaker 1: those those companies that would be economically insensitive or at
Speaker 1: least agnostic to any downturn in the markets. You compare
Speaker 1: that to the fixed income market, and wow, it's it's
Speaker 1: two very very different messages that we're seeing right now.
Speaker 1: The fix income market right now kind of looks like
Speaker 1: the six space mount in Disney World. Right You kind
Speaker 1: of ride up the curve a little bit going up
Speaker 1: to the to the sixth month, and then it rolls
Speaker 1: on down until the ten year, twenty year, get a
Speaker 1: little bit of a bump going into the thirty year.
Speaker 1: But that's not posed for sort of a growth market.
Speaker 1: That's not i think signaling happy landings or at least
Speaker 1: anything other than volatility going forward. Where the equity market
Speaker 1: right now, it's like it's fine we're whistling past this
Speaker 1: particular graveyard and hoping that continues forever. I guess at
Speaker 1: this point hard to see that with rates, you know,
Speaker 1: in the short term rifle of five percent. But maybe
Speaker 1: we'll have, you know, forever, forever, perpetual growth, but that
Speaker 1: seems unlikely. Mike. I don't know about you, but I
Speaker 1: love roller coaster rides, especially in the market. My kids
Speaker 1: get this season passes to six Flags. I can't even
Speaker 1: watch them go on is really fun. Yeah, so that's
Speaker 1: a new Jersey staple. Patrick. I have a follow up
Speaker 1: question about the what you were just saying about the
Speaker 1: fixed income market, because a couple of weeks ago, what
Speaker 1: a lot of people were saying was that there was
Speaker 1: a short squeeze in the fixed income market and that's
Speaker 1: why we were seeing all those moves. So I'm wondering if, like,
Speaker 1: can we even trust the signals that the treasury market
Speaker 1: is sending us if we did see some of those
Speaker 1: moves happening because of the short squeeze. That's a that's
Speaker 1: a tough question, right, It's it's it kind of depends
Speaker 1: on what As an acid owner, your your time horizon is.
Speaker 1: It's been a really nice trading signal if you've been
Speaker 1: sort of a high frequency quant and you've been moving
Speaker 1: in and out sort of middlesecond trading and uh and
Speaker 1: and taking advantage of the volatilities we saw up until
Speaker 1: the last week or so. I think at the very least,
Speaker 1: what it does give investors though, as an opportunity that
Speaker 1: we haven't had in a long time. People aren't really
Speaker 1: necessarily pulling out of this large cap tech trades that
Speaker 1: we were talking about. There hasn't been a rebalance and
Speaker 1: to say staples or something like that, which is more negative,
Speaker 1: but people are sitting on cash and you can actually
Speaker 1: get a yield for the first time, you know, in
Speaker 1: a decade decade plus, and that's really I think going
Speaker 1: to have an opportunity. Well, you have a rising opportunity
Speaker 1: set now, so that's going to have a big impact
Speaker 1: I think on more markets go that marginal dollar, that
Speaker 1: next investment dollar. You don't have to chase the current trends.
Speaker 1: You can actually sit there in a money market fund
Speaker 1: at close to five percent and kind of not panic
Speaker 1: and kind of maybe just kind of cool your jets
Speaker 1: and rest for a little bit. And that's a nice option.
Speaker 1: I think for people to have. So whether it's a
Speaker 1: pure signal of an impending recession or not, I will see.
Speaker 1: It's kind of hard, in my view, my personal view,
Speaker 1: to see where this goes. Have this not end and
Speaker 1: at least some sort of pull back. The consumer keeps
Speaker 1: proving me wrong. There seems to be this interesting fight
Speaker 1: going on now between the Fed and the American consumer.
Speaker 1: But it's it's rare, I think, to have to go
Speaker 1: from basically zero to what's called five percent interest rates
Speaker 1: and not just break a few relatively small, obscure banks.
Speaker 1: I would expect to see people start pulling back, And anecdotally,
Speaker 1: you know, I'm starting to see it, just just amongst
Speaker 1: my friends, my family. Things are getting awfully expensive out there,
Speaker 1: and it's hard to see how that doesn't have some
Speaker 1: sort of consequences for the economy going forward. You know, Patrick,
Speaker 1: the one thing you hear so often is, well, yes,
Speaker 1: the Fed is raising rates. Jerome Powell pretty much signaled
Speaker 1: that he does not see any environment in which they'd
Speaker 1: actually cut rates this year, regardless of what the short
Speaker 1: term interest rate market is saying. But on the other hand,
Speaker 1: that Fed balance sheet that everyone keeps a close eye
Speaker 1: on has really ramped up aggressively, and obviously, to me,
Speaker 1: there's a big difference between quantitative easing, where they are,
Speaker 1: you know, expanding the balance sheet by buying assets from banks,
Speaker 1: buying treasuries and mortgage back securities, and this version of
Speaker 1: it where they're just extending loans through the discount window
Speaker 1: and through this new term loan facility for for banks
Speaker 1: that are struggling. But yet there's this almost this knee
Speaker 1: jerk reaction that hey, the Fed's outing liquid liquidity, the
Speaker 1: bounce sheet is expanding, This is unabashedly uh good for
Speaker 1: risk assets. How do you think about that? I mean
Speaker 1: that that to me seems like kind of a risky
Speaker 1: interpretation of what the Fed's doing. Um, and I'm just
Speaker 1: curious how you how you view it. I think that's
Speaker 1: I would agree with your with your view that that's
Speaker 1: that's that's a bit of a risky way to view
Speaker 1: what's going on with the FED. And maybe we can
Speaker 1: kind of flip that and see what people have what
Speaker 1: the impact has been across the quote un risk free
Speaker 1: quote unquote risk free asset class over the last even
Speaker 1: just year to date, right, I mean, suddenly duration is
Speaker 1: really mattered and suddenly if you just looked at the
Speaker 1: whip sawing of the two year much less, you know,
Speaker 1: any thing longer dated duration matters. Again, so even risk
Speaker 1: free holding maturity government securities aren't exactly risk free if
Speaker 1: it doesn't if it doesn't line up properly with the
Speaker 1: liabilities on your balance sheet. So trying to kind of
Speaker 1: time this from from a risk asset perspective is I
Speaker 1: think a bit of a fools game at this point.
Speaker 1: Probably better to take advantage of that yield bring you
Speaker 1: can get it played the defenses at least a little bit.
Speaker 1: And again, even if you look at the tech names
Speaker 1: that are doing well in the equity market, they're not
Speaker 1: really the risky end of the spectrum. This isn't the
Speaker 1: startup end, This isn't sort of the aggressive well perhaps
Speaker 1: maybe fifty times and age we mentioned is a bit
Speaker 1: on the extreme end, but very big, very stable, very
Speaker 1: safe companies. I don't really think we're going to see
Speaker 1: much of a risk on market in the foreseeable future.
Speaker 1: And we started see some of those wobbles across more
Speaker 1: risky ends of that's called CPAs or hedge funds, people
Speaker 1: getting kind of wiped out a little bit in that
Speaker 1: space and even across private equity. Now, maybe I'm a
Speaker 1: little bitter as a public's guy and having a daily
Speaker 1: marked to mark rather than being able to kind of
Speaker 1: hide on my multi year contracts there. So maybe we
Speaker 1: should all take this with a grant of salt. But
Speaker 1: it is interesting to see some of the news breaking
Speaker 1: on some really big PE players having to finally again
Speaker 1: finally you can tell my bias there. But that's that
Speaker 1: marked to mark across some of these other asset class
Speaker 1: So I'm not really sure the market is digested all
Speaker 1: this free capital that we've had it from that's called
Speaker 1: the thread round one. If this is round two, I
Speaker 1: don't know where that goes in a safe in a
Speaker 1: safe manner, I'm wondering patch of what you think the
Speaker 1: market should be pricing in, or the stock market should
Speaker 1: be pricing in at this point. I've read this interesting
Speaker 1: note from City this week that said something like stock
Speaker 1: neither stucks nor bonds have priced in a recession, and
Speaker 1: as Mike just mentioned, you know the market is expecting
Speaker 1: some cuts later this year. What should the market be
Speaker 1: pricing in? I think what the market should be focusing
Speaker 1: on is actually earnings at this point, and I think
Speaker 1: that would be kind of the way to it to
Speaker 1: adjust the pricing going forward. We kind of had a
Speaker 1: little bit of a reset of of the pe ratio
Speaker 1: the last year or so as markets came down last year,
Speaker 1: but earnings haven't moved much and there hasn't been that
Speaker 1: that resetting of future expectations of what companies can be
Speaker 1: doing and what companies can be doing. I think, really realistically,
Speaker 1: I'll keep picking on the big tech names because they've
Speaker 1: been the winner's space. If you've got billions of hundreds
Speaker 1: of billions of earnings coming in a year, how can
Speaker 1: you really be priced at twenty or thirty or whatever
Speaker 1: the multiple is going forward. You're so big that seems
Speaker 1: really unrealistic unless there's some sort of new product or
Speaker 1: new area for growth. That's hard to see right. We're
Speaker 1: seeing it now. I guess if we want to pick
Speaker 1: on sort of the AI approach, where you're more consumer focused,
Speaker 1: big tech companies have been going hasn't exactly. I mean,
Speaker 1: it's been fun. We've been hearing all sorts of crazy
Speaker 1: news stories about people falling in love with chatbots or
Speaker 1: chat box suddenly becoming aware and threatening to destroy the world.
Speaker 1: I think that was an eighties movie I grew up on,
Speaker 1: but the actual impact of that from a revenue perspective
Speaker 1: seems premature at this point, I would say, so, I
Speaker 1: think we need to as as a market collectively start
Speaker 1: reevaluating what more reasonable growth expectations are and I think
Speaker 1: that will help reset the p that's going to be
Speaker 1: the prices down that's going to I think reawaken what
Speaker 1: more realistic upside or quite honestly downside would be in
Speaker 1: the market. And that's not to say that markets are
Speaker 1: miss identifying quote unquote good companies. I think what they're
Speaker 1: missing though, is where companies go from here. So where's
Speaker 1: the upside? If you think back to Microsoft, right, you know,
Speaker 1: good company has been a good company for decades, really
Speaker 1: got hammered at the end of the tech bubble, but
Speaker 1: wasn't going out of business. There was no there's no
Speaker 1: fear of Microsoft going out of season to exist. It
Speaker 1: was still a good company. The price just didn't move
Speaker 1: for well over a decade, so it wasn't necessarily a
Speaker 1: good investment at that point, and I think that's where
Speaker 1: we maybe need to start thinking about redistributing capital for
Speaker 1: that actual upside. Potential rather than just kind of seeing
Speaker 1: the companies to stay paved. Patrick, let's get into that
Speaker 1: notion about microcaps, because I know you've done. I've been
Speaker 1: looking into them a bit lately. Talk to us about,
Speaker 1: you know what you've researched, what you found, how we
Speaker 1: should think about microcaps. Part of this started out with
Speaker 1: trying to identify companies for that actual upside potential, right
Speaker 1: if you think about it, from pure economic growth, almost
Speaker 1: an academic study of getting back in to say like, hey,
Speaker 1: where where are these companies with new ideas that have
Speaker 1: been overlooked or can come in and disrupt markets and
Speaker 1: actually disrupt So we're not going to pay for the
Speaker 1: the Ugers and again the Microsoft, So for the apples
Speaker 1: who have already come and disrupted and are now the
Speaker 1: established players. Where can you find some of those new places?
Speaker 1: And it started with tech, It started with tech and biotech.
Speaker 1: It was kind of looking into, you know, what are
Speaker 1: the structures of those names and is there an opportunity
Speaker 1: outside of the VC or private equity space and really
Speaker 1: realizing that the microcaps have been very overlooked. Now there's
Speaker 1: a lot of choppiness down there, there's a lot of
Speaker 1: noise down there. You have to be very very careful.
Speaker 1: You have to be very systematic or structured. I of
Speaker 1: course think wants to invest in every it wants or
Speaker 1: the answer to every question. But but you really do
Speaker 1: have to be diversified and clean and structured in the
Speaker 1: way that you do it in a microcraft space. But
Speaker 1: you also have the opportunity for other segments of the
Speaker 1: economy that aren't really necessarily in vogue, so things like banks, right,
Speaker 1: you could actually diversify in financials. You can look at
Speaker 1: industrials that are actually down sort of the real end
Speaker 1: of the economic spectrum, if you will, and get into
Speaker 1: that space in a more diversified way through microcap And
Speaker 1: it's also something that is not really played in from
Speaker 1: a traditional institutional investor space. It's something that people have
Speaker 1: historically avoided. Whether that's governance you need to give another
Speaker 1: manager who gets into space or look at it. Or
Speaker 1: you could get your growth from other or at least
Speaker 1: you assume do you get your growth from other segments
Speaker 1: of the market, which means it's not crowded. So it's
Speaker 1: an area where you can go in and get a
Speaker 1: lot of upside even above just the pure beta in
Speaker 1: the microcap space, so so very exciting, I think from
Speaker 1: an opportunity to set, at least in the long term.
Speaker 1: I feel like individuals stock selection would be tough in
Speaker 1: that space though, I mean, is there a systematic way
Speaker 1: to do it? Is you know, would you buy an
Speaker 1: ETF just buy everything? You know, I'm thinking of PGM
Speaker 1: with what a trillion and a half dollars to work with,
Speaker 1: you know, and quants in general tend to have billions
Speaker 1: and billion dollars to put to work. Like, how do
Speaker 1: you how do you approach microcaps systematically? I think you
Speaker 1: hit one of the nails on the head right there
Speaker 1: with knowing your limitations. This isn't a space where you're
Speaker 1: going to have billions and billions of dollars to be
Speaker 1: able to play in. If you do so, you're just
Speaker 1: going to completely overwhelm the space. So to be very
Speaker 1: very tailored in what you're doing. So in the US
Speaker 1: microcap space, you know, we probably want to put in
Speaker 1: a billion or show at a maximum level at this point,
Speaker 1: So you're limiting the upside that you can from an
Speaker 1: AUM growth. But you're doing that so you can preserve
Speaker 1: the actual ability to do stock selection. The ability to
Speaker 1: actually add value in the space you have to come
Speaker 1: out of to a certain extent from a philosophical perspective
Speaker 1: of hey, we still want to harvest the same underlying
Speaker 1: economic principles that we do as quants in the larger
Speaker 1: cap space. But you can't just take the same old
Speaker 1: model and slap it down there and call it a solution.
Speaker 1: You have to look and see what actual works. So
Speaker 1: you have to understand that there's going to be more
Speaker 1: sentiment driven trades that go on there, a little bit
Speaker 1: more volatility, or in some cases a lot more volatility.
Speaker 1: You have to be really clean, you have to be
Speaker 1: very efficient, and you have to be really really experienced
Speaker 1: to trade in that space, particularly if you're doing it
Speaker 1: across multiple names. But the benefits of that or diversification
Speaker 1: a lot of upside potential, as I said, both in
Speaker 1: the space so you think the data, but also in
Speaker 1: the name selection that you're doing. But you have to
Speaker 1: be really really disciplined from a risk perspective as well.
Speaker 1: So this is where you have to have multiple, multiple holdings,
Speaker 1: so you're just not putting all of your eggs in
Speaker 1: one basket. So you go so far as to go
Speaker 1: to the OTC pink sheet type of markets, or they
Speaker 1: too risky to get involved with. It's a little risky.
Speaker 1: I think in that point, if you're going to start
Speaker 1: doing OTC, you would need some sort of information advantage
Speaker 1: to really want to play in that space. I don't
Speaker 1: think you need to. That's the fun part, though. You
Speaker 1: don't actually have to get in that space to add value.
Speaker 1: You can do it with the liquid names, and that's
Speaker 1: really where I think being systematic mic bias notwithstanding, but
Speaker 1: being systematic in the way that you're trading, right, So
Speaker 1: you have to be able to go out and make
Speaker 1: sure as you're picking the names you can actually harvest.
Speaker 1: We use the ADP measures for example, right we're looking
Speaker 1: at the average daily volume of certain names and making
Speaker 1: sure we don't get anywhere near max adv across any
Speaker 1: of these names, so that you actually have the space
Speaker 1: to come in and harvest the upside of that name
Speaker 1: without driving that name up on your own. If you
Speaker 1: come in, you drive the price up as you're buying it,
Speaker 1: there's no room for it to grow, so it's just
Speaker 1: bad business to do that. The other is you have
Speaker 1: to make sure you really have good relationships with your counterparts.
Speaker 1: It's not as liquid, although the adv and liquidity as
Speaker 1: a rule has been going up significantly microcaps, So this
Speaker 1: isn't twenty years ago, ten years ago. Even this is
Speaker 1: very very liquid markets. But you have to make sure
Speaker 1: you have good relationships with your counterparts. You might want
Speaker 1: to cancel trade halfway through if someone else is jumping
Speaker 1: up on that name. Be a little bit more comfortable
Speaker 1: having a little bit more cash, not canceling your not
Speaker 1: fulling out filling a full order for example, if it
Speaker 1: starts to move away from you, and then rebalance it
Speaker 1: across other names in the portfolio. So there's a lot
Speaker 1: of science that goes into it, but you still have
Speaker 1: to have that art as an experience PM to make
Speaker 1: sure that you can leverage the information flow that you're getting. Okay, Patrick,
Speaker 1: I have a two part question, which is typically something
Speaker 1: that Mike would give guests, like a multipart question. So
Speaker 1: I'm stealing from him. Two parts Is amateur our amateur? Yeah,
Speaker 1: but I'm trying not to scare the guests away anyway.
Speaker 1: You So, Mike and I might not have our favorite microcaps,
Speaker 1: but maybe you can lay out some names that you
Speaker 1: guys are looking at and then The second part is
Speaker 1: you said you have to be very experienced to be
Speaker 1: trading these names, So I'm wondering who your advice is for, Like,
Speaker 1: is it for the professional or is it something that
Speaker 1: you know a retail investor and at home investor should
Speaker 1: also be looking at. I'll take the second part of
Speaker 1: that first. I think it's probably not a space where
Speaker 1: you want to be doing a lot of day trading
Speaker 1: per se, simply because you names can move against you
Speaker 1: really really quickly. There's a lot of information flow that's
Speaker 1: going on there. And also I think you want to
Speaker 1: be diversified, so I don't think you want to be
Speaker 1: necessarily researching five, ten, even fifteen names in the space
Speaker 1: and putting all your capital across those names. You really
Speaker 1: want to be diversifying away from any single name. There's
Speaker 1: a lot more what I would call sentiment or the
Speaker 1: underlying upside potential for individual names, less of the more
Speaker 1: traditionalist valuation and quality signals where those do exist in
Speaker 1: the space, and you want to make sure that you
Speaker 1: can harvest that systematically because you're going to diversify those
Speaker 1: single name risks away by having say one hundred and
Speaker 1: fifty two hundred names in your portfolio. That's harder to
Speaker 1: do as a retail investor individual investor, you can still
Speaker 1: do it, but it's a lot harder to do. The
Speaker 1: other is t costs. It's a lot more expensive to
Speaker 1: trade if you don't already have those big existing pre
Speaker 1: exist trading relationships where you can keep those costs down.
Speaker 1: So it's a lot harder for I think your average
Speaker 1: person to do it in this space. I don't know
Speaker 1: if I have this done for it as an individual
Speaker 1: investors will be quite honest with you, but it's a
Speaker 1: lot easier to do to leverage it across a partner,
Speaker 1: like as a pigeon quand so I think it makes
Speaker 1: a little bit more sense to leverage some sort of
Speaker 1: institutional help as you're doing that. So a little bit
Speaker 1: more limited as far as individual names. One area that
Speaker 1: I'm interested in, and it'll be interesting to see what
Speaker 1: happens given some of these regional banks that we're providing
Speaker 1: liquidity in the space is biotech. Biotech. As you know,
Speaker 1: a lot of these companies are just not profitable. They're
Speaker 1: just generating costs as they're out chasing usually one or
Speaker 1: two ideas, usually one idea as they're doing and it's
Speaker 1: really really exciting because it ends up being a lot
Speaker 1: of individual R and D types of companies that could
Speaker 1: come up with the next greatest breakthrough on an individual
Speaker 1: drug or of something along those lines. And I think
Speaker 1: it's really really cool and really exciting and just from
Speaker 1: a personal perspective, kind of a nice thing to employ
Speaker 1: some capital too. But with interest rates going up, which
Speaker 1: is a big part of it, and some of these
Speaker 1: you know, you can think of Silicon Volley Bank for
Speaker 1: a good example, or some of the more VC like
Speaker 1: banks that we're providing the capital for these companies, it's
Speaker 1: been a lot harder for them to make payroll, to
Speaker 1: make costs to do this. Going forward, I think there's
Speaker 1: a big opportunity for some of the biggest names in
Speaker 1: the in the pharma space to go in there and
Speaker 1: kind of bottom fish and pick up some really nice
Speaker 1: external R and D as it were in the space.
Speaker 1: So I think there's some opportunity for some takeouts there
Speaker 1: across biotech in particular in the space. Potentially in a
Speaker 1: little bit less likely but but maybe more interesting, is
Speaker 1: with Signature Bank being bought out and some of the
Speaker 1: potential for M and A across financials a little bit
Speaker 1: more of a risky bet, but it could be interesting
Speaker 1: some of these smaller regional banks get swept up by
Speaker 1: some of the bigger bets. Now, since we've seemed to
Speaker 1: have forgotten too big to fail and ander mar now
Speaker 1: almost more encouraging it, it'll be interesting to see if
Speaker 1: there's any M and A. They're not necessarily sure i'd
Speaker 1: put on my eye in a particular basket, but there's
Speaker 1: some opportunity in that space. Now. If there's a little
Speaker 1: bit more of a recession environment, we could see microcap
Speaker 1: slow down, So it's a little bit more of a
Speaker 1: longer bet, or at least a risk on bet in
Speaker 1: the space. But we've already seen valuations come down from
Speaker 1: the end of last year until including up three year
Speaker 1: to date. The valuations across sort of the public smaller
Speaker 1: startup come down. So I think if it's the potential
Speaker 1: for an entry point, or if we're not there yet,
Speaker 1: we're getting there soon in much the same way we're
Speaker 1: seeing across you know, even the privates in the p space.
Speaker 1: You know, I wonder you know you mentioned the higher
Speaker 1: interest rates, and I wonder you know, from sort of
Speaker 1: a macro level, what effects a microcap trade. You know,
Speaker 1: my guess is there's a lot of data involved. You know,
Speaker 1: if the smps going up x percent, the microcap index
Speaker 1: will go up at a percentage greater than x. If
Speaker 1: it goes down, why percent, it's going down at a
Speaker 1: rate greater than why. I mean, do you need a
Speaker 1: boat market to really fully embrace microcaps or is there
Speaker 1: a potential for some non someone correlated returns. You know,
Speaker 1: large caps are weak, but you can still get some
Speaker 1: some good returns and microcaps the beta of the acid
Speaker 1: class is very, very similar, so one hundred percent right.
Speaker 1: You know, when there's sort of that risk on environment
Speaker 1: for equities, you tend to get a little bit more
Speaker 1: juice in microcap and then when it's a risk off,
Speaker 1: you get a little bit less than what you're seeing
Speaker 1: the market. But the alpha or the upside potential, the
Speaker 1: security selection opportunities that is much higher in the in
Speaker 1: the microcap space, and you get a little bit more
Speaker 1: of that alpha buffer, which gives you that opportunity to do.
Speaker 1: So what actually it might be more interesting is sort
Speaker 1: of a a typical portable alpha. To use a marketing
Speaker 1: term from from a long time ago. I don't know
Speaker 1: where I dreads that one up, but you can kind
Speaker 1: of hedge out the beta or short the market in
Speaker 1: the space and just use the upside potential. Stock selection
Speaker 1: is a pure offer, and that's an interesting overlay perspective
Speaker 1: even in a downward market, even for a reasonable de
Speaker 1: sizable institution that doesn't onmally plan the space. You get
Speaker 1: a little bit of that flexibility, and that shows the
Speaker 1: creativity that you can do in the space doesn't have
Speaker 1: to just be that that pure long only. Well, that's
Speaker 1: something that you can conceivably lever in the space with
Speaker 1: the right risk of And what's the time horizon you
Speaker 1: guys are dealing with, because Mike mentioned there's a couple
Speaker 1: that are up like two or three hundred percent so
Speaker 1: far this year. Is that something you're looking at and
Speaker 1: expecting actually we can expect even more from some of
Speaker 1: these names. Or what does the time horizon typically look like?
Speaker 1: A lot or it's a lot shorter in microcap than
Speaker 1: it is even in small cap and it's signifulantly less
Speaker 1: so thanks you get up the cap space in a
Speaker 1: larger cap, so you have to be willing to take
Speaker 1: profits a lot sooner in the space, So you have
Speaker 1: to be much more of an active trader in the
Speaker 1: space for exactly as you said, if you're up two
Speaker 1: or three hundred percent today, you know it could be
Speaker 1: on a news flow. Let's say it's one of those
Speaker 1: biotechniques you're mentioning, they're up for a stage two trial,
Speaker 1: for example, on a particular drug. That's a nice profit
Speaker 1: and you should be willing to take it at that
Speaker 1: point and then you can reevaluate it and decide if
Speaker 1: you want to replay capital. But you have to be
Speaker 1: a lot more active in the space than you would
Speaker 1: be in here, particularly in your a larger cap Well.
Speaker 1: Patrick McDonald, Managing Director a p GEM Quantitative Solutions, thank
Speaker 1: you so much for joining us, and I'd like to
Speaker 1: segue us into our favorite part of the show, which
Speaker 1: is the craziest thing we all saw in markets this week,
Speaker 1: and I'd like to kick us off. So, okay, I
Speaker 1: know last week I had a weirdest thing that had
Speaker 1: absolutely nothing to do with markets, So this time around,
Speaker 1: I'm sticking something tangentially related to markets. There's a Champagne
Speaker 1: fifty index, the live x Champagne fifty index, and I
Speaker 1: saw this as part of a Bloomberk story about how
Speaker 1: champagne prices for certain champagnees are. They've just skyrocketed, and
Speaker 1: this index is doing or has beaten the foot Sea
Speaker 1: goal the SMP five hundred over the last couple of years.
Speaker 1: That's a pretty good one, Patrick, How about you? You
Speaker 1: see anything crazy this week that's hard to top. I
Speaker 1: guess what I'm confused about. Where I think is crazy
Speaker 1: is is why is bitcoin aging like a fine line?
Speaker 1: I'm not really sure why. I'm sorry, that's good. I
Speaker 1: don't understand why bigcoin bitcoin ons from what was the
Speaker 1: twenty thousand to twenty seven thousand. I'm not I'm a quant.
Speaker 1: I love tech. I think anything that has to do
Speaker 1: with computers is inherently cool. But I just don't understand
Speaker 1: why we're kind of refighting a battle that I thought
Speaker 1: we'd already won at this point with bitcoin, so seeing
Speaker 1: sort of and Bitcoin alone, it wasn't the other cryptos.
Speaker 1: It was particularly Bitcoin, which I know, I guess is
Speaker 1: the biggest and the most established, But I thought we
Speaker 1: already proven that it wasn't inflation. I'm just not really
Speaker 1: sure what the base case. So I'll have to drink
Speaker 1: some of that champagne and it will come. It's a
Speaker 1: moving target. The base case, you know, the irrational for
Speaker 1: buying bitcoin is I think, read the headlines, put your
Speaker 1: finger in the air and see which way the winds blowing,
Speaker 1: and pick a narrative and go with it. But but
Speaker 1: it is a really interesting topic because it Bitcoin is
Speaker 1: having a fantastic quarter, it's up something like sixty five
Speaker 1: seventy percent. But at the same time, we're not seeing
Speaker 1: the typical stuff, the typical like animal spirits that come
Speaker 1: with huge price surges for cryptocurrencies. Like you don't have
Speaker 1: people coming out and giving like huge price predictions as
Speaker 1: you might have seen in like twenty twenty or twenty
Speaker 1: twenty one, or you know, people going crazy on Twitter
Speaker 1: with yeah, you know, shilling some weird crypto coin you've
Speaker 1: never heard of, and you know, and to be fair,
Speaker 1: if you go back to the origin story of bitcoin
Speaker 1: after the financial crisis two thousand and eight, two thousand
Speaker 1: and nine, the whole thinking was you can't trust your
Speaker 1: money in a bank, you can trust it on the blockchain.
Speaker 1: So I don't know if that's really it. Other people
Speaker 1: have said all the liquidity being added to the market
Speaker 1: by the Fed you know a little from Columba, A
Speaker 1: little from Columba, all the above, But it's fascinating to watch.
Speaker 1: I agree. I agree, you would felt like it was
Speaker 1: left for dead there. But always those laser eye traders
Speaker 1: always give us something to talk about. I like it anyway,
Speaker 1: I'll give you mine mine. Some a Bloomberg story sounds
Speaker 1: like the beginning of a joke, But an investment advisor,
Speaker 1: a financial planner, and NBA agent and a former stockbroker
Speaker 1: all walk into SEC complaint basically, so stories about how
Speaker 1: there was these schemes to um cheat a handful of
Speaker 1: NBA players out of something like thirteen million, and that
Speaker 1: in the face of it is not that crazy. Unfortunately,
Speaker 1: the you know, these guys are kind of sitting ducks
Speaker 1: for scam artists out there, NBA players in fact. That
Speaker 1: that's that's what gets me to what I thought was
Speaker 1: the most interesting thing in this story. And I'll just
Speaker 1: read out this one paragraph to you. The case comes
Speaker 1: amid a rising trend of frauds on the pros, marked
Speaker 1: by their fame, financial inexperience, and high net worth. According
Speaker 1: to a twenty twenty one report by Ernst and Young,
Speaker 1: professional athletes have reported, and I'm not going to give
Speaker 1: you the number. And here's where we play the prices precise.
Speaker 1: Between two thousand and four and two thousand and nineteen,
Speaker 1: Ernst and Young went and tallied up all of the
Speaker 1: money that was scammed off of pro athletes based on
Speaker 1: publicly available criminal, civil and bankruptcy pleading. So two thousand
Speaker 1: and four, twenty nineteen, Da Ernston Young accountants did the
Speaker 1: math how much money were pro athletes scammed out of?
Speaker 1: I'm gonna go with five point four billion. Five point
Speaker 1: four billion, Yeah, all right, Patrick, prices right, roles are
Speaker 1: in effect. Remember, so you can go a dollar over
Speaker 1: a dollar under. You have a good poker face right now,
Speaker 1: How did I do with five point four billion? I
Speaker 1: was gonna go one point two? Oh no, I've got
Speaker 1: that just popped in my head. On much or why
Speaker 1: so's it's enough of an under? So I'm hoping that
Speaker 1: I played the odds there one point to well, you're
Speaker 1: under it was six hundred million. I thought that was
Speaker 1: a lot. That's way too low, bigger than most microcap stocks.
Speaker 1: It's not worth the effort. If I'm going to scam
Speaker 1: a bunch of basketball stars, I want like a couple
Speaker 1: of billion dollars. You know, all right, all right, you've
Speaker 1: got big ambitions, I guess, but six hundred million, Yeah,
Speaker 1: it's not enough. I thought that was a lot. You
Speaker 1: don't think that's a lot. Five point four billion, Well,
Speaker 1: Josh Allen has a five hundred million dollar contract, you know. Well,
Speaker 1: but you know, the other thing is, I bet there's
Speaker 1: a lot that they don't even realize they got scammed
Speaker 1: out of. You know, we're put into lousy investments or otherwise.
Speaker 1: You know. But wow, I thought six hundred millions a lot.
Speaker 1: You guys are tough, tough audience. Five point four billion.
Speaker 1: We're cynical New Jersey and I think that anyway. Patrick
Speaker 1: McDonough of p JIM so great to catch up with
Speaker 1: you in hear your thoughts. You got me thinking about
Speaker 1: microcaps more than I ever have now, a very overlooked
Speaker 1: but fascinating asset class. So gave us plenty to think
Speaker 1: about here. Hopefully we can get you back again in
Speaker 1: the future. Oh, Bill, Donna, Mike, thank you. This was
Speaker 1: so much fun. I really appreciate you guys taking the
Speaker 1: time to chat with me. I'm gonna go back to
Speaker 1: the server room with the other quants now, Thank you Patrick,
Speaker 1: What Goes Up. We'll be back next week and so
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