Morning Notes — Event Risk and Opportunity

Overall equity positioning remains light, but positioning in software is crowded and multiples are at all-time highs.  Software is the consensus long and ‘work from anywhere’ has almost become a safe-haven asset.  Valuations only matter if investors feel they no longer need a safe-haven, which seems likely if/when a vaccine is approved.  I added ‘if’ to be fair, but there are 6 vaccine candidates currently in Phase 3 trials, 12 in Phase 2, 18 in Phase 1 and 135+ pre-clinical candidates according the NYT.  The event risk for multiple compression is undeniable, but safe-haven assets can also lose their luster on stronger than expected economic data.  Global Manufacturing PMI is currently in expansion territory at 50.3 and, believe it or not, Global Services PMI is also in expansion territory at 50.5.  PMI data is the best forward looking data with the highest correlation coefficient to GDP growth 6-9 months out.  August flash PMIs are due on Friday 8/21.  When software multiples compress, the pain is usually most acute in companies with  negative Operating Margins of -5% or more.  Of course, any re-rating lower in the group will be an opportunity to add the best names.