This week’s charts and research highlights from Variant Perception.
Chart of the Week
Aug 1, our Eurozone growth leading indicator recovered.
The VP Bank Quality Score - A Specialized Approach
(August 19)
Standard factor models don’t work well with financial institutions.
Banks are a spread businesses built on levered balance sheets, so assessing quality needs to account for capital adequacy, liability management, and tail-risk avoidance.
With that, we are pleased to present our new Bank Quality Score - a quality framework specialized for global banks.
We score Bank Quality across three pillars
Balance-sheet management
Consistency
Margin of safety
Our backtest show across North America, EAFE, and EM markets that the lowest-quality banks:
Structurally underperform
Show higher downside volatility
The framework outperforms during market crisis, when low-quality banks collapse. And it can underperform in the immediate aftermath of crisis, when market rallies can lead to a “dash-for-trash” frenzy.
Over the full cycle, however, high-quality banks tend to come out and compound steadily.
Crowding Score: Popular Stocks Are Bad, Actually
(21 August)
“Nobody goes there anymore. It’s too crowded.”
Yogi Berra was probably talking about a restaurant when he said that, but he could have been describing many of the stocks in the S&P 500. The price goes up, the story gets better, and investors pile in on the comforting idea that a crowd is a hedge.
If only it was so simple.
With two decades of data, we tested what actually happens when real news hits a crowded stock. What we found was that popular stocks gained less on good news and lost more on bad news, than their less-loved peers.
In other words, crowded stocks capture less of the upside even when the news is good.
Popular stocks, it turns out, are inherently fragile.
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