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FT on Hamas | Revisiting GSIB vs non-GSIB banks trade

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Mehul Srivastava of the FinancialTimes co-authors another outstanding article:

Military briefing: How Hamas fights

Mehul Srivastava, John Paul Rathbone and Raya Jalabi

Their sources and analysis are impeccable. Interestingly, the article writes:

“Another lesson that Hamas copied from other militant groups is the importance of secure communications. While Hezbollah has built its own fibre optic network, Hamas has maintained operational security by going “stone age” and using hard-wired phone lines while eschewing devices that are hackable or emit an electronic signature.

One reason Israel was unable to predict the October 7 attack, said one Israeli official, was that it was listening to “the wrong lines”. Crucial military information was meanwhile shared either over that “analogue” system, or another encrypted system, maybe imported from Iran, that was unknown to Israel.”

Analogue?! An encrypted signal of a bespoke nature would ordinarily stick out like a sore thumb when intercepted in a bulk collection exercise. There's more to secret communications than encryption protocols. Often, it is better to hide a needle in a haystack using standard (mainstream) encryption methods. We wouldn't be too surprised if it later emerges that there was a mole within the heart of the Israeli security establishment.

GSIBs US banks vs. non-GIBS investment thesis

On April 23, 2023, we initiated the following thematic trade idea to be reviewed and appraised at the end of the year:

LONG GS shares @ $341.66 and SHORT USB @ $33.52 in equal notional amounts.

Here is how the pair have since traded on a relative basis after adjusting for dividends:

FT on Hamas | Revisiting GSIB vs non-GSIB banks trade | Speevr
Long Goldman Sachs vs. Short US Bank Corp

So far, it has not been the smartest trade idea, however, our initial investment thesis remains intact. Specifically,

i) headwinds from non-favorable regulatory regimes ahead for non-GIBS banks post failure of Silicon Valley Bank (SVB), 

ii) Goldman Sachs‘ business model is better suited to wider range of possible (future) economic and financial conditions, and

iii) more aggressive mark-to-market and risk management practices by Goldman to recognize and trim losses early.

We believe US Bank Corp was the beneficiary of a unique set of macroeconomic conditions (widening deposit margins), less stringent regulations, and accrual accounting practice which allow the bank to defer losses.

Typically, we publish a thematic trade idea of this nature which we believe is grounded on a robust mid-to-long term investment thesis. In the previous years we ran with an overweight on US Big Tech stocks and US Treasuries which continues to outperform the standard 60/40 portfolio.

Measuring success or failure

Rather than setting explicit targets and stop-loss levels inline with sell-side firms (which may perform/underperform due to non-thematic factors), we opt for an alternative approach which appeals to a broader audience. We review the merits and relative performance of each trade idea on a semi-annual basis.  

An investment thesis is deemed successful if after a prolonged period it outperforms according to a series of measures: both in terms of absolute and risk-adjusted returns, relative gains compared to drawdowns for the duration of the trade, such that our conclusions are (broadly) unaffected by the exact timing of entry points.

A high hurdle to clear

In the case of our GS vs. USB relative value trade idea, as a rough guide, the former must outperform the latter by at least 20% (since inception) over the course of the next year to validate our investment thesis. We have a tall mountain to climb, so some folks need to get busy making money to salvage our pride.

Alan Brazil broadly disagrees with us

As a reminder, Alan Brazil currently has the opposite view to us, albeit expressed at the macro/index level. So far, he is winning on this one, having traded in and out of the spread tactically. We like a bit of friendly competition with our partners. Alan adopts a unique approach where buy/sell signals are not dictated by profit-and-loss targets, but according to the persistence, or lack of, initial (stated) justifications before entering into a trade.

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FT on Hamas | Revisiting GSIB vs non-GSIB banks trade

Encrypted comms. How’s our trade doing?