The World Cup Investor's Playbook

China is reopening, October inflation was softer than expected…and economists are officially projecting a mild (at best) recession next year. Let’s dive into the news you need to know.

Bottom Line Up Front

Contribute something new to the news you’ll coffee chat over

• A group of banks led by Bank of America and Citigroup have two days to try to sell $2.4 billion of debt that will help fund the buyout of auto-parts maker Tenneco Inc. The Tenneco offering is part of a larger $37.5 billion in risky corporate loans stuck on Wall Street’s books.

• Michael Burry’s Scion Asset Management reported a new stake in QVC’s parent, sparking its biggest daily gain in two years. After Burry’s hedge fund added 5 million Class A shares (~$10.1M value) according to a regulatory filing Monday, the stock closed higher by 17%.

• Gemini Trust, the cryptocurrency platform run by Tyler and Cameron Winklevoss, said customers’ redemptions are being delayed after its product partner, Genesis Global, paused withdrawals on its borrowing platform amid a liquidity crunch.

But first, a quick note from The BAD Investment Company.

Tired of ESG Bullsh*t? Fortunately, there's a money manager that decided that B-A-D might be the better acronym for investors.The BAD ETF (NYSE: BAD) launched last December and is taking a different stance in this green washed world focusing on 3 industries for which the ticker represents – B-A-D.

• Betting – Casinos, gaming, and online gaming operations – 33%

• Alcohol – Alcoholic beverage manufacturing and distribution – 23%

• Drugs – Pharmaceutical and biotechnology product development and manufacturing – 33% (Cannabis cultivators & distributors - 10%) 

The case for these BAD industries remains strong for a simple yet important reason – they have historically offered attractive risk-adjusted returns. In addition to these industries overcoming government scrutiny, these industries have shown resilience during economic downturns because people tend to indulge in their vices, or what some call hobbies.

As a result, we believe these asset classes are typically underappreciated and therefore under-valued but the reality is that people will continue to consume alcohol, gamble, and need medicine in good times, and in BAD.

In regards to the betting and cannabis aspects, as these industries become more widely accepted socially and legally, they may offer investors additional growth as more states look to legalize those industries for additional tax revenues.

Learn more about the BAD ETF fund details and sign up for our mailing list to get the latest fund insights and information.

Deep Dive: The World Cup Investor's Playbook

The World Cup is coming to cut Powell’s hot girl fall short. Let’s dive into one of the only events with a proven track record for significantly drawing down the markets even more than an FOMC meeting.

If you’re a real one, you saw us briefly mention this yesterday, but there is a way for stock investors to make money off the World Cup. But it’s via their actual jobs, not the Betfair accounts they’re accessing via their favorite finance influencer’s preferred VPN partner. In less than a month, it’s finally time to shine for that one analyst who spent the semester abroad in Barcelona – and now it’s his entire personality.

Shocker: sporting events impact behavior. Less founded is the impact sporting events have on market behavior.

Lost soccer matches have a significant impact on stock markets, especially during the World Cup games. Excess monthly returns on a loss are larger than 7% and strongest for Western European economies and their smaller stocks (Journal of Finance). Smaller companies tend to have a higher percentage of retail and local ownership. Contrastingly, economists have not found a corresponding benefit when teams won.

Here’s how you can take advantage of individual investor sentiment and position your portfolio by the time the World Cup kicks off.

Economists have identified three key ways markets are impacted during and after the World Cup.

1. Negative investor sentiment after a loss

2. Small-cap stocks falling further than large-cap ones

3. Bigger matches breed bigger Ls

It’s not a ground-breaking finding: investors’ trading has been empirically validated to be affected by World Cup results. In particular, losing a game leads to a decrease in market returns on the subsequent trading day. This supports the notion that the market is not efficient, at least in the sense that it is driven not just by rational risk calculations, but also by investors’ emotional biases.

Second, the effect of a team loss is more significant for small-cap stocks than for their large-cap counterparts. Small-cap stocks are more likely to be driven by investor sentiment due to information scarcity. Not to mention, small-cap stocks are predominantly held by retail investors, who are more prone to fluctuations in sentiment than are institutional investors.

Finally, the effect of soccer sentiment on stock returns is subject to the attention of investors. Specifically, decisive matches have a greater loss impact, leading more views to the match but also heightened emotion.

Positioning your portfolio

Sports sentiment and asset prices are correlated. Specifically, there are confirmed differences in the effect of losses in sports on daily abnormal returns, depending on how much your MD cares about sports. This “loss effect” is currently concentrated in Western European countries with developed stock markets.

A profitable strategy typically includes correctly predicting surprise defeats for major Western European nations and shorting small-cap stocks from those countries ahead of time. This suggests traders could see large excess returns by trading on “emotional” World Cup matches. Another way to do this, for example, is by shorting futures on both countries’ indices before an important match to exploit the asymmetry of the effect.

In current research so far, the loss effect is particularly strong in small stocks and involves shorting. Even traders that face low transaction costs would find it challenging to take advantage of the price drop.

For the best results, investors wait until the elimination stage of the World Cup, which this year is slated to start December 3rd. There are plenty of stocks to choose from, as England, Germany, France, Spain, Portugal, Belgium and the Netherlands are all playing this year.

Let us repeat: the loss effect has only been validated in Western Europe. That means no matter how short you may be America (should be very), don’t expect to see the same trends described above. But if Zion breaking his Nike could tank its stock, so too could America managing to lose to Liechtenstein.

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