This interview features Danny Moses, a key figure from 'The Big Short'. He argues the market is now driven by ETFs (funds that track an index) and algorithms, making company fundamentals nearly irrelevant, which he sees as dangerous. Key examples: New Century (a subprime lender he shorted, collapsed from high leverage), CONN's (a retailer whose profit came from late fees, not selling goods), and Harley-Davidson (a motorcycle maker that acts like a finance company, posing credit risk).
Danny Moses, in Episode 34 of Invest Like the Best, reflects on his experience as a core trader on the Frontpoint team (led by Steve Eisman) during the financial crisis, when they shorted the U.S. housing market—a trade documented by Michael Lewis in The Big Short. The key insight is that by identif
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The guest is Danny Moses, a core trader on the Frontpoint team (led by Steve Eisman), whose short-selling of the U.S. housing market was chronicled in the book The Big Short. This interview primarily reviews that legendary trade, extending into discussions on the current state of sell-side research, changes in market structure, and the plight of fundamental investing. Danny Moses believes the current market is driven by ETFs and algorithms, with fundamental analysis at its lowest point of importance, a situation that ultimately requires a major market correction to reverse.
Danny Moses judges the current market to be a "non-fundamental" market, where ETFs and algorithmic trading have replaced fundamental analysis as the primary driver of stock prices. He argues that seven of the top ten shareholders in many S&P 500 companies are ETFs, making it more important for fund managers to focus on which ETF basket a stock is included in, rather than the company's business itself. He warns that this structure creates a dangerous "self-fulfilling" cycle: CEOs no longer care about communicating with active funds like Fidelity but instead focus on meeting ETF screening criteria (e.g., non-GAAP earnings momentum), allowing them to manipulate stock prices. Moses specifically points out that many equity ETFs are essentially "fixed-income ETFs," with a serious mismatch between the duration of their assets and the feature allowing investors to redeem at any time, which "cannot end well."
Moses believes the quality of current sell-side research is at its worst in history, as it has been "corrupted" by multiple interests. He traces the evolution of sell-side research from "research-driven" (e.g., the DLJ model) to "investment banking-driven" (issuing buy ratings to earn underwriting fees), and now to "management access-driven." He points out that analysts must give buy ratings to secure meetings with CEOs, causing research to lose its objectivity. "If I were a CEO of a company, I would want to travel with an analyst who has a sell rating on my stock." Moses emphasizes that while excellent independent research firms (like Autonomous) still exist, overall, sell-side research has devolved from a "necessity" to a "tool." Top buy-side analysts do their own homework first, then use sell-side views for validation or to find opposing viewpoints.
Moses details what made the Frontpoint team's short on subprime mortgages unique: they were not making a macro bet, but rather, through bottom-up credit analysis, precisely shorting specific mortgage-backed securities with poor underwriting standards. He explains why the team shifted from shorting individual stocks to buying credit default swaps (CDS): shorting stocks was too costly (borrow rates of 40-50%), and companies would consume short-sellers' returns through high dividends. The team executed their first trade in August 2006 and immediately began profiting, avoiding the prolonged pressure Michael Burry faced. Moses emphasizes that the most unsettling moment of the trade was not the losses, but during the 2008 crisis when they realized the disaster's impact on ordinary people and the irony of working for Morgan Stanley (Frontpoint's parent company). He admits the team chose to close the position at 10 cents on the dollar out of fear of potential government intervention (voiding all CDS contracts), not greed.
Moses's investment philosophy is heavily influenced by the book When Genius Failed, with the core belief that "no trade is as good as it looks, leverage will eventually bury you, and ego always gets in the way." He believes the behavioral patterns behind Long-Term Capital Management, the internet bubble, and the subprime crisis are all the same. In his analysis, he places immense value on cash flow, considering it the primary indicator of a company's health, far superior to manipulable GAAP or non-GAAP earnings. He is particularly wary of retail companies with financial operations (like consumer credit), such as CONN and Harley-Davidson, viewing their profit sources (e.g., late fees, financing charges) as unsustainable. He advises investors to start with the balance sheet and work upwards to deduce a company's business model and long-term value.
| Position | Guest's Stance | Key Data |
|---|---|---|
| New Century | Short (Historical Case) | High leverage, retained worst bonds, unable to secure financing |
| CONN (Conn's) | Risk Warning (Historical Case) | Profits from financing fees and late charges, not from selling goods |
| Harley-Davidson | Risk Warning (Historical Case) | Essentially a financial company with credit issues |
| JDS Uniphase / SDL | Short (Historical Case) | Stock price rose post-merger, but fundamentals had already deteriorated |
| Ames Financial | Short (Historical Case) | Poor underwriting standards in subprime auto loans, facing bankruptcy |
| Oxford Industries | Hold/Observe (Personal Anecdote) | The stock that triggered his investment interest |
| Level 3 | Risk Warning (Historical Case) | Fiber optic capacity glut, unsustainable business model |
1. The importance of fundamental analysis is currently at its lowest point in history. (Danny Moses) — Because ETFs and algorithmic trading dominate the market, CEOs are more focused on meeting ETF screening criteria (e.g., non-GAAP earnings momentum) than communicating with active fund managers.
2. Sell-side research has been corrupted by "management access." (Danny Moses) — Analysts must give buy ratings to secure meetings with CEOs, causing research to lose objectivity. The real value lies in finding analysts with opposing views.
3. "No trade is as good as it looks, and leverage will eventually bury you." (Danny Moses) — This is the core lesson he learned from When Genius Failed and the LTCM event, applicable to all market bubbles.
4. The key to Frontpoint's success in shorting subprime was being "bottom-up" and "immediately profitable." (Danny Moses) — They didn't make a macro bet but used credit analysis to precisely short specific bonds, and their first trade was profitable, avoiding the prolonged pressure Michael Burry faced.
5. Cash flow is the primary indicator for measuring a company's value. (Danny Moses) — Compared to manipulable GAAP or non-GAAP earnings, cash flow better reflects a company's true health.
6. The "fixed-income-ization" of equity ETFs is a major risk in the market. (Danny Moses) — Many high-dividend ETFs hold assets (e.g., REITs, bank loans) with longer durations, creating a serious mismatch with the feature allowing investors to redeem at any time.
7. Active funds cannot beat passive funds if money continues to flow from active to passive. (Danny Moses) — This is simple math; unless active managers take extreme risk, outperforming the index is nearly impossible amidst capital outflows.
8. Searching for "non-depository financial institutions" is fertile ground for discovering excess returns. (Danny Moses) — These companies rely on the securitization market for funding, making their costs and risk exposure more transparent and their vulnerabilities easier to identify through fundamental analysis.