Market destroys bears....again

It's been a relentless rise as the market keeps making fresh all time high after all time high. In my last post I suggested that pullbacks would be shallow...what pullbacks? It's been nothing but pain for bears who got trapped shorting that first big rally from the bottom in early October. So now what? Well, pretty much all short term indicators are redlining here which suggests at the very least that the market is due for an immanent rest but I suspect that rest will be relatively shallow and short lived and we close out the year at a high. We'll see. I reserve the right to change my mind if evidence suggests doing so. I've sold almost all my energy holdings at this point. We'll see if I end up regretting that. 

So what's causing this rip higher in the market? I think the market is sensing peak inflation here. Remember, inflation scares are what caused bond yields and energy prices to spike and markets to sell-off in September. Now we've recovered all those losses and then some. Freight rates have rolled over energy prices have stabilized and are are possibly rolling over,  and there are early indications that some supply chain bottlenecks are starting to subside. I read how Ford and some others have reported that chip shortages are easing.  The big bad tapering event this week turned out to be a non-event which caused further FOMO capitulation. 

The key to this market all year has been to avoid chasing/embracing the narrative of the day. In my last post I mentioned how financials and energy were being chased and therefore due to underperform. That has certainty been the case. Growth and US stocks have resumed their dominance since mid May. For many months Ken Fisher has suggested that the COVID decline was a large correction in the bull market that started in 2009 and therefore the sectors/factors that were leading prior to COVID should eventually resume their leadership. It looks like he's going to be proven right especially if inflation pressures subside and we get back to low but stead growth in the coming months which seems poised to happen. The huge fiscal boost we've gotten during the past 2 years is set to subside significantly next year. 

So, the big question is, how does this all end? When will the next big bad bear market happen? What we've been missing is the full embracing of the bull market at a time when monetary and fiscal conditions are unfavorable. We've seen some instances over the years where froth was apparent like earlier this year, but then we would get a shakeout that washed out the froth and revert it back to pessimism/skepticism. I don't know what it will take for us to get the ultimate peak but there's certainly some late bull market stage indicators out there. Margin debt levels, the  high level of quit rates for example. Will next year's fiscal drag be the trigger to cause a bear market or at the very least a 20%+ correction?  Stay tuned ad stay vigilant... 

 

Mixed feelings

Well, the markets have staged quite a strong rally so far since my last post and is knocking on the door of all time highs once again. The S&P is actually already there. This week we have FANG earnings on deck and it's happening at a time where the market is ST overbought. It's an interesting junction because although we are ST overbought I get the sense that there are trapped bears out there who shorted the bounce in the market mid October. Why? Because I myself was tempted to make a ST bearish bet and so if I was tempted I'm thinking many of the bearishly inclined must have pulled the trigger and are now underwater. Being short the market as it's making new all time highs is usually not a good spot to be in because fresh all time highs tend to result in more all time highs. It would appear to me that barring some significant negative bad news,  pullbacks should be relatively shallow.  

Energy stocks sold off earlier in the month but are rebounding today as oil and nat gas are rallying today. The more I think about the energy complex, the more I'm becoming a weak holder. I mentioned in my last post how the cat is now out of the bag with respect to the energy crisis. This awareness has resulted in a major shift towards energy stocks from so called "institutional money" as indicated from BOAs  most recent Global Fund Manager survey. It's the exact opposite of what they did in August when energy stocks had been selling off and making a low. Financial are also being chased.  Rising energy prices are not necessarily bearish for the market in general until they get to the point where they have risen "too much" . Where is that point? I've read that it could be around $140 oil. 

In addition to the exuberance in the energy complex there's evidence of extreme pessimism in bond which goes hand in hand. All of this suggests we are close to the peak inflation narrative. If that's the case and we see energy prices and bond yields cool off, that could provide fuel for the markets to power higher barring that the decline in inflation pressures are not the result of collapsing economic growth. I'm seeing hockey stick charts when it comes to inflation related pressures and rates of change in commodity prices. Some might say that this constitutes a long term break out, but it could easy well be largley the result of the supply chain disruptions were a seeing which not only results in lower supply but also hoarding. I've been reading stories about how the warehouses for major commodities like copper, zinc and nickle are a very low levels.

This whole supply chain disruption is making me rethink my thesis about the commodities complex in the short to medium term. Once we start to normalize we could see at least a 6-12 month period of disinflation which would hurt the entire commodities space, especially energy. Although there has been a lack of new investment in energy cap ex, there is more ability for a supply response compared to that of  metals. In addition, high energy prices may speed up the transition to electric vehicles and so you could have negative demand pressures on energy forthcoming. With metals on the other hand, the demand side is slated to have positive demand pressure long term for the same reasons - electrification.  So, if 2022 ends up being the year of disinflation which hurts commodities in general, I could be a strong holder of my copper/mining plays but not my energy plays which I have already reduced by 50% and am looking to sell more into strength. 

I am also looking to initiate a position in LT calls on TLT given the contrarian condition of bonds. It will also nicely offset my positions in commodity related stocks. I also have a healthy level of cash. You always need to put yourself in a position where you could be strong holder. This is what I'm doing. 

The energy cat is out of the bag

 First off some market comments. September was rather nasty living up to its reputation. We had Evergrande fallout fears, debt ceiling fears and inflation fears creating the jitters. It's the latter that you should be most focused on, the other 2 are just noise in my opinion. Rising inflation fears creates selling pressure on bonds and when yields rise it is typically negative for the markets.  The culprit is rising energy prices, we saw a similar thing happen in May. This time around the nat gas price is taking the spotlight. It hit all time highs in Europe due to perfect storm of low nat gas storage, coal shortage and below average power generation from wind power. Sentiment wise, we are seeing a marked rise in pessimism and unwinding of bullishness, mind you, there wasn't as extreme bullish sentiment condition at the recent market peak. There is room for sentiment to become more bearish before I think there would be an all clear. I also read about how coming into September Global Fund mangers were complacent and had a low level of hedges in place.  That complacency no doubt has been at least partially washed away. There's also signs that economic growth will be downshifting....not a good time for this when energy prices are rising.  Bottom line is that at this moment,  I expect to see the market chop here and possibly retest or break the recent low by a bit, but nothing more than that. Take a step back here and look at the bigger picture. The market is still up nicely for the year and the correction so far has only been about 6% in the SPX. Even a 10% correction would not be that serious if you look at how much ground the market has gained in the past 18 or so months. 

On the topic of energy, I mention in my last post and also back in May how there could be a energy crisis due to the shunning and subsequent underinvestment in fossil fuels due to ESG and green tech. Well, this is what's happened and now the cat is out of the bag. I've seen several articles pop up in the financial media stating the exact same thing. So, now that this narrative is out there front and center, I'm debating what to do here with my all my energy holdings because I know from experience that this could be a signal that the bullish news for energy could be priced in, at least in the short term. The stocks are at or close to very ST overbought levels. To quote Jesse Livermore "be right and sit tight" which means you have resist the urge to exit your positions prematurely. Selling just because you are showing a profit is not necessarily the right or even prudent thing to do if you have good reason to expect higher prices in the future. Sitting tight was easier for me to do when I initially bought my positions back in March/April because I had good reason to believe that I was still picking low hanging fruit. But now that the cat is out of the bag, the stocks are overbought and I'm seeing victory lapping on twitter from energy longs we could be close to a ST peak here. As such I'm  looking to trim 40% of my positions. The risk of me doing this is that we are at one of those long term inflection points where the generalist investor capitulates and gets back into the energy sector in a big way. If that's the case, there will be a relentless bid in these stocks and pullbacks will be shallow. Tough to tell if we are at that point yet. If not, we could see quant funds and retail types bail en mass if energy prices cool off in the near term  like what happened in July. US crude inventories are building and Russia says it will provide increased supply of gas to Europe. This is all happening at a time when global growth is cooling.

So, bottom line here is that there's good reason to be ST cautious on energy but even if O&G prices see a notable correction the stocks in the sector will still be relatively cheap generating tons of cashflow. Of course, there's always the bearish case that this energy move is a one and done thing and the green energy revolution will accelerate faster than expected. Tough call here for me. So, this is why I'm looking to exit 40%, this way no matter what happens I won't have too much regret either way. There's also a ST opportunity to deploy the money in other other commodity plays. Copper stocks for example have been drifting lower since May despite the fact that copper has has been holding above $4/lb.  Again, the cash flows that are being generated  for copper producers will be quite substantial making a  lot them look quite cheap. Given the current growth slowdown, this will be a good test of how durable the copper price is in the ST. In the LT there is a huge underpinning bullish force in place if you assume that we continue the quest for decarbonization. It will require copper prices of at least $5-$6/lb to produce the quantity of copper that is required to fully or mostly electrify energy consumption cleanly.  

Steady as she goes

Since my last post the market has been grinding higher with a couple of modest dips along the way. It's been acting as I'd expected. There is still a tug of war between value and growth with the latter getting the upper hand as of late but there's some burgeoning signs that value has taken back control, the energy sector in particular, which had a notable correction in July and early August. The correction was mainly triggered by fears of the Delta wave and its potential impact on demand. The correction appears to have washed away the weak handed johnny come lately and momo traders. I saw a report from BOA mid August that showed global money mangers had fled the sector in July after having piled in a couple months prior. With natural gas and oil prices remaining firm, the energy sector won't be able to be held back for much longer. The FCF generation relative to market value is already high but it's going to be enormous come Q4 and Q1 2022 because a lot of companies in the O&G sector put on hedges in 2020 which for the most part will be will rolling off in Q3. These hedges have been capping profits this year, especially in the nat gas sector.  With nat gas prices well north of $4/mcf  these companies are absolute monster cash cows once those 2020 hedges roll off. Even at $3/mcf, most of these companies will produce a gusher of cash flows. This should result in significant dividend hikes and/or share buybacks and also acquisitions. 

Nat gas prices have been notoriously volatile and in the doldrums for 15 years, however, because of the anti-fossil fuel movement and ESG push, new investment in oil and gas has been well below average for quite some time and was cut to the bone in 2020 due to COVID.  We've been  shunning  O&G too much. This will have consequences and we could very will have an energy crisis in the next year or 2 because although the future appears to be one of electric vehicles and clean energy, we aren't gong to get there overnight like what the clean energy and ESG hypesters are implying in my opinion.  And here's another thought...what if there's a breakthrough in carbon capture technology that either makes it more affordable and/or more effective? That could provide a new lease on life for the O&G sector. Don't get me wrong. I do envision a future where we no longer use fossil fuels and the solar and wind sectors will continue to be growth sectors in the long run, but we can't just turn off the fossil fuel taps as abruptly as Gretta and her ilk want us to. 

Getting back to the general market, it continues to be a goldilocks type environment. Everyone seems to be looking over their shoulder for the next big correction but that's tough to get without sentiment becoming excessively bullish. The lack of extreme bullishness continues to be case. Anytime that sentiment starts showing early signs of giddiness it quickly gets washed away on just a modest dip. That's wall of worry behavior which underpins a bull market. We're seeing the market roll over a bit here...let's see how people react it. So far I'm already seeing fear pick up notably. There's a concern out there about market valuations being high which does appear to be the case when you look at traditional measures such p/e ratios and such. I don't want to cherry pick bullish arguments, but Fidelity Sector Strategist Denise Chisholm (who I find is a hidden gem) makes the case that earnings are poised to accelerate more that what's being expected which means the market isn't as overvalued as people think. The concern about valuation is also indicative of the wall of worry. Near a bull market peak you will probably not have such concerns. People will find justifications for high valuation like in the late 90's rather than worry about it as they do now. 

Bottom line is continue to look for long set ups and resist the temptation to short.  If you must, raise some cash if that's gong to make you a strong holder. People who have used stops loses and  made trades based on trend lines, support/resistance lines and such have been chewed to bits. 

Goldilocks Market

I nailed it with my value is overbought vs growth call. Growth has handily trounced value since late May. It's been like a tennis match with growth and value - a back and forth. And if you chased the momentum for either you got burned. So now what? Value's time to shine again? I'm not so sure this time. In late May it was a easier call to make. But whether it's been value or growth taking the leadership role, the one constant is that the market is making new all time high after new all time high with very little in the way of pullbacks. The last pullback we got was triggered by the Fed's blinking in their timeline to start raising rates. So now they are saying 2 hikes in 2023. Big fucking deal. This change in course was enough though to create knee jerk reactions in financial markets. The dip in the stock market was short lived, however the jump in the USD has been sustained. LT government bond yields have actually dropped since that announcement after an initial knee jerk move higher. Inflation pressures is what make the fed blink but are they behind the curve? Aside from energy prices, commodities have notably cooled off. There is definitely a decoupling in the commodities space right now. It used to be that the oil price was the leader of the complex but not anymore. It seems now that that each individual commodity is beating to its own drum. The fact that oil has been rising despite the strength in the US dollar is impressive and tells you that its own supply/demand dynamics are what's mainly driving it. If the US dollar starts heading down again it will act as a further tailwind.  

Let's get back to the general stock market. I hear a lot of griping lately about the poor breadth of the market and how this is a warning sign to not trust the strength of the market. This poor breadth is due to the rotation into growth, namely. the FANG stocks which have a large influence on the indicies. Last year when FANG type stocks were leading the charge there was the same complaining of bad breadth. Then what eventually happened? The bulk of the small stocks played catch up as the big value rotation took hold. When this happened the FANG stocks didn't collapse, they just stagnated. The end result was the market making significant new highs. This back and forth rotation from value to growth and vice versa has being going on for sometime now and so long as the in favor style is not rising solely at the expense of the out of favor style, the market can continue to make new highs. 

People are trying hard to find reasons to doubt this market but aside from the high valuation argument (which hardly ever works, not to mention it's subjective), it's really hard to find them.  The recovery continues with buoyant earnings trends. Short and long term interest rate levels are near rock bottom/historically low levels  with the long end now trending sideways/lower for the past 3-4  months.  Stress levels in corporate bond markets are non-existent. Just look at junk bond yield spreads. It's at a record low. The fizzling out of the speculative sections of the market earlier this year i.e. the SPAC, meme and hype growth stocks appears to have not infected the broad markets. This was a concern many people had, including me. There was ominous parallels to the dot com bubble bursting but from the looks of it, this fallout will end up being a sideshow given how the broader market has been able to soldier on including the NASDAQ. I pointed out before that the main difference then compared to now is that monetary and fiscal conditions were tight whereas now they are ultra loose. This gave me reason to be open minded about the fallout. 

Sentiment has turned bullish recently but I wouldn't categorize it as extreme. Another concern is that we are at the peak of growth acceleration in the economy and the rate of growth is destined to come down. That's probably true, but slower growth is tolerable in the case where fixed income markets are yielding so little. So long as we don't go from growth to contraction, what you got is a market that for now at least, is in a goldilocks type situation which means that as I've said before, only mild/moderate pullbacks can be expected at this point unless something really nasty comes out of nowhere.  Whenever someone comes up that creates a drop in the market ask yourself this question”is this going to result in a material change in general earnings?” If the answer is no which it typically is, then all you’re going to get are pullbacks, not bear markets. The more sentiment/positioning is bullishly lopsided the greater the pullback will be. The other thing to watch for is rising yields. The higher they get the more of a headwind and pressure builder it becomes on the  market as it makes valuations of stocks less attractive.

It could be that this tranquil period in the market ends up being the calm before some sort of storms arrives but the burden of proof is on the bears. Lot's of people  including me, have a worry in the back of their mind  (and many in the front of their mind) that something is coming to sideswipe this market. That's actually a bullish thing as it indicates a wall of worry. But let's try to keep it real here. The SPX is up about 16% YTD. That's quite a bit and suggestive that the 2nd half of the year won't be as good. 

I've had some really good moves in my portfolio. FOM turned out to be a huge winner. I have exited 60% of my position, keeping the remainder 40% come hell or high water. Given recent developments there is clear pathway for them to go from exploration company to an actual producing mining company which means another 5 x  potential from here.  I've also done well with my overweight in natural gas/liquid stocks PD, ARX, PEY and PRQ. These stocks, in particular the latter 2 have been significantly re-rated because they were on the brink about a year ago. Now thanks to strong gas/liquid prices they are cash flow machines trading at low multiples to cash flow even despite the big moves they've had. I believe that natural gas will be a bridge fuel used in the global quest for zero emission, electricity generation.  It is however a notorious volatile commodity which has been in the doldrums for 10+ years.

I became attracted to this sector first and foremost because of the gorgeous charts. It's what I call low hanging fruit set up.  Look at for example the beauty of a chart that is PRQ. It is so similar to the chart of a big winner I had in 2010 Bennet Environmental. Bennet ended up going from $0.50 to $3+ in under 6 months. 

Secondly, as just as important, these stocks have improving fundamentals and low valuations after having been out of favor for so long.  This gives you plenty of upside potential as there's lot of room for new people to get into the pool before it becomes too crowded. 

My only dud is BKI. It had a good run to 0.70 but now back to 0.44 which is about my average cost. They have a great project but it seems like management could be weak in that they are having difficulty generating the interest of bigger players to get into the stock, unlike with FOM. They are now undertaking a financing. Let's see if the underwriter,  Cannacord is able to generate some interest. They better because I'm starting to lose patience.  

It's been a long time since I've been so exposed to Canadian resource related stocks. It does make me feel a little uncomfortable but the market has been telling me to get into these stocks and so I have...At some point I will harvest more gains and ride the remainder so that I can be a strong holder. I need to find the courage of my convictions to be able to do this. 

Is value over growth overbought? Crypto crash

The commodities complex has cooled off a bit as I had expected. If you look at long term futures prices some key commodities such as lumber, corn and  iron ore are trading at significant discounts to spot prices. This strongly suggests that their recent spikes are not sustainable. If you look at copper however, the discount is modest and so that suggests current prices are more likely to have limited downside. If that's the case, copper producers and exploration companies with attractive late stage projects are going to do quite well longer term. Shorter term, it can be dicey. I'm definitely seeing a lot of inflation talk which is giving me contrarian vibes to expect at least a reprieve in such concerns, but as I stated, some commodities appear much more vulnerable than others. 

I'm also sensing a lot of negatively towards tech relatively speaking. If inflation pressures cool this will be a positive for tech. At the same time, the love for financials and to a lesser degree energy may be indicative that the value over growth trade is due for at least a temporary reversal. Am I getting too cute? Maybe, but as I said before, you don't chase. You gotta zig when others are zagging. I saw a recent chart showing that according to a BOA survey, Fund managers have fled the tech sector by a historically extreme amount and have embraced value/cyclical sectors. Again, not the ideal time to be embracing such a trade.  

The crypto crash has been the main focus in the financial headlines. It started with TSLA no longer accepting BTC as payment followed up by a China ban on their banks dealing with crypto in any way. Has the bubble burst? I think it has. A 40% drop in BTC is reminiscent of the NASDAQ bubble bursting in 2000. A lot of crypto bulls are saying "we've seen this movie before. BTC has crashed several times but always came back". True but that's only because on each revival of BTC it  was able to recruit a fresh batch of greater fools. Where are the greater fools going to come from this time? At the recent peak you had institutional money embracing BTC. They were the last bastion of fools. Now, they are bag holders. I suspect now that the only thing that will keep BTC afloat are short squeezes and greater fool buying from ST traders.  You may also get one last hurrah from those who were waiting to "buy the dip". That can only get you so far however. I suspect most of the would be buyers are already in which means only one way to go longer term and that's down.  I suspect we will see lower highs and lower lows now with BTC and it will ultimately go sub $10K within 6-12 months maybe even less. 

Commodities rush

First off some general market comments. So far the implosion of the frothiest parts of the stock market i.e. SPACS and the momentum growth names i.e. ARKK stocks has not bled into the general market. Even the stagnation of the FAANGS hasn't prevented the SPX from hitting new all time highs. Last year  I saw so many people on Twitter post a pie chart showing how  5-7 stocks dominate the  performance of SPX implying that once these giants start faltering, the market is toast. But somehow, someway the market has managed to soldier on...at least for now. The value to growth and growth to value rotations have continued to play out and so far YTD value is winning the battle but it's been treacherous to those who chase in either direction. Friday's job report is creating a narrative that the Fed is not going to raise rates sooner than scheduled which is becoming a concern lately given Yellen's comments, the surge in certain commodity prices and the chatter in general about how inflation pressures are building.  Any kind of abatement in interest rate hiking fears will probably help the underperforming tech sector you would think. When I look at the main sentiment indicators the message I'm getting is neutral which suggests either a continued uptrend or a sideways market with only modest dips. 

So let's talk about commodities, specifically copper and oil. Goldman recently came out with research which paints a very bullish picture for copper in the long term and oil in the short term. Goldman came out with a report in April titled "Copper is the new oil"  Their thesis is that the transition to a green economy is going to lead to substantial demand for copper for several years given its use in wind, solar, energy grid/storage and EVs and since copper and commodities in general have gone through a lost decade from basically 2010-2020, not enough was invested in new mining supply to cope with this newfound demand which will keep copper prices elevated. If this thesis turns out to be true, junior mining companies that have advanced copper projects are going to have the most torque. I happen to own one such stock which I have had for several years -  Foran mining. The stock has been on a tear because they are in the right space and in the right development stage of their project. They are also being ESG conscious with their marketing and approach. They recently had a new CEO come on board who was so attracted to their prospects that he chose not to take a salary but to rather get paid by stock incentives which are tied to company milestones. Copper has recently hit an all time high yet there's nothing even close to the same enthusiasm for resource/materials stocks as there was back in 2010-2011. It's been relatively under the radar.  

In late March/early April I found my self loading up on other resource stocks because the market was telling me to do so. The charts were all showing what I like to call rare "sweet spot" setups whereby you have favorable technicals (uptrend with higher highs, higher lows), fundamentals and valuations. The setup reminds me of  the stocks that I had picked out and had success with in 2009 and 2010.  What's probably creating a lot of surprise this year is how fiercely the energy sector has come back to life. This was the most hated sector for years. Most people, including myself had called this sector "un-investable" because of the ESG movement and all the hype surrounding EVs and then in 2020 the absolute unfathomable happened when oil prices  traded negative. Now, oil is having its revenge and I doubt it's over yet. Because of all the hatred and avoidance of oil and gas companies these past 4-5 years we may soon find ourselves with an acute shortage of oil because of the lack of development in new supply. This is what Goldman thinks. Some energy bears think that fracking will come back on line in a hurry now that prices are higher. I say not so fast. All this ESG awareness will make fracking a much more difficult proposition than in the recent past.  And we're not going to all transition to EVs overnight and so it could very well be the case that this oil rally has legs. Even though I can sense that more people are warming up to this sector it's still  under-owned. 

Another interesting commodity which is not getting much headlines is iron ore. It's also making all time highs. I hold a position in a speculative company called Black Iron Inc. They have a mining project in the works which is highly leveraged to iron ore. They also have a high premium  ore which not only commands higher prices but is also ESG friendly as it cleaner to process than regular grade ore. The more ESG friendly a company is the most likely they will get access to capital and attract institutional investors. The project they have has excellent economics with an assumed iron ore price of $60 and right now the price is $195!   I also scooped up positions in small cap companies leveraged to natural gas and condensates. Again, the charts were screaming at me to buy them. 

My timing in purchasing all my resource names (aside from Foran which I have held for years) has been exquisite as all of them had huge moves almost instantly after I bought. Now, I do realize  that after such a great run we could get a breather in the commodity space soon especially if part of the reason fueling the rise in the ST was supply disruptions due to COVID. The US dollar has been declining steadily as of late and so any sharp reversal of that would put pressure on commodity prices as well. But I'm not going to mind such things. I'm in a position where I can be a strong holder and ride out any counter trend moves. I will not take profits just for the sake of taking profits. That's a rookie mistake. The market doesn't a give a shit about what price you bought in. I will sell when either the fundamentals say so,  I see some sort of blow-off move which makes the stock over valued or I have a better idea to invest the money. The stocks I own are either cheap fundamentally or in the case of the junior exploration companies, have a lot of "story" left to be told i.e. important announcements which pertain to the development of their mining projects. I'm also in a situation whereby  I have a regular stream of good income such that I don't rely on my portfolio gains to make my living as I once did. That puts me in much better position mentally to be able to hold on to positions if they start going against me. My portfolio can get chopped in half or even more and I'll still be fine. With my junior miner plays, I intend to keep at least 25% of my position invested until the very end i.e. until they develop their mine or possibly get acquired because the gains you can make in such cases are massive. If  you're going to play the long game you have to resist the temptation of getting out too early. If we are indeed in the early innings of a commodities run there will still be big money to be made but you gotta be prepared to hold during periods where the stocks do nothing for several months maybe even up to a couple of years.  I've been very lucky to have experienced instant gratification but I know that's not sustainable in the long run. If I am to fully capitalize I must be prepared for the inevitable corrections and stagnations and resist ST trading.  Most people can't do such a thing because they watch their stocks every day tick by tick. Doing so leads you make hasty decisions and  not having the patience or mental fortitude to handle adverse moves.  

China-like GDP growth?

 First off, some comments on recent market action. In my last post I talked about  frothy sentiment indicators but a funny thing happened the next day after that post - the main short-medium term indicators I look at reversed course to a moderate degree thus leaving a window for the market to advance and advance it did! Even the left for dead Cathy Wood stocks i.e. ARKK caught a bid....OK left for dead is over the top in describing it. 

The job number on Friday absolutely blew away expectations.  Usually the permabear types will find something to pick on when you get a report like this but this time...crickets. Goldman Sacks and JPM have come out with reports claiming that there's going to be a massive spring boom in economic activity as vaccine rollouts allow major locked down states like California, Illinois and New York to re-open. We could see growth rates that challenge China.(temporarily) even when excluding base effects. If this bullish scenario was to happen, then it's going to take off the charts level of bullish sentiment to mark a top of any significance. The SPX has made a new all time closing high. That has to be respected. Fresh all time highs tend to be beget further new highs. My bearish inclinations are premature it would seem.  However, I will not let emotions take hold and still be disciplined and on guard. Sentiment can be fickle and we could see the recent caution be thrown to the wind on a dime. 

Lets say we do this get massive surge in economic activity. It's going to put tremendous pressure on Powel to change his "no rate hikes until 2023" tune. Any hint of him doing that would cause a knee jerk market correction you would think. We're just going to have to wait and see how this all plays out...it will be interesting no doubt.  Commodities is one area I have been focusing on...more on this in a future post. 

 

Uneasy feelings

First let's talk about that Fed meeting last week. When I looked at what expectations were the day before the meeting, many folks were thinking that the Fed could blink in the opposite way I was suspecting - that the Fed was going to suggest hiking rates sooner than expected whereas I was thinking they would be even more dovish by suggesting they would cap long term rates. The end result was something in the middle. The Fed had mildly surprised the consensus by remaining steadfast on their "no hikes until 2023" stance but didn't go so far to suggest yield curve control. The bond market had a "meh" reaction while equities had a mild rally. Since then yields have cooled off due to declining oil and growth expectations as a result of new lockdowns in Europe and markets have rolled over a bit with vicious day to day rotations from growth to value and vice versa. 

Now I want to discuss what's been bothering me about market conditions. My posts as of late have had a pessimistic tone to them based on all the excesses I've been seeing.  Inflows have been surging at a time when supply of new stock via IPOs and secondaries have been spiking.  That's a bad combo. And  the silliness in meme stocks has not gone away as per the recent pops (and now fizzles) in GME and AMC and of course bitcoin.. Now, given the huge amount of stimulus that is forthcoming I get why animal spirts are elevated and I know one must be careful to not be contrarian just for contrarian's sake but I got to say that there is little in the way of a wall of worry right now for the market to climb on.

Something that could potentially be more ominous is how the recent carnage in the pure hype/momo stocks could be a parallel to the bursting of the tech bubble in March 2000. The carnage in 2000 first started with the dot com stocks which were pure hype garbage. Tech in general lagged the broader market for the next few months while the market overall held up OK  until one by one the bigger tech names started getting hit and eventually dragged down the entire market. By the end of 2000 the SPX  had clearly rolled over into a downtrend. However, there's some obvious major differences between that period and now. Back then interest rates and fiscal policy was notably tight whereas now it's notably accommodative if not off the charts accommodative. But you can't shake the parallels in the speculative excesses when you look at retail trading frenzy, bitcoin, NFTs, the issuance of IPOs/SPACs, ect.  I've been listening to the commentary of the "pros" i.e. fund managers and the consensus view by far is that there's going to be a huge acceleration of growth in the 2nd half of the year as COVID subsides. A  roaring 20's style boom is another thing I've been constantly hearing. As someone who is a contrarian at heart, all this talk makes me cringe. Now I get why there's such a bullish expectation given the stimulus that's going to be unleashed, but folks, it's all about expectations. Always remember the market has a way of making fools of as many people as possible. It seems to me that expectations are so high right now about a rosy outcome for the second half of the year. that there beckons to be some major disappointment in the pipeline.  Remember last year at this time? It was the complete opposite. Everyone's outlook was bleak including mine. Things looked really hopeless. 

Maybe I'm over-fretting here and the sentiment concerns I have will end up only being ST/medium term negative for the markets due to extremely accommodative monetary and fiscal conditions which will limit any downside to being just a sharp correction. But I just can't shake that uneasy feeling I have given the poor sentiment backdrop and excesses I'm seeing. Housing is another one which I will save for another post.  If we are at a major top right here or perhaps in a few months time,  could we look back a year from now and say that there were clear signs of irrational exuberance to have marked the top? The answer to that is a clear yes. The best thing for this bull market to continue would be for something to come along that cleanses the excesses and rebuilds the wall of worry. This would no doubt result in pain i.e. a 10-20%  decline. If not, we're probably just setting ourselves up for bigger pain down the road. 

Until sentiment conditions improve, I will continue to be very alert and practical sticking only with high conviction positions while keeping a healthy cash reserve.  

Will the Fed blink this week?

Immediately after I had warned about rising rates the market stumbled with tech stocks taking the brunt of the damage, especially the pure momo hype stocks like NIO, PLTR, TSLA and others. The Only places to hide were in value names. Did I happen to nail peak Cathy Wood and Elon Musk 3 weeks ago? Time will tell. ARKK and TSLA took a big hit.  I did see some Cathy Wood bashers come out of the woodwork and so maybe her time isn't up just yet.  We'll see. 

This latest surge in rates may have very well pierced the tech bubble in the purest of momo names, but if rates can find a way to stabilize and retreat from here, we could see a stabilization and resurgence in tech names...at least for a while.  During the depths on the recent pullback we didn't see the typical run for the exists type sentiment that we normally see except for the NAAIM indicator and a couple of other shorter term indicators. Fund flows and AAII sentiment didn't budge and is still showing elevated bullish behavior. Also look at how muted the VIX spike relative to other recent pullbacks. Thanks to the resurgence in value names the SPX and especially the DOW have recovered from the pullback while the NASDAQ is still well off the highs. We are seeing crazy day to day rotation in and out of growth and value names. 

So, the narrative as to why growth has been getting hit is because rising rates have a  negative impact on the valuation of secular cash flow generators given the higher discount rate applied to cashflows. At the same time rising rates have steepened the yield curve which supposedly makes financials more attractive and so you get this massive rotation from growth to value happening. Growth over value has dominated for years and really accelerated during COVID but for the past 5-6 months this trend has reversed sharply. So, is this the beginning of the long awaited value over growth cycle turn? For that to happen I believe you would need to see earnings disappointments or some other negative shock to the tech bellwethers i.e. the FAANGS. This is what kick started the last major value cycle from 2000-2007.  If earnings from the tech giants and growth plays in general don't come under threat then this value upturn will probably end up being a short lived affair.

In the short term the value rotation looks overbought here. All the Fed has to do is just hint that they are ready to step in to cap the yield in long bonds and this trade would reverse hard in the short term.  At some point the Fed has to step in. If yields keep climbing it will undermine the massive $1.9T stimulus bill. Remember, it wasn't too long ago that the Fed was urging politicians to play their part in supporting the economy by passing a major stimulus bill. Well, they did just that and so now the ball is back in the Fed's court.  Given the passing of this stimulus and Fed's accommodative stance towards the economy, It would be asinine if the Fed just sits on their hands and continues to just watch this surge in long bond yields. Mortgage rates are already ticking higher. What's the Fed's uncle point?  Is it 1.75%, is it 2% on the 10 year?  The Fed meeting this week will be a big one. If they don't hint strongly towards doing some sort of yield curve control we will probably see yields on the 10 year make a run for 2%. That's going to cause more pain for the market, tech in particular. And then what....the Fed is going to capitulate a few days later and announce something? They need to say something at this meeting or they will risk looking like fools like they did in late 2018 when they stubbornly took too long to respond to changing market conditions. Maybe Powel learned something from this. Maybe he didn't.  The last time Powel spoke he didn't suggest any changes to Fed policy and the market sold off  and yields took off notably. All he said was the rising yields had "caught his eye".  It appears that most market players are expecting more disappointment from Powel again,  but given how bond yields keep making fresh highs I think there's a much better chance this time for a positive outcome.

Back in late 2018 the bond market bullied the Fed into doing a complete 180 turn from their rate hike campaign. The tail wagged the dog. They are now bullying the Fed again. The Fed has to realize that they are the dog. If the Fed wanted to, they could  rip out the throats of the bond bears for they have literally unlimited buying power.  Right now there's a lot of speculative trend following shorts in the bonds. It's ripe for a squeeze and the Fed probably won't even need to do a lot of heavy lifting. Just them announcing that they will backstop bonds would send yields sharply lower on their own. If the Fed does this  you're going to hear it from the permabears and self righteous market purists as they cry foul about such manipulation. But guess what? Manipulation is here to stay. The Fed stepped in to backstop corporate bonds last year and it worked. You're never going to have markets be totally free, nor would that even be desirable. If markets were totally free,  manipulation would be worse.  Those with the largest pools of capital would be in position of power and would manipulate markets with no mercy in order satisfy their self interests at the expense of everyone else.  Due to the madness of crowds psychology, unfettered free markets would likely result in more frequent bigger boom and bust cycles as well. The truth is, you need regulations and you need central authorities to keep "the children" in check. It's arguable as to how to organize and run such overseers and no doubt they have been less than perfect and have abused their powers at times,  but we need them to prevent the larger abuses and instability of purely free markets.  Anyhow, I digress.

It will be interesting to see how things play out here. If the Fed says the right things this week and the markets end up making new highs with NASDAQ making a comeback to take back leadership, it will probably result in one last hurrah before something else eventually comes along to make the market stumble. The reason I say this is because sentiment conditions are already bullishly elevated for the most part and therefore not providing a wall of worry backdrop at the moment aside from a couple of shorter term indicators. It wouldn't be long before we see bullish sentiment turn to euphoric bullish  and bad things tend to happen when we get that. 

FOMO culture

 There was a notable bullish shift in sentiment the last couple of weeks as per fund flows and sentiment. We're also seeing a sizable spike in bond yields. I've said it here many times before that notable pullbacks/corrections have been preceded by a surge in bond yields like this.

One of the biggest newsworthy events of late is the revelation of Tesla having bought $1.5B worth of BTC while  other "whales" are joining the party or are strongly considering it despite probably not truly understanding BTC or what they are getting into.  Tesla, buy the way, effectively used debt to buy BTC given the bonds they issued in the past couple of years. Whether they want to admit it or not, this newfound institutional inflow into BTC is purely monkey see monkey do and FOMO behavior. They can try to rationalize it all they want, but that's what it is. It's no different than the retail meme stock mania. My theory has been that BTC is being driven purely by greater fool buying which can only be sustained by a steady inflow of new fools and now because of Tesla and others, institutional money flow is providing a fresh source of inflows to keep the BTC party going, There is also now a BTC ETF which will also suck in every last retail investor and momo trader who was always tempted to buy BTC but didn't know how or were afraid to. With the BTC ETF it's now easy to buy BTC.  A buddy of mine asked for help to set up a Questrade account so that he can buy $2500 of this ETF. Do you think he has a clue about what BTC is or how it works? Of course not. Just like the "GME to the moon" reddit "investors" had no clue or how Hertz "investors" had no clue what they doing last summer.

Given these recent developments we are fast approaching the all in scenario for BTC where the bubble will be ripe for bursting and this time for good because there will be no more greater fools to get in. As institutional flows pour into BTC, systematic risk from a BTC crash rises along with it.  I should look into this more because we all know what happened the last time there was widespread exposure of toxic assets held by so called smart money institutional investors (yes I'm talking about MBS in 2008).  

I've seen people including Tyler Winklevoss say "if you don't own BTC you are short BTC". What a fucking crock of shit statement. They are basically saying if you don't own BTC you're a loser. I quoted Cameron Winklevoss at the height of the GME mania tweeting "If you don't like the suits buy GME and AMC, if you don't like the bankers buy BTC".  Just shameless, baseless pumping from these clowns but because they are such "influencers" people blindly follow them. Same goes for Elon. Elon seems to be going off the rails lately. He's been pumping Dogecoin like a fiend - a crypto currency (if you want to use that word) which was created as a joke and now has market cap of over $7 Billion thanks to his pumping. Remember Elon was also pumping the "revolution" stocks.  

We've never had a time like this whereby people are willing to pile into just about anything  as either an expression of their opinions, or sheer  FOMO ignorance. Clever contrarians who bet against these moves too early only add fuel to the fire as they get ran over  while momentum type traders who are programed to chase strength add even more fuel to the fire.  But ultimately it ends in disaster once you run out of buyers and the fundamentals assert themselves. To me it's as clear as day that the true underlying driver of the BTC price is greater fool buying and that can only take you so far. Eventually reality hits and hits hard and fast. The ridiculous assent of  Hertz, Signal, GME, AMC, blockbuster and all the other junk stocks ultimately ended in disaster because the fundamentals said so. BTC will end the same way, but sure, it can keep going higher first as this newfound institutional love continues to pay out.  After resisting for so long, you're seeing a lot of advisors/market strategists capitulate and now say t's a good idea to add 5-10% of BTC to portfolios as an inflation hedge to replace gold. Even though these strategists still can't rationalize why the BTC is worth what it is, they've basically shrugged their shoulders and drank the koolaid. Have you noticed that gold has been in decline while pretty much every other commodity has been on the rise as of late? That's got to be mainly due to the BTC displacement effect. 

I will leave you with this consideration. Right now the Elon's, Winklevoss's and Cathy Wood's of  today are being worshiped but one thing I've learned over the years is that today's geniuses are often tomorrow's goats. It wasn't too long ago when permabears such as Roubini and Schiff where looked at as geniuses because they were big bears prior to the 2008 meltdown. Meredith Whitney was another name.  Remember her? She made a great bearish call on the banks.   But these folks remained bearish all throughout the bull market that followed and eventually turned out to be goats which I predicted would be case. Back in April 2009 I wrote this "A comment on analysts Whiteny and Roubini who have recently achieved super star status: From my experience anytime an analyst or strategist or whoever become market sages they inevitably will fall from grace usually shortly after the point when everyone worships their every word (we could be at that point already with these 2). These 2 will WITHOUT A DOUBT one day become goats. Mark my words.""

Abbey Joseph Cohen was the permabull star strategist for Goldman Sachs who gained notoriety in the 90's for her permabull outlooks. She reminds me a lot of Cathy Wood today. When the tech bubble burst in 2000 Cohen stayed bullish all throughout the bear market that followed and her star had fallen. So, beware of blindly following gurus just because they've had a hot hand. That's one of the things I've learned over many years. Along the same lines, what I've also learned is this: respect price action but don't defer to it. Just because the price of something is either rising or falling doesn't necessarily validate the respective bullish or bearish narrative that accompanies it. It's easy to be convinced by the bull case when price is rising and likewise in the bear case when price is declining. Always keep an objective perspective to the best of your ability and always remember the motto of this blog. Once everyone starts to worship someone or some particular narrative that's when you need to be on guard for things going in the opposite direction. 

Random thoughts

First off, a few comments about recent market action. To no surprise the "revolution" aka "meme" stocks crashed and burned. While there's lots of finger pointing going on, the true culprit are the "revolutionists" themselves for being such naïve fools, not the brokerages, hedge funds or whatever. But I will say this, nobody is pointing any fingers at  Cameron Winklevoss or Elon Musk who were cheerleading this "revolution". God knows how many people jumped in because of them and now they get to hold the bag while Winklevoss and Musk still hold onto their billions 

While the "revolution" was happening there was an acute deleveraging by hedge funds late last week as there was great fear that all short positions would be targeted for squeezes. As such, the market had a sharp but short lived dip and is now hitting all time highs as I type this. Lots of people were bracing for "the big one"  as the VIX spiked to near 40 but once again Mr. Market said no dice. You could hear the collective groans from the permabears and all the rest who have been bracing for a big drop for so long. ST sentiment conditions are back to neutral after having shown some exuberance a couple weeks back. When you have such conditions while the market is grinding to new highs, the market either keeps going higher or any dips that do happen tend to be relatively modest i.e. less than 5%. 

Coming into this year there is a clear consensus call for reflation. That would be bearish for bonds, bullish for the market in general with commodities, deep cyclicals outperforming.  Now as I mentioned in a recent post, you need to be careful to not be contrarian just for contrarians sake and automatically take the opposite view of the consensus. However, with this consensus view the market is clearly going to be vulnerable to a repricing of expectations should reflation fail to take place. I feel much more confident in being bullish when the market is making new highs while the consensus view is one of pessimism or very cautious optimism. That's a low hanging fruit type situation. Right now I would say the fruit is high hanging - not out of reach, but more difficult and dangerous to pick, so be alert.

Switching gears now to talk about some personal stuff. It's been about 7 years since the Greenstar fiasco whereby I took a devastating loss.  I was naive and foolish for putting myself in a position to get badly hurt like that especially given all my years of experience. I was ashamed of myself.  It was one of the lowest points in my life. I would say that the only time I felt worse was when this girl I knew who I had a huge crush on in high school found a boyfriend just as I was getting the courage to make a move on her. I remember how my heart just sank to the floor when I first found out and the agonizing weeks that followed. To this day I still carry that scar. There's 2 main ways people deal with huge setbacks like this. One way is to be consumed by the misery whereby your loss of confidence and sense of self-worth becomes permanent. The other way is to learn from the setback and to fight back with everything you got . Doing so can not only make up for the set back but put you in an ever strong position than ever before. I've always been one to fight and bounce back from major setbacks, but there's no guarantee that if you have a big set back you will be able to recover from it. In some situations you simply can't no matter how hard you try. Luck can be a big factor. 

The loss I incurred from Greenstar led to a series of events which actually ended up making me better off than had I not experienced the loss.  In fact, I'm easily in the best spot I've ever been in. I remember the dark place I was in after the full effect of the Greenstar loss sunk in mentally. I wrote about it here http://bulls-bears-pigs.blogspot.com/2014/11/still-alive.html.  I felt like I was walking around with a big hole in my chest.  I had to essentially rejoin the workforce to get a "regular job", one that was well below my qualifications. It was a 45-60 minute drive each way to work too but I knew I had to start somewhere. From there I climbed my way up which also had its own ups and downs. I was really, really fortunate. I was lucky to have met the right people and be given great opportunities. Of course, I made the best of those opportunities and so I'll give myself some credit  but without this good fortune, things would not have turned out  as good as it did.  There's a good book I read a few years ago called Outliers which describes what made super successful people so successful. The basic conclusion is that their success was due to part skill, part hard work and part luck such as being born at the right place or the right time or to the right family which allowed them to get unique opportunities. Without having the opportunity one's potential can easily go to waste. Of course, you have to try your best to create opportunities but it's often the case that you can't and you get them by luck. 

I admit that I am one lucky SOB to be where I am right now. especially during this pandemic. I just need to make sure now that I don't become complacent or reckless. As such, I have a sticky note taped to my desk which says "DFIU" as a reminder. Can you guess what it stands for?    

The Revolution

I've been a market observer for over 20 years and I've seen some really crazy shit. This GME mania is right up there. People from all walks of life, including porn stars and rappers are joining "the revolution". A tweet from Cameron Winklevoss sums up the revolution perfectly "If you don't like the suits buy GME and AMC, if you don't like the bankers buy bitcoin". I'm not surprised that this frenzy has lasted this long because "clever contrarians"  have simply been adding fuel to fire. On Monday I read an article which said that for every short position in GME that was closed there was extremely strong demand from new short sellers. They were probably thinking "What an opportunity to make money off these fools"  Whoops! The clever contrarians got ran over and they became the fools! Such a thing is not uncommon when you have a mania. People see what looks to be clearly irrational behavior and they figure they could profit from its inevitable demise, but they underestimate the frenzy and end up adding more fuel to the fire as they are forced to capitulate. 

This will of course end badly. There's only so long you can keep a stock or asset inflated based on feelings or hype and you'd be incredibly naïve to think that all the "retards" as the WSB members call themselves,  are going to successfully cash out at the expense of the shorts. Some will no doubt, but most will end up being bag holders as they are being brainwashed to "hold the line"  and have "diamond hands",  Unjustified high prices will attract sellers and eventually they will overwhelm the buyers once there's no more greater fools left or weak shorts to squeeze. Notice I said weak shorts. Not all shorts can be squeezed easily as they may have hedges or strong hands.  

The action in GME and the like are further examples of the point I made about bitcoin in that its inflated value is based purely on speculative inflows underpinned by some delusional belief/notion that goes viral. Now, don't get me wrong. I have no sympathy for hedge funds who are getting raped shorting GME. The setup to squeeze them was brilliant but ultimately, fundamentals prevail.  All of this revolution talk is nonsense and can only end badly for the little guy. Expressing your dissatisfaction of wallstreet elites by artificially inflating certain stocks to ridiculous prices is not a viable long term strategy and can only end in tears for those who are now jumping on board.  The easy money was made initially with the squeeze that caught the shorts by surprise. Again, well done.  But now the cat is out of the bag as this story has gone mainstream. The end result of this will be that the vast majority of the naïve revolutionists who are getting in now will be holding the bag. That's really the bottom line here.  I suspect the frenzy will fizzle out this week.  

Retail army of traders taking pump and dump to a new level

 In my last post I talked about the power of the greater fool phenomenon. Don't for second think that whatever stocks you own which are preforming well are being purely supported by the good "fundamentals" you researched. There's almost certainly a significant degree of hot money momo flow that is supporting the stock too which will bail at the first hint of weakness. Hot money flow is no different than greater fool buying - people are buying only because the price is rising. So long as there's more buyers than sellers at a particular moment in time, the price of any asset regardless of its fundamentals will go up.  This is the notorious principle underlying a pump and dump scheme. Usually you see pump and dumps orchestrated by shady stock promoters or scammers like Wolf of Wallstreet types. But now thanks to a cocktail of social media, smart phone trading apps, free money from the government and unemployed millennials with time on their hands, stocks that a have a low float and/or high short base like GME can get highjacked by retail trading "cults".  At first the pros scoffed at them and most still do, but meanwhile the "smart money" is being left if the dust or worse getting raped being short. 

The stocks that are targeted doesn't necessarily have to have a high short base (although that would be ideal). So long as the float is small they can highjack the stock. And unlike with a pump and dump where there is usually misinformation/hype that suckers people into a buying a stock, the trading cults can simply target any random stock and highjack it with just the simplest of reasons like "the technicals looks good"  or "it's in a hot sector" or "let's squeeze the shit out the shorts" and that's it!  GME was an example of the latter. Then you got stocks like BB which have gone up for no apparent reason with the company officially making such announcement. 

Surely this must be a sign of euphoria, that the end of this run is near right? Well, not so fast. As I mentioned earlier, the "pros" are still scoffing this rather than behaving recklessly themselves. Although I would say there is indeed some indicators that bullish positioning is elevated, I don't get nearly the same sense of euphoria from them. Mind you, I'm not expecting the pros to engage in similar pump and dump behavior, but what I think will eventually happen is that the pros will capitulate and get fully invested into high flyer type stocks and find whatever rationalization to do so without always looking over their shoulder for the next correction like they are now. You can see evidence of this by the stubbornly elevated VIX which is quick to jump on the fist hint of weakness.

I said this before but it bears repeating. The one major thing missing for the ultimate top to be near is tight monetary and fiscal conditions. Such conditions right now are at the opposite end of the spectrum  and provide a fertile environment for this type of speculative activity to take place. While you can get nasty corrections, you simply don't get major bubble peaks until the authorities take away the punch bowl unless the economy unravels on its own accord without the usual trigger of tight money and fiscal. That simply doesn't  happen though. You can get periods of  a slowdown but not outright contraction. 

The question I'm wresting with is do we just keep melting up to the point of maximum all in or is there some sort of a shakeout first?  If the authorities just give the slightest of hints that the punch bowl will be taken away sooner than expected or the punch bowl will be less filled than expected, that would probably be a catalyst for a correction. Until then, embrace the action if you can do so intelligently while incrementally raising cash into strength.  It's very tempting to try and pick the top but just remember the pitfalls of trying to be the clever contrarian. However when in doubt just stay out. If know you're going to be a weak long it's best you don't get involved for you will get shaken out easily just like today's morning action. 

Bitcoin the ultimate greater fool play

It's quite amazing how far this bitcoin pyramid scheme has gone on for. A few weeks ago my dad asked me about bitcoin. The last time he asked me about an investment was silver back in 2011 when it was near $50...take that for what it's worth. Never under estimate the madness of crowds. There's books you could read about irrational crazes such as the tulip bulb mania and the south sea bubble. Bitcoin will probably go down as one of the biggest if not biggest bubble of all time. What's amazing is how the bitcoin bubble got  re-inflated after bursting about 3 years ago. That's incredible and I suspect part of the reason for this is that institutional money got more involved which is scary. 

If I could summarize the bullish thesis of bitcoin bulls it would be this: Bitcoin is the currency of the future because a) it has limited supply b) it is self governed by a decentralized system rather than a central authority which can print fiat currency at will c) you can transfer coins from one holder to another anonymously  d) it's the poster boy of blockchain technology.  All of this is fine and dandy but the problem is that bitcoin was created out of thin air by some random dude. It is not legal tender. The fact that it has limited supply is meaningless. My turds are of limited supply too, does that make them valuable? The fact that "the people" are saying bitcoin has a value given its current price does not validate it either. In Holland at the peak of the 1637 tulip bulb mania, tulip bulb prices fetched  $100-$500K in today's dollars before collapsing over 99+% in a few months, hence the price did not "validate" anything.  Just like with other manias, the price of bitcoin is purely supported by the speculative inflows of greater fools. These manias typically happen when a group of people are deluded into believing some pipe dream and it goes viral. Ultimately, you run out of suckers and the whole thing collapses. 

The fact that bitcoin uses  a clever technology,  no way justifies the bitcoin token itself to have any value. Again, it's not legal tender, it's simply a "token" created out of thin air. Anyone can come up with their own coin and they have. There's several dozens of other coins out there, one more worthless than the next. Although some merchants  are starting to accept crypto (mainly bitcoin), ultimately they have to convert to it to fiat currency for it to be useful and they are willing to take the risk of doing that....for now. Let's see how that changes when bitcoin collapses.   

One might argue that fiat money is also created out of thin air and so it too should be worthless. Well, there's a big difference. Fiat currency is enforced by the government as it is legal tender, It is also needed to pay taxes. As such, society has set it self up to offer labor, goods and services in exchange for fiat currency due to the confidence/enforcement of the government that issues it and the strength of the underlying economy itself.  It's not a perfect system as it is possible for the government to mismanage the economy causing the currency to lose value i.e. via inflation, but what's the alternative? Switch to bitcoin? Think about how silly and impossible that would be. You expect a government to relinquish its authority to manage the economy to an algorithm? To bitcoin miners?  How would anyone be able to get a "bitcoin" mortgage to buy a house? The limited supply of bitcoin is a mismatch for the ever increasing growth in the economy. It would be massively restrictive and deflationary. Why am I even wasting internet space discussing this? And what about the ridiculous power that is being consumed to mine bitcoin? As much as the entire country of Switzerland. What a totally asinine waste of resources. It's so fucking ridiculous. This is the "currency" of the future???? 

The fact that institutional money is getting involved in bitcoin makes it scary because now the general economy can become at risk when this thing collapses. There's apparently a lot of manipulation in bitcoin trading as there's little regulation. There's already been a notable number of frauds and theft. I think most  people are woefully underestimating the greater fool buying that is driving bitcoin. I turn your attention to a company called Signal Advance Inc. ticker SIGL. About 2 weeks ago Elon Musk tweeted favorably about messenger app Signal and it caused this stock to sky rocket from 0.60 to $70 in a couple of days even though it has absolutely nothing to do with app except for  having the name Signal. Now, I could understand if there was a one day misunderstanding/confusion but the fact that this stock is STILL trading 10 times higher  than it was prior to Elon's tweet 2 weeks later tells you something about how long stupidity and ignorance can linger on for in regards to any "asset" that's out there. We saw a similar stupidity in the trading of bankrupt Hertz in June. It was so stupid that Hertz tried to issue additional worthless shares to the suckers but lucky for them regulators blocked it. Too bad...they should have allowed it! These examples show you just how far greater fool buying can go. It can drive up prices of any asset regardless of its intrinsic worth even if that worth is 0. 

I strongly suspect bitcoin will end badly....again, and this time for good. But don't get me wrong. I'm not like the embittered, miserable SOB permabear types whos gets angry about things like this. I laugh about it. If you can make money on it good for you! I salute you. I'm not a jealous or envious man. 

I am also open for anyone to provide me with a convincing bullish case for bitcoin. Any takers? 

The folly of trying to be clever

I've been meaning to write this post for a while. I tend to approach the markets from a contrarian perspective. I try to be mindful of what others are doing and avoid or do the opposite of a trade that  becomes too popular. I don't like the thought of possibly being late to a crowded party and then be left holding the bag with the rest of the lemmings. I much  rather prefer trying to be one step ahead of everyone, arriving early to the next party. There's a certain satisfaction one gets using a contrarian approach. It makes you feel clever avoiding groupthink and doing what most others aren't and if you get it right it can be very lucrative.  On a personal level, I'm very much a contrarian. For instance, unlike most of my friends, I didn't let myself go. I'll be 44 this year and without trying to sound arrogant, I don't look or feel like a 44 year old. When new people I meet first realize my age I almost always get a surprised look on their face. I workout everyday for 45-60 minutes and I eat fairly clean.  I can still keep up with 20 somethings on the soccer pitch.  I do what most people my age don't do and I take pride in that. 

There is however pitfalls with contrarian thinking when it comes to financial markets. In order to be successful at taking a contrary approach you need to be mindful that there will be a period of time when the crowd is "right" and if you fail to appreciate that, your contrarian stance will prove too hasty which could lead to leaving big money on the table or even worse taking heavy losses betting against the crowd. It can be difficult to know just how far the crowded trade can go on for. You might think that everyone is all in only for there to be a new group of "suckers" that come to the party.. The other pitfall of contrarian thinking is being a contrarian just for contrarian sake. For example, taking a contrarian stance that grass will soon be non-green because everyone believes it's green is foolish. In financial markets a good example is when a company files for Ch 11 and the stock crashes since  it becomes fundamentally worthless. Taking a contrarian stance on such an outcome will prove futile aside from the temporary stupidity/ignorance that could happen like with Hertz stock in June. 

Then  there's also the possibility that you could be flat out wrong about a contrarian call whereby you think you're being a contrarian when in fact your thesis is being shared by many others too which therefore makes YOU the sucker. I think we've been seeing this type of phenomenon play out more so in recent times. The 2000-2002 and 2007-2009  big bear markets created a legion of bitter, cynical investors who vowed never to be a "sucker" again. I often call these folks the permabear trading community. After getting burned by bear markets they vowed never to be fooled again by "Wallstreet crooks" and blogs like zerohedge became popular.  The COVID crash may have added a bit more to this ilk but at the same time it minted a legion of newbie millennial traders. The perrmabear trading community scoffed at these millennials saying "just you wait and see, they're gong to learn a hard lesson!". The ironic thing is that the permabears you see today were once like the naïve, happy go lucky newbie millennial trader until they eventually turned to the dark side after getting burned. So what I suspect ending up happening is that many of the permabear trading community bet against the highflying stocks like TSLA thinking they are being clever contrarians and ended up just adding fuel to the fire making the so called "contrarian trade" not so contrarian after all.  So long as there's a greater fool, there's no limit as to how high or how long a stock/asset can go. Bearish bets placed against an asset are a potential source of buying power especially when being placed by weak holders like those of the permabear trading community tend to be. Eventually we'll get to the point where most of the permabear types will throw their hands up in the air and say "if you can't beat em, join em" or at the very least step aside. But this transition could take time. You might see the permabears back off for a while but on the first hint of notable weakness they come back, much like a crack addict who quits and then uses again a few weeks later. We saw this happen in the aftermath of 2008 crash.  

So in conclusion, be careful trying to play the contrarian for you may be early or not actually be one after all. If you are going to make a contrarian bet you need to make yourself a strong holder. Making a large bet with a "tight stop" is an example of what not to do. Come in with the expectation that you probably going to be early. If you're going to go long be prepared to handle ANY amount of paper loss which means you position your size accordingly. If you want to make a bet against a stock, I strongly advise to use (if possible) long dated  put options,  this way you can't be forced to cover if the position goes against you and you're giving yourself plenty of time for your thesis to pay off.  Don't buy options that will expire in a couple of months. Again, come in with the expectation that you will be early. 

Next post I will talk about bitcoin which was also a long time coming. 

Expectations have risen substantially coming into 2021

I've mentioned here more than once how important it is to keep tabs on expectations of market participants. You can quantify expectations to a degree by looking at earnings estimates, price target and such; you can also try to get a sense of what the narratives are from the pundits and media but in my opinion the most important thing to look at is what people are are actually doing with their money. People will only truly embrace expectations when they put their money where their mouth is. Post election there has definitely been a notable upward shift in expectations when you look at recent trends in fund flows, margin debt and IPOs/SPACs. You won't find a shortage of market watchers claiming how all of this is ominous for the market. I share these concerns but for now, it's a short to medium term concern. Is the market primed for a 10-20% correction? In my opinion yes. Conditions are such that the door is open to this. I felt a similar way coming into 2018 but my conviction level isn't as great  this time around. In my opinion, we could soon see something along the lines of what we saw in the spring/summer of 2010 whereby we had a massive relief rally given how the world didn't in fact come to end but then complacency/greed crept in too much and a cleansing of this froth was necessary which started off with the flash crash. 

On a longer term scale, there's still more room for more people to ""get in the pool". Yes, fund flows have  spiked, but that's coming off a period of chronic flat/negative flows for 2 years.  If you look back from when the bull market of 2009 began, equity fund flows have been pretty tepid generally since then. The speculative actions of millennial traders are not representative of the sentiment that exists from the baby boomers (who control far more money) and institutional money. Yes, sentiment is more bullish overall from these 2 groups of folks but it's not as extreme. The other thing that prevents me from believing we are near a major bull market top i.e. a la 2000 or 2007 is because monetary and fiscal policy are extremely accommodative now whereas it was restrictive then. And although the narrative has definitely shifted to a more positive tone, there's still lingering concerns in the back of most people's minds about COVID and the recovery and it probably wouldn't take much to inflame those fears. When you look at  the conditions near major bull market peaks of the past, it tends to be nothing but blue skies ahead. 

It's a very peculiar market we find ourselves in right. now. The excesses in SPACs/IPOs is clearly a red flag but normally you would see such behavior near the peak of an economic cycle i.e. a after a long period of low unemployment strong growth. Can it be possible for us to get a cleansing of this froth and yet have the bull market still be in tact? I think the answer is yes for the reasons I've already mentioned. Outside of COVID we've had some scary corrections since 2009, 2 of which were 20%. Those corrections proceeded periods of froth not unlike such as what we see now. So long as earnings in general don't collapse;, i.e. there's no financial crisis which leads to general mass deleveraging and bankruptcies,  any corrections that do happen, severe as they may be, should only remain just that - corrections and not the end of the bull market, simply because the fixed income markets don't provide an attractive enough alternative. 

I think it will be important to be tactical in the coming weeks/months but stick with long term high conviction themes i.e. clean energy and energy efficiency.