If that was the bull market peak...

Major selloff this week. So, was that it? Did we just witness a blow-off top to cap this 9 year bull run? Well, I've been saying repeatedly on this blog: Bull market peaks are made when there is tight money and euphoria/greed. There was definitely flashes of the latter with the bitcoin craze and weed craze which I think are over, but we didn't see tight money because inflation, although picking up, is not a problem at this time.  The yield curve did not invert and therefore, no recession would appear on the horizon and that's what ends bull markets. In 1987 there was a similar situation where the market had been soaring for months, greed was in the air and there ended up being a 25% crash. It's debatable as to whether you can call the 87 crash a bear market. To me, I look at it as a major pullback in the bull market that began in 1982 because the drop was swift and short lived.  Be prepared for the possibility of this type of drop because the markets have simply gone up in a straight line for a year. The trigger of the 87 crash was arguably rising bond yields in the face of a market that had been so strong for months and that made people start to get jittery. Then a bill got passed that made mergers & acquisitions less appealing (M&A was in a frenzy at the time) which created more selling pressure and then there was the popular use of portfolio insurance, which arguably was the straw the broke the camels back and was largely responsible for creating the biggest one day market collapse in history. This time around we have rising bond yields. We don't have portfolio insurance but what we do have is a mindless amount of ETF buying that took place during the past couple years. If sentiment turns negative let's see how how the appeal of low fees holds up during a  meltdown whereby ETF holders have no escape as they are held hostage to the indicies. ETF selling could exacerbate a correction into a full blown panic especially if there is leverage behind these purchases.

Be very careful at this junction. Markets could have ST bounce but I suspect that we are going to see a much larger correction at some point to clear out the excesses that have accumulated. I expect to see YTD gains wiped out at the very least. So, bottom line I don't believe we are entering a bear market but it may feel like one soon enough.

Optimism Phase with flashes of Euphoria via weed and blockchain stocks

The market has gotten off to a rip roaring start up about 4%. It's been a breathtaking move these past 5 months. I've read somewhere that the Dow Jones is the most overbought in its history which spans over 100 years! I remember back in the depths of the 2008 meltdown how insanely oversold the market got in November of that year. Overbought markets are not necessarily a sign of a top, it can often signal a long term breakout but even in such cases, a resting phase tends to follow where the market consolidates. That has to happen at some point. Many have been calling for a 10% correction since at least September and have been made to look the fool. That's the thing about trying to play a correction in a bull market. It's very, very difficult to time and even if you get the timing right, the correction often doesn't go as deep as you were expecting.  Now, having said all this, if was was ever a time to be on the lookout for at least a consolidation it would have to be about now given the sentiment surveys and signs of excess with the weed and blockchain sectors. We are clearly in the optimism phase of the bull market with flashes of euphoria.

People are blindly piling into these 2 hot sectors despite the likelihood that most of these companies will never be profitable. I've been around long enough to know that investing on hype in the long term is a guaranteed loser however in the short to medium term if you are a nimble trader you could do well. At this point however, if you get in  you'd be arriving late to the party. I overheard an adviser at a conference the other day talking to his client about ways to play the weed sector. The average retail investor is very keen on this sector and bitcoin/blockchain too and that to me says stay away. Sure, they can go higher but I'm always looking to be one of the first people at a party, not the last. You jump in now, you need to be a trader, not an investor and have one foot out the door. That's not my style. That's essentially gambling.

The interesting thing about the bitcoin mania is that there is also no shortage of warnings about it being a bubble with a crash being immanent. Warren Buffet recently chiming in that he's certain crypto will end badly one day. If we go by the motto of this blog it would suggest that if a crash were to happen, it won't be just yet. It suggests that the market will first frustrate and shake out a lot of the skeptics just like it did in 1999 with the tech bubble and 2006 with the subprime bubble and then the rug will be pulled out from underneath everyone. So, we could very well see a lot of chopping and flopping with the price of bitcoin  before it rolls over perhaps later in the year.  As such, I'm staying away from this sector but I do want to bet against it one day as I agree with Buffet and don't ever try to write this guy off as being old and irrelevant. Nobody is infallible but this guy has been right far more times than wrong and you don't get labeled as one of the greatest investors of all time for nothing.

I remember when Buffet came out with his bullish "buy America" call on October 18, 2008 when the S&P was about 945, obviously a great call in the long run but in the 5 months that followed the S&P went down another 30% and I bet a lot of people thought he was a fool and lost his mojo.  The skeptics of crypto may have to go though a similar baptism of fire with many of them capitulating or least becoming silent. We'll see how this plays out...

Outlook for 2018: Curb your enthusiasm

Unless something happens by end the end of the year, 2017 will be characterized as a one way upward street. The biggest corrections we saw were about 3% and there weren't many of them. I've read many market outlooks from the major investment firms and the consensus view is one of optimism and somewhat complacency. They are basically saying this:

"the markets should benefit from global synchronized growth with international markets, Emerging Markets, being the more attractive. There is little risk of recession as the yield curve is not inverted. The major risk is that the fed ends up tightening more than expected if inflation flares up".

Last year at the time, the consensus from these "experts" was far more cautious as there was concerns about political risks and valuations. Those concerns aren't as prevalent today, yet I would say now would be the time to be more concerned about political risk and valuation! Instead I have seen more strategists justifying current valuations saying that they are fair given interest rates or some other reason. Remember all the hoopla about the high CAPE ratio? Seems like this is being more ignored now (but not entirely).

As a bull market rise in stocks or any asset class (such as bitcoin which I will discuss shortly) progresses it's not surprising to see people make justifications for it as they finally throw in their bearish towel and embrace it. Towards the end of a bull run the gains will accelerate and so too do the justifications which at that point become very weak. I've said before many times that this has been the most hated bull market I have ever seen.... I am now seeing some love for this market...but it only took 9 years! Where the fuck were all you bullish strategists when the S&P was at 1400? lol 

So, now that there appears to be optimism and quite frankly some complacency heading into 2018 does this mean the end of the bull market is nigh? Well, like I said before, euphoria/complacency and tight money is the killer of bull markets. What we are seeing now can be categorized more as optimism with a splash of complacency, but money is not yet tight as the yield curve is not inverted. However, I will say this, I'm seeing that the "experts" have also been pointing to the non-inverted yield curve as a reason to remain bullish and that makes me uncomfortable.  Again, where the fuck were all of you in 2011, 2012, 2013, 2014, 2015, 2016 ? How come no mention of the yield curve then?  Remember the motto of this blog. If too many people become complacent because of the yield curve or for some other reasons, the market will find a way to surprise and punish the masses. Either that indicator won't work this time or there will be some other unexpected thing that happens. I remember in 2001 when the fed did a surprise interest rate cut there was all this bullish hoopla because of a statistic which showed that the market was always up every time 12 months after the fed cuts interest rates - except for 1929. Well, guess where was the market was 12 months later....  

So, here's what I feel. I still believe the bull market is in tact but I'm a lot more cautious than I have been in some time and I won't hesitate to change my stance depending on how things unfold. I believe there is a very high chance of a major correction in the first half 2018 to wring out the complacency I see right now. If the market simply keeps on chugging along then we would likely enter the euphoria/ blow off phase of this bull market.

Speaking of euphoria, let's switch to bitcoin and cryptocurrencies. This is a classic bubble which is so crystal clear to me having witnessed other bubbles: The parabolic rise in prices, the hundreds of spin off coins that have popped up,  adding "blockchain" to your company name or any involvement in blockchain results in  an instant 300%+ gain in the stock price, all the mainstream media attention with celebrities like Katy Perry asking about it (dumb money),  the inquiries I'm getting from friends and co-workers (dumb money), reports of people borrowing money to buy bitcoin, outlandish forecasts for much higher prices after prices have already skyrocketed. These are all major red flags, and this will clearly end badly. Yes, I know many skeptics were calling bitcoin a bubble when it was at a much lower price and they got made to look foolish, but the same thing happened with the dot com skeptics of 1999 - they were right, but early. Bitcoin is 100% in a bubble and I think there's a good chance that it has already began to implode.  I lived through the dot com bust and I will say it again, all the signs for a peak to this frenzy are there and all manias end BADLY. 

If you want to talk about a risk to the market that's not really being discounted I would say it's the implosion of cypto currencies. The fact that there are reports of people borrowing money to buy bitcoin and the introduction of bitcoin futures pose a dangerous threat to the general economy if the mania continues. I'm not sure of the extent of leverage behind bitcoin but it's there and the longer this mania continues the greater the contagion effect will be. We saw that happen with the dot com bust and the sub prime mortgage bust. If the cypto-currency bubble has indeed popped which I think it probably has, it would be for the best as the fallout shouldn't be too bad at this point, but I can't really say that with confidence at this point.... I need to investigate this. 

Is this what the end of the bull market looks like? (probably not)

I know it's been a while and probably nobody follows this blog anymore. I've been busy with a lot of stuff and found it hard to find the time to make posts  and so this post is long overdue. My last post about 10 months ago suggested that you give the bull market the benefit of the doubt for the reasons I've been mentioning here since day 1 which is this: Prior bull markets have ended when most have fully embraced it (i.e. greed/complacency) and when monetary conditions are tight (i..e inverted yield curve). It really has been that simple! They don't end when a certain valuation metric is reached or after a certain number of years as the pundits who have been crying wolf would like you to believe. So, given our definition of what the end looks like can you truly say that people have embraced this bull market? Sure, it's a subjective thing to qualify but I still don't see it. Ask the average guy on the street what he/she feels about the markets or the economy. I bet you will get a response that would range from cautious to luke warm at best and it's been this way for years! And what about monetary conditions? Yes, they are tightening but only starting to tighten from extremely accommodating levels - interest rates are in the process normalizing from all time record lows but they are still quite low and the yield curve is positively sloped. This all suggests the bull market is still in tact.

I will be one to admit that valuations are not attractive and for this reason it's keeping people on edge, that along with Trump being at the helm of the USA, but I remember in 1999 when valuations were also high, people were rationalizing them saying it was the result of a new era (the internet) and so traditional valuation metrics didn't apply. It's that kind of complacency that makes the market vulnerable and we are not seeing that now. So long as people are on edge, there is a wall of worry for the market to climb! This is not to say that you won''t get nasty drops -  you can, and we've seen them happen throughout the recent years, but you must continue to give the bull market the benefit of the doubt when they happen if prior to the drop you did't see greed and tight money. Maybe we are going to get one now with this latest standoff between the US and North Korea. This looks like yet another poor excuse for the market to go down.if you ask me and I doubt this correction will go really deep...it could very well be over already (tough to say). North Korea will do fuck all like it always does...they are like my neighbor's barking dog. Trump may very well be brash and a bully but he's obviously right in that North Korea is totally over matched and would be crushed if they dared to make any type of attack.

So in conclusion I will say that when the markets are "high" it does make it susceptible to corrections and frustrating to find good set ups on the long side but you must to continue to give the bulls the benefit of the doubt until we see greed and tight money. Don't go short and don't get shaken out easily. Keep some cash on hand if that what it takes to make you a strong holder, hedging a bit is Ok too but don't go net short.  There hasn't been a shortage of articles and pundits who have been warning since 2015 about the "aging bull market" and what has the market done? Gone higher and higher and that's not surprising to me given the motto of this blog.

Wall of worry well in tact

It's been quite some time since my last post. I've been quite busy now that I have a "real job" and so blogging is low on the priority list, but I have a lot on my mind that I want to let out. Being in the position that I'm in, I have a lot of interactions with advisers, wholesalers and portfolio mangers which gives me a good sense of market sentiment. I can tell you that I hear a common refrain also echoed in the financial media which is this: "market valuations are high, the risk reward is not favorable" and so everyone has their guard up worrying about the next catalyst that's going to take the market down such as election uncertainty or a rate hike. I know from experience that well advertised worries seldom come to fruition or if they do, like Brexit, they tend to be short lived.

I know Donald Trump has talked a lot about walls but one wall that doesn't get mentioned much is the wall of worry that this market has been climbing. Coming into the year I wasn't too optimistic about the markets because we had a situation where rates were expected to rise along with a trend of declining earnings (due to energy companies). That negative posture was a correct one to have...for a few months. What has happened since the spring is that energy prices hit a bottom and rates have not gone up and that has caused the market to recover from the 1st quarter damage and then some. Everyone, myself included didn't expect the market to rebound as swiftly as it did from those lows in March. Most were expecting a lower low at some point. Well, as the motto of this blog has proved over and over again "the main purpose of the market is to make fools of as many men (any women lol)  as possible" and so here we are not too far off  the all time high which was made in the summer with very little fan fare. Mutual fund and ETF flows have been negative for most of the year even as the market recovered and made those new highs.  I can tell you this from my experience and that of history - major bull market peaks don't end like this. They don't end when people are worried, they don't end when monetary conditions are easy (even if we get some hikes). They end when there is complacency and few see it coming. When oil peaked out a couple years ago how many people called for a decline to $30? Nobody. Not once single fucking person. The prevailing sentiment was that oil was ultimately heading to $200 at some point. When oil started rolling over, most pundits said it wouldn't go below $70... then when it was in free fall we ended up to the point where there were lots of  calls for $20 (which of course never happened either and it marked the bottom).

At those lows in March, I can tell you that sentiment towards commodities was black enough to be considered "maximum pessimism" caliber and as so we are probably in the early stages of a multi-year commodities bull market. As such, I have been accumulating positions in commodity-linked names such as t.hwo. t.cke. t.nsu  and v.orc.b which are fundamentally cheap, have strong balance sheets and lots of upside potential.

I will conclude by saying that I can respect the notion that valuations are high by historical standards when it comes to the overall market (not crazy high but high) but then again, what are the alternatives? Bonds? Cash? GICs? Their yields are piss poor even if rates do start going up. Also, it would be reasonable to assume that if energy prices are on the up and up, overall market earnings will improve next year and what if the global economy actually starts grows at a normal pace which nobody is expecting? The market appeared expensive in the early 90's as it emerged from the recession of 1990 but it "grew" into it's high earnings multiple as the economy went from second to third and fourth gear. Some of you will poo poo this idea but you've probably been poo pooing this entire bull market as well.

Keep an open mind, pick your spots. I'm not suggesting you go all in after the market has had a big run but unless I see a shift in sentiment towards complacency, I'm still giving the bulls the benefit of the doubt if and when we get another pullback. 

Will there be a helicopter drop one day?

It's been a rough ride this year so far no doubt. I already highlighted my concerns in prior posts and the market has been sliding due to them. Back in September I mentioned that it didn't feel like quite like a bear market at that time but I admitted that I personally wasn't afraid enough and that was a red flag suggesting we were not out of the woods yet. I said

 I know that in the depths of 2011 I had more doubts about the market although I gave the benefit of the doubt for a bullish resolution. You know you're near the end of a correction when even the bulls like me start having second thoughts! 

Well, I can say now that I have genuine doubts much like near the depths of 2011, in fact more so. I'm not alone in my doubts. Doom and gloom is thick. Talk of recession is on everyone's lips. Most people are comfortable calling this a bear market - and quite frankly, it is. A bull market is characterized by a grinding uptrend punctuated by sharp but short pullbacks while a bear market is a down-trending  highly volatile, environment punctuated by both severe declines and vicious snap back short covering rallies. We have definitely seen this type of bear market action and so it has to be respected. However, with everyone so quick to embrace it, fearing the worst, from a contrarian perspective this leaves the door open to the possibility that at the very least, an intermediate term counter trend rally is not too far off, much like the rally from March 2008-May 2008 and from March 2001-May 2008. Those rallies ultimately failed but they were doozies. For me to be more confident that we're at the cusp of a mulit-month rally I would like to see a spike in the VIX and outflows. Both have been increasing but only grudgingly so which could indicate not enough fear. Although from anecdotal evidence, I've seen quite a lot of fear such as contacts I have who deal directly with retail investors

There are legitimate worries out there no doubt and it seems like this time it's a culmination of many factors. There's the hard landing in China, European Bank stress, US high yield debt stress and the general deceleration of the global economy. For a good chunk of these problems, the collapse in the energy sector and the strength of the US dollar aided by fed tightening are the culprits. Government authorities have the ability to reverse these negatives to some degree if they have the political will to do so. If somehow OPEC and Russia can come to an agreement to cut oil production the price of oil can rocket to $50 in a heartbeat. If the Fed decides to back off hiking rates for the rest of the year there would be relief in the currency markets (the fed might signal that in their next meeting mid March) . Now, perhaps the damage is already done and any rally would ultimately fail, but if the above happens it would be one hell of a rally and one that could erase all the losses year to date. Memories of 2008 are still fresh and government authorities around the world have learned their lesson to pay more attention to the message of the markets and be proactive.

There is a popular notion that government authorities have already used up all their bullets to stimulate the economy. The latest attempt has been negative interest rates which so far has fallen flat on it's face. I think it's pretty sick to see savers get punished. What's this world coming to? There's another option that nobody is talking about which I think could ultimately be used. It's the "helicopter money drop" idea proposed by Ben Bernanke in 2002. What if governments announced they are going to give every adult citizen a monthly paycheck of $500/month and they financed this by simply printing money? You might say this is ludicrous, it will lead to high inflation, it's a moral hazard, ect  but whatever you say it would be a huge fiscal stimulus and unlike QE, it puts money directly into people's pockets, it reduces debt burdens.  You don't think this could happen? Well, I bet 5 years ago nobody thought negative interest rates could even happen either. Now, I'm no economist and I'm not going to debate the consequences of such a policy but I do know that in paper based currency economy there is no limit as to how money can be printed which gives governments the ability to give it's a citizens a  "mulligan" if they wanted to. Theoretically,the government can pay off all our mortgages with the stroke of a pen.Will it get to that point where we literally get free money? Don't think it can't happen....don't underestimate the ability of the government to intervene in the economy.

2016 will be for traders

In prior years since I've started this blog most of the time I would look upon the new year and have a decent sense of what lied in store because there were at least a few major indicators that suggested the bull market since 2009 had room to go. I was generally bullish long term and always suggested to give the bulls the benefit of the doubt during corrections. I advocated buy and hold as a result. This time around I can't say that because we are in a situation where corporate profits as a whole are rolling over and monetary conditions are tightening which are not the ingredients for an advancing bull market that is 6 years old. At the very least this suggest the bull market will be on hiatus characterized by choppy action for months with a reasonable possibility of a full blown bear market.  The bulls would argue that profits have only rolled over marginally (so far) with energy and the strong US dollar as the culprits and although interest rates are now on the rise, we're a long way from monetary policy being restrictive.They can also argue that with energy being so oversold it's poised for a bounce back which would be positive for overall corporate earnings in 2016. These are a good points, however, the burden of proof is now on the bulls and until we actually see evidence of earnings turning the corner for the better, investors will be skittish. Also, with the fed in tightening mode there is always going to be the fear that they will over do it and cause the economy to tip into recession not to mention the belief many have that this entire bull run was predicated on the fed's easy monetary policy which is now being unwound. As a result of the above, the market will have a very hard time making headway and the best we can hope for would be a range bound market. 1994 and 2004 were the last times the fed tightened monetary policy for the first time coming out of recession and although there was ultimately a bullish resolution,  the markets were range bound for months as investors took a wait and see approach to see what kind of economic damage if any, the tightening would do. Once the market got the sense that the fed was just about done with little or no damage to the economy, the markets took off. Will this happen again this time around? We will see....I think it's certainly doable but then there's the bear case which is not weak by any means.

There is an eerie parallel of the energy crash to that of the tech and housing crashes of 2000 and 2007 respectively which lead to recessions and major bear markets for stocks in general. Both those aforementioned sectors were important drivers of the cycles that preceded them, responsible for significant earnings and job creation. When they crashed they created stresses in corporate bond markets and resulted in job losses which at first were dismissed as isolated events that wouldn't spill over to other sectors. Energy state Texas was by far the greatest contributor to job creation in the US since 2009.  In fact about 40% of all job creation in the US since 2009 was due to Texas!

To believe that this prosperity in Texas was not due to the oil boom would be very naive. I've heard the  argument that Texas is no longer as energy dependent as they once were as their economy is more diversified but I'm quite sure the energy sector in Texas leads their economy and  drives other important sectors such as housing and retail - it certainty can't be the other way around.  Now that the oil sector is in the tank we are at serious risk of seeing the reverse of this Texas wealth effect kick in.
There is a silver lining to the oil crash in that it's an economic windfall to consumers which is different compared to the tech and housing crashes whereby there's no such windfall. I'm not sure that's going to be enough to offset the negatives but at least there is a positive effect.

The bottom line though is that flat/down earnings when there's monetary tightening is simply not a good recipe for bullish action when you have the market trading at arguably high valuations. I think the best the bulls can hope for at this point is a range bound market but as I've mentioned many times on this, I never felt we reached the euphoria stage of this bull market and people are always so quick to turn negative at the first hint of trouble and so the contrarian in me is not writing off this bull market yet, however, for the first time in a long time, I'm giving the bear case a lot of respect. Be careful.