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I’d Rather Get a Poke in the Eye with a Sharp Stick Than Buy Equities
At a PE multiple of 20 times earnings, US equities (SPX) are at the top of a seven year valuation range. Emerging markets are even worse, with countries like China and Taiwan sporting positively bubblicious multiples.
There is no doubt that corporate managements panicked at the beginning of 2009 and chopped overheads at an unprecedented rate, leading to the eye popping, jaw dropping 700,000 monthly nonfarm payroll losses we witnessed. With the economy snapping back faster than any of them expected, they accidently created the widest profit margins in history.
Don’t expect lightening to strike twice in the same place. Those margins can only shrink from here, either through the long delayed rehiring of workers that bumps up costs, or because of a subpar recovery or double dip recession that slashes revenues. Equities are a lose-lose trade here, threatening more downside than upside. My former mentor, Barton Biggs, taught me to always leave the last ten percent of a move for the next guy, which I always considered sound advice.
Unfortunately, with interest rates at zero, and $9 trillion sitting in short dated instruments, some models value equities at infinity, and many traders seem hell bent on taking stocks there. So as expensive as equities are here, they may be about to surf a New Year tidal wave of liquidity to even greater heights. During their eighties stock market bubble, the Japanese loved to quote a favorite local expression: “When the fools are dancing, the greater fools are watching.” That was the decade when we took the multiple on Japanese stocks from 10 up to 100. The same may apply now to American equity investors.
I think this next boost could well be setting up one of the great shorting opportunities of the decade, which could start tomorrow, next week, next month, or by summer at the latest. The risk/reward of a long equity position here is terrible. I am particularly keeping in my crosshairs sighted on anything with a poor balance sheet, especially in financials, REIT’s, housing, and retailers. The bell ringer that the top is in will be a failed Treasury auction that triggers frightening, simultaneous sell offs in stocks, bonds, and the dollar. With the volume of government debt offerings increasing at an ever accelerating rate, it’s only a matter of time before this happens. Just as last year delivered a “V” market, this year could bring us the inverted “V”, or a Greek Lambda, “?”.
If some bully is holding you by your ankles outside a high floor window, threatening to let go if you don’t buy equities, only pick the emerging market variety (EEM) where forecast GDP growth rates are the highest. Think the BRIC’s, Brazil (EWZ), Russia (RSX), India (PIN), and China (FXI), with South Korea (EWY), Taiwan (EWT), and Indonesia (IDX) thrown in for a more sophisticated flavor. I prefer my portfolio with a generous soy sauce and ginger flavor, with a little kimchee thrown in for spice, a nice Russian pavlova for desert, all washed down with some strong Brazilian Arabica coffee.
But keep an itchy trigger finger on your mouse, because when the turn comes, there will be no place to hide. And make sure you increasingly add downside protection in the form of cheap puts, or some simple stop losses as we grind our way up towards our appointment with destiny. Also be sure to beat the rush by booking long vacations at that house in the Hamptons, the lakefront property at Tahoe, or the mega yacht in the Mediterranean, early.
For more iconoclastic and out of consensus analysis please visit me at www.madhedgefundtrader.com .
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The Charts do work for timing. The Basilisk can run on water because it isn't too heavy and can move its feet fast enough.
You have also done somethng examination of bullish side viability when you entered those positions you have now profitably closed. And this is an unusual market. Some very good bull market periods are much more gradual.
Danger will come when you begin to get too comfortable and and begin to be bored. Sometimes, even when fundamentals are very good and good news is reported, the PPS doesn't respond for a quarter or two.
Also, at higher income levels, in the US at least, short term taxes begin to be a factor. Eventually, there will eventually be issues you want to simply stay with because the management is good and you have conficence in the situation.
Good Luck and Happy New Year!
Clearly on the road to great fortunes.
Yes, the ONLY fortunes in Amerikanski today are to be gained by buying pretty scraps of paper (or electronic equivalents) and trading them within 48 hours. Don't rely upon fundamental analysis, cash flows, or economic reason. Just buy. Rely on Uncle Slam to prop and perpetuate the LIE. Eventually the sheeple will come back to the trough and relieve them of their false securities.
Since 2000, we've had three unfathomable run-ups and two treacherous run-downs with asset blowups and panics galore. Yes, this is the way to run a modern economy. Obviously command and control, fiscal and monetary policy are curing the systemic ills. BTW, how much has the system-wide debt come down? That's right, less than 15%. While these next 5 years promise a public balance sheet morbid with new debt.
Meanwhile while the financial securities and money aggregates lift-off, the real estate and durables continue to languish and await another deep step down.
Classic collapse function. But no better time in history to make a fortune front running a corrupt Fed/Treasonry and to buy fancy paper.
The music stops, but they keep bidding the band to play on...
None of this is founded upon economic production, but is an effort to jam a larger supply of money into a rotted-to-the-core atrophying system.
Transfer reward away from the productive economy and into the speculative financialized sector. That will assure a future free of want.
You wrote a lot of text, but the summary of it is as follows.
I love tool A. Everyone is using tool B. Everyone else are fools because they should be using tool A.
Very dry, but I doubt she gets it.
So I will elaborate, in the hope she does some simple math before Wall Street fleeces her blind. Putting $48K VAR for $677 is bad, but deducting shot term capital gains tax plus fees makes it even more ridiculous.
Note my handle. There is no tax here on foreign-derived income.
$48k is not VaR in the example unless assuming that no exit would be actioned until the stock in question went to zero... which would only be a sensible assumption if the original poster worked for Moody's/S&P/Fitch.
As for me - shorted ASX200 futures yesterday at 4940 and closed out 2/3 positions today at just under 4900. $15k margin for $1375 profit. ($15k is NOT VaR in my case either).
The dam's not going to break yet, but markets aren't going higher either. For the moment, best just to scalp shorts and hold partial positions after profit taking (unlike the long bond, where we've been short since ZB was at 127).
Cheerio
GT
GT's Market Rant
ZH does fine work.....But it's posts like these that have led me to believe it's not useful to stock traders.
Exactly. While reading this site for about a year now, and finding great value in it, I've noticed that anyone using it for investment guidance would likely have lost a great deal of money, being stuck in a paradigm of pessimism while one of the greatest bull rallies ever was in full swing.
OR, you could have bought commodities like some on this site (ahem) have been suggesting, and beaten the stock market.
Whatever happens in the economy, one thing you can count on is Bernanke continuing to kill the dollar.
+1