"It's Better To Turn Cautious Too Soon..."

Tyler Durden's picture

Authored by Simon Black via SovereignMan.com,

One of the greatest investors in the world is getting worried…

Howard Marks is the billionaire founder of Oaktree Capital, one of the largest and most successful investment firms in the world.

A few times each year Marks write up his thoughts about financial markets– he calls them ‘investment memos’.

And he just released his latest one with a very clear message: it’s time to be cautious.

From Marks’ memo…

I think it’s better to turn cautious too soon (and thus perhaps underperform for a while) rather than too late, after the downslide has begun, making it hard to trim risk, achieve exits and cut losses.

Marks admits this bull market could continue. But he’s happy taking chips off the table in today’s particularly dangerous market.

Asset prices are high across the board – the S&P 500 is trading at 25 times trailing 12-month earnings compared to a long-term median of 15 – and prospective returns are low.

Meanwhile, we’re also seeing record-high complacency amongst investors.

Just this morning the Wall Street Journal published data from Yardeni Research showing that percentage of ‘bearish’ investors who believe that the market will fall is near its lowest level since 1987.

The Volatility Index (VIX), a statistic which measures ‘fear’ in the market place, is at its ALL-TIME lowest point in its entire 27-year existence – hitting 8.84 last week, compared to above 80 in 2008.

The VIX hit 8.89 on December 27, 1993. From Marks:

The index was last this low when Bill Clinton took office in 1993, at a time when there was peace in the world, faster economic growth and a much smaller deficit. Should people really be as complacent now as they were then?

Compare that today, where market pitfalls abound…

  1. North Korea is threatening to nuke the US
  2. Donald Trump is firing his entire cabinet
  3. The Federal Reserve has dropped interest rates to record lows and drowned the world in trillions of dollars of cash
  4. Debt levels are at record highs
  5. Entire banking systems, especially in Europe, are in need of massive bailouts
  6. The US government will run out of money in less than 90-days and hit the debt ceiling once again

Marks points out an important thing to remember about the VIX… It doesn’t say what volatility will be, only what investors think volatility will be. And the crowd is almost always wrong.

We’re eight years into the current bull market. Stocks have been rising for eight straight years– the second-longest winning streak in history behind the S&P 500’s 417% gain between December 1990 and March 2000.

And investors seem to see nothing but clear skies ahead.

And their false sense of security is pushing them to take on greater amounts of risk.

For example, junk bonds today yield just 6%.

In other words, pitiful, low quality companies that few analysts expect them to even remain in business are able to borrow money at just 6%.

That’s insane.

We recently wrote about Netflix losing $2 billion over the past 12 months. Yet the company’s stock price continues soaring to all-time highs.

In May, Netflix issued more than a billion dollars in debt at a rate of just 3.625%.

Would you loan money to a company that loses $2 billion a year in return for 3.625% ?

The answer is probably no. Marks shares his thoughts on Netflix’s debt:

Is it prudent to lend money to a company that goes through it at such a prodigious rate? Will Amazon or Google be able to loosen Netflix’s hold on its customers? Is it wise to buy bonds based on a technology position that could be overtaken? Positive investor sentiment has taken the company’s equity value to $70 billion; what would happen to the bond price if worries about rising competition took a bite out of that one day? Should you take these risks to make less than 4% per year? In Oaktree’s view, this isn’t a solid debt investment; it’s an equity-linked digital content investment totally lacking in upside potential, and it’s not for us. The fact that deals like this can get done easily should tell you something about today’s market climate.

In addition to appetite for their bonds, the “FAANG” stocks – Facebook, Amazon, Apple, Netflix and Google – are priced for perfection.

Netflix trades for nearly 240 times earnings. Amazon’s price-to-earnings ratio is over 190.

The market believes these stocks have cemented their leadership positions and cannot be unseated. But the future is always uncertain.

And throughout history, plenty of “can’t lose” companies – like Kodak, Xerox, Yahoo, etc. have fallen from grace.

I’d encourage you to read Marks’ full memo here. It’s one of the longest he’s ever written.

And remember to be prudent today…

There’s a global glut of liquidity. Asset prices are sky high across the board.

Investors are happily taking large risks for low returns. And they’re as complacent as they’ve ever been.

This is the type of behavior that takes place closer to a market top than a market bottom.

So it’s OK to take some money off the table today. Yes, you may miss out on future returns.

But you can also be 100% certain that money will be safe when the markets turn… And you’ll have more cash to take advantage of any bargains.

To repeat Marks’ initial warning… It’s better to turn cautious too early than too late.

Do you have a Plan B?

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EHM's picture

I said the sky was falling in 05 and got laughed at for three years. It always lasts longer than you think.

Sliced into ribbons's picture

The question is when did you buy again?

EHM's picture

I didn't. Still in awe. Will sure buy the next crash though now that I understand how the game is played.

Clock Crasher's picture

What if you were being laughed at for four, five, six, seven years?

How many years of this behavior do you tolerate before capitulating?

not being sarcastic its a serious question.

Clock Crasher's picture

I never capitulated either.

I do not recommend that strategy. Wholly regret it. (doubting the rise in equities).

Turin Turambar's picture

I'm in the 7+ year category.  I've lost a fortune, both in shorts as well as missed opportunities.   I am very close to capitulating.  I would like to buy puts for third week of August, but there are so many experts now advising caution that I think we may see another epic short squeeze to new all-time highs, but what the heck do I know?  Absolutely ZERO based upon my 7 year historical record of picking prowess.  :-(

Clock Crasher's picture

I am right there with you. I'm starting year six.

The day my mining longs off set my previous vix losses (or as dampening as I can get) I'm cashing out 90% of what I've got and letting the other 10% ride and never investing in digital/stocks unless its a 1000% slam dunk.

Miners might not be in a bull market. Or they might not have started their bull market yet. My only justification is that looking at a stock like first majestic she had a six month rise jan-aug 16' followed by a 12 month decline/consolidation with no break out. six month uptrend followed by more than 50% decline from 16' peak twelve months later doesn't cut it for me.

But like I said in earlier threads,  I'm going down with the miners for better or worse.

I thought I was smart thinking that there was no way Obama was going to skate out of office after eight years of ZIRP without any consequences.

Wrong. Big time.


Arnold's picture

Be there, get swag.
Change the world.


inside the egg scrambler, pocket fisherman, please,
Are most of the consumers you know buying... what?
Groceries , transportation and home chachkies.

Selling: homes, equities, and accumulations.

SimmerDown's picture

I'm with you on the mining roller coaster. CDE down 40% since I bought. It's okay though, I successfully deluded myself into calling that investment my economic insurance policy. Along with the stacked Eagles.

I wlaked to the sidelines in 2016 and I'm gonna watch the game from there from now on.


slice's picture

Opportunity Cost = the difference between what you are doing and what you SHOULD be doing.

You pays your money and you takes your choice.

The dilemma never stops, does it?

EHM's picture

Not worried about what others think and not worried about missing out. Greed is bad for your well being. Principle eventually wins.

johngaltfla's picture

When you have the DJ Trans dropping 600 points in July and the world proclaiming this is the greatest bull market in history, somewhere the bullshit spreaders are working over time.

This will not end well and I refer again to 1987; the DJIA dropped 17.5% in one week. With current technology that could happen in less than an hour should the algos go ape shit in pre-market and overnight trading.

shizzledizzle's picture

They know better than to let a drop over 5% happen. All market transactions would be halted either by the plug being pulled or a "malfunction" long enough for the PPT to stop the bloodshed. 

Clock Crasher's picture

Europe will tapper, US indexes will rise or form a top for weeks or months initially then decline into the winter. Then the Fed will cut rates and QE4. We will recover new all time highs and gold will break through 1,400 on its long tortuous way to 2,000 and beyond.

There will be no crisis, collapse or reset.

Just more of the same for years and years and years.

Gold:Dow ratio will tighten (with silver out preforming) with the Dow well north of 20,000.

Why? because the only way to make debt payments is sequential rounds of devaluation.

Food producers will be subsidized to contain civil unreset. The priniting presses will be pinned at max RPM. Amazon and others will gain more and more market share as competition is priced out of the market.

Peacefulwarrior's picture

Until every retail investor not participating walks into the gas chamber.

True Contrarian's picture

Getting out early gives more time to mean average in on counter trades. You will thank yourself in the long run.

"Leave the top 10% to the other guy."

Clock Crasher's picture

Yeah, but this time its different.

Any counter trend move is going to start on a sunday night and be over monday morning.

There will be no averaging.

True Contrarian's picture

None is a bit of an absolutist stance. But each to his own. Seek and ye shall find.

khnum's picture

they will print to infinity till the day they dont print to infinity when they short the whole planet

Fundies's picture

I got cautious 10 years ago now. How cleverer am I ? Poor but very cleverer. 

coast1's picture

if you were cautious 10 years ago and bought gold, you would still be doing well

Clock Crasher's picture

How can the market crash when 90% of market participants are computer programs with lines of credit worth many billions?

Even if every human trader left standing went 100% short 0% long the dip would be bought intra day and print new all time highs the next day or week.

Think about it.

jamesmmu's picture
Expert Warns of Financial Meltdown. “The Whole System Will Be Wiped Out.”


SimmerDown's picture

I thought ZH headlines were at the top of the page.

FullStrike's picture

What will gold do in a crash? Gold equities? I'm thinking of selling my gold equities to shield against a massive sell off in the markets...

Clock Crasher's picture

There are 107 TRILLION dollars of entitlements coming online a little bit each day.

I would hold onto those monetary metal producer shares.

Worst case there is a high frequency raid to rob you blind of your shares and leave you as a captive witness as they 20, 50 and 100 bag as weak hands try to find a good trauma counselor.

ReturnOfDaMac's picture

Sadly, crash too, but with a delay.  Gotta to sell something to cover those margin calls ...

Hkan's picture

Deep state in control timing finance crash and war diversion.....

dark pools of soros's picture

This clown doesnt understand modern markets... Netflix takes a billion loan from guys that leverage the stock... they dont even care about that loan since they are getting huge returns on the stock then dump both to bagholding pensions or whoever

Clock Crasher's picture

exactly. And as for stock buy backs.. if that debt gets painful to repay there will be restructring in a manner that does not effect the share price by more than 5%.


Clock Crasher's picture

I would not turn bearish until a high level government employee is tried in a court of law, convicted of crimes by a jury, and sentenced to prison with no parole.

Only then would I get bearish because that would indicate a faint but possible scenario of some of the bankers going to prison. If any member of the tribe were to be subjected to pain they would retaliate by resetting the markets.

absent that I don't see any calamity in the stock markets on the horizon. This fucker is on LOCK-DOWN.

Clock Crasher's picture

Dollar down 6 months in a row

Dow up 6 months in a row


Turin Turambar's picture

Turning cautious too soon is a surefire way to go broke and lose it all.  Ask me how I know.  :-(


GunnerySgtHartman's picture

Nobody ever lost money by locking in profits and taking that money off the table.

SantaClaws's picture

Why not something more extrinsic to the markets?

Another event like 9/11 could get the job done very quickly.  Martial law, digital cash only, Cyprus-like bank and equity account haircuts, lots of patriotic music on radio and television.  Open borders and full retroactive amnesty for those willing to fight for the USA.

What might be a possible scenario?  Since 9/11, if anything, technology has become more sophisticated, cheaper, and readily available to bad actors.  An angry but very wealthy Mexican cartel firing off an EMP?  An Israeli sub off Washington (some say this happened on 9/11) doing the same?  Dirty bombs in subways?  Anything could happen in minutes.  Hard to get out of your equity and other positions in when there's so little time.

soyungato's picture

The reasons given are just ridiculous

North Korea is threatening to nuke the US   -  So what ?

Donald Trump is firing his entire cabinet   -  So what ? 

The Federal Reserve has dropped interest rates to record lows and drowned the world in trillions of dollars of cash   -    That is good news. Where do you put your incresingly worthless money ? Why. into a business that is producing money.

Debt levels are at record highs - and it will go higher, making the dollar inncreasingly worhtless. More incentive to hide your wealth in stocks and gold.

Entire banking systems, especially in Europe, are in need of massive bailouts - more printing needed. You have a better idea how to get out of debt ?

The US government will run out of money in less than 90-days and hit the debt ceiling once again - and they either print some more or the US go belly up. How will you bet ?

illuminatus's picture

Too bad I was cautious 5 years too early! Damn!!

nagan's picture

Markets can stay irrational longer than you can stay solvent..

dont try to be a hero and short.. if you must just goto cash...