Today is the greatest day I’ve ever known
Can’t live for tomorrow, tomorrow’s much too long
I’ll burn my eyes out
Before I get out – Smashing Pumpkins “Today”
The broader stock markets have been hitting new all-time highs all year. Corporate profits and corporate profit margins have been hitting all-time highs for several years. Confidence in the steadiness of the bull market and strong economic cycle in turn is leading to more M&A activity. High paying corporate jobs and investment in infrastructure and long-term technology bets are actually starting to catch traction too.
We’ve been properly positioned with lots of longs that have gone up huge and having avoided falling into the bear trap as so many hedge fund managers and traders have done for this economic cycle and market phase.
It’s been historic how steady this market has been as this part of the economic cycle upswing has built upon itself since the bottom in 2008. And we don’t even get temporary panicky sell-offs over geopolitical crises like we did in the last few years. The escalation of war and terror in Iraq itself is sickening and my prayers go out to everybody there. And as a market observer and trader, it’s rather surprising that the stock markets have hardly hiccuped as the violence and uprisings and potential for more anarchy and destruction in Iraq and its surrounding countries escalates.
In the last week, we’ve had several of our long positions spike and go crazy to the upside. Yelp was up 15% on Friday and is up nearly 50% since I added it to my portfolio just a few short weeks ago. RocketFuel FUEL and FireEye FEYE are up big again today and are up huge since we added them at the same time as Yelp a few weeks ago. Intel told Wall Street that business PC demand has picked up along with the aforementioned stronger economic cycle and it added more than $15 billion in market cap as it spiked 15% last week. Ciena popped 15% in the last couple weeks after reporting strong earnings too.
Sandisk SNDK announces a billion dollar acquisition today and the stock goes up to yet new all-time highs again for it. (I’ve owned $SNDK for years and now that Sandisk is acquiring Fusion-IO FIO for $11 per share cash, looks like I’ll own $FIO again. $SNDK‘s got more than $5BB net cash on the balance sheet before this buy. Smart buy and smart use of shareholder money. Vertical integration is often profitable.) In “normal markets” you often see the acquiring company sell-off when it buys another company, but just today, I heard surprise from market pundits that Level 3 actually did sell-off after announcing a $7 billion deal to buy Time Warner Telecom. Level 3’s own market cap is only $10 billion, making the deal worth more than what Level 3 was worth just a few months ago before the LVLT stock doubled.
Apple’s added nearly $100 billion to its own market cap so far this year and is back to within 7% of its all-time high from a couple years ago, making the company worth more than half a trillion dollars again.
Meanwhile, you know that the Federal Reserve’s 0% interest rates and QE and other “emergency liquidity measures” are still on full-blast! With corporate profits, banking profits, corporate cash balances and stock prices at all-time highs and with the cost of capital for corporations at all-time lows, what do you expect is going to happen to this market in the near-term? What about over the mid/long-term when the full cost and ramifications and unintended consequences of all these trillions of dollars and years worth of “emergency liquidity measures” come home to roost?
So what are we supposed to do now? Step back and remember how horrible it felt to lose all that money in 2008. Remember how scared you where in 2010 when the EU financial crises and Greek bankruptcy and Cyprus deposit theft were playing out in the headlines and the markets were tanking 10-20% in the blink of an eye.
And as you remember that, make sure that you’re not so long that you’d be hurt if the markets were to tank, sell-off or just pullback for a while. My own playbook says to trim back a bit when stocks go vertical and that is indeed what I’m doing today.
I’m going to trim about 1/5 or so of my positions in: YELP, FEYE, FUEL, INTC and SNDK today. I’m also selling half of my remaining $AAPL call options which leaves me with about 1/4 of my original number of call options which are up huge since we bought them.
Sell when you can, not when you have to.