Steady as she goes today. Don’t rush into or out of anything. Scale in. Scale out. 1/5 or so at a time. Broken record? Nah…
For much of the last five years, I’ve felt a bit like a broken record as I predicted and prepared for what I said would be the “Biggest Stock Market Bubble in History.” Most of my own focus has been on tech and the “App Revolution” specifically.
Since I first coined those two phrases in quotes there, the Nasdaq has rallied more than 130%. Apple’s up 200% since I wrote, “Why so confident about Apple’s positioning for the next decade? Apps, apps, apps. We are changing how we interact with the Internet as we move from browser-based/keyboard-based computing, to app-based/touch screen-based computing.” Google is up 250% since I wrote, “Google’s even cheap, trading at about a 12x earnings (not sales) to enterprise valuation. Those seem like pretty good odds to me. Stick with Google.”
Don’t get me wrong, I’ve not avoided mistakes during this bull run (see Riverbed and Ivensense for example).
Anyway, I’m starting to feel a bit like a broken record again now, as I remind you that you should be trimming down your long positions, raising some cash and getting to be a little bit more defensive now while markets are once again hitting all-time highs.
In my own personal portfolio, I’ve reduced the number of long positions I had in 2010 by more than half. I still own big chunks of my long-held favorites like Apple, Facebook and Google, along with some of my more recently built positions in Ambarella and Sony (likewise, I’ve trimmed down most of my remaining long positions too). The point is that I’ve slowly but surely become more defensive throughout this year whenever markets have hit new highs.
Do you remember how you felt in 2008, at the height of the financial crisis? Try hard and I bet even the most bearish and conservative amongst you reading this were scared and in pain at the bottom. While I’m not preparing or expecting another crash like we had in 2008 anytime soon, I am plenty aware that such a crash could come.
What would cause the next crash and when? Near-term potential catalysts for a new stock market crash would include:
* A drop in oil to the $50s or lower. Just another $20 drop in oil would cause tremendous pain in the entire energy sector and would quickly spread to the financial sector levered to higher prices.
* A spike in gold to $2000 an ounce. A spike in gold prices would cause major pain for the Treasury, Fed and too big to fail banks who have a lot bet on gold not spiking anytime soon. The financial sector would be forced them to scramble to cover the derivatives and to meet the paper promised demand for physical gold.
* Food prices and inflation take off. Deflation is a silly concept when applied to food and clothes for the vast majority of Americans. Beef prices and chicken prices and vegetable prices and candy prices and coffee prices and so on are all up big at the grocery store. There’s no way that Burger King can be making profits on selling 10 pieces of chicken nuggets (0.4 pounds) for $1.49 when the Bureau of Labor itself says that the same kind of boneless chicken that’s supposedly going into those BK nuggets would cost you $3.50 per pound to buy raw at the grocery store. That’d be $1.40 for the 175 grams of chicken you’d use to make your own home made nuggets. Food inflation is concerning because it’s driving the fast-food joints and major food suppliers to substitute ever cheaper ingredients. Healthy food is expensive unless you grew it yourself. Anyway, food inflation should be on your radar right now, especially since it’s so quickly dismissed as a concern by the same pundits, bureaucrats and reporters who dismissed real estate’s coming crash before 2008 happened.
* Currency wars. Seems that the governments around the developed world have decided that a valuable currency is the last thing they want. For those of us who work for a living and are paid in dollars, we’d prefer those dollars always be as valuable as possible. But giant corporations who depend on exports and giant banks who get to borrow free taxpayer dollars at 0% and gamble them in the markets, make more money when the currency loses value. With governments around the world being funded by corporations and giant banks, you can expect more currency trashing around the world. The dollar might win vs the Euro and the Yen and the Yuan, but that doesn’t mean those currency wars aren’t sapping real prosperity and savings. And currency wars create dislocations and unsustainable cycles that then catalyze real crashes in markets and economies.
In 2007 and early 2008, I warned everybody about the real estate securities crash that would take down the largest banks and many billionaires in its wake. I don’t see the same crash dynamic built up right now. In fact, I continue to bet on higher prices in the stocks I own and in my overall general exposure right now. But I don’t want to be complacent, and neither should you.
Heck, remember the Ebola lows (remember those http://www.scutify.com/scuttle…) just a few weeks ago? Didn’t take long to get back to all-time highs. If you were scared when the DJIA broke below 16,000 last month, you’re too long.
Be objective. Be vigilant. Trim down some while you can, not when you have to. I know something about crashes.