Q. Is there any particular reason for the market dip right now? Are there any stocks which are on your latest positions list that you would recommend buying on these dips?
A. Yes there are plenty of reasons for the market to tank right now, just as there always are. Sometimes those reasons are temporary, fleeting or silly and that makes such market tankings great buying opportunity. Sometimes you can see a real market crash forming as I did back in 2007 when I closed my hedge fund as real estate’s fundamentals were collapsing and about to take down the entire stock market and financial sector, as I took at job as a TV News Anchor. Right now, I am worried that the “Great Corporate Debt Bubble, Buyback Binge and Dividend Delirium” have peaked. Not time to panic quite yet, but time to really dig in and look at the reality of this potential Black Swan for the market.
Q. You said in you alert today: “And to be sure, the Great Corporate Debt Bubble is popping right now, at least in the energy sector.” You reiterated the likelihood that there could be additional crashes in our lifetimes; and you cited Robert Marcin part of whose comment on Scutify was: “…its real and big and not an issue until its (sic) an issue. and then its (sic) the only issue. Timing of course is always problematic! (1) What additional warning signs would you look for that would suggest such a crisis is more imminent, not necessarily just in the energy sector? (2) Can you suggest some relatively cheap way to get WAY out in front of this? When it becomes “the only issue” it may be too late to do much.
A. Your questions about this risk from a popping “Great Corporate Debt Bubble” are very good and I’m working on the answers right now. I’ve spent the last five years since I came back to trading and investing telling people that we should be positioned for much higher stock prices and that the bears and economic/geopolitical risks were negligible. As we head into 2016, I’m not so sure that’s the case any more. It’s good for me to step back and question everything and dig into a potential clear catalyst for downside risk before it’s too late and before the rest of the world/news/traders/investors are panicking about it, if they do eventually panic about it. Most likely tell that it’s about to get really bad will be when there are more stocks of companies that are heavily indebted in sectors other than just energy that have crashed 50-90%.
- Follow up Q: Forgive me but your statement “…more stocks of companies that are heavily indebted in sectors other than just energy that have crashed 50-90%.” doesn’t seem too helpful. Maybe the emphasis is unclear. When we can see that many stocks having fallen that far, isn’t it likely to be too late for action? Does the “that have crashed 50-90% refer only to the energy sector companies that have already fallen?
- A: When the Great Corporate Debt Bubble starts to pop for real, any company that has 2x or more debt than cash on the balance sheet, especially companies that have levered up their balance sheets to do huge stock buybacks are going to crash 50-90% and then the banking sector will likely be in trouble too and then the markets will sell off and so on.
- Follow up Q: Is there some aggregate measure where we can keep an eye on that? As noted before: it’s real and big and not an issue until it’s an issue. and then it’s the only issue. I tend to lose sight of these kinds of things, and then when it becomes “the only issue” I feel like a deer in the headlights, i.e., incapable of action.
- A: My hope is that you and I can together navigate the popping of the Great Corporate Debt Bubble when it happens. No easy aggregate measure to keep an eye on…just thousands of stocks and the trends and debts and economies they carry.
Q. Re energy: maybe an obvious, and perhaps already asked/answered question: with your gloomy look at the sector, and prediction that they most likely will face further bankruptcies (we know some already have happened) are there any supremely likely candidates for that (based on balance sheets) that you might point us towards for shorting? You’ve said something to the effect that this is a “cyclical” segment and thus you’re not trying to getin at these low prices, but you seem so sure about further bad news. Nothing here to play on the downside?
A. I wish I’d had the guts to go all out short in the energy, oil, MLPs, pipeline, transport stocks at any point in the last year! I do think any energy-related stock carrying more than twice as much debt as cash on their balance sheet are at risk of going to $0 in the next year or two ala $MHR already. But I wouldn’t want to be very aggressive shorting energy at this point as there will certainly be some snapback temporary spikes in those stocks as they go to zero. $LINE, $EMES, $KMI, $FCX are all in trouble with their balance sheets for example, but I wouldn’t short any of them as each of those stocks are already down 70-95% in the last couple years.
Q. Is it possible we would test August low again?
A. Sure it’s possible we test the August lows again. Not sure it’s terribly likely in the next few months, but I am doing a full work up on how the Great Corporate Debt Bubble could be starting to pop with energy’s collapse and creeping interest rates, and when Corporate Debt crashes, it’d likely take the stock market 30-50% lower. As always, it’s as much of a question about when and not if, as I always say that I fully expect we’ll see at least a couple or more market crashes of 50% or more in my lifetime over the next forty years.
Q. I want to be a better investor and psychology is important. How do you avoid chasing pennies. For example, when Goog was trading around $510, I thought if it dips below $500 I will buy… Needless to say I dont own any! I do this more than I should. How to change my pattern?
A. This is why I suggest doing your buying and selling in tranches, so that you don’t end up with all or nothing on a stock like $GOOG when it was near $500. I’d mentioned several times back when it was at that level that I thought $GOOG was a great buy and I did add a tranche of common stock and some call options when it would drop near $500. But I didn’t try to catch an exact bottom. Instead, as I wanted to own more GOOG near those levels, I added a 1/5th-sized position in a tranche buy at like $510 and be ready to add another 1/5th-sized tranche if it did get below $500 too.
Q. I don’t have any gold exposure. Can you recommend an equity to gain exposure? I was thinking GG, pays a dividend and is one of the better managed miners. Thoughts?
A. I don’t like any of the gold miners while $GOLD is down here below $1200. If gold stays down below $1200 or $1300 for the next couple years, most of the publicly-traded gold mining stocks will be in as much trouble as $KMI, $CHK and others in the energy sector as oil has stayed below $50 for an extended period of time now. Best way to invest in gold is to just buy some gold coins from APMEX on eBay or from a local gold dealer you’ve gotten to know and trust.
Q. Any thoughts on $MU, this new 3D xpoint chip seems interesting. Stock near 52 week lows. Thanks so much!
A. Micron has $6 billion in debt to go along with the $6 billion in cash it has and that’s not a strong enough balance sheet for me to get excited about the stock. It’s cheap if the company can deliver on the $2.25 earnings estimate for next year, but the revenue growth was negative 10% this year and I’m not likely to buy this stock given that balance sheet and questionable ability to meet forward growth estimates.
Q. Given any more thought to our perpetual flagging friend, BKS and its spinoff? I believe you said you’d take another look.
A. $BKS was a multi-billion dollar market cap company when we shorted it. It’s now valued at $700 million and they have no major debt but not a lot of cash. I’m not going to short it again here.
Q. I speculate there are some creditors/banks that are highly leveraged to some of the troubled energy sector companies that might be facing trouble now or potentially themselves as the commodity crunch continues? Have you considered or would you consider shorting some of those creditors as a viable trade option? Perhaps there pain is not as evident t this time as the troubled companies they finance.
A. I was just thinking about trying to find the most exposed lenders to the energy sector and shorting a basket of them. If you find a few banks or finance-related companies who have serious exposure to energy, I’d think you probably can catch some big gains on shorting them.
Q. Emailed question: How about a stock pick to hold for the next twenty years? Reinvest any dividends and hold for a long time. Looking for the next Nike!
A. I actually won a New Mexico state stock picking contest back in 8th grade as I put every dollar I had into Air Jordan…er, Nike $NKE. Michael was a rookie and nobody had any idea how great he would be, but I’d written him a letter when I was in sixth grade and he was a freshman at UNC proclaiming that he was already my idol from watching him on ESPN. He blew up the NBA that first season and Nike paid his fines for wearing those ugly red and black Air Jordan 1’s that didn’t meet league code. And $NKE doubled by the end of the year and I won the entire stock contest. If I’d actually taken the $95 I spent on my own pair of those ugly red and black AJ1’s and bought $NKE stock instead, it would today be worth $30,000. Can you believe that? I’d like to find another $NKE like I did buying $GOOG, $FB, $AAPL and others early on in my career. As for the “next Nike/Google/Facebook/Apple” I work on those ideas every day and continually send you alerts and analysis about that work. I don’t have just one stock to feature, but I do think some of the names in my portfolio right now will have some 5, 10 or even 100 baggers over the next twenty to thirty years as some of those names already have been for me.
Post script: Those old red and black AJ1s I spent $95 on in 1984 when I was in 8th grade and cleaning cages and being a kennel boy at my dad’s vet clinic for like $3 per hour…two days after the the season ended, I was wearing them on my four wheeler and promptly slid it off a 20-foot cliff into a two-foot deep stream and the AJ1s were never the same again. I guess I should have bought the Nike stock instead, as it has lasted better than that.
Not my actual pair, but you get the point. Nike stock is shinier.