Markets cycle. Here’s a video from my Fox Business TV show back in July 2008, in which I outline that:

“I used to poke fun all the time at the permabears for not being able to recognize the boom times for what they were, say from 2003 to 2007. Oil, real estate, unemployment, inflation, the dollar, geopolitics were always their reasons for pending Armageddon. Now though, here in 2008, oil, real estate, unemployment, inflation, the dollar and geopolitics really are as bad as the permabears wished they used to be.” 

I could rewrite that these days to say:

“I used to poke fun all the time at the permabears for not being able to recognize the boom times for what they were, say from 2010 to 2015. Peak oil, unemployment, valuations, currency wars, and China were always their reasons for pending Armageddon. Now though, here in 2016, peak oil is proven silly, deflation is real, currency wars are real and China’s a concern.” 

Let’s hit on each of these points:

Peak Oil, Commodities and employment

Peak oil, the theory that the world was about to run out of energy sources and that higher energy prices were destiny, doesn’t have many advocates these days. But while lower energy and commodity prices are good for consumers and tech companies and for shippers and so many other industries that use lots of energy and commodities, the collapse of this sector and it’s impact on the employment can’t be dismissed.

Employment numbers have continued to strengthen, but the collapse of the energy and commodity sectors and the tens of billions of dollars in debt that has to be restructured in coming quarters will probably bring escalating unemployment numbers with it. Main Street and consumer-oriented businesses will continue to hire more this year but maybe not quite enough to offset some of the pain in energy and commodity employment numbers.

I was managing the wholesale division of a start-up telecom company in 2001, and saw the devastating domino effect of rolling sector bankruptcies as dozens of publicly traded and privately funded telecom companies collapsed in value under the strain of overbuilt facilities.

Sounds a bit like the energy sector these days, doesn’t it? The good news is that some telecom supply-chain companies including Cisco (CSCO) were terrific buys when all was said and done in 2003 and have had huge returns, growth and success in the last decade. One of the primary differentiators among all those telecom stocks that went to $0 — including companies that were once worth tens of billions of dollars, like Nortel — was balance sheet strength. Is KMI the energy sector’s Nortel?

The great telecom crash started in early 2000 and finished in 2003. But even then it took several more years before the industry had settled and fully digested the bankruptcies, debt, overcapacity and competition in the sector. So on that timeline, we’re probably just about halfway through the energy crash and still several years away from stronger fundamentals in the energy sector. You know I’ve just completely avoided the energy sector aside from our First Solar winner. You don’t need to nail the bottom in that cycle, which could very well take several more years to play out.

Peak Smartphone

Peak smartphone growth, on the other hand, is quite real is probably one of the other major reasons for being more cautious too. We’ve ridden the App Revolution and the ensuing App Bubble very well in our stock portfolio, owning some of the best plays on it, including Facebook, Apple, Sandisk, Google, Amazon and others to doubles or triples over the last five years. Back in 2010, I used to write articles that explained how huge the growth for smartphones and apps would be, such as in this 2010 column called “How to invest today for the app bubble arriving tomorrow:

“You know that even as the early adopters have been using apps and smartphones for the last few years, it’s just now starting to become a mainstream phenomenon. This year some 250 million people will buy a smartphone, up from 150 million last year and on its way to more than a billion people in less than a decade from now. When was the last time you heard growth statistics for a marketplace that blew your mind like that?”

There are now more than a billion smartphones sold every year, and there have been more than three billion smartphones sold total since the iPhone hit in 2007. So with a billion smartphones now being sold annually, basically every one you know has a smartphone, and they carry it with them everywhere.

Smartphone growth has cooled from 70% per year back in 2011 to about 5-10% for 2016, or just few percentage points faster than the broader US economy.

I also used to draw parallels between the App Revolution and the earlier Dot Com/Internet Revolution from 1996-2000. In that same column about “How to invest today for the app bubble arriving tomorrow” published in early 2010, I wrote:

“Hopefully you were one of those people who got in that second phase, after the early adopters had worked through much of the bugs and the mainstream masses were just starting to get their first Internet accounts back in 1996/1997, right?   And hopefully you’re one of those people figuring out ways to invest in the app bubble now that the early adopters have worked through much of the bugs and the mainstream masses are just starting to get their first apps … right now in 2010, baby!“

So, what happened when PC/Internet growth stalled out in 2000 and the market had to process hundreds of billions of dollars in debt? And what happened when the real estate/financial crisis hit in 2008?

Stock markets crashed 50-70%.

I’ve long reminded people to be free-thinking, including making sure that you never lock yourself into being either a perma-bull or a perma-bear. A permabull is a trader / investor / pundit who is always bullish on the market. And a permabear is a trader / investor / pundit who is always bearish on the market. I’m not outright bearish like I was back in that video from July 2008 just as the stock markets were topping out before a big stock market crash. But I’m far from being outright bullish right now. And our portfolio positioning reflects that, as I’ve already halved the number of longs in the portfolio, trimmed our other remaining existing longs and added new short positions over the last year, but I remain net long.

Valuations

The other problem with stocks in general right now is what I’ve mentioned a few times throughout the last year — valuation levels throughout the stock market in individual names are still far from being full of the kind of screaming buys I could find in 2010-2012 when I was being so aggressively long as I’d repeatedly noted back then.

Currency Wars

Perhaps the single biggest issue in this current set-up is the impact of the ongoing strong dollar and the correlating crash in the commodity-based economies of the world and their respective currencies. It’s not just the trillion or so dollars that US-based energy/commodity companies have on their balance sheets, but from Australia to Russia, the energy/commodity-based economies of the world are seizing up and seeing their currencies continue to fall.

To be sure, I’m not predicting a crash right here right now. I’m simply looking back at the last couple cycles in the economy and the stock markets along with the current set-up and analyzing it for us here. And anyway as I just said, I’ve already halved the number of longs in the portfolio, trimmed our other remaining existing longs and added new short positions over the last year.

Let’s make a couple trades here and raise yet more cash again today:

I’m going to let go of our Silicon Motion SIMO stock today. We entered this position originally around $25 a share and have taken a few profits on it when it was higher than today’s quote. I’m going to go ahead and take profits on the remainder of this position as I remove this name from the portfolio today and leave the proceeds in cash.

I’m going to sell all of my Synaptics today. This stock looks quite cheap on this year’s earnings estimates but as I noted in last week’s Latest Position Round Up: “Smartphone and tablet supplier stocks are struggling mightily. Careful here.” The company’s balance sheet has weakened over the last couple quarters as they have spent tens of millions of dollars buying back stock. I originally entered this position around these levels back in December 2014 and have taken some profits when it spiked at various times last year. Most recently though, I’d nibbled on this stock in the high $70s. I’m selling all of it today.

I’d rather own Qualcomm than these two names, as Qualcomm is a much bigger, more stable and established company in the smartphone/tablet marketplace and it’s got the added kicker of being so well positioned for the just burgeoning Car Tech Revolution marketplace. I’ve already bought 2 one-third-sized tranches in Qualcomm and am looking to add another tranche at some point.

One of the reasons you guys subscriber to Trading With Cody is because I help remind you that we don’t have to be aggressive in our trading styles all the time. There are times to be opportunistic, times to be aggressively long, times to be cautious or even outright short. There are almost always times when you might want to be a bit more aggressive in one individual name or another as opportunities arise. I think Apple, F5, Sony and Qualcomm are compelling buying opportunities at their current levels and you’ve seen me scale into more of each of them recently. But overall, I remain cautious about the markets and valuations and stocks for now.