Are the markets about to crash?

Here’s the first half of this week’s Trading With Cody Conference Call Q&A.

Hello everybody and welcome to another Trading With Cody conference call Q&A. I am Cody Willard and I am here and ready to rock and roll here with you guys.

I think the big news in the markets and in the headlines business-wise today is the 400-point rally in the Dow Jones Industrial Average ($DJIA) over the last two days and the fact that the Nasdaq ($COMP) is at another all-time high yet again, breaking through the 6000 barrier. And the S&P 500 ($SPX) within half a percent of its all-time high as I am talking, which it set just recently anyway.

Saying Nasdaq 6000 makes me a little woozy. In large part because I remember the dot com bubble. I remember when the Nasdaq hit 5000 in March 2000 and it was crazy. The stock market every day seemed to go up 1- 2- 3%. And you would have Pets.com go up 38% in one day because some small brokerage firm that nobody ever heard of initiated coverage on it with a $400 price target.

That euphoria back then, as I remember it at least, seemed much bigger than what we are experiencing right now. You guys know that I have spent the last 6-8 years here predicting that we will head into what I have been calling the “biggest bubble of all time”. The Bubble Blowing Bull Market that we have been living in for the last 6 to 8 years since we came out of the financial crisis in 2009-2010 has propelled us from the $COMP at the bottom in 2009 at 1200-1300. That was down from 5000 eight years earlier.

You look at it today and we have rallied now and not just to 5000, but right on past to 6000. But it’s not entirely as reminiscent of that euphoria and bubble atmosphere at the top in March 2000.

That said, I will say looking at that stock market and feeling this move up in the last 4-5 months since the election, it feels almost “blow of toppish”.

A lot of times when stock markets finished a bubble, like they did in the year 2000, from January to March 2000, the $COMP just went straight through the roof. Even faster than it is today and the last four months. Now that was a blow off top. The last move up was just insane. Everybody who had been short, every bear ending up puking and covering and that is part of what took it to the all-time highs and made that true spike in that market happen like it did in January 2000 to March 2000.

That was the top of course and you had a drop immediately down 75-80% in the next two years in the $COMP…in the next  18 months to October 2002 where it bottomed. Which happened, by the way, to be when I launched my technology hedge fund. Then, of course, you re-tested that bottom in March 2008. And, you pull up the chart today and again $COMP has gone from 1300 to 6000, in a straight line almost. A few pullbacks here and there. We bought all those pullbacks along the way. You guys have been with me. We’ve ridden this Bubble Blowing Bull Market and I am worried that we are getting a little bit of a bubble, a little blow of top kind of action right now. But I can’t say I am ready to call a top or get bearish.

The catalyst for the actual fundamentals to collapse along with the stock market or soon thereafter the stock market had crashed in March 2000 was that the funding for all of those dot coms dried up and there wasn’t a sustainable business model at most of those companies. Whether it was the fiber optic companies that were selling the infrastructure components to Cisco whose revenues and earnings collapsed because it wasn’t a self-sustaining ecosystem inside of that industry at that point. Sixteen years later, we have lived out that reality and Amazon proved just how brilliant everyone was for seeing the future that was someday going to be here. It is a matter of timing.

In 2008 to 2009, the big crisis was the financial crisis that we all still wear on our sleeves all the time and have battle scars from. That crisis itself has been a part of the wall of worry. The bricks and wall of worry that we have been able to climb in the Bubble Blowing Bull Market.

Look, don’t chase stocks right now. Especially after 400-point rally in two days and catalysts being the election in France and these proposed tax budgets from Trump that are going to be another huge handout to giant corporations, including the ones that we have been investing in all of these years because they have been benefiting over so many handouts over the last 25-30 years that I have been investing. It is still status quo.

It is still steady as she goes. Let’s stay on our horses. I am certainly not adding more fire power to my longs right now. I’d love to see a 10% pullback frankly at this point. Forget a 5% pullback. I’d really love to see some meaningful fear build up to get us the next leg higher, if we are going to go higher, while the fundamentals are good. This relentless climb is making me nauseous. That’s today’s opening notes. Open to questions now.

Q. Hi, Cody. I’m a new subscriber. I’ve been around a little bit, all the way back to 1980 is when I entered adulthood and the market. Historically, I remember the crash of ’87, I remember the dot com and of course, 20008 and other things. Is there anything else that you see this is more like?

A. Welcome and thank you for subscribing and your question. To answer your question, not out of those three. The ’87 crash was before my time on Wall Street, I was 15 years-old and was in a stock picking contest in high school at the time. I certainly didn’t get battle scars from that. Why did we crash in ’87, do you mind reminding us?

Subscriber response: The only similarity I would make is that it was crazy euphoric, and the markets just finally exhausted themselves and crashed in that one day. But, I can’t remember the catalyst or the pin prick that popped it.

A. The reason I sort of ask that is also because our opinions color the facts. When you hear about the reason that World War I kicked off and it’s an assassination of some guys that no one ever heard of until that happened and you wonder how accurate that interpretation can possibly be. So we look back from today’s perspective and we repeat what is the Wikipedia version of what caused a world war.

So what caused the crash in ’87, we can also summarize in two sentences, like I just did the dot com explanation of what caused that crisis and the funding drying up and the non-self-sustaining business models or the real estate downturn across the United States in 2006 and 2007 eventually catalyzed the 2008 crash. There is a quick 30 second version explaining it all, right?

Of course, all this stuff is so much bigger. The societal impacts and catalysts themselves. The stock market catalysts. The economic catalysts. All that stuff gets washed away with time and we look back we can just summarize it and say here is where we are today and it all turned okay. I’m sure it didn’t feel like that in ’87. It certainly didn’t feel like that in October 2002 when I was launching my hedge fund on a belief it would be okay and stock markets and technology fundamentals were hopefully going to bottom soon. I had no idea that ten days after I launched my hedge fund that the stock market would actually bottom. In some ways, that wasn’t good for me and my investors because, as you guys know, it is not like I plowed all the money in in the first ten days. I was maybe 20-30% invested by the time the market bottomed and really started a sustainable rise.

Of course, even more recently, you remember 18 months ago, the $DJIA was down 1500 points one morning. I was in the hospital with my littlest daughter, meeting a cranial surgeon that we didn’t end up needing. But I remember the crash that morning and the emotions going on. “Is it going to be okay?” I wrote about it and said “this sell-off today isn’t a big deal….buy”. I bought call options that morning from the hospital in the waiting room for the appointment.

It’s easy to look back and explain. It’s easy to look back and either regret you didn’t do more, you didn’t have a perfect timing or to feel like a genius because of all the gains you’ve had. It’s not easy in the moment.

Leaning back to your question, then, what do I see now that is similar to past tops? Yes, maybe euphoria. Maybe ’87 is a good analogy because it was just sort of a pullback from euphoria and a mini crash. The $DJIA lost 22% in one day. It wasn’t a long time before it was able to return. Looking a long-term chart, you can hardly find that down turn anymore. It was back in there within a year or two.

However, fundamentally, economically, my spider senses aren’t alarmed like they were back in 2007 or 2000. The euphoria is there in the market, but the fundamentals for a crash, I am always worried. There is a chance there is a Black Swan that I am not on top of that’s hitting right now, but my sense is that these general trends in the Bubble Blowing Bull Market, the technology fundamentals and the growth of apps, and the cloud, and robotics and driverless cars and semiconductors that make all that stuff happen — it’s still in a relatively healthy part of the cycle. It certainly isn’t as great of a time to buy as 2010 and 2012 and 2014. Partly just because prices are up so much. I am wanting to find that next down turn and the catalyst for it, but I am not sensing it yet.

Subscriber response: The reason I ask that question and for bringing it up is that I am a business guy, started a lot of companies, and I haven’t seen this much unapologetic pro-business since the 1980’s and so I am just wondering if we are kind of underestimating just how long and far this could just keep rallying and go to crazy highs that were unthinkable just because everything is almost like this big sigh of relief that everything is getting pro-business now and lower taxes and un-endless good news maybe coming out, etc., etc., etc.

A. I want to just clarify. I totally disagree that what is happening is “pro-business”. It’s not pro-business. It is pro-giant corporation. Let’s not confuse the two concepts. I am a business man in a small business and I am paying 30-40% income taxes and $GE is paying 0%, $CSCO is paying 3% and $AAPL is paying 2%. And now Trump and his Republican Democrat colleagues say they are going to give these giant corporations an even bigger tax cut. They don’t even mention the small business. I don’t think it is pro-business at all, but it is certainly pro-giant corporation. And, therefore, probably pro-stock market, too. I do agree with that concept that it is pro-stock market.

That being said, I have always argued that if we cut out all forms of corporate welfare, including bank subsidies, 0% tax rates, bail-outs, quantitative easing, loopholes, overseas hoarding of cash…if you were to just simply say “I don’t care where the money is coming from or what it is, you are paying 30% (or 20% or whatever) on your earnings across the board” for very corporation, every business. If you were to do that, you would instantly balance the budget, and you would have an explosion of prosperity on main street, especially. And, I think it would, thereby, continue to have a huge boom in the stock market and in prosperity for the society at large in the United States.

That is not what we are doing, though. What we are doing right now is continuing to prop up artificially these banks and these corporations.

Going back to you question and trying to tie this all together, no matter whether we are talking about equalizing the tax rate to truly be pro-business or whether we are talking about allowing giant corporations to continue to profiteer and underpay relative to what small businesses are… Yes, man, there is so much more prosperity in this world being generated by apps and spreadsheets and communications and people starting businesses and being able to make more money in their businesses and pay less salaries and pay less infrastructure costs and be able to be more efficient. That stuff is being unleashed constantly and its creating trillions of dollars of value, wealth and prosperity across the globe every year. The problem is that we suck all the prosperity and efficiencies out of the economy through the government and the welfare programs for corporations and through corruption (and also people can argue against benefits for poor people too of course and against government providing help for people who need cancer treatments, etc. though such benefits and subsidies are a tiny fraction of what corporations and banks get every year).

Anyway, If you sucked all that out, there is truly trillions of dollars of prosperity that is right there that would be more effectively invested. More effectively used and spent. People in the Hamptons wouldn’t be tearing down $10 million mansions that were built fifteen years ago because they need a $50 million mansion because he is a welfare executive at Goldman Sachs or JP Morgan.

We have mis-allocated our money to that guy who is now doing that with his money instead of it being spent on cancer research or on some person being able to be hired for $12/hour and not have to go on welfare. That reality is there and if we could allow our society and the individuals in our society to grasp on to that real prosperity and not mis-allocate all those funds through the tax code and the subsidies and all the protections and stuff that we talk about all the time — man, I can’t imagine how wonderful are society could end up and how much more prosperous it would be for most everybody in the society. I suppose we should consider that maybe it’s not everybody as people who are drug addicts and who use every dime that can ever get on their addiction and/or people who are self-destructive… There are certainly people who are going to be self-destructive in elements society and so let’s not pretend there is going to be utopia.

But there is certainly more prosperity out there if we wouldn’t misallocate it all and what is being enabled by the tech revolution every day. Don’t under estimate it. Don’t underestimate how big the stock market bubble could go. I agree with you on that concept, too.