Cody Kiss & Tell: Bailouts, Fed playbook, market direction & more

Q. Cody, is there any chance for banks or any too-big-to-fail corporations defaulting on oil loans and begging government for bailout ?

A. I was just talking about this idea when I had a drink with John Carney from the WSJ and also when I had coffee with Todd Harrison from Minyanville in NYC this week — what I told them is that I expect the banks and the Fed learned from the 2008 bailouts and the reactions they got to it and aren’t going to do it the same way this time. Rather, this time, as the Great Corporate Debt Bubble is popping in the energy and commodity sectors and crashing commodity/energy-based economies and creating all kinds of losses for the banks who stupidly lent hundreds of billions of dollars each to these sectors to help inflate the now crashed energy/commodity bubble…well, the banks are likely to get the Fed to create a $2 trillion or even a $5 trillion Quantitative Easing program where the Fed uses taxpayer funds/backing to buy up those worthless energy/commodity/other-corporate bonds at par (100 cents on the dollar) instead of the 10 cents or less they are probably worth. Thereby the banks get a stealth bailout rather than a full on bailout like they needed in a panic in 2008.

Q. There are provisions in Dodd-Frank to make the banks pre-fund a future bankruptcy. These “living wills” are part of the “extensive regulations” that most bankers scream about. Among other things these provisions require that shareholders lose their entire investment before any temporary help comes from the government. Moreover, I believe that in the CCAR tests (stress tests) the Fed will be asking the banks to demonstrate how their living wills will keep the Fed from needing to contribute to keep the banks afloat while they are passed on to new management. Regardless, I’m sure things could get bad enough to require some kind of initial government help. If so, I would expect the US government to make billions on the next deal just like they have made billions from bailing out the banks in 2008.

A. I have read over the 20,000 pages of the Dodd Frank bill personally and while there might be a few paragraphs that include some language about “There are provisions in Dodd-Frank to make the banks prefund a future bankruptcy. These “living wills” are part of the “extensive regulations” that most bankers scream about. Among other things these provisions require that shareholders lose their entire investment before any temporary help comes from the government.” I don’t believe for a minute that the Too Big To Fail banks would “allow” the FED they control and the RepublicanDemocratRegime they fund to allow their shareholders any actual bankruptcies any time in the next down cycle. I wish it were otherwise, but alas, the banks wrote Dodd Frank themselves and they are protected. The “Emergency Measures” from the Fed and congress that funnels trillions of dollars to the Too Big To Fail banks are still in place. Any dollar the banks supposedly paid back to the taxpayer for the bailouts simply came from other bailouts including QE1, QE2, 0% interest rates, etc.

Q. What are your thoughts on the direction of the market over the next month, half year and year? Thanks.

A. I think the path of least resistance for the stock markets is mostly downward with some large counter trend rallies at least until the Fed formally gets started into a formal easing cycle including new QE and/or negative interest rates sometime in the next three to six months. Then maybe a little more weakness and/or panicky sell-offs and, if so, I’ll likely start buying some stocks more aggressively there and then we’ll have another major leg up in a Bubble-Blowing Bull Market for a year or two in 2017 and/or 2018 or so. But let me be clear that I’m just outlining paths of least resistance and I’m not changing any of my stance or anything just now since I’ve already spent the last year or so raising a lot of cash, reducing my number of long positions, adding more short positions and getting more hedged.

Q. Looking for a big selloff?

A. At some point, I do think we’ll have another round of sell-offs in the stock markets, but whether that’s next week or next month is a good question!

Q. The tech portion of my portfolio consists of AAPL, FB, and GOOGL. How would you suggest I apportion these investments (e.g., 1/3 each; half to FB and the rest split between AAPL and GOOGL, etc.). I’m 61 years old.

A. I would have a little more diversification in tech than just those big 3 holdings of mine. I think probably having about equal amounts of all three and/or a couple more tech names would probably make sense for most investors, including 61 year olds.

• Subscriber follow-up:  Your comment about “more diversification in tech” makes sense. To date what I’ve done is stick to my favorite three names (AAPL, FB, GOOGL) and then round out the tech section with the XLK. I’ve also go decent sized investments in both T and VZ so I keep that in mind when buying or selling XLK. What tech subsectors do you think I’m missing? Please note that I’m not comfortable owning companies like AMZN and NFLX that don’t have traditional earnings because I have no idea how to value them.
• A. I wouldn’t think a little $QCOM $SNE, and/or $FFIV would kill ya.

Q. Relatively new subscriber as of December, 1st time chatter. Long time AAP & RealMoney subscriber. Your podcasts on RM drew me to your service, love the music. I have been unhedged for a while now and overweight financials. Needless to say my performance has been horrendous year to date. The only good trades I have had involved the FB\UA calls I participated on your call. The question I have is if I were to start some hedging which of your short ideas would you suggest I start with, are any in a better position than another for further downside ? Thanks for your advice.

A. Thanks for the kind words. The music on my podcasts is from my band, The Muddy Souls. You can download my podcast theme song, “I don’t think Hank done it this way” here: And you can download some of our other songs here. As for hedging, I think there are still some great short trades out there and I am likely to add a couple new short positions here and there in the next few days or weeks. I do think the $IBB makes a good broader short hedge for the portfolio and remain short some of it myself.

Q. Hope you and your family are well. What are your thoughts on FFIV? It’s creeping up :).  I’m holding a small amount of April $110 calls. This was my own trade.

A. Yes, $FFIV is up 10% from last week’s lows, along with a lot of other tech stocks. I think the $1.2 billion in cash and no debt plus the $8 in potential earnings next year make $FFIV attractive fundamentally. The fact that I expect it might end up an acquisition target in 2016 if it stays at these levels is a nice kicker. Will it get to $110 in the next seven weeks as you need for those calls to pay off? That’s a high bar and probably not very likely, but not impossible either.

Q. Welcome back, Cody. Let’s revisit and old (non) friend, Herbalife. For whatever reasons, earnings beating expectations, an inkling that the Fed investigation might go away, whatever — it’s had a massive blip up. Has your negative view of it changed? Might this be a short opportunity (and might the blip in part have been people covering)?

A. $HLF remains a good short prospect, but the fact that you’ve got two major hedge funds battling it out makes it a tough one to game. Carl Icahn is a major $HLF shareholder and he’s getting killed in a lot of his positions this year and will potentially have to sell some of $HLF at some point to balance some of those losers if his cash really is running short as has been reported (see “Carl Icahn faces cash crunch due to bad oil bets” http://money.cnn.com/2016/02/2… ). He’s probably been forced to sell Apple if he is indeed short on cash (see “Carl Icahn Dumps $700 Million In Apple Stock”http://www.forbes.com/sites/br… ). On the other side is Bill Ackman who is short $HLF and he’s getting killed this year on most of his positions (see “Remember Bill Ackman’s 40% Hedge Fund Gain in 2014? It’s All Gone” http://fortune.com/2016/02/25/… ) including $HLF (see “Is Herbalife on the Verge of Victory Over Ackman?” http://blogs.wsj.com/moneybeat… )and he could very well be one of those shorts that is being squeezed out of it. I remain on the sidelines for now.

Q. I have read FB is either hugely under valued or greatly over valued. Little weird.

A. That’s what makes a market. I wouldn’t call it hugely undervalued or and it might be a bit overvalued at this point– it could fall 30% and still be rather expensive on some metric…of course, it could rally 30%…looking out five years from now, I think earnings will be much higher than they are this year and the stock will be somewhat higher.

Q. Speaking of movies and the Oscars (which nobody was doing), what did you think of The Big Short? (I assume you saw it. If not, do.)

A. Haven’t seen it, might when it hits Netflix. 🙂

That’s a wrap, thanks everybody!