How much cash? Is there a crash coming? PLUS the real story with the GOP tax plan

Here’s part 1 of 2 of the transcript from of this week’s Interactive Live Stream/Q&A Chat. You can also watch a replay of the discussion on The IAm Cody Willard App, on YouTube here, and listen to a podcast version of it on Soundcloud or iTunes.

Cody: I’ve got questions here in the queue, I’ve got people on the phone, I’ve got people on The IAm Cody Willard App. Download The IAM Cody Willard App at the iPhone App store or at the Android store now.

Before I start with the questions I’d like to start with some market commentary. As I sent out in a note to Trading With Cody subscribers today, the market is down 106 at the moment and 150 earlier when I sent that out. That means that the stock market down is two thirds of one percent on the day which means it’s slightly more than two thirds of one percent or seventy percent away from its all-time high. Just a little perspective for you there. A one hundred and fifty point drop today, but if you look at a two year chart you can barely even see it.

With that said, there was some magnitude to some of those selloffs this morning and a little bit of worry in the market this morning. I wouldn’t call it panic, but I would call it worry. It’s not like it’s turning me bearish or something. I’ve been bullish calling this bubble blowing bull market and had myself and my subscribers and my position for this seven or eight years now, since 2010 when I left TV. I’m still bullish I think the bubble blowing bull market and the dynamics that create that are still in tact.

$CMG is down fifteen percent after its quarterly earnings report. It was a terrible quarter on top of a terrible year, so that shouldn’t surprise anyone. $GE down yet again this morning to a new multi year low and no sign of a bounce there. There’s some fear out there perhaps and it might be a healthy thing to get a little bit of a fearful pull back in the near term.

The market hasn’t had a five percent pull back in two years. The S&P 500 could use a five percent pull back. A little bit of fear could be a good thing for us as an opportunity to do some nibbling. When we’ve had some fear driven sell offs in the last five to seven years here with Trading With Cody subscribers, we’ve several times gone in and bought some call options; made some nice gains on those in the ensuing months. But, I don’t know that I’d do that right now because evaluations are a bit stretched.

I was pleased yesterday speaking with a privately held tech company recently that might go public in a couple of years and I asked them about their evaluation. I guessed they were doing about one hundred million dollars in sales this year and that their revenue is growing fifty to seventy percent per year, let’s say a 10-12x sales evaluation. They said, “Really? That sounds high.” Meanwhile, in the public market I see companies trading publicly that at 10-12x times sales evaluations and growing fifty percent per year. So maybe he should take his company public sooner. That underscores the fact that the evaluations are a bit stretched in the stock markets. A lot of growth stocks trading at 10-12X sales.

A name I’ve been looking at recently is called MongoDB, symbol is MDB. It’s a database company that just went public last week at $1.5 billion dollar evaluation. Kheang Ly, shout out to the chief technology officer who did all of this magic that enables me to live stream interactively. I love you guys. Alex, Russia, thank you. Anyway, Kheang loves MDB. At any rate, MDB. Let me look at the financials. Analysts are projecting $150 million in sales for 2018; that’s 10% of their market cap. I just said market cap is 1.5 Billion. That’s ten times sales. I think there are a lot of technology growth companies out there trading at 10-12 or even a higher multiple of sales and that’s, quite simply, a bit stretched. Many of these companies will grow into those evaluations in coming years and maybe MDB will be worth $50 billion dollars in a few years, up from $1.5 billion today. So, the high multiple of 10-12x sales wouldn’t necessarily preclude me to investing in some of those companies. As a general statement on the market, it does underscore the rather high evaluations out there.

Subscriber: What percentage of my portfolio should be cash reserve for when there’s a pull back buying opportunity, in your opinion?

Cody: I never give a percentage on this question because everyone’s risk reward scenario is different. Everyone’s personal situation is different. As I’ve mentioned before, my situation from five years ago when I was a carefree single bachelor, former hedge fund manager versus now having two children and a wonderful wife — one of those children being medically-fragile that needs nurses. Everyone’s own risk tolerance changes over time too. Point being, I’m more conservative than now. Six years ago, in 2011, I was one hundred and fifty percent invested. I had call options and was aggressively long. I’m much less than one hundred percent net invested right now. Let’s put it this way, you should probably have twice the amount of cash now that you did eighteen months ago. If you were 80% invested eighteen months ago, maybe you should have 60% invested right now, and leave 35-40% percent in cash. Such a high percentag of cash seems really defensive, but 80% could have been considered defensive eighteen months ago when I was more bullish than I am right now in this scenario.

There’s no right answer to how much cash you should have at any given time. I would tell you to err on the side of being comfortable with cash when the stock markets are up three hundred percent from where they were three to five years ago. As great as the economy is, a lot of that may be priced into the market and it could be argued that it’s more than priced into the market with so many tech companies trading at twelve to fifteen times earnings. So, err on the side of caution when everybody is praising the economy and the bull market.

Subscriber: Hi Cody. I would like to ask you if you could elaborate more on money management and a strategy to put in place in a down market? For money management I know every case is different, but I am struggling in knowing what is the percentage I should have in cash in my investment portfolio? I’m not talking about cash in general, but the cash portion of my investment portfolio. I read about you leaving the market in the past when you thought it was time to leave, but is that the strategy and when will it be that time? Sell everything and leave the market and wait? Sorry for the long question but I enjoy and value a lot reading your views and not just on stock picking but especially on money management, market psychology, and lessons from past experiences.

Cody: Thank you for the kind words. We hit on that earlier and I don’t want to repeat myself so let me just continue where I left off. This question is in the chat room and they might not have heard what I said earlier and they’ll get the transcript that has all of these questions typed out and answered in organized form and a little bit edited exclusively for Trading With Cody subscribers.

There is no right answer and the crux of your question is should we leave the market if it is about to crash. And, even for that, I’m going to say maybe. The vast majority of you are not going to be able to sell everything and get out of the market before the next crash and time it well enough that you don’t end up regretting it — because the market went up after you got out but before the crash, or you didn’t buy in at the bottom of the crash, and all of that stuff.

That’s why I say to have your cake and eat it too. Be a little bit nuanced. We don’t have to be greedy. We don’t have to be fearful. We can have a little bit of both. We have to accept that there will be times in our lives when various assets that we invest in, such as stock market, bonds, gold, real estate, Bitcoin will all go up and other times they’ll all go down. There will be times when it sucks to own stocks. You’ll be sick to your stomach and think how could I have not sold everything at the top?

That being said, it’s hard. That’s why I’m trimming some here and there. I’m more cautious because markets are through the roof and we’ve been so right for so long. We have so many stocks up so big. Let’s catch our breath. Let’s take profits. But I don’t want to get out entirely. And even if I really thought the markets were going to crash next week I probably still wouldn’t get out entirely. I might just raise some more cash and be a little bit more defensive and accept that there will be losses in my stocks.

If you’re ninety years old; if you’re seventy years old; if you’re forty years old you might have more money invested in so many various places in the stock market that you can even get out right now. How long would it take you to go to all of your 401K’s, you’re IRA’s, you’re broker accounts, and different whatever and get all of that money out? Just slow down a bit. There will be a crash someday, and you should be prepared for it. After it’s crashed again, we should start getting more aggressive.

I’m staying net long for now. Maybe there’s going to be a blow off top in the stock market and maybe I’m foolish for not being more aggressively long right now.

Let’s flip our own logic. All we’re doing is talking about crashes. Meanwhile, the market is at all-time highs. Let’s pat ourselves on the back for being long, but remember we could have been longer. We can always make more money, baby.

Subscriber: Cody, are you expecting/preparing for a crash? Is there an event that you are looking for to trigger a crash?

Cody: No. I am not at this moment expecting or preparing for a crash in the near term or frankly over the mid term which is basically the next two or three years. That said, there’s always the threat of a crash. There are always things that, no matter how well prepared you are, how much you’ve researched, how tapped in you are, how smart you are, how well you’re connecting the dots — you can be wrong. And, you don’t want to be one hundred and fifty percent long when a crash hits. You probably don’t even want to be eighty percent long when a crash hits. I think realistically most of us are not going to be out of the markets when a crash hits. Although I was able to do that successfully when I closed my hedge fund in October 2007, just six months before the financial crisis crashed the markets, and I certainly plan on being in a much more defensive and/or bearish posture if and when I do think the chances for another crash are likely.

The second part of the question, am I looking for an event to crash the markets and economy? An event that will trigger a crash like real estate securities crashing and Lehman and them going under, I suppose. But “event” might not be the right word. We’re looking for “circumstances” that trigger a crash. Back in 2008, it wasn’t like the Lehman event by itself is what caused the financial crisis. It’s not like Bear Stearns going bankrupt and the government giving a six dollar welfare check for every share to the investors of Bear Stearns and then giving the entire assets of the bank for free to JP Morgan or any other individual event that happened during the Great Financial Crisis of 2008 happened without circumstances leading up to it. It wasn’t just a singular event that caused those crashes.

There are always global investment banks and sovereign governments that are doing things, even if they’re not nefarious, that are stupid. And when those stupid things come home to roost, hundreds of billions of dollars can be lost, and eventually will cause a crisis of some sort, contained or contagious. Eventually those losses get recognized and then events, based on the circumstances of there being so many losses, start to trigger crashes. Chicken and egg. I don’t even know whether the events trigger the crashes, the crashes trigger the events but in many ways, you get vicious cycles.

In 2007 I closed my hedge fund and wrote all the time that I thought things were precarious and talked non-stop that even though the US never had real estate across the country down turn all at once, it looked like it was happening. Meanwhile, Bernanke was on the TV all the while saying not to worry about it. I’m in 2007 saying wait a minute, it is happening. Just because it never happened doesn’t mean it won’t and if it does happen there’s trillions of dollars of securities and insurance and derivatives around securities that are going to go up in flames. And the casinos that are writing this insurance and allowing the hedge funds to gamble on these derivatives — the casinos themselves are going down. They don’t have the money to cover the losses.

So then, we got the bailouts; we got crisis; we got crashes.

I don’t see that right now, but I am paranoid about it and looking for clues of it. I don’t want to be caught off guard when the next crash comes, but there are crisis brewing out there that could cause crashes. It could be a currency event. It could be an interest rate event. It could be things like some random currency or sovereign bond’s yield spiking or crashing or going crazy in different directions. And then you end up seeing that those investment banks, hedge funds and/or countries that are swimming are now being exposed and the whole vicious cycle would start.

Are we here right now? I don’t think so. Everytime we get a sell off of one hundred and fifty point though, I have some of my permabear hedge fund friends and permabear other friends calling me to tell me to say the crash isn’t just coming but that’s it’s here right now and that the consumer is dead, that such and such is a sure sign of the crash finally finally finally arriving for them.

Subscriber: Regarding Senators Corker and Flake, will this impact the GOP tax plan?

Cody: It doesn’t matter whether this latest tax plan from the Republican Democrat Regime passes or whether some other form of it passes or whether there’s just some individual tax proposals get passed in the next few months. The fact is that the GOP tax plan and the Democrat tax plan are all a continual moving along a spectrum of lower corporate taxes and more free money and assistance and subsidies for giant corporations like the ones we invest in. The nuances around what specifically gets passed and what doesn’t get passed is noise. Taxes for corporations have been trending lower for twenty-five years and they will continue trending lower for the foreseeable future whether Corker or Flake or the GOP or Democrats or none of the above come together on a “comprehensive tax package.”

Corporations will get more breaks and more subsidies in coming years one way or another. The biggest story that will probably end up being a so-called compromise out of all of these negotiations and fake negotiations between the Republicans and Democrats and Trump around these tax policies will be that they will agree to allow global corporations based in the United States to bring home their trillions of dollars of capital based overseas. Maybe tax free, or maybe at 10% or something with all kinds of loopholes. Even if they say it’s at 15%, the Republicans and Democrats in power will give the global corporations so many loopholes around paying taxes that when they bring all this cash home, these corporations won’t probably pay very much on all of those built up earnings and cash reserves all around the world that are sitting in banks and not in the U.S. so they wouldn’t have to pay taxes in the U.S. yet. Even though these same corporations are using our court systems, our roads, our stadiums, and getting subsidies from middle class Americans that are paying their real estate taxes in the places where these corporate headquarters that don’t pay their real estate taxes are located. It’s all subsidized by the middle class guy who’s paying thirty-five percent of his income while the real corporate tax rate, that’s not reported, is fifteen percent or lower already.

So, point being, expect more of the same. Expect lower taxes for corporations, more subsidies for corporations, higher stock prices, and lower costs of capital for corporations until those circumstances change. And we need to be paranoid and looking for those circumstances changing. It all ties together. Your questions, my answers. The whole theme of the discussion is one big economic market reality. Deep thoughts man.