Strategies For A Market That Nobody Fears

“Everybody knows that the dice are loaded, Everybody rolls with their fingers crossed
Everybody knows the war is over, Everybody knows the good guys lost
Everybody knows the fight was fixed, The poor stay poor, the rich get rich
That’s how it goes, Everybody knows.” – Leonard Cohen

Every money manager and professional finance pundit is almost positive of about five things right now:

• That the Fed is going to cut rates sometime in the next few months.
• And they’re also sure that such a move would be very bullish for the stock markets.
• Meanwhile, consensus estimates for the S&P 500 to see revenue growth accelerate from 2.3% in 2023 to 5.5% next year and for earnings growth to accelerate from 0.7% this year to nearly 12% next year.
• Economists expect inflation is going to decline from 4.5% in 2023 to 2.7% in 2024.
• Also concurrently, the S&P 500, currently at 52-week highs and within 3% of its all-time high is expected by Wall Street analysts to be up another 8% or so next year.

I’m not sure how to reconcile all of that analysis.

• Historically-speaking, the Fed very rarely cuts interest rates when the markets are at all-time highs. The Fed usually starts cutting rates when the markets get hit, usually getting hit hard.
• If the Fed’s target rate for inflation is 2% and inflation is still running 35% higher than their target rate next year, it seems like it’d be problematic for them to explain to the middle-income and low-income masses that the Fed thinks its okay to start opening up the possibility of another bout of higher inflation by taking rates below their natural level again.
• If the S&P 500 is growing revenue and earnings in a bull market, why would the Fed need to cut rates?
• And again, perhaps most importantly, when the Fed first starts cutting rates, the stock markets are usually in trouble and crawling towards bear market territory.

The overwhelming consensus that the Wall Street folks seem to have about the market and Fed set up is one of the biggest reasons that the markets have been so strong for the last six weeks. And the fact that I can’t hardly talk to anybody in this business who doesn’t agree with the consensus outlook reminds me of a mirror of how wildly confident those same folks were last year that, as I wrote late last year when the markets were in free fall and the overwhelming consensus was that the markets and economy would be terrible in the first half of 2023:

“ARKK at new lows. So are the semi’s and the Nasdaq and as of this moment, the broader indices are too.

You can smell the fear building in the air on Wall Street. And there’s the stench of fraud, silliness and stupid cryptos rotting away. This is exactly what I’ve been saying I expect will happen in the crypto industry for the last year with 99.99% or more of the current batch of cryptos being silly, stupid and/or fraudulent.

I went ahead and nibbled some BITO in the hedge fund to get some bitcoin long exposure back on the sheets today with bitcoin cracking $17,000. I still have quite a few shorts in some of the bitcoin-related stocks and I plan to continue selling those down and slowly scaling into some bitcoin exposure.

In the hedge fund, I’ve bought some META common, some GOOG calls (dated out a couple weeks with $102 or $103 strike prices), I bought some more VZ common, bought a tiny second tranche of WOLF, some AMZN and GLD common, some GOOG calls with strikes around the current quote dated out the next week or two, some DIS calls, with strikes around the current quote dated out the next week or two, some U calls with strikes around the current quote dated out the next week or two. Be careful out there, but now is not the time to be scared, in my opinion. Everybody I know can not think of a reason for the markets to go higher. Nobody can think of a reason to buy or believe that it just might work out for the US once again. If not today, perhaps soon. But it usually does work out for the US. And since we’ve spent the last year being cautious and defensive I don’t think now is the time to get even more cautious and defensive since prices have already in large part crashed and, as I keep saying, everybody knows that the markets and economy are precarious. And if everybody now knows it, it’s too late to act on that information. What will everybody know in six months that it will be too late to act upon then?

We just might be seeing the markets and economy morph into something a little bit healthy for a while. That would be unexpected, I do believe in a world where nearly 90% of CEOs and analysts are predicting hard times ahead for the economy.“

Cody back in real-time December 2023 now. Just as the consensus at the end of 2022 when there was almost no greed and no euphoria and lots of fear in the markets and that consensus turned out to be dead wrong, I’m worried that we are on the other side of that coin right now. The consensus is full of greed and euphoria and no fear in the markets and that might turn out to be dead wrong when we look back late next year.

The valuations in many stocks have gotten to nosebleed heights again and the broader market isn’t terribly cheap either, as the S&P 500 P/E is 18.8 which is above the 10-year average of 17.6. The average cloud stock is trading at about 22x next year’s sales estimates and at over 50x next year’s earnings estimates. Many of the semiconductor stocks have been on fire for weeks and are likewise trading at 10x next year’s sales and 40-50x next year’s earnings estimates. High valuations are not a reason in and of themselves to turn bearish, but the higher the valuations are, the more limited your upside in the months and years ahead.

So here’s the playbook: I don’t think we should be panicking or chasing. We were buyers of our stocks at much lower levels and it’s been a helluva year for many of them but most of them look a bit overextended, overbought and overvalued near-term. So let’s stick with our many Revolutionary winners though I do think it’s wise to do some trimming right now and raising some cash. In the hedge fund, I’m long some puts on CLOU, WCLD, XLD, XSD, etc and I added a few more puts on AMD and AVGO today, mostly near-the-money and dated out a month or so.

And as I said above and last year:

“If everybody now knows it, it’s too late to act on that information. What will everybody know in six months that it will be too late to act upon then?”

I leave you all with an image that ChatGPT made for me off the prompt: “Create a cartoon-style illustration of Wall Street analysts throwing a party and high-fiving each other in a festive setting.” I know it misspelled “Success” in the image, but isn’t the pun it accidentally created quite humorous?