This was one of the hardest weeks for me and likely for many of you as well. Still I am going to share my thoughts. I have used up all the cash that I set aside and since my stocks have dropped precipitously I could not trade around my positions enough to be effective. Also, I closed my hedges way too early which was clearly a mistake. In my defense though, I didn’t expect that Powell would so actively talk down the market. In hindsight, it made so much sense for him to do so, to be able to squeeze the froth out of speculation without even raising rates was masterful. Look at the bloodbath in crypto, look at how pessimistic consumer sentiment now has fallen. In actuality not that consumer surveys are in any way an accurate predictor about consumer behavior) Realize that Powell is concerned most about the overactivity in the real economy, not the markets. However, the two markets, Main Street and Wall Street are more intertwined than ever in that the hardest slice since 2020 is slowing down some of the hyperactivity and malinvestment of the real economy.
Powell knows markets, and because of that he really knows how to hurt stocks when he has to.
The rub is, Powell is the first Fed Chief that I can remember that knows the markets very well. He also receives the latest and best information of real world indicators of what is going on in the economy. Right now, Powell has to thread a very narrow eye of the needle. On one side is the nascent recovery that still hasn’t gotten back anywhere near the amount of jobs pre-shutdown of the economy. On the other side there is a demand pull of too many dollars chasing too few goods. Making a sharper point on the danger of over tightening, all you have to do is look at the workforce participation rate, and only now is it creeping back up. Look at how many (or more to the point, too few) women are out of the workforce right now. If Powell would do what all the screaming hawks want to do, the latest prescription is to jump the short term by 50 basis points then slather on another 8 rate hikes. Oh and I am not finished, first he must cut off all bond purchases immediately (no taper), and start selling all the bonds they have bought in the QE (quantitative easing). I don’t know what these guys are smoking, do we want a depression? Do we want to destroy a couple million jobs? On the other side frankly is me, who still believes that much if not all the pricing pressure will dissipate, or at least could dissipate with the proper policy on the executive, regulatory, legislative (or a lack of it) activity and even a bit more time and we will see a lot of prices come down. However, I concede that the Fed should pull in the mortgage bond-buying, and a few rate hikes are warranted given the rebound in economic activity we have.
Powell has decided that the surest way to begin to tap on the breaks is to rein in speculation.
I started this article with the accepted premise that the stock market is in no way the “real” economy. That is the accepted wisdom, though something has changed, trading has become a national pastime. I believe that as of several months ago, retail investing is at a 70-year high. Throw in crypto, and you have a craze going on. Then I would say throw in sports betting, and I think you see the picture. All of this risk of money means that there is just too much money being dumped into the real economy, especially with what started it all; the federal government opening the spigots. I think the vast majority of Americans felt that propping up the small business sector and the little guy must be a major feature of the US government’s compensation for killing the small business economy. Even distributing checks to nearly every American was okay. Then it went too far, look around you can see it yourself. We constantly read about crypto-millionaire teenagers, and people (the smart ones) buying real property with their crypto winnings. Not just crypto of course, everyone with hard assets has seen prices balloon in the last few years, like home prices. So naturally, Powell, knowing that the market hates uncertainty, started jawboning and withdrawing the “I am not even thinking about thinking about interest rates” and banishing “transitory” from the lexicon of describing inflation. Instead, he said he is raising, and his compatriots have been ratcheting up the number of raises. Knowing very well that they will be aided by the talking heads who love the drama and look so smart for the camera. This past week the aforementioned news about shutting down QE and even starting QT (Quantitative Tightening) was broached. If I seem to be rehashing what everyone knows, I am sorry but it is worth putting it all together and looking at it dispassionately. With the 10-year finally breaking above the 1.78% peak of last year, the market lost its mind. Never mind that the 10-year is already back to the old range now. Also because Netflix (NASDAQ:NFLX) missed earrings and the financials sold off after reporting (it almost always does), the result is everyone sold anything that wasn’t nailed down. But why? Well, here is one of my glaring errors, we had a huge leap last year in stock values. All participants who have taxable accounts will wait for January to take profits. Usually, the optimism of a new year and the allocation of savings to retirement funds are usually more than enough to offset the sales. Also, the fact that the year-end rally usually continues the first few days of January so the selling is attenuated because their portfolios are still going up. That really didn’t happen this time, quite the opposite.
Hurt so good (kudos to J.C. Mellencamp)
Powell, managed to squeeze out a lot of the froth already just by leaving it to the market’s “imagination”. I believe I said this last week, actually, I apply this rule a lot. Let’s make it our first law of market behavior, the market craves visibility and abhors a vacuum. So because there have been so many open questions about how far is the Fed going to go to slow the economy, the overall behavior is to look for the worst-case scenario and discount that. Anyone who has been paying attention should conclude that a lot of this messaging was coordinated, and purposeful. Here is a great data point to ponder. I just checked and Bitcoin has fallen another 3,000 to about 35,000, and I am sure Ethereum and all the baby crypto coins are following suit. At $35K, we are talking about the BTC cut in half, who do you think got hurt? The latecomers, this time it will include some pros and corporate interlopers like MicroStrategy (MSTR) and their carnival barker of a CEO Michael Saylor, who has thrown billions on this pyre of Bitcoin conflagration. He exclaimed that BTC was the best investment his software company could make. Never mind that this company makes enterprise data reporting and it’s not even a fintech company. He threw the company cash-flow into it and it should have been devoted to R & D. He also borrowed to buy more Bitcoin on top of that to boot, now up in smoke. How many more quiet CEOs and CFOs got on this bandwagon? NYC’s new mayor and Miami’s mayor have been converting their paychecks to crypto, and El Salvador has based their currency on crypto. Aside from all the angst, and the personal and corporate displacement this creates, it’s also going to go a long way to destroy that excess cash causing inflation. Let’s not be too gleeful (I am probably the only crypto denier left it seems) this maneuver has also destroyed a lot of excess cash from our stock market too. Let me make a finer point on this as a step closer to close off this errant harangue and move on to what to do now. Powell once again, has done something masterful, though it hurt nearly all of us badly, he accomplished much of what was needed in cooling the economy without touching interest rates!
Ok, let’s look at the collective damage and what it means.
I am not just picking on Crypto or Bitcoin because I am a non-believer. It has fallen the most precipitously in recent days, much steeper than any of the major indexes. I suspect those that are pulling the ripcord are the latecomers, so in effect “real” dollars are being destroyed. Meaning late coming dollars that bought in at 60K, 50K or even 40 thousand was money taken out of checking accounts, or stock portfolios, or even rent money (heaven forfend) so to my mind this is a great illustration of monetary destruction. Do I feel sorry for those that sold Bitcoin at extreme loss? Absolutely. Let’s just for a moment acknowledge that the monetary largesse which must be repaid by either coming out of our pockets or our children’s pockets, and this money was sprayed wildly. According to CNN some 30-50% of the Pandemic Unemployment Assistance (PUA) was sent to undeserving wallets. There are even instances of funds sent to China and Nigeria as well. Pulling back on creating more and more dollars out of thin air has a number of side-effects like any strong medicine. In this case, perhaps tens of thousands of “innocent” citizens put money into crypto and also into SPACs (for example) that may take years to get back to the price they paid, if ever. There’s a difference between crypto and your average story stock and that it at least should have some actual business plan, there is some value. That is unless you bought shares in Luckin Coffee (OTCPK:LKNCY) and found out it was a total scam. As far as Bitcoin, the only way to make a return is to sell it at a higher price. When crypto is cut by ⅔, the retail investor will despair of getting their money back and will sell at the bottom. Let me get back to my main point. Keeping in mind that leaving open the question of what tightening, if any the Fed will do, the destruction of liquid assets will keep a lid on over speculation and risk taking.
What to do now? Stop trading for one.
Last week I mentioned that I have slowed down “fast money” trading. Now I have completely stopped any attempt at trying to pick a bottom for a trade. I instead have turned to keeping my options viable, by rolling my short calls out and down, and taking the resulting cash to extend the expiry of the long side. All of my long options expirations are at minimum out to March, and most are already out to April. I did get hurt on my Upstart (UPST) Call options off of the crash in that equity. They are too expiring in March and April and yes, hope is not a strategy, but I am keeping faith that UPST will rally very strongly once they report earnings. Let me address this when I talk about equities. In any case, stop trading. If I had long calls or at least 100 shares of any equities, I would write short calls against all long positions.
Make sure you are absolutely convinced of the long-term viability of any stock holdings.
My first step is to do as much research as possible. Understand what the bears are saying about your equity. I have subscriptions to a number of resources and of course, I am a premium user of Seeking Alpha. If you don’t understand the underlying technology of a stock you shouldn’t own it. I understand my limits and I avoid the biotech-pharma stocks, specifically in development stage names. I don’t understand the drug approval process, and I don’t understand the exact mechanisms of different antibodies and protein interactions. Once treatment is cleared, that can be a different kettle of fish. I also am much more comfortable with med-tech and diagnostic tools. I am moving away from my point. Basically, stay in your lane. If I want to be in a new lane, I want to make sure I understand the underlying process of whatever that is. In less dicey times, perhaps you can be looser with the requirement. Now, with even great stocks being smashed right now, you can’t afford to be into a name that is not easy to understand, and not a well-known entity.
The only longer-term trades I made this week are Eastman Chemical (EMN) and Cleveland-Cliffs (CLF), hardly hot tech stocks. CLF is a name I have been in before, it’s a small position that I will add to if CLF breaks down in the next swoosh down. That’s correct, before you buy any new name, say to yourself “I am buying XX stock, even with the likelihood that the market will have a panicked sell-off this week. If you still feel that this is an area that should hold up even under yet another onslaught, it means that you understand what this company does and that it should perform very well once this season of selling is over. As for EMN, many years ago I met the CEO, Mark Costa, right before he ascended to that job, and he’s nobody’s fool. I recently saw an interview on Bloomberg where he confidently stated that Eastman has perfected a way to break down polyethylene and polyester into constituent chemicals and turn garbage into fresh plastic using much less energy and obviously emitting less carbon dioxide than processing crude oil or nat gas into additional plastic to clog up our landfills and our oceans. As they start to scale up, EMN will rise in value. I am really hoping that the next woosh EMN falls more. I would sell some of my oil names to pay for it. Speaking of selling, in my January 10 article I mentioned that I bought Activision Blizzard (ATVI), it was my very last entry on the “My Trades” section. I had no idea that Microsoft (MSFT) was going to make a huge offer for ATVI. If you followed me into that position, after you did the research and you made ATVI your own pick, you should know that I immediately sold my position pre-market in the low 90s, and the rest at 89. At this point, the stock has been met with selling and I am not buying it until it reverts back to the range I first started buying it at, 70 into the 60s. I am of the view that MSFT will get static from the FTC. So, I’ll wait for some skeptical words from Lina Kahn, then I’ll think about it.
Having no free cash doesn’t mean I am out of moves for medium and longer trades and investments.
As I said in the beginning, I don’t have free cash right now. That doesn’t mean I am a sitting duck, as I said, I can write some calls against my biggest positions. The key move for me is that I have all these oil shares. I am not abandoning the oil play, it’s just that I think they need to rest and consolidate a bit. Meanwhile, I want to use some of that cash to buy some well-known names, perhaps Intuit (INTU), or maybe a mega-cap like MSFT, or old tech that’s performing again – Oracle (ORCL). As far as what I am still putting money into; number one is Adobe (ADBE), following at very close second is UPST, then all the semiconductor plays – Micron (MU), Marvell (MRVL), MACOM (MTSI), Arcellx (ACLX), Kulicke and Soffa (KLIC). I seriously have my eye on Applied Materials (AMAT). AMAT is coming into a very nice price level. Unfortunately, I have enough funds allocated to semis right now, so I may have to trim off some of what I have now to pay for AMAT. I am still legging into PayPal (PYPL), Twilio (TWLO), and DocuSign (DOCU). Let me address UPST, frankly, I didn’t expect to pick up shares so cheaply so I’m considering myself lucky. Another commentator wrote a recent piece throwing shade on UPST. As proof for his questioning the current price level, and previous earnings report is that the “Market” called into question its AI (algorithm effectiveness), with sharp increases in interest rates a fait accompli (sarcasm), and that they project that UPST will “only” report 207% so their current price target is lowered to $270. The main dig on UPST with higher interest rates is that there will be fewer loans written, so UPST will suffer. Can anyone find the glaring hole in this logic? Anyone? Anyone? Bueller? The answer is that UPST is being analyzed like it’s a cyclical stock and UPST happens to be a secular growth stock that is just starting to accelerate, even if it stays at 200%. It can grow at 200% for several years before it makes any kind of dent in the personal loan, car loans, and mortgage opportunities. Then it will take share from others that originate on their own. The algorithm is learning every day, and even if loan losses go up a little it will learn from those defaults and refine its process. As far as PYPL, I am excited to raise my share count even as market commentators are saying that PYPL is toast. They first said that because of Affirm (AFRM) and its “By-Now-Pay-Later. When PYPL launched its own BNPL the stock was dinged BECAUSE they had all these BNPL accounts. Shortly, PYPL’s Venmo will be an accepted mode of payment at Amazon (AMZN). We don’t know what the relationship is, but Venmo is close to becoming a paying service. It certainly can become the basis of a “SuperApp” like the kind that is very popular in China and elsewhere in South Asia. In fact, PYPL has proven that it can be a fast-moving innovator with a great future in payments and perhaps other financial services. At the 3rd tier are TWLO and DOCU. I’m still adding shares to them but slower, like I said I have my eye on other well-known names like MSFT, or INTU. At some point, stock market participants will have clarity on how the Fed reacts, and I believe it will be incremental, and not precipitous. I also believe that going into late Q2, we will see much less price acceleration. For traders and investors who are pulling out money now, at what point can they put that money back in? I want to stay in the game and have stocks at the best prices. Perhaps Powell surprises us on Wednesday and lightens his messaging, that would be grand. Remember, hope isn’t a strategy.
Please note: You should not take the above text as investment advice. I am not a broker or a certified money manager, I cannot give financial advice. What I am doing is chronicling my thought process. Always do your own research and understand what you are buying, what your risk is, and be sure before you make a purchase. Also, only trade what you can afford to lose.