April Overview

Current state of play

Oil is very weak on a combination of demand and supply. Donald J Pump made it go up 5% on 3rd April, but surely it’s trend will not be reversed. The “Incredible Hulks” trade should survive, but DJP has badly injured it.

US Equities, certainly large cap, must be still too expensive. Idea: find the biggest buyback stocks. Without buybacks, these may be vulnerable.

The big risk is that QE infinity will lift all boats. I am not sure what to do about this. Maybe buy corp. credit and short stocks. But if bond issuers can raise capital at (likely) negative rates, won’t that support their share prices?

The biggest beneficiary of QE inf. will be govt. bonds. I find it very hard to buy a ten-year at 0.6% but I guess if the yield goes negative I’ll make money. As always, knowing what will happen to inflation is the key to profits, and as usual I don’t have a clue about what will happen.

Another tack is to buy low quality stuff, like MBS ETFs and companies suspected of fraud. Although the authorities never unveil the fraud, sometimes funding stress does. Obviously, your shorting of TSLA, which is a prime example of a fraud, has not gone so well even lately.

Insurance

Insurance companies rely on returns on their float to cover the cost of their claims. Deaths will be up a bit (maybe overall down though, because of less pollution and less general infection). Negative risk-free yields and defaults on corporate debt will increase liabilities, and reduce assets: not a good combo. The other problem is companies who liabilities which are defined benefit pensions. This will mainly be municipals, but also some paternalistic employers.

When Markets are due for a correction

No matter how over valued or insane valuations are, even that arbitrage opportunities exist, it’s still foolish to trade on the basis that the market will suddenly wake up to your view before drifting a long way further along the path that it had previously been on.

Markets are self-fulfilling prophesies.

Perma Bear or Perma Bull?

This is a fantastically balanced piece by Value Stock Geek. He says that:

• being ideological is a barrier to being a successful investor,
• the Fed is not the author of all our misfortune, nor is it the omnipotent wizard that can stop all recessions,
• the markets are not as rational as Eugene Fama would like them to be but they are also not as irrational as the ideologues think,
• that, actually, it is best to avoid overreacting to any market moves.

There are some good links to videos from Peter Lynch and Milton Friedman. There is quite a good link to an old Onion piece making fun of the money illusion.

The worst stocks will likely have the biggest recoveries

This is a very important principle. Often, a big turnover company with poor margins will be pushed into loss by a bad economy. When the economy bounces back, even a bit, the eps can roar back (even though earnings yield is still pretty crap). You also have a momentum thing, and a liquidity thing. Basically, something illiquid and high beta should not be shorted, no matter how much a basket case it seems. Except in tiny size.

Gold nervousness

Sold a few MU. Noticed that GC was damaging my bottom line and decided to reduce my exposure by writing some calls. It’s complicated because I have a stop at the strike price. Prob. better cancel the stop.

Nobody Knows Anything

Sound words of advice Josh Brown on CNBC said as he and Brad Gerstner of Altimeter Capital discussed the markets, (and I paraphrase):

The person you want to run away from now is the person who KNOWS what will happen.

Just before that Adam and I were chatting and shared these simple thoughts:

Sound words of advice The fact is we are grasping at straws and hoping. In fact, the first words I typed today were:

The GBP is the strongest and the USD is the weakest as NA traders enter for the day as stocks (and yields) move back higher on hope. Hope for a stimulus package passage, hope that the Fed’s stimulus helps the economy, hope that the virus does not get too outta hand, and hope that the deficits being built will one day ease. Yes… “Hope” is part of trading. No one “knows” for sure, or even close to “knows”, what will happen - especially now. We will, and should have a “hard time believing”.

Now when the dust settles, there will be those that “knew all along”. Fine. Have your day on twitter or in a comment. However, if you did not include a level of risk…you are just flipping a coin in my eyes.

For me, I would rather remain humble and listen to those that are humble who understand where they are wrong.

I will also base my thoughts on what I see in the charts, because it tells a story to me. That story has included in it, a lot of “IFs”. In fact, in a post earlier today titled “The USDJPY remains in the middle of the 3 day range. Buyers keep more of the bias”, I wrote:

Intraday, the price action is up and down today. The lows have stalled along a trend line. The price is trading around the 50% of the move down from yesterday’s highs at 110.828. The price is above the 100 and 200 bar MAs at 110.543 and 110.63 currently. The price has been able to stay above the 200 bar MA since breaking about an hour or so ago. If the price can stay above the 200 bar MA (green line), that keeps the buyers in control intraday. Move below the 200 and 100 bar MA (blue line) and the intraday sellers are back in firm control. The last two sentences are my way of saying “I don’t know” or “I hope”. However, the “IF” is my way of also saying “That is my stop area. Things are good as long as that condition remains true.”

Some people don’t like that. Some people are not like that. They feel that you have to have a “conviction”. “Buy…. it is going up” or “Stop with all the “IFs.”.

My response is “What makes me know more than “the market”? What makes my crystal ball so much clearer than all the others out there?” Don’t be silly.

What I know is what I see. If I see it in the chart, my feeling is others from all around the world can see it too. In fact I try to make it simple to all (or those that read my posts). I post what I see (post the chart(s)). I comment on what I see with arrows and words, but do “I know for sure?” NOPE! It is contingent on the “IF the price stays above the…..blah, blah, blah”.

The point is traders, if you KNOW what will happen, run away from yourself. Instead, find where the “IFs” are that will tell you where you are wrong, and you will have the right mindset for trading.

When Stanley Druckenmiller complains, you know it’s tough. He’s a billionaire and undoubtedly one of the greatest traders of all time.

He laments how algos and quants have changed the game.

“I made 30 percent a year for 30 years. Now, we aren’t even in the same zip code, much less the same state,” he said.

It might be easy to dismiss him as a has-been but he’s not just complaining, he outlines how markets have changed.

“You’re getting noise that used to mean something, and now it doesn’t mean anything,” he says.

Volatility used to be something that traders and active fund managers loved. It was seen as an opportunity but not any longer.

“Volatility is only good if it’s part of the trend and it’s giving you entry points within a trend,” he said. “When you’re going up and down, but there’s no real trend, that’s a nightmare. You might think that a volatility move is the beginning of a trend and get yourself whipsawed.”

At the end of the day, that’s the lay of the land now. People will always find ways to make money and today is no different.

Druckenmiller highlights the things that will always be key, including curiosity, open-mindedness and courage.

“I’ve never made a buy at a low that I didn’t just feel terrible and scared to death making it,” he said.