Tuesday, January 14, 2020

Bubbles Can Be Great, and a quick Q and A

Here's Hedgeye Risk Management's tech analyst Ami Joseph on the present setup:
"A bubble can be great, everybody gets richer, and it's hard to call the end of it. But when it ends, if the bottom line isn't growing, those things tend to end harshly."
He featured the following graph showing S&P 500 (now with record concentration in its top 5 positions) companies' aggregate earnings per share versus actual profits across all U.S. companies. Orange areas highlight past recessions.

Now, I can't reiterate enough, as much as you may think I'm making a market call with all my red-flagging of the current market setup, that's not the case. What I am doing is calling your attention to growing issues and trends that have our attention, and articulating that whether or not this turns out to be the last-stage thrust that coaxes in the last buyer and ultimately ushers in the next bear market, or it arrives at some later date, it'll ultimately occur amid trends similar to the ones we've been illustrating herein. 

Hypothetical conversation between me (A) and a client (Q):

Q: Can these trends reverse and turn positive as they did amid the 2011 (European debt crisis) and 2016 (manufacturing slowdown)?

A: Absolutely! 

Q: In the aggregate, do the data read worse today than they did then? 

A: Yes they do.

Q: Does that mean we can't see a third soft landing during this longest expansion ever? 

A: Like I said, nope, we're open to all possibilities. 

Q: Does that mean we can continue to invest as if all is well in the world, hoping that massive global stimulus will keep the markets inflated?

A: Absolutely not!

Q: Are we going outright bearish?

A: No, we're striving to capture more upside if the market continues to trade higher. But we are hedging with a less-correlated (to an all-out bull market) asset mix, and trailing it with an out-of-the-money (cheap) put option.

Q: I like it!

A: Me too!

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