Plus ca change, plus c'est la meme chose!
It is almost five years since the market took a dive following the 2008 Lehman and 2009 Bear Stearns issues. The events leading up to the collapse had the following characteristics:
- Rising home prices;
- Rising stock markets;
- Central bank stimulus;
- Growing deficits in most industrialized countries;
- Growing national debt worldwide;
- Many stocks hitting all-time highs; and,
- Generally bullish sentiment across all asset classes.
Sound familiar? It should. The headlines today are full of similar themes. Every day someone comments on the strength of the housing recovery and the Case-Shiller index keeps rising. Stock markets are touching all-time highs. The Fed has made it clear it will continue stimulating the economy with the largest stimulus program in recorded history, the so-called $85 billion a month of market-distorting quantitative easing, a term for printing money. The national debt is hopelessly out of control and the legislators are incapable of agreeing on the weather, the time of day, or what policy will bring it under control.
At the same time, many stocks are hitting all-time highs and of those many at price-to-earnings multiples well in excess of 100 times. Netflix (NASDAQ:NFLX), LinkedIn (NYSE:LNKD), Amazon.com (NASDAQ:AMZN) and Salesforce.com (NYSE:CRM) are great examples. More importantly, investors are indifferent to the valuations and in many SA articles and comments argue that the traditional valuations don't apply in the particular case. Drunk with the euphoria of watching their once $20 Apple (NASDAQ:AAPL) shares hit $700 just last October, and certain they will again, investors in the world's once largest capitalization company will invest in vaporware yet to be released to justify maintaining their belief that the ride is not yet over. And, it might not be.
Irrational markets know no bounds, but they do depend on finding new investors to replace those that exit as they rise. Traditionally, the smart money in hedge funds and institutions gets in early and the period of "distribution" takes place when the professionals start to liquidate and the sell-side finds arguments to persuade retail investors to take their place, clipping a tidy commission on the pass.
The recent conviction of Fabulous Fab Tourre, a partner at Goldman Sachs, for outright fraud should give investors some idea of how much the Wall Street giants care about their well-being. Goldman avoided a similar fate by coughing up several hundred million dollars in a settlement that did not include any admission of wrong doing. Nor did the settlement exonerate it. There are several hundred reasons to believe that perhaps, just perhaps, it had its interests and not investors interests at heart.
There are smart investors and there are smartphones. Smart investors realize that when suppliers are shipping 1 billion smartphones a year to the 7 billion people on the planet that a time will soon come when everyone who wants one will own three. If there is anyone among those 7 billion people who believes the smartphone market will continue to grow at double-digit rates when that point is achieved, those people are the "muppets" the Goldman Sachs of the world will seek out to sell "investments." Don't be surprised to find Goldman and others on the other side of the trade.
For my money, it is a good time to be cautious and may be a good time to be short. Short selling has its risks but finding a buyer is not one of them. The best shorts in my view are popular stocks, not already shorted by everyone in sight, with high liquidity but vulnerable to the shifting winds of markets and the economy. Apple is one of them. Liquidity is not an issue, and the maturing smartphone market will eventually take its toll as the massive growth that propelled it to its pinnacle spot on the world's stock markets turns into a cycle of incremental changes, lower margins and increased consumer choices from the plethora of others crowding into the space.
You will know when the period of "distribution" is well under way. It will be the day you get a call from a broker you don't know suggesting a stock investment pitched with a "you don't want to miss out on this one" line. And, while I don't give advice to anyone about their investments, for my own money I have a long-standing rule. If you are offered an investment on a cold call you can safely short the stock. By the time they get to me, brokers have exhausted every other buyer they could think of and the game has ended.
I am short Apple calls above market. If exercised, I will be short at $500. For my money, it is a risk worth taking.
Additional disclosure: I am short calls on Apple above market