Market Pricing In Armageddon: Positioning Ourselves for Returns

by: Nigam Arora

Markets throughout the world are pricing in as high as 20% chance of Armageddon. This phenomenon has caused discounts in the stock markets as well as premiums in commodities, precious metals, U.S. Treasuries, Japanese bonds, Japanese yen, Swiss franc and German bunds.

At The Arora Report, the 20% Armageddon discount/premium conclusion has emerged from the extensive amount of data we have been routinely monitoring for years. We monitor:

  • Economic data from 23 countries
  • Macro trends
  • All major currencies
  • All major commodities
  • Geo political considerations
  • Technology/Science developments
  • All major industries
  • 3000 U.S. stocks
  • 1000 International stocks
  • Trends in bonds all over the globe

Our models using the ZYX Change Method show that the hard data does not support such a high probability of Armageddon. In due course, these discounts and premiums will narrow, giving us an opportunity now to position ourselves for decent but not spectacular returns.

Some times over a short period of time, perception is reality and facts do not matter. This is precisely the environment we are in now. Our research going back 100 years shows that in such an environment the best course of action is to be more concerned about the return of capital than the return on capital.

If hard data supported the 20% probability of Armageddon, we would have employed a strategy similar to what we used in 2008. In 2008 when most investors were losing big money, those following our models made a boat load of money. This was accomplished using inverse ETFs, i.e., positioning the portfolio to profit from the markets going down. Some of the inverse ETFs we used include the following: ETFs: SH, SEF, SBB, EFZ, KRS, TWM, SMN, FAZ, FXP. We also made lot of money by going long on US Treasuries using TLT.

This is just a reminder to my long time readers that the models are designed to hit home runs both in up markets and down markets.

Currently we are in no man's land. The data is very noisy with no clear trends. In this environment, in addition to being on the defensive, we will focus on hitting singles and doubles. At the same time, we will allocate a small portion of the capital to be positioned for potential home runs.

The potential to hit home runs again in the future is very high as the discounts/premiums related to Armageddon are likely to narrow. However, we cannot enter a lot of positions because a vast majority of asset classes and subclasses are neither cheap nor expensive. We buy them when they are cheap and we short sell them through reverse ETFs when they are expensive.

The key to making money in this environment is lots of patience, holding lots of cash, and the willingness to pull the trigger when a certain asset class or subclass becomes too cheap or too expensive.

These are cheap asset classes, sectors or sub-sectors in the context of the how we see the world evolving over the next five years:

  • Large cap technology. A good ETF is XLK
  • Large cap European stocks. A good ETF is FEU
  • United Kingdom stocks. A good ETF is EWU
  • Semiconductor stocks. A good ETF is SMH
  • Oil service stocks. A good ETF is OIH
  • U.S. dollar. A good ETF is UUP
  • Grains. A good ETF is JJG
  • Crude oil. There is no good ETF. USO is not recommended.

These are expensive asset classes, sectors or subs-ectors in the context of the how we see the world evolving over the next five years:

  • Swiss franc. A good ETF is FXF
  • Japanese yen. A good ETF is FXY
  • Gold. Two good ETF are GLD and IAU
  • Silver. Two good ETFs are SLV and ZSL
  • U.S. Treasuries. Three good ETFs are TLT, TBF and TBT.

I recognize that the views in this article are not popular, but the our established record speaks for itself.

As a full disclosure, subscribers may have significant additional information on timing and position sizing; Without such information, an investor may incur big losses. Subscribers and I may also in the short term hold positions contrary to the very long term view expressed here.

Disclosure: I am long XLK, TBF, OIH, EWU, SMH. I am also short SLV, FXF, TLT