Most of last year I was bearish but apart from a dry run crash in October I’ve been dead wrong. The stock market wants to go up and it doesn’t matter how screwy the valuations get, the market doesn’t care.
There are reasons for this, mainly global QE’s that drive money to park in equities, particularly dollar denominated ones, but it doesn’t help a fundamentalist case.
The market wants to go up and I believe we are in a bubble phase that could run a long time or burst one morning for no apparent reason.
This makes the future quiet ‘exciting.’ There are fortunes to be made and lost. Personally im risk off so much of my firepower is sat languishing in cash and trembling in fear of the future bust.
However there is no point railing on about how the market is too high. Its likely to go higher.
You can ride it as long and as leveraged as you like. You can go all in or you can go risk off. You can make a mint or you might lose your shirt. It seems to me that the near future is uncertain and risky, but risk equals reward.
However one thing is certain, there will be a crash. Unless economics have been banned, and this time its different, the market is certain to crash. Its just a matter of when.
When the market melts down it is unlikely to simply fold in a day, the bubble will end, the market will slump ands if there is a strong catalyst for it, it will fall for months perhaps a year or two.
This is the charts for 2000 and 2007/2008. I like charts because they predict the past perfectly.
As you can see these bust weren’t over night.
This will happen and it will be sometime this decade. The years roll by pretty quick after all.
So what should we do when the bubble bursts when the balloon goes up?
Of course things might of changed by then but its always a good idea to put together a short portfolio. Often people look at shorting as a one of betting kind of operation but you can build a short portfolio in the same way as you build a long portfolio.
You can combine a long short portfolio too and go full ‘hedge fund’ with your investments. However when a bear market kicks off rather than run to cash or wait for a bottom, you can simply pick overvalued shares and dip your toes in the water of the dark art of shorting.
Here are a few suggestions for go to companies.
Facebook.
A 72 p/e is not going to hold up well if the bottom falls out of the market, a valuation 18 times sales is also unlikely to hold up well in a bear market.
You don’t have to be a rocket scientist to follow that Facebook is super-valued. In a bubble that’s fine, but in the aftermath things don’t work out so well. On floatation I said the company was expensive but was destined to rise, well now I’m suggesting when the bubble bursts Facebook it destined to take a heavy thumping.
Tesla.
Clearly Elon Musk is a genius and the stock price of Tesla supports that, but while the long term upside of electric powered cars is enormous the valuation of car companies is tiny as a ratio to their business. Tech companies like Google and Apple seemed destined to enter this space because their market caps would be astronomical if they could do auto comp any scale business and keep their tech valuation ratios in place. That’s an interesting gambit with autos being a messy business. Lets not even imagine oil at $60 a barrel for year to come as a downer or the fact that its valuation bears no resemblance to the GM, Ford and Fiat’s of this world. But lets not fight Tesla in a bull market, just write its name down for the aftermath of the end of this lovely neverending bull market.
Twitter.
Twitter is without doubt a wondrous thing, but 24 billion is an awful lot of money for a company selling #1.4 billion dollars of advertising and losing half a billion in the process. How exactly you lose $500m running an online SMS service is a mystery to me but that’s another matter, if these ratios remain in place when the market decides the bull is dead, then it’s a sure thing that twitter will lose big time.
These glory stocks are buoyed my a stock market treading firmly into bubble territory. There are many other such stocks and you might build a check list of them for the big day that will come when everyone seems to be agreeing that the bull market was all a terrible dream.
There is no need to jump in straight away, because bear markets run and run too.
As a rule of thumb, if you think it’s a bust, it isn’t, if your know it’s a bust it is.
So when you wake up one day and the market is off 500 points, don’t worry about diving in short leave it a week or two then if its still looking bleak you can move in on stocks like these and prepare for the rest of the fall.
Big companies with massive multiples never last in the same way as small companies with huge valuations almost always end up in the trash can of stock market history. But don’t fight the market to jump short on an expensive stock, wait for the market to make their move then pile on.