This Week’s Message: Half-Court Shots

I could honestly just limit this week’s message to the last paragraph of last evening’s note (but I won’t):

“…while, per the above, it’s not just us, our experience with past bear markets, our deep study of conditions and our understanding of the signaling within market internals in no way guarantees — as our messaging of late may imply — that the bear market’s next leg lower will be soon upon us; it simply says that the risk/reward setup right here demands that we hedge our bets.”

While, absolutely, the folks who are throwing all caution to the wind and buying equities against the severest fundamental headwind in nearly a century may turn into gazillionaires for their efforts, in my candid view they’re taking the equivalent of half-court shots with their money.

Recall my oft-referenced-of-late basketball analogy:

We can sum up basketball shooting as follows. There are:

1. Good shots that go in.
2. Good shots that miss.
3. Bad shots that miss.
4. Bad shots that go in.

#1’s are great. #2’s are fine, unavoidable, and possess a livable probability rate. #3’s, while costly, are the most predictable and, therefore — being costly — should be readily avoided. #4’s — as explained above — are an utter curse!

Here’s my point:

We can sum up investing as follows. There are:

1. Good investments that make money.
2. Good investments that lose money.
3. Bad investments that lose money.
4. Bad investments that make money.

#1’s are great. #2’s are fine, unavoidable, and possess a livable probability rate. #3’s, while costly, are the most predictable and, therefore — being costly — should be readily avoided. #4’s: I can’t think of a worst case scenario than a new investor hitting a #4 right out of the gate. The perverse feedback from that experience could absolutely send him or her to the poorhouse — as he or she might think that he or she’s discovered a high probability investing method and chalk up the subsequent string of losses to rotten luck. I.e., believing what are in reality #3’s to be #2’s. The emotional imprint from that early “success” may indeed last longer than his or her capital.

Recall also from last evening’s note:

“Tiny investors are historically bullish. Last week, the smallest of options traders (those who trade 10 contracts or fewer at a time) positioned themselves to bet on a rally, buying bullish calls and selling bearish puts at a record pace, according to Sundial Capital Research.

“When we look at a group of traders who tend to be wrong at emotional extremes, the warning sign is clear,” said Jason Goepfert, the president of Sundial. “There is no data we follow that is more worrying than this.””

Speaking of options, take a look at the current equity put/call ratio (white). Note the red circles. S&P 500 is in yellow:  click to enlarge…

One more from last night:

“The latest Bank of America Fund Manager Survey shows a net 23% of respondents think value will lag growth going forward. That’s the most bearish stance on value stocks since late 2007.”

Anything that rhymes with “late 2007” should grab your attention… 

Apparently advisors (save for yours truly) are beginning to rejoin the party. Here’s from Investors Intelligence’s weekly investment advisor survey:

“The bull-bear difference expanded further to +24.9%, up from +21.1% a week ago. That is the widest positive spread since late Feb. It is also a large shift was from the negative -11.6% difference at the Mar lows, when the bears outnumbered the bulls for three weeks.”

Now take another look at the chart above, specifically “late February.” 

Earlier this week I wrote about Fed Chairman Jerome Powell’s 60-minute interview. What I failed to mention was that 60-minutes failed to air the part where Powell said unemployment could exceed 30% (it was in the transcript). Interesting… 

Speaking of perhaps* being a bit* less than forthright on the prevailing risk (*Powell’s aired commentary, however, wasn’t exactly all sunshine either), here’s Hedgeye’s Darius Dale on how company execs are pointing to week-on-week improvement (man, there better be w-o-w improvement!), and not to the abysmal reality of earnings reports to come.

“Sticking with the theme of “classic”, how about the recent influx largely unsolicited weekly updates from company management teams? You know, the ones where they dodge investor questions about sales and earnings potentially being down a third to a half (or more) in Q2 in order to focus on the sequential week-over-week improvement in the most recent week(s)? Yeah, those updates.

Classic C-Suite behavior. Anything to get the stock price up. I can’t say I blame them; it’s the same perverse incentive structure we’ve allowed to be developed and gamed as voting constituents.”

Operative words there being “perverse incentive structures.”

Indeed, tying executive pay to stock price-action not only inspires the sort of stock-pumping shenanigans referenced above, it also largely explains the corporate debt mess the world presently finds itself in. I.e., that would be the last decade of borrowing, not for the purpose of expanding capacity and enhancing productivity, but for the sole purpose of artificially hiking earnings per share, and, thus, the company’s stock price via share buybacks. A phenomenon that won’t be there in nearly the past decade’s measure to support the market for some time going forward.

There’s lots more I could throw at you (other than record stimulus, and perhaps momentum, virtually none of it bullish), but I’ll simply sum it all up for now with the following:

While stocks continue to claw their way back from the March low — while the bulls are sinking those half-court shots — the court these days is looking dangerously slippery to me…

Have a great day!


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