Credit deflation and the reflation cycle to come.

[DurhamBorn]

15 hours ago, Majorpain said:

Too right, ive been lucky so far with a small profit but its only one wrong move and your down 20-30% on a big chunk of your capital.  There is an old joke about thats what turns a trader into a long term investor!

The most important thing i learned is was Chris saying that PM miners are following the main markets more than they are PM's, so any losses in the main market get amplfied leading to the current situation where Gold rises but there is no follow through in the miners.  That obviously gets reversed if they are both going higher (which they eventually will if they print enough).  That signals to me that the next opportunity will be in Q1 2019 when the falling main markets meets the long term trend line, and should produce a nice bounce in miners if the fear factor is starting to ramp up, so im playing it safe and staying out of the more economically unviable miners for the moment.  Although the first story on MSN earlier today was "how prepared for the next recession is your State", everyone seems to be waiting for this one...

I tried laddering in on the first share i ever bought, sadly i was young without the experience i have gained from that painful episode.  It really doesnt work if it keeps going down!  Thats why i have an obsession with buying good companies with solid revenue, and not speculative investments in the arse end of Africa.

Thats the key.Good companies with solid cash flow.They are often called value shares,defensive etc.I find a portfolio of around 20 companies has always worked for me.Iv opened positions in almost everything i want now,but only 37% of capital deployed (i dont count my miner capital that would be about 20%).If all my ladders are hit then my portfolio as a whole will be in stocks that are down around 80% from their highs and il be down 15% on the portfolio (before dividends).At that point it would yield 12% before dividend cuts.Of course they could half again from that nothing is ever certain.I always try to put probability in my favour and i invest for a full cycle (or what i think is the cycle).Im pretty sure the next cycle will be reflationary.In that certain sectors will have a tailwind for different reasons.Transport for cost and public policy.Green distributed energy.Telecoms for data explosion.Silver due to the green growth and investment demand.Delivery networks that can cover the whole country each day.Value retail and entertainment within communities.

Outside of the PM space everything is going exactly as expected.The PMs are a coiled spring,if they do run they will run hard.Im very happy to take that chance within my portfolio and im buying more with 100% of my salary each month.

I love times like this as an investor.Lets not forget as well this and the other thread nailed to the mast what was coming.We can never know all outcomes,or hit every ball,but we have been very close on most things,and the PMs would be the icing on the cake if they run.

[Calcutta]

Do we think this is game on now then? Things have simmered along for so long I'd pretty much given up taking notice. 

[sancho panza]

5 hours ago, Cattle Prod said:

The one with the fear index at 5? Yeah I saw that. Its fascinating how the herd turns, and can go to extreme emotions very quickly.

Panic is the right word, and people are stupid and irrational in a panic. I think its overdone, I think there are uncanny parallels to December 2015 and there is potential for a huge PM run for the next 6 months...but they all need to calm down! It's happening too quickly and its risking pulling everything down together.

Gartman it a tool, and a herd follower. He needs a cattle prod ;-)

ZH have called 50 of the last two recessions.Some articles are great otehrs are pisspoor.You have to nsift tehmThis market has short covering/ rally written all over it.Markets can stay oversold for long periods but it's a real risk staying short.

6 hours ago, onlyme said:

Housing transactions take time, quite a long time nowadays to go through. if it all falls apart quickly then you will notice in the market pricing, though it does tend to be sticky initially with stock just building up. I bet a lot of the speculative purchasers use this time to decide on go / no go purchase decision, going ahead if they already perceive they have gained by the committing to the exchange. 

Had a mate,chain of 3,took one year.

In chains of 6+ you run the real risk of the middle rungs getting MMRed out.Housing is illiquid,the main reason I prefer the building shares as a proxy

4 hours ago, Barnsey said:

Agreed that things are looking very oversold at the moment, short term rally still possible, just be careful that if you are bravely riding the PM wave short term, know when to pull out. This thing is going to be worse than 2008, when gdx went from $57 to $18 in 7 months.

I'd say highly likely.Things like AMZN and AAPL could you whipsaw viciously here imho.Others are in long nterm downtrends.Thye action is UIS fincanicails of recent days is really telling.Year of growth gone in a few days.

4 hours ago, Democorruptcy said:

Won't a Brexit factor be at play now? Project fear suggests house prices 30% lower than they would have been if we Brexit with no deal (over time not the often suggested straight -30% drop). If we did leave with no deal buyers might want a reduction on the agreed price and should get it - we all trust the jolly old BoE don't we? Alternatively if we abort leaving or go for the 2nd referendum won't sellers think they have agreed a price that's too cheap?

The underlying market is heavily overbought by retail money specualtors which leaves it wide open for a decent drop for a variety of reasons-overleveraged banks,weakening demand creating a vicious circle down,world wide trade downturn.Brexit is down the list-the US hosuing market is rolling over without Brexits help.For me Brexit will exacerbate the worldwdie downturn.

Also,politicians who know downtunr is coming will have a convenient scapegot for tehir mismanagement of the UK over last twnety years.Hence,we will get brexit I think.

2 hours ago, Democorruptcy said:

Under what scenario?

Don't they already have a plan? The mansion house £1.2bn then and up to £5bn later, leveraged 150x to £180bn then and later £750bn, to keep credit flowing?

That money created will be excessivvely exposed to losses hence I dont think theyll leverage that capital anywhere near as much as they could.Just my virew

1 hour ago, DurhamBorn said:

Thats the key.Good companies with solid cash flow.They are often called value shares,defensive etc.I find a portfolio of around 20 companies has always worked for me.Iv opened positions in almost everything i want now,but only 37% of capital deployed (i dont count my miner capital that would be about 20%).If all my ladders are hit then my portfolio as a whole will be in stocks that are down around 80% from their highs and il be down 15% on the portfolio (before dividends).At that point it would yield 12% before dividend cuts.Of course they could half again from that nothing is ever certain.I always try to put probability in my favour and i invest for a full cycle (or what i think is the cycle).Im pretty sure the next cycle will be reflationary.In that certain sectors will have a tailwind for different reasons.Transport for cost and public policy.Green distributed energy.Telecoms for data explosion.Silver due to the green growth and investment demand.Delivery networks that can cover the whole country each day.Value retail and entertainment within communities.

Outside of the PM space everything is going exactly as expected.The PMs are a coiled spring,if they do run they will run hard.Im very happy to take that chance within my portfolio and im buying more with 100% of my salary each month.

I love times like this as an investor.Lets not forget as well this and the other thread nailed to the mast what was coming.We can never know all outcomes,or hit every ball,but we have been very close on most things,and the PMs would be the icing on the cake if they run.

As I sit down and watch what;s going on,increasingly,I'm thinking of jsut adding PM miners,picking up a few utilities/telecoms/oil as they hit good value and taking my risk shorting.Im buying the goldies on a 20 year view potentially.I'm prepared for 50% down across our holdings.I had some techies lose 80/90% before the late 90's bull run saw some things 50 bag ++ from their bottom.I naturally sold early in the bubble.

Part of me is pondering whether I wait for the eponetial phase with the goldies.I've left plent yof space for another tranche after last weeks and if the value gets better might even start moving divis from comms/leccy/oil into them .If I'm wrong I'm wrong,but this could be the biggest opporutnity since late 90's and goldies in 08.

16 minutes ago, Calcutta said:

Do we think this is game on now then? Things have simmered along for so long I'd pretty much given up taking notice. 

I think it's game on.US financial shares are the lead indicator for me at the mo.

[kibuc]

The fun has only just begun. 

 

Trump Discusses Firing Fed's Powell After Latest Rate Hike, Sources Say

https://www.bloomberg.com/amp/news/articles/2018-12-22/trump-said-to-discuss-firing-fed-s-powell-after-latest-rate-hike?__twitter_impression=true

[Democorruptcy]

12 minutes ago, sancho panza said:

The underlying market is heavily overbought by retail money specualtors which leaves it wide open for a decent drop for a variety of reasons-overleveraged banks,weakening demand creating a vicious circle down,world wide trade downturn.Brexit is down the list-the US hosuing market is rolling over without Brexits help.For me Brexit will exacerbate the worldwdie downturn.

Also,politicians who know downtunr is coming will have a convenient scapegot for tehir mismanagement of the UK over last twnety years.Hence,we will get brexit I think.

That money created will be excessivvely exposed to losses hence I dont think theyll leverage that capital anywhere near as much as they could.Just my virew

I think what happens re Brexit will affect sentiment.

These days banks don't seem to have to worry about losses. Just bundle the losing bets up into a bad bank and sweep it under the carpet.

[Calcutta]

Premium Bonds and Bet365 not going to be looking such a shoddy portfolio soon then hopefully.

[Barnsey]

Funny thing with Brexit is that if it's called off or postponed, it'll come at a time when we're entering a global recession, so damned if we do or don't imo.

[Barnsey]

1 minute ago, Calcutta said:

Premium Bonds and Bet365 not going to be looking such a shoddy portfolio soon then hopefully.

I've set up a twice weekly lottery direct debit for the first time, why not?  All cash in NS&I premium bonds.

[DurhamBorn]

1 hour ago, Cattle Prod said:

Nail on the head, Sancho, it's about being psychologically prepared. Hussman recently published the stages of a bear market turn, so people can get their heads right. I look at the panic in recent weeks with amazement, these people simply cannot suffer even a small loss, they have been conditioned to always believe in the win. 

It doesn't bother me in the slightest, because I have 100% conviction in where things will be in 5-7 years from now. Therefore, what happens now is just bookkeeping. I have to remind myself of this sometimes, because I'm human too. Every time I take a hit on my oil positions for example, I say "but you know, with absolute certainty, that this will hit $200 a barrel within 5 years", and then I get excited that we are moving closer to the bottom. For example, WTI got to within $8 of it's inflation adjusted 2009 bottom this week. I'm astonished, and delighted. For me, the fear is not that it's dropping, its that I won't get the opportunity to buy more. Because it is the opportunity of a lifetime, possibly my last one.

Same for PMs. I'm not sure GDX will halve like 2008, I think it already has. It cane close to its 2008/9 bottom in August, and costs have gone up since 2009. But can I safely buy more? Yes, if it goes down! Stocks? I'm down about 3.5% in recent weeks, happy enough with that. Especically with an average 7.1% dividend.

Fear attacks when you're not mentally prepared. And that is what this thread is all about for me. 

Superb post,and people should read it and think about that.Im 99% convinced silver is going to $200,maybe even $300.Im also convinced some PM miners will 20x,50x even 100x in the next cycle.My roadmap  on oil is $20 or less but $200 in the reflation.I dont play oil,but it matters for my other investments like public transport.They will hedge 5 years out so at some point they will be using oil priced at 20% of what the public is paying and their free cash those years will explode higher.

The key here is what will come back and do very well and what wont.Amazon can go to $500 and i wont be buying it.That goes for most other growth companies.The next cycle will be a distribution cycle.That doesnt favour want,it favours need.The hated sectors will shine bright.Companies that depreciate expensive assets and can front run or keep up with inflation will be great investments (prices up 7% but wages only up 7% a year later with the pay deal etc)

The companies im buying should be able to keep around 70% of the present dividend payouts going at the bottom,so thats around 6%/7% of the price im paying now.If the cuts are smaller all the better,if higher no problem.

Im seeing massive value already in many sectors and im sure the pain in them isnt over.I have no concerns about going red on every holding,and i will buy on my stair case points whatever is happening.

For the PM miners im buying more each month with my salary (100% of my salary).Last months went into Endeavour silver at $2.50.Il keep doing that as long as im there,or until GDXJ hits $40 (i expect $60+ at some point) when il stop.If they go to zero across the bunch il lose my labour and shrug my shoulders,but i expect il double at least what im putting in.

Reflation cycles produce massive wealth in a few sectors.I doubt anyone in the city or Wall Street understand them because they are rare beasts .In simple terms if you have £100k,put £10k in silver and £10k in silver/gold miners.Inflation can return with a roar and youl be protected.

I agree 100% with @sancho panza on the PMs.I have no concern if they half or more.I dont think they will,but if they do im fine.However i do think they have a real potential to make life changing amounts in the next 7 years.I like that kind of risk reward.

 

[Durabo]

23 minutes ago, DurhamBorn said:

The companies im buying should be able to keep around 70% of the present dividend payouts going at the bottom,so thats around 6%/7% of the price im paying now.If the cuts are smaller all the better,if higher no problem.

 

Any companies in particular that are catching your eye?

[Bobthebuilder]

Hi Durham Born,

Say i was going to invest 10k into silver, what do you think would be the best option. Monthly at say 500 / 1000, or staircase at 25% amounts.

Sorry if a dumb question but i am currently drip feeding silver at much smaller amounts than this.

Thank you in advance.

Bob.

[Harley]

7 hours ago, Cattle Prod said:

Fear attacks when you're not mentally prepared. And that is what this thread is all about for me. 

Tidy!

[Lightscribe]

21 hours ago, DurhamBorn said:

Silver due to the green growth and investment demand.

I found the following paper interesting (as much as these topics can be anyway) in regards to silver usage in green energy. The amount of industrial usage looks set to decline by refined processes such as ‘thrifting’ but will be offset with sheer demand for the likes of demand for green energy and vehicles. Certainly very relevant and covers a lot of the stuff we’ve discussed on here.

https://www.silverinstitute.org/wp-content/uploads/2018/07/Role_of_Silver_Green_Revolution_28Jun2018.pdf

[DurhamBorn]

17 hours ago, Bobthebuilder said:

Hi Durham Born,

Say i was going to invest 10k into silver, what do you think would be the best option. Monthly at say 500 / 1000, or staircase at 25% amounts.

Sorry if a dumb question but i am currently drip feeding silver at much smaller amounts than this.

Thank you in advance.

Bob.

Others would say in one go,but i like to stair case in slowly.I would say £500 a month is a very nice way to do this,or maybe even £300.Id also maybe look to add the odd miner as well,even if again just holding 6 with £500 in each.For myself i have roughly 20% of net worth outside of my house in PM miners and silver.17% of that is in miners.I wouldnt go outside my rules on my portfolio,but as i wanted more miners i decided to go back to work and save 100% of the salary into more miners each month.That was a big choice for me as i had pretty much retired.I count it outside my portfolio and figure il lose a years labour (if the work lasts that long before a crash)or maybe make an amount i could really enjoy.I always think life is a pay off,and whatever happens i think long term silver is a bargain at these prices.I look at it like this.Even someone on a lower paid job can put away £2k-£3k in silver and forget about it.If it does run to $150-$250 at some point its likely other assets (like houses) are in big trouble.That £2k of silver might turn into half a house,or a nice little dividend portfolio.

As always everyone had to DYOR and do whats best for their personal finances etc.

[DurhamBorn]

17 hours ago, Durabo said:

Any companies in particular that are catching your eye?

Im looking at the next cycle Durabo and slowly adding in a stair case.I like big/medium companies that should get a tailwind from inflation.I like the areas of distributed energy (Centrica might be a big player here,thats might of course),green energy,public transport (hated sector,huge potential in a reflation and just really cheap),telecoms,mobile data will just grow and grow and companies who built their next gen networks early borrowing from bondholders at 2% will clean up.Imagine depreciating assets over 15 years that are only costing you 2% in interest with inflation at 7% to 12%.Free cash explosion.Community assets where you can have discount retail and cheap entertainment like budget cinemas,budget gyms etc.NOT huge malls.Miners,especially silver miners.Silver is going to find its way into more and more things.Electric cars alone will start to consume more.Most comes from copper mines and i expect the demand curve to be well ahead of any new copper mines coming on stream.Natural Gas and oil will have their last,but maybe biggest bull market (its that that will drive the push into clean transport,the costs of oil).Nationwide distribution networks with lots of already paid for land etc.Half empty lorries wont be sustainable in the next cycle so small players will be destroyed.

Im also quite happy to buy other areas that maybe arent so suited to the next cycle,but look cheap anyway and a buffer if im wrong.Iv started buying Imperial Brands and BAT tobacco again.I had both for 20 years but sold them all near their highs (along with many others).I wont have anywhere near the holdings i had before,but i will own a few.

One big problem of course is the chance this bear could be so brutal it wipes out the equity in most of the market.Its a very difficult time to invest and caution is needed .

[afly]

I'm in the fortunate position of a second employment leaving me about 2-3k going spare every month. I don't know how long that will last and am treating it as temporary bonus

Should I overpay my 3yr (remaining) 2.24% fixed mortgage penalty free or drop my balls in the miners & reflation stocks every month?  Instinctively I have been overpaying the mortgage knowing that it may not be the wisest financial move but how would folks on here assess that risk position?

Theoretically a low, fixed rate mortgage may be hard to come by in the coming years and suddenly seem like very good value. But in the relatively short 3 yrs remaining on mine, I could be going head first into a world of pain if I haven't tamed it by then. 

Perhaps a 1k pick per month and 1-2k to the mortgage might be a sensible? 

What say you DOSBODSers?

 

 

 

[leonardratso]

this question was raised previously by stokiescum, he opted for the paydown, quite rightly id say. But its up to you really, i personally wouldnt trust my income to string it out over the years, so i would definately plump for the overhead reduction first and foremost, over what id term 'a spot of gambling where nothing is guaranteed'.

[Gin]

1 hour ago, DurhamBorn said:

Others would say in one go,but i like to stair case in slowly.I would say £500 a month is a very nice way to do this,or maybe even £300.Id also maybe look to add the odd miner as .Even someone on a lower paid job can put away £2k-£3k in silver and forget about it.If it does run to $150-$250 at some point its likely other assets (like houses) are in big trouble.That £2k of silver might turn into half a house,or a nice little dividend portfolio.

As always everyone had to DYOR and do whats best for their personal finances etc.

Quick question :

Are you looking at maybe 5 to 8 years before silver really hits the highs..do you have a time scale in mind.

Is that $ per ounce you are hoping for.?

(thanks in advance)

[DurhamBorn]

6 minutes ago, Gin said:

Quick question :

Are you looking at maybe 5 to 8 years before silver really hits the highs..do you have a time scale in mind.

If things go to plan id say around 7 years from now the next cycle will be starting to run out of gas.The key is when CBs start to turn loose.Of course in bubbles the big gains might be made right at the end.These are just potential road maps.A lot can change,and a lot depends on CB action.If they dont turn loose we might be stuck in stagflation.That would be a terrible place to be.

[spygirl]

48 minutes ago, afly said:

I'm in the fortunate position of a second employment leaving me about 2-3k going spare every month. I don't know how long that will last and am treating it as temporary bonus

Should I overpay my 3yr (remaining) 2.24% fixed mortgage penalty free or drop my balls in the miners & reflation stocks every month?  Instinctively I have been overpaying the mortgage knowing that it may not be the wisest financial move but how would folks on here assess that risk position?

Theoretically a low, fixed rate mortgage may be hard to come by in the coming years and suddenly seem like very good value. But in the relatively short 3 yrs remaining on mine, I could be going head first into a world of pain if I haven't tamed it by then. 

Perhaps a 1k pick per month and 1-2k to the mortgage might be a sensible? 

What say you DOSBODSers?

 

 

 

does the mortgage clear in 3 years?

If not, how much remains? More than 1x income than carry on overpaying.

 

[afly]

Nope the fix ends in 3 years. The mortgage is about 90k falling naturally to around 75k after that period which is a substantially higher figure than my annual income so all heads seem to point to the safest solution and pay the damn thing down while I can. On paper I could clear it inside two years although I don't know if my marriage would survive that 

[Bear Hug]

48 minutes ago, afly said:

Nope the fix ends in 3 years. The mortgage is about 90k falling naturally to around 75k after that period which is a substantially higher figure than my annual income so all heads seem to point to the safest solution and pay the damn thing down while I can. On paper I could clear it inside two years although I don't know if my marriage would survive that 

Your financial position looks like you should be offering advice rather than asking for it but thanks for sharing anyway.

Edit - apologies, this above comment of mine looked unnecessary harsh.

To me the question boils down to whether you can get a return higher than 2.24% pa over 3 years by investing into miners and reflation stocks.  Possibly. 

Would I borrow money at 2.24% pa to invest in stocks?  Probably not. 

[sancho panza]

22 hours ago, Cattle Prod said:

Nail on the head, Sancho, it's about being psychologically prepared. Hussman recently published the stages of a bear market turn, so people can get their heads right. I look at the panic in recent weeks with amazement, these people simply cannot suffer even a small loss, they have been conditioned to always believe in the win. 

It doesn't bother me in the slightest, because I have 100% conviction in where things will be in 5-7 years from now. Therefore, what happens now is just bookkeeping. I have to remind myself of this sometimes, because I'm human too. Every time I take a hit on my oil positions for example, I say "but you know, with absolute certainty, that this will hit $200 a barrel within 5 years", and then I get excited that we are moving closer to the bottom. For example, WTI got to within $8 of it's inflation adjusted 2009 bottom this week. I'm astonished, and delighted. For me, the fear is not that it's dropping, its that I won't get the opportunity to buy more. Because it is the opportunity of a lifetime, possibly my last one.

Same for PMs. I'm not sure GDX will halve like 2008, I think it already has. It cane close to its 2008/9 bottom in August, and costs have gone up since 2009. But can I safely buy more? Yes, if it goes down! Stocks? I'm down about 3.5% in recent weeks, happy enough with that. Especically with an average 7.1% dividend.

Fear attacks when you're not mentally prepared. And that is what this thread is all about for me. 

I'm hoping to get more into the oilies,mobile comms and utilities.Your comment made me reference GDX but the chart doesn't go back that far.Hence I psot GFI as a proxy-I'm aware of the weaknesses but jsut trying to esablish a decent historical perpsective.

In a sell off GDX aka the liauid could get sold off with the illiauid but I doubt the people holding it now would be long AMZN.So I agree.Prospects of it halving from here are poor.

Quick uestion have you got a view on Italian giant ENI which seems beat up?

 

23 hours ago, Barnsey said:

Funny thing with Brexit is that if it's called off or postponed, it'll come at a time when we're entering a global recession, so damned if we do or don't imo.

Brexit is going to be the convenient scapegoat for the banking system delveraging in the UK I'm afraid.

 

2 hours ago, DurhamBorn said:

Im looking at the next cycle Durabo and slowly adding in a stair case.I like big/medium companies that should get a tailwind from inflation.I like the areas of distributed energy (Centrica might be a big player here,thats might of course),green energy,public transport (hated sector,huge potential in a reflation and just really cheap),telecoms,mobile data will just grow and grow and companies who built their next gen networks early borrowing from bondholders at 2% will clean up.Imagine depreciating assets over 15 years that are only costing you 2% in interest with inflation at 7% to 12%.Free cash explosion.Community assets where you can have discount retail and cheap entertainment like budget cinemas,budget gyms etc.NOT huge malls.Miners,especially silver miners.Silver is going to find its way into more and more things.Electric cars alone will start to consume more.Most comes from copper mines and i expect the demand curve to be well ahead of any new copper mines coming on stream.Natural Gas and oil will have their last,but maybe biggest bull market (its that that will drive the push into clean transport,the costs of oil).Nationwide distribution networks with lots of already paid for land etc.Half empty lorries wont be sustainable in the next cycle so small players will be destroyed.

Im also quite happy to buy other areas that maybe arent so suited to the next cycle,but look cheap anyway and a buffer if im wrong.Iv started buying Imperial Brands and BAT tobacco again.I had both for 20 years but sold them all near their highs (along with many others).I wont have anywhere near the holdings i had before,but i will own a few.

One big problem of course is the chance this bear could be so brutal it wipes out the equity in most of the market.Its a very difficult time to invest and caution is needed .

Bit i bold is perhaps one of the most succinct explanations of why things like Vod/CNA are great punts for the here and now.I won't lie,I'll be quoting that to a couple of family members over the holidays.

I have to say though,the last bit in bold is 'wise wrods'.I'm genuinely not sure how co.s like RBS/Barc and LLoyds will come out of this.

2 hours ago, afly said:

I'm in the fortunate position of a second employment leaving me about 2-3k going spare every month. I don't know how long that will last and am treating it as temporary bonus

Should I overpay my 3yr (remaining) 2.24% fixed mortgage penalty free or drop my balls in the miners & reflation stocks every month?  Instinctively I have been overpaying the mortgage knowing that it may not be the wisest financial move but how would folks on here assess that risk position?

Theoretically a low, fixed rate mortgage may be hard to come by in the coming years and suddenly seem like very good value. But in the relatively short 3 yrs remaining on mine, I could be going head first into a world of pain if I haven't tamed it by then. 

Perhaps a 1k pick per month and 1-2k to the mortgage might be a sensible? 

What say you DOSBODSers?

 

 

 

Post cross over,I think there's scope for reverting to a ten year fix and setting up some money in another asset class.

 

[sancho panza]

Wolf clearly reading thsi thread

His coverage of the markets is really top drawer given it's free.You can pay for worse advice

https://wolfstreet.com/2018/12/22/fangman-stocks-nasdaq-sell-off-tax-loss-harvesting/

Nothing Goes to Hell in a Straight Line, Not Even Stocks

But a whole generation of investors has never been through a Nasdaq-bubble unwind, and they’re shocked.

I just dug out my “Dow 20,000” hat, but I might not need it for a while because nothing goes to hell in a straight line. And I still have my “Dow 10,000” hat somewhere just in case, though I doubt I’ll need to go look for it anytime soon for the reasons I’ll explain in a moment.

I have to admit, this was a beauty of a Santa rally. We were promised a Santa rally by the buy-buy-buy hype organs on Wall Street, so here we go with our Santa rally:

The Dow dropped 6.9% this week, to 22,445, and is down 9.2% for the year. It’s down 16.3% from its all-time peak in September. It’s only about 11% away from my “Dow 20,000” hat. The last time we saw 20,000 on the way up was in January 2017. But rolling back 21 months of gains in the stock market — from September 2018 back to January 2017 — is nothing. The big deal is how much the Dow has surged over those 21 months from 20,000 to the peak in September: 35%.

Over the same period, the economy grew maybe 5%. So going back to 20,000 will just surgically remove the very tippy top off the bubble.

The S&P 500 Index dropped 7.1% this week and is down 9.6% year to date, down 17.5% from the peak in September, and back where it had first been on June 1, 2017.

The chart is not exactly pretty, with that nearly straight red line south, but let me assure you again: Nothing goes to hell in a straight line, and in a moment, I’ll get to why this one won’t either.

The long-term chart puts this into perspective: The nine-year surge has been so huge that the current sell-off doesn’t really measure up, especially not compared to the last major sell-off during which the S&P 500 dropped by about 50%:

The Nasdaq dropped 8.4% this week to 6,573, and is down 8.3% year to date. “Nasdaq 5000” not yet. But those who promised us Nasdaq 10,000 will have to be patient, very patient. The Nasdaq is down 22% from its peak at the end of August, and is back where it had last been in September 2017.

But when the Nasdaq, which is powered by the FANGMAN stocks — Facebook, Amazon, Netflix, Google, Microsoft, Apple, and Nvidia — heads south, it’s good to remember the stocks on this index are huge bubble-blowers, and they can plunge hugely. In the 2000-2002 sell-off, the Nasdaq plunged 78%. So a 22% decline in the Nasdaq is fairly minor.

But there is a whole generation of investors out there who have never been through a Nasdaq-bubble unwind. For them, this is the first real tech stock sell-off, and they’re shocked. For them, tech stocks can only inflate. They can never deflate. They don’t know from experience that hundreds of the companies on the Nasdaq will fold during such a sell-off because they run out of money to burn and just disappear. A real Nasdaq sell-off entails a real shake-out, where the wheat is separated from the chaff, and this chaff in your portfolio goes to zero.

So how bad can a Nasdaq bear market get? Well, from experience, it can get a lot worse than expected. That’s what Nasdaq sell-offs have taught us.

In terms of magnitude, the FANGMAN stocks have provided much of the fuel for the Nasdaq bubble. So let’s step back and reflect on what Goldman Sachs said about these tech stock in June 2018. I covered this propitious event with an article titled, “FANGMAN Stocks Are Not a Bubble, Pleads Goldman Sachs. This time, it’s different, said the strategists.” I wrote: “With regards to tech stocks, no matter how high they’ve soared, there is no bubble, based, believe it or not, on fundamentals, Goldman Sachs strategist Peter Oppenheimer and Guillaume Jaisson pleaded in a note. And the fun is going to continue, they said. And it’s different this time.” And then I debunked them with some numbers, such PE ratios and price-to-sales ratios.

The FANGMAN stocks combined reached a market capitalization of $4.63 trillion on August 31 that has since plunged 27%, or by $1.26 trillion – just these seven stocks, all of them traded on the Nasdaq! By the sheer size of their gargantuan market capitalization, they were the powerhouse on the way up, and they’re the powerhouse on the way down. Their combined market cap is now back where it had first been on October 25, 2017:

This list shows the illuminating plunge of the individual FANGMAN stocks from their highs earlier this year:

Facebook [FB] at $124.95 (-43%), back where it had first been in August 2016.

Amazon [AMZN] at $1,377.45 (-33%). But this is the mind-boggler: the stock has plunged 33% and is still up year-to-date, which shows just how far the stock has bubbled this year! But this is not atypical for hyperinflated Nasdaq stocks, which is why the Nasdaq tends to go so much lower.

Even after the plunge, Amazon’s PE ratio is still 77. Given that it’s still a growth company, it should have a higher PE ratio than companies with stalling sales, so maybe 25. At current earnings, that would cut today’s stock price to $460! That price would mean a 78% decline from the peak. See the theme here?

Netflix [NFLX] at $246.39 (-42%). The company is massively cash-flow negative, is junk-rated, and needs to borrow enormous amounts of money every year to do what it does. Amazon never had to borrow money to survive. Netflix does. Its PE ratio, despite the 42% plunge in share price, is still a stratospheric 88.

Alphabet [GOOG] at $979.54 (-23%).

Microsoft [MFST] at $98.23 (-15%). Feathers barely ruffled so far.

Apple [AAPL] at $150.73 (-35%). Once the most valued publicly traded company in the world with a market cap of $1.12 trillion, it is now in second place at $715 billion, behind Microsoft.

Nvidia [NVDA] at $129.57 (-56%), back where it had been in May 2017, which shows just what a ludicrous bubble it had experienced from May 2017 to October 1, 2018: It shot up 133%. But in the three months since October 1, it has given up all of those gains. That’s what it means to gain 133% and to then lose 56%.

But let me assure you again, nothing goes to hell in a straight line. Near term, there are a couple of reasons.

Investors who bought these FANGMAN shares — or most other Nasdaq shares, or most any shares — this year have some sizeable paper losses on their hands that they can harvest for tax purposes by selling the shares and turning the paper losses into real losses on their tax returns. These tax losses will have to be incurred by year-end. So part of the selling we’re seeing now is tax-loss harvesting.

We haven’t seen tax-loss harvesting in any magnitude in years because the losses were limited to some individual stocks, as markets overall have risen year-after-year since 2009. So we have forgotten what this can do at year-end.

But this will abate before year-end. And then early next year, this headwind is gone.

In addition, a lot of money has been set up in specialized hedge funds for the specific purpose of trading the sell offs. Individuals too play this game. This has been the case all year, and it continues to be the case. These are institutional dip buyers, many of them algo-driven, and individual dip buyers too, that together have lots of firepower. And they’re short-term traders: buy low, sell higher. Let others worry about the rest.

So early next year, with tax-loss harvesting out of the way, and with institutional and individual dip buyers waiting for their chance, there is bound to be a rally, maybe a sharp one that will rattle some short-sellers, causing a brief short-squeeze. And then the market will be ready for the next leg down.

This is why this stock market downturn will be highly volatile with many big ups and downs, and with an overall down-trend that is likely to last for years. 

[spygirl]

4 hours ago, afly said:

Nope the fix ends in 3 years. The mortgage is about 90k falling naturally to around 75k after that period which is a substantially higher figure than my annual income so all heads seem to point to the safest solution and pay the damn thing down while I can. On paper I could clear it inside two years although I don't know if my marriage would survive that 

I think the age of cheap mortgages will be over soon.

Ive just over 3 years of a 1.4 5 year fix. Fixing at that rate is no brainer - they wont fall much more, they didnt!

Its not a big mortgage -  less1x income.

Ive overpaid for 2 years and had some extra cash to throw at it. Itll be halved at the 2 year anniversary. Im happy to stop the overpay the, let rest run out at tge initail monthly.

There be about 10k left when the fix ends. Do little i dont give a fuck. Goes to mrs spy to clear it - either lump sum or carry on paying. Interest exposure risk is fuckall, would not care if svr is 8% - thats only 800y or 70m.