Next Comes the Crash

When I was just sixteen, in the year 2000, I babysat for a family in which the father was involved in Lucent Technologies, a hi-tech telecommunications company. I saw it as an IT Giant, worth hundreds of billions of dollars back then, and it purchased his startup for the sum of $4.5bn, without there being a finished product!

A year later, the company’s operations, under Lucent’s leadership, basically closed down shop and the two co-founders, one of whom was the father of the boy I was taking care of, saw his $700mn share compensation risk getting cut in half, if he didn’t hedge it.

I will never forget his words to me: “ALWAYS step back as much as you can, so that you can see the bubble. There’s always a bubble, but when it’s small, you want to be in it; when it’s huge, you want to cash out and leave.”

That is exactly how I see markets; bull markets are, essentially, bubbles in formation, so you’ll always hear someone warning you about them, but it’s your job to assess whether or not he is way too early.

Now, let’s look at what has happened in 2021, so I can explain to you why the bubble in stocks seems large enough to me, so that I’m much more risk-averse right now. I’m not chasing anything higher and, as you can see from MY PORTFOLIO Watch List low-ball bids, I’m only after beaten-down deals:

1. The NASDAQ Composite is up 11 straight days, its longest win streak since July 2009!

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2. The 30Y US Real Yield is trading at a new record low, -0.50%, even though we are clearly about to embark on a massive global tapering, tightening and rate hike mission.

Courtesy: Zerohedge.com, Bloomberg

I haven’t even begun talking about the number of households that are now part of the stock market and the vast sums that millennials are putting into cryptocurrencies and options.

It’s clear to me that if an entire generation of Americans is investing their discretionary income, instead of spending it, then that is what’s driving an equities super-boom and slowing money velocity down to record lows!

Here is my strategy for reducing risks in times like these:

1. Under no circumstances do I chase up individual stocks; the exposure I already have to indices is pushing my portfolio to all-time highs – nearly on a weekly basis – so I don’t need to chase momentum.
2. Lower bids for individual stocks: In a melt-up, the number of companies that rally shrinks, while the markets continue to go up. This presents an opportunity to buy extremely well-run businesses, after they’ve fallen by 25% to 50% – a situation that opens itself up every few years, so we must be opportunistic about these and FEAR NOT.
3. Take profits on non-core positions and on lucky trades: Portfolio management is an evolving tactic, and sometimes high-conviction trades turn into more complicated ones. Because of the strong trend, you’re making a fortune without really knowing how or why, as the results don’t justify the price. In those times, take some or all of the chips off the table!
4. Cash up and wait: Accumulate dry powder and be ready for a market puke, so as to begin entering into new positions.

The markets will cheer rate hikes, because inflation is exploding, so the melt-up is not over, but the flames are getting too strong and we need to take one step back from the fire.

Best Regards,

Lior Gantz
President, WealthResearchGroup.com