Why should the market go down now?
I’ve been bearish since I first learned of this Quantitative Easing Nonsense.
The governments just printed money out of thin air and suppressed interest rates at zero for a decade.
How could the Ponzi not have dire consequences?
But it just went up, and up, and up.
The upward grinds last for months, the drops are dislocations, a matter of days.
So here we are teasing the 200 DMA. I made a fortune the last time this support gave out… that was three years ago… the markets a hell of a lot higher than it was then… Learned a painful lesson about calling tops. Nothings changed except things are even more jumbled now.
Interest Rates are like a pin to prick this Bubble of Madness.
Then again, the economy is not the stock market.
Asset Prices are out of hand. What’s the value of money?
What do we value?
What in the world is going on?
There is a great divergence between American and Emerging Markets.
Something happened in January 2018.
American market euphoria continues, while Emerging markets bleed.
The question is, who’s bluffing?
Will EEM snap back and play catch-up or will the S&P eventually succumb to global forces?
The QE Bubble has been relentless, incredible, one for the history books.
Valuations are stretched. Interest Rates are rising.
A swift unwind seems inevitable. Yet, timing remains impossible.
My strategy of holding a portfolio of heavily-diversified, value oriented, high dividend paying securities still seems like the necessary core.
The temptation remains to gun down these insane bubble tech queens…
TSLA will most assuredly crumble in time.. However, I’ve been burned with shorts and derivatives so many times, it’s hard for me to want to risk anything…
So do we stick with what we know works and grind out the dividend strategy, or do we gun it for the fast money?
The market's getting weird.
Interest Rates are going to affect the economy sooner or later.
Rates are already beginning to hit median housing prices in the United States.
The public at large has an unduly large amount of their wealth tied up in real-estate.
Real-Estate prices have been bid-up to insanity levels. Almost no young-adult can afford to buy a house and lord knows there has been a builder feeding frenzy in commercial real estate / multi-family housing for years. At some point demand will be fully-saturated and the pendulum/price trajectory will tip.
As always, Timing.
August 30, 2018
Tesla had earnings last week showing record losses. With a rotten balance sheet and cash-incinerating income statement, Tesla is sprinting towards bankruptcy.
As proof that the market trades on fairy dust, TSLA promptly surged $50, obliterating short-sellers, skeptics, and anybody who wants to believe that there is any sort of rational basis to make sense of stock valuation.
As clearly that wasn’t enough, just 3 days later, during market hours, in an unprecedented and likely illegal move of brash self-indulgent stupidity Elon Musk tweeted a remark stating that he had plans to take Tesla private at $420/share and that funding was secured.
The stock rallied, was halted, opened, and then rallied even further as algorithms and fan boys rejoiced without a thought to the truth and viability of the asinine statement.
I’m going to lay this out for you right now. If I am proven wrong so be it but this is the truth as I see it.
No rational entity would make a bid to take TSLA private at $420/share.
Tesla is not in the business of manufacturing losses. Tesla is a car manufacturer, perhaps the shittiest car manufacture of all time. Tesla makes shotty cars that literally burst into flames out of the blue. Thanks to an overhyped ‘autopilot’ functionality, crashes are frequent and as a result, the Tesla Model S is the most expensive car in the market to insure. Tesla makes cars whose panels misalign and wheels fall off.
Terrible consumer reviews, ridiculous delays, tent shaded manufacturing lines, repair shops booked solid for months. Tesla made cars are dogshit, but let’s be honest; nobody is valuing TSLA stock based on TSLA cars. People are valuing TSLA stock based on a widespread disillusionment that Elon Musk is some sort of demi-god sent from the heavens to save humanity. Unfortunately for the true-believers out there, not only is this notion false, Elon Musk will assuredly go down among the biggest charlatan, soothsayers, and con-men in history.
Elon is an eccentric and perhaps it’s no shock. The apple rarely falls far from the tree and Elons father Errol is a peculiar man. At 72 years old Errol Musk recently had a child with his 30 year old step daughter, claiming it was ‘God plan.’ It’s this lineage that gave rise to the paranoid schizophrenic Elon, a man who claims we are ‘almost definitely’ living in a Matrix-style simulation.
Looking at the valuation of Tesla stock, it’s hard to dispute Musk. In what rational world do cognizant people value a cash-incineration flamethrower that has never turned a profit at $60B? This quirk must be a glitch in the Matrix. Perhaps Elon is the overseer reprogramming the simulation as he sees best… Or maybe... just maybe... he’s a fraud no better than Bernie Madoff.
That little tweet of his (among countless others) has launched a full-scale investigation from the SEC that may well lead to criminal charges.
However, before Elon gets arrested and rots away on the tennis courts and tiki bars of the finest white-collar prisons money can buy let’s examine the viability of taking Tesla private of examining the financial condition of the operation.
Tesla is hurtling themselves towards bankruptcy at an accelerating pace. The Altman’s Z-Score is a bankruptcy prediction model initially found to be 72% accurate in predicting bankruptcy two years before the event. In a series of subsequent tests over the next 31 years (up until 1999), the model was found to be approximately 80%-90% accurate in predicting bankruptcy one year before the event.
You don’t need to be a CFA to look at the financials and see that Tesla is effectively insolvent.
Clearly, the broad market doesn’t give a fuck about tangible numbers. Alas, the retardation of algorithms and mouth-foaming fan-boys does not necessarily extend to large private equity players.
Private Equity focuses on cash-flow. Generally private equity companies like to find healthy, cash-flow positive operations with low debt. These investors then use immense leverage to effectively buy out the old-guard owners and pay down the debt with operational cash-flow from the acquired company.
Are you seeing any problems here? Terms such as “Cash-Flow Positive”, “Low Debt”, and “Healthy” are all terms that do not apply to Tesla and should immediately strike investors eyes as burning red-flags.
It will be interesting to see how this saga unfolds. Tesla is a stock for the history books. Much like the QE Bubble, the logic defying euphoric exuberance continues to burn strong in the hearts of the true-believers. Just like every bubble throughout history as the drums march onward, there is no end in sight. Just like every bubble in history, the end will be tragic and obvious in hindsight.
When will this aberration end? When will fundamentals matter again? I have no idea..
 James. "Did Elon Musk Violate Securities Laws With Tweet About Taking Tesla Private?" The New York Times. August 08, 2018. Accessed August 10, 2018. https://www.nytimes.com/2018/08/08/business/elon-musk-tesla-sec.html.
 Washington Post. (2018). [online] Available at: https://www.washingtonpost.com/news/innovations/wp/2018/06/18/video-shows-tesla-bursting-into-flames-on-la-street-out-of-the-blue/?noredirect=on&utm_term=.4715c5eaf9ab [Accessed 10 Aug. 2018].
 Usatoday.com. (2018). [online] Available at: https://www.usatoday.com/story/money/personalfinance/budget-and-spending/2018/05/25/25-most-expensive-cars-to-insure/35234533/ [Accessed 10 Aug. 2018].
 Ray, T. (2018). Tesla: What Do a Failed Touch Screen and Misaligned Panels Add Up to?. [online] Barrons.com. Available at: https://www.barrons.com/articles/tesla-what-do-a-failed-touch-screen-and-misaligned-panels-add-up-1520598253 [Accessed 10 Aug. 2018].
 Rob Crilly (2018). Elon Musk's father has baby with step-daughter he has known since she was four. [online] The Telegraph. Available at: https://www.telegraph.co.uk/news/2018/03/25/elon-musks-father-has-baby-step-daughter-has-known-since-four/ [Accessed 10 Aug. 2018].
 Robinson, M., Bain, B. and Hull, D. (2018). The SEC Is Intensifying Its Probe of Tesla. [online] Bloomberg.com. Available at: https://www.bloomberg.com/news/articles/2018-08-09/tesla-is-said-to-face-broader-sec-scrutiny-over-musk-statements [Accessed 10 Aug. 2018].
This was a draft from 7/6/2018. I should've posted it because now it's headed towards complete collapse. Especially the Turkish Lira.
I'll update this more thoroughly when I get time,
Emerging market currencies have been having a tough go this year.
Last week I took the CFA Level II Exam in Seattle. It feels good to be on the other side. Between finishing college and the CFA, the past three years have been nonstop academics. I’m glad I did it. It was a challenge and I conquered it! At the same time, I feel a bit behind in the career game. The CFA is a ridiculous amount of work and it didn’t help me get into the investments industry as the universal truth of, It’s not what you know but Who you know, flexed it’s might..
The ugly truth is the industry is dying. Countless veterans’ have told me the same thing. Despite a rip-roaring bull market, the professional landscape is scarred. The proliferation of passive investing and low-cost ETF’s has gutted the need for analysts and portfolio managers. Everybody has more-or-less the same access to information thanks to the Internet and if everything is just going to grind higher in financially engineered unison why bother with stock-picking or investing money in an actively managed fund? The ugly truth is that what limited roles remain in Wall Street are reserved for the ivy-league elite. You are born into it.
I tend to think that everything happens for a reason. Perhaps it’s for the best I didn’t end up in a concrete jungle, suffocated by smog and diseased from the rat-infested sewers. Montana is God’s country. The air is fresh and the water clean. Life is better here. I got a good job with a local bank that I’m excited about. Who knows where I’ll be in ten years but at least for now I’m on the right track.
There have been many interesting developments in markets. I’ll do my best to keep you updated with greater frequency from now on.
The market’s gotten extremely volatile. So volatile that the Average True Range (ATR), a measure of volatility, on the Nasdaq composite is the highest it has been since the dot-com bubble.
When volatility reaches extremes, it is a sign of market uncertainty.
Investors are scrambling to make sense of the environment. There is great confusion with money managers on how to allocate capital. Money is getting shuffled through this market like a deck of cards.
There are several primary factors stoking the volatility:
I.) Timing Q1 2018 ended last Friday.
End of quarter is always a busy time for money managers. There are many regulatory reporting requirements that must be dealt with. End of quarter is when you see ‘window-dressing’, essentially this is money reallocation. Managers want to maximize returns (and thus fees) for clients and show them that they were invested in the right places at the right time.
For 9 quarters in a row, the S&P posted positive gains. Q1 2018 was the tenth straw that broke the camel’s back. The parabolic march of tax-cut euphoria finally ended with a bang as the S&P ended Q1 18 with a 1.17% loss.
II.) ‘Trade War’ Proposed Tariffs on Chinese Imports
On Tuesday April 3rd, the Trump administration said that it will place a 25% tariff on Chinese imports such as flat-screen televisions, medical devices, aircraft parts and batteries, etc.. The proposal outlined more than 1,300 imported goods that will soon face levies as part of a sweeping trade measure aimed at penalizing China for its trade practices.
China responded to this threat by saying that it would impose tariffs of 25% on 106 types of imported U.S. products worth $50B, including soybeans, aircraft, and automobiles.
I am a big proponent of tariffs having outlined the history of trade-restrictions in previous posts. The American middle-class has been gutted, a fact which is impossible to ignore through examination of the rust-belt. It is my opinion that import tariffs will drastically help with the competitiveness of American manufactures and lead to strengthening of the labor force.
While not the least protectionist nation in the world. USA trade-weighted tariffs are among the lowest of developed nations. Push-back by areas such as the EU, Canada, and especially China is quite frankly hypocritical.
The tech unraveling began with Facebook as the spotlight revealed egregious privacy concerns. Indeed Facebook believes the data of up to 87 million people was improperly shared with the political consultancy Cambridge Analytica. These tech companies are sitting on mountains of personal information and it should not be surprising to see increasing regulatory pressures in the near-future which could put downward pressure on margins.
Amazon was next in the FAANG fire line as president Trump repeatedly lashed out against the company with claims that they were strong-arming the US Postal Service, avoiding paying their fair share of tax, claiming that Washington Post was Jeff Bezos personal propaganda outlet, etc..
The fact of the matter is that Amazon has gotten immensely powerful. Where a decade ago it was Walmart that was the main culprit of disruption, today it is Amazon who is almost single-handedly gutting brick and mortar retail. The company is quickly becoming an all-encompassing monopoly as they expand into grocery, entertainment, cloud-computing, shipping, financial, and almost every other industry imaginable. At some point anti-trust regulations become a serious and valid concern. After all, the last thing we need is for our society to become one giant Amazon network where we are all working and living for the company store.
Strategy Moving Forward
When volatility levels get elevated as they have in recent months often the best strategy is that of sitting on one’s hands. In markets such as these it becomes easy to get carried away, overtrade and get caught on the wrong foot. I suspect that the rotation away from tech is just beginning as money flows towards more ‘safer’ more traditional high-yielding assets in industries that have been overlooked and underappreciate throughout the crazed FAANG era.
As such moving forward, I will keep a diversified and hedged portfolio long value, short FAANG.
Three months out of school.
My life consists of two activities: trading and studying for the CFA Level II in June.
Perhaps I will attempt another tedious job search in July. Until then, I’m taking my fund and running with it as far as I possibly can.
Reconnecting with my mentor. The man is hands-down the best in the business! I’ve been at this for nearly six years now with the past two a prisoner to the library, full-time grinding theory and textbooks. My knowledge base is immense and there are no obstacles too great to overcome!
My focus is bottom-up. When the fundamentals and technicals align: that is where the magic happens!
At it’s core, my portfolio will consist of high-yielding securities. Within that a crisp slice of alternative real-estate investments that perhaps I will illuminate in a later post.
Orbiting this core will be satellites. The satellites are likely to come in the form of derivatives which will be responsive to the quick hits, executing trades when prime-opportunities present themselves.
My fund is called the:
BIGSKY INVESTMENTS® Hidden Gems Portfolio
R. J. Sullivan IV