A Market Embracing Risk

 | Feb 27, 2014 | 12:30 PM EST
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I try to manage my investment affairs like a true long-short manager would, staying close to home at all times, trying to capture alpha. I will lean net long (or short) at times.

But I still care strongly about which direction the market is going, because, well, that's who I am. That's because even a perfectly-hedged portfolio will perform differently on the way down from the way it did going up.

The market seems to really like risk these days. Everyone knows what is going on with Tesla (TSLA), which rallies after a capital raise. That is truly unbelievable. This site in particular likes to talk about the momentum names which have been ramping, so business is good.

The Wall Street Journal is even talking about day traders coming back into the market. They included an anecdote about a club disc jockey in Cleveland who is planning for his retirement by punting around OTCBB marijuana stocks. So like I said, the market really likes risk.

It will come to an end at some point. And it will be very painful. We've had five years of bull market, now, and an entire generation of traders is being conditioned to believe that the market only goes up. I really cut my teeth in the bear market of 2002-2003, and boy, do I remember what that was like. It seems like only yesterday.

But to paraphrase Chuck Prince -- if the music's playing, you have to keep dancing. (Side note: he probably did not realize how profound of a statement that actually is.) And the music might be playing for months, or even years.

You start seeing some insane stuff such as $19 billion for WhatsApp. But it's really hard to keep perspective on how insane things actually are. I'm old enough to remember a $1,000 price target on Qualcomm (QCOM) by a 26-year-old Walter Pieczyk at PaineWebber. I watched the stock almost get there. I think we are closer to the end than the beginning -- but the end could be a long way away.

The reason I believe that is because of Janet Yellen. If you know Janet Yellen, you know that she cares -- above all else -- about people getting jobs. We've had a couple of bad jobs numbers in a row. We have one coming up next week. She just gave dovish testimony at Humphrey Hawkins. What happens, if we print sub-100 on payrolls? Do you think we will stop tapering? Do you think there will be a "taper pause?" Do you think something else might happen?

I have a lot of theories about what Janet Yellen will do to ease monetary policy further, but I'll save that for another piece.

This is what I call a heads-I-win, tails-I-win situation. Yes, in a roundabout way, I am bullish. For my own purposes, in dealing with a hedged portfolio, I am comfortable with my current positions. But if the market ever starts to meaningfully roll over, this perfectly-hedged portfolio won't perform so well. I will be trading up a storm, trying to position myself for a correction/bear market.

Not only do winners become losers, but losers will become winners. Any responsible money manager and student of the market has to ask himself or herself that question on a daily basis -- is today the day? It's OK to be bullish. But you always want to make sure your life raft has signal flares in it.

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