The Great Unwind Is Nigh

 | Mar 27, 2014 | 9:30 AM EDT
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It was a long time ago now but if you ask folks about what marked the top of the internet bubble of the late nineties, they will usually tell you that it was the Super Bowl commercial in 2000.

That wasn't exactly the top tick, but it was pretty darn close. For comparison, even before the stock market opened this morning, we had people dressed up as pieces of candy dancing around the NYSE. And Facebook bought this googly-eyes virtual reality company (for billions).

As far as bubbles go, this one pales in comparison to the one 14 years ago but as I've commented in this space before, the amount of wealth being created in Silicon Valley is nothing short of breathtaking.

Consider this: Sequoia, the primary venture capitalist investor in WhatsApp, put in $8 million two years ago, which became -- get this -- $3.5 billion. Folks, that's not normal. In normal times, that doesn't happen.

We are no longer in normal times. It is important to have perspective. People freaked out, very irrationally, when Google bought YouTube for a billion dollars, in Silicon Valley's "dead ball era."  That was the period from 2001 to 2008 where venture capitalists were pitching shutouts and the state of California had no tax revenue.

I hope a lot of people click on this article and I hope a lot of them make it to the third paragraph. Because I think it is really important for people to know that this kind of speculative activity is over -- probably for a year or two at a minimum. Maybe longer.

My lunkhead wrestling team high school buddies were talking on Facebook about punting around OTCBB marijuana stocks. Some people were planning their retirement around this. This is very bad.

So I sort of consider it my role to be the sober burgher and say that bull markets don't go on forever and there is such a thing as the business cycle. I believe the Federal Reserve  is embarking on a tightening cycle. And yes, I think they are going to tank the markets, but leave that out of it.

Technically, the internals had been deteriorating for a few weeks, and my intuition was screaming at me to do something, and I finally did. I liquidated everything speculative out of my portfolio and now I am putting on offsetting trades.

One thing I learned in my early days at Lehman Brothers was that when risk unwinds, not only do treasured longs get hit, but treasured shorts start to squeeze. Pull up a chart of iShares MSCI Brazil Capped (EWZ), the Brazil ETF, or even better, Petrobras (PZE).

After two-plus years of declines, relentless bearishness, a sentiment black hole, Brazil is starting to turn up. I bought EWZ Wednesday, and I am buying more today. I have been talking about being a contrarian in emerging markets like an imbecile for months, but now is when it really starts to work. Even Russia is up.

I am also going to get some index protection, probably in the form of  iShares iBoxx $ High Yield Corporate Bd (HYG) puts or put spreads. Without going into too much technical detail, the kurtosis is massively underpriced when you consider the instability in the credit markets created by the Volcker Rule.

In classic understatement, I think that things are going to get very choppy. I am very concerned, especially for the individual investor, who has been focusing on momentum stocks almost to the exclusion of all else. Most of these things do not have much of a valuation cushion.

It is not like being long Verizon. How much can it go down? The Teslas and the Amazons of the world can go down a lot. The problem is that in bubbles, people are dreamers. It will come back, people say. I have seen this movie before.

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