I am an inveterate screen-shotter and self-emailer.
When market hours are underway, I am constantly sending little reminders to myself to read articles later or to look at charts later that I saved in screenshots. I will not be beaten by Mr. Market, because "He" has more information than I do. Never.
I also travel the world seeking investment ideas, business for my firm and occasionally a well-mixed Negroni cocktail, so I will not be beaten by a gestating problem that is outside the myopic view of this country's Nasdaq-focused financial-industrial complex. Never.
In terms of formulating investing ideas from that information, well, that's more of an art than a science. But the raw information itself produces some inconvenient truths for market participants. There is a disturbance in "The Force" this week, and all my screenshotting has no predictive value against these weird flips we are seeing between futures trading and trading at the cash open. On Friday morning, the Nasdaq has reversed major pre-market losses and is heading toward the flat line, while the day prior it was just the opposite. In the time it took me to compose that sentence the Nasdaq started to fall again.
The Damocles' sword hanging over all of this now is a quadruple-witch. December contract single-stock options and futures, and index options and futures all expire Friday -- and the third Friday of the final month of every calendar quarter.
So, how to play this volatility? Do some research. Whether that includes screenshotting articles or reading my columns or hitting the Reddit chat channels, just make sure you are paying attention. So, my research this week has shown me:
This excellent chart from Tavi Costa at Crescat Capital. The commodities-to-equities ratio in the U.S. market sits at business cycle highs, so I will buy low and sell high. Short the Invesco (QQQ) and buy the Invesco DB Commodity Index Tracking Fund (DBC) .
I went to John Butters' excellent FactSet Earnings Insight product expecting to start another rant on the overvaluation of the S & P 500. To quote John:
The forward 12-month P/E ratio is 21.1. This P/E ratio is above the 5-year average of 18.4 and above the 10-year average of 16.6. It is also above the forward 12-month P/E ratio of 20.1 recorded at the end of the third quarter (September 30).
Yes, stocks are not cheap by any measure, Crescat's, Butters', The Buffett Indicator (ratio of market cap to GDP,) but it is the componentry of these calculations that is mind-boggling.
As the net profit margin of the S&P 500 is estimated to reach a cycle-high level of 12.6% in 2021, and then to expand slightly in 2022, it is not IT or a tech-y sector that is leading the way. It is real estate, the S&P 500 sub-sector of which is forecast to generate the highest net margin, in excess of 30% this year and next. Granted the largest constituent is American Tower (AMT) , a solid play on cellphone infrastructure growth based on 5G, just as it was on 3G and 4G, but any look at history shows that real estate companies have never been this profitable. Why? Because money was never free before and now it is.
A shocking revelation and one hell of a chill, despite the warm, humid weather in Sao Paulo, where I am writing this column. But what if that changes? What if the crushing inflation generated by this tide of free money hurts the average person in a way that unelected technocrats like Powell and Lagarde could never imagine? Well, interest rates will have to rise.
So, one look at a largely-under-followed sector in a weekly publication did more for me than listening to Janet or Jerome bloviate ever could. I know they are feckless, but what they have wrought is just ... hard to explain in terms of overvaluation.
I am scared now. Be very careful. The Fed is taking its foot off the quantitative easing pedal, but we are nowhere near a neutral level for long-term interest rates, and short rates are pathetically low. A reversion to mean will hit the profitability of the most profitable sector in the U.S., and believe me not that is not the sector that makes EVs, but those stocks will be hit too, as Rivian (RIVN) is taking it Friday and Tesla (TSLA) has had a terrible week.
Take advantage of today's quad witch-volatility to risk-off your portfolio before the Holidays. You can thank me in January.
