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  1. Home
  2. / Investing

So, Everything's Good Again? Sorry, That's Just Not True

Here's the way you have to approach this market.
By JIM COLLINS
Sep 13, 2019 | 12:00 PM EDT
Stocks quotes in this article: AAPL, MSFT, SPY, QQQ, TSLA, F, GE, GT, XOP, BA

It's all ball-bearings these days. I thought of Chevy Chase's Irwin Fletcher from Fletch (temporarily under the guise of an airplane mechanic named G. Gordon Liddy) when watching the S&P 500 futures climb to a near-all-time high this morning. For the stock markets, it's all macro these days.

It's difficult to pinpoint exactly what has turned investor sentiment from negative to positive in the space of two weeks, but it seems to be a combination of increased optimism for the resolution of U.S.-China trade tensions and some excitement over the upcoming Fed meeting, which concludes next Wednesday. Those two factors have calmed investors' ardor for sovereign debt and increased bond yields across the globe. That ardor had produced an all-time low yield for the I.S 30-Year Treasury bond in August and sent the yield curve into its most pronounced inversion in 12 years.

So, everything's good again. Trump and Xi are best friends and there is no slowing in the global economy. Sorry, that's just not true. I have been to China for all of seven days in my life, but I guarantee you that is more on-the-ground experience than most of the commentators bloviating on some networks about U.S.-China relations have had. It's all just speculation at this point.

That's the key, and that's why I set up my new trading vehicle, Excelsior Capital Partners. When speculation is excessive in any market, there is - as I mentioned in my RM column yesterday - a heightened chance for a Minsky Movement. That's the moment when, as Dr. Hyman Minsky noted, bubbles inevitably burst.

The problem with today's markets is that speculation is expressed in movements of broad market ETFs that serve to increase the valuations of individual stocks. The SPYders don't rise because investors are bidding up Apple (AAPL) , Apple rises because investors are buying more SPYders, and as the largest stock in the market - in a virtual tie with Microsoft (MSFT) , anyway--those broad ETFs mechanically buy more shares of Apple.

A rising tide lifts all boats is a great cliche, but it is probably the worst investing axiom ever. Unless you are shorting individual stocks, that is. Those numbers on your screen mean something. The stock price (multiplied by the number of shares outstanding) gives the full equity value of a company. If that is rising while that company's business outlook is worsening, that's a short-selling opportunity.

That's the way you have to approach this market. There are thousands of funds (like (SPY) and (QQQ) ) that can give an investor long-only exposure to the U.S stock market, but there are very few funds that offer short-only exposure. The ones that are marketed as 2x and 3x daily short funds have weak correlations with the overall market, and, in my experience, just do not provide the returns that are being sold to gullible investors.

If you want to short stocks you have to do your research and short individual stocks, not the market. I looked at this market at the open and I see companies that have deteriorating fundamentals--Tesla (TSLA) , Ford (F) , GE (GE) , Goodyear (GT) - all trading higher in today's early trading and all well off their 52-week lows. If you want to find individual stocks in a group that is collectively hated by investors, you could look no further than (XOP) , the ETF comprised of energy exploration and production companies. Well, XOP has risen almost 15% in the past two weeks. This as WTI oil prices remain mired near $55.barrel.

It's easy to facepalm and make exclamations like "why the hell is Boeing (BA) back to $380 per share?"(I have no answer for that, by the way,) but hedge fund managers don't do that. They look for specific events that will trigger pullbacks in individual stocks and short ahead of them. I made tidy profits for Excelsior in July and August by shorting overvalued names into earnings reports. With the market rising while FactSet's consensus calls for a third consecutive quarter of decline in S&P 500 EPS in the September quarter, the market will once again be rife with individual short opportunities as we get past the Fed and into October.

So, keep your palm off your face and keep researching individual companies. You'll find some that are mispriced. As Dr. Minsky knew very well. eventually exuberance becomes irrational and markets - and individual stocks- must correct.

(Apple and Microsoft are holdings in Jim Cramer's Action Alerts PLUS member club. Want to be alerted before Jim Cramer buys or sells AAPL or MSFT? Learn more now.)

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At the time of publication, Jim Collins had no position in the securities mentioned.

TAGS: Short-selling | Federal Reserve | Investing | Markets | Stocks | Trading | Treasury Bonds

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