When the truth is found...to be lies. Of all the classic rock references I have made in my RM column, I think Jefferson Airplane is the most unique... and the most relevant to current market conditions. The broad array of red figures on my screen this morning -- every global market that I track is in the red today, and only the VIX volatility index is in the green -- is an indication that the markets' blistering pace in the first half -- the S&P 500 rose 15.2% in the first half -- was just a mirage.
Does that mean that you should dump all your stocks and go to cash? No, of course not. But the drastic nature of such a move belies the truth surrounding its logic. The reason not to dump your stocks is not because they are under- or even fairly-valued, it is because cash and its fixed income friends -- the 10-year U.S. Treasury note is the benchmark there -- are essentially worthless.
I use Bloomberg's U.S Rates & Bonds tab as my go-to source for the money and bond markets, and it is sad reading today. How did we end up in a world in which the 10-year UST is trading at 1.29%. Who thinks that is an attractive return for lending money to the drunken-sailor-spending, feckless U.S. Treasury? I don't. But if your alternative is to pour money into equities at cycle-high valuations, maybe it makes sense to take some money off the table, and hence the incredible rally in U.S. Treasury bonds in the past six weeks.
It makes no sense to me. It is a "lesser of two evils" trade and I don't invest my or my clients' money in such trades. I buy things that are undervalued. And I try to short things that are overvalued.
The best way to short the overvalued U.S. equity market is to find an incredibly overvalued name in an incredibly overvalued sector, and take profits as the soufflé starts to deflate. Tesla (TSLA) is still my favorite trade there. I am adding to my short position as the stock justifiably falls this week. Tesla is now down more than 10% this year against the backdrop of an overall market, as measured by the S&P 500 that is still, even after today's decline, up 14.5% year-to-date. That is a very difficult dichotomy for professional fund managers. No matter how much they may love Elon it is very hard for the average performance-obsessed manager to own a "loser." Two quarters is more than enough time for that dynamic to play out.
Conversely, I just keep scratching my head at the movements of the U.S. Treasury market against the backdrop of the Biden Administration's extraordinary and unprecedented bout of government spending. It just does not compute. So, I play that via (TTT) , ProShares UltraPro Short 20+ Year Treasury ETF. TTT is getting cheaper this week, and I am buying more and averaging down.
So, buy things that are undervalued and sell things that are overvalued. That makes sense, but I take the temperature of all markets at all times, even if I don't play them. So keep one eye on crypto here. The Nasdaq may be overvalued, but Bitcoin -- and the other cryptos -- simply cannot be valued. Anyone who claims otherwise is lying to you. It is not a value judgment, it is a valuation judgment. So, watch Bitcoin -- down 6.5% today to $32,500 as of this writing -- as a proxy for the risk tolerance of the average market participant. As that falls, so will valuations. Always have, always will. Be careful out there.