When you go to new highs, you do not look for justifications for why things have gone right. You look for reasons why they could go wrong. If you are not thinking that way, then you aren't demonstrating the kind of critical reasoning that's needed to be a good investor.
So, on the eve of earnings season, let me articulate seven concerns I have that explain some caution I recently demonstrated when I took $100,000 out of the market for my charitable trust, which you can follow along by joining the Action Alerts PLUS club. These are not "what keeps me up at night" comments to that silly question -- I sleep like a baby if I can sleep -- they are simply good reasons to take some profits and put the money aside for a rainy selloff.
First, are the earnings. This week we have bank earnings and, as much as I like the banks, the stocks have gone up, up and away, something that makes it imperative that earnings have to be perfect. The banks have two things going for them, the yield curve, which isn't as bad as it was, and their relative cheapness.
Even after this run they are still inexpensive versus the rest of the market. Those are good reasons to own the stocks, but are they a good enough reason to buy the stocks? If you think the Fed really isn't going to tighten, or you think the rest of the market is too expensive relative to the banks, then you don't have a leg to stand on. I keep seeing the stock of JP Morgan (JPM) opening up a buck and a half and then slowly, but surely working itself down to flat and then having all of the people who bought it up big puking it up as if they had no conviction, either in themselves or in the bank, which they probably didn't know much about anyway. Bank earnings are so hard to know and learn about that the headlines are a dice-roll and there are a lot of dice rollers out there who are immediately disappointed.
So, call me concerned about this red hot group, and what it can do to hurt the tenor of earnings season.
Two, inflation. I think Fed Chief Jay Powell is right that the inflation spike is transitory. I see oil up well beyond where the fundamentals dictate, even with the great reopening, because the Saudi Arabian leaders could wake up one day and say, "Jeez, at these prices Americans are drilling again, so let's produce more oil and get them to stop."
I think that oil is up artificially. Yes, there are worries about whether President Joe Biden will curtail drilling or insist that emission standards are met that would limit fracking, but I think that oil could fall 10 bucks in a heartbeat if the Saudis even whispered that they want it lower.
I think that plastics are up so much, because of the severe outages along the Gulf Coast caused by Superstorm Uri. But what if it takes months to get these plants restarted as it is looking more and more the case? At what point do we say that the port congestion that is causing endless price increases really is endless and is therefore not transitory? Will Jay Powell have to reverse himself? Maybe I am being too hopeful about inflation in agreeing with Powell?
Three: endless supply. Wednesday, Coinbase, one of the largest companies to come public in years, starts trading as a direct offering. Given that the company hasn't given us much to go on in terms of its future, you have to wonder if institutions will play. If individuals storm the gates with rowdy buying, if it quickly becomes a "Wall Street Bets" project, will it collapse on the first really down day for bitcoin?
We have seen way too many deals this year already to make me feel comfortable with a $100 billion dollar direct listing. Not confidence inspiring. Plus I think that the special purpose acquisition companies, the dominant offerings these last few months, have taken a temporary pause, that will soon end when the SPAC GRAB will launch for $37 billion, which seems to be a combination of Uber (UBER) and perhaps banking. This one sounds serious: The sponsor is staying. But there's too much money being given away for the celebrities to resist. Will the Securities and Exchange Commission examine SPACs? I am always pointing out that supply is what kills the bull. It will be sorely tested this week, and Coinbase will test it.
I don't like the 37% of tech companies that are profitless right now, but there's obviously not a lot of discipline being exercised. This is the highest amount of unprofitable tech companies since 2000. Ominous? Too much supply, too many questions,
Four, the complacency we are seeing about the virus astonishes me. Social distancing seems like it is a thing of the past. We act as if we have this thing under control, yet no one even seems to know whether the vaccines really work against all sorts of new variants. People are sick of quarantining and many seem to think that the virus was never deadly, so what's the point of wearing a mask.
Right now, though, in the province of Ontario, doctors soon may have to decide which patients can get a bed in an ICU and which ones can't. This is playing out in Toronto, not some backwater place where denial reigns supreme. Right now in the U.S. the vaccinators seem to be outrunning the plague -- Johnson & Johnson (JNJ) notwithstanding -- because its pause isn't that meaningful given that it's not been able to produce the darned thing save about 4 million doses imported from the Netherlands. Remember, its outsourced plant had a screw up, and isn't going to be opened any time soon. Perspective: The JNJ blood clot numbers are very low, no higher than the regular flu vaccine. We have to expect that those who are already vaccinated could need boosters if this keeps up. We are all weary. We are collectively in danger of letting our guard down.
Five, we are overbought on the S&P oscillator you know I swear by. It's not terrible, less than 5 on a thermometer that tells you if we have a fever. But I would feel more comfortable after a run like this if we were able to have a gentle decline rather than some sort of cliff jump and the longer we hang up here the more concerned I get, especially in light of the critical story we ran last week about Tom Demark, a great technician and his reservations.
Six, the shortages really do worry me, especially the chip shortage. There really isn't anything many manufacturers can do to increase production. Companies like Ford (F) and GM (GM) simply can't cash in on the demand, because of a lack of chips, and I don't see it getting better. Not in the time needed to make a difference to 2022 earnings. I think it is terrific that the president is focused on this issue and he managed to attend some of the Washington conference about the shortages held just yesterday. But you can't just throw up factories in a few months time. It's more like years. And there simply aren't enough machines being made to create more chips, even as they are working pretty much around the clock to do so. You think that the stocks of Applied Materials (AMAT) , KLA (KLAC) and Lam Research (LRCX) would be this high otherwise?
We have shortages throughout the system, because of decisions made years ago by our companies to handle inventory in a just in time manner, rather than a just in case manner, which is how they do it in China. It's left our companies with no alternatives, but shutdowns and loss of sales as far as the eye can see.
Finally, seven: foreign policy. We have a new president and it seems that everyone from the Iranians to the North Koreans to the Russians and the Chinese want to test his resolve. Is it time for him to come out and talk about an "Axis of Evil" as George W. Bush did not long after 9/11? Certainly seems like there is one.
The most important concern here has to be China, which seems to determined to show Biden that it doesn't want to hear anything about civil rights or it will make a move on Taiwan if it keeps up. I think that such an action is no longer unlikely.
To me this flashpoint, this action by a country that has always claimed it owned Taiwan anyway, is the most dangerous story line in the world right now. I am quite concerned that we could wake up one morning with a declaration by the Chinese that it is time for the Taiwanese government to submit to its rule, or else, with or else being an unknown. Why else would the Chinese send 25 planes over Taiwan airspace last night if they didn't intend to exercise their alleged sovereignty over Taiwan?
Again, I am not a bear. But I wanted to give you some of the reasons why we sold so much for the charitable trust on the eve of last week's club call. The market can handle one or even two of the problems I have traced out, but not all of them. So why not raise a little cash and be ready if one tips the scale in favor of the bears?