Hello Again,
On 12/30, when the market went up I was sure that investors were irrational about the risks we face
In the market so I bought 2 put options to short sell the market. On Friday morning (12/31), soon
after the market opened the Dow was down 400 points and my put options were up by 48% and my
overall portfolio had a very small loss. At the end of the day on 12/31, Dow was down 603 points
and my puts were up 75% in 24 hours; and my overall portfolio had a net gain!! This is the magic
of hedging! Over the past 40 years I have seen amazing things in the market what I observed on
Friday 12/31 was truly amazing. There is a company called Lucky (LK) coffee in China which is a
Startup but growing at an exponential recipe which is a recipe for a disaster. Remember what
happened to Boston Chicken? I do not want to be a long term investors in that but since Starbucks
closed 50% of their stores in China and since there are so many fools chasing LK, I bought 1 share
of LK at $27 on 12/31 morning; and at the end of the day, it had a gain! I was expecting it drop 50%
to 75%-that is what prudent investors would have done. Trying to get in too early is called,
“catching a falling knife”.
Coronavirus!! We are definitely in a bubble!! During the first part of last week, 12/27 to 12/29, the
market fell due to the Coronavirus that is fast spreading in the 2nd biggest economy and spreading
all over the world. Then came news that we might find a vaccine and the market shot up on 12/31,
how absurd! Even if the virus is stopped prior to 4/1/20, Global GDP will go down 1% to 2% and
that alone is big drag on corporate earnings. Even before this crisis we had doubts about economic
growth for 2020 and now we know that in 2019 we had the lowest growth rate for the Trump
administration. Scientists say that even if we find a vaccine it will be like December when we can use
it for humans. Does the unknown bother investors? Oh no, now they say they are being positive-that
is the new word for greed.
Even with what happened last week, we had a very small gain for January 2020. In December 2019,
I added Uber and Intel and even with what happened last week, Intel is up 6.82% in one month and
Uber was up 22% in one month! How was my call!
See what I wrote on 1/10/20:
Complacency! That is what is happening with investors right now and this is very dangerous.
Most people call it resiliency and that is not true and just a bogus justification. Proof of that came
when Trump killed the top general in Iran and Iran threatened to take revenge and nothing happened
in the market. This is different from the time Iran bombed Saudi oil fields as that had no direct impact
on us. On that Jim Cramer asked his followers to be cautious and increase their cash position and
be careful about what might happen in the future-“risk off”. Jim got blasted by his followers for being
“too negative” or pessimistic. This clearly show that we are definitely in a bubble but bubbles could
last years or could fall apart in a few days. It is always good to be cautious. One of the analysts I
admire stated, “I got to show that I am in to risk management”.
On 1/10/20, for the first time the Dow went over 29,000 for the first time. It only took 37 days to go
from 28,000 to 29,000! Out of that 1,000 rise, 6 stocks were responsible for 950 or 95%! 85% of
the S&P 500 stocks are over the 200 day average so most stocks are taking part in the rally. This is
a momentum driven market. Now unlike one year ago, Chinese, European and Japanese and some
‘emerging markets’ have been on a bull rally.
On 1/14/20 technical analyst, Sebastian who was watching the rise of the market with the change in
VIX index (fear index) stated that as the market goes up the VIX index is going down. Not only the
VIX is going down VVIX (commodity market fear index) is also going down so even when all
the prudent market watchers are being very cautious after such a market rise, the technical
analysis show that market could rise even further. That was correct at least up to 1/17/20.
However Sebastian noticed that at times with bad news the index changes sharply so his conclusion is that the market could go in to a correction without a lot of notice.
I do not know what to expect next week. If investors are rational we could see a market correction of
1,000 to 3,000 point but that is unlikely because most investors are not rational. These days everyone
wants to get in to the market and that is very dangerous and a sign that we are at a market top. Just
before the 1929 crash, a shoe shine boy was telling old Joe Kennedy (father of President Kennedy
and the man FDR trusted as the first head of the SEC) about his investments and Joe Kennedy
quickly sold off his holdings and did not get caught to the 1929 crash. Remember if you had money
in the market 1929, you only broke even in the 1960s. Better to be safe than sorry. Be cautious!