June 4 Post
Hi Again,
I sent out my last newsletter on 5/1/23; and in that I mentioned that per Jim Cramer,
the banking crisis was almost over but I disagreed. I agree with Jamie Dimon, the
CEO of JP morgan that the fallout of this crisis will go on for years to come. On
5/2/23, at 9am PST, the Regional Bank index was down 7% in 2.5 hours! That was
the lowest level for the KRE index since 2020! When the Regional Banking crisis
started, I sold one of my 4 KRE put options (to short sell KRE) at a 150% profit and
I kept the rest as I expected the KRE index to fall further in the future. On 5/2/23,
9am PST, my 3 puts had a paper gain of 140% to 199%! For the past few months,
Wall Street were only focused on the problem faced by Regional Banks due to high
interest rates on short term Treasuries compared to long term Treasuries (now the
Federal Reserve is assisting banks with the capital they need); but my focus has
been on loan losses that are yet to come. On 5/3/23, for the first time Wall Street
started worrying about future loan losses of these Regional Banks.
Plenty of analysts have said the inversion of the yield curve, traditionally seen as
a sign that a recession is coming, no longer matters. Bond King' Jeffrey Gundlach
thinks they're wrong. On 5/3/23, Gundlach stated that banks are paying 50% of
the Treasury Bill rate so many banks will go insolvent in the future; as he stated,
“this is not the last chapter of the regional banking crisis”.
The market is extremely “top heavy” as only a few big mega stocks are responsible
for the market performance in the recent past. As Josh Brown stated on 5/3/23,
the market cap of Apple is bigger than the UK market cap and it is double the size
of the German market cap! Jason Hunter of JP Morgan stated on 5/11/23, that
comparing S&P100 to the S&P500, it is very clear how most investors are shifting
towards a few mega cap stocks. He termed this as a “flight to quality”. According
to Jason this “flight to quality” will be followed by a “flight to cash”; which will
bring down the market to 3500 on the S&P 500 (SPY). Great! A buying
opportunity!
What is the latest craze on Wall Street? Artificial Intelligence (AI) stocks and
ETFs! Some compare this craze to the “crypto craze” we had a few years ago and
some compare this to the “dot-com” craze we had around 1998/2000. All agree
that we are in the “early innings” and this will unfold for years or decades to
come. In my personal account, I put a little bit of money in to some of the AI
stocks and ETF’s even at high prices and if the prices drop in the future, I intend
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to buy more. Investing or trading is all about taking a calculated risk. As long as
the overall gain is acceptable, we have to live with some losses. In my opinion, it
is always wise to have 25% to 50% in cash to take advantage of sudden
opportunities that appear in the market – as we saw over the past 12 months
when Tesla, Neflix, AMD, Meta/Facebook fell about 50%. On most of those
names, I made a 100% profit within a few weeks or days. Now that Treasury Bill
rate is around 5%, keeping 50% in cash or liquid assets is much easier than it
used to be since 2008.
I feel that we will have an interesting market during the summer of 2023