Bust
Posted on Sunday, May 1st, 2022
Wow! What a week! I am the Treasurer of our Men’s Golf Association and we had a major event this weekend. Planning for it has taken some of my time which usually doesn’t amount to much but it puts some added stress on the schedule when tournament time comes around. I chose not to play because I am not quite 100% recovered from a back injury but it was a really good thing that I didn’t play. I forgot that it was Prom Weekend for our youngest and my middle son came home stressed out over an exam and term paper. His political science class has been a real bear for him. In our house I am in charge of money, political science and light bulbs. Diane is in charge of vacations, parties, food and all other things science. So, I drew the short straw in helping with the term paper. Diane got to do prom stuff. At least Diane had some fun. As for prom it was a great time. The prom itself was a bit of a bust but they all had a great time going downtown and going out to dinner. Bluette – I will send you some pictures.
Speaking of busts – the stock market was a bit of a bust last week. My weekends are usually filled with reading and analysis from the week before and this weekend (sandwiched between prom pictures and term papers) is much of the same. This is weekend is a bit different though, in that, we are seeing a lot of analysis starting the words … the worst since… This has been the worst start of a calendar year for the NASDAQ since the 1970’s. There is that decade again. It’s a good thing that we sold our tech stocks months ago. The S&P 500 is off to its worst start of the year since 1939!!
This is what we had to say last week. Stocks haven’t been this ‘expensive’ relative to bonds since April 2011. The last time that happened, bond prices went higher and stocks went lower. You know when in doubt we follow what bonds are telling us over stocks. We will go with bonds again and I would expect more of the same as 2011. Bonds are oversold and the gap between stocks and bonds is wide. I would expect stocks to go down here and bonds to go back up to close this gap.
We have noted for months that we are stuck in a bear market. A bear market with a range of 3800-4800 for another 10-14 months. That does not mean that the low is 3800 or that it will be hit 14 months from now. We will see some dips and rips as the market is stuck in negative gamma. Negative gamma works both ways and that is why you see some of the biggest up moves in markets during bear markets. An average drawdown in an average year is 13%. We should expect that. The S&P 500 now sits down 14% from its high. So far it has been an average drawdown. An average bear market sees a move lower of 34% so we are one third of the way to a typical bear market. Why not sell it all? We are not guaranteed to see the big selloff. We could just sit in a range and collect our dividends and interest. We were prepared for some rougher seas. The good news is that we are deleveraged and underweight stocks and bonds. We are overweight gold and energy and that has done us well.
May the 4th is a big day this year as we expect the Fed to raise rates 50 bps. They have the room to get aggressive here and they should. On May 4th there should also be some news surrounding Russian debt. If we look at the markets and currencies Russia is doing just fine here. Exxon and Chevron earnings growth year over year was outstanding and I am sure that Putin’s oil companies are doing just as well. Things were not helped in the US stock market last week as corporations were the buyback blackout period when they reported earnings. We are coming out of it now and that should help support markets. Some massive buybacks have been announced in recent days but Exxon’s got my attention. That should help the oil giant.
There in old saying in football. When you pass the ball there are three things that can happen and only one of them is good. In investing when you are long assets there are three things that can happen but two of them are good. If we are long and asset prices go up we make money. If asset prices go nowhere we make money on the time value of money – interest and dividends. The last is if markets go down we expect to lose money.
We are all volatility traders now. If we see the volatility measure – the VIX – trade two standard deviations above its average we will look to be buyers of stocks. That will show that investors are fear filled and liquidating. We have a strong hand and are positioned to benefit from buying at lower prices. It is the poorly prepared or weak hands that sell because they HAVE TO. We don’t have to and can wait it out because we are appropriately positioned.
Longer term – We still see us still stuck in the 3800-4800 range on the S&P 500 for months to come. We closed on Friday around 4130. To be clear the bottom end of the range is just that – the broader range – it does not mean the dead bottom. We will be buyers at the low end of the range but it could burst lower and therein lies the opportunity. The bottom end of the range is another 8% from here. That would put the S&P 500 down 20% from its highs.
“Short term volatility is greatest at turning points and diminishes as a trend becomes established.”– George Soros
I think we aspire less to foresee the future and more to be a great contingency planner… you can respond very fast to what’s happening because you thought through all the possibilities, – Lloyd Blankfein
A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty. – Winston Churchill
To learn more about us and Blackthorn Asset Management LLC visit our website at www.BlackthornAsset.com .
Disclosure: This blog is informational and is not a recommendation to buy or sell anything. If you are thinking about investing consider the risk. Everyone’s financial situation is different. Consult your financial advisor.