Oh Brother!
Posted on Sunday, January 24th, 2021
Growing up as one of 5 boys in a family was a special experience. I was reminded of that meeting with a client this week. He was from a family of all boys and when he was growing up they used to play in an orange grove behind their house. As he was relating a story of a game that they used to play I anticipated what he was going to say and finished his words “Orange Fight”. It was a special moment and reminded me of how much I cherish my brothers and the childhood that we shared.
If you know the Reilly Boys then you that I would be considered the Fat Reilly. While I have never been the most in shape Reilly (although frankly I think the standards are a bit too hard to match) my weight at the end of 2020 was getting a bit higher than usual. I decided that I needed to get to the gym and work hard at getting back into shape. After three weeks of going I went to get my numbers from the trainers at the gym to see if I was making any headway. I was horrified. My numbers were awful. Four more weeks at the gym. I was ready to go back to get weighed in again at the gym but first I went to look at the previous test. It turns out the trainer at the gym had inputted that I was 60 years old and 5’6’’. I may look 60 but I am most definitely not 5’6”. Add about 4 inches. Suffice to say my numbers this week were a lot better. Oh well! It did motivate me to get to the gym for another month. Reilly’s Rules – Trust but verify.
It seems as though everyone, when it comes to asset prices, agrees that we have entered bubble territory. The extreme speculation box is definitely checked. GameStop is a brick and mortar retailer of video games. My kids tell me that no one goes there anymore. Their business model is dead. Well, it’s back from the dead as far as traders are conccnered. Most of the shares of the stock have been borrowed to sell short as investors bet that the stock was headed of the trash heap. Traders have taken those shorts to the proverbial cleaners and precipitated what is known as a “short squeeze”. Game Stop was up over 75% at one point on Friday!! Traders are accomplishing this by executing the strategy that I have explained in regard to Tesla. They are buying near term options that make the market maker short and it drives the stock higher. No fundamentals – just spread the word on the chat rooms and away we go. The small investor has never had such power.
Short-term, the continued chase of call options has forced dealers to remain hedging these bets with buying the underlying stocks, adding additional fuel to the uptrend in equities. There seems to be little to no interest in put ownership, so the only hedging dealers are required to do to offset the daily appetite of option traders is purchasing equities. – Andrew Thrasher – Thrasher Analytics
So, the question is when does the bubble burst? No one knows but I suspect not yet. While I agree that we may have entered the bubble phase of market cycle market valuations can be justified by the historical monetary and fiscal policy in the world at the current time. While prices are high and rising with speculation rampant I don’t see the conditions available for it to burst at this time. The music is playing so we keep dancing. I do expect a near term correction. Nothing spectacular. Just your normal garden variety correction and the market can resume moving higher. The danger is if it becomes a liquidity crisis and I don’t see that yet. If it becomes something more I will warn you.
The Fed is still feeding the market while the new administration is looking to spend. Inflation will be the attendant problem. The Fed is actively cultivating it and has said that they will allow it thrive longer than you think they should.
“But right now, with interest rates at historic lows, the smartest thing we can do is act big. In the long run, I believe the benefits will far outweigh the costs, especially if we care about helping people who have been struggling for a very long time.” – Incoming Secretary of Treasury, Janet Yellen
The costs she is referring to will be inflation. The CNN Fear and Greed Index is currently at 69. That lies in the Greed category. There are other models of Panic and Euphoria that are literally off the charts showing extreme Euphoria. Usually, at this point, with a new administration the honeymoon period ends as we begin to see the realities of governing. History would show a decline here into March. Don’t know if that is going to happen. We would love to see a correction of 10% which would act as a relief valve to the speculative pressure building from the bulls. We projected that the S&P 500 would move towards 4000 back in November. That climb continues as we closed Friday at 3841.
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.