Getaway
Posted on Sunday, February 5th, 2023
We managed to get away for our first overnight trip in years to the Highlands area of North Carolina. It was an old inn with plenty of hidden nooks, old passageways, and fireplaces to sit by and have a glass of wine together. We were talking before we left, and we both admitted that we felt – guilty. Guilty? I guess all these years taking care of dogs and kids and it was just our knee jerk reaction. We got over it quickly.
We also spent a good deal of the week helping a client try to purchase some Florida real estate. We did not get the property. The seller basically turned down an offer that approached full asking price without another buyer bidding on it. We walked away at the end, but it speaks to the madness of crowds. There appears to be a sentiment that prices always go up. We have written about this in our quarterly letter. The US investor may need to detox themselves from the Era of Easy Money or monetary heroin. Prices don’t always go back up and the Fed will not always have your back. Real estate agents may be ground zero for this debate.
The animal spirits of the market are back. They are buying the worst performers from last year. MEME stocks are up 40%! Most Shorted stocks are up 32%. Nasdaq up 16%. On Thursday we say the VIX up AND stocks up. That is a sign of exuberance and panic buying and usually leads to an unstable market. It will be difficult to sustain this move. The key to the markets right now is the realization that systematic strategies are now very long, and a turn lower would put excess pressure on the markets as those strategies would be forced to sell.
The pain trade has been up as investors have been forced to cover shorts in an illiquid market. (According to Goldman Sachs, Thursday’s short covering was the largest since November of 2015.) Day traders are buying impactful zero DTE options. Those are options that expire at the end of the day. They are like rocket fuel and highly speculative. It’s gambling basically. We are staying patient as we suspected that the market could move to 4200 on the S&P 500. We touched 4195 on Thursday. It’s a long year and it just got started. Short covering, FOMO and rocket fuel options and systematic strategies (computers) are driving the market. That can all change on a dime. Unstable markets.
One year ago, Fed rates were at 0.25%. We are now at 4.75% and headed a bit higher. Monetary policy works with lag and those rate hikes have not even impacted the market yet. Tailwinds are now headwinds as Fed policy, de-globalization, inflation, and demographics change course. The fight to watch is in the labor market as the Fed needs it to cool off so it can stop raising rates. We see rates higher for longer.
Investors are starting to believe that the storm has passed or believing it won’t be as bad as anyone thinks. The market has rallied into the 4200 area. We look for the bulls to struggle here. We have some risk on and would prefer the market head lower and give us an opportunity to buy cheaper stock, but we are also comfortable receiving 4.5% on our cash holdings and the optionality that it brings.
“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.