
I, Who Vowed to Never-Ever Short Stocks Again, Just Shorted the Entire Market - SQL2219
https://wolfstreet.com/2019/12/30/i-who-vowed-to-never-ever-short-stocks-again-just-shorted-the-entire-market/
======
konschubert
When the rich get richer, and the poor don’t, one can expect that prices rise
for things that rich people buy (stocks), but not for things that poor people
buy (food, gasoline, rent).

Yet the latter are the kind of items used to measure inflation.

Maybe stocks aren’t really getting over-valued, maybe it’s the dollar that’s
getting de-valued.

Quantitative Easing.

What I am trying to say is that I’m not confident that a correction is
imminent.

~~~
ncmncm
I think we can be confident that the current administration will do everything
in its power to detach the measuring instruments from the actual economy in
order to present a rosy picture. The effect will be a much more resounding
crash when the facts cannot be papered over anymore.

So the only question is, how long can they be papered over? How long were they
successfully papered over before the last blowup?

~~~
chii
> how long can they be papered over?

until the administration changes.

Or, until china becomes so potent a force that their purchasing power cannot
be checked and no amount of papering over in the US works - thus leading to
WW3

~~~
chongli
_until china becomes so potent a force that their purchasing power cannot be
checked_

That’s assuming China isn’t also papering over the cracks. I see no reason to
believe that, given all the ghost towns full of crumbling high rises and the
enormous amount of effort the CPC puts into their nationalistic propaganda.

~~~
ncmncm
Yes, no one expects China to exercise any scruples. But US and European
administrations, and certain smaller countries, have been known to observe
them, at times.

------
ksec
>Mega-weight in the indices, Apple, is a good example: shares soared 84% in
the year, though its revenues ticked up only 2%. This is not a growth story.
This is an exuberance story where nothing that happens in reality – such as
lacking revenue growth – matters, as we’re now told by enthusiastic crowds
everywhere.

I nearly stopped reading after this. In hindsight I should have done exactly
just that.

Despite that ridiculous 83% _growth_ , Apple's P/E is only just inline with
S&P average at 24. With high amount of Net Cash. It is basically the market
buying into Services and Finally admit Apple is not _dead_ , and wont be any
time soon. ( But the stock is now used to manipulate the wider indices )

And in the Tesla and GM example, it is simply Tesla was one of the stock
trading at very high vs GM trading low.

At the current growth rate and tension between China, may be a P/E of 24 is a
little optimistic, but they are by no means a bubble. The first sentence in
the article:

 _In my decades of looking at the stock market_

Bubbles happen when everyone in the market is stupid. Stupidly believe nothing
could go wrong. Housing wont fall, Stock will go up. I dont see any of these
at all. It seems to me investors are still very cautious, and talk about the
2008 crisis as something happened a few years before, when it has been 12
years now.

The only risk I see right now is China. Simply because the market is so opaque
we have no idea what is really going on.

~~~
elfexec
> Bubbles happen when everyone in the market is stupid.

No. Bubbles happen when interest rates are low or via other mechanisms ( QE,
etc ) excess capital is created.

> Stupidly believe nothing could go wrong.

No. This is just standard nonsense we teach entry level financial analysts who
know nothing or something the business news parrots. The "stupid" masses don't
create bubbles. The highly "intelligent" financial masters do - FED/banks with
the help of politicians and media.

> The only risk I see right now is China. Simply because the market is so
> opaque we have no idea what is really going on.

Another one of these. Once again, somebody has to link china with something
that really has nothing to do with china. Also, the chinese markets aren't any
more "opaque" than any other markets. Really, you have no idea what's going on
there? I thought china was collapsing because of all the "ghost cities"?

The anti-china crowd is so hilarious. On the one hand, china is a risk because
we know exactly what's happening there. On the the other hand, china is a risk
because they are "opaque" and we have no idea what's happening there.
Sometimes it's hard to tell whether these comments are from propagandists or
those mindlessly parroting the propaganda.

But in the meantime, people who know nothing will argue about silly nonsense
PE, EPS, Beta, etc. There is a bubble because the big boys want there to be a
bubble. APPL rose 84% because the big boys wanted it to. The bubble will pop
and there will be a recession when the big boys decide.

"I nearly stopped reading after this. In hindsight I should have done exactly
just that.". Amen to that. Should be the HN motto.

~~~
perl4ever
"Bubbles happen when everyone in the market is stupid.

No. Bubbles happen when interest rates are low or via other mechanisms ( QE,
etc ) excess capital is created."

\---

Nobody has or can define a bubble.

Nobody can see 30+ years into the future.

Right now, 30 year treasury bonds are paying about 2.3%.

If the capital markets are efficient, then there is no free lunch, so you can
expect returns of stocks in the next 30 years to be essentially the same or
about zero if inflation stays low and all nominal income will be from
dividends.

Is that a bubble in stocks or bonds? Well, I think what will determine if
people call it a bubble in hindsight is if inflation goes up and interest
rates as well. But that is not expected by most.

------
PhantomGremlin
I like his approach.

He sold short SPY and QQQ. Those are very liquid and he will have no problem
being able to cover if the market moves against him. He's not shorting
individual stocks.

I just did something similar. I bought puts on both SPY and QQQ. As the author
notes, I had to pay a put premium. I will exit quickly if the market continues
to go up at the beginning of the new year.

There is one advantage to buying puts instead of shorting. If the price of
puts (the implied volatility) goes up, the put becomes a leveraged bet. A put
can go up in value even if the market goes sideways. Of course that is just
short term, longer term there are many other factors such as time decay
involved.

~~~
blackrock
As much as I would like to buy a put, the timing is hard to get right. The
decay of the option will make your derivative expire worthless. And then, the
next month, the market will fall as you predicted, but you lost your money on
that option.

Or if you're a true believer, then you'd roll over your options, and keep
throwing money down.

But as they say, the market will stay irrational, longer than you can stay
solvent.

~~~
PhantomGremlin
_the timing is hard to get right_

Yes the timing is tricky and decay is a bitch.

My thesis is that the market will begin to drop in January. Perhaps as soon as
January 2. The puts are to protect my portfolio from that scenario. If the
market doesn't drop I will quickly blow out of my put options.

The time decay over a few days or even weeks on a 90 day option isn't that
significant. Of more concern is that the price of a put will decline if the
market continues to move up away from the strike price. It's a double whammy
because, as a market moves up, the inherent cost of options (the implied
volatility) usually goes down as well.

 _Or if you 're a true believer, then you'd roll over your options, and keep
throwing money down._

Yes it's foolish to keep rolling put options in a rising market. You must use
them tactically for when you expect an inflection point might soon be at hand.

You can also use put options for more practical reasons. E.g. in my case I
need to periodically sell stocks because I have tuition to pay for my daughter
currently in college. Two scenarios:

1) stay in the market, buy puts, lose some of the upside because of cost of
puts.

2) sell stock now against future tuition needs, lose all of the upside.

~~~
blackrock
Good luck! The market tends to crash right after everyone is exuberant and
claiming that it'll go up forever. Then, the adults come into the room, and
pull the rug from under them. Then these same people start seeing red and cry
that the world is going to fall apart. They completely forget that their
previous stance was that the market would go up forever.

On a side note, some people think that they could've timed the Big Short of
2008. If only they had bought a Put. Or go naked, and short the SPY stock
directly.

But from my analysis, this was an impossibility. At least to a normal trader.
There were just too many fake-outs, too many dead-cat bounces, that the
likelihood of you fulfilling your original trading thesis, is nil. The whole
thing took place over a 12 month span, which is far too long to execute a
derivative trade. So, you would have to short the stock naked, and hold it for
12 months, and hope and pray that your thesis was correct. But, you can only
borrow so much money, thus the benefit of such a trade, was not worth the
risk. If you made any money, then it would be a rounding error.

Now, if you had insider information (especially on when critical actions were
being taken by the government and key players), and if you have significant
financial resources, then that might be a different game. And you would've
benefited significantly from that once-in-a-lifetime trade. But for the rest
of us normal folks, shorting the market in 2008 was impossible.

Anyways, good luck! This market needs to correct. The bigger they are, the
harder they fall.

This QE insanity has impoverished us all. Except for the rich elites. They're
like vampires that suck on the souls of the poor unwashed masses, and the
middle class that hopes to be rich like them but never will, and laugh at us
all, as they lounge around on their 3rd yacht.

------
smabie
Maybe as a retail trader, shorting has a bad risk premium. But in general,
people short for only one reason: to gain leverage and reduce volatility. A
hedge fund might go %100 long and 30% short for a gross exposure of 130%,
gaining both leverage and reducing volatility (which they use to net risk
premium through leverage). Or if you’re a quant, you use shorts to make your
portfolio market neutral. While a fund might short SPY or QQQ in order to
hedge a long position, I don’t think an acute investor would take on a short
position of the entire market in order to make a directional play on beta.
There are a couple reasons for this:

1\. If you’re positive the market is going to crash in a specified point in
time, you would want to be more aggressive and buy some puts or vix futures.

2\. Beta almost always has positive returns and betting on entire market
crashing is almost impossible. You would need to be very confident for it to
mathematically make sense, and if you were that confident, you might as well
go big or go home (using vix futures, etc).

3\. Negative beta exposure historically has been a very bad investment
philosophy. While it can make sense to hedge market crashes (though not as
often as you would think, puts as portfolio insurance are almost always a bad
deal), I don’t think it makes sense to actually try and make money off of it.
Either you hedge out all market risk or you take on some market risk. It’s a
suckers game to try and profit from negative beta.

Some other stuff he says is suspect too. Saying that Tesla can’t crash because
the short-sellers will always take profits is a strange thing to say. It’s
like saying a stock with a lot of long-interest can’t go up because investors
will always take profits: historically untrue.

------
nine_zeros
The US stock market appears to be directly correlated to the amount of money
the FED prints.

With the current QE, there will be more dollars printed. I'm not holding my
breath. However, day-to-day workers and young people will be destroyed by this
asset inflation.

~~~
technics256
How will they be destroyed?

~~~
Terretta
I think the idea is that their cash flow is constricting relative to assets
they would need/want buy to establish their place in the world.

------
djaouen
This type of speculation is irresponsible. Does he expect us to sell and short
the market, too?

~~~
ncmncm
He specifically stated, in so many words, that he doesn't.

------
dotcom4
you really think it's time?

