Wednesday, December 7, 2016

Short Term Thinking

One of the reasons opportunities arise on Wall Street is because of the prevalence of short term thinking.  Short term results are emphasized, even though these asset managers talk about the long term while trading in and out of positions on a daily and weekly basis.

You don't see investors stick around with a fund manager if they have a couple of bad years.  A few bad months is tolerated, a couple of bad years is not.  That kind of investor behavior keeps the fund managers on their toes, always worried about short term performance.  This leads to herd like behavior, because one is forgiven for going down with a crowded ship, but going down in a ship as the only passenger leads to pink slips and redemptions.

Right now,  the Trump trade of buying the dollar, buying US equities, and selling bonds is pervasive on Wall Street.  Even though we are in the late stages of a bull market in both the dollar and stocks.  To enter now and buy the dollar and S&P, you are taking a big risk for a small reward.  On a PPP basis, the dollar is already overvalued, and speculative positioning is already loaded up on long dollars.  For the S&P, at over 2200, you are trading at over 20 times earnings which are growing in the low single digits with rates rising.  It is one of the worst times in stock market history to enter a long term investment in the S&P.  

These are not big secrets.  And although valuations/earnings were mentioned as being a concern in 2015, and earlier this year, almost no mention of it now.  It is known, but not mentioned.  Because it goes counter to the prevailing theme of having to play the Trump trade, of buying stocks on hopes of big tax cuts, some infrastructure spending, and deregulation.  Those are hits of crack, as I mentioned before, which the market will eventually see for what it is:  a short term earnings boost that doesn't affect the long term value of US corporations.  

Yet the short term thinking of Wall Street buys stocks at what are bad prices for long term investment because that is the safest way to keep their jobs.  If they lag the averages and the market keeps going higher without them, they will be fired.  

For individual investors, this presents an opportunity to play the other side.  Fade the extremes of short term investment flows and build positions for the ride down.  The tricky part is the timing, because tops are always harder to time than bottoms.  But with the amount of exuberance we are getting off this Trump victory, my gut tells me the top is not far away.  I give this bull market 6 months at most.  

I have been doing a lot less short term trading and more long term fundamental research.  The long term picture looks bad.  Overvalued, lots of debt, with no growth, and now with a lot of optimism.  But I have refrained from shorting because we are not that far removed from the tumult of earlier this year when the S&P went down to 1812.  It usually takes the stock market at least a year to top out after forming such a powerful bottom.  But as that scary period gets further and further away from the rear view mirror, the risk of a big move lower gets higher and higher.  Hopefully in 2017, the short term behavior of the funds and institutions will provide the exquisite selling opportunity that I am waiting for.  

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