CHOP-HOUSE

So I am supposed to tell you how everything is great now since AAPL best estimates and is higher the AHs. I will also tell you I was chopped to hell and back today, in a wide pastiche of ways — a session that was born into success but ended in failure — much like the human experience of most people.

We rally and then we collapse. We have all sorts of things to worry about and all of this grinds us down and raises our “pink levels” to 100000%. The way to manage through it is easy — trade less and hold more cash. I ended with 50% cash, down another 1.6%, now laden with shorts in a manner which I had hoped might disconnect from traditional bull market correlations.

I am short oil, banks and long VIX. This blend is sure to be a money loser tomorrow. Good thing I am heavily long SAAS via WCLD and tech via TQQQ. I’ll be lucky to walk away with a 10bps gain. But the issue isn’t the opening tick but what you do with it. Do you sell the longs, keep the shorts or keep the shorts and sell the longs?

We are all worried to death about missing out on the rally to come. We can see it and taste it and we understand if and when it ever bounces — the cocaine will flow furiously and the dicks of shorts severed expeditiously. As we wait, however, we are the one’s having our dicks removed and if this pattern keeps up there won’t be any fucking to be done once the sellers exhaust themselves and fuck off for good.

BIG PICTURE OUTLOOK is for spiraling economic statistics, followed by a collapse in the housing market and overall doom. But before we get there, thanks to Apple Computer, we might rally for the next several days, or perhaps hours.

The bond market is causing a disruption in stocks thanks to soaring 2 yr bond yields and falling 10s. The spread between the two was is 71bps — still a very decent and profitable level but the trend is, inexorably, lower. If that yield curve flattened it would be accompanied with a crescendo of pundits who would then declare a recession was around the corner, since the flattening of or inversion of the yield curve is our best predictor of economic angst.

We went from +200 NASDAQS to swimming in a sea of red and the day is young and filled with terrors.

The NASDAQ is down 140 and I, once again, was forced to liquidate early and then hedge. Then we had a bounce so I added to both FNGU and WCLD and then we plunged again, and then I hedged again. All in all, my damage is limited, down 60bps — but my YTD losses now exceed 10%. Even worse, when markets do lift for 30 mins in the morning and everyone else is drinking champagne out of their trophies — my gains are almost always limited to 1%, due to my risk aversion.

I cannot get behind this market, even for an oversold bounce, when the patterns are horrendous and this is exactly what that is.

A best case scenario for bulls is playing out now, as the Dow lifts more than 550. We saw futures recover after comments out of Russia that seemed diplomatic. On that news alone, European stocks boosted higher and here we are early on with a rally.

Not all stocks are up due to specific events underway with liquidations and n I’m sure markets will scare us a little today with an hour or two of red candles. But if we can stick a rally today and close strong, we might be able to salvage something from January. To make me reverse course on recession for 2022, I’d like to see a 5% lift from here.

I am still 75% cash.

With the NASDAQ already down 13.5% for January and futures pointing to another 1-2% lower at the open of trade, January of 2022 is turning out to be one of the worst trading months in modern history. Let’s delve into the stats and then I’ll discuss my stratagem.

QQQ Return/ Month/Year
-13.5% Jan ’22
-11.9% Jan ’08
-12.3% Feb ’02
-26% Feb ’01
-17% March ’01
-12% April ’02
-13.5% April ’00
-12.3% May ’00
-13% June ’02
-12.1% August ’01
-15.6% Sept ’08
-11.8% Sept ’02
-21% Sept ’01
-12.7% Sept ’00
-15.5% Oct ’08
-11.5% Nov ’08
-21% Nov ’00
-12% Dec ’02

What do all of those years have in common? DAS RIGHT — bubble bursting recessions. If curious about how I dealt with those fucking tapes, the bursting of the dot com bubble, I wrote two short books about them.

Before I theorize what is going on, let’s review what happened the month following those large double digit declines.

QQQReturns Month following crash
Feb ’08 -4.8%
March ’02 +6.7%
March ’01 -17.5%
April ’01 +17.9%
May ’00 -12.3%
June ’00 +12.4%
July ’02 -8.6%
Sept ’01 -21%
Oct ’02 +18.5%
Oct ’01 +17%
Dec ’08 +2.1%
Dec ’00 -7.3%
Jan ’03 +0.3%

That is what you call heart attack trading. We are in for a severe February either way you slice it. Out of 13 months following large crashes in the NASDAQ — 6 times it fell the following month, losses range from-4.8% to -21%.

The bubble we have been in post 2009 has burst, all thanks to COVID lockdowns and fuckhead stimmy checks. The inflation boogeyman has placed the Fed inexorably in the fag-box, menacing markets with the specter of having to go it alone without the Fed put.

As for me, I closed the session with 70% cash, 13% weighted in FNGU, which will serve me 3x tomorrow. I have reduced my buys from 5% weighting to 2.5% and will reduce it again tomorrow to 1% buys. The idea of nibbling into calamity doesn’t make me feel good, especially if Feb is lining up to thrash us again. I, of course, am simply looking for a decent reflex rally in order to move to cash and reassess. But I might not get that opportune and might need to quickly hedge without bottom ticking the market and ruining my chances at participating in an oversold bounce. The problem with waiting for oversold bounces during periods of truly unique circumstances is you might wait forever.

The Martingale Stratagem might be applied, but I also might apply a fast 15% weighted short to stem the flow of blood flowing from my head.

The prognosis is grim and if we’re looking down the line and accepting what the market is telling us — stagflation is here and we are 3 quarters, maybe 4, away from recession. Under those conditions, kiss your fucking housing market goodbye and subsequent leverage applied to the system — meaning banks, CMBS, leveraged loans, and all of the fat trimmings that go with collapsing of the general economy.

Unfortunately, it appears Alex Jones was right again.

A true fuck you you’re dead trading day. I have bore witness to these innumerable times throughout my trading career. The Fed didn’t say anything the market liked and we dove lower, from +350 NASDAQ to down more than 100 at the lows only to close flat. I did catch some FNGU as it came in and I bought some LABU 12% off the highs, yet still managed to dig myself into a hole. My position was mostly cash anyway and even at the highs I had only been +1.4%. I finished down 1.34% and undeterred in my belief a tradeable bottom can be achieved.

This of course is folly and the war with Russia nears soon. None of the news is good and now the Fed is our enemy. Nevertheless, the blood is flowing considerably and margin liquidations are happening at a frantic pace. My Quant closed +28bps, down from +350bps. Even worse was my algo account, off by 4.5% after gaining 7%.

What can I say other than to suggest you do not offer too much of yourselves or your money into a tape wrought with uncertainty. There was a time when I was a younger man I might’ve done something bolder into the close, short or long. But I can tell you from the scars that I have and the tears I’ve tasted — nothing this market or any market can offer you is worth the amount of stress that is necessary to withstand the fires. Clearly this is not an easy tape and as men we often lean on violent ideas to formulate decisions, jumping headlong into fires and imagining ourselves coming out as heroes — capturing the praise of women and children. But no one likes a loser and once you’re dead from the fires — no one will remember you, especially the children.

This is a bear market. Our President is an incompetent fool and his replacement might be worse. It’s important that you know this now and accept that all hope is lost and the only happiness you’ll ever get from this tape is fleeting and inconsequential.

https://www.youtube.com/watch?v=AasLUP1jEiw

The initial move is always wrong. We spiked and the COLLAPSED in a ceremonious “fuck you” candle and now we’re stabilizing.

I took this dip to add to my FNGU position and start a new one in MTTR. Before the Fed I swapped WCLD for FNGU because SAAS just wasn’t acting good enough. My best take is for a rally, only because the Fed is more or less what we expected and the market IS oversold. The backdrop of war is a negative one but if a diplomatic solution can be reached, bears will rue the day they were born.

For those new to this game, it never used to be like this. Before the dot com bubble bursted the Fed was more or less a passive thought in the big scheme of things, tweaking rates here or there but for the most part no one paid too much attention to them. The Fed was always important, but we didn’t rely upon them for our stock prices. Stocks were guided up and down by earnings and analyst upgrades/downgrades and mergers and rumors of takeovers. Today, because of the zero rate environment, all we care about is what the Fed is going to do next.

The reason why we are so reliant upon them is because we died in 2008 and the Fed replaced the economy with a Frankenstein bastardized version of something that should never have been created. Gone are the days when you could receive 5% interest in your savings account, even higher for a CD. Now you get NOTHING and if you want to earn a rate of return you must invest in stocks or bonds. The Fed has created a monster and every time they try to put the genie back into the bottle, said genie gets irate and does malevolent things.

Today is a Fed day and we all wonder what can the Fed do with CPI at 7% and stocks down 40% off their 52 week highs? I think the answer is obvious — they should not be in a position to do anything. But they will and they shall ignore their mandate in favor of saving stocks. My confidence in this isn’t high, only because it defies logic and reason. But we are talking about the Fed here, not an organization with integrity.

Futures are way up and I suspect if the Fed accommodates traders we shall continue to go way up. But if the Fed sticks to their guns and tells us they mean business — this entire rally might wash away.

Decisions decisions.

Now that we’re heading into another Great Depression, I thought we’d check in on the valuation metrics for America’s favorite group of stocks: FAANG (FB, AMZN, AAPL, NFLX, GOOGL)

Year to date this basket of stocks is down 18%, with NFLX leading the charge lower -39%. The average loss from their 52 week highs is -24.5%. The total market cap of these 5 stocks are $6.7 trillion, down ~$1.5 trillion or so from the highs — capital destruction largess.

Average revenue TTM growth is +33% and earnings TTM growth stands at an impressive +70%.

The avg price to sales ratio is 6.1x, with the 3yr avg standing at 7.2x. If share prices did nothing for a year, based on current estimates, the future price to sales ratio would be 5.1x — putting this basket, based on its 3yr median multiple, at a 44% discount to proposed price targets.

But what if this year isn’t like the past 3? Let’s compare them to say 2015 multiples, a year that sucked balls during peak Obama “EAT YOUR PEAS” era.

Stock/ 2015 PS

AAPL: 2.2x

AMZN: 2.6x

FB: 17.3x

GOOGL: 6.5x

NFLX: 5.9x

Average 2015 PS was 6.9x, but to be fair FB was still a hyper growth play then. If we X’d out FB — the current PS is 5.75x and 2015’s PS was 4.3x. The FPS for this basket ex’d out FB is 4.9x. In other words, in spite of the calamitous drop — these fucking stocks can barrel another 25% to get down to 2015 price to sales levels. In order for that grim forecast to come to fruition the economy would need to materially change for the worse. If the economy is fine and this is just a stock correction, this basket has +44% upside based on current bull market multiples.

Data provided by Stocklabs.

The Nasdaq lost another 300 today with severe selling that had the hallmarks of liquidation. The strength in oils buoyed the market and had oils not bounced we’d be in a much much worse position right now. Early on I doubled my position in GUSH and it ran +12 from then till the close. I sold CELH and RIOT, one for gain, one for loss and continued to average down in WCLD. My LABU position is +7% from basis and is 15% weight, but I did not sell it because I didn’t feel like it.

On the whole I am 42% cash, 5.5% UVXY and the rest long. I shed 1.6% today, after sinking 3.5% and then moving back up to breakeven. But we saw significant weakness in the final hour, again rooted in margin liquidations and forced selling. Those who leveraged into this decline have been dispatched. Although the prices look cheap, they’re also subject to forced selling. You have to realize this before stepping in.

I was tempted to allocate 100% long but then I remembered WW3 could quite literally be days away. If the worst case scenario played out we will undoubtedly collapse 1,000+ and continue to spiral lower until peace is negotiated. Until we get some clarity, it’s really hard to see anyone going all in. Even if we rally hard and everything looks great, we are one cruise missile away from total dislocation of the markets.

From an hour after the close last night futures sold off. There was no bids the entire night, barely any periods of lift in spite of a milquetoast Asian session and strong European open.

At the open we head faked with a bid and now we are diving straight the fuck lower, in a bidless tragedy of monumental proportions. I’m off by 3%, almost giving up all of yesterdays gains, even with 42% cash. For bulls, this is a worst case scenario and it’s likely due to the fact that too many people are hopeful, expecting a rally. I did a sentiment poll yesterday and it was almost even bull v bear. The only way we bottom is via cataclysm and by the looks of it we might get it today.