• * Beware of investment fads and the experts that deliver endorsing pablum in the business media
• * They are not your allies in delivering good investment returns — they are harmful to your investment well being

“Thus hath the candle singd the moath.”
– William Shakespeare, The Merchant of Venice

This morning the price of bitcoin is down by another 10%: the price is flirting with $10,000 after trading at around $20,000 a few months ago.

The phrase “like a moth to a flame” is an allusion to the well known attraction that moths have to bright lights.

The word moth was used in the 17th century to refer to someone who was apt to be tempted by something that would lead to their downfall.

So it is with many in the business media, who too often, like Wall Street offering up conflicted research recommendations, seek audience over intelligence by parading experts (in the latest fad, like cryptocurrencies) and, too wittingly become the enemy of the average and uninformed investor. These experts, with memorized sound bytes, will always sound confident and rarely express the notion of risk. But, many of that audience will learn, like The Wizard of Oz, that they’re simply delivering an odious pablum –– bland or insipid intellectual fare and entertainment.

Those outlets that are inundated by crypt talk know who they are — like Warren Buffett, I prefer to criticize by category (and praise by name). (As evidence to the preoccupation, just take a quick look at the Twitter threads of some of the leading business media shows — they are overwhelmed by crypto chatter and nonsensical and hyperbolic opinions.)

Popular investment fads often too quickly become unprofitable investment endeavors — dot.com stocks in 1999 and housing/banking stocks in 2007 come to mind.

Ultimately the frequency of media coverage will diminish coincident with the fads’ price declines (and investors/traders lost interest). While the business media may shamelessly move on (unlike research firms and money managers who deliver poor investment advice, will face little retribution), your portfolio could be permanently impaired by what Joe Granville used to call “the bagholders’ blues.”

I may be wrong in my ursine view of bitcoin, et al, and though I no longer have any position (See Tales of the Crypt (Issue IX), I have written tens of thousands of words on the subject, discussing both the potential rewards but also, importantly, the risks as I saw them:

* There’s A Sucker Born Every Minute
* Res Ipsa Idiot

Many in the business media may ultimately forget their current preoccupation with crypto and drop coverage if my negative forecasts continue to be realized — but not until lots of money is lost in the process.

More

Not to worry, when enough time transpires, the same experts will be trotted back onto the business media with another investment idea in hand — just as the case is now, some nine years after The Great Recession and near 80% drops in their portfolios.

Some may say “time heals all wounds.”

But I disagree, as this elephant never forgets.

“The market does not know you exist. You can do nothing to influence it. You can only control your behavior.”

– Alexander Elder

It is up to each trader/investor to evaluate reward vs. risk of each investment — as many in the business media and the talking heads and commentators will not necessarily address upside compared to downside particularly in the trade du jour.

These days I am too often reminded of Benjamin Disraeli’s quote:

“What we have learned from history is that we haven’t learned from history.”

“For many, it will be increasingly difficult to navigate a market dominated by the overly popular ETFs and quant (volatility-trending and risk-parity) strategies that worship at the altar of price momentum. It is also because the ‘buy the dip’ mentality remains indelibly etched on the forehead of most investors and traders that the Pavlovian reaction won’t die easily.

Favoring the bulls is the diminished number of publicly held companies outstanding (from more than 7,600 in 2000 to 3,800 in 2017), a 17% reduction in the float of the remaining companies via corporate buybacks, and still-abundant liquidity. And on top of this, as previously mentioned, is the market’s participants confidence in buying the dips.” – Kass Diary, The Bull Wont Die Easily (November, 2017)

In trying to understand the relentless “Bull Market” advance since the Trump Election fourteen months ago I am reminded of what I wrote above in November, 2017.

These words were underscored in Jim “El Capitan” Cramer’s “Four Reasons Stocks Keep Going Up,” written at the end of yesterday’s trading session, in which he discusses the important structural changes that have led to the popularity of passive investing (ETFs) and in the share count drop caused by a near decade of aggressive corporate buybacks.

Of course there are numerous other reasons (some Jim details further) like the employment of large liquidity infusions from central bankers around the world, optimism about the cut in corporate taxes, the reductions of business regulations (around the fringe), sustained lower interest rates, etc.

As I have also written, investment vision is always 20/20 when viewed in the rear view mirror.

These past observations don’t really help us project the future — though I did touch on some of my concerns in yesterday’s opening missive, “Blinded By a Sense of History” (with some updates in parentheses):

“It is a mania shared by philosophers of all ages to deny what exists and to explain what does not exist.” – Jean-Jacques Rousseau

I have no clue how long it will continue:

* What I am certain about is that liquidity, which has buoyed our markets for years, is starting to be reduced. (Central Bankers are reversing course and beginning to contract their balance sheets)

* What I am fairly certain about is that we are at sentiment and valuation extremes — at least based on history. (And every day these measures grow more stretched)

* Interest rates are likely headed higher, posing — at some point — a potential risk and alternative to stocks. (The ten year US note yield rose above 2.50% this morning)

* I expect no further major legislative initiatives coming out of Washington, D.C. — specifically on the infrastructure front — and a further deterioration in the relationship between the Republicans and Democrats as we move toward key midterm elections. (My expectation is that the House goes Democrat while the Senate stays Republican.)

* As to the Administration, their belief appears to be that the benefit of world leadership is not worth the costs — which runs the risk of a policy mistake in the year ahead.

* As well, though markets have not been yet unnerved even with the White House having gotten bitten by a Wolff this past week, there exists the possibility that the Special Counsel’s
activities could be market unfriendly.

* And I am of the view that the earnings and economic growth expectations will, once again, be disappointing in 2018-19. (Earnings revisions higher have been material (in large measure from tax cuts) but I see mid year as a pivot point of slowing, not accelerating growth)

The markets seem to be moving back to being one with more concentrated leadership — as technology and the FAANGs (a large percent of the S&P Index) have regained their strength. Small caps, supposed tax cut beneficiaries, are lagging. Again, historically these are not positive signposts but it can continue, I have learned, far longer than I anticipated.

The speculation in cryptocurrencies and blockchain and penny stocks is yet another thin reed indicator of a mature Bull. And so is the self confidence and hubris seen in the business media.

Risk assets, like stocks, are called risk assets because they have risk — though you wouldn’t know it from the recent action in which fear and doubt has left the Exchanges.

But, wrong is wrong — and I continue to see ghosts that few market participants are viewing, blinded by a sense of history.

My strategy, given that the markets have clearly moved so much higher than my baseline expectations — is to become more trading oriented and to maintain high cash levels.

As described in my Diary, I see few longs that meet my standards of purchase.

As the market moves almost parabolically, I have recently begun to more aggressively short strength while keeping my stops fairly tight. (Day or days trades.)

Recently, with the exception of the last day of the year in which I profited, this has been a losing proposition.

Wash, rinse, repeat.

My view through the windshield (and the future) has been dramatically worse than my view through the rear view mirror (and the past) as stocks have marched ever higher without the sign of any meaningful pause.

While Grandma Koufax used to say, “Dougie, matzah doesn’t grow to the sky,” the investment trees are like redwoods these days.

“The opening crawl is the signature device of every numbered film of the Star Wars series, an American epic space opera franchise created by George Lucas. It opens with the static blue text, ‘A long time ago in a galaxy far, far away….’, followed by the Star Wars logo and the crawl text, which describes the backstory and context of the film. The visuals are accompanied by the “Main Title Theme“, composed and conducted by John Williams.

The sequence has been featured in every live-action Star Wars film produced by Lucasfilm with the exception of Rogue One. Although it retains the basic elements, it has significantly evolved throughout the series. It is one of the most immediately recognizable elements of the franchise and has been frequently parodied.

Each film opens with the static blue text, “A long time ago in a galaxy far, far away….”, followed by the Star Wars logo shrinking in front of a field of stars. Initially the logo’s extremities are beyond the edge of the frame. While the logo is retreating, the “crawl” text begins, starting with the film’s episode number and subtitle (with the exception of the original release of Star Wars – see below), and followed by a three-paragraph prologue to the film. The text scrolls up and away from the bottom of the screen towards a vanishing point above the top of the frame in a perspective projection. Each version of the opening crawl ends with a four-dot ellipsis, except for Return of the Jedi which has a three-dot ellipsis. When the text has nearly reached the vanishing point, it fades out, the camera tiltsdown (or, in the case of Episode II: Attack of the Clones, up), and the film begins.” –Star Wars Opening Crawl, Wikipedia

As Mel Brooks wrote in the opening crawl of his parody “Spaceballs“:

Once upon a valuation warp. . . .

In a market very, very, very, very far away, there lived a ruthless race of beings known as … Momentum Investors.

Chapter Eleven

The evil leaders of momentum investing, having foolishly overestimated economic and profit growth and taken valuations to an extreme, have revised a secret plan to take every breath of reason from their reason- loving neighbor, Value Investing.

Today is Halloween. Unbeknownest to the consensus, but knownest to us, danger lurks in the stars above..

If you can read this, you don’t need glasses.

But I am getting ahead of myself, so let me start from the beginning:

Episode I: THE PHANTOM MENACE

“Turmoil has engulfed Planet Investors, upending rational investing. The statutory corporate tax rates to outlying star systems are in dispute.

Hoping to resolve the matter with a tax-free repatriation of overseas cash, the White House has stopped all shipping to the small planet of Maine.

While the Congress of the Republic endlessly debates this alarming chain of events, the Supreme Tweeter has secretly dispatched two of his warriors (Mnuchin and Cohn), his guardians of low taxes for the nobles in the galaxy, to settle the conflict….”

Episode II: ATTACK OF THE CLONES

“There is unrest in the Galactic Senate. As several establishment Republicans have declared their intentions to leave the Republic.

This separatist movement, under the leadership of the mysterious Count Flake, has made it difficult for the limited number of warriors to maintain peace and order in the galaxy.

Senator Collins, the former Queen of Maine, is returning to the Galactic Senate to vote on the critical issue of creating an ARMY OF THE REPUBLIC to assist the overwhelmed Jedi….”

Episode III: REVENGE OF THE SITH

“Twitter War! The Republic is crumbling under attacks by the ruthless Sith Lord, Robert Mueller. There are heroes on both sides. Evil is everywhere.

In a stunning move, the fiendish aging droid leader, General Bernie Sanders (not to be confused with the Evil Colonel Sandurz), has swept into the Republic capital and kidnapped Chancellor McConnell, leader of the Galactic Senate.

As the Separatist Droid Army attempts to flee the besieged capital with their valuable hostage, two other Jedi Knights lead a desperate mission to rescue the captive Chancellor….”

Episode IV: A NEW HOPE

“It is a period of investor strife. Rebel spaceships, striking from a hidden base, (with price-earnings ratios ever expanding and dips ever bought) have won their first victory against the evil Galactic Empire (despite the robotic and fake impressions coming out of Facebook and Twitter) .

During the battle, Rebel spies managed to steal secret plans to the Empire’s ultimate weapon, the Death Star AMAZON, an armored space station with enough power to destroy an entire planet (and/or markets).

Pursued by the Empire’s sinister agents, Princess Kamala races home aboard her starship (on the Left Coast), custodian of the stolen plans that can save the markets and instill value and common sense to the galaxy….”

Episode V: THE EMPIRE STRIKES BACK

“It is a dark time for the Rebellion. The Death Star Amazon has not yet been destroyed and Imperial troops have driven the Rebel forces from their hidden base and pursued them across the galaxy.

Evading the dreaded Imperial Starfleet (of Generals Kelly, H.R. McMaster and Mattis) , a group of freedom fighters led by Luke Booker has established a new secret base on the remote ice world of California.

The evil lord Paul Ryan, obsessed with finding young Booker, has dispatched thousands of remote probes (and quant strategies) into the far reaches of space, continuing to boost investor confidence and buoy the S&P Index….”

Episode VI: RETURN OF THE JEDI

“Luke Booker has returned to his home planet of Newark in an attempt to rescue his party from the clutches of the vile gangster Bannon the Hutt and from (unregulated and growing power/value) of the sinister FANGS.

Little does Luke know that the Galactic Empire has secretly begun construction on a new armored space station even more powerful than the first dreaded Death Star, AMAZON.

When completed, this ultimate weapon will spell certain doom for the small band of rebels and short sellers struggling to restore freedom and common sense to investors…”

Episode VII: THE FORCE AWAKENS 

“Luke Booker has vanished. In his absence, the sinister DARTH PUTIN has risen from the ashes of the Empire (and Facebook/Twitter) and will not rest until Booker, the last Jedi (and market complacency), have been destroyed.

With the support of the REPUBLIC, Princess Kamala Harris leads a brave RESISTANCE. She is desperate to find her brother Luke Booker and gain his help in restoring peace and justice and reasonable valuations to the galaxy.

Princess Kamala has sent her most daring pilot on a secret mission to PLANET DNC, where an old ally (Princess Elizabeth) has discovered a clue to Luke’s whereabouts….”

Hopefully, to find out the market outcome, we may only have to wait for next month’s (Dec. 15) release of Episode VIII, “The Last Jedi.”

But the wait could be as long as Dec. 20, 2019, with the release of the still-untitled Episode IX.

“Your eyes can deceive you. Don’t trust them.” – Obi-Wan Kenobi

It’s scary out there — after all, it’s Halloween.

Trick or treat?

Regardless of market outcomes, “May the Schwartz be with (all of) you.”