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Market Update

It has been a difficult trading environment. The market took off unrelentingly with some stocks going into orbit during the past few months. I like to say that trading pays the bills while investing builds wealth – so I do both. Trading requires two-sided action. Stocks like TSLA, APPL and ZM only went up until a couple of days ago. So these stocks made poor trading vehicles and I would never invest in them at these valuations. TSLA might have been the most extreme example. Was TSLA worth $440B? It was valued at ten times Toyota’s and forty times VW’s EBITDA multiples despite selling only five percent of the number of cars that they do. There are many unhappy TSLA owners which is supported by the manufacturer ranking worst in JD Power’s Initial Quality survey. Despite buying two MacBooks this summer to help fuel demand, how can APPL be valued at $2.2T? It took 35 years for the company to reach a $1T market cap. It tacked on the next $1.2T in a year. My open ZM trade was looking like it would be a full loser given how ZM skyrocketed forty percent after earnings. There is some hope now that the trade might work out as the share price has pulled back, but is a company with no moat worth $130B?

The action of the FAANGs and other high fliers resembles the ’99 technology stock bubble. It was all about dot com back then. Now it is about the cloud. What is the real reason for these stocks going parabolic? Because there is huge demand. There is a new army of daytraders who have the time to trade given the prevalence of working from home or not working at all. The phenomenon is spurred on by the advent of platforms like Robinhood and content providers like Davey Day Trader. The demand for call options has created demand for stocks and futures as dealers are forced to hedge. And professional investors are buying in order to keep up with the indices in the short term. Their jobs depend on it. This situation is unsustainable and we may have just witnessed the popping of the bubble.

So the good new is that the trading environment is looking promising now that volatility is rising. How about investing? Does it make sense to buy stocks for the longer term in a rising volatility environment? It appears that the economy is experiencing stagflation as prices are rising due to supply disruptions. Exposure to hard assets and commodities including copper, nickel, zinc, lumber, grains and ag complex, natural gas, and crude looks appealing. I am bullish gold and silver especially given the uncertainty of global politics, although I believe that these assets will underperform when economies start to grow again. Having said that, precious metals will likely outperform during a general market decline.

Commodities have experienced a decade long bear market that appears to have ended. There are many excellent senior listed equities that will benefit from a commodity bull market, but my preferred products are located in the junior markets. These are tiny companies that are risky, but offer huge upside. I write about some of these stocks in my posts about Speculations. In fact, the juniors in my portfolio are outperforming many of the hard asset stocks listed on the senior exchanges including the deep value tanker plays. For example, FPX Nickel has been on a tear.

These speculations can take years to work out, if ever, so it is important to be patient while carefully continuing to monitor their health and prospects. It is also very important to know when to cash them in.

It has been nearly one year since I started posting Trades and Speculations on this blog. There have been no losing months. I will continue to post with expectations that this year will offer many challenges and rewards. The trading environment is looking good and I expect my investments and speculations to excel in an inflationary environment. There may be drawdowns correlated with general market weakness, but given the cyclical nature of commodities along with a heavy sprinkling of precious metals, I anticipate a prosperous outcome.

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