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As Good As It Gets?


What could we walk into any day right now that would ignite another leg higher, precisely when most of us will agree the rally is over?


So I get pinged by my friend Adam Katz yesterday, apparently he clicked on the wrong name because he asked me "So what is the smart money doing?"

Back in March I shared with Minyans that Adam - a sharp cookie is an understatement - was on the other side of the cautiously crowded trade, assuming we were due for a correction almost every day since. He predicted a meltup instead and was righter than rain. A few weeks later I buzzed the following in agreement: "I can make several cases for the buyers to be exhausted in here, but they are currently being trumped by…liquidity." Demand was swelling and supply of shares shrinking. So against better judgment, I thought I'd share two more possible trump cards today when it makes perfect sense to assume again that surely this is as good as it gets. Right?

See that's the thing, Adam and I enjoy rapping because we'd rather make money than be right. That's no small decision you must make in this business. The perverse truth, thankfully for me, is that this does not take supreme intelligence to do well. This business requires a willingness to look foolish, a course I've studied for quite some time. To paraphrase a great trader named Victor Sperandeo, he once argued that...

Intelligence is not a prerequisite and in fact people who are, or have been "right" most their lives can find it difficult to admit mistakes. In trading the one who can easily admit to being wrong is the one who walks away the winner. Besides trading there is no other profession that rewards and requires admitting to being incorrect so often, or at all. Rationalization is a guaranteed road to ultimate failure.

Most of the time we hear quotes like this in reference to discipline and making sure we put in stop-loss controls for meltdowns. I'd share that equal consideration be given to stop-win's, for meltups.

Adam has been spot-on in his meltup call over the past few months. So he ask me what I thought because he knows I like to look away from my screens and try to imagine what I cannot see yet. Or he may just be on mute, laughing. We enjoy pushing each other. So, I took a shot at describing two possible outliers that I have been wrestling with. Plenty of traders, including myself, have pointed to reasons the market could and perhaps should go down. To wit, Adam and I talked about the curious fact that bears seem more comfortable to us than bulls in here. Pros have fought this rally all the way, retail investors have missed it entirely and from the bears, I can't recall such convincing cases for so many corrections – mix together for a recipe for a rally all by itself.

You hear often now, very often lately, "You can't go broke taking profits." That is advice for an individual with a limited bankroll and modest goals that is hard to argue with and I will not, so please do not mistake the crazy ideas below as anything close to advice. This is nothing more than sharing a dirty little secret that might be helpful for you to know when trying to figure out the methods to the madness in this business. You see, the wicked truth is that taking profits is precisely how you can go broke as a money manager. I am not suggesting this is right or wrong, not sharing anything about our style, just shining a light on a dark corner of Broad and Wall, wanting to share with you the other thing bulls have to worry about – not being bullish enough.

We hear and read quite a lot about what bears worry about. The bearish cases of what can go wrong are considered, I believe, as more intellectually rigorous and somehow "smarter." There is perverse satisfaction in thinking you know about something bad before others. It's human instinct as long as we've been around – our very survival depended on it. On the other hand, a wildly bullish idea is often scoffed at as cockeyed optimism, and roundly critiqued and picked apart (often for very good reasons).

So in looking away from my screens and acknowledging there is plenty that can go wrong from here, I also wonder about what may go right since page one of my playbook reminds me "it will go farther than you think possible, in both directions."

What could we walk into any day right now that would ignite another leg higher, precisely when most of us will agree the rally is over? Here are the two riptides that I can imagine when left alone long enough with a good Rioja recently:

  • 1. There is a private equity bid seemingly underneath any company willing to "consider alternatives" that has been now included in most bulls' cases. Is it as good as it gets? Probably. We all seem so willing to call the top as soon as the biggest deal is done and it always feels like that is right around the corner. I am thinking about something that would change the game, not end it.

    What would happen if there was a new fund that made Blackstone look like a short stack after an all-nighter with Teddy KGB? Everyone points to China's minority stake in Blackstone as a big deal. I wonder if it was not a small ante. If it is able to gain political favor and gain generous access to Rolodexes in the US that would be great, but Americans would protest most takeovers I'd guess. So I think while the US argues about selling, China will be busy buying, from other countries, some of the precious natural resources they desperately need and perhaps at the very moment traditional analysis suggests those stocks can't go much higher. If China or a Middle Eastern country pulled up a seat at the table with a planet shaking purchase of a natural resource rich group of assets, I can imagine a ripple effect of "who's next?" that could make this energy and materials rally look like a warm-up act.

    I believe there are several assets that make a lot more sense for China to hold in reserves than dollars. That would surprise the bulls on gold (including myself) if they skipped over that sensible choice and opted instead for dirt that sits underneath corporations. What might make even less sense is if this led to a rally in the stock market while interest rates rose. What was most telling to me about China's interest in Blackstone was not where that $3 billion would go, rather I was interested by where it was not going – the Treasury market. What might surprise bulls AND bears the most would be rising rates that don't doom the stock market because supply is being added to the bond market and subtracted from the stock market. Is that likely? No. That's the point of this exercise. The best bet is not the best horse but the best price born from not considering possible outcomes.

  • 2. I call this next one my rolling-back-the-odometer trade. I have been quick to point out the severe headwinds that large cap US companies face from taxes, higher rates, litigation, regulation, entitlements and generally from a law of large numbers that make it very easy to understand why $250 billion companies stop growing 15% a year every year when they get that big, despite bulls extrapolating that growth rate in future estimates, especially since they are such "good" companies.

    Good companies have often made bad stocks the past several years because once everybody has recognized their quality and bid up their shares they simply became over-owned. Nothing has changed my mind completely but I can imagine something that would, temporarily, and has already begun to. Some of the highest quality companies have almost completely convinced investors that their share prices will never go up again after several years of going exactly nowhere. Revenues and earnings have doubled and tripled while stock prices, in some cases, sit right where they were years ago.

    If there is one other rally that I can imagine that will be considered artificial it would be just that – artificially created. Financially re-engineering a few large cap stocks, whether it be breaking one up, spinning something off, selling assets, leaving this country, or leaving the public markets all together…I am admittedly convinced of very little. Except for the fact that the recipe for a rally in large cap stocks would be to be little, or at least make us think they could become little again by cheating the law of large numbers and rolling back the odometer.

    There are a couple of deals that I have considered and think would ignite a "who's next?" rally. You could easily argue that nothing is substantial or intelligently cited here, heck I'd even help you. That's the funny thing about surprising rallies, they surprise you, especially when it has just got to be as good as it gets. Right?

Is it crazy to write all of this at this point in the cycle? I mean shouldn't we be worried about what can go wrong? Yes and yes, I worry more than anybody I know. But, I humbly submit it is also crazy not to consider what can go right from here.

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