Switched from 100% Long to 0% Long

[Andrew Stepner]

Today I switched from basically 100% long to basically 0% long. I am now very bearish so in some sense I might effectively go below 0%.

Thesis

In my view, interest rates are the catalyst. Too much stuff has been overvalued due to artificially low interest rates. Now that interest rates are rising I expect stocks to continue to fall. I think a continued domino effect downward is more likely than an upside catalyst. We've gone quite a while without a recession and it feels like this is likely the start of the next one. Certainly I could be wrong, and I will monitor things to see which way they continue to go. But it seems to me like there is more downside than upside as we wait to see how the stock market drop plays out.

Druckenmiller
My thesis is largely triggered by thoughts from this recent Stan Druckenmiller interview. It was excellent (I hold him in really high regard). I highly recommend it (90 minutes): https://twitter.com/realvision/status/1062463129106477058

Re-Positioning shift

I sold the vast majority of my stocks. I have a little left but I am pretty much converting everything to either cash or defensive stuff or downward bets (puts).

I have bought some defensive stuff (Utilities ETF $XLU) and bought some Jan 82 puts on HYG (bet against high yield bonds).


Which companies are vulnerable?
I am looking to buy puts to bet against vulnerable companies with high amounts of debt. Any ideas which companies are vulnerable? Any bankruptcy candidates? What would you short? Actually, since getting borrow can be hard, what would you buy puts on?

Or are there online places you would look to get short ideas from other people?

Stepner

[Richard M]

There's a guy on SeekingAlpha that does a lot of shorting named Keubiko.  Follow him on Twitter.  He does a lot of foreign listed stuff, like Canadian retailers and the like.

Bold move on going 0%, but judging by doing it on the 19th you avoided another nasty drop.  I am still long, but have positioned for lots of sideways without much dropping.  So much economic data is good, and the Q3 drop was nonsensical to me.  I'm surprised this is contrarian...but in a mild recession I like tech stocks the most.  That's when people look for "free" or cheaper items.  Cord-cutting, in a mild recession, should accelerate drastically, but people won't quit TV cold turkey: they'll sign up to NFLX.  (I don't own NFLX fwiw.)  The Saas companies should take share, but ALSO the saas companies can - almost instantly - tweak their products to offer more or less at any given price point.  Googling free entertainment (reading, blogs, etc) should rise, Youtube viewership should go up.  Multiple compression could negate any progress, though.

And related to that, the tech companies are so flush with cash that the future they are bringing about should still arrive.  Great example is self-driving cars.  Google is at zero risk of becoming insolvent and/or giving up on it.  And when it launches, the price advantage is structurally amazing.  It will be like Southwest with even more advantages and none of the disadvantages:

• Entire fleet of same model car: lower maintenance = lower cost;
• Bulk purchasing from non-oligopolistic producers (i.e. buying from Nissan/Ford/Chrysler/Honda/etc/etc vs just Airbus or Boeing) = lower cost;
  
• Less technology needs and regulations than air travel = lower cost;
  
• Better traffic prediction and routing = better fuel economy = lower cost;
• Massive more utilization per car than private ownership or even uber drivers = massively lower costs;
• No driver needed = lower costs;
• Bulk fuel purchases/hedging = lower cost.
• and THEN:
• THE pre-eminent AI/Machine Learning company is analyzing the data.  E.g. they used DeepMind to reduce data center cooling costs by 40%.  I have zero doubt they will find insights in this data years (if not decades) ahead of the competition.;
• Their giant cash pile allows them to price at (or below!) cost to win the market.

That was obviously a tangent, but that is a massive upwards option on the shares.

For short candidates, cable-cutting is a favorite, but the trick is to find someone that can't get acquired.  I'd actually consider Verizon to be a candidate (a ton of debt) and Dish network (given what's happening to DirecTV, why would people want dish?  Oh, the 'why' is Dish owns a lot of spectrum and just sits on it, unused.)

I would short Apple but can't because of the cash pile and because I've been so wrong about replacement elongation and the sustainability of a premium phone to competition that I'd have lost my shirt.  They have so. much. cash.  But I have no idea how they will succeed increasing prices massively and their services are not great.  I know this sounds dumb, but really - really - if they want a new narrative of being a "services" company...they should find a way to buy Square.  It's the apple for business.  The problem with Apple is contagion: that stock falling brings down the entire index, which then causes other stocks to fall.  It's too heavily weighted.

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Richard Mordini

[Andrew Stepner]

Thanks for the rec on Keubiko!

Shorts and Debt

I have been looking at companies with lots of debt and/or exposure to floating interest rates. There's a good post here with info on floating rate exposure. In particular, the "Exhibit 7" image. The post is from back in April, but it seems like a lot of it should still apply:

https://www.thestreet.com/story/14543453/1/50-stocks-that-might-be-crushed-because-of-rising-interest-rates.html.

I also like the idea of scouring finviz.com for technicals trends. Generally I like their charts and in particular I scouted out their screens. I looked at stock screens for Debt/Equity, Current Ratio, and Quick Ratio. I also looked at "Wedge Down", "Channel Down", etc. The main thing I found was a TON of emerging market ETFs showing up as downtrends ($VWO for example)

I am now to some degree short on these:

GE - in the news and I am just trying to pile on (partially via Puts)

CPB - Campbell's Soup, happened to be mentioned in Druck interview as overvalued and has an interesting situation with Dan Loeb (and plenty of floating debt)
HYG - high yield ETF that's been tumbling, play on a credit collapse (via Puts)

LQD - corp bond ETF that's been tumbling, play on a credit collapse, idea is that all the AAA rated stuff is probably not actually AAA

SWK - Stanley Black & Decker, not quite as massive debt, but lots of it is floating per the article

DE - Deere, debt

AMC - movies, debt

MAT - Mattel, debt, declining business

And then I added some XLU utilities ETF for defensiveness

Reactions welcome.

Stepner

[Andrew Stepner]

I think I may have discussed more on "Portfolio Update..." emails but anyway circling back to this original email, I am thinking of calling off my very bearish position. It seems pretty clear that I got the macro call very wrong. I attribute it mostly to a failure to properly anticipate and respond to action by the Fed and its stabilizing impact.

Anyway, I'm thinking about switching from defensive/~0% long to something more like 50-100% long. Thoughts welcome as I contemplate (although I may move quickly).

Stepner

[Richard M]

I've been considering a big move to cash. Maybe coupled with a sp put vertical 

Elizabeth Warren wins one primary and poof. 

I hate the Fed, namely bc in June on a Tuesday AM in Chicago Powell implied he's cutting rates. Not even at a FOMC meeting. The Fed should keep their mouths shut to reintroduce caution. You say shit 30 days before the meeting and markets rally then you're almost bound to do it. They're too present. 

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sent on the go

[Andrew Stepner]

Interesting. Yeah, you may have a different thesis and timing than me. I just think my former thesis is maybe disproven.

Warren is a potential problem but she's also quite a ways away

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[Richard M]

Monday, Feb 3rd is the Iowa caucuses.  Market, to me, is pricing zero chance of things going wrong with China (the deal seems pretty weak), impeachment, any other scandals, companies are actually having EPS fall but prices are going up, and any democratic candidate who plans on increasing corporate taxes (all of them).

companies are literally reporting negative EPS growth and shares are surging

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Richard Mordini

[Andrew Stepner]

This is partially why I was surprised to have been wrong thus far.

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