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market strategy for untrod ground ?3

Before earnings reports monopolize my attention again, I wanted to publish an update to the note below.  Although I still admit that I won't necessarily be able to give enough warning, I will continue communicating what I do see, and today's market weakness did NOT have any of the hallmarks of the beginning of a sustained downturn.  In fact, I mostly see more of the same.

The House Financial Services Committee will hold a virtual hearing tomorrow at noon.  I plan to give it a look, mostly for laughs, as the Chair's statement on the matter is pure populist drivel.  Hedge funds who got hurt weren't being "predatory", and after having worked with them, I'm more than tired of seeing the adjective "sophisticated" applied by the media as well.  They were being overconfident at best and moronic at worst, for allowing themselves to be drawn into and then not exiting an overcrowded short position.  The Chair of such a committee should know that the NY Fed's own study in the aftermath of 2008 concluded that
Short selling does not appear to be the root cause of recent stock market declines. Furthermore, banning short selling does not appear to prevent stock prices from falling when firm-specific or economy-wide economic fundamentals are weak, and may impose high costs on market participants.
If she wanted to truly help workers and non-institutional investors, instead of score political brownie points, she would press for implementation real-time settlement, and doing away with private placements and shelf registrations.  With real-time pass-through settlement Robinhood would not have been so poorly prepared for its own success and forced to limit trading.  Without shelf registrations MicroVision would have had to issue a new prospectus disclosing risks that are relevant to current market conditions thereby giving fair warning of the dilution that current shareholders would be subjected to.  Without private placement all investors would have an equal access to and pricing influence on newly available shares.  If one wanted to go so far as to take a common sense approach, one could simply drop the regulation and licensing for CFAs like Roaring Kitty and limit fund and advisor income solely to a small fraction of the net income they generate for clients.

I'm not hoping for much better from the SEC.  It's suing Moody's for silently adjusting models to lower the stress on mortgage-backed securities in 2015 & 2016, but the company paid only about a third of percent its annual revenue ($3.5M of about $1b) to settle charges that it had exacerbated the financial crisis of 2008 by violating conflict of interest rules designed to separate credit ratings and analysis from sales and marketing.  To me, that just says keep on doing it, which apparently, they did.  In my original post below, I pointed out that policy matters so much more than enforcement.  The SEC might string up some pump and dumpers and make some more insignificant institutional money grabs.  However, there's no talk at all of completely stripping ratings agencies of any input into financially regulated behavior, as part of a freer, more open system like the one I describe above. 

Ultimately, the distance between actions and hearings can make it rather hard to distinguish between ignorance, negligence, and fraud, while making it easier to conflate different types of market inefficiencies.  A free market means letting people bear the consequences of listening to bad information, not regulating their money toward mediocre analysis.  I've yet to see any public media reference the CUSIP-based trading system error that I fingered as kicking off the ephemeral LUMN short short squeeze at the end of January.  I don't think any those media sites should be held accountable for completely missing the point in the last Himax report, when I was able to accurately estimate its subsequent trading range within minutes.  Instead, people need to learn not to trust what they read from unknown or unreliable sources.  The CEO of Reddit should focus as much of his responses as possible on educating questioners on Section 230, until they apologize for having him there at all. 

We all know they won't do that, though.  In the end, I fear that the new guard's response to swarm trading will be every bit as effective at producing meaningful change as the misguided old guard invasion of the capitol was.  I very much doubt any government body will even defend, let alone lionize the sort quality short-sellers who actually bring a dose of honesty to markets by exposing Enron or warning about General Electric.  Politicians and regulators need to acknowledge that both the capitol invasion and swarm trading are valid signs of broken systems in need of radical change, even if the participants show little understanding what's wrong or how fix things.  My real fear is that politicians and regulators have long been aware of this, but that they are unwilling to take actions that would cause short-term pain by changing the mechanics that got them where they are in the first place.

On 2/8/21 10:11 AM, Esekla wrote:
In recent days discussion in Washington has turned from how much more money to dole out, toward the details of to whom and when.  This has pushed treasuries down and €/$1.205.  The long-term economic implications of the associated debt load are unfathomable, but that won't matter to the market right now.  I also see this as trivial compared to the Fed crossing the line back in April.  In that note, I wrote that it would be "easier for companies like AES, CenturyLink, Covanta and BGC to borrow again", but contrary to the conditions then, high valuations have now pushed the market progressively toward higher risk, as we've seen in GRoDT stocks.  For the record, I've seen no news to account for the Friday afternoon move in RESN.  As far as I can tell, it is mostly due to short covering reaction to current market conditions.  Hopefully, I've already made it clear that I regard a sustained market downturn as an inevitability, but that I don't necessarily expect that I will be able to given sufficient warning, let alone predict the timing with any precision. 

This note is a distillation of interaction with subscribers on the why I think as I do, and how I've modified my own investing in response.mean
          assets  Let's begin with a look at these two charts from median
          assetsthe Fed's Survey of Consumer Finances showing the Mean vs Median values.  Note the differences in base and scale on the left, and consider also that these use the Fed's fudged inflation numbers which are only about a quarter of real inflation.  Thus, the difference between total assets and the calamities that befell most families in 2000 and 2008 is even more stark than it appears at a glance. 

In response, I've been shifting away from selling any long-dated puts even though that was formerly a regular part of my modus operandi.  That said, my macro outlook hasn't stopped me from selling shorter-dated puts on some names that I still regard as values, though, like GLNG & BGCP, which again, should benefit from the rate volality.  It's also worth noting that BGC has formally split off its insurance business, as I anticipated, but there is still no telling what that will mean for the corporate transition or current BGCP shareholders.  I am also selling more covered calls these days, but will maintain my positions in EBIX and VIRT unless they resume unreasonable rates of appreciation.  Finally, I've become more nimble as well, taking advantage of the the trading anomaly in LUMN, and headline reaction to HIMX, for example.  For the record, I am hedging my position in the latter on today's move, in line with my already stated $12.50 - $15.00 price range.

It might also be appropriate to remind readers that I short, but don't publish that research, as disclosed in the description of the service (long-only) and first discussed a little more here.  Such positions are typically limited to highly liquid equities with exposure to dangerous macro trends, NOT GRoDT stocks or the mega-caps like Google that dominate indexes.  They are not consistently profitable, but it should help mitigate the generalized effects of a sudden downturn.  For the record, I am willing to give my opinion on short ideas once I'm sure that my correspondent understands that shorting is the best way I know of for inexperienced investors to ruin their portfolios, if not their lives.  It's also worth pointing out that my investing strategies tend to be very account & stock-specific, taking taxation and personal factors into account.  With all of these strategies, which I generally execute with multiple trades over time, I still don't tend to stay anywhere near all cash on a consistent basis, but as my macro view has soured, there are points where some accounts become more than half cash while waiting for new opportunities. 

To close, I'll reiterate that markets have little to do with their general economies over the short term.  Those wishing to track the latter for America should watch this chart employment population ratio which was updated with Frdiay's mostly good jobs report.  To me it puts an exclamation point on how policy, not stimulus, is what matters to a society over the long term.  I see governments that are either unaware of or unwilling to acknowledge reality.  America needs to comprehensively purge its electoral and Senate processes, reform its educational and legal systems, and reverse its monetary policies.  Europe (and the world) needs to let go of inappropriate regional control where that prevents it from embracing mobility over stability.  Both need to be willing to unseat incumbents in the process, particularly in the financial industry, instead of engaging in further theater.  I don't see how doing any of that can avert the market turmoil that we're only beginning to see, but our responses to crises needs to get better or the crises will only continue to get worse.