(B)(N) The Asymmetric Market – When they go high and long, we go short and low

Oh, Mama, what should we do now?

Drama. The market is very confused and doesn’t have any idea what it should pay for a stock, neither one stock nor many; should they pay 20x earnings? 30x earnings? 40x earnings?

We don’t know either what’s good for them but they’re paying 100x earnings for the stocks that we’re not holding today – we’re short on almost all of them since last year and we’ve also covered our shorts in a few cases (please see below) – and it’s a small but diversified slice of America of only thirty-five companies and the investors thought it was worth $430 billion in 2015 which was 80% more than the $250 billion that they were willing to pay in 2012 when they were cheaper and they’re settling today for $260 billion after five years of ferocious buying and selling of these stocks; please see the illustration below (and click on it and again to make it larger as required).

We worked this market as a (B)-class portfolio running both the long and short portfolio in it (please see below) and we increased our wealth by 770% in five years – an almost nine-fold gain with no risk at all – but 57% of it is now in cash and another 37% is in our brokerage account and it is also in cash net of all our costs including covering our shorts if we have to and the balance, 6%, is in the stocks although almost 100% of it was in the stocks by early 2013 – hence the term, the Asymmetric Market – it was in investments then and earning money and an income but now it’s all in cash and we don’t want to be in cash.

And neither does the market as long as there’s no return on cash as money or bonds and we’re waiting now for the big surprise because this market has to go to cash and buy the government’s cheap debt or be prepared to pay 100x earnings? 150x earnings and just 50% more?

What will they pay to earn an income on their cash because neither the earnings nor the revenues for these companies have increased in five years but their losses have and the return on the shareholders equity – the ownership – has plunged from 19% in 2012 to 2.9% today.

Figure 2: It’s just a game until somebody gets hurt

The investors are, therefore, in a tough spot – if they sell today, we’re into cash, all of their cash because our shorts come in – but if they bid-up the prices, we can cover our shorts and buy whatever they’re buying at a low price, a very low price – effectively zero net of all our expenses.

But all of the world’s markets look like this one; some of them actually look exactly like this one (please see our Posts) and for all the others, the symptoms and causes are already in place and it’s a just a matter of figuring-out what to do with all those tens of trillions of dollars in cash.

The Asymmetric Market

We went into this market with $400,000 in cash and activated a margin account of $140,000 for the long portfolio and we can take out $2 million in cash today and it won’t affect what we’re going to do tomorrow and leave the brokerage account for the short portfolio active with a current balance of $1.3 million after all expenses and after covering all of our shorts if we have to.

Where are my benefits?

In other words, we’re not “making” money or “earning” it in the stock market – we’re printing it – and there’s lots of evidence that it’s a global problem in every market – in other words, money is imploding and it isn’t “worth” anything if it can’t earn an income and neither are your pension plans worth what you hoped for; please see Exhibit 1 below for the details, and bring a sharp pencil.

Exhibit 1: (B)(N) The Asymmetric Market – When they go high, we go low

For more examples of the (B)-class portfolio in difficult markets, please see our recent Posts on”The “W” Syndrome“, Steel,  Green Energy, UFOs and the High Flying Techs, and The Coal War which is heating-up again now; and the Canadian Mines have also taken-off – please see our recent Post “(B)(N) Extreme Economics – The (New) Canadian Mines” for a heads-up on that as well as The Great Rotation & Twenty Hot Canadians 2017.

And for more information and examples of the Free Market Yield and the terms that we have used above, please see our Posts “(P&I) The Dismal Equation (Ecclesiastes 9:1)” and “(B)(N) S&P 100 Volatility Risk and The Full Moon” and “(B)(N) NASDAQ 100 Volatility and The Stone Bunnies“ and for an introduction to The Barometer “(B)(N) What’s A Girl To Do” or “(P&I) The Swiss Franc Debacle“.

And for more information on real “risk management” in modern times and additional references to the theory and how to read the charts and tables, please see our Post, The RiskWerk Company Glossary and “(P&I) Dividend Risk and Dividend Yield“, and our recent Posts “(P&I) The Profit Box” and “(P&I) The Process – In The Beginning“; and we’ve also profiled hundreds of companies in these Posts and the Search Box (upper right) might help you to find what you’re looking for, such as “(B)(N) TLM Talisman Energy Incorporated” or “(B)(N) ATHN AthenaHealth Incorporated” or “(B)(N) PETM PetSmart Incorporated“, to name just a few.

And for more applications of these concepts please see our Posts which rely on the Theory of the Firm developed by the author (Goetze 2006) which calibrates The Process to the units of the balance sheet and demonstrates the price of risk as the solution to a Nash Equilibrium between “risk-seeking” and “risk-averse” investors within the demonstrated societal norms of risk aversion and bargaining practice. And for more on The Process, please see our Posts The Food Chain and The Process End-Of-Process.

And for more on what risk averse investing has done for us this year, please see our recent Posts on “(P&I) The Easy (EC) Theory of the Capital Markets” or “(B)(N) The Easy (EC) Theory of the S&P 500“, and the past, The S&P TSX “Hangdog” Market or The Wall Street Put or specialty markets such as The Dow Transports & Utilities or (B)(N) The Woods Are Burning, or for the real class action, La Dolce Vita – Let’s Do Prada! and It’s For You, Dear on the smartphone business.

And for more stocks at high prices, The World’s Most Talked About Stocks or Earnings Don’t Matter – NASDAQ 100. And for more on what’s Working in America, Big Oil, Shopping in America or Banking in America, to name just a few.

Postscript

We are The RiskWerk Company and care not a jot for mutual funds, hedge funds, “alternative investments”, the “risk/reward equation” and every other unprovable artifact of investment lore. We have just one product

The Perpetual Bond™
Alpha-smart with 100% Capital Safety and 100% Liquidity
Guaranteed
With No Fees and No Loads on Capital

For more information on RiskWerk, please follow the Tags or Categories attached to this Letter or simply enter Search for additional references to any term that we have used. Related data may be obtained from us for free in a machine readable format by request to RiskWerk@gmail.com.

Disclaimer

Investing in the bond and stock markets has become a highly regulated and litigious industry but despite that, there remains only one effective rule and that is caveat emptor or “buyer beware”. Nothing that we say should be construed by any person as advice or a recommendation to buy, sell, hold or avoid the common stock or bonds of any public company at any time for any purpose. That is the law and we fully support and respect that law and regulation in every jurisdiction without exception and without qualification to the best of our knowledge and ability. We can only tell you what we do and why we do it or have done it and we know nothing at all about the future or the future of stock prices of any company nor why they are what they are now. The author retains all copyrights to his works in this blog and on this website. The Perpetual Bond®™ is a registered trademark and patented technology of The RiskWerk Company and RiskWerk Limited (“Company”). The Canada Pension Bond®™, The Medina Bond®™, The Barometer®™, the Free Market Yield®™ and Extreme Economics®™ are registered trademarks or trademarks of the Company as are the words and phrases “Alpha-smart”, “100% Capital Safety”, “100% Liquidity”, ”price of risk”, “risk price”, and the symbols “(B)”, “(N)” and N*.