Disconnect Between Valuations And Economic Reality “Couldn’t Be More Apparent”

Submitted by QTR’s Fringe Finance

Heading into the third quarter of 2024, I can’t say the market has done exactly what I predicted it would at the beginning of the year. However, I will say that the risks I pointed out and the themes I thought would dominate the year have held true to form.

Here’s my take on when I think the overall market will see volatility and a couple new names on the long side I’ve been watching over the last month.

I’m now more convinced than ever that a pullback in markets, which I still believe is inevitably coming as a result of the effects of 5.5% rates working their way through the plumbing of the economy, will arrive just as soon as, or slightly after, the first rate cut.

There are a number of negative catalysts still just waiting to play out: numerous potential wars, a fiscal situation in the U.S. that is completely untenable (listen to this interview with James Lavish and read this report from Mark Spiegel to understand), uncertainties with the 2024 election, regional banking and commercial real estate showing major cracks, consumers completely tapped out as reflected in retail companies’ recent earnings, and unemployment now ticking higher to 4.1%, the highest it’s been since November 2021, this past week.

When it comes to the market pricing in the risk of these scenarios, let alone the risk of getting another four years of a Democrat in the White House, all I can say is: I don’t think the market has priced in a goddamn thing. The disconnect between this market, trading as though QE and negative rates are still here and that valuations don’t matter, and reality, where the economy is on the verge of collapse and American families are completely tapped out, overseen by a President and party with what can only be described as a sick addiction to spending, couldn’t be more apparent if someone was blowing it out of an airhorn a half inch from my face.

Source: CBO

But hey, things work on God’s timing and not QTR’s, so I’ve adopted a stance of continued patience in waiting for the bottom to fall out. It was foolish of me over the last two years to believe the market would instantly fall apart due to the rate hikes and I definitely had my timing wrong. There was too much excess savings and liquidity to go around and, even now, there’s still decent liquidity in retail money markets despite the fact that credit card debt is skyrocketing and personal savings really have tanked.

Source: OFR

Right now, the situation continues to be that a handful of stocks, led by Nvidia, Apple, and Microsoft, are driving the entire market. Market breadth continues to be alarming, with indexes finishing green many days with upwards of 65% to 70% of their components trading red on the day.

“Just when you think it can’t get any wider…” Zero Hedge tweeted on Friday about the NASDAQ A/D line compared to how the index is performing.

A/D vs. NASDAQ index, showing a major gap & indicating just a few stocks are driving the entire index (Source: Zero Hedge)

This cannot last forever and, when the music stops, valuations that already look insane—like 65x earnings for Tesla and even 35x earnings for Apple—are going to be the obvious exits for those looking for liquidity. Even if you adopt the total nonsense new-school Cathie Wood snake-oil view of markets that they can somehow stay this aggressively valued on a P/E basis as a result of low rates or innovation or whatever bullsh*t excuse she’s using this week to buy 200x PE dung, valuations are still too frothy.

First, to dovetail off my last point, take a look at bitcoin over the last couple of weeks. In terms of risk assets, bitcoin is on the bottom of the totem pole. Since it’s the newest and arguably the least yield generative, one could argue it would be the first place people would go when they need to tap into liquidity (i.e., people will sell their crypto before they sell their bonds, stocks, real estate, gold, etc.).

Should that be the case, it’s important to note that bitcoin has broken major support and trendlines. It has also uncoupled from moving higher with gold and equities. Does this mean overall liquidity cracks are showing in bitcoin? There is a distinct possibility. As Zero Hedge noted on Friday, Bitcoin has now broken below its 200DMA despite trying to rally back Friday, and the psychology behind such major trendline breaks can sometimes beget far more near-term selling:

If bitcoin is going to survive in the way that maxis believe it will – and the way I’ve subscribed to as the only way it can survive, through a long-term populist digital uprising of sorts – you have to believe in the long game. Saylor’s attitude says it all: “I’ll be buying the top forever”. Meaning bitcoin is either going to millions of dollars, or close to zero. Ergo, if the former is your thesis, you simply have to keep buying no matter what the price. This is what I do, though it should be noted my bitcoin holdings are much smaller than my weighting to gold and silver.

For getting started with recurring bitcoin buys that you can set and forget without worrying about, I like the Swan App. You can use this link and get $10 in free bitcoin and Swan will waive fees on the first $10,000 you buy (Disclaimer: I also get a very small referral fee, usually a couple basis points. Not trying to “sell” you anything, I legitimately like the app & trust the people who work there and are involved with it).

On top of the unprecedented monetary fiscal situation that our country finds itself in, the geopolitical landscape has in no way gotten better. In fact, to the contrary, it has gotten significantly worse. We now have imminent threats in Israel from Iran as part of a Middle East conflict that appears to be broadening — and general growing unrest and loss of patience between world leaders for a cease-fire, on top of conflict participants who keep figuring out ways to gin up chain-reacting methods for getting on each other’s nerves.

You’ve heard the phrase, “There are too many cooks in the kitchen”? Well, there are too many cooks in the kitchen here – and they are all pulling steak knives on one another. It’s tough to say that it doesn’t look like the beginnings of a potential World War III, but sadly, it looks more like that than it did at the beginning of the year when I put my portfolio positioning in place.

For my full thoughts on bitcoin, including risks and potential reasons it may survive, you should watch this full interview I did with Peter McCormack earlier this year.

And to take a look and review some of the 24 stocks I picked for this year and two new names I’m adding now, you can read my full July 2024 portfolio review. 

QTR’s Disclaimer: Please read my full legal disclaimer on my About page here. This post represents my opinions only. In addition, please understand I am an idiot and often get things wrong and lose money. I may own or transact in any names mentioned in this piece at any time without warning. Contributor posts and aggregated posts have been hand selected by me, have not been fact checked and are the opinions of their authors. They are either submitted to QTR by their author, reprinted under a Creative Commons license with my best effort to uphold what the license asks, or with the permission of the author. This is not a recommendation to buy or sell any stocks or securities, just my opinions. I often lose money on positions I trade/invest in. I may add any name mentioned in this article and sell any name mentioned in this piece at any time, without further warning. None of this is a solicitation to buy or sell securities. These positions can change immediately as soon as I publish this, with or without notice. You are on your own. Do not make decisions based on my blog. I exist on the fringe. The publisher does not guarantee the accuracy or completeness of the information provided in this page. These are not the opinions of any of my employers, partners, or associates. I did my best to be honest about my disclosures but can’t guarantee I am right; I write these posts after a couple beers sometimes. I edit after my posts are published because I’m impatient and lazy, so if you see a typo, check back in a half hour. Also, I just straight up get sh*t wrong a lot. I mention it twice because it’s that important.