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Surprisingly, few people recognize how drastically the financial landscape has changed over the past year. Exactly one year ago, the vast majority of global assets were in bull markets. Today, more than 40% of all Nasdaq stocks are down more than 50% from their 52-week highs, while most global stocks, high-yield corporate bonds, cryptocurrency currencies, NFTs and maybe even real estate have trended lower. Some oversized percentage drawdowns have created bargains at various times over the past few months.

I shifted my short to long ratio of stocks significantly to the long side while remaining short to long at 2:1.

My current total as of Friday February 4, 2022 close was 20.636% long and 42.13% short, which is almost exactly 1:2, not including the TLT. If the bear market continues for US large-cap growth stocks as I expect, I will likely be longer than short before the end of 2022. I list the exact percentages at the bottom of this essay.

TLT has become very unpopular, as investors do not trust a forty year old bull market.

One of my very first investments was buying long-term US Treasuries in 1981. At that time, there was an almost unanimous consensus that US Treasury yields would continue to rise indefinitely in due to persistently high inflation and skyrocketing budget deficits. Every year, often more than twice a year, even in the early 1980s, there was a proclamation that the 30-year US Treasury bull market was over, and we’ve continued to experience that gloom every year since then, including understood at this time. . On Friday, February 4, 2022, the TLT fell to 138.78 at 10:52:28 a.m. Eastern Time. I made my most frequent purchases of TLT on Friday as it had been even more down in late winter and early spring 2021. Longest-serving writer of BarronsRandall W. Forsyth, wrote a bullish column on long-term US Treasuries which is the lead story of this week’s print edition: “Indeed Contrarians: Two Seers See Lower Rates, Bond Boom.

The online version has the same essay but a different title: “Forget inflation. Opposites expect a recession and lower bond yields. It’s probably no coincidence that The Economist has the following cover story: “How High Will Interest Rates Go?”

Many investors confuse the Fed’s overnight lending rate with long-term yields.

If we are headed for an increase in recession expectations, as the flattening of the US Treasury yield curve has told us, that would mean higher short-term yields and likely lower long-term Treasury yields to create additional flattening. I plan to continue buying TLT in weakness as it could be one of the best performers as it has been in the past whenever investors have moved from near zero expectation of a US recession like now , to a majority of investors expecting such an economic slowdown .

US house prices may have started to decline after a more extreme bubble in 2021 than we had in 2005-06.

The median US home price fell about 34% following the housing bubble we experienced sixteen years ago. Average valuations were even higher in 2021 by Case-Shiller and many other reliable metrics, so the overall pullback is likely to be larger. US Fed data on new home prices saw its first pullback in a long time:

median sales of new homes in the united states

Many sectors had become particularly attractive in recent weeks, including GDXJ, KWEB and XBI.

In addition to my very recent purchase of TLT, I have accumulated GDXJ, KWEB and XBI in weakness. GDXJ is a mid-cap gold mining equity fund; this sector had been one of the biggest percentage gainers after the collapse of previous US growth stock bubbles in 1929, 1972 and 2000. KWEB is a fund of Chinese internet companies that has one of the highest ratios high earnings growth relative to price. earnings ratio for any US-listed exchange-traded fund. XBI is a biotech equity fund that recently had an earnings-to-earnings growth ratio of more than 1.5 to 1, according to the sponsor’s website, and also featured significant insider buying of many of its components. XBI and GDXJ were trading near two-year lows while KWEB fell to a five-year nadir. T (AT&T) is clearly out of favor, in part due to confusion about its upcoming spinoff and the uncertainties surrounding it. I plan to continue buying all of the above at lower or upper lows, especially whenever we experience dramatic net outflows from these and related funds, as well as above-average insider buying against the insider sales.

Too many investors wait for triggers that don’t exist.

Extreme deviations from fair value in either direction are reason enough for dramatic price changes to occur. People often ask “what will trigger a huge QQQ drop” or “what will make Chinese internet stocks rebound?” I often answer such questions with this question: what caused the collapse of American Internet companies after 1999-2000? What caused the crash of 1929? What caused global stocks to surge in late winter and early spring 2009? The answer in all three cases is that, even with years or decades of hindsight, there has been no obvious trigger for any of these major trends. Any irrationally huge deviation from fair value will always resolve itself sooner or later.

In summary: we have dangerous overvaluations for US large-cap growth stocks combined with attractive bargains for several other sectors. Now is a good time to combine long positions in unpopular assets with short positions in trending stocks.

Disclosure of current holdings (most recent purchases are highlighted):

Here is my asset allocation with average opening prices adjusted for dividends/splits and newly opened positions in bold: 43.6% in cash, including bonds I paying 7.12% guaranteed (available to anyone with a US social security number), TIAA Traditional Annuity paying 2.758% to 3.519% (for legacy retirement accounts) and Discover Bank High Yield Savings paying 0.50% (available to all US residents with a retirement account and regular savings account); 18.0% XLK Short (112.7737); 17.3% long TLT (147.86); 15.9% short QQQ (309.7504); 6.4% short TSLA (494.9721); 5.9% long GDXJ (39.68); 5.0% long GEO (7.52); 2.54% Long GDX (28.98); 1.68% long KWEB (35.19); 1.32% long EWZ (27.33); 1.23% TUR long (17.17); 1.05% long ASA (19.49); AAPL short at 0.90% (125.5481); 0.74% long XBI (86.14); ECH long 0.62% (22.98); 0.53% short IWF (223.0119); 0.40% short SMH (170.7813); 0.27% T long (23.33); 0.12% long UGP (2.565); 0.10% long ITUB (3.83); 0.052% long BBD (3.39); 0.014% TIMB long (9.99). This is not 100% since short positions require less cash; there is no margin involved.

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Editor’s note: The summary bullet points for this article were chosen by the Seeking Alpha editors.


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