YOLO reloaded

Disclaimer: this is not investment advice. Before taking any investment decision, do your own research.

In December 2020 I wrote Getting back to Shortville, about how different factors made me think that professional shorts could get back to shorting Tesla soon. After a 2 and 1/2 years in which that post was quite prescient (we had a melt up, followed by a bear market,) now we are at a point were the same factors seem to become relevant again:

• We are back at higher CAPE than all times outside the dot-com bubble.
• Tesla was at a reasonable 5 times sales in december 2022, but it is back over 10 times.
• The market is going wild again, specially big Tech and AI.

My take now is that we are still experiencing the tails of the TINA (There Is No Alternative) market of the near-zero rates era. The idea behind TINA is that with high liquidity and low rates, any investment looks reasonable. The excess liquidity caused all investments to go up, creating an upward spiral and a YOLO attitude. The 2022 bear market put a stop to that but the recovery during this year shows me that the YOLO/TINA spirit is still prevalent and got us fast into unrealistic valuations territory. But some things have changed:

• Oil prices are coming back up with a vengeance, which may create a second wave of inflation, making more rate hikes likely. Not clear yet how high it may go and what the impact to core inflation may be, but with low unemployment and no sign of recession yet, the Fed may prefer to err towards the hawkish side.
• There is one alternative: bond yields are much more attractive than during the 2020–2021 craziness. Which makes the prospect of staying in absurdly valued stocks a worse proposition.
• Leading indicators point to a recession that so far we’ve been able to avoid, but is highly likely to strike if rate hikes continue.

With this information, what should we expect from the market? My best guess is a repeat of what I wrote in 2020: a melt-up, although shorter and not as strong as then, followed by a new bear market. Of course we could have other possibilities:

• We may skip the melt-up (or already experienced it.)
• We may skip the recession this year and next. Leading indicators and valuations point to lacking returns in the next decade, but that may come without a recession in the near term.
• We could have a long sideways market.
• Or we could repeat 2021 and move higher to even more absurd valuations before hitting a wall.

It is difficult to make predictions, especially about the future.

The pandemic made predictions even more complicated. Leading indicators, like inverted yield curve, are being questioned by their proponents. Some indicators are strong but misleading.

Tesla

What about Tesla? Same thing applies, particularly the valuation part. But the problem with Tesla is that it can surprise with a game-changing announcement at any time. Several come to mind: FSD achieving 10x better than human milestone, FSD getting approval for robotaxi testing, under 25x model unveil, dojo training increasing capacity 10x, Tesla SaaS/AIaaS, etc. It’s very hard to position for a uncertain economy while also maximizing exposure to a moonshot. Maybe sell some covered calls (risking no more than 20% of stock position) and buying very far OTM LEAPs with the premium. Doing so at strategic prices (technical), IV and timing, can make it cheap and allow to accumulate a hedge in the middle-term. But it’s hard to do well.