YOLO revisited
Disclaimer: this is not investment advice. Before taking any investment decision, do your own research.
In August 2023 I wrote YOLO reloaded, proposing that what we have been through in the last decade is a behavioral pattern produced by the zero interest rate era and that the recent drop in the market did not shake that off. After a short period where fear of recession made valuations a little more reasonable, the last quarter came back with a vengeance.
The prevalent narrative to support higher prices is that a soft landing is almost guaranteed. The recession leading indicators that we have doubts would work this time have been improving. Inflation has been receding. And GDP growth is stubbornly high.
But that everything seems to be going right doesn’t mean that is a great time to enter the market.
- Valuations are going higher again and are only comparable to .com bubble.
- Although leading indicators are improving, they still point to bad times ahead.
- One factor that is still pulling demand upwards, the jobs openings/hires gap, is shrinking fast.
- Household debt is almost at 2008 peak when adjusting for inflation, but with non-housing debt having a much larger proportion, with it’s higher implied costs.
- Credit card delinquency rates are still low on a historical perspective, but increasing at alarming pace.
It’s not difficult to project a scenario in the next 2 years where we enter a recession at bubble valuations (Shiller P/E over 30) with record consumer debt. But it may take a year or more to get there (projecting job openings gap closing in about a year and credit card delinquency rate taking 2–3 quarters to get to 3Q2007 values.) Other factors like commercial credit and bankruptcies may trigger a downturn sooner, but there’s no indication of imminent doom. Just deterioration in many variables with absurd valuations.
So, where will the market go from here? This is one of the most difficult environments for investors. Valuations point to a hasty exit. Trend points to rosy new highs. Emotions point even higher. Technically we are at an indecision point (double top or long-term bull market with higher highs every month?) Difficult to trade, even more to invest. Volatility is very low, so even short premium strategies are difficult. Only tempting option for participants already riding the uptrend with a good entry point is to hedge a little with LEAPS puts taking advantage of the low volatility. For less lucky investors, it may be just a waste of money taking away even more of the meager returns.
In general, it seems to me like a time to reduce risk, reduce exposure. Pay attention to macro variables. Be careful with market trends. Markets try to anticipate and can turn around in a blink of an eye.
Tesla
Looking particularly at Tesla, it is as hard (or even harder) than the rest of the market to predict. Rates peaking is a big tailwind. But consumers getting in trouble is a huge headwind. It’s possible that Tesla can’t grow at expected rates for a few years, which would likely mean lower margins and lower deliveries than estimates. That would be catastrophic for the stock since it lowers all parameters for the value equation: lower earnings with lower multiples because of lower growth expectations.
It’s also possible that Tesla has a step change in expected growth, with any number of products changing expectations (AI, Optimus, energy, Gen 3 vehicle.)
For the fully invested long-term holders there’s nothing to do but be patient (and maybe avoid margins.) At higher valuation (over 300), I would consider buying 2 year very far OTM (150 strike or lower) LEAPS puts, maybe selling short term (30 to 60 DTE) calls against a fraction of the stocks (1/10 to 1/3) for financing if volatility is high. NOT investment advice, just my personal rumination.
