Michael Steinberg

How High is High?

I have been inordinately quiet during the months of pandemic lockdown.    The free flow of money coming from the government and the rise of the Robin Hood traders have made me wary of the markets as P/E ratios vault towards the heavens.  Despite my fears I also realize that with the Fed committed to zero interest rates, there is literally nowhere else investors can put their money with any hope of a nominal or above normal return.  This presents a quandary for retirees and pension funds driving them into investments that will ultimately end badly.  But not right now.

The flow of money sloshing through the system that will be added to by any stimulus program is likely to drive the market higher at least through January 15^th, an options expiration date.

I have avoided individual stocks during this run up and I know I have missed many opportunities as I have stocks on my watch list that are up between 300-900% this year.  I considered them over priced before the run up started and now view the ratios as astronomical.  There is a feeling of the Emperor’s New Clothes as I watch ridiculous valuations for many of the IPOs coming to market.

Having said that, I have not been sitting on my hands.  Not trusting individual stocks, I have not fought the trend and instead have been trading options on ultra short ETFs that track the various indices.  They are generally cheap and unloved, but during each monthly period have provided returns in excess of 60%.  These are not for everyone, but they are low risk in the amount of capital devoted to the options, (i.e. maximum loss is the premium purchased) and provide ample opportunity for vertical spreads.

At some point, probably after February 2021, the market will roll over and the question investors will be confronted with is whether the pullback is a normal correction providing another buy the dip opportunity or the start of something more serious.

I believe that as the pandemic proceeds it will change forever many industries and business practices resulting in unexpected upheavals.  I anticipate that the rotation will be fairly swift with many industries falling out of favor as changes caused by the pandemic become ingrained in the economy.  I do not see the entertainment, leisure, and travel industries having any significant recovery prior to June of 2022. 

Yield investors are going to have a rough time until the economy achieves some form of normalization.

The true issue in coming years will be the value of the dollar relative to other world currencies and whether it can retain hegemony.

Michael14Steinberg December 11th, 2020

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