How To Navigate A Bubble II
It’s been two weeks now since I wrote “How To Navigate A Bubble”. Since then, the S&P has tacked on another 50 points – from 6,664 to 6,715. Market timing is notoriously difficult. So difficult, in fact, that many of the best investors in the world don’t believe you should even try to do it. The only guy who seems to have excelled at this art was the great Jesse Livermore. Nevertheless, I continue to feel that we are close to a major top and to take steps to ready my portfolio for a downturn.
Two days after I wrote “How To Navigate A Bubble”, Spencer Jakab published a profile of the views of “The Crash Guy” Mark Spitznagel in the WSJ (“Black Swan Manager Sees Huge Rally, Then 1929-Style Crash” [SUBSCRIPTION REQUIRED], Monday September 23). Spitznagel runs a hedge fund called Universa that profits by buying extremely cheap derivatives that profit in the event of extreme market meltdowns. The great majority of the time the fund loses money but when the market does melt down Spitznagel cleans up. He has an excellent track record as far as I understand. Spitznagel apparently believes that the market is in a melt up that will take it to 8,000 in short order before rolling over.
While not explicitly referencing a coming top, Peter Boockvar did recommend cheap stocks in the consumer staples sector in what he termed “an expensive market” Friday on CNBC’s Fast Money. He likes Conagra (CAG) which is extremely cheap after having fallen 35% over the last year. CAG’s margins have been squeezed by higher commodity prices. It is guiding FY26 operating margin to 11.0%-11.5% from 14.1% in FY25. EPS is expected to come in between $1.70 and $1.85 compared to $2.30 in FY25. The stocks dividend yield has reached 7.33% so you do get paid to wait.
While I don’t own CAG, I have been buying similar types of of value stocks of late to tilt my portfolio in that direction. I bought a little Pepsi (PEP) on Friday. Other recent buys have included Pfizer (PFE), Philip Morris (PM), Target (TGT), Starbucks (SBUX), Carmax (KMX) and Getty Realty (GTY) – a small triple net lease REIT. Centene (CNC) is up 30% since I recommended it about 6 weeks ago and significantly added to my position. These stocks in general are quite cheap and pay excellent dividends.
In addition, I have taken a stab at shorting the QQQ. I started with a 5% position on Thursday September 25 and doubled it on Thursday October 2. This is my third stab at this trade in the last month or so and I am slightly underwater to date. I covered the last two for slight losses. The rationale, once again, is that I want to tilt my portfolio more towards value and away from the mega cap tech stocks that dominate the market and are leading it higher.
Last, I want to say a word about inflation. As mentioned above, CAG is being squeezed by rising commodity prices. That’s what’s happening in the real world. But interest rates are not pricing this in. Commodity prices are moving higher while interest rates are mostly flat to lower of late. I think this is going to reverse as it becomes more widely understood that inflation is higher than the CPI and will likely be robust as the Fed shifts to easing. Certainly the precious metals are signaling higher inflation. Higher interest rates would put pressure on the high multiples of expensive growth stocks where much of the value lies in future year earnings.
In addition to the 10% QQQ short, I have a 10% TLT short. Neither of these positions are working at the moment and they are subtracting from the gains from the long side of my portfolio but I have conviction in them for now.
