A Sell-Off is Inevitable

My business partner and close friend of nearly 30 years, Christian DeHaemer, has one of the most astute minds of any investor I’ve ever known. And that’s saying something…

I can’t give you the full play-by-play of his track record – we’d be here for hours. But he got his readers in Bitcoin in 2016 at $492. His Microsoft call at $35 worked out pretty well, too.

But the best one was his call on oil back in 2014.

At the time, it cost around $50 a barrel to produce a barrel of oil in the Permian and Bakken basins. Oil itself was trading around $90 to $100 a barrel. This was before President Obama lifted U.S. oil export restrictions, so all that oil was staying in the U.S.

The market thought this was a pretty good setup. Oil companies had a reasonable cost basis and a captive market. Demand was solid…

I don’t mind telling you I was a little skeptical when Hammer, as he’s known, said he thought oil was likely to trade down into the $40s. Yeah, cue the spit-take.

In fact, I wasn’t just skeptical – I argued the point that it made no sense for oil prices to fall below production costs.

Well, it was only a few months later that Saudi Arabia decided to destroy the U.S. shale oil business. The Saudis hiked their production as high as it would go and oil prices started falling…

All the way down to $35 a barrel. Over 100 U.S. oil companies were driven out of business.

Hammer was 100% right…

Prices Don’t Always make Sense

Now obviously, Hammer didn’t have any insight into the Saudis plans for oil. That’s not the point. The point is that there is no fundamental or intrinsic value for anything. The price for any asset is just what someone will pay for it. Price is a measure of investor sentiment. And investors can be bat-shit crazy at times…

In March of 2009, the S&P 500 traded down to 666 – and yet most investors couldn’t see the upside. I should’ve saved the hate mail I got when I told my readers to buy Bank of America at $9 in 2012. Three years after the market bottomed, people still thought banks were going to fail and I was a lunatic for recommending them.
Oil futures went negative during the pandemic. But things were so scary, this did not look like an opportunity at all. It actually made sense for traders to pay money not own oil.
On its first day of trading as a public company, an EV maker was valued at over $120 billion – more than Ford and GM combined – even though it would only make 1,000 trucks that year. Blackstone and T. Rowe Price were buyers.
Bernie Madoff ran the biggest Ponzi scheme in history. His (fake) reported returns were so good, investors figured he was cheating. But that didn’t scare them off, it made they made want in so they’d benefit from whatever his scam was.

These are just a few of many, many snapshots of market episodes that make no sense – times investors’ look back on and say “wow, what were we thinking.” But they happened anyway. And these episodes of temporary insanity will continue to happen…

Is It Different This Time?

We’ve talked about Nvidia a lot here at Outsider Club. How can we not talk about the incredible run the company has been on? And it’s not just the stock – the company’s execution has been absolutely flawless. How do you grow revenue from $20 billion to $80 billion in 2 years without a single hiccup? They’ll study this in business schools for the next 100 years.

Nvidia is valued at 42X its revenue. Not earnings. Revenue. Many investors think it will go higher…

One thing I’ve learned in my 27 years in this business: there is no economic trend that can support a valuation like Nvidia’s forever. Such a trend has never existed, does not exist now and will never exist in the future.

And the reason is very simple: people will change their mind. Investors will eventually decide they are not willing to pay 42X revenue to own Nvidia stock. I know, very scientific, right?

But when the worm turns, when greed and optimism turn to fear and pessimism, look out. There will come a time when investors will take whatever they can get for their Nvidia shares.

So what will change people’s minds? The economy. Specifically unemployment.

And you can throw in housing data, contraction in manufacturing, rising bankruptcies, rising loan delinquencies, government debt and a Fed that is once again asleep at the wheel.

Hammer laid his bearish case out for you yesterday, and if you missed it, it is worth your time to give it a read. It is not different this time. Forewarned is forearmed.

A Note About Timing

Maybe you saw the market sell-off yesterday, after the latest CPI inflation data fell yet again. Normally this inflation data would be good news. Yesterday it was not.

So is that it? Does that mean it’s over? Did the market just put it in its highs for the foreseeable?

Maybe. But probably not just yet. Market tops are always a process. There are a lot of minds that have to be changed. That takes time.

We’re right at the start of earnings season. Earnings are likely to be good, and it’s a decent bet that investors will celebrate and buy the dips. Just be sure to sell the rips when they come. It is no longer time to simply hold stocks for the long-term.

Hammer wrote that September looks pretty good for a correction. I’m not arguing with him. Be strategic, raise cash and be ready: babes always get thrown out with the bathwater.

One more thing: I am not a perma-bear by any means. I came into 2024 with the most bullish forecast for the S&P 500 of any analyst or strategist out there. You can read it here.

Recently, I’ve watched as all the investment banks change their minds and raise their S&P 500 targets again and again, for no other reason than stock prices keep running higher.

The next minds to change will be investors’. And they won’t be looking for higher prices. Stay tuned and we’ll start discussing how to profit from a sell-off when it comes.

Godspeed,

Briton Ryle
Chief Investment Strategist
Outsider Club

X/Twitter: https://twitter.com/BritonRyle

A Sell-Off is Inevitable

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