A warning from Buffet
9/4/23 Prospero.Ai Investing (55th) Weekend Edition
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A warning from Buffet - Outline:
Market Update
QQQ and SPY Net Options Sentiment and Portfolio Allocation
Portfolio Macro Strategy
How we are approaching the number of longs/shorts and sectors
Longs
Adds —> Keeps —> Drops
Shorts
Adds —> Keeps —> Drops
Portfolio Allocation Notes
The market was extremely volatile this week. How we added upside, while limiting our risk.
Market Update
For Tech: QQQ Net Options Sentiment > 30 = Bullish. < 20 = Bearish.
For Non-Tech: SPY Net Options Sentiment > 20 = Bullish. < 10 = Bearish.
QQQ returned 3.73% this week vs 2.55% for SPY. Very much in line with what our metrics would expect, with both Net Options Sentiment metrics in our Bull zones.
We are running a 25% off special on our trading letter because updates during the next few weeks will be especially important. While signs continue to point to short term Bullish sentiment, we’d like to outline one new concern, as well as an old one, with a catalyst this week.
On the new front, Warren Buffet continues to prepare for a recession. His consistent concern makes this latest Bull run feel pretty temporary. The man who is the authority in value investing does not see value in this market.
Berkshire sold a net $8 billion of stocks and slowed its pace of buybacks last quarter, sparking a 13% rise in its money pile to a near-record $147 billion.
The sprawling conglomerate has now disposed of a net $33 billion of stocks over the past three quarters, fueling a $38 billion increase in its stash of cash, cash equivalents, and Treasury bills during that time.
Here’s our ongoing/older concern. We’re continuing to monitor the ballooning consumer credit issue. Looking at the economic calendar there are a few big credit benchmarks, like the Beige Book (2 PM 9/6) and the consumer credit report (3 PM 9/8), which could send stocks downward, especially those stocks that deal with personal spending. So be sure to monitor the market until the end of the day on Friday, to ensure you don’t miss any potentially big moves.
There are various fed speeches on 9/7, but if a hawkish Powell did not slow the market down, not a good bet that others will.
Because of the uncertainty, we’re adjusting our levels to a higher sensitivity to ensure you are well warned if the market is about to turn.
For Tech: QQQ Net Options Sentiment > 40 = Bullish < 30 = Bearish.
For Non-Tech: SPY Net Options Sentiment > 25 = Bullish < 15 = Bearish.
Portfolio Macro Strategy
We made this new section because we are trying to be more formulaic with this letter to make it easier to follow. We’ve been slow to turn fully Bullish. The reasons for this, are despite QQQ Net Options Sentiment turning Bullish, SPY was a bit behind and we had macro concerns. We were much more willing to turn Bearish (quickly) to start August, because we saw SPY, QQQ and our Macro view, all telling the same story.
Despite Macro concerns, SPY and QQQ Net Options Sentiment are both Bullish, so we will turn neutral for our Macro Portfolio construction. 4 Bulls and 4 Bears. (moving from 3 Bulls and 6 Bears last week) FYI the ratio is something we determine at a high level, but the number of each rests on how much we like the screens we are looking at.
A few tips regarding Macro strategy:
If you aren’t going to just put your money in an index fund, you need to do your research and have an informed Macro view (or at least a diversified set of sources to follow and “amalgamate” a view)
Do not let price or technical indicator movements affect your Macro view. Keep them separate.
If price movement and your Macro view aren’t both Bullish, you need to liquidate some of your investment funds to cash (As seen above Buffet the last 3 quarters) and buy an inverse ETF to hedge downside or learn/research how to short stocks.
Because we’ve seen Growth stocks handsomely rewarded in Bull runs this year (and recently too) we will focus our Bull screen on high-growth, and Bear on low-growth.
Long / Bull Adds
We will get to META and TSLA in the “keeps” section, but here’s a quick value / portfolio construction lesson on how we selected SMCI and MELI. To start, let’s look at P/E using 2024 earnings forecasts for MELI, LLY and SMCI.
MELI: 47.09
LLY: 42.26
SMCI: 19.64
As a quick comparison for SMCI, NVDA, a competitor in the high performance computing space, is trading at 52.5 2024 earnings P/E. So the above comparison and the discount we see here for an AI play relative to NVDA, makes it an easy add for us.
Because MELI and LLY are so similar, we need to dig deeper. Both had great Q’s. MELI grew sales at 31.5% Y/Y and LLY 28%. But if you smooth out recent results and compare TTM sales to 2022 you get 15.28% growth for MELI and 3.40% LLY. MELI has been more consistent with growth AND HHS Selects the First Drugs for Medicare Drug Price Negotiation is a threat to all drug companies. And a company like LLY, trading at such a premium to 2024 earnings, could face a big hit as this expands from 10 to 60 drugs. 4/10 of the first batch touched diabetes and LLY’s Mounjaro, the company’s Type 2 diabetes injection, posted $979.7 million of its $8.31B in sales. If that appears on the next list, it could put a hurt on the stock price. We don’t dislike LLY, but the risk/reward on MELI is better.
Bullish this week if:
MELI/SMCI Net Options Sentiment > 70
MELI/SMCI Net Social Sentiment > 40
QQQ Net Options Sentiment > 35
SPY Net Options Sentiment > 15
Long / Bull Keeps
Bull review - META (Meta Platforms Inc) Bullish this week if:
META Net Options Sentiment > 80
META Net Social Sentiment > 50
QQQ Net Options Sentiment > 35
META returned 3.81% vs 2.55% for SPY and is kept as a Bull because it is ranked 1 on the screener above. Not to mention, at times this week, we saw it reach a perfect score for Upside Breakout + Net Options Sentiment (200).
Bull review - TSLA (Tesla Inc) Bullish this week if:
TSLA Net Options Sentiment > 85
TSLA Net Social Sentiment > 50
QQQ Net Options Sentiment > 35
TSLA returned 2.69% vs 2.55% for SPY and is kept as a Bull because it is ranked 2 on the screener above. Because it has historically done well, with a perfect score for Net Options Sentiment, we are happy we added it back to the portfolio.
Long / Bull Drops
We are dropping SQ as a Bull, primarily because it has dropped to 700 on the above screener. This means, given our signals, there are many stocks we are more bullish towards. Covered on 8/20-9/1 and finished 2.27% and a Loss, Losing to the SPY benchmark by 1.10%.
Short / Bear Adds
We are adding MED, EXPD and ESCA. The reason we didn’t add NAVI and LNC, is they are in very positive technical trends; and HE as we explained last week, is in a strange Macro trend around the Maui fires, and not to be touched either way. (Very good miss as it was up over 11% last week)
We were comfortable adding two consumer cyclical stocks (MED and ESCA) due to the looming consumer credit crisis and potential bad news this week.
Bearish this week if:
Above Stocks Net Options Sentiment < 50
Above Stocks Net Social Sentiment < 60
QQQ Net Options Sentiment < 30
SPY Net Options Sentiment < 15
Short / Bear Drops
Dropping FOX as a Bear. It ended the week at 55 Net Options Sentiment, too high for us, despite the excellent move down on 9/1. It finished -4.64% and a Win, Beating the SPY benchmark by 7.19%.
Dropping ZUMZ as a Bear. It ended the week at 46 Net Options Sentiment, a little too high (note the filter above cuts off at 40). It finished +4.32% and a Loss, Losing to the SPY benchmark by 1.77%.
Dropping ABNB as a Bear. It ended the week at 57 Net Options Sentiment, too high. It finished +11.44%* and a Loss, Losing to the SPY benchmark by 8.89%.
*Typically we do not use after market price movements to calculate this number, but that is because often, trades of single shares can move the post-market price in a way that is not reflective of the market. Since it was announced that ABNB will be added to the S&P500 and the stock traded large volumes at the post-market price, we took the additional 5.49% post market loss, in order to display our letter picks as accurately as possible.
Dropping BOH as a Bear. It ended the week at 64 Net Options Sentiment, way too high. It finished +6% and a Loss, Losing to the SPY benchmark by 3.45%.
Dropping ORA as a Bear. It was 1,064 on the above screener, too many better, lower growth opportunities. It finished +.81% and a Win, Beating the SPY benchmark by 1.74%.
Short / Bear Keeps
XRX returned 6.05% vs 2.55% for SPY and is kept as a Bear because it is ranked 3 on the screener above.
Portfolio Allocation Notes
Long: TSLA, META, MELI, SMCI
Short: XRX, MED, EXPD, ESCA
You might be wondering why we kept 2 consumer cyclical stocks as Bulls, despite our Bearish thoughts about the sector when adding MED and ESCA as consumer cyclical Bears.
We view this as a more advanced hedge case for the incoming consumer credit reports. While MELI and TSLA could benefit from optimism from their sectors, we view them with better downside protection:
TSLA is also an AI company, so it won’t be hit as hard from credit worries because that subsector continues to be hot even as the market has turned.
MELI is international consumer cyclical and the company has demonstrated strong growth in already tough economic conditions in their Latin American markets (65% average growth rate the last four years).