We’re coming into the final stretch here, and it’s going to be difficult.
In the final stages of any bull market, the moves become more erratic, and the convulsions and pain in the economic sphere more violent. The zigs will be sharper and the zags extend longer, as the confusion grows exponentially.
You can expect all manner of bad behavior, too, on the street and in the otherwise ‘respectable’ halls of government, business and academia as the new era dawns. No one suffers change very well.
It’s now that the biggest mistakes are made. Now, that major planning and spending blunders are committed for a lack of understanding of what exactly the future holds.
Most corporations are stacked with board members who are more far-sighted than the average store manager Molloy, but even there, most still expect current conditions to continue ad infinitum. No one wants to believe that a radically different future requiring a radically different approach to business is at hand. Who has the energy, after all, to retool a fifty year old company to navigate the greatest business challenge in nearly a century? Better to ignore the signposts and carry on.
A bad approach.
All that notwithstanding, we’re not prophets. Nor can we offer a precise timeline of when the economy is going to flip and go under. Some ships take hours to suck enough water to send them below. And some individuals can tread water for days before, in the end, they get rescued.
What’s for sure is there’s a hole in the hull, and we’re taking on water. No more need be said. The future belongs to those who are ready to hop aboard a lifeboat and head for shore.
That’s who we are.
We at Normandy are your personal financial and social lifeboat. We’ll be with you all through the storm and will guide you safely to harbor. When the market turns, we’ll be here to inform you and to offer you the best possible trades for the day. And when the social and civil context changes, we’ll offer you the best advice on where to turn and how to survive the potentially calamitous consequences of a systemic blowout.
Ignore the Yelps and Whoops of the Panicked
Part of the reason people succumb at times like this is a simple lack of confidence – and a willingness to listen to others who are filled with fright.
That’s a no-no.
Negativity is as dangerous as pollyannish optimism, and we recommend neither. A middle road that’s circumspect about everything is the best course when volatility rules.
Remember, too: even when the captain and crew have given themselves up for lost and everything looks bleak – the darkest hour is just before dawn.
And it’s starting to darken.
Everywhere we turn, confidence levels are falling.
- The American Association of Individual Investors (AAII) has reported below average sentiment levels for coming on ten months.
- Consumer discretionary stocks, a measure of Joe Public’s penchant for spending (and therefore a worthy confidence indicator unto themselves), are now slowing dramatically in the race toward investment Shangri-La.
As the chart below shows, the discretionaries have been losing strength against the S&P 500 since early December 2015.
Very simply put, when consumers feel confident, they engage in more discretionary spending. Recent weakness in the sector reveals ongoing worry.
- Home prices, too, have been very strong of late, yet the latest homebuilder confidence figures were weaker, inching back toward the nuts and bolts housing starts reality that’s a truer measure of the industry’s health.
Take a look –
The disconnect between builder expectations (in blue) and real house building numbers (red) has never been greater in the last thirty years, and now both appear to be slowing.
- One of the most widely watched indicators of confidence is issued monthly from the Conference Board. The latest report’s ‘Expectations’ index fell to 83.3 from 84.6, and included a decline in the presumption of a) plentiful jobs, b) income growth, c) plans to buy a car, and d) inflation.
In the under-35 age cohort, confidence plunged from 132.3 to 122.8.
Nothing warm and fuzzy there.
- There’s one more stat we’d like to touch upon that speaks directly to the theme of confidence, and it may be even more telling than the rest. It’s the nation’s birth rate, and our information on it comes from an article found here.
Without spinning it out in great detail, suffice to say that the nation’s birth rate for women ages 15-44 has never been lower.
Have a look at the chart below –
Why would that be related to confidence, you ask?
Well, again, without delving into the detail, a number of recent studies undertaken globally indicate that falling birth rates are indicative of a society that possesses a general pessimism about the future, while societies that continue to generate large families have a more robust and positive outlook about the future.
That’s a telling sign for the West, where populations and birth rates are shortly to begin declining substantially (not including immigration). The United States, in fact, had been the last holdout in this regard, but the latest stats bespeak an end to that trend.
Where’s it all lead?
In the first place, the overall lack of confidence and its contagion-like spread once the situation worsens is an inevitability. We have to be on guard for it and flee from it like a cheetah.
Second, we have to know exactly what it will cause and how to profit from it.
And to that end, we’re taking the very unlikely step of partially unwinding a trade we made just last week on gun manufacturer, Smith and Wesson (NASDAQ:SWHC), a company we expect to profit extraordinarily once the smell of doom descends.
The letter was called Money-Guns Blazing, and there we commented on the likelihood of SWHC taking a break before moving higher later in the year.
After this week’s action we’re changing our call and buying back one of the options we sold last week. We’re going to refit the trade better to our liking – and the changed circumstances – by doing the following:- Content protected for Normandy Executive Lounge, Option Trader Elite, Executive Lounge members only]
Many happy returns,