The market is 1% away from an extreme point of high value. Reward to the upside is 1%, while risk to the downside is 15%. What would you do if while preparing to enter the casino you were told there were even odds you would either lose 15% of your capital or win 1% of your capital? Of course, the odds are not even, and given Central Bank intervention it is impossible to effectively calculate odds. However, in a world of activist bankers, the historic outcomes at these high levels of valuation are pretty consistent. My view, I do not want to lose money by committing new capital to this endeavor. Additionally, I have sold down my trading positions to the lowest levels in my investing history and have meaningful short positions in place.
I will hopefully find the time later today to complete my weekly write-up (currently in the Hamptons’ with family). In the weekly newsletter’s absence, consider this:
Cash flow multiple:
1) Today’s cash flow multiple exceeds the July 2007 CFX.
2) The number of companies within the 187 company portfolio that are priced today above their Discounted cash flow price number 79. The last time we reached this level of overpriced stocks was in December 2015.
3) The spread between the portfolio’s price and the portfolio’s cash flow price is as narrow as it has ever been. Every time we have reached this small of a spread the market has sold off. The four other times since 2006 that we have had such a narrowing were:
a) October 2007 = we know what happened after this (Bear Sterns and Lehman Brothers)
b) April 2011 = 900 DJIA point drop over next eight weeks
c) March 2014 = 400 DJIA point drop over next five weeks
d) July 2015 = 2,000 DJIA point drop over next seven weeks
Be careful out there.
FYI the Connolly Portfolio is up 9.26% YTD.
Have a great weekend,