“If more respected investors had warned about the market in ’07, we might have avoided the crisis in ’08. I think the public is walking into a trap again…” – Carl Icahn via Twitter June 24, 2015
Following up on his Twitter post, Icahn called in to CNBC. Further explaining his views, he shared the following:
- I think the public is walking into a trap again as they did in [2007]… I think it’s almost the duty of well-respected investors, like myself I hope, to warn people, to tell people, that you really are making errors.
- It’s almost déjà vu… I do think you’re going to have a dramatic pullback.
- Icahn is especially worried about “fudged” earnings – noting that many companies today are using creative accounting tactics to boost their share prices. (Something I have been talking about as a particular worry at peak margins and extremely high valuations).
- He reiterated that high yield bonds are particularly dangerous, saying it was nearly certain they’re headed lower. See my Forbes posts here, here and here.
- He added he likes to look for “no-brainer” trades and “the high yield [market] to me is really a “no-brainer.” That’s going to happen in my mind.”
- On the positive side, Icahn did say he is still long several stocks. Noting he is still incredibly bullish on Apple (“hasn’t sold one share”). He said if the stock falls along with the broad market, he would love to buy more.
Perhaps the hardest part of this business is helping investors avoid being their own worst enemy. The data shows both individual and institutional investors tend to buy and sell at the wrong times. In sharing the secret to his investment success, Sir John Templeton was quoted, “I buy when everyone else is selling and I sell when everyone else is buying.” It takes discipline and process.
Icahn is saying, like I am saying, the potential reward relative to the sizable risks makes as little sense today as they did in 2007.
Given the complexities of all of this, risk management should be front of mind. Today, valuations are high, equity ownership is high, margin debt is high and the bull market is aged – risk is high.
Every Wednesday I post a piece called Trade Signals. In it I look at a number of weight-of-evidence based indicators that have historically done a good job at identifying major inflection points – when best to reduce (hedge) market risk exposure. You’ll see the weight of evidence supports equity exposure but it is weakening. You’ll also see the Zweig Bond Model moved to a “sell” several months ago, suggesting short-term bond exposure over long-term exposure.
Pressed for time and a long holiday weekend ahead, let’s keep this week’s OMR short. You’ll find just one link. When you hear warnings such as fudged earnings, illiquidity risks or a candid “the public is walking into another trap”, know that there are things you can do to protect yourself. Put this week’s letter in the “what you can do” category. I hope you find the letter insightful and helpful. Grab a coffee and put your quant geek hat on. And, most importantly, have a fun weekend.
Included in this week’s On My Radar:
- Trade Signals– Trend Positive, Pessimism Extreme (bullish) and We Are Still Watching Out For Minus Two
Concluding Thought:
Mindful of the heightened risks, I believe investors should focus on upside potential but with a downside protection process firmly in place. We want to avoid, as Icahn says, “walking into a trap again”.
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I hope this research is helpful for you.
With kind regards,
Steve
Stephen B. Blumenthal Chairman & CEO CMG Capital Management Group, Inc.
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