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Soros, Icahn, Nelson Hedge for Market Fall

publication date: May 17, 2016
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author/source: Valuentum Analysts

Pictured: George Soros; source: Heinrich-Böll-Stiftung

By The Valuentum Team

Following news that Warren Buffett’s Berkshire Hathaway’s (BRK.A, BRK.B) took a rather sizable stake in Apple (AAPL), news flow from other large investors continues to be decidedly bearish. As our members are aware, we recently added put options on the S&P 500 (SPY) to protect capital in the Best Ideas Newsletter portfolio, a move that may expire worthless but accurately captures our sentiment toward today’s overheated equity market. As of May 13, the forward 12-month price-to-earnings ratio on S&P 500 companies is 16.6, above both its 5-year average (14.5) and 10-year average (14.3).

Reversion to the 10-year average alone means the S&P 500 Sector SPDR ETF (SPY) has downside risk to ~$170 per share on the basis of calendar 2016 earnings numbers, an approximate 17% decline, and this assumes that markets don’t overshoot to the downside! Some of the “safest companies,” as in those in the consumer staples (XLP) sector, are trading at nearly 21 times forward earnings compared to 5- and 10-year averages of ~17 times. The broader market valuation picture is rather ominous, and long-term investors can’t simply waive their hands at this “inflating” bubble.

Today, we found out that another high-profile investor has noticed some of the large risks the market faces. Billionaire George Soros, who believes “the situation in China reminds him of the 2008 crisis,” effectively doubled his allocation to put options on the S&P 500, to the tune of $430 million, a huge bet that comes with expiration risk – meaning Mr. Soros is betting that a decline is coming soon. We’ve outlined our concerns about China (FXI) many a time before, “China (May 2016),” and even if the long-term might be bright for the Communist nation, the near term could be troublesome if not concerning, particularly given its massively escalating debt load. That could hurt the markets in the near term.

George Soros also has taken a large position in gold via an equity position in Barrick Gold (ABX) and call options on the most popular gold ETF (GLD), which has been one of the best trades thus far in 2016, “The Market – On Its Head (April 2016).” We had highlighted a trading opportunity in gold in February, “Dividend Growth ‘Bubble’ To Continue…”, but the greater fool attributes of the yellow metal kept us on the sidelines, “Gold Is But a Shiny Yellow Metal (January 2016).” That we didn’t add gold to the Best Ideas Newsletter portfolio has turned out to be a “mistake,” as we had a difficult time getting comfortable with a thesis that centers on “fear mongering” than one based on tangible, free cash flow generation. Sometimes we should act on our trading instincts.

Another billionaire investor is also betting big on the market’s decline. Carl Icahn (IEP) now has an incredible ~150% net short position, with media outlets reporting his views that a stock market “crash” is coming. How about that? Stretched valuations certainly support his perspective, and just like Mr. Icahn, we continue to take cautious measures to prevent any market dislocation from damaging the strong performance of the Best Ideas Newsletter portfolio. As we mentioned, a 17% decline in the S&P 500 would mean share prices have reverted to their 10-year averages, but how can we forget that we’re more than 7 years into a strong stock market recovery? Earnings estimates and growth rates could very well be too high for this time in the cycle, and non-GAAP earnings presentation is only adding more “air” to the bubble.

Some of the smartest investors are betting on a market “crash,” and we’re not going to be caught off guard. We’re seven years into one of the strongest bull markets in history following the March 2009 panic bottom, and a 20% decline in the S&P 500 from current levels wouldn’t even move the needle when it comes to the sizable gains had since the generational bottom. It only makes sense to keep your guard up.


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