May 24, 2016

Markets could end up down more than 10% for this year 2016

I remain in a pessimistic mode, but a practical one. Trading around positions seems to be a reasonable strategy given what expect for 2016's balance -- a choppy, newsy and even random market that's governed by machines and algos.

I continue to expect low-double-digit percentage declines for the S&P 500 for the year as a whole. Ergo, I'll be a short seller on any market strength. I still believe that stocks began making an important and major market top in May 2015, and that what we've seen since has just been a part of that process.

Of course, the market might be due for a bounce in the near term, so I responded accordingly yesterday by reducing my short exposure.

The Fed
Despite growing expectations for the Federal Reserve to boost rates at its June or July meetings, I still don't foresee any rate hikes this year (as I expressed in December in my 15 Surprises for 2016).

The Fed's June meeting is simply too close to Britain's "Brexit" vote, and I expect greater visibility of a U.S. economic downturn to appear by July. Did you see the carnage in many fixed-income sectors over the past two days -- particularly in closed-end municipal bond funds? Remember: When sentiment turns, liquidity dries up. Ergo the expression: "Sell when you can, not when you have to!"

Valeant Pharmaceuticals 
Valeant received another notice of default from bondholders Thursday. I would avoid Valeant's shares, as I believe things could end badly there.

I've been quiet about Apple over the past few weeks. The shares are trading in the $90s, buoyed by Berkshire Hathaway and its purchase of about $1 billion of AAPL stock.

But my bearish thesis for Apple remains intact, and I believe Berkshire will be proven wrong. I give the stock a 12-month target of about $80 a share vs. Thursday's $94.20 close, and I'll consider shorting more AAPL in the $95 to $100 range.

I continue to believe that Apple won't eclipse its 2015 earnings-per-share peak for years, given the conclusion of the iPhone's last important upgrade cycle and the absent of any needle-moving new products. The New York Times' James B. Stewart discusses the concept of Apple as a value play in an interesting recent column, but I respectfully disagree. As CNET reported, the Android just blew past the iPhone.

Retail's Winners ... and Losers
I'm simpatico with Jim "El Capitan" Cramer that Amazon and Walmart will ultimately win the retail battle.

But I suspect that I'm even more negative than Jim is on the rest of the bricks-and-mortar space, where I see numerous "value traps." I have no longs in retail space and one major short: Nordstrom, which has been very good to me.

I also recently shorted Foot Locker, which l'll have more to say about next week. I expect to launch even more shorts in the sector on any strength in the weeks ahead.

Do Your Research
My big theme yesterday was on the importance of doing your own research. After all, few "experts" saw the retail sector's recent carnage coming, even though the evidence for it was right in front of us.

Consider how unlikely it is to succeed in delivering great investment returns when you participate in what I call "Group Stink." (This is one of the reasons that I see Peak Hedge Funds.)

I'll admit that doing your own research is hard work, but think about how much research goes into Jim Cramer's hard-hitting CEO interviews on Mad Money.

And remember, be wary of the self-confident -- especially many of the business media's "talking heads." Many are trying to sell you something, and they're often not being honest with themselves or us. And frequently, their knowledge of a given company is "miles wide and inches deep." As I noted yesterday, you can do your own independent and innovative research while in your pajamas!

As I've mentioned previously, a lot of high-profile stocks are rolling over these days. So, I'd recommend avoiding Apple, Ford, General Motors, Netflix, Starbucks and Walt Disney even though they might seem "cheap."

I'm short on all of them, and my diary is filled with critical analyses of each one. As always, the most important factor that I see is slowing secular profit expectations for them all.

Position: Long SH (small); 
Short: IWM, AAPL, F, GM, SPY (small), QQQ (small), SBUX (small), DIS (small), NFLX (small), FL (small)

via thestreet