Although the public seems to be getting more emboldened with their stock market bullishness, I am getting increasingly nervous about the current situation.

I am cognizant of the fact that we are teetering on the verge of breaking out to new highs. And although we have not yet been able to pierce that level, neither have we collapsed and firmly rejected that notion.

http://themacrotourist.com/images/Azure/SPXFeb2714.PNGS&P 500 – can’t break through</a> </div>

What concerns me the most is the fact that often bull moves finish with a massive spike to the upside that ends up being short in duration, but large in terms of price. Given the increasingly frothy nature of the market, I am concerned that this is a definite possibility.

And make no mistake about it – it is getting frothy.

This week’s action in Facebook and Tesla reminds me so much of 1999 that I am expecting to turn on the radio and hear nothing but Sugar Ray and Britney Spears tunes. Britney’s song “Baby one more time” has never been more appropriate. We are once again in the midst of a stock market bubble where dreams trump hard cold reality.

However when I see Forbes’ article titles such as the following, I know it is time to hit the eject button:

WhatsApp Could Be Worth $100 Billion Once It Monetizes Like Its Asian Peers

Although the bulls have all sorts of methods of justifying Facebook’s $19 billion acquisition of WhatsApp – it is all smoke and mirrors. Zuckerberg paid $42 per user for a messaging app whose popularity is largely driven by the company’s promise to never deliver an ad to users. The service is also free for the first year, with the low price of $1 per year to kick in after that. I get it that Facebook trades at over $100 per user, so assuming that the market will continue to pay this sort of premium for Facebook, these sorts of deals are accretive for Facebook. But come on. This isn’t some sort of unique technology that is not easily copied. I am not surprised that that Facebook is trying to buy users. But I am surprised (and alarmed) by the fact that the market is eating this shit up so eagerly. If after the deal was announced the market had rightfully punished Facebook by sending the stock down (even marginally), then it would have sent the right message. But instead the eager fools drove Facebook up to new highs on the news.

http://themacrotourist.com/images/Azure/FBFeb2714.PNGFacebook pushing up to new highs</a> </div>

This is the stuff of bubbles – no doubt about it. Who knows how long this can continue, but it is my belief (hope) that the market will figure out before it gets too much worse. Many market pros are too young to remember the origins of the phrase “jump the shark.” Not me. I remember all too well the Happy Days episode where Fonzi put on the water skis (leather jacket and all) and jumped over the shark.

http://themacrotourist.com/images/Azure/JumpSharkFeb2714.jpg

I think that might as well be Zuckerberg on the water skis. This purchase is just money out the window. And although I am aware of what Keynes said about bubbles and solvency, I have to believe that the big smart money is going to have a look at this deal and start selling. I think this move from $65 might be the last gasp before reality sets in.

Although I have used this picture before, I can’t resist putting it in again. I guess that is what happens when you are a big Lord of the Rings geek.

http://themacrotourist.com/images/Azure/ModorFeb2114.jpg
</a> </div>

And then let’s talk about Tesla. I guess at least I can take solace in the fact that Musk is a Canadian and actually creating something that will benefit the world. But I am still struck by how much this resembles 1999. Three days ago Morgan Stanley issued a super bullish analyst report and spiked the stock higher by 14%. Then yesterday the company announced a big convertible bond issue. The part that is most shocking is that market participants are surprised at the fact that Morgan Stanley had managed to weasel their way into the deal and there might be a conflict of interest. The comment from Casablanca doesn’t do this justice. It is like telling Charlie Sheen and Lindsay Lohan to host a party and then being surprised that there were drugs at the party. I don’t begrudge Musk’s masterful playing of Wall Street, but I do feel as capital allocators, we are once again doing a poor job. The public is repeating the error from 1999 of blindly participating in analyst led bubbles. Did we not learn anything from that period of stupidity? Did we not learn anything from Jack Grubman and the farce that was his analysis?

Here is today’s Tesla analysis from the Merrill Lynch analyst. This seems more appropriate given the massive risks associated with this stock, but this report does not seem to be getting any traction.

http://themacrotourist.com/images/Azure/MLTWTRFeb2714.png

As I said – I am happy that at least Musk is getting extremely cheap financing to build his dream. I have nothing against the business and think it is a great company led by a great entrepreneur. But I have lots of problem with the price that investors are paying for that company. As Musk himself said half a year ago (and $83 lower);

“the stock price we have is more than we have any right to deserve.”

This sure looks like 1999… only the symbols are different…

http://themacrotourist.com/images/Azure/TSLAFeb2714.PNGTSLA – it’s the stock that is on fire (irrespective of the cars also being on fire)</a> </div>

I have to admit there is one way that today is different versus 1999. Fifteen years ago it was Linux stocks or telecom startups that were doubling every week. Today Nancy Reagan’s “just say no” campaign is long forgotten and marijuana companies are becoming half billion dollar companies overnight.

Have a look at this insanity. Here is a chart for Advanced Canabis Solutions.

http://themacrotourist.com/images/Azure/CANNFeb2614.PNG

Here is the Bloomberg description for this company:

Advanced Cannabis Solutions Inc leases growing space and related facilities to licensed marijuana growers and dispensary owners for their operations. The Company provides a variety of related, ancillary and innovative services to the cannabis industry.

What I like best about this company is the market capitalization at yesterday’s close… $486.4 million… maybe Zuck didn’t overpay after all…

And it is not just me that is noticing the increased froth. Have a look at this great tweet from tech analyst Paul Kedrosky:

http://themacrotourist.com/images/Azure/SpecialPurposeFeb2614.png

And it’s not equities only. Have a look at the recent warnings from Goldman’s head of credit:

Feb. 26 (Bloomberg) – Investors who have been pouring money into funds that purchase leveraged loans need to be wary of a reversal in demand, according to Justin Gmelich, the head of credit trading at Goldman Sachs Group Inc.

“It’s been a bit of a one-way freight train,” Gmelich said in a question and answer session, posted on the company’s website yesterday. “I would just caution those that are involved in the loan space to be mindful of the fact that they’ve been beneficiaries of inflows for 88 straight weeks and the tide can turn.”

The exuberant atmosphere is also making overly aggressive corporate raiders like Carl Icahn all the more rabid. Not happy with trying to tell Apple’s Tim Cook how to run his company, Carl is now taking a nasty run at Ebay. As I have said in the past, I am no Carl Icahn fan and wish the market would take care of dishing this guy a little karma. He is like a real life Gordon Gecko – only worse because he is continually popping up on my TV and I can’t simply take out the DVD like I would do to Michael Douglas.

While smug jerks like Icahn are busy trying to bully companies into doing their bidding, true market wizards like George Soros are quietly exiting the building. It was recently reported that good ole’ George is now long $1.3 billion in S&P put options. Even for George that is a big position.

I am scared for us if the madness does continue and even escalate. Once a bubble starts expanding, it is extremely difficult to determine how big it will be blown. And I do worry that if we break out to new highs, the buying will accelerate. However if that does happen, rest assured that the top might not be close in price, but that it will be close in time.

This froth is the stuff of the end of bull markets – not the beginning…


Things that I am watching

I have been pounding the table on the fact that no one thinks there is any chance that inflation will return any time soon. This creates a wonderful opportunity to take the other side of the trade and bet on a return of inflation with very favourable risk reward characteristics.

I recently came across this great graph that Bloomberg Reporter Matthew Boesler tweeted:

http://themacrotourist.com/images/Azure/CPIExpectationsFeb2614.png

Basically no one thinks inflation is coming anytime soon. All the better for us…


Positions

Long a tiny position of puts on TSLA and FB. Just for shits and giggles. Conviction 1. Stop – none: when they go to zero the market will do it for me.

Short US 5 Year Treasury Futures. I expect the Fed to continue to withdraw stimulus aggressively.  Conviction 3

Short US 2 Year Treasury Futures. I think the downside is a move from 31 bps to 25 while the upside is a move up to 50 bps.  Conviction 4

Short Euro. Added to this trade into the recent rally.   Conviction 5

Short Nasdaq 100 futures, short Eurostoxx futures, and short Nikkei futures. I entered the trade last Wednesday with idea that the Fed is going to taper until something breaks and that the bulls are pushing their luck.  Conviction 4.  No stops for now

Short European stocks via ESTX50 index vs Long S&P 500. I continue to believe that the ECB is too tight relative to the Fed and the BoJ, and that this will translate into relative weakness of European equities.   Conviction 5

Short Yen.  Establish short Yen last week.  Now I will sit tight and wait.  Conviction 4

Short JGB futures. I can’t call myself a macro trader without this widow maker on the sheets. Small position for now, but will add aggressively at the first sign it is working. Conviction level: 2. No stop.

Long Yen volatility. I believe we are entering a period of increased volatility for the FX pair.  Conviction: 3

Long 30 year US treasury volatility.  Swapping half of this position into Yen volatility.  Conviction 2

Long various deferred crude oil futures contracts.  I own a variety of different expiries in years from December 2014 all the way to December 2020. Conviction level: 5. No hard stop.

Long precious metals smorgasbord. Long gold, silver and platinum futures. I also believe that the closed end ETFs (CEF.A CN Equity or PHYS US Equity) which are now trading at discounts versus years of trading at a premium are a good way to play this idea. Conviction level: 5. Using the year end lows as a stop for half the position.

Long grains. Long deferred corn, wheat and soybean futures.  Although this trade has not worked at all, I really like it long term. Conviction level:6. No stop period.

Long Ithaca Energy IAE CN Equity.  See previous posts. Conviction level: 5

Long Input Capital INP CN Equity.  I have not yet written this up, but I really like this story. More to come in coming days. Conviction level: 5