Mr. Market To Carl Icahn: “Danger Ahead”? LOL!

Early this week, Carl Icahn put out a video to express his concerns regarding risk assets called, “Danger Ahead.” The video, directed by my friend Jim Bruce (writer/director of “Money For Nothing“), is very well done. I encourage you to go watch it at

In it, he discusses what he believes to be ‘fallacious earnings,’ driven by faulty accounting, a merger boom and buyback bonanza. And for these inflated earnings, he claims investors are now paying ‘bubbly valuations,’ in both stocks and high-yield bonds at a time when liquidity has been falling dramatically. He ultimately blames the Fed’s zero interest rate policy for exacerbating all of these issues.

I’m glad to see someone of Icahn’s reputation willing to stand up and tell it like it is. But what I’m most impressed with, though, is Carl’s clear desire to try to help the little guy – which seems to be the whole purpose of the thing. He recently tweeted:

Today he warns:

I’ve seem this before a number of times. I been around a long time and I saw it ’69, ’74, ’79, ’87 and then 2000 wasn’t pretty. A time is coming that might make some of those times look pretty good… The public, they got screwed in ’08. They’re gonna get screwed again. I think it was Santayana that said, “those who do not learn from history are doomed to repeat it,” and I am afraid we’re going down that road.

What I find most astounding, is the popular reaction to the video:

Screen Shot 2015-10-02 at 10.07.17 AM

Here you have one of the greatest investors of all time going out of his way to produce a short video intended to help the little guy and the response is dismissal and ridicule. And I haven’t read one article that actually addresses the substance of the Icahn video. They all resort to logical fallacies that support preexisting biases. Could there be a better contrarian signal that Carl is actually onto something AND that the markets haven’t fully priced it in yet?


Contrarianism In The Age Of Social Media And More On #TheMustFollowPodcast

I recently sat down with @ChicagoSean over at StockTwits to discuss the beard, of course, along with my general investment philosophy and feeling for the markets right now. We had a blast – maybe too much fun! Hopefully you’ll find the discussion valuable food for thought in feeding your own investment portfolio:


Why This Correction Will Likely Lead To Another Painful Bear Market

Back in May I wrote a post arguing that the record-high levels of margin debt should make investors more cautious. Basically, there is compelling evidence to suggest that margin debt is a very good indicator of long-term fear and greed in the stock market.

When margin debt is relatively high it signals that greed is predominantly driving stock prices. Conversely, when margin debt is relatively low it indicates that fear is the predominant factor. If an investor believes it’s wise to ‘be fearful when others are greedy and greedy when others are fearful,’ as Warren Buffett suggests, then it’s probably going to be hard to find a better indicator for long-term investors looking to do so.

This also makes perfect sense from an economic viewpoint. Relatively high levels of margin debt suggest there is little potential demand left for equities and plenty of potential supply to pressure prices lower. Conversely, relatively low levels of margin debt suggest there is little potential supply and plenty of potential demand to pressure prices higher. And, in fact, this is exactly how margin debt has worked its magic on stock prices over the past 20 years.

One of the most valuable ways I have found to view margin debt levels is in relation to overall economic activity. The chart below shows that when margin debt has approached 3% of GDP in the past it’s usually been a good signal that greed has gotten out of hand. Back in April this measure hit a new record. Screen Shot 2015-08-31 at 10.13.45 AMThe reason I find this measure so valuable is that it is highly negatively correlated to 3-year returns in the stock market. When margin debt relative to the economy has gotten very high, 3-year returns have been very poor and vice versa. Right now this measure suggests the coming 3 years in the stock market could be very similar to the last two bear markets we witnessed in 2001-2002 and 2007-2008 after margin debt reached similar levels in relation to the economy.

Screen Shot 2015-08-31 at 10.13.30 AM

What’s more, in the past, when stocks’ 12-month rate-of-change has turned negative it’s usually triggered a significant reduction of margin debt. In other words, once the stock market starts declining over a year’s time record levels of margin debt, which functioned as demand to push prices higher in the past, start to become supply, which pushes prices lower going forward. This is how the last two bear markets began.Screen Shot 2015-08-31 at 10.42.30 AM

Now the stock market only needs to rise by about 3/4 of a percent today in order to maintain a positive 12-month rate-of-change. On the other hand, the longer the current correction in stocks continues the likelier we are to see it evolve into a longer-term bear market, as the massive amount of margin debt stops working in the favor of all of these “greedy” speculators and begins to work against them and they start to become more “fearful.”

And if the past couple of full market cycles are any guide, the potential supply coming to market in this scenario could make the next bear market another very painful one, at least for those who ignore the crystal clear message of margin debt relative to the economy.


A Brief @Twitter Timeline Of My 11-Month Correction Beard

Late last September I made a vow:

I had been making the case here and on Twitter that the bull market was long in the tooth and there were many signs that could be waning.

At the same time, stocks, which normally have a 10% correction once per year, hadn’t had one since 2011.

Within days my wife sent me this:

But, in just 3 weeks after my initial pledge the stock market fell about 9%…

…until the Fed came to the rescue:

Then the Santa Claus rally took over.

E*Trade called me out, on my birthday, no less.

Then the heat on the beard intensified.

As the stock market made new highs, the beard trolling got pretty loud.

And as the beard grew longer and longer, the media began to take note…

…as did the most creative of technicians.

Then this past Monday the market finally cracked.

To be clear…

…I was just trying to make a point…

…and have a bit of fun in the process.

Mission accomplished.


Druck Backs Up The Truck And Loads Up On Gold

Back in April I wrote a post titled, “how to trade like Stan Druckenmiller, George Soros and Jim Rogers.” It centered on a quote from Druck that really gets at the key to his incredible success in the markets:

The first thing I heard when I got in the business, not from my mentor, was bulls make money, bears make money, and pigs get slaughtered. I’m here to tell you I was a pig. And I strongly believe the only way to make long-term returns in our business that are superior is by being a pig. I think diversification and all the stuff they’re teaching at business school today is probably the most misguided concept everywhere. And if you look at all the great investors that are as different as Warren Buffett, Carl Icahn, Ken Langone, they tend to be very, very concentrated bets. They see something, they bet it, and they bet the ranch on it. And that’s kind of the way my philosophy evolved, which was if you see – only maybe one or two times a year do you see something that really, really excites you… The mistake I’d say 98% of money managers and individuals make is they feel like they got to be playing in a bunch of stuff. And if you really see it, put all your eggs in one basket and then watch the basket very carefully. -Stan Druckenmiller

The way Druck generated 30% average annual returns over a period of decades was by being a pig, by putting all his eggs in one basket and watching it very carefully. Considering he may be the most successful money manager alive, you may be curious to learn what Druck is buying today.

Well, you’re in luck! Druck’s latest 13F filing shows that he is currently backing up the truck and loading up on gold. In the second quarter, he bought over $300 million worth making it his single largest position. He now has more than 20% of his portfolio allocated to the SPDR Gold Trust (GLD). This position is more than twice as large as his next largest holding.

Clearly, Druck feels (as I do) that it’s time to get greedy in the gold market.

UPDATE: I just noticed that Stan also bought a sizable position in Newmont Mining, as well. What a pig.