Q: I’ve watched with interest your tweet conversations with Urban Carmel. He’s correct in that the US economy as a whole is doing ~OK right now. But what I find strange, given his length of time in the finance industry, is that he seems fixated on data for ‘now’ and is ignoring how the stock market will start to discount the future recession (that I see as likely to a year or so out).

J: I don’t know if we’ll have a recession or not. Certainly looks like the possibility is growing. Generally, I have a hard time with folks who never take any position on the markets yet love to pat themselves on the back.

Q: Stock at $25.50+
You can sell Dec. 18th $25 puts at .90+ per share.
Another way to play the stock.
Stock has to hit $24.10 by Dec. 18th to lose money on this trade

J: Interesting. I’ve sometimes thought of selling puts as a way to buy a stock at a lower price but with KMI I’d rather just own it. 5 separate insiders bought over the past week, too, something I should mention in the next chart book.

Q: Jesse, if you could only make 1 trade to support your position on the market topping out here shortly what would it be and why? Expected holding period?

J: That’s really, tough. I think I’d probably just short SPY or QQQ expecting the market to bottom sometime over the next 18 months or so. That’s really just a guess. I’m doing my best to trade it and share exactly what I’m doing on the site.

Q: I saw Dan Zanger post a chart of SP500 vs. Fed Funds rate from 1999-2000. During the last major hike, stocks actually moved up. Dan is presenting this to say that interest rate rises are good for stocks. To me, this might be a bit of “correlation is not causation.” In any case, can you provide some insight on interest rate hikes and stock market prices (given that they have moved in tandem in the past).

J: This is REALLY a stretch. First, I think it’s very easy to make the case the Fed has already been tightening for almost two years now (since they began tapering). Second, I haven’t seen anyone make a convincing case that a rising Fed Funds rate should make stocks go higher. In fact, anyone who notes any correlation between rising stocks and the Fed Funds rate conveniently leaves out everything prior to 1983. The two rate hike cycles at the end of the Nifty 50 era (which has many similarities to today’s market) both coincided with bear markets. Finally, to compare the current cycle to the 80’s and 90’s completely ignores the major differences in the economy and where we currently stand in the credit cycle among many others.

Q: I know you are probably being bombarded with folks asking you about your gold thesis, and in fact questioning it. Last Friday, on CNBC’s Trading Nation,, Gina Sanchez of Chantico Global stated “The trend that we’re seeing is a trend that’s going to be in place for some time… Gold hates a recovering economy, gold hates higher interest rates and gold hates a stronger dollar and those are all three things we can expect.”

We can question the recovering economy portion of her thesis, but the other two seem likely to happen, and wouldn’t we then expect gold to go even lower from here? In fact, gold is favorable to a recovering economy in the places where consumers buy a lot of gold, namely India and China, and those economies can’t be called ‘recovering’ by any substantial measure. So, it seems the cards are stacked against your long gold trade right now, in a case of “the fundamentals are gonna trounce the technicals”. What do you think?

(Thanks for considering the question. I’ll look for any potential response on the Q&J section or woven between the lines in your blog posts or commentaries!)

(Also, thanks for the intel… it’s very valuable)

J: I think her three-pronged premise is extremely difficult to support: “Gold hates a recovering economy, gold hates higher interest rates and gold hates a stronger dollar and those are all three things we can expect.” There is just so much I disagree with, I don’t know where to begin. And to clarify, the technical bullish case I have presented for gold is supportive of the fundamental case I have made in the past. I don’t use either technicals or fundamentals without the other.

Q: A couple quick questions.

1) Would you be willing to provide any insight into your personal performance managing money over the years (have you matched or exceeded SP500, for example)? I don’t want to fall prey to genetic fallacy (as the info you provide is excellent), but I think it’s worth knowing as I consider your strategies and trades. I’m assuming you’re confident you can outperform the ETF portfolio, given that you have your money in specific equity trades. Understand if you’re not comfortable providing anything though…

2) What’s up with KMI? Lately it seems to be moving with crude oil…

J: I’m not comfortable providing returns for the same reason I don’t show exact positions. It just encourages copycatting rather than thinking which is counterproductive. As I’ve said many times, I’m not trying to provide anything more than food for thought.

As for KMI, the only specific thing I can find today that might matter is this story. None of it is news but it does rehash some of the bearish thesis. REITs and utilities have also taken it on the chin recently but not today. Energy was generally hit pretty hard today, though.

Personally, I like the fact that 5 insiders just stepped up and bought more stock.

Q: I was curious if BHP is on your radar? Could it be a situation that Jim Rogers was referring to when he said “I just wait until there is money lying in the corner, and all I have to do is go over there and pick it up.” Kinda similar to BP in 2010?
Thanks in advance! Love your site/service and reading all your alerts/blogs/charts/etc.

J: Man, I haven’t really looked at the broader mining sector at all. Just seems like they are way to levered to a slowing global economy. I like the gold miners because I have high confidence the gold price is bottoming. Not nearly so confident about the large commodity space.

Q: See chart in this article, think it is what you are also thinking.

J: I really like John’s work and agree that the current volatility is typical of a topping process.

Q: Are you looking at SUNE at all? Sentiment (via stocktwits) seems to largely be bullish still, but given the price, wasn’t sure if it’s something catching your eye at the moment?

J: No. I haven’t really looked at it at all despite the smattering of insider buys. They just have a LOT of debt and I have no idea where to begin in valuing the business. That said, just glancing at the StockTwits bullishness and crappy financials it looks like it could go to zero. Still, I did notice John Hempton is long and he wrote a post about it recently. I’d probably start there.

Q: I really like what you are doing. I’m a value guy and I tend to make my investment decisions based on value only. It’s interesting to see someone doing a blend of value, TA and sentiment.

A couple of questions:

1/ I listened to one of your podcast a few weeks ago and you mentioned that you biggest trading mistake was to buy the Corinthian college stock. The main point of your thesis was that there was no way the government would put that company our of business. But it happened.

It seems that your thesis on HLF stands on a similar assumption: it’s very unlikely that the government would terminate that kind of business. I’m not super familiar with HLF but I read a little bit about it. And I understand that Ackman’s short thesis relies on the same argument, only that he thinks it’s highly likely that the government will intervene and put HLF out of business.

I frankly have no idea how to handicap that. It’s in my “too hard to understand” pile. But I was wondering if you had thought about the similarities between Herbalife and Corinthian.

2/ As mentioned earlier, I’m a value guy. But probably a little different than many other value investors in the sense that I currently have lots of positions in gold miners. I have no doubt there is incredible value there – it’s probably the cheapest sector I have ever seen – and that I’ll make lots of money in the next few years. But the past couple of years have been pretty frustrating and I sense I could make a better job if I timed better my entry points based on technical analysis (This is actually one of the reasons I subscribed to your letter). I was wondering if you had any good introduction book on technical analysis to recommend (more the basics than something too sophisticated).

3/ Great post on Amazon today. I’m actually “la nuit sera calme” on twitter and we started an exchange on AWS. As i think more about it, I’m not sure you can set aside AWS in your calculation because that’s the main driver of the stock price performance this year. It started to rise when AMZN disclosed AWS #s (much higher margin than the retail biz, about 10% of total rev for 50% of amzn profit). It’s completely insane to value AWS at $170bn (10 times 2017 revenue…) and it sounds like we are back to 1999. But again, that’s the primary driver of the current valuation.

The other question on AWS is whether it’s a commodity-like product or not. I honestly don’t know. It might be relatively easy to replicate and there is lots of new competition (read overcapacity) coming in, but what about the switching costs? Would businesses easily change to another provider?

Anyhow, I think we both agree that AMZN is way overvalued. 🙂

J: Good questions and I appreciate the discussion.

1/ I’ve done a LOT of due diligence here and based on the legal precedents and how they relate to HLF’s business model, I think the worst case for the company is some sort of a relatively small fine at this point. The market has also confirmed this view as the stock is now in a solid uptrend – not the case at all with COCO where I ignored the warning from the persistent downtrend.

2/ There are some good books out there like “Technical Analysis of Stock Trends” by Edwards and Magee but it’s more of an encyclopedia than anything. I’ll say I’ve learned the most, by far, by simply contacting folks directly who I believe are especially talented. I’ve learned directly from studying and discussing with Helene Meisler, Scott Reamer, Kevin Tuttle, Tom DeMark, Todd Harrison and others.

3/ Analysts now estimate AWS can grow revs to $20b by 2018. Still would be less than 20% of Amazon’s overall. Even if you apply a generous profit margin (which is a big “if” in my book) I don’t think there’s any way to justify anything close to $300 billion for the company. As for switching costs, it’s pretty tough to switch hosting companies right now but that doesn’t prevent the biz from carrying zero profit margins even for the largest players.