stock bubble mania | pursue alpha

The stock market, led by the Dow, is going parabolic, expanding due to the helium that the Federal Reserve has forced into the financial system. The bubble has become crazier and more all-encompassing than the dot.com/tech bubble of the late 1990s. Nasdaq. This time the Dow is leading and is irrationally exuberant.

This could get even crazier on the upside, but sentiment and levels of speculative activity have returned to levels that historically represent peaks. A sudden and sharp turn in the stock market on Wednesday (December 20) is likely a warning sign. That is, the shaking before a larger earthquake occurs. Retail trading accounted for 30% of total volume on Friday, compared to the 30-day average of 10%. Trading volumes for stocks under $1 are surging, reflecting extreme risk appetite. But it’s not just a penny stock. Meme stocks like CVNA and snap It’s going parabolic.

A longtime subscriber asked me how I explain CVNA’s big move, since it’s clear the company will eventually have to file for bankruptcy. I asked him to look at this chart and say the following:

The chart shows CVNA (candlesticks) and MEME Stock ETF (MEME) (blue line). Note the strong correlation between MEME and CVNA. In fact, CVNA is said to have underperformed MEME during the uptrend that began in early November. Every retail idiot trading in this market is chasing the worst junk stock higher. Most stocks in MEME have very high short-term interest rates. Most will go bankrupt within the next three years.

CTA’s long positioning has reached its most extreme level in at least eight years. Extreme long or short positioning by CTA is a very reliable contrarian indicator. VIX is at its lowest level since mid-January 2020. Additionally, bullish sentiment jumped to 51.3% by Wednesday, the highest since July 19, according to the weekly survey by the Association of Individual Investors (High Net Worth, Retail). . The decline rate was 19.3%, the lowest during the same period.

No one can say for sure when this madness will reverse. But we can be sure that will happen, and when it does, the resulting selloff is likely to be brutal. Although I have taken a huge hit in my put portfolio over the past three weeks and have liquidated most of my positions. I continue to hold the January CVNA $50 put, the AN January $125 and $130 put, the NVDA March $435 put, and the TSLA April $220 put. Also, on Friday I initiated a $195 put position in the Russell 2000 ETF (IWM) in late December. Earlier this week I started buying late January SNAP $16.5 puts. Take a look at the SNAP chart (next page) to understand why. Oh, I also own a January GDDY $100 put option.

Come on, buddy. In the third quarter, SNAP had an operating loss of $380 million. It had an operating loss of $1.14 billion over nine months. The only reason the company is still in business is because it was able to raise more than $4.8 billion through the capital markets through convertible bonds from 2019 to 2022. No debt will be issued in 2023. But the only thing keeping SNAP from going out of business is this: This amounts to $3.4 billion in cash on hand at the end of the third quarter of 2023.

The stock soared on Nov. 14 following reports that SNAP had signed a deal with AMZN that would allow SNAP to run ads on SNAP that would allow SNAP users to shop on AMZN and pay without leaving the SNAP app. The economic terms associated with the contract were not disclosed, meaning that the terms do not generate direct revenue from the SNAP contract. In terms of the financial benefits of this deal for SNAP, the only thing I can dig into after researching articles and reports is that this deal will increase the average user time on the SNAP app, allowing SNAP to charge higher advertising rates.

In my opinion, the value of SNAP is nothing more than the per share value of cash on the balance sheet, and over time that value will be depleted. Current cash is $2.42 per share. At some point, I plan to increase my capital commitment to the SNAP put options beyond the January $15.50 put option I currently own.

Housing Market Update – Homebuilders and homebuilding stocks have gone completely parabolic.

The Dow Jones Home Construction Index has surged 17% since the end of November. The MACD momentum indicator is currently at the most overbought level in the history of the index (since 2000).

But although homebuilders have been boosting deliveries through deep price discounts and other incentives, they are not reporting record levels of sales and profitability. And the contract amount of the order backlog is also plummeting. Below is a 10-year illustration of monthly seasonally adjusted annual rates for new home sales.

While new home sales have rebounded after nearly two years of decline, the overall rate of new home sales has been in sharp decline since the end of 2020. In other words, the gap between the market capitalization and profitability of home construction companies is the widest in stock market history. DJUSHB is 2.4x higher than it was at the height of the housing bubble in the early 2000s, and SAAR peaked at over 700,000 then, compared to SAAR 679,000 today. I believe reality will hit the stock market hard in 2024, with a rapid sell-off of homebuilding stocks.

Lennar (LEN – $149) reported its FY fourth quarter and full-year results on Thursday after the market closed. Shares fell 3.6% on Friday despite ‘beating’ revenue and EPS consensus and forecasts for the first quarter of 2024. This is because it was clear to the market that LEN had sacrificed margins by cutting prices and offering huge incentives.

Sales in the fourth quarter increased by 7.9% compared to the same period last year, but operating profit increased by only 4.8%. Typically, in a healthy operating environment, home builders benefit from economies of scale and operating profits grow more on a percentage basis than revenues. However, ASP fell 8.7%. This does not include incentives such as interest rate buy-down loans and architectural upgrades.

Ren’s stock price has surged 42% since the end of October. I would be a fool if I didn’t admit that I wish I had bought the call 7 weeks ago. However, the increase in market capitalization cannot be justified at all in terms of fundamentals.

Despite a 4.3% increase in new orders, LEN’s backlog value plummeted 24%. The ratio of backlog value to market capitalization of LEN is 6.4. A year ago, this ratio was 2.98. This shows how far the market value of LEN is completely out of touch with reality.

Builders saw a rebound in sales in 2023 thanks to a rate buy-down gimmick and other mortgage term adjustments that lowered costs in the first two years, adding “savings” to mortgage back-end costs. , coupled with exorbitant prices and upgrade incentives, there’s no doubt that home builders are in for a tough 2024.

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Editor’s note: The summary bullet points for this article were selected by Seeking Alpha editors.