TDI Podcast: Telemetry Hedging (#932)

30:56So we've, we've trimmed it on the way up too. So that's the, I'm not just sticking on that uranium deal. Um, we bought a few, a few positions for clients. Uh, constellation energy is a, is a name I own, uh, Oaklow, uh, SMR that monsters, monsters. Now some of them constellations are quality, you know, as a company that's, that's, that's got revenue. It's, it's, it's, it's solid. It's had some ups and downs and all that. And it will move up and down with the concept of, So as I call it, new clear energy, not nuclear, new clear energy, so that we don't have all the people hysterical about China syndrome.

31:29But those other stocks, the hope to bees, the ones that are in the small module reactors have been absolute monsters, monsters this year. So I get it. That uranium is a great thing. Yeah. And that's the thing, too. A lot of people will do the opposite of what you should do, which is you overweight the ones that have the larger ones in a particular sector. And then you layer in with some smaller weighted positions with some of the ones that have a little bit more spice. And a lot of times, you know, I mean, this is a market where people are trying to get rich overnight. And it really, it's very difficult to do in any market.

32:19But I think that that was one of the things back in April that I told people, I said, here's the opportunity to upgrade your portfolio and buy things that we really wanted to buy for a while. We bought, I bought Nvidia under$100. I sold it at, you know,$145 a little early. Okay, fine, whatever. but still I felt like that's what you do. Well, you do that in, in markets when you have, when you have markets that go down, that's where I start to look at it and say, buy the best quality and, and, and try and hold on as, as long as you can, because that that's going to give you some peace, peace of mind, especially if markets are volatile.

33:08There's a lot of news that is volatility driven. And so that's the part of the process as well. So right now, the way we are, here we are, and we're now in the third quarter, I think we're coming into a tougher time. And of course, we've got a lot of tariff news. We've got a lot of stuff happening out of Washington. Sometimes you got to take that with a grain of salt and try and just stay focused on the fundamentals. And one of the issues that I've had, and I chart these as well, is that this has been a market that has seen some extreme multiple expansion, which what that means is the price has gone up much more faster than earnings.

33:55And you can look at them. I mean, for example, Microsoft was trading at a reasonable 25 times earnings. It's now 40 times earnings. I mean, I'm not going to even throw Tesla in there because that's almost 200 times earnings now. But you even have an NVIDIA that's trading at 50 times earnings, and that's getting a bit rich. Even for a company that's growing as strong as they are, that's historically a bit high. So I look at individual stocks much more so than just looking at the S &P multiple, which is also high. So there's a valuation risk here as well. And that to me is a bit of a concern. And one of the things I've learned of doing this for multiple decades is you can never time the market based on valuations.

34:43It's a very dangerous game. And that doesn't mean you can't get close. But, you know, the problem is that you can have a market that is a 20 PE, goes 21, you know, forward earnings, 22, 23, 24, which obviously is a pretty big expansion on an index, right? And it's for other reasons that are outside the scope of what we're looking at. Yeah, I would tend to agree. But one of the things that, and again, I look at individual stocks when they get to the extreme multiple expansion or contraction. I've overlaid DeMarc indicators on the P.E. ratios with the price. And it's been actually pretty remarkable how well those exhaustion signals do at peak multiples.

35:37For example, I'm sure a company, Wingstop, and it was trading at nearly 100 times earnings. And now it's come down quite a bit. But we had exhaustion signals on the PE ratio at the highs. and that that's just another little quirk and part of my process that i use and and it's not one thing in itself that i would ever use you know i i throw a lot of stuff into the mix um i mean it's just like you know if you're you're baking a cake you need more than flour yeah uh to make it right so i i is is tom de mark still is he still active uh in his time is still Tom is still active and they have some new things coming out that they're trying to do some more things with AI.

36:33We'll see how that goes. But I generally have what I need and I know the indicators. I've used the indicators for almost 25 years. And again, I know when they're going to work real well and when they're not necessarily that effective. And every indicator in itself, again, you need other things to sort of correlate with it. And when it all sort of lines up on one side and you can then make a fairly informed decision, either, you know, you buy or sell. Got to count to nine. You got to count to 13 on DeMarc. That's true. If you know, you know. If you know, you know. But DeMarc Indicators is one of those things, by the way, for people who don't know.

37:17So they're a fascinating countdown. It's actually one of the things that's called a countdown. At first, you're like, what? Seriously? But then you start understanding about what it is, particularly about exhaustion on the up or the down and the intensity of it. And you have these countdown clocks. And if a couple of them line up together, or up, count up, countdown, but if they line up together, and once you get to know them, it's kind of really interesting to understand because he does a certain calculation based on pricing and all that. And it can be very accurate, which is for whatever weird reason, by the way.

37:54Yeah, it is pretty fascinating. And I really can't look at a chart without the indicators on there. And even when they're wrong, you sort of understand why they are. And that's a big tell in itself because that's telling you that the trend is super strong. But, you know, again, we had we had signals. I mean, the I'll be I'll be honest, the ones that happen with the let's say the S &P or the NASDAQ are a little trickier when they're on the upside versus the downside, because we had we had exhaustion by signals in April. And that was, you know, very helpful for me. The other thing I do, and I, with, within my, you know, with the work I do with the subscribers that we have, I try to keep it simple.

38:43And this, these can be very complex and, and they change and I try to explain what to anticipate. But one of the things that I do is I screen within the S &P 500 every day what signals are happening with the most relevant buy or sell signals. So sometimes when I'll see a huge amount of sell signals happening together, let's say they're happening within a sector, that is a signal in itself that perhaps that sector is getting overdone. Perhaps on the downside, when you start to see just a ton of buy signals lining up, that's telling you something as well. And usually when that happens, most people are panic stricken when it's on the downside.

39:30And on the upside, they don't want to listen to either because they're along the market and they don't want to pay any attention. But lo and behold, for the most part, they tend to work and work out pretty well. You just made the case for having a process, for having a discipline. Thank you. Because if you don't, then emotion, fear, and even to a point, your own personal overlays get in the way. Yeah. And I use fundamental analysis as well. And that's, you know, an important factor as well for me. So let's talk about some fundamentals. Let's talk about, let's go keep this on this discussion right now with regard to PE.

40:17So just a PE discussion. Big, big picture. First, we're going to start the big picture.

40:25April, I think we both agree that the gains have been more on an expansion basis where earnings have not grown. The hope is that they will, but they have not. We've gone from, I think, 20, sub 20 to about 22 and a half right now on a forward PE, trailing PE about a 30. The S &P 500 CAPE ratio, the cyclically adjusted price to earnings ratio, 10-year average has been rising over time. It was rising like this in 1999 through about 2025. And we saw it before that from 87 to about 99. but this time it's rising to about 30. We are now at about 30, 37 on the Cape ratio. And that is a time back in 2000, we'll call it 2023-ish, 2024, where it reached that point.

41:18Also back in about 2019 reached that point. And then it seems to be a top end right there. Those times are the highest levels in history aside from 1998, 1999? Now, I don't know if we can say, well, you know, look at that. Or we could say, well, these are different times. You know, now the data is flowing a lot more freely and there's transparency and an understanding of what's happening and investors have, you know, quick access to all this. Is it a different market? To a degree, I think it is somewhat. But the question then still remains, are we out of control right here? Yeah, I'd say that every market is different in some respect, but the basics are always there.

42:09And in the end, the fundamentals always do play out to come to levels that make sense. Sometimes it takes a long time. And when you start to see some of the behavior that we're seeing in the markets recently with a lot of the meme stocks going crazy and zero data expiration options, the amount of volume that's being traded every day, the concentration in the market is very concerning. because basically the market is trading 10 stocks every day, and it's the same stocks that are seeing the most amount of volume or I'd say the most market cap movement, so those of you know. But I also see some really dangerous signals that it will probably look back and say, this is a little bit concerning, and that could be the leverage in the market And the leverage in the market is quite high.

43:17Where is it now, comparatively? Well, the FINRA stuff is, it's hard to really, they changed some metrics on it. So they used to have some of the bank leverage in there. So it's different. But one of the things that I'll say that the advent of the single stock levered ETFs is a bit concerning. And I actually am very good friends with one of the guys that's a big issuer of those and the, you know, the kookier ones at that. And he's a fantastic guy. And he's like, I'm just, you know, fulfilling what people want. And he's hedged with swaps. And I think that people just want more bang for their buck.

44:02And that is sort of a sign. You could also use it as a short, an inverse inside of a IRA to hedge. Yeah, that's true. For that matter, you could use it inside your regular portfolio to do like a short against the box without selling your long position. Yeah, that's true. You can do that. But what I've heard from him is that the inflows into the most bullish things continue to be just growing like crazy. And every little dip gets bought into with the long exposure levered. Another thing that is really concerning is the amount of assets that have moved into funds that sell options. And that could be a covered call strategy.

44:54That's fine. But a lot of those funds are selling puts. And if you sell a put, and let's say something just falls out of bed and it lights out, those people are going to get dinged pretty hard. And with the VIX here, you know, and the teens, it's a bit concerning to me. And so like what, you know, some of the, all these things, this leverage, this short-term options, all these things and the put selling. What happens, in my view, is that we could have a correction that could turn into a catastrophe if some of these things have to get unwound. I mean, I know that the semiconductor levered ETF went down so big.

45:55I think it was down like 30 % in a day or maybe even more because of when DeepSeek came out and revealed themselves to have a cheaper AI type of process. process and it's working as well. And they didn't cost$10 million versus, you know, $100 billion. So that was pretty eye-opening to me. And so I see people, you know, overwhelmingly taking a lot of risk with these. And if we do have some sort of catalyst or event, it could just be exacerbated. And so when I see those types of things happening, my process tells me to take some money off, have some short positions, and be ready for something because it won't take much after the move we've had to prick the bubble.

46:54So what you're saying basically is if this was an F1 race, the guys in the race car have their pedal to the metal, they're not taking their foot off no matter how sharp the curve is. And the problem is that can only last for so long. And if it starts raining out and they continue doing that, there could be some real problems for their cars and for them. Well, I'll tell you this. Ayrton Senna was a Brazilian, one of the greatest Formula One drivers ever. And he raced for McLaren. And he was leading the Monaco Grand Prix. And he was leading the Grand Prix by 50 seconds, which is a lifetime in Monaco because nobody can pass in Monaco anyway because it's so narrow, the streets.

47:45But he was just going as hard as he possibly could. And he talked about it. He was in this zone. and what happened is with I think it was like 10 laps to go he hit the wall and and it was just that taking too much risk when you have a huge lead it it can it can bite you and it can bite the best of people because he was clearly the best driver I've ever seen drive and that is sort of how I see it. If you've got a big lead in the markets right now, you don't need to take more risk. You need to think to yourself, you know, what's my stated goal for the year? What do I need to do to be on my track rather than get caught out in something?

48:37And I think also we could blend in here in a non-political discussion, all the things that are going on, the information flow about whether it's tariffs, taxes, you know, the trial balloons that are thrown out every day, whether it's firing Bernanke, not Bernanke, maybe fire Bernanke, but fire Powell, fire Powell, don't fire Powell, you know, find him with fraud, or maybe let's now start thinking about no taxes on capital gains on houses, or whatever the daily, you know, you roll out of bed, it's like, okay, What's today going to bring? The big thing that I think putting that all aside, whether some of it's just funny or it's debilitating for some people, the fact of the matter is – the fact is that we know something to be true.

49:30We know that – put that all aside and that we have massive deficits. We have massive debt levels. We're at a point right now that we used to laugh at 10, 15 years ago that how could a country be 120, 130 percent debt to GDP? We're there, folks. How is that going to impact our country and not only the country, but the ability for the Fed to operate? And then finally, even the ability for companies to continue on this profit growth that they've had for a long time. okay well as far as the politics of everything um i i take a more neutral approach since i'm an independent uh i'm skeptical most politicians um the last president the last president this president um i am one of those that is concerned about the growing deficit in peacetime the out of control U.S.

50:30debt that I thought was going to be addressed, as well as the deficit. But that doesn't seem like that's going to be an issue. The talk of firing Powell is something that I find to be just a lot of noise. I don't see how that's going to happen. They're trying all sorts of ways now. But I think that Powell is trying to stay disciplined to his process and the Fed's process and knows through history that tariffs do raise inflation to some degree. We don't know what the true tariff rate's going to be, if it's 10%, 15%, 25%. It's been talked about and it goes and forth. So that makes it difficult for the Fed to figure it out.

51:24And the Fed's mandate is not necessarily for the stock market. It's for providing stable pricing, liquidity in turbulent times with the financial institutions, as well as maintaining low inflation, as well as the jobs market. And I think that the economy is strong. The jobs data has been coming in steady at 4.1%.

52:00That's low. I see the point of lowering rates a little. I don't feel they're restrictive. They haven't been restrictive if you look at the equity markets. And the equity markets is sort of the measure I would use there. But I think the bond market has other plans. And this is really important because when the Fed cut rates last year, they cut rates significantly. The 10-year and the 30-year yields, the treasury yields, lifted 100 basis points after these big cuts. And the yields were starting to move down because the people were thinking, oh, you know, the Fed's cutting rates. Everything's going to come down.

52:47It's just, but it didn't. And rates went higher. And I think the bond market is more concerned about the deficits, spending, maybe throw in tariffs, throw in the huge amount of U.S. debt. And if you really want to get interest rates, treasury rates low, you should probably be addressing more of the deficit. But President Trump is under the assumption that if you lower the Fed funds rate, that's treasury rates in this thing. And there may be some correlation, but I think the bond market's going to say, I don't think so. We're more concerned about the other issues that haven't been addressed. And so, you know, oh, everybody wants to buy, you know, let's lower rates to 1%.

53:40That would be inflationary. If we did that so more people can buy houses, the prices of houses would go up. I know, that's the ridiculous point right there. The unaffordability would even get worse. It would exacerbate the fact that housing prices have been going up all along. The last case, Shiller numbers are up three, three and a half percent on a U.S. basis. Housing prices, again, that's not everywhere, but that's the general statement. How does housing prices get more affordable if you reduce interest rates? Because it's automatically going to slingshot prices higher. You're right. And any time you give, I want to say free money, but low interest rates on something, it can be, I mean, we learned in the housing crisis.

54:26And when you had such low interest rates and basically my dog could have got a mortgage for a house and we saw it, you know, I'm friends with the guys from the big short. So we talk about all the time and our firm was short, you know, similar, but we didn't have a movie made about us. But it's same thing with student loans. If you make loans easier to get for students, the prices of colleges is going higher because there's more demand. And that is really the problem. I mean, sadly, if you want the housing market to, let's say, prices to come down, more turnover, you have a recession. And then you have more people that need to sell their houses because they lose their job.

55:20Now, I'm not advocating for that, but that is historically what has been a trigger for the housing market to turn over a bit. And Paul, you know, just blindly trying to lower interest rates is exactly what we just talked about. That's just populism right there. That's just a bad idea. Let's not even talk about it. I can't even talk about it. It makes me nauseous. Seriously, it's like the stupidest thing I've ever heard of. No, no, it's just stupid. It's just stupid to even talk about this. Because the idea, if we do so, first of all, it's going to be an upheaval in the markets themselves due to the fact that there will be a realization that politics are taking over an independent Fed.

56:00That's number one. Number two, we're going to go back to Erdogan in Turkey or Argentina or Venezuela and what they did and the belief that lower interest rates will bring down inflation, which didn't happen. We're in 30%, 40%, 50%. And the fact of the matter is it wrecked their markets, it wrecked their economy. There's no – and then on top of it, the final nail on the coffin will be that there will be no confidence in the U.S. economy at that point. So I don't even want to talk about it because if we get to that point, that's going to be really troubling to me. You're really getting me nervous.

56:31But I'm fine otherwise. I am fine otherwise. Well, you're right. Right. And again, if you just take a step back and you look at history and you look at what's happened in the past, and that's part of my process. I look at things when markets get oversold. What were all the other indicators doing? What was market sentiment like? Everything that when it gets oversold, it did it before. And if all those things line up, then great. We can get in there and buy, but it's also evident as well with economics. And maybe we're living in a little, you know, of a strange period with so much emphasis with the administration talking on TV every day.

57:26It's getting a little exhausting. I will tell you that. It's exhausting. Yeah, it's hard. And I, one of my neighbors who lives two houses away, he's, he works for Goldman Sachs. And he, after Trump was elected, he said to me, he said, and he works in the prime brokerage business. So he talks to hedge funds all day. He said, I don't think people quite remember the volatility with Trump and the tweets and all the other stuff. And I said, no, I don't think people do either. But with that, I will say I don't necessarily I mean, it's exhausting. Yes, I will say that. But it creates opportunity as for a trader and for, you know, you can have a dislocation in the market.

58:17and you scoop something up and get a great price. And lo and behold, you're looking back and saying, thanks, that's cool. Or the other side is true also. You get jacked up on promises that do not come to fruition or information that's only half stated. And for example, I'll give you an example of a half stated statement that is not factual. Well, let me say that. It is factual, but it's not factual. Here we go. no tax on tips. That's factual, except it's only half the sentence. No tax on tips up to$25 ,000. You know, as long as you make less than$150 ,000. So those kinds of things where we have the greatest deal ever with, I don't know, pick your poison, Japan.

59:07Really? So they're going to buy some corn and they're going to buy some rice and they're going to buy some vegetables from us and there's going to be a lower tax. I mean, that's the greatest deal ever. I feel like I'm back to when China was going to buy more soybeans. And that was like, oh my God, fantastic deal. These aren't great deals. These are not great deals. I understand and agree with you. I think there's imbalances out there and they should be addressed in some places. They might be picking off more than they should at first. Trade deals take years. I don't think that, I mean, look, I would love to see a better balance with trade.

59:55That would be great. But forcing it down the other country's throat at the expense of just basically higher prices, which let's remember who, I mean, again, who pays the tariffs? prices get jacked up and the consumer pays some, the company selling it in the U S pays some of that tariff. And, and, and then the supplier from, you know, Mogadishu is, is getting tagged for it as well. So it's a, it's going to hit margins and, and probably see a slowdown ultimately with some consumer spending. But it's not that, you know, you have, you know, these countries are writing the U.S. a check. It's it's I don't think that's quite factual.

1:00:46These are I wouldn't consider these quote unquote trade deals because I agree with you. Trade deals take they're intense. There's a lot of little big things. You don't just do this on a on, you know, a couple of months and say we're going to do this. You got to get it done by then. What this is, I'll tell you what it is. I break it and then I fix it and it looks like it's all better. That's what this is. And it makes sense. Yeah, I would agree. You know, that is sort of a staple of how Trump operates. And, you know, we just have to sort of align ourselves and see that for what it is and go with it.

1:01:25We can't. That's the bottom line. That's the bottom line also. Don't get caught up in all this. That's what we have. Yes, we have. Again, I think that if you go back and you saw like the beginning of the beginning of this term for Trump, he he had a I was all on board with seeing the government spending get cut. That how's that going? Well, I don't think it's I don't think it's addressing the big issues that, you know, the big places where there's too much spending. I mean, I, you know, finding the little things in there that are going to spin, you know, a billion here, a billion there. When we have a trillion dollars that's added to our U.S.

1:02:11debt every quarter, it's four trillion dollars a year. And the deficit is, you know, maybe it's going to come down a little bit, but still it's at levels that are really concerning. And if we go into a recession, which I will say this, I'm not necessarily, I mean, everybody know there's no recession in sight. I don't think that's necessarily off the table. And I'm not saying this year, but I could see something. There will be a recession in the future. There's going to be, let's get this out. There's going to be a recession one day. We can't deny that. And the fact is that probability is we're still going to have massive debt ahead of it.

1:02:50That's going to make it very difficult to deal with that. I think that's the bottom line. So change the scope of that. Thomas Thornton, I got to cut it right there. Tell everybody how they get in touch with you and where they can find it. We're going to have, by the way, on episode number 932 on thedisciplinedinvestor.com. You go there. You can just find right on the front page there under the podcast. Under the podcast notes, there'll be all sorts of information on how to get in touch with them. But Thomas, tell us anyway. Okay. My website is Hedge Fund Telemetry. Reach out there if you'd like a free trial.

1:03:19If you'd like to just sign up and say, yay, go for it. We're building a whole new site, and it's coming out in the next month or so, and I'm really excited about that. Good. Love that. I'm also on X at Tommy Thornton, but I've locked my account because I don't like the spam bots. I've been getting a lot of people doing imitations of me. You know, they changed my name to Andrew Horowitz with an L at the end or something like that. Nobody knows. And it's an imposter. And then they start talking to all my people about cryptocurrency. Yeah, I've had hundreds of those. And actually, I've had I've had people reach out to me and say, are you going to refund me for this this trade that I did?

1:04:03And I said, who are you? And he said, I was in your discord. And I'm like, I don't have a Discord. And there's a lot of scammers out there. And unfortunately, Elon hasn't cleaned up the mess that Twitter was. And now it seems to be even worse. All right, buddy. Have a good day. I'll see you soon. Take care. Thanks. That's it. That's a wrap. Thanks so much for being here. I'll see you again next week. This podcast is intended for informational purposes only. and does not constitute personalized investment advice. Investing involves risk, including the possible loss of principal and past performance is not indicative of future results.

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