Doug Kass' Code Red; Retail Investors Power the Trading Wave; Tip my daughter generously at Urban Roast; Day 2 in Bukhara; I'm investing in Uzbekistan
1) My friend Doug Kass of Seabreeze Partners is a veteran investor with great instincts, so I always listen to him carefully.
I continue to think his bearishness is a little early in light of the unprecedented fiscal and monetary stimulus that has led to the "mother of all economic booms," but it's worth reflecting on his latest warning:
Code Red
- The market is in chaos and more unstable than many think, but most are ignoring it
- The market averages are holding on by a thread
- The supercharged Fed put is about to expire
- Stocks are more overvalued relative to "fair market value" than at any time in recent history
- Market participants have been bamboozled into buying speculative gewgaws with little value (read: GameStop (GME), AMC Entertainment (AMC), Canaan (CAN), Marathon Digital (MARA), Plug Power (PLUG), etc.)
Breadth has deteriorated markedly and many other technical indicators are signaling trouble ahead. Many talking heads in the business media, investment "communities" (such as Reddit, WallStreetBets and Robinhooders) have sold traders and investors a bill of goods by pushing and sanctioning speculative gewgaws (read: SPACs – loaded with unconscionable fees and questionable acquisition strategies that follow high fees – and collateral cryptocurrency plays) because they briefly were dramatically outperformers.
When I was critical and shorted many of these stocks (some that are now down 75% in value), I was ridiculed and criticized. A common refrain: "What, Dougie, these stocks are flying and you obviously don't want to make money!" Most have swept these idiotic trades under the rug, but what is really scary is that they still think they were right.
Hell, even CEOs such as AMC's Adam Aron have been fooled into suboptimal capital allocation strategies! He should be fired from his job for kowtowing to a bunch of day traders (the daily volume in AMC's shares routinely trades near or in excess to its float) and those who supported him should admit their big mistake (they will not).
With their demise, traders and investors (and the entire business media community) have glommed on to Microsoft (MSFT) and FAANG, taking those stocks arguably to inflated levels with little margin of safety. Even bona fide antitrust issues (from both Republicans and Democrats) and threats have been entirely dismissed at this point.
The outperformance of these great franchises pose a potential threat to investors in them, for should a broader market decline occur they will become ATMs and could drop swiftly despite the protestations of many who are long them.
Remember, there is a pattern historically of the first becoming the last. In all likelihood we will see that pattern develop again, especially if interest rates gap higher from current levels.
Powell Poops
- Beware of false prophets
- Normalization of policy may prove to be market unfriendly
The Federal Reserve and our undisciplined political leaders on both sides of the pew have produced a potentially lethal and liquid cocktail that has lifted equities, fixed income, art, digital currencies and real estate to levels that are unsustainable and vulnerable.
The Fed is now behind the curve and its hastening readjustment to tighter policy likely lies ahead, and with it will be a hard hit to the markets at a time in which no one anticipates a large market drawdown.
The supercharged Fed put is about to expire...
On Wednesday I wrote:
It is important to note that while I believe the S&P 500 Index is measurably overpriced, I am still relatively small in exposure as measured in both gross and net terms.
This reflects (1) my respect for the unrelenting market strength, (2) my attempt to be more reactionary than anticipatory, and (3) a view that there is some possibility of a blow-off top at some point.
I currently think the highest probability scenario is that we are in a relatively narrow trading range with a bias toward profit taking (call it -3% to -5%).
Bull markets die hard.
But, given the ongoing market chaos, the remarkable narrowing of leadership and other technical conditions I am changing my highest probability scenario of a 3% to 5% market decline to a 5% to 10% decline.
Bottom Line
"Market vision is always 20/20 when viewed in the rear view mirror."
– Warren BuffettAs Bob Farrell teaches us, there are no new eras or paradigms and excesses are never permanent.
Over history, markets reflect the balance between risk and reward. But it seems that we are in this new-world belief where risk doesn't exist and the rewards are easy to be had.
I am not short enough.
Code Red.
2) Here's another warning flag: Retail Investors Power the Trading Wave With Record Cash Inflows. Excerpt:
Retail investors keep pouring money into markets, even as many of their favorite meme stocks and cryptocurrencies have languished.
In June, so-called retail investors bought nearly $28 billion of stocks and exchange-traded funds on a net basis, according to data from Vanda Research's VandaTrack, the highest monthly amount deployed since at least 2014. That even trumped the amount retail traders spent in January during the first meme-stock frenzy.
The activity underscores the enduring influence of ordinary investors in markets. When the COVID-19 pandemic ushered in a wave of first-time traders, many market observers suspected these investors would retreat when the economy reopened.
Instead, individual investors have grown in number: More than 10 million new brokerage accounts are estimated to have been opened in the first half of this year, according to JMP Securities. That is around the total for all of 2020.
Retail investors' enthusiasm is in contrast to professional money managers' growing unease about the market's outlook. This has risen as markets on the surface appear placid, but volatility has grown around individual stocks.
3) If you live in the Washington, D.C. area and want a good meal with great service, be sure to check out Urban Roast.
My middle daughter Emily, who just graduated from Wake Forest and started working as a retail sales rep at Nestlé, is working there part-time as a server. She'll be there on Sunday, so if you go, be sure to ask for her – and tip generously!
4) As you read this, I'm somewhere over the Atlantic, flying home from Zurich.
Yesterday, Farrukh and I spent our second day in Bukhara before catching the 3:50 p.m. high-speed train back to Tashkent. We arrived at 7:45 p.m., which gave me a few hours before my 2:40 a.m. flight to Istanbul, then Zurich (which I toured a bit on a seven-hour layover), and home to Newark, landing at 8:10 p.m. tonight.
Here are five of my favorite pictures from yesterday:
I posted these pictures – and 15 more, as well as descriptions of them – on Facebook here.
A few final thoughts and answers to questions I've received about Uzbekistan:
• The country has a new stock market, albeit a small ($6 billion in total market cap, most of which is held by the government, which is privatizing its stake in many companies) and thinly traded one.
I had an interesting 90-minute meeting with an American named Scott Osheroff, who runs a small ($16 million) hedge fund called the Asia Frontier Capital Uzbekistan Fund. He makes a good case that Uzbekistan's economic future is bright and compares it to Vietnam years ago. You can see his 36-page investor presentation slide deck here, watch him present it during a Zoom webinar here, and e-mail him if you have questions or want to learn more at uzbekistan@asiafrontiercapital.com.
I'm going to invest $25,000 in the fund (the minimum for U.S. investors) because I think it'll do well and it's a good way to keep an eye on the country and region.
• There may be a bigger gap here between the modernity of the country and the prices for things than in any country I've ever been (72 and counting)...
This is a well-developed country – universal education, health care, electricity, water and sewer, paved roads, decent housing, everyone has a phone, no visible trash, slums or extreme poverty, etc. – yet things are insanely cheap.
A big meal at a nice restaurant, including salad/appetizer and a Coke, is $5 per person... a 25-minute taxi ride: $3... a four-hour high-speed train ride: $20... the subway: $0.14... a big piece of bread: $0.25... a bottle of Coke: $0.50... a visit to a doctor in a private clinic: $7... three prescription medications: $12.
This chart from Scott Osheroff's presentation shows how low the monthly minimum wage here is, relative to some nearby countries:
• As a result of the low wages here, an estimated 10 million Uzbeks (beyond the 35 million who live here) work in other countries, the majority in Russia, doing manual labor like construction, sending money back to support their families, and returning every couple of years. According to Farrukh, Uzbeks have a good reputation for being very strong and hard workers.
• The reason you see few people in my photos is that – sadly for Uzbekistan but great for me – there are almost no tourists in the country right now due to the pandemic.
• Speaking of which, officially, Uzbekistan has had only 785 COVID-19 deaths, but this is nonsense.
According to one friend, there have been 20,000 excess deaths here since the beginning of the pandemic, which, in a country of 35 million, would be equal to around 200,000 in the U.S. – meaning about one-third as many deaths. There is a national mask mandate, but it's widely ignored (on one train ride, only two of the 18 people I could see were wearing a mask, and I've only worn my mask a few times in the five days I've been here).
At various times when COVID-19 has spiked (like right now), the government has implemented policies like closing mosques and other mass gatherings and requiring restaurants to close by 8 p.m., but in general, it seems to have decided that the country can't afford to do any meaningful lockdowns (it, correctly I think, fears social unrest more than COVID-19 deaths).
In light of this, a) Uzbekistan was one of only three countries in all of Europe and Asia whose economy grew in 2020 (albeit by a depressed 1%)... and b) I can't explain why Uzbekistan hasn't gotten walloped like, say, Brazil, Peru, and Kenya. The good news is that a Chinese vaccine is rapidly becoming widely available.
• Jews have been in Central Asia since the 4th century, and there was a particularly large and vibrant community in Bukhara.
Like so many other Jewish communities, the Bukharian Jews had big ups and downs over the centuries, sometimes allowed the freedom to flourish and prosper yet other times persecuted. According to a good write-up on Wikipedia, there are 320,000 Bukharian Jews in the world today, but almost none remain here. When the Soviets loosened restrictions on immigration beginning in 1972, they left, mainly to Israel (160,000) and the U.S. (120,000), two-thirds in NYC. According to Wikipedia:
In Forest Hills, Queens, 108th Street, often referred to as "Bukharan Broadway" or "Bukharian Broadway," is filled with Bukharan restaurants and gift shops. Furthermore, Forest Hills is nicknamed "Bukharlem" due to the majority of the population being Bukharian. They have formed a tight-knit enclave in this area that was once primarily inhabited by Ashkenazi Jews.
• The government doesn't mess around with Islamic fundamentalism – a huge risk in light of what's going on in nearby countries like Pakistan and with the Taliban in Afghanistan. It monitors mosques and Imams closely, and a central "Muslim Board" scripts what Imams preach every day in every mosque in the country.
• Soccer is the most popular sport here, but this isn't a soccer-mad country like so many others. Since it began competing in the Olympics as an independent nation in 1994, Uzbekistan has won 32 medals (31 summer and one winter), led by 14 in boxing, seven in wrestling, and six in judo.
• Here are three good articles aimed at those thinking of visiting Uzbekistan:
○ 12 Days on the Most Storied Highway of Them All: The Silk Road (New York Times)
○ The unseen treasures of Uzbekistan's silk road (Financial Times)
○ The superfast silk road in Uzbekistan (Financial Times)
• This is a very safe, low-crime country. Tourists can walk around at night, and I met a young British woman who was traveling around the country by herself without any problems. Farrukh said a typical sentence for murder is four years, 10 for stealing a car, and life for drugs.
• Nobody comes here for the cuisine (and vegetarians are going to have trouble), but I like rice pilaf with meat (a traditional dish called plov), meat samosas, and shish kebobs, so I was fine!
• The cars here remind me of what Henry Ford once said: "You can have any color car you want as long as it's black." I'd estimate that half the cars are white Chevys, thanks to two Chevy plants in the country.
• Bring a lot of cash (I brought a bit over $2,000, mostly $100 bills plus plenty of smaller ones). Most tourist places accept credit cards and there are lots of ATMs, but you get a better rate if you convert cash, and you'll get a lower price for expensive things like a guide, rug, knife (I paid $275 for an ornate hunting knife made of Damascus steel – a gift for a friend), etc. Believe it or not, it's important to bring crisp, new $100 bills, as worn ones are worth perhaps 5% less...
• My Verizon phone had good 4G coverage in the three cities I visited (not so much on the train between them), so I could use it normally for a $10/day charge, and every hotel had decent Wi-Fi.
• If you come to Uzbekistan (or anywhere in this region), I strongly suggest hiring a guide, especially if you're traveling alone, because it will greatly decrease your stress level and increase your learning and enjoyment.
The level of English-speaking is mixed, and signage – even at the major attractions – is poor. And guides don't cost much. My three-day trip, including a 24/7 guide who spoke excellent English (Farrukh), high-speed train, local cars, two nights of hotels, and admission to all sites (basically everything except lunches and dinners), with tip, was $900.
I highly recommend Farrukh – not just for guiding but for everything else like hotel reservations, and not just in Uzbekistan, as he guides in nearby countries as well. You can reach him at ibodullaev.citizentravel@gmail.com or +998 (99) 735 30 00 (cell/WhatsApp).
Best regards,
Whitney