A Crash Is Coming

In this edition of the Alpha Letter, we cover: 

  • Market: What’s the likelihood of a crash?

  • Stocks: Here are the equities to own if you think a crash is coming

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Market

What’s the likelihood that we see a crash this year?

Traders and pundits are always trying to predict a crash. Usually, it’s a futile task. If it was super obvious a crash was imminent, it would have already happened or be in the process of happening. In other words, if there was such a catastrophic event or negative event on the horizon, stocks would be selling off very quickly.

Usually, it’s easy to tune out the cries of perma-bears. I follow several accounts on Twitter that have been predicting a massive crash “within a week or two” every single week for the last 14 months.

I think in many cases, it’s people who panic sold at the bottom last year and didn’t get back in quickly enough to benefit from the furious bull run. Now, their calls for a new crash are just wishful thinking.

However, there are some legitimate bear viewpoints to look at. Probably the most famous and well-regarded is Michael Burry, made famous by The Big Short and his call that the housing market would crash in 2008.

Lately, Burry has taken to Twitter to issue warnings about an upcoming crash.

Here’s a summary of Burry’s tweets, which have seen been deleted:

Burry was bullish on GameStop as far back as 2019 and was one of the few well-known Wall Street figures who supported the GameStop movement as it was getting started.

I think this underscores that Burry isn’t just some “angry suit” who’s rooting against retail investors. I think his concerns come from an objective analysis of the current market.

What’s going on right now is definitely unnatural. Brick and mortar retail stocks going up 10% a day everyday for three weeks is certainly unnatural. It’s great while it lasts (we were calling AMC a buy back in early May when it was around $10) but it won’t last forever.

I think a key takeaway from Burry’s words is that you shouldn’t allow yourself to be convinced that the current market realities are the “new normal”.

AMC will not trade at 46x sales forever, which it closed at on Friday.

Burry’s warning is that when stocks like AMC, GameStop or speculative cryptocurrencies fall from their lofty valuations, it could trigger a painful meltdown across the market. 

I’m not saying this is imminent, but it’s possible. During any gainful bull run, traders collectively convince themselves that the euphoria is the new normal - and it can last for months or years, until it suddenly ends.

We have always advocated for our readers to maintain a long-term outlook. 

Right now, there are 71 cryptocurrencies trading at a market cap greater than $1 billion.

Is that likely to last? 

Most of them have similar or the same goals, while many of them don’t actually have any useful application. Would you feel comfortable holding a token similar to Titan, which collapsed from a $2 billion market cap to zero in just a few hours?

AMC has been a great way to make money. I think it could keep going up, but at the same time it could do the same as GameStop did when it fell from $483 to under $200 as people took profits.

Is that a bet you want to make as an individual investor? 

Personally, I prefer to hold stocks with strong intrinsic value relative to the price I paid.

Stocks

If you’re at all worried that Dr. Burry is correct about a meme stock and crypto crash, here’s where you should be looking to park your money:

  • Dividend Stocks - If we’re headed for a meme stock collapse, growth names will also be affected adversely. Value would likely do much better compared to growth as investors flee high growth stocks for the safety of value. Dividend ETFs like the Vanguard High Dividend Yield ETF (VYM) tend to be more value-oriented. There are also several high-dividend ETFs in the small and mid cap space, like the ProShares Russell 2000 Dividend Growers ETF (SMDV). 

  • Commodities/Real Assets - During a growth crash, companies and investments holding real assets will be a safe haven. Holding real estate, gold, silver, or investing in companies that control or produce commodities like corn, wheat, metal, or lumber will be well-positioned to hold their value. Real estate is one of my favorite investments because of the cash flow potential, but if you don’t have the capital to purchase your own, REITs can do the job. 

    • One REIT I really like is Medical Properties Trust (MPW). It’s yielding 5.65% and has held its value very well during the Pandemic. As for as commercial properties go, medical facilities are one of the few classes of assets that won’t be crushed by the remote work trend. 

    • One important thing to note is that real asset tend to do poorly during a recession, but avoid the common fallacy of thinking that every crash is the same. In 2008, housing was the worst-performing asset class (besides maybe mortgage lenders), but that’s unlikely to be the case during the next crash. If Dr. Burry is correct, speculative growth stocks and cryptocurrency will be the worst-performing assets, while real estate should hold its fundamental value. 

Alpha Thought