Well, we’ve done our purge!
Like an Agatha Christie novel, stocks fell one by one out of our Long-Term Portfolio (LTP) last week – leaving us with about 40 longs and well over 80% CASH ($4M+)!!! after a fantastic two years – where we started with $500,000 in June of 2024. We also have $1.4M worth of downside protection for what is now about $1M in longs – which means we certainly want to find $400,000 worth of stocks that are worth protecting, right?
We’ve already added 4 Top Trade Alerts this month: TAP, MCD, TMUS and ACN – that will give you an idea of the kind of stocks we are looking for heading into 2027 – more bolts and less nuts!
The “nuts” are indeed in the Nasdaq, which has experienced it’s own little correction this month – falling 7.2% from 31,250 to test 29,000 on Friday and 28,000 is NOT out of the question – depending on how early tech earnings go:
But we don’t care about the Nasdaq – as it’s not our index anymore. In fact, the sell-off barely touched our long portfolios because those are NOT The stocks we’ve been investing in lately. And yes, TMUS is on the Nasdaq – but you know what I mean! DON’T make bad decisions just because you want to LOOK consistent, right?
The table below illustrates how moving away from the Magnificent 7 shifts the economic picture from “bubbly tech speculation” to “stable economic production“:
| Benchmark |
Trailing P/E Ratio |
What It Actually Measures |
Economic Interpretation |
| Nasdaq 100 |
31.25 |
Top 100 non-financial Nasdaq giants (dominated by Big Tech). |
High speculation on future AI and tech infrastructure growth. |
| S&P 500 |
25.93 |
The 500 largest US companies (includes the Mag 7 heavily). |
Heavily skewed upward by a few top-heavy digital monopolies. |
| NYSE Composite |
21.40 |
All common stocks on the NYSE. Zero Mag 7 exposure. |
The Real Economy. Reflects manufacturing, banking, energy and transportation. |
Are Nasdaq stocks worth 50% more (in multiples) than NYSE stocks? That’s a false dichotomy as the real question is are ANY stocks worth more than a TBill – which has a US Government-backed GUARANTEED annual return of over 5%. I wouldn’t call it “risk-free” as it costs about 0.4% ANNUALLY to insure against loss on your 10-year note because Uncle Sam is a bad, Bad boy – who drinks heavily and spends a lot of time at the track…
The NYSE’s 21.4x p/e multiple means it will take the average NYSE company 21.4 YEARS to EARN (the /e) the amount of money you are paying for a share (the p). That translates to a (100/21.4 =) 4.67% rate of return – less the cost of hedging, of course – THAT is the way we insure against stock risk…
The Nasdaq 100s 31.25 p/e ratio means you are getting effectively an uninsured 3.2% rate of return BUT THAT IS DECEPTIVE because it includes this year’s UNUSUAL explosive growth and we’re right back to that extrapolation joke we discussed in last week’s Live Trading Webinar:
That is why we prefer the Shiller CAPE Ratio, which smooths out earnings over the past 10 years (adjusted for inflation) but that model also has it’s flaws as it diminishes the current trend of Explosive Tech Earnings BUT, as an Investor and not a Trader – I much prefer to error on the side of CAUTION!
In other words, if the prior 9 years averaged 10% earnings growth, that’s 90% but if this year earnings grew 50%, your new average is ((90 + 50)/10) = 14% – that’s a 40% difference to your AVERAGE 10-year earnings caused by one exceptional year that is HIGHLY UNLIKELY or even MATHEMATICALLY IMPOSSIBLE to repeat itself.
THAT is where the markets are now…
THAT is why we have gone to CASH!!!
If all they are offering you are contracts that predict record earnings growth will be the norm for the next 10 years – you DON’T have to buy! This is the psychological problem Traders run into – because they are here to TRADE and, if they are not trading – then what are they?
That trap springs tighter if the Trader only makes money by trading – in which case a day without trading is a day without income, right? INVESTORS, on the other hand, make money when their stocks grind higher over long periods of time and PSW INVESTORS learn to make INCOMES while we are waiting, PATIENTLY, for our FUNDAMENTAL INVESTMENTS to pay off by SELLING options premiums to the IMPATIENT Traders – who are trying to circumvent the system.
So that’s our game plan as we dive into Q3 Earnings Reports, next week’s FOMC Meeting and, of course, the US Elections – just two week’s from Tuesday!
The Economic Calendar is kind of sparse this week with Housing Data, the Atlanta Fed Wednesday, Leading Indicators and the KC Fed Thursday and PMI along with Consumer Sentiment on Friday. NO Fed Speak (quiet period ahead of their meeting) and a 20-Year Bond Auction on Wednesday (1pm) is the only long one other than 5-Year TIPS on Thursday but, other than that… yawn…
So it is ALL about Earnings this week and we’ve got PLENTY of those, including 330x earnings Tesla (TSLA) Wednesday morning. Their forward p/e is “only” 156 based on selling flying cars and we WERE going to make fun of their demo last week and pull it apart technically but it was SUCH A FARCE that RJO and I decided it would be beating a dead horse…
And SPCX is the other half of Elon’s Trillion-Dollar Empire and they report tomorrow against their $2Tn (at $150) market cap with NO profits at all AND not really and prospects for profits next year either.
This will be a great opportunity to see if Traders are sobering up after last week but don’t count on it. As PT Barnum once said – there’s a sucker born every minute but the population of the Earth was just 1Bn at the time and now it’s over 8Bn – 8 suckers a minute is enough to float Elon Musk for another quarter or two….
