I tweeted an alert to members this morning going over the macros. Already our Futures shorts are working as the Dollar comes off the floor at 80.50. As you can see from Dave Fry's NYSI chart, we're not that overbought yet so we can expect a saw-tooth pattern that is typical at this stage of the Spitting Cobra chart that is now evident on all the major indices.

I'm also not going to discuss TSLA, other than to say "I told you so" but, since I've been telling you so for the whole summer, there's no real victory until we're back at the 200 dma ($110), as that's our ultimate downside target. Let's call last night's 10% correction "a good start" and we'll see how well we do on our Jan $120 puts, which we bought 20 of for our Short Term Portfolio at an average of $3.53 and had sunk as low as $2.20 yesterday. I'm guessing $4.50 this morning and we'll look to take half off the table and let the rest ride for a (hopefully) bigger drop.

TSLA is, of course, a good example of a bubble stock and THAT is what we're supposed to be talking about this week.  TSLA was my example of a bubble stock from the morning post yesterday and, during Member Chat in the morning, we discussed why we were short in great detail (and we had just bought 10 more of the Jan $120 puts for $2.50 on Monday). Now TSLA is down about 10% pre-market, despite actually beating official estimates by a penny. When bubbles get stretched this far all it takes is a tiny prick to pop them.

This is why it's NOT okay to chase momentum stocks ever higher.  All it takes is a single down data-point and you can lose 10% overnight.  When the entire market is in a bubble, then you could wake up on any given day and see your whole portfolio off 10% in a flash crash. Then what do you do? Do you sell or do you wait for the bounce?  What if the bounce doesn't come and you lose another 10% and another and another.This is not a paranoid fantasy, we just went through it 5 years ago - how dare you forget!!!

As I said yesterday, the Fed's constant injections of monetary heroin have made us all "comfortably numb" and, in our Chat Room yesterday morning, I noted that it was fun to play that song while watching the idiots on CNBC telling you how great everything is in the World.

We took another look at the classic Daily Show compilation of clips of CNBC telling us how wonderful things were in 2008, while the markets were collapsing all around us.  You should watch this clip at least once a month during a bull market!  

To some extent, the VIX is a "numbness" indicator as complacent investors simply don't see the downside of the markets. (Chart on the right by Davd Fry.)  

As Andy Xie notes:

As the bubble takes hold and yields on property and real interest rates decline, private investment also flows to the United States for higher returns, which pushes up the prices of risk assets, like property, stock and credit, in the United States...  Hot money sort of plays the role of exporting the United States’ monetary policy around the world. The trouble is that the main force behind hot money is speculation. Hot money earns a profit only if it creates a bubble and leaves a hot potato for others to hold. The Fed’s QE may have stimulated emerging economies, which in turn benefited the U.S. economy. It is mainly a bubble phenomenon. When the bubble bursts, the global economy tanks again, leaving behind collateral damage like bad loans.

 

Statistics suggest that the top 5 percent account for most wealth and almost as much in income. The concentration generates instability in circulation among income, demand and production. When income is so concentrated, a few must lend to others to finance demand.

As people pile up debt, they pay interest and, hence, must borrow more for the same demand. As debt piles up, a crisis is inevitable. The crisis leads to monetary stimulus and more bubbles.

A bubble is a zero-sum game at best and, due to a misallocation of resources, a negative-sum game most of the time. While in aggregate, a bubble may be zero sum, significant redistribution occurs in the process. History tells us that wealthy and high-income people are more likely to win than others. Serial bubble-making by central banks only exacerbates inequality, which is fine with the Fed (see "The Creature from Jekyll Island").  

The only reason analysts don't see stocks as highly overvalued already is that they are comparing current bubble values to previous super-bubble values we hit in the late 90s.  That's ridiculous, of course, because companies like Yahoo were trading at 10,000x earnings and, as should be very clear from the fact that the Nasdaq dropped 75% from those levels and, 23 years later, still hasn't fully recovered - indicates how unreal those PRICES (not values) really were.

In the longer-term, HISTORIC view of p/e ratios, 16 is the 50-year average, we're 25% over that already and, as companies like TSLA illustrate - we're already priced for perfection that we may not, ultimately, attain.  Tomorrow we'll take a closer look at some of the broader earnings reports and see if we can find a way to justify these growth expectations.

Meanwhile - be careful out there.  

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