Submitted by Eric Peters, CIO of One River Asset Management, as excerpted from his latest Weekend Notes
“Every market has its generals,” said the CIO, atop the hill, surveying the battlefield. “Bull markets march onward, upward until their leaders die,” he said, lowering his binoculars, smoke rising from the valley floor.
Banks led the last great bull market. Fueled by reckless lending and leverage, loose regulation, moral hazard, and the wondrous illusion of boundless riches that accompany all reflexive markets, these generals charged ever upward, looting, pillaging. Leading the troops. Until they didn’t.
The S&P 500 peaked in October 2007, then fell 58%. When it bottomed seventeen months later in March 2009, Citigroup stock lay in the dust, trampled, mangled, mutilated beyond all recognition.
Citi’s stock price had collapsed 98.3% from its 2007 highs. It never really recovered. Bank of America plunged 95%. Morgan Stanley fell 91%. Goldman 82%. JP Morgan 72%.
“I suspected that regulation would be the death of the current market’s technology generals,” he said, turning to his table, unrolling a map. “I was right.”
From the 2009 lows through the recent highs, the S&P 500 advanced 331%. In that drive, Facebook rallied 413% (from its 2013 IPO), Amazon surged 2102%, Apple 1123%, Netflix 5349%, and Google 586%.
“The generals are dead.” From recent highs, Facebook has stumbled 18%, Amazon 8%, Apple 10%, Netflix 10%, Google 14%.
“Trading market tops is difficult,” he explained, “That’s where we are now.” With his finger, he traced the advances and retreats of the S&P 500 since WWII. Nearly every top was a volatile series of skirmishes lasting 6-18mths, before the real decline. The notable exception being 1987.
“The generals are dead, but the economy remains strong.” Employment, wages, profits too. “The bull case is all backward looking. It describes why it makes sense to stay invested. But it’s intellectually bankrupt,” he said, repositioning his troops on the map. “You get paid for the future, not the past.”
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