Forewarned is forearmed they say

The end is nigh is the call of the day, as Palantir, one of the hottest AI stocks, saw its earnings beat and guidance remain robust. Despite this, the stock fell during trading hours; earnings were good, but perhaps not enough to justify a forward earnings multiple of 230x earnings. It was also revealed today that Michael Burry, of “The Big Short” fame, has bought put options with a notional value of $187 million on Nvidia stock. Michael Burry’s Scion reported a much larger put option against Palantir, with a notional value of $912 million. Together, the two positions represent 80% of Scion’s portfolio. He definitely has the courage of his convictions. Put options are a geared bet on a market move.

A Bloomberg article reports that Wall Street chief executives said investors should brace for an equity market drop of more than 10% in the next 12 to 24 months, and that such a correction may be a positive development. We would say not only is it possible but probable that we will see a 10% correction in stocks within the next two years. It’s fair to say that, regardless of the current circumstances, market corrections of that magnitude are always possible and usually an opportunity.

The issue is that everyone knows it’s coming at some point, and how one should prepare. It feels like those who make statements about bubbles and crashes are almost willing them to happen, anticipating that opportunity to buy. It’s a bit like holding off on that expensive sweater you really want, hoping it appears in your size in the January sales.

One cannot argue that stocks, particularly those related to AI, are not expensive, and the recent rise has made them even more so. Traditional valuations are right out the window, but as they say, markets remain irrational longer than you can stay solvent.

Yesterday, Rachael Reeves attempted to provide some context for her budget at the end of the month. The speech had the same tone as the employer about to deliver the bad news to the unsuspecting employee: ‘This will hurt me more than it will you, and it obviously does not, I don’t want to do this, but circumstances dictate, not my fault.  Following the press conference, the pound declined, and bonds rallied, suggesting that the market anticipates the budget will not be positive for growth. We have the Bank of England meeting on Thursday. If they leave rates unchanged as expected, the voting will be interesting, and how close it is, will this pre-budget speech encourage some members to vote in favour of a cut?  The genuine concern is that she could return in April for another attempt. Still forewarned is forearmed.