Giffen Goods

Maybe you have heard of Giffen goods, which have an upward-sloping demand curve—the more expensive something is, the more people want it. Maybe an ultra-luxury watch falls into this category, or a supercar. Or stocks! Or bonds!

Nobody wants cheap stocks. If you see a stock whose charts has gone from the upper left to the lower right, nobody wants it—there must be something wrong with it!

Nike falls into this category. It has imploded, for a bunch of reasons.

The big question in the markets is whether Nike will figure it out and restore the brand to its former greatness or if it is doomed to mediocrity. Now, I like buying cheap stocks, and I like buying things that nobody wants, but I don’t get the impression that Nike’s management team has got the joke yet.

In other words, it could work, but it will take a lot of patience. Turnarounds are rare. Larry Culp at GE engineered a massive turnaround, but the same doofs are in charge at Nike. Anyway, I am getting off topic.

Trend Following

In general, all financial assets are Giffen goods, to a certain extent. The more the price goes up, the more people want them. Nobody wanted Nvidia in 2022 after it went down for the dirtnap with a 75% drawdown. Everyone wants it now, at a $5 trillion market cap. For some reason, everyone wanted sovereign bonds when they had negative yields. Nobody wants them now, with yields approaching five and six percent (there must be something wrong with them).

Having said all that, there has been some research done on this, and studies have found that you actually do better buying the upper right-hand corner of the chart than the lower right-hand corner. Trend following works, and turnarounds are rare. Things that are good keep getting better, and things that are bad keep getting worse. 

There are exceptions, of course. But value investing is a thing, and I would say that if you are a value investor, things look pretty good right now. The funny thing about bonds is that people give me ____ all the time for being a pessimist, but by buying bonds, you are actually being an optimist.  You are saying that inflation is going to work out for the best, along with the debt. Maybe you are also saying that the stock market is going to collapse.

But these are not intractable problems. As Winston Churchill said, Americans can be counted upon to do the right thing after exhausting all other possibilities. And as I said, if you wait until the last minute, it only takes a minute.

Coincident Indicators

Someone was complaining on X the other day that CNBC trots out the same permabulls all the time. I have two people in mind, but I am not going to name names, because I always get in trouble when I do that. Just imagine permabulls. 

The comment I made was that if the market went down 30%, these guys would no longer be on the air. They would have the permabears on the air, or at least people who were a little more thoughtful about risk. Maybe me! Probably not. 

Remember Nouriel Roubini in 2009? He was on CNBC all the time, with his unsmiling visage, telling everyone that things were going to get worse. And for a while, they sure did. That is the nature of media—they’re coincident indicators. They report on what’s hot right now. 

I called my mom the other day and the first thing she told me was about diesel prices. She doesn’t have a diesel car. Now, where did she hear that? She doesn’t have a Bloomberg terminal. Probably diesel prices went up to the point where Fox News or Fox Business started to pay attention to it, and now it is in the news, and it is in our collective consciousness. Which means that diesel prices are probably close to peaking. There is a moral panic about it, and you always want to short moral panics. This doesn’t pertain to Giffen goods, but as a general rule, every shortage is followed by a glut.

I went on Yahoo! Finance TV to promote THE AWESOME PORTFOLIO a few weeks ago, and they asked me about Lululemon, which had just crashed. Which is ludicrous because I am a macro guy, and I probably don’t have any opinions on Lululemon. But since you asked! 

Lululemon was a growth stock, and it stopped growing. It is an apparel retailer—nothing special—but for a while, the stock was a Giffen good. It’s not mispriced now; it was mispriced three years ago. I wanted to short it but couldn’t stomach the volatility. Between Nike and Lululemon, I am more bullish on Nike because the brand is so valuable. The swoosh alone is probably worth more than the current market cap. But I don’t have the patience for either.

Nothing Is Cheap Today

Warren Buffett is in the news because he just retired as chairman of Berkshire Hathaway at the age of 96. How lazy can you get? Anyway, Buffett’s greatest trade of all time was Apple. Now you might say, Buffett is a value investor, and he bought a growth stock, so what gives? If you look at a chart of Apple’s P/E since inception, it looks like a giant U. It was very cheap from 2010–2014, like a single-digit P/E. He made, what, 10X on that investment? 

Yes, Apple is a tech and growth stock, but for a period of time, you could get it for very cheap. And Buffett did. And Apple has grown a lot since then, and there has been a lot of valuation expansion, so he is selling it. The problem, of course, is that today nothing is cheap. At all.

Poll

Dumbest Thing I Saw This Week

You probably know how I feel about private equity. If not, we’ve got a whole site dedicated to it: ShortPrivateEquity.com.

This brings me no joy as a Yankees fan:

Jared Dillian, MFA

P.S. I recorded a new mix a couple of weeks ago called “The Bondage of Self.” High-energy fun. You will be typing 200 words a minute while you listen to it.

Also, THE AWESOME PORTFOLIO has been out for two weeks now, and everyone loves it. Zero negative feedback. Here’s a bold statement for you: You can fire your financial advisor if you read it! No kidding! Buy it here and see for yourself.