MAGGIE LAKE: Hello, welcome to the Real Vision Daily Briefing. It's Tuesday, December 14th, 2021. I'm Maggie Lake, here with Thomas Thornton, the founder of Hedge Fund Telemetry. Tommy, great to see you.
TOM THORNTON: You called me Thomas. That's good. My mom called me--
MAGGIE LAKE: I felt like serious today.
TOM THORNTON: Okay. I'm very serious today, no jokes.
MAGGIE LAKE: It does feel a little bit like that for some people watching the market because everyone's waiting for some shoe to drop. We had another hot inflation reading, PPI, which measures inflation at the wholesale level, 9.6 year over year, I think that was a record annual increase coming on day one of the Fed meeting that everyone's been waiting for. And we saw tech stocks get hit again today. 10 Year Treasury creeping a little higher. It's still holding pretty steady around 1.43%, 1.44%. But what do you make of that selloff in technology?
TOM THORNTON: Well, it was just bound to happen because we've had these five stocks leading the market higher. And let me see if I can remember them all. It's of course, Apple, Microsoft, Nvidia, Tesla, Google, and this one. Those, according to David Costin at Goldman Sachs, represent 51% of the total return, just five stocks in the S&P this year, so much higher in the NDX obviously, because that's what the NDX is.
But I've been getting some demark indications or some signals, exhaustion signals, and I run several custom charts with indices. I have one with Apple and Microsoft alone. And yesterday, we had some upside exhaustion signals, and lo and behold, they reversed. That's what they're supposed to do. And they do it quite often. Sometimes they don't. And when they don't, it's actually a good sign that the trend is going to continue.
But right now, I think that we have a very hot inflation number with the PPI, which those are what the producers are paying for goods and materials that they're going to have to pass through to whoever's buying them through the retailers, and that's going to be a trick. To me, inflation's here. I think Jay Powell saying it's not transitory or they retired that term, yeah, you're right, Jay, it's not transitory.
But it's going to be a little bit more evident going into the next couple months of what's happening. And that PPI I think is going to hit margins and earnings, corporate earnings, a little harder in Q1.
MAGGIE LAKE: Yeah. And do you think that because they're not going to be able to pass it along? Or is it just the entire thing, even if they can pass them along, some of these increases we've seen, and by the way, this is coming, so this lags a little bit we know, but we know already that China's shut some factories in an area where they've-- we were still dealing with these variants so it drags out that whole supply chain issue, doesn't it?
TOM THORNTON: Yeah, it actually does. And I think the supply chain is going to take a while, I think everybody's been saying that. And what I worry about going into maybe mid-2022 is that demand is going to start to decline, because prices go up. And then the consumer says, you know what, I'm not going to go out to dinner, I'm not going to buy that item. I'm going to hold back because I can't afford it. Then you're going to start to see the commodity prices and other inflationary issues start to come down. That may be mid-2022. I'm working on my year of 2022, all the predictions, and I have it in my little book here.
MAGGIE LAKE: Oh, I love it. Wait, we're going to have to get that--
TOM THORNTON: Things that needed to get done but probably won't. You see that? I'm working on it.
MAGGIE LAKE: Awesome. I want to hear about that when you get it done. Let's go back to some of those tech names you were looking. We talked about the supply chain. We know Apple's had some issues with many, especially companies who have consumer facing products, but the fact that we're seeing this selling in tech, is it linked to fundamentals? Is it linked to inflation and concerns about higher rates? Or is it the charts telling you some? Have we seen this building for a multitude of reasons, including the type of people who've been playing in this? All of the above.
TOM THORNTON: The bottom line with Apple is they've come out a few times and through the Nikkei and other forums where they try to leak out bad news saying that they're going to have a fewer iPhone sales and the market didn't care. There's been even a story about demand issues that hit the suppliers in Asia. I have a couple Asia clients who are tech analysts and write in ground zero for technology. And they've said, no, Apple still looks really strong.
But I think people are buying the stock, because it works. It's easy to understand. It's a great company, they've got a buyback that I'm sure that whoever's doing it has their elbow on the buy button, they just egged and they've got lots of cash. But here's the problem. It's trading well over 30 times earnings, which is historically very, very high. And with all these $200 price targets, I think some-- [?] upgraded them today and put 215 on their price target.
That's at 35 times earnings. And to me, I think it's too rich. I'm not going to pay that for Apple. I have a little apple and some accounts that are long term. But I'm not at all inclined to buy the stock here at this price. It makes no sense. And I think it's ripe for a pullback and a disappointment come earnings.
MAGGIE LAKE: You bring up a good point, because with so many of these mega cap tech names, so many people are conditioned to buy the dip, because it has worked. And let's not forget, there's nowhere else to go. There isn't anything else, there is no alternative, whatever you want to call it. Is that trade over?
TOM THORNTON: Well, let's remember that the majority, like I mentioned, there are a lot of stocks down significantly from their highs and I'm looking, I can run my screen so I could--
MAGGIE LAKE: Actually, we should talk about that. Because I think whenever we talk about-- and maybe we want to talk about the S&P broadly, whenever we talk about that, people say like, oh, it's trading off. But then everyone turns around and said, well, remember, it's really close to its record high still, so it feels like it's been terrible. But then when we saw that pullback earlier, it drifted back up to record highs again. What do we need to know about what's going on underneath the market headline? Does it look different if you move away from just looking at the S&P 500 headline?
TOM THORNTON: Yeah. I'm a stock picker and this has been a market that with these mega cap names that have hidden a lot of the underlying weakness in the market. If you look at the Russell, it's near the low of-- right there, it's at the low of the range almost for the whole year. And I only have six months on there.
But that also has a downside DeMark countdown, a sequential countdown on day six. What makes me a little concern here with the Russell is that when you have this countdown, not near 13, and you're near the support levels, this thing could go and break below that 210 level on the Russell and that gives me a bit of an eerie feeling heading into the end of the year. And my note today was about, you don't need to be a hero. And there's not a lot of people that are on desks of managing a pad of a portfolio or mutual fund or hedge fund that are saying, hey, let's go out and take a lot of risk right now mid-December, we've had a good year.
Nobody really needs to squeeze another 1% to 2% out if their year has been good. And that's why hedge funds derisked and took down a lot of exposure in the last month. It's caused a bit of a whip up and down but hey, shorts had been winning lately. And we were talking about the Goldman Sachs most shorted basket and this is within their prime brokerage the number of the stocks that are most shorted.
And that's down in the last month 20%. 20%, most shorted, that's pretty good. Down 9% in the last five days. I'm a long/short manager. I like to find dispersion and this has been great for that environment. It's been fabulous.
MAGGIE LAKE: Does it look like there's still downside in those names, like are you continuing to short those names? Do you feel like that move has happened?
TOM THORNTON: What happened recently at the previous low that we just had, I put out a note saying we're at critical levels, and it was either make or break.
MAGGIE LAKE: And what do we look at here, the S&P 500? Are we looking at Russell?
TOM THORNTON: You can look at the Russell, the S&P, the NASDAQ, Qs, whatever. Everything was basically at a level, and sentiment and some demark indicators, everything was at a level where I said, hey, if this goes a little further south, we're in trouble. But we bounced, and many of those indices made lower high bounces, which is a concern. Lower high bounces trap people and now, like the Russell, I think there are a lot of people that bought that bounce, there was a lot of volume and now they may start to get underwater.
MAGGIE LAKE: I want to come back and talk about some, we have a question, I want to talk about some individual names. But it's interesting that we have to pay attention to the relationship on what's happening here with the inflation, not only in regard to the Fed, but as you mentioned before, in terms of margins, and Chris Alexander spoke with-- and this interview is out today, with Steve Clapham about stock performance in an inflationary environment, let's have a listen to what they had to say.
STEVE CLAPHAM: I believe there's been a high amount of inflation. I know the statistics don't tell you that, but actually if I look at my outgoings, things like, what do I spend money on? I spend money on school fees. School fees have--
CHRIS ALEXANDER: I don't have anything to say about that, everybody knows that.
STEVE CLAPHAM: Health insurance, medical insurance, only gone up. House insurance. All the things that I spend a lot of money on, they've all been rising. I think there's been inflation in the system, it just hasn't really come out in the statistics.
CHRIS ALEXANDER: Looking forward two years, what's your base case?
STEVE CLAPHAM: Honestly, I'm not in the business of macro forecasting and I just try and buy stocks that look like they're going to be rerated. I have a macro framework in mind and so when I'm looking at stocks, I'm thinking, okay, I don't know whether inflation is going to be 4% or 5%, 6%, 8%. All of these are plausible. 2% I think is probably less likely. What do I want? I want companies which have pricing power, if you've got the ability to pass the costs on.
And that's the only thing that matters because if you don't have a pricing power, you're going to get screwed. Your margins are going to fall and margins start at very, very elevated levels. You either want a business in which they're not susceptible to those cost pressures, very rare to find any, or you want companies that have pricing power.
MAGGIE LAKE: It's interesting. By the way, that full interview is available on Essential, Plus and Pro tiers and it dropped today. Check it out. It's interesting, Tommy, I feel like for a while, people are broadly looking at their shoulder, the idea of having to look at the fundamentals of individual companies and decide whether they have pricing power. I don't know that everyone's been doing that due diligence in that same way for a while because you really haven't had to. Do we need to start doing that more? We should have been doing it all along. But is this going to become much more of an individual stock story as opposed to broad index, broad sector type of story?
TOM THORNTON: Well, let's go back to Apple, Apple's had pretty good pricing power, and they've been able to raise prices moderately over the years and people keep buying their products. And I think that's one of my favorite pricing power stories out there. He talks about health care. Yep, health care companies can raise prices, because insurance companies will continue to pay and insurance companies raise prices on the consumer because the consumer has to have it. Yeah, I agree. I'm 100% agreeing on pricing power.
MAGGIE LAKE: We have a question from Anthony S saying, can you discuss, given the fact that shorts have been winning, we look like we're in an environment where it's going to be a little dicey for stocks. Can you discuss stocks that you'd be looking at in the event of a larger drawdown? I guess should establish if there is going to be a larger drawdown, discuss stocks we should be looking at.
TOM THORNTON: Okay, well, I have a whole portfolio of stocks that I am short, I'm still short DoorDash. I think that one has, talking about no pricing power. That one still has vulnerability on the downside. I'm short, Adobe. They report earnings this week, and the stock just fell out of bed, was downgraded and looks extremely over extended. And they have a similar product and not everything but Adobe I think is a great company.
But like DocuSign, and DocuSign came out, whipped earnings and the stock was murdered. And that could be possibly something that could happen as well, because Adobe has a bit of a sign online type of fill out your PDF thing. That could be an issue to watch and it's so extended out there, and we did have some DeMark exhaustion 13 on the exact high, and 680.80 is where I'm short.
I think, look, when you're looking for good shorts in the market, avoid the obvious, and I occasionally will go for the obvious and I'm short Tesla but that's a whole another story. But you don't want to necessarily short the meme stocks here that just you can get run over if they bounce and get crazy. You want to be looking for stocks that are breaking down that have a lot of overhead supply of people that bought higher, that actually is Tesla, and companies that have exhaustion signals and that are over loved, and also companies that don't have a higher amount of short interest.
And by the way, Tesla does not have a high amount of short interest. It's actually the lowest it's ever been in its history. That's one of the reasons why I added more to my Tesla short last week. And here's a pro tip, don't ever talk about Tesla that you're shorting it on Twitter, because people will come out of the woodwork.
MAGGIE LAKE: We should call you Teflon Tommy because honestly, the fact that you're brave enough to engage at all, because so many people and especially I know there was a whole back and forth after you got Time Magazine Person of the Year, we actually have to hold off on talking about Tesla because that's all I end up talking about, because of all the people that love Tommy about this.
TOM THORNTON: It's a chaos, it is total chaos.
MAGGIE LAKE: It is, but I applaud you for doing the work to have a two-way conversation about it.
TOM THORNTON: I will mention a couple other things that I've recently started to short. I started to short some of the homebuilder indices. I have a monitor that's on the side of my page here, and ITB and XHB, which I'm sure these are the highest above the 50-day moving average of all my ETFs. And I look at how far extended they get above the 50-day and I can look at historically how far they typically go.
And my monitor has all the ones that are high above the 50-day gravitate towards the highs and then the lows. Like for example, OIH, oil services is down 8.8% below the 50-day moving average. That was at the top at a point and we did short that and now we're out of those shorts. Look, I think that you can do a lot of good shorting by using technical indicators, somebody rolling their eyes, and you don't need to necessarily go to war with the CEO or be an activist to make money.
I covered AMD and Nvidia today, both 12% gains. And those are great companies. Again, overloved, overhead supply, exhaustion signals breaking down.
MAGGIE LAKE: Yeah, and you have to pay attention. You put these on, you got to really pay attention to all the signals you're saying. It sounds like it's shorter. This is a good question actually. I'm assuming that you have a pretty short time horizon when you're doing this, but when it comes to shorting, how large, small in terms of positions do you take and what determines your exit? How do you know when to get out?
TOM THORNTON: This is a really good question. There's times where I'd like to ride a short from DeMark exhaustion 13 on the top to the exhaustion 13 on the bottom, which by the way, Robinhood has a 13 on the bottom today. And that was my last time I was on, it's down 45%.
MAGGIE LAKE: Last time you were on, you recommended shorting Robinhood.
TOM THORNTON: That one turned out to be extraordinary and occasionally, you get lucky and really have a great return. I'm a big believer in understanding how to weight your own portfolio. And my largest waiting is 5%. That's it. And I usually will start with 2% and if I'm wrong a little bit and I still believe it, I'll add more. Take it to 5%, then I use stops. And I'm often wrong. And if I'm wrong, I cover. I move on, that's part of the game.
But sizing is really, really important and sizing properly based on the asset that you have. You don't want to oversize something when it's really volatile because it'll cause you headaches and indigestion and sleepless nights. You don't need that. You size appropriately for the volatility that the instrument has and that's really important. And as far as covering things, there's a lot of times where I'll look at a shorter term chart and see, maybe look, for example, the NASDAQ today was trying to find a level, the Qs at 384 and S&P at 460.
And both of them had 15-minute timeframe DeMark 13s. I looked at it and said, you know what, I don't mind taking some profits here. Ring the register on stocks that if the market does bounce with the Fed tomorrow, or Friday, or Thursday and Friday, I think that Nvidia, AMD are going to retire, because that's where they'll run those. And they're oversold a little bit, so that's fine. Go on.
MAGGIE LAKE: No, go ahead.
TOM THORNTON: No, I'm just rallying here.
MAGGIE LAKE: This is really important. We have a lot of