Shah Gilani here.
An old Wall Street saying has been flashing in my mind, over and over again, since March…
And, even if you don’t know the phrase itself, you know exactly what I’m talking about.
Stocks take the stairs up and the elevator down.
NOTHING could be more relevant to today’s markets. Especially when searching far and wide for opportunities to profit. When you’re taking the stairs up, you buy call options or go long on stocks. That’s easy.
But on the elevator down – which is what we’re going over today – it’s a little more difficult. But, it can be much, much more lucrative.
Let’s unpack a bit.
Shortly after the Great Recession of 2007-09, the clowns in the Federal Reserve and in Washington decided that to promote growth, they’d slash interest rates to near zero.
This led to an artificial prop-up…
Taking the Stairs Up
It spurred growth in the stock markets. Take a look at the major indices…
Tech is one of the main beneficiaries of “easy money,” but there are hardly any sectors or companies that are truly “safe.”
Notice that the Nasdaq climbed much higher and much faster than the others. It’s no secret that big tech did most of the carrying these past few years. The top five holdings of the S&P 500 are Apple (AAPL), Microsoft (MSFT), Amazon (AMZN), Tesla (TSLA), and Alphabet (GOOG/GOOGL), and they account for nearly a quarter of the entire index.
This pushed up nearly all other 495 companies – and others on top of that.
But this is all on the surface. Investors made a lot of money, maybe you can count yourself among them, but the problems that this created were many.
Companies that barely made anything in sales with very little overhead were able to stay afloat for years. When you don’t have to make payments on interest – even on our level with credit cards or mortgages – it’s easy to borrow money and not think about it. All you need to do is eventually pay back exactly what you borrowed.
But now, that problem is finally coming home to roost.
Taking the Elevator Down
The logic of this is scary (but only for the companies and you if you’re holding one of their stocks).
As interest rates rise, the worst companies – the deadbeats who just got by during this bull market by borrowing money just to keep the doors open – are going to have a tough time keeping their heads above water.
Think about it.
A tiny tech company is making 1%, 2%, 3% in profit margins each quarter. They’re barely keeping any of what they’re selling. And they’re able to keep the doors open solely because they can borrow money without worrying about interest.
As interest rises, their profit margins fall. That 3% margin falls to a negative 3%.
So, what’s next?
Companies can keep their heads above water a short time while doing this. But not for long. For the firms with more complete business plans, it’ll be a slow burn.
But for those without that – the end is close.
These are the leeches.
And the market will get rid of them on its own.
That downward slide is where you come in.
There’s a strategy you can implement today to profit from these companies on each “wave” down. It’ll be a cascading effect, spelling out profit after profit.
Chief Investment Strategist, Money Morning
August 19 2022