How to Invest Alongside Bearish Billionaires

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How to Invest Alongside Bearish Billionaires

There is a conscious effort among stock market bulls to ignore growling stock market bears such as well-known bond fund managers Bill Gross and Jeffrey Gundlach – the latter of whom called the U.S. stock market “dead money.”

But now the rumbling from other bears has grown even louder and cannot be ignored. It is coming from investors who have literally made billions by being the “smartest guys in the room.”

This list of bearish billionaires is growing, and now includes the likes of Stanley Druckenmiller, Sam Zell, and Carl Icahn.

But one man stands out as the most fascinating of these hungry money makers  . . .

George Soros.

The Bear Is Back

For readers unfamiliar with Soros – he has made roughly $25 billion by consistently reading the market right.

Most famously, in 1992, he “broke” the Bank of England. He bet $10 billion worth (through a short sale) that the British pound would have to leave the European Exchange Rate Mechanism (ERM). So when England did leave the ERM, Soros quickly pocketed a cool $1.45 billion.

Here is where it gets even more interesting . . .

In recent years, Soros has been semi-retired and the trading at his firm has been run by his colleagues. But suddenly, the 85-year-old Soros spotted something, and earlier this year he became much more engaged and is now quite actively again managing the investments at his firm.

To say Soros is bearish is an understatement. His concerns and interests over his decades-long career have spanned many markets – including central bank policies, China, Europe, the Brexit, and the overvaluation of U.S. stocks.

The last time Soros the Bear emerged and took his place at the head of his firm’s trading was in 2007, just before the 2008 financial crisis. Soros pocketed more than $1 billion in gains between 2008 and 2009.

Clearly, his next move will be one to watch.

Should You Be Worried?

The very fact that Soros is once again so engaged should grab the attention of every investor – big or small. But it’s just as important to know the players in the game as it is to see where he moves his pieces.

Because Soros is a macro trader, my article 7 Things Investors Need to Pay Attention to in 2016 is a must-read for anyone with a buck in the game. This comprehensive list discusses seven macro areas that have and continue to play crucial roles in the 2016 market.

My own personal warning alarm went off this past week as the CNBC talking heads could not stop yammering on about the TINA trade.

TINA stands for “There Is No Alternative (to U.S. stocks)” due to negative interest rates. My years of market experience tell me that we only see such hubris before a fall.

The TINA reference seems to be very similar to the promise, “This time it’s different.”

This seemingly harmless phrase is often heard near market peaks, and legendary investor Sir John Templeton referred to these as the “four most expensive words in the English language.”

Unlike other stock markets, on a global scale, U.S. stocks are currently richly valued on a historical price-to-earnings basis. This is in addition to the fact that we’ve had an earnings decline for five consecutive quarters, which is cause for concern.

Yet, the current consensus of the Wall Street macro-trade is long S&P 500 and short 10-year Treasuries.

But, don’t forget my oft-repeated warning – a crowded trade usually turns into a bad trade.

Betting on the Billionaires

Without the prowess and financial stronghold of a billionaire, it’s often hard to know how to follow what Soros and others are doing with their investments. But it’s not impossible.

First, many bearish billionaires – including Soros – are going big on gold and gold stocks. My favorite play on gold is the MarketVectors Merk Gold Trust (OUNZ). This fund offers its holders the option of converting their holdings into gold bullion or gold coins.

Soros himself owns Barrick Gold Corp. (ABX), and for broader exposure to the sector, there is also the opportunity to invest in VanEck Vectors Gold Miners ETF (GDX).

There are also a number of inverse exchange-traded funds (ETFs) that allow investors to place a trade in the expectation that the stock market will go down. Included in these are leveraged ETFs.

Instead, here’s a list of some of the most liquid (and easily tradable) straight-up inverse ETFs: ProShares Short S&P 500 (SH), ProShares Short Russell 2000 (RWM), and ProShares Short QQQ (PSQ). The latter is a short on the Nasdaq 100 Index.

Overall, I urge investors to steer clear of dangerous derivatives-loaded funds.

For investors who don’t agree with the foretelling that the market is headed lower, but that volatility will increase, instead, ProShares VIX Short-Term Futures ETF (VIXY) is a solid ETF option.

Keep in mind that these types of ETFs are NOT long-term investments, but are short-term trading vehicles that can be used to protect an investor’s overall portfolio. The VIX ETFs in particular are extremely volatile and must be carefully watched.

Before going bearish, it is crucial to do due diligence. There is only one George Soros, but that doesn’t mean we can’t take a hint when he gets to growling.

Good investing,

Tim Maverick

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By Tim Maverick