Taking a break from disciplining corporates, billionaire activist investor Carl Icahn has sounded a grim warning bell for investors, asserting that Fed’s inactivity, the ongoing stalemate in Washington and CEOs’ recklessness are driving financial markets and the U.S. economy to the brink of yet another catastrophe.
Icahn, who for years has been a staunch critic of the U.S. Fed policy that created a six-year cure for a two-year flu, believes that the Fed "may have backed itself into a corner" by failing to start normalizing interest rates earlier this year. He said that prolonged low rates create bubbles in financial markets, real estate and even in art markets, and we might be repeating history all over again.
This trifecta, taken together, can only have one conclusion according to Icahn: a stock market collapse.
The eccentric investor is particularly worried about run-of-the-mill investors buying high-yield debt issued by highly leveraged companies, as they strive to find some decent yield in this zero-rate environment. These bonds, often referred to as "junk bonds," offer a greater return with a higher default risk, and are sold via exchange-traded funds.
The entire scenario seems like a movie theatre with one little exit door, and all is fine now. But the moment someone yells FIRE!, all hell will break loose. The one little door won’t be enough for everyone to get out, and in a heartbeat, the buyers for the junk bonds will have gone poof!
For Icahn, the situation strongly evokes déjà vu, as he compares the present to the pre-recession days, when mortgage-backed securities were being widely sold. We all know how that turned out.
Veteran Investors Raising Red Flags
Coming back to the stock market, Icahn expressed deep apprehensions about financial engineering of stocks and inane takeovers done by corporates, instead of investments in innovation and capital spending. The Wall Street veteran, who made his fortune buying stakes in companies such as Apple Inc. AAPL, Lions Gate Entertainment Corp. LGF, Netflix, Inc. NFLX, Texaco, Phillips Petroleum and eBay Inc. EBAY, said that he is more hedged than he has ever been.
Icahn is not alone — billionaire investors from Warren Buffett to Paul Singer have all expressed qualms about the level of the market — specifically, bonds.
And the Fed is clearly in a Catch-22 situation. A decision to hold interest rates sends a worrying sign of global growth concerns to investors. On the other hand, a rate hike will formally signal the end of monetary stimulus and put an end to the boost that stocks have indulged in over the past six years.
A Fool’s Paradise?
Nothing really sedates rationality like large doses of effortless money. Yes, the last few years have been a heady experience, but let’s face it — the easy money has already been made. Believing that this market will keep going up forever is a fool’s paradise, to say the least.
So let’s not overstay the festivities. But is it a smart decision to hedge like Icahn?
Dash for Cash
Investors could buy puts, or inverse ETFs to hedge themselves, or they could simply book profits on stocks. The first two hedging options could make losses in case the market moves in the opposite direction. However, there is no harm in booking profits.
To make matters simpler, we have shortlisted a few stocks that have had a good run of late, but are starting to see negative analyst sentiment. These sell-ranked stocks have been on a rampage this year, but weak growth fundamentals and tricky industry dynamics are fast catching up with these companies.
4 Stocks to Book Profits Now
Shares of Bona Film Group Limited BONA, an integrated film company, have been on a rampage all year, increasing almost 70% year-to-date. However, things have gotten difficult for this high-flying stock in recent times, as negative analyst estimate revisions led to the current year Zacks Consensus Estimate falling from 29 cents per share to 21 cents over the past month. It currently carries a Zacks Rank #4 (Sell).
Ormat Technologies Inc. ORA, engaged in the geothermal and recovered energy power business, has seen its shares rally over 25% year-to-date. However, it seems that the company’s consistent earnings misses have finally caught up. This Zacks Rank #4 company has recently seen a downtrend in the Zacks Consensus Estimate for 2015, which has fallen to $1.47 per share from $1.51 over the past couple of months.
Financial services provider First Foundation Inc. FFWM has been on a steady incline of late, and has risen almost 26% year-to-date. However, it looks like it’s time to book profits and chuck the stock, as analysts have turned sour on the company. The current year Zacks Consensus Estimate of this Zacks Rank #5 (Strong Sell) stock has fallen from $1.30 per share to $1.19 over the past couple of months.
Shares of Geely Automobile Holdings Ltd. GELYY have charged up over the recent times, increasing nearly 32% year-to-date. However, the Zacks Rank #4 stock has lost analyst favor of late, as negative estimate revisions have led the Zacks Consensus Estimate for 2015 to fall to 80 cents per share, from 90 cents a couple of months ago.
No Crystal Ball
Celebrated investor Jim Rogers once remarked about QE: "Give me a trillion dollars, I will show you a good time." It was fun while it lasted, but the joyride is now nearing a cliff, and no crystal ball can help us debark at the last second. So let’s learn from history and heed the warning signs, and get out while we can.
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