The Panic Play

The panic play

The global rout in stock markets has erased $11 trillion in value in just 5 short weeks.For good reason…

  • War in Europe
  • Global inflation
  • Central bank tightening
  • Lofty valuations

…All set us up for a crash.And it’s all happening in real-time.In the United States, the S&P 500 is getting close to bear market territory. As of this writing, it’s down 19% from its 2021 high.

The Panic Play

Thanks in large part to massive stimulus packages in the US and abroad…Valuations were becoming extreme and approaching dotcom valuation points.Below is the 1-year forward price to earnings ratio for the S&P 500.

  • Analyst Tip: Recall while it is common to use “trailing P/E” this metric uses the last 12 months of earnings, which is useless. It’s because the stock market doesn’t care what happened last week, it cares about what will happen next week.

The Panic Play

Now that Prices and Earnings Matter Again…

The average Price/Earnings Ratio since 1990 is 15.2x.This means that the market capitalization of companies in the S&P 500 trades at 15.2 times the earnings of companies in the index.

  • The higher the ratio, the more overvalued the index or stock is.
  • The lower the ratio, the cheaper or undervalued the stock or index is.

Given all the uncertainty in the world right now, it seems plausible that the S&P 500 should reflect that and should trade at best on par with its historical average.Though one could certainly make the case it should be trading significantly lower.

Investors around the world are getting defensive…

One way we can look at this is through the ratio of put options purchased to call options purchased.Investors who are bullish buy calls.And those who are bearish typically buy puts.

  • When the ratio is less than 1, it means more call options are being bought than puts and suggests the market is optimistic.
  • If the ratio is greater than 1, it suggests the market is pessimistic.

The chart below shows the ratio of puts purchased to calls purchased for US, Japanese and European markets.

The Panic Play

Around the world, investors are buying more puts on average than usual, with all 3 major markets seeing more put buying than the 10-year average.

Follow the Money Flow…

Diving under the hood of the S&P 500, we can look at the sectors which are receiving the most dollars invested right now.

  • Again, we can use the forward-looking P/E ratio as a clue.

In the chart below you can see the massive spikes in P/E for the consumer discretionary sector.This is composed of companies that provide products to consumers which they don’t need to sustain themselves.Contrary to the consumer discretionary is the consumer staples segment, which includes companies that produce goods which we need on a regular basis.

  • Today you’ll see that the discretionary group has been crushed, as expectations of future spending on non-required goods falls.

On the other hand, consumer staples are seen as a “safe haven” and money is flooding into the segment. Pushing the P/E ratio up to its highest levels since the dotcom bubble popped.

The Panic Play

What are Investors Buying Right Now?

For this, I’ve taken a lot of heat…Insults…Social media slander…But I don’t care.I’ve said it many times and got laughed at. But proven correct: the US Dollar remains a haven.And I believe will remain so for at least the remainder of the year.The US Dollar is up 6.4% for the year versus other major currencies.

The Panic Play

  • I’ve always said, cash is a position. And this is a trend I expect to continue.

Whenever I say that I get the counterargument that cash is “losing to inflation”.That’s true. But the amount of share price destruction is greater and without cash, an alligator cannot pounce on opportunities.Just like in the past crises and attempted recoveries, never bet against the Federal Reserve or the U.S. Dollar.The U.S. Dollar has and remains my currency of choice and it’s where I keep the bulk of my cash. Yes, even though I’m Canadian.

But Marin, Bitcoin Fixes This…

Other “stores of value” such as bitcoin have taken it on the chin.

I have no qualms with bitcoin and consider it an asset class, but I see it more as a risk-on asset, rather than a risk-off.This is coming to fruition here as it is flirting with a long-term support point at $30,000.Will it hold? We will see, but things don’t look good in crypto land…Just like junior resource exploration stocks that go illiquid, if Mother Bitcoin drops further, many cryptos (and even NFTs) could get illiquid fast.

The Panic Play


Stagflation is a topic I have addressed multiple times to my premium subscribers and see this is a continuing trend in the near to medium term.

  • Stagflation is a deadly combination of above-average inflation coupled with below-average economic growth.

Doesn’t this sound familiar to what we have today?Sure, does to me. But don’t get stuck into a framework.Right now, though, inflation around the world is high and well above the target levels of central bankers.Economic growth is slowing due to the war in Europe, supply chain issues, a stronger US Dollar, and COVID outbreaks in China.To combat this, bankers are going to try to raise rates and pull back on the flow of “money” to slow inflation.This is a standard play in the playbook. However, what is not in the playbook is weening the world off the Financially Transmitted Disease known as ZIRP or zero-interest-rate-policy.The global markets for the past decade are used to or let me put it differently, addicted to massive amounts of cheap or even free capital.This era has ended, and many businesses and individuals are not set up to survive a plethora of rising interest rates and a rising US Dollar.

At Katusa Research we follow Warren Buffett’s two rules:

  1. Don’t lose money
  2. Don’t forget rule #1

Our focus is to practice alligator investing discipline and how to keep your head while others are losing theirs.We’ve come to a crossroads in many markets and the most important thing is to only own fundamentally valuable companies and to have cash available as attack capital.If you were caught off guard in this recent correction…Want to add some defense to your portfolio, or are looking to gain an edge over the long term…consider learning more about my premium research service, Katusa’s Resource Opportunities.Stay safe and solvent,And remember, the markets can stay irrational longer than you can stay solvent.Marin Katusa