Editor's note: The recession clock is ticking... Investors have been searching for signs to determine where the market is headed as we enter 2024, holding out hope that we can avoid a recession moving forward. But the "smart money" has been changing its tune about what's coming next... You see, Joel Litman – chief investment strategist for our corporate affiliate Altimetry – believes business mogul Mark Cuban's recent investment decisions signal a recession is imminent. In today's Masters Series, adapted from the December 12 and December 6 issues of the free Altimetry Daily Authority e-letter, Joel discusses Cuban's recent array of moves... explains why these moves signal the market is headed south... and details how investors can prepare their portfolios for this downtrend...
Mark Cuban Is Preparing for a Market Downturn By Joel Litman, chief investment strategist, Altimetry November was a big month for Mark Cuban... First, he announced that he's departing ABC's hit venture-capital TV show Shark Tank after his 13th season. Then, just one week later, the tech billionaire said he's selling his beloved Dallas Mavericks basketball team to Las Vegas Sands (LVS) majority shareholder Miriam Adelson. Speculation is now running rampant over what Cuban may be up to next... Some folks think he's gearing up for a presidential bid (despite his claims that he has "no plans" to run next year). Others see his recent decisions as a sign that he wants to dedicate more time to his family. Then, there are those who claim Cuban is exploring a new business venture... potentially one that includes bringing a Las Vegas Sands property to Texas. However, what people seem to forget is that Cuban has a reputation as a shrewd investor... and that these steps might be a cautionary sign of what's to come in the stock market. Today, we'll look at what may actually lie behind Cuban's recent moves. As we'll explain, there's good reason investors should take them seriously... Cuban has a history of calling the market top... Back in 1999 – in the midst of the dot-com bubble – he sold his Internet-radio startup Broadcast.com to Yahoo in an all-stock deal. It left Cuban with about $1.4 billion worth of the search giant's shares. He wasn't legally allowed to sell the stock right away. Yet, he knew that holding that much of one stock was risky... especially a tech stock. At the time, the technology sector was running hot, and it could have collapsed at any moment. Cuban worked with Goldman Sachs (GS) to protect his investment. Together, they created a "collar" trade, where he bought put options as a safety net. This ensured that he could sell his Yahoo shares for at least $85 per share if their value dropped below that price. However, buying options can be expensive... So, he offset the cost by selling call options at the same time. He agreed to a "strike price" of $205, which meant that if Yahoo stock rose above that price, Cuban would sell for exactly $205 per share. This collar trade ended up costing Cuban nothing... and it saved him more than $1 billion. You see, in the months after he set up this trade, Yahoo's stock price rose to a high of $237 per share. If it had stayed that high, Cuban would've been forced to sell for just $205 per share. While this capped his upside on Yahoo stock, it also protected him in the event the tech bubble burst... which it did. Cuban had to wait to sell his stock, as the collar was set to expire roughly three years after he set it up in 1999. And by the time the collar expired, tech valuations were in the toilet. The tech-heavy Nasdaq Composite Index had plummeted as much as 77%. Yahoo stock fared even worse. It fell from $237 to just $13 per share... which meant Cuban saved his investment from a nearly 95% drop. The deal for the Dallas Mavericks looks similar to what Cuban pulled with Yahoo... He sold a majority of his stake in the Mavericks at a final valuation of $3.5 billion. That's a substantial increase from the $285 million he originally paid for the team back in 2000. Plus, Cuban will retain full control over basketball operations. In other words, while he still gets to manage the team, his cash investment is now safe... This could be a sign that Cuban is trying to sell high. If we enter a recession, sports teams could struggle to sell as many tickets and as much merchandise at their games as they do normally. That could hurt team valuations, which could take years to recover. However, just like with Yahoo, he has protected his investment in case things go south for the Mavericks' valuation. It's also not a big surprise to us that, on top of selling the Mavericks, Cuban is stepping away from Shark Tank... The coming years will be hard on private equity. When interest rates are high, small businesses (like the ones on Shark Tank) often struggle. That's because these companies don't have strong financials like larger companies... and it costs more to borrow money. Loans for running a business, growing it, or starting it up become pricier. On top of that, high rates mean consumers spend less because they're paying more for their own debts. This means they might buy less from small businesses. This dynamic is exactly what has been playing out as of late... You see, after raising rates more than 5% in 2022 and the first half of 2023, the Federal Reserve put a pause on rate hikes in July. Since then, all of its most-watched metrics have started to show that high rates are having their desired effect. The central bank wanted to push unemployment to at least 3.8% by year-end. It's already at 3.7% as of October, the most recent data available. Plus, inflation has fallen to 3.5%. While it's still above the Fed's 2% target, it's falling faster than its former year-end expectation for 3.7%. And for the sixth quarter in a row, banks tightened their lending standards... meaning credit availability is dropping. It's getting harder for companies to secure loans. In short, the economy is cooling off. The Fed's strategy is working. That's an urgent sign investors should take a hard look at their portfolios. And it's not the only one... At last month's Federal Open Market Committee meeting, Fed Chair Jerome Powell said current policy is "significantly restrictive"... Powell means that the Fed has been making it more expensive to borrow money... on purpose. That's one of its main mechanisms for slowing down inflation. However, if the Fed's policy gets too restrictive, it's almost certain to throw the economy into a recession. The Fed's policy is already restrictive... meaning inflation should keep falling and unemployment should keep rising. Any more rate hikes would cause unnecessary damage to the economy. In fact, the central bank will have to think about cutting rates sooner than later... Just look at the last two times Fed policies were this tight... in 2001 and 2007. Both times, we entered a recession within a few quarters. The Fed set out to give us a recession, and it's delivering. Even if it starts cutting rates tomorrow, the economy is already going cold. Essentially, Cuban recognizes times are getting tough... While he might be better known as a TV personality these days... don't forget that he's also a great investor. Some investors lost billions of dollars when the dot-com bubble burst. Yet, Cuban came out on top. Now, when it seems like a recession is right around the corner, he's selling his beloved Mavericks and stepping away from a hit TV show. If Mark Cuban is taking precautions today, investors should do the same. Heed his warning... and be careful with your investments in 2024. Regards, Joel Litman
Editor's note: Proceeding with caution doesn't mean you should hide your money on the sidelines as we await this looming recession. In fact, following the usual crisis playbook could result in the most catastrophic losses for your portfolio than at any other time in recent history... That's why Joel recently teamed up with Chaikin Analytics founder Marc Chaikin to share exactly what to do with your money right now. Remember, what happens next could determine your wealth for the next decade. Catch up on the full details here... | 
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