Watch Out! We Just Started a New Venture..

With the kick-off of our firm, HX Research, these past few weeks, I have been reflecting on my thirty-year career on Wall Street.

The first thing that comes to mind is the fact that each time shortly after I started a new venture – the stock market has gotten crushed!

My first money management job started in late 1997, and less than a year later, we saw the Long-Term Capital Management collapse hitting the markets…

We started our first fund in March 2001, and I don’t need to tell you what happened just a few months later…

My next fund was started ten days (!) before Lehman Brothers collapsed…

Finally, I joined my partner Whitney Tilson at Empire Financial Research in September 2019. We could not have predicted what would happen six months later…

What do those periods have in common?

We DO see a couple of things in the financial markets today.

The first – and most prominent – is that the Federal Reserve had been raising interest rates in all those periods.

Here is the Fed Funds Target Rate chart going back to 1995…

The Fed Funds rate is the interest rate at which our central bank – the Federal Reserve – at which banks can borrow and lend to each other. Think of it as the Fed setting the “price” of money.

When the price of money goes higher (money is more "expensive"), then economic conditions "tighten.” Simply put – you are paying more to borrow money, so you are likely to borrow less and do less…

You can see from that chart that all the MAJOR selloffs around me starting a new business were preceded by increases in the Fed Funds rate—every single time.

Do we face that same risk right now?

Indeed, we do!

During these periods, we saw that tightening financial conditions eventually resulted in something "breaking" in the economy.

We mentioned the Long-Term Capital crisis back in 1998. That highly leveraged hedge fund went bankrupt quickly and almost took down the financial markets with it…

In 2000/2001, we saw the Internet Bubble collapse. This was less of a financial crisis, but after several years of massive spending in the "Bubble Economy," the enormous and abrupt reduction in spending hit the economy hard.

The rate increases from 2006 to 2009 eventually crushed the housing market. Housing had been overheating the economy like internet investing had been a decade earlier.

The final period – 2016 to 2019 – is a little different. In that case, the "crisis" was (to an extent) self-imposed with the COVID shutdowns.

How do we look by comparison?

We have burned off the excesses that happened in the post-COVID period with the huge jump in growth as restarted and the high inflation that followed.

We do see some “bubble” elements in the stock market right now.

Look at what has happened recently to the share price of semiconductor stocks like NVIDIA Corporation (NASDAQ: NVDA) and ARM Holdings PLC (NASDAQ: ARM).

These are huge companies whose stocks have been trading like the meme stocks of 2021!

There also are indeed cracks in the financial structure of the economy.

Just a year ago, some significant banks collapsed, including Silicon Valley, Signature, and First Republic. Investors were reminded of this recently with the volatility in shares of New York Community Bank (NASDAQ: NYCB), the bank that bought the assets of Signature Bank.

The Fed raising rates, signs of “bubbles” in the stock market and cracks in our financial system.

It sounds similar to the OTHER times I launched a business…

What do we think will happen THIS time?

Honestly, we don’t know! Nor did we know those other times we launched our ship right into a hurricane…

What we do know, though, is that we have strategies that can navigate these periods.

Our strategies outperformed the market massively in those previous periods and MADE money in the downturns.

This was done through a combination of trading (the main reason) and stock picking (a contributor).

The products we have launched at HX Research are the evolution of those strategies.

Both HX Trader and HX Income are based on a trading methodology that we developed over the last thirty years.

The predecessor products to these strategies at my previous firm – Empire Elite Trader and Empire Elite Options – were nicely profitable in 2022's terrible stock market. Even though they only went long stocks…

Our long-term HX Legacy is also built to “survive” these types of markets. It might not make money, but historically, the stocks in my fund outperformed nicely.

What we have learned across these last few decades – and our experience launching into challenging markets – is to be prepared for ANY market…