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Apr 28, 2022
[2 min Read]
What happens when a stock falls 90%? It falls 80%. And then it falls another 50%. This is bear market math. You can take advantage of it.
If you bought into the Cathie Wood dream and got hammered for it, it's not too late to learn your mistake and correct it.
What are you buying when you buy ARKK? ARKK holds stocks that are long DURATION - the period of time it takes to receive cash flows. You are buying a leveraged bet on future cash flows of companies that mostly make no profit in the present. When unprofitable, ARKK-like companies need to finance themselves to continue their operations. They can do that by raising debt OR equity but NEITHER will be available in an environment of contracting liquidity that the Fed is creating. These companies either start to go bankrupt when they run out of cash OR they have to pay a very high price for financing that is terrible for their share prices. Inflation AND rising interest rates AND contracting liquidity are all BAD for growth stocks!!! The Fed hasn't even started selling bonds back into the market, the pain has hardly started. ARKK is going to keep getting fucked.
Cathie has largely been receiving inflows into her fund while the stocks that she owns in her fund have been dropping. What does this mean? The price of ARKK has actually been held UP by people continually purchasing ARKK! When investors actually begin to hate ARKK (as they WILL in an inflationary bear market), they will start redeeming ARKK en masse and ARKK will head lower than you ever thought possible. See how her fund's assets under management (AUM) has stayed constant while ARKK's return has undergone the FIRST phases of a Dotcom-bubble collapse here: https://twitter.com/Keubiko/status/1517304541556920321
The solution: SHORT ARKK! It can easily be done by buying the inverse ARKK ETF. Whatever ARKK loses in a day (approximately), its inverse ETF makes in a day. The time for making money off of unprofitable growth companies will come again one day in the future. For now, you must know the market regime you are in. In an inflationary bear market with contracting liquidity, ARKK's holdings are not only going to get hammered. If the Fed breaks the funding markets several months from now and has to pivot on monetary policy, that will be a cue to go back into growth.