Don’t Get Caught in the Market’s Bull Whip

It’s a scene lots of us experienced last year…

Arist Mastorides had one last meeting at the office. Then he headed off to a work-from-home future.

It was March 2020, and many of us expected to be back at our desks in a couple weeks. But Mastorides had an early clue that something much more cataclysmic was happening…

On his way home that last day, Mastorides stopped at Walmart. He found the section that stocked his company’s product empty… completely barren. And he had a lot of work to do.

Mastorides worked for Kimberly-Clark (KMB). He’s the president of the company’s North American Family Care division. It’s his responsibility to put the toilet paper on the shelf. And as everyone knows now, the toilet paper was not there.

Just the day before, sales had surged 734% over the previous year as panic-buying set in. And no one saw it coming…

The toilet paper industry scrambled to try to refill shelves, but there wasn’t much anyone could do. We all just had to watch our stockpiles dwindle and hope we could track down a few precious rolls before someone else snatched them up.

Kimberly-Clark and its competitors spent the pandemic with a product in high demand… that they couldn’t sell… with upset customers… and with little to do about it.

When the COVID-19 run on toilet paper happened, the supply chain was caught unaware. For one, no one predicted that a pandemic would lead to toilet paper shortages (unless perhaps it was a global cholera outbreak). But more important, rising demand only meant shrinking supply.

So when toilet paper sales soared 734%, Mastorides upped his machines to 99.8% capacity… But that was as far as he could go.

Big projects to raise production levels didn’t make any sense. Demand for toilet paper was destined to collapse as people worked through their stockpiles. Then in the long term, it would settle right back to where it was before – 141 rolls of toilet paper, per person, per year.

In supply-chain management, this is known as the “bullwhip effect.” When you give a small flick to a whip, the motion travels down the whole tool. By the time it hits the end, the result is a large snap.

In supply chains, a small change in consumer behavior leads retailers to place a bigger order with suppliers, which place bigger orders with their suppliers, which then place even bigger orders with their raw-materials providers, and so on. These little changes wreak havoc with supply chains.

The same happens in finance…

Financial markets are all just one system running in a perpetual cycle. The Fed keeps monetary policy easy, so investors have cash to buy stock. Rising stock prices lure in more investors. Index funds take in cash and are forced to buy more securities. But eventually, when the momentum slows and even breaks down, the market can crash.

The Fed provides backstops to risk and eases financial conditions. But true breakdowns happen fast – and faster than they used to. We saw this in downturns in 2013, 2018, and 2020 that were brutal in their speed and depth, and then rapid in their recovery.

The point of all this is that the market (and the world) is a complex beast. If you try to run your portfolio right along the razor’s edge, you have the potential for ruin. If you’re optimizing your portfolio for maximum efficiency in euphoric “Melt Up” conditions, you’ll be like Kimberly-Clark’s toilet paper factory – helpless to do much about it when things change unexpectedly.

And things will change.

At the same time, while you may feel torn between avoiding potential losses and missing out on potential gains, you don’t have to…

There are still incredible opportunities to be had. And no one knows that better than my colleague Dave Lashmet.  

Dave has one of the best track records in our industry. He has shown his readers how to double or triple their money over 20 different times in the last few years.

Next week, Dave is sharing how to take a stake in an early-stage company on the verge of a $1 trillion windfall.

Dave will reveal all the details next Tuesday morning. Click here to make sure you don’t miss it.

Let’s get into this week’s Q&A now… With the ongoing pandemic, we want to hear how you’ve maintained (or improved) your financial and health wellbeing. Send your story to [email protected].

Q: I did not understand if we should be buying or selling options on major companies like KO or MSFT? – J.S.

A: In our options service, Retirement Trader, we love to sell options on big, sturdy blue-chip companies. These are giants like Disney (DIS), Coca-Cola (KO), and Microsoft (MSFT). These stocks rarely have wild price swings.

The likelihood of Coca-Cola falling 20% in a short time is pretty slim, but some people want to sleep well at night… so they buy a put option to insurance against the stock falling.

I’m willing to take the other end of that trade all day long. And here’s the thing… If you only sell put options on stocks you want to own, you can’t lose.

Let’s think about the worst-case scenario… Coca-Cola falls 10% in a matter of days. The put buyer will use his insurance to sell his Coca-Cola shares to us for the price we agreed upon at the beginning of the trade.

So, everything went wrong in this trade… but we end up owning shares of a world-class business for less than it was trading for when we entered the trade (since we get to keep the premium he paid us).

If you sell insurance against low-risk, blue-chip stocks, you’ll collect safe income each month that can help you grow your retirement fund, pay bills, and even pay for a trip to Aruba.

And again, worst-case scenario, you end up owning shares of a great business for a cheaper price than if you’d simply bought shares.

Q: In your recent Q&A regarding cinnamon, you recommended consuming it by the “sprinkle.” Can you please be more specific? Half a teaspoon per day? One-quarter teaspoon per day? Other? Thanks so much! – D.C.

A: Nowadays, I use about half of a teaspoon or so each day, but no more than a teaspoon (from time to time). I don’t eat it all at once, as I’ll spread it out throughout the day, whether it’s in my coffee or on toast.

What We’re Reading

Here’s to our health, wealth, and a great retirement,

Dr. David Eifrig and the Health & Wealth Bulletin Research Team
August 20, 2021