Carl Icahn, one of the world’s most astute investors, has turned into one of the most vocal bears on Wall Street. Over the past few months, one of the smartest investors in the world has warned “a day of reckoning” is coming. Carl Icahn’s prediction for the stock market crash of 2016 is all but inevitable unless the Fed continues to prop up the economy.
He’s not just spouting rhetoric and fear, hoping to pick up stocks on the cheap. Icahn Enterprises LP (NYSE:IEP) announced a net short position of 149%! On December 31, 2015, IEP stock had a net short position of just 25%. If actions speak louder than words, Icahn is warning of an imminent stock market crash in 2016–2017.
But is he right?
Carl Icahn Betting on a Stock Market Crash
It’s been a tough year for investors, even for a billionaire investor, business magnate, and activist shareholder like Carl Icahn. He may be the 70th wealthiest person in the world with a net worth of $21.2 billion, but he’s protecting his wealth and warning of a stock market crash in 2016 or 2017 by betting against the U.S. economy.
Even on the surface, the writing is on the walls. In 2015, his $2.0-billion hedge fund took an 18% hit. In September 2015, Icahn said in a video on his web site that there is “danger ahead.” When it comes to a stock market crash, he said, “I think it’s not will it happen, it’s when will it happen?” (Source: “Danger Ahead,” CarlIcahn.com, last accessed May 11, 2016.)
Over the ensuing months, the stock market suffered rollercoaster pitches over fears about China, low commodity prices, and junk bonds. In January, the stock market experienced one of its worst starts ever.
In fact, Icahn maintains that there is an “earnings mirage” on Wall Street and that earnings “are very suspect,” propped up by selective guidance. On top of that, debt-laden companies trading at 30 times their earnings with no net worth continue to buy back their stock to prop up share prices.
So while share prices continue to rise quarter after quarter, year after year, GAAP earnings haven’t increased in three years. But who’s going to continue to buy these overvalued stocks when true earnings start to come down?
Carl Icahn Stock Market Crash Predictions
Not surprisingly, Carl Icahn’s stock market forecast calls for a stock market crash. And he’s not shy about this. In April, Icahn said the markets will have a “day of reckoning…unless we get fiscal stimulus,” noting that the Federal Reserve has fueled the bull market with artificially low interest rates. Not solid revenue and earnings growth. (Source: “Icahn: Markets will have ‘a day of reckoning’,” CNBC, April 28, 2016.)
To avoid the “day of reckoning,” the Federal Reserve will, unfortunately, have to pump more fiscal stimulus into the markets so the economy can live up to the promise that the long-in-the-tooth bull market is not running out of steam. At the same time, Icahn maintains, you cannot have low or even negative interest rates without creating tremendous bubbles and a huge wealth gap.
Odds are good, though, that the Federal Reserve will not, in fact, drop trillions of dollars from a helicopter into the outstretched hands of CEOs and save Wall Street. Federal Chair Janet Yellen may not raise rates, but that can’t fuel a sustainable bull market indefinitely. Why? Because the bull market is not being propelled higher by strong fundamentals. It’s a mirage.
What’s going to happen? Like all mirages, it’s going to disappear and the markets will tumble. On a May 5, 2016 earnings call, Icahn Enterprises CEO Keith Cozza warned that “We’re much more concerned about the market going down 20% than we are it going up 20%.” (Source: “Q1 2016 Earnings Webcast,” Icahn Enterprises LP, May 5, 2016.)
And how is Icahn going to make money when this happens? He’s been increasing his short position, betting stocks will fall.
Icahn Enterprises Portfolio
Icahn Enterprises stock is a diversified holding company—and holds a roughly 90% stake in the company. The Icahn Enterprises portfolio comprises companies from 10 primary business segments: Investment, Automotive, Energy, Gaming, Railcar, Mining, Food Packaging, Metals, Real Estate, and Home Fashion. (Source: “Investor Relations,” Icahn Enterprises LP, last accessed May 11, 2016.)
The company invests its capital through a number of private investment funds managed by the investment segment. As of March 31, 2016, the fair value of IEP’s interest in the funds was approximately $1.8 billion.
Heading into 2016, Icahn’s biggest holding in his investment fund was Apple Inc. (NASDAQ:AAPL). He owned roughly $4.8 billion of the company he once said was a “no brainer” investment. But he announced in late April that he had sold off all his Apple stock.
Now that his love for Apple has been bruised, Icahn’s biggest holdings are as follows: American International Group Inc (3.9% ownership worth $2.40 billion); Paypal Holdings Inc (3.1% ownership worth $1.46 billion); Cheniere Energy, Inc. (13.9% ownership worth $1.10 billion); Freeport-McMoRan Inc (8.3% ownership worth $1.07 billion); and Herbalife Ltd. (18.3% ownership worth $1.04 billion). (Source: “Icahn Enterprises L.P. Q1 2016 Earnings Presentation,” Icahn Enterprises LP, May 5, 2016.)
Other companies held by Icahn Enterprises include CVR Energy, Inc.; Chesapeake Energy Corporation; Federal-Mogul Holdings Corp; Pep Boys and IEH Auto; American Railcar Industries, Inc.; Tropicana Entertainment Inc; PSC Metals, Inc.; Ferrous Resources; and WestPoint Home LLC.
How Is Icahn Prepping for the Crash?
How is Carl Icahn prepping for the stock market crash? Just take a look at his stock market crash survival plan. He’s betting against the stock market. And because he owns 90% of the fund, he has free reign to pretty much invest however he pleases.
From its inception in November 2004, Icahn Enterprises’ fund’s gross return is 136%, representing an annualized rate of return of approximately eight percent through March 31, 2016. But his portfolio hasn’t been performing all that well as of late.
Again, in 2015, his fund lost 18% of its value. In the first quarter of 2016, Icahn’s investment fund fell by 12.8%. Echoing his previous sentiments, at the start of the second quarter, Icahn warned that stock prices are seriously overvalued as a result of artificially low interest rates and financial engineering, not strong, underlying fundamentals.
Icahn is looking to avoid a third straight year of losses in his investment fund. To protect his fund and profit from the inevitable stock market crash, Icahn’s fund has taken out a large hedge against a market.
At the end of 2015, Icahn was considered bearish when his fund’s net short position was 25%. He’s become a little bit more bearish since then. Today, Icahn’s investment fund has a net short position of an eye-watering 149%.
What does that number mean? First, we need to consider the entire fund. According to the company’s recently filed 10-Q, the long exposure was 164% (156% long equity and eight percent long credit) of the investment fund’s capital, while the short position was 313% (277% short equity, 36% short credit and other). The difference is 149%. (Source: 10-Q, Icahn Enterprises LP, May 6, 2016.)
This means that the value of Icahn’s short position (assets his fund has borrowed as opposed to having bought) is worth 149% more than the value of his long positions. Icahn will make money on these assets if they decline in value. He would cash out by buying shares in these companies at a cheaper price than what he borrowed them for—banking the difference in price.
If the stock market does crash, Carl Icahn will be one of the biggest winners.
Heeding Icahn’s Warning to Survive a Stock Market Crash
What steps can you take to survive a stock market crash? There is a lot of opportunity out there for investors to profit should the stock market crash or even experience a well-deserved correction, as predicted by the eerily prescient Carl Icahn.
Inverse Index Funds
Inverse index funds short different exchanges.
For example, the ProShares UltraShort Dow30 (ETF) (NYSEARCA:DXD) seeks results that correspond to two times the inverse (-2X) of the daily performance of the Dow Jones Industrial Average.
The ProShares Short S&P500 (ETF) (NYSEARCA:SH) seeks a return that corresponds to the inverse (-1X) of the daily performance of the S&P 500.
And the ProShares UltraPro Russell2000 ETF (NYSEARCA:URTY) seeks daily investment results that correspond to three times (3X) the daily performance of the Russell 2000 Index.
You don’t need to limit yourself to exchange-traded funds (ETFs) that track U.S. stocks, though. There is plenty of economic instability everywhere that you could profit from. The Direxion Daily China Bear 3X Shares ETF (NYSEARCA:YANG) seeks daily investment results of 300% of the inverse of the performance of the BNY China Select ADR Index, for example.
If you’re a confident enough investor, you could always follow in Carl Icahn’s footsteps and actually short a stock if you think the valuation is too high.
Defensive Dividend Plays
If the stock market does crash, you can rest assured that it will rebound and reach new record levels. It always has. And it always will. It’s the predictable cyclical nature of the stock market. If you’re looking to invest and shield yourself from a stock market crash or correction, consider defensive stocks.
Consumer products, utilities, and tobacco may be boring, but they make a lot of money and return it to shareholders in the form of long-term capital appreciation and consistently higher annual dividends.
In lieu of buying individual stocks, you could always consider an ETF like the iShares Dow Jones US Consumer Goods(ETF) (NYSEARCA:IYK) or the Guggenheim Claymore/Sabrient Defensive Eq Idx (ETF) (NYSEARCA:DEF).
If you think the stock market is in a critical state and it’s ready to crack, you could take profits and wait on the sidelines. This will free up valuable capital and allow you to take a position in well-run, undervalued stocks when the crash comes and investors run for the exits.
You may not be a Wall Street titan like Carl Icahn but that doesn’t mean you can’t read the writing on the wall. And while you may not be as liquid as Carl Icahn, that doesn’t mean you can’t create your own stock market survival guide that will help you profit when the markets are crashing.