I’m fairly sure that no one in the stock market cared much about my negative comments about stocks from three days ago:
83% of these new stock offerings over the last three months are money-losing companies…That almost equals the all-time record for such madness of 84% in the year 2000 during the internet/tech stock bubble.
But what about when David Einhorn, probably one of the five most successful hedge fund managers ever, says basically the same thing, which he did in a report issued today. Einhorn says he is selling short (that’s betting on a price decline, that is, Einhorn will make money as the prices of these stocks go down) a basket of overvalued tech stocks:
Our criteria for selecting stocks for the bubble basket is that we estimate there to be at least 90% downside for each stock…
So he thinks there is a good chance that the prices of these stocks will decline by 90% or more. Think that can’t happen? Einhorn again:
There is a huge gap between the bubble price and the point where disciplined growth investors (let alone value investors) become interested buyers. When the last internet bubble popped, Cisco (the best of the best bubble stocks) fell 89%, Amazon fell 93%, and the lower quality stocks fell even more.
For anyone interested, Einhorn’s full report is embedded in this article:
Here’s another perspective that should make anyone with money in stocks promptly head for the hills (that means sell!). In 2002, after tech stocks crashed, Scott McNealy, co-founder and CEO of Sun Microsystems, gave a famous interview in Business Week. Sun was one of the many tech sock darlings. They made and sold high-powered workstations favored by the scientific community, Wall St, oil and gas engineers, etc. At its peak, the market valued his company at 10 times company sales. Not profits (that’s what is left over after all expenses), but sales, the amount of money that comes in the door prior to all expenses such as salaries, rent, supplies, etc. McNealy described how absurd it was for the market to value his company at 10 times sales:
But two years ago we were selling at 10 times revenues when we were at $64. At 10 times revenues, to give you a 10-year payback, I have to pay you 100% of revenues for 10 straight years in dividends…That assumes I have zero cost of goods sold, which is very hard for a computer company. That assumes zero expenses, which is really hard with 39,000 employees. That assumes I pay no taxes, which is very hard. And that assumes you pay no taxes on your dividends, which is kind of illegal. And that assumes with zero R&D for the next 10 years, I can maintain the current revenue run rate. Now, having done that, would any of you like to buy my stock at $64? Do you realize how ridiculous those basic assumptions are?
Well, in mid-March of this year, there were forty companies valued at 10 times sales or higher. The list, compiled by Goldman Sachs, is at this link:
On average, these forty are valued at 15 times sales! To quote David Einhorn from his report: “After all, twice a silly price is not twice as silly; it’s still just silly.”
Silly is a direct result of money printing by central banks. The chart in the bottom panel below shows how, since the start of 2008, when the Federal Reserve was printing money (the color-shaded areas on the chart) stocks rose and rose and rose. Anytime they weren’t printing money, stocks fell promptly. So they keep printing. It doesn’t help regular folks, whose real incomes have been declining through this whole period, but it sure helps wealthy stock market investors:
It’s very obvious that the sheep are getting set up for another shearing, just as they were in 2000 and again in 2007. When exactly will this shearing take place? I claim no expertise on that score. Can the stock market go higher still? Sure. Clearly it depends on how much money the Federal Reserve prints, how long traders believe in the effectiveness of that printing, and how big the many wars in the world get. But I can tell you for sure, when the shearing happens, “silly” will not be the word on the minds of investors.
I don’t like being shorn, so I have nothing to do with stocks these days. I don’t want my savings anywhere near a brokerage account for reasons described under Lie #6 here. So I don’t have to guess about when the next shearing will take place. If I did want to guess, I would closely follow the work of Jeremy Grantham since he has a multi-decade real-time excellent track record of predicting future returns from stocks. His firm publishes a quarterly newsletter at their web site and Grantham’s comments are followed at web sites like ZeroHedge and King World News. Here are some recent comments:
Grantham: We do think the market is going to go higher because the Fed hasn’t ended its game, and it won’t stop playing until we are in old-fashioned bubble territory and it bursts, which usually happens at two standard deviations from the market’s mean. That would take us to 2,350 on the S&P 500, or roughly 25% from where we are now.
Q: So are you putting your client’s money into the market?
Grantham: No. You asked me where the market is headed from here. But to invest our clients’ money on the basis of speculation being driven by the Fed’s misguided policies doesn’t seem like the best thing to do with our clients’ money.
We invest our clients’ money based on our seven-year prediction. And over the next seven years, we think the market will have negative returns. The next bust will be unlike any other, because the Fed and other centrals banks around the world have taken on all this leverage that was out there and put it on their balance sheets. We have never had this before. Assets are overpriced generally. They will be cheap again. That’s how we will pay for this. It’s going to be very painful for investors.
Grantham is a smart fellow and one of the few Wall St people who is honest about the food crisis brewing in the world and certainly one of the very few to quote Bob Marley. He wrote a detailed report on the topic, from the point of view of a numbers man, which he is:
We are five years into a severe global food crisis that is very unlikely to go away. It will threaten poor countries with increased malnutrition and starvation and even collapse. Resource squabbles and waves of food-induced migration will threaten global stability and global growth. This threat is badly underestimated by almost everybody and all institutions with the possible exception of some military establishments.
As I’ve said before on other topics: be careful out there.