Read This, Spike That
WEDNESDAY, MARCH 26, 2014
The Case Against This Stock Market
By JOHN KIMELMAN
Everyone from hedge-fund star Seth Klarman to Website impresario Henry Blodget has soured on stocks.
With the stock market sputtering lately, is this finally it—the end of the five-year bull market?
A few notable stock-market minds think investors ought to be concerned.
A BloombergView column written by William D. Cohan summarizes the latest thinking of Seth Klarman, the highly respected hedge-fund manager whose 1991 value-oriented investment book, Margin of Safety, sells on Amazon.com for $1,495 for a used copy.
Writing in his latest investment letter, Klarman, the founder of Boston-based Baupost Group, argues that he sees artificially high prices everywhere he looks in the stock and bond markets.
"A policy of near-zero short-term interest rates continues to distort reality with unknown but worrisome long-term consequences," writes Klarman.
Klarman notes that the Nobel-winning economist Robert Shiller has calculated that the stock market's price-to-earnings ratio is more than 25, "a level exceeded only three times before—prior to the 1929, 2000 and 2007 market crashes. Indeed, on almost any metric, the U.S. equity market is historically quite expensive."
What's more, Klarman writes, "a skeptic would have to be blind not to see bubbles inflating in junk bond issuance, credit quality, and yields, not to mention the nosebleed stock market valuations of fashionable companies like Netflix (ticker: NFLX) and Tesla (TSLA)."
And for what it's worth, Business Insider chief executive and top editor Henry Blodget feels similarly about stocks these days.
Now I don't put Blodget, the former Merrill Lynch tech analyst who was forced out of the securities industry for publicly touting stocks he was privately knocking, in the same league as Klarman.
Instead of investing billions of dollars of client money like Klarman, Blodget spends his days running a Website devoted to the markets and most anything that will generate clicks.
But Blodget deserves his due: He is a thoughtful student of markets. And Tuesday, he penned a provocative piece saying that "stocks are now so expensive that they will likely deliver crappy performance over the next decade. I also believe that there is a decent chance of a 40%-to-50% crash in the next couple of years."
Blodget writes that his view on stocks "is based almost entirely on valuation: According to most historically valid and cyclically adjusted pricing measures, stocks are at least 50% overvalued, and I don't think it will end up being 'different this time.' "
That being said, Blodget is quick to point out that "despite this concern about stock prices, I am not selling my stocks (not yet, anyway). One reason I'm not selling is that valuation is almost useless as a timing indicator: Stocks could go a lot higher before they drop, especially if the Fed keeps frantically pumping money into Wall Street. Another reason I am not selling is that no other major asset classes are attractively priced either, so there's nothing else I want to buy."
Not everyone is seeing bubbles everywhere.
A piece on the Quartz site by investment writer Mark DeCambre makes the case that tech stocks in particular are not in a bubble despite all the action in the space right now, including Facebook's recent purchase of messaging company WhatsApp and King Digital's initial public offering.
"Yesterday the market closed at 4,234.27—around 2% up on the year, but still about 22% shy of that 5,408 peak from 14 years ago," DeCambre writes. "Nor are we anywhere near the pace of tech IPOs seen during those manic days. In fact, between 1999 and 2000, a combined 794 tech execs took their companies public on either the Nasdaq or NYSE stock exchanges. By comparison, the 86 tech firms that went public during 2012 and 2013 looks relatively paltry. So far, only about 10 tech companies have gone public in 2014."
Given the disappointing reception that the King Digital IPO received Wednesday by investors, the tech bubble talk might lose some of its urgency.
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A few notable stock-market minds think investors ought to be concerned.
A BloombergView column written by William D. Cohan summarizes the latest thinking of Seth Klarman, the highly respected hedge-fund manager whose 1991 value-oriented investment book, Margin of Safety, sells on Amazon.com for $1,495 for a used copy.
Writing in his latest investment letter, Klarman, the founder of Boston-based Baupost Group, argues that he sees artificially high prices everywhere he looks in the stock and bond markets.
"A policy of near-zero short-term interest rates continues to distort reality with unknown but worrisome long-term consequences," writes Klarman.
Klarman notes that the Nobel-winning economist Robert Shiller has calculated that the stock market's price-to-earnings ratio is more than 25, "a level exceeded only three times before—prior to the 1929, 2000 and 2007 market crashes. Indeed, on almost any metric, the U.S. equity market is historically quite expensive."
What's more, Klarman writes, "a skeptic would have to be blind not to see bubbles inflating in junk bond issuance, credit quality, and yields, not to mention the nosebleed stock market valuations of fashionable companies like Netflix (ticker: NFLX) and Tesla (TSLA)."
And for what it's worth, Business Insider chief executive and top editor Henry Blodget feels similarly about stocks these days.
Now I don't put Blodget, the former Merrill Lynch tech analyst who was forced out of the securities industry for publicly touting stocks he was privately knocking, in the same league as Klarman.
Instead of investing billions of dollars of client money like Klarman, Blodget spends his days running a Website devoted to the markets and most anything that will generate clicks.
But Blodget deserves his due: He is a thoughtful student of markets. And Tuesday, he penned a provocative piece saying that "stocks are now so expensive that they will likely deliver crappy performance over the next decade. I also believe that there is a decent chance of a 40%-to-50% crash in the next couple of years."
Blodget writes that his view on stocks "is based almost entirely on valuation: According to most historically valid and cyclically adjusted pricing measures, stocks are at least 50% overvalued, and I don't think it will end up being 'different this time.' "
That being said, Blodget is quick to point out that "despite this concern about stock prices, I am not selling my stocks (not yet, anyway). One reason I'm not selling is that valuation is almost useless as a timing indicator: Stocks could go a lot higher before they drop, especially if the Fed keeps frantically pumping money into Wall Street. Another reason I am not selling is that no other major asset classes are attractively priced either, so there's nothing else I want to buy."
Not everyone is seeing bubbles everywhere.
A piece on the Quartz site by investment writer Mark DeCambre makes the case that tech stocks in particular are not in a bubble despite all the action in the space right now, including Facebook's recent purchase of messaging company WhatsApp and King Digital's initial public offering.
"Yesterday the market closed at 4,234.27—around 2% up on the year, but still about 22% shy of that 5,408 peak from 14 years ago," DeCambre writes. "Nor are we anywhere near the pace of tech IPOs seen during those manic days. In fact, between 1999 and 2000, a combined 794 tech execs took their companies public on either the Nasdaq or NYSE stock exchanges. By comparison, the 86 tech firms that went public during 2012 and 2013 looks relatively paltry. So far, only about 10 tech companies have gone public in 2014."
Given the disappointing reception that the King Digital IPO received Wednesday by investors, the tech bubble talk might lose some of its urgency.
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