If ever you needed proof that some of today’s ‘asset’ prices have become completely mad, here it is.
A pair of fake muddy jeans is being sold for…wait for it…$425. That’s about £330.
Insane? I’d reckon so. But maybe it’s no worse than US share prices re-testing their all-time highs, as they did yesterday.
Last month I warned about over-extended stock valuations in the States that have also driven up the likes of the FTSE100. And today I take another look at what’s happening – through the eyes of one of America’s top hedge fund managers.
First, back to those jeans: I was writing a piece for Strategic Intelligence about Shell’s new Nord Stream 2 pipeline project. One minor typo later…and Google threw up the story about US retailer Nordstrom selling those distinctly costly denims.
But here’s where the similarity with America’s equity market ends, for the moment at least. While the price of the jeans is being widely ridiculed on social media, it seems that investors are still happy to pay up for US shares. Even though they’re widely aware how over-expensive these are.
Take electric car maker Tesla. It’s now valued at almost $52bn. That means it’s now overtaken GM to become America’s most valuable car manufacturer by market cap.
Tesla delivered just 25,000 cars last quarter. GM sold more than 25 times that amount. In profit terms there’s simply no comparison. GM won hands down. In fact Telsa isn’t expected to make a surplus until 2018. And even then it’s likely to be tiny.
Yet because Tesla is seen as some sort of ultra-tech stock, investors are happy to ignore all the conventional benchmarks. They’ve stopped worrying about boring things like price-to earnings and price/sales ratios, let alone dividend yields. Tesla, according to Morningstar, is on a PER for next year of more than 160.
The mantra has become: buy Tesla ‘cos it’s going up. Regardless of valuation, you’ll be able to unload your stock onto someone else at a higher level in the future.
Don’t just take my word for this. Over to David Einhorn. He’s an American investor, hedge fund manager and philanthropist. As founder and president of Greenlight Capital, he’s been (to say the least) rather successful – his net worth is almost $1.5bn.
Einhorn has just released his latest letter to clients. And he makes some very pertinent remarks about the state of the equity market which he believes has “regained enthusiasm for profitless companies that aren’t at risk of paying taxes”.
“A number of these stocks are back in full-blown momentum mode”, he says. “Analysts continue to raise “target prices” which the market treats as news. The bulls explain that traditional valuation metrics no longer apply to certain stocks [and] are confident that everyone else who holds these stocks understands the dynamic and won’t sell either. With holders reluctant to sell, the stocks can only go up – seemingly to infinity and beyond.”
“We have seen this before. There was no catalyst that we know of that burst the dot-com bubble in March 2000 and we don’t have a particular catalyst in mind here. That said, the top will be the top and it’s hard to predict when it will happen. A number of bubble stocks advanced despite missed expectations and/or falling estimates…with the understanding that twice a silly price isn’t twice as silly. In due time, we expect these bubbles to pop.”
Right now, consensus has become very complacent again. Just look at the US equity market’s ‘fear gauges’ (such as the VIX index) that indicate the current level of investor concern. These measures surged in early-April in the mini sell-off. But since then they’ve plunged and are down at around their all-time lows.
In turn, the FTSE 100 has rallied strongly. Pundits will tell you this is due to French politics. The real longer-term driver, though, remains Wall Street.
David Einhorn has neatly explained above how the US equity bubble has inflated, pumping up American share prices into very dangerous territory. But as he himself admits, he doesn’t know when the exact peak will be.
So let’s not try to hit it. A far better plan for investors is assessing the risks they can tolerate. In other words, look at each of your holdings on its individual merits.
There are still a few cheap shares out there. Finding these is what we do at Strategic Intelligence. But where a rational analysis of upside scope/downside danger clearly indicates the latter is much larger than the former, selling out must make sense.
There’s an old market adage that says ‘they don’t ring a bell at the top’. By the time we know that the indices have peaked, as I’ve noted before, it will be too late to sell.