More tales of “What the Bleep is Going On?”… historically-high valuations… how to approach markets in these conditions
A 341% gain isn’t bad…for a weekend.
Last Friday, I received a text from a friend I haven’t seen in years. He’s a lawyer – no professional investment experience. But in recent months, he’s been doing more and more trading.
His text pointed me toward an altcoin that had just been released; my friend had decided to throw some money at it.
He bought last Friday when the crypto was at $4.50. Two days later – Sunday afternoon – he sent me a screenshot…
The price was $15.73…in barely 48 hours. Its high, a few hours later, would be $19.85, for a gain of 341% for my friend.
What the bleep is going on?
That’s a fair question after a two-day, 341% gain – it’s also the question we asked yesterday, which serves as the name of a segment we’re running in the Digest this week.
From our CEO, Brian Hunt, as we quoted yesterday:
If you’ve followed the financial markets – even casually – over the past year, you’ve seen a parade of weird events. Events that don’t make much sense when analyzed inside most financial models.
Events that make you wonder What. The. Bleep is going on.
And to be clear, it’s not just the Average Joe scratching his head in disbelief. It’s also Wall Street. It’s also many of the world’s richest, most powerful people. Billionaires. CEOs. Venture Capitalists. Hedge fund managers.
Today, people who can pay whatever price it takes to know what is going on don’t know what the bleep is going on… in a way that is much different than confusing and strange times of the past.
To put it simple, we are living in a World That Is Nuts.
Yesterday, we looked at Friday’s nuts job report. Whereas economists had forecasted we’d see one million new jobs added, the actual number came in at just 266,000.
Since Friday, we’ve seen a slew of additional “what the bleep” stories…
U.S. gasoline prices are climbing after hackers stole almost 100 gigabytes of data from Colonial Pipeline’s networks, locking its computers with ransomware and demanding payment. Certain gas stations are completely out…
Iron ore futures prices soared 10% to a record-high on Monday, as the metal boom (which we’ve highlighted many times here in the Digest) rages on…
An NFT of a kid, loopy on anesthesia after visiting the dentist, sold for $13,500…
Chipotle Mexican Grill announced it is offering a career path for interested workers to make a whopping $100,000 – in just 3.5 years. Not exactly a teenager summer job…
This morning, Stanley Druckenmiller – one of the most successful money managers in the world – warned that the Fed’s policy is completely inappropriate and is endangering the U.S. Dollar’s status as the world’s reserve currency.
Finally, as I write, the Nasdaq is continuing its slide as the 10-Year Treasury yield climbs back above 1.62%. The tech index has lost roughly 3% in one-and-a-half trading sessions.
What the bleep is going on?
In today’s installment, we’ll turn to our macro investment expert, Eric Fry. We’ll also return to Luke Lango for more of his thoughts.
Lots to cover, so let’s just jump in.
***What the bleep is going on with valuations?
For newer Digest readers, Eric is our global macro specialist and the editor behind Fry’s Investment Report. As a macro investor, he evaluates markets and asset classes from a big-picture perspective to identify attractive opportunities. Once something is in his crosshairs, he digs down to find the right, specific investment to play the opportunity.
Looking at the market today, one of the things that jumps out to Eric are the eyebrow-raising valuations.
From Eric:
Based on price-to-earnings (PE) values, the S&P 500 Index is now trading at the priciest level of its 95-year history. (Although the actual S&P 500 Index did not emerge until 1957, its 90-stock predecessor launched in 1926.) The S&P’s current PE of 32 tops its 2000 peak reading by a nose.
Stock market valuations appear even more stretched from the perspective of other common metrics like the price-to-sales ratio, price-to-EBITDA ratio and the “Buffett Indicator.”
On average, these valuation gauges place the S&P 500’s current pricing about 50% higher than its 2000 peak.
The Buffett Indicator, for example, shows the S&P’s valuation to be hitting all-time record highs that are 56% above the previous record highs of the 1999-2000 dot.com bubble.
Crazy.
Eric is quick to point out that this doesn’t automatically mean U.S. stocks are on the verge of topping out. On the other hand, there’s no way a rational investor could suggest we’re near anything that resembles a major low.
This is significant because most multi-year, robust bull markets tend to originate from major lows – or at least, meaningful lows.
And what tends to happen to broad market returns when starting at meaningfully-high valuations?
Back to Eric:
When stocks become as pricey as they are currently, good things rarely happen.
At the start of 2000, for example, U.S. stock market capitalization reached a lofty 144% of GDP. Over the next ten years, the S&P 500 produced a loss of 24%.
Even after including dividends during that 10-year span, the S&P delivered a total return of minus 9%.
***So, what is driving today’s crazy valuations?
Eric tells us that a significant part of the answer boils down to FOMO – Fear of Missing Out:
This unique kind of “fear” is the one that causes rational individuals to pay irrational prices for high-flying stocks… or to pay any price whatsoever for a stock, as long as it’s a high-flying one.
When FOMO is the dominant investor sentiment, valuation rarely figures into the investment calculus. Momentum is everything. Momentum and a good story.
Eric tells us that what often happens when FOMO rules the investment landscape is even seriously-flawed stocks can soar – for a time – before they turn and lose money for their investors.
***So, what does all of this mean for you?
Is it time to cash in and take your chips off the table?
Back to Eric:
Probably not. But we should exercise some degree of caution…even while continuing to invest in new opportunities.
Successful investing always requires a balance between trimming some risks, while still embracing others…
No matter the overall market conditions, we should continue applying the same disciplined investment strategy we utilize in all market condition – both bullish and bearish.
We should insist on buying only the best opportunities we can find, and never settle for ones that are merely “fine” or “decent.”
This relates to a sentiment we’ve highlighted before in the Digest that originates from our CEO, Brian Hunt…
“It’s not so much a stock market as it is a market of stocks.”
In other words, while it’s easy to think of “the market” as one big monolith that rises or falls in unison, the reality is that it’s made up of thousands of companies with widely-varying fortunes – and futures.
Today’s craziness demands that we view everything through a detailed, one-off perspective. A “broad market” perspective is likely to be dangerous, hiding toxic stocks that could do major damage to a portfolio.
But when your focus is on specific investments – and their respective pros and cons – today’s crazy market is not so much incredibly dangerous and must be avoided, but rather, something to respect and wade into cautiously…yet take advantage of.
***To dig deeper into the interplay between valuations and returns, let’s turn to Luke Lango
If you’re newer to the Digest, Luke is our hypergrowth expert, and the analyst behind Hypergrowth Investing. His specialty is finding market-leading tech innovators that are pioneering explosive trends.
When we asked Luke about what signs of craziness he’s seeing in today’s market, he pointed toward cryptocurrencies. But his perspective offers a powerful takeaway for investors of all asset classes.
From Luke:
Cryptocurrencies are the future, and cryptocurrencies are in a bubble. That may seem contradictory. It’s not. Both are true.
This is the Dot Com Boom and Bust all over again. Back in the late 1990s, the internet was the future, and internet stocks were in a bubble. History is repeating itself in 2021.
And, if we take lessons from history, we can see the real opportunity in cryptos is not in the headline names that everyone is talking about like Bitcoin, Dogecoin, Binance, etc.
Fun fact: Of the top 5 companies in the Nasdaq back in 2000 – Cisco, Intel, Oracle, Microsoft, and Ericsson – none of them had reclaimed their peak Dot Com valuations until 15 years later… despite the fact that they all went on to do incredible things during those 15 years.
Instead, the real winners were Nasdaq “sleepers” like Adobe, Amazon, Apple, and Intuit – all of whom, 15 years after the bubble popped, were up several hundred percent.
Get the point? Valuation matters.
Don’t go looking for opportunities in the crypto world at the top of the barrel. Look beyond the hype. Find the hidden gems. Buy those coins.
Building on this, let’s return to Eric:
Chasing after high-flying “story stocks” is a dangerous game.
Today’s stock market offers no lack of dangerous highfliers. Risk is higher than average. That’s clear.
But many great opportunities remain in select portions of the market.
Tread carefully… and selectively.
Wrapping up today’s “What the Bleep is Going On?” segment, we’ll highlight one major takeaway: despite today’s weakness, the market is churning higher thanks, in large part, to FOMO.
But FOMO always has an end-date, after which investors will come face-to-face with valuations.
So, don’t fall for the FOMO-trap. Make sure you’re analyzing your portfolio holdings on a one-by-one basis, focusing on their intrinsic value/growth potential. And don’t confuse recent, bullish momentum with a long-term winner.
But…
There are strong investments out there. As noted earlier, metals are exploding. Certain reflation stocks are soaring. Commodities and other hard assets (real estate, collectibles) are making strong moves.
There’s money to be made in this crazy market, despite the caution that’s needed.
On that note, remember the two-day, 341%-gaining crypto recommended by my friend?
As I write, it has lost more than half of its value and is trading back down in the $9.60 range.
Have a good evening,
Jeff Remsburg
