Markets become much less nerve wracking when you quit looking for “logic” in them and realize they are exercises in quite illogical crowd psychology. Hedge fund guru David Einhorn highlights the super-abundant absurdity of the stock market. As an aside, SLL would not at all be surprised if the stock market’s intraday high yesterday turned out to be the ultimate top, and that the devastating bear market of which we’ve frequently warned, most recently in “Hard Core Doom Porn,” has begun. From Wolf Richter at wolfstreet.com:
Why trying to bet against this madness is a widow-maker trade. Logic has nothing to do with it.
Investors who’ve approached this stock market and its ludicrous valuations over the past few years from a point of view of fundamentals and “value” – thus, often on the side of short-selling those stocks – have gotten clobbered, or were at least left in the dust by buy-buy-buy fundamentals-don’t-matter automatons.
This has become an exercise in frustration-management for many – including, apparently, David Einhorn, founder and president of Greenlight Capital, a $7 billion hedge fund that became successful by searching for overvalued and undervalued companies and betting one way or the other. This strategy has hit the rocks in recent years. So far this year, the fund is up 3.3% while the S&P 500 is up 14%.
In a letter to Greenlight’s clients, reported by Business Insider, he unloaded his frustrations about this crazy market.
“The market remains very challenging for value investing strategies, as growth stocks have continued to outperform value stocks. The persistence of this dynamic leads to questions regarding whether value investing is a viable strategy.
“The knee-jerk instinct is to respond that when a proven strategy is so exceedingly out of favor that its viability is questioned, the cycle must be about to turn around. Unfortunately, we lack such clarity. After years of running into the wind, we are left with no sense stronger than, ‘it will turn when it turns.’”
On the short side, he cited Amazon, Tesla, and Netflix, whose ludicrous valuations are glaring examples of what a good short-target looks like, but so far, most of those daring souls who tried to follow logic and profit from shorting these stocks over the past few years have gotten their head handed to them.
Here’s what Einhorn said about the three heroes that he considers “our three most well-known ‘bubble’ shorts”:
Amazon: “Our view is that just because Amazon can disrupt somebody else’s profit stream, it doesn’t mean that Amazon earns that profit stream. For the moment, the market doesn’t agree. Perhaps, simply being disruptive is enough.”
Tesla: “Tesla had an awful quarter both in its current results and future prospects. In response, its shares fell almost 6%. We believe it deserved much worse.”
Netflix: “On the second quarter conference call, the CEO stated, ‘In some senses the negative free cash flow will be an indicator of enormous success.’ To us, all it indicates is that Netflix is capable of dramatically changing the economics of stand-up comedy in favor of the comedians.”
Yet Amazon is up 30% this year, Tesla and Netflix 58%! This market simply doesn’t tolerate logic other than buy, buy, buy – until something changes.
To continue reading: Einhorn Vents his Frustrations about the Crazy Markets