Tag Archives: Overvaluation

Waiting for the Last Dance, by Jeremy Grantham

A market pro thinks we’re in for a huge market downturn sometime this year. From Jeremy Grantham at gmo.com:

The Hazards of Asset Allocation in a Late-stage Major Bubble

Executive Summary

The long, long bull market since 2009 has finally matured into a fully-fledged epic bubble. Featuring extreme overvaluation, explosive price increases, frenzied issuance, and hysterically speculative investor behavior, I believe this event will be recorded as one of the great bubbles of financial history, right along with the South Sea bubble, 1929, and 2000.

These great bubbles are where fortunes are made and lost – and where investors truly prove their mettle. For positioning a portfolio to avoid the worst pain of a major bubble breaking is likely the most difficult part. Every career incentive in the industry and every fault of individual human psychology will work toward sucking investors in.

But this bubble will burst in due time, no matter how hard the Fed tries to support it, with consequent damaging effects on the economy and on portfolios. Make no mistake – for the majority of investors today, this could very well be the most important event of your investing lives. Speaking as an old student and historian of markets, it is intellectually exciting and terrifying at the same time. It is a privilege to ride through a market like this one more time.

“The one reality that you can never change is that a higher-priced asset will produce a lower return than a lower-priced asset. You can’t have your cake and eat it. You can enjoy it now, or you can enjoy it steadily in the distant future, but not both – and the price we pay for having this market go higher and higher is a lower 10-year return from the peak.”1

Most of the time, perhaps three-quarters of the time, major asset classes are reasonably priced relative to one another. The correct response is to make modest bets on those assets that measure as being cheaper and hope that the measurements are correct. With reasonable skill at evaluating assets the valuation-based allocator can expect to survive these phases intact with some small outperformance. “Small” because the opportunities themselves are small. If you wanted to be unfriendly you could say that asset allocation in this phase is unlikely to be very important. It would certainly help in these periods if the manager could also add value in the implementation, from the effective selection of countries, sectors, industries, and individual securities as well as major asset classes.

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He Said That? 7/20/15

From John Hussman, of the Hussman Funds, in his weekly newsletter released today:

As I wrote on January 8, 2001:

“Investors haven’t learned their lesson. Despite the brutalization of New Economy stocks over the past year, ignorance and greed obey no master. Following the Fed move, investors went straight for the glamour tech stocks, dumping utilities, pharmaceuticals, consumer staples, hospital stocks, insurance stocks – anything that smacked of safety or value. Investors are behaving like an ex-con, whose first impulse after getting out of the joint is to knock over the nearest liquor store… the immediate response of investors to interest rate cuts was to create a two-tiered market. And unfortunately, it’s exactly that failing ‘trend uniformity’ that places this advance in danger. Historically, sound market rallies are marked by uniform action across a wide range of sectors.”

“To illustrate the probable epilogue to the current bubble, we’ve calculated price targets for some of the glamour techs, based on current revenues per share, multiplied by the median price/revenue ratio over the bull market period 1991-1999.

Cisco Systems: $18 ¾, 52-week high: $82
Sun Microsystems: $4 ½, 52-week high: $64
EMC: $10, 52-week high: $105
Oracle: $6 7/8, 52-week high: $46

Get used to those itty-bitty prices. That’s what happens when companies keep splitting their stock during a bubble.”

Alan Abelson kindly featured those comments in Barron’s Magazine, followed that Monday morning by a round of dismissive remarks by several CNBC anchors. No matter – those projections turned out to be optimistic. As it happened, the 2002 lows for these “four horsemen of the internet” took Cisco to $8.60, Sun to $2.42, EMC to $3.83, and Oracle to $7.32. We forget that the most popular large-cap speculative leaders at the 2000 peak lost 92% of their value over the completion of the cycle. It feels better to forget.

Good thing nothing like that could happen today; the Fed has our backs.