Stocktake: No bubble here, says Grantham

Jeremy Grantham is famed for his prescience on market bubbles

Jeremy Grantham is famed for his prescience on market bubbles


The US stock market is 65 per cent overvalued, GMO investing legend Jeremy Grantham warned recently, but nowhere near bubble territory.

Grantham, famed for his prescience on market bubbles, takes an approach that blends quantitative and sentiment analysis. On the latter, he told Barron’s last week that professional investors are bullish but ordinary investors remain sceptical. The current boom is very different to the late 1990s, when cautious GMO had clients “who not only wanted to fire us, but who didn’t want to ever see us again. It was personal ”.

You can, he adds, “patch together global equities and get a semi-respectable-looking portfolio”. Emerging markets are near fair value, as are value stocks in “most of Europe”, while high-quality stocks in the US are also worth looking at.

Be wary of bonds, however – “absolutely, nerve-rackingly overpriced” and “a lot more dangerous than people imagine.”

Nothing frothy about margin debt highs

The amount of margin debt – money borrowed from US brokers – recently hit an all-time high ($451 billion) for the fifth consecutive month. Is this another sign of the type of frothy sentiment seen at market tops?

Actually, no. Sure, margin debt was at record highs at market tops in 2000 and 2007. However, Bespoke Investment Group screened for past periods where margin debt hit record highs for five or more consecutive months and found that three months later, the S&P 500 was higher on 91 per cent of occasions, averaging
4 per cent gains.

Six months out, it was up on 64 per cent of occasions, averaging 5.3 per cent gains, and on 55 per cent of times 12 months out, gains averaging a healthy 9.3 per cent.

Remember, a certain number of investors will always borrow money to buy stock. As the overall market capitalisation of the stock market rises, so too must the margin debt figure, unless investors suddenly decide to stop utilising the practice. That’s why, as Bespoke notes, more than 25 per cent of all monthly readings since 1980 have been at record levels.

A massive spike higher in margin debt might indicate excessive bullishness. The current figures, however, are a non-issue.

Don’t expect Alibaba to do a Microsoft

Microsoft last week hit $40 for the first time since 2000, although it remains a third lower than its 1999 peak.

Still, anyone who bought the stock at its initial public offering (IPO) in 1986 is up an incredible 54,000 per cent, says S&P’s Howard Silverblatt.

That kind of stat is often referenced by those keen in investing in high-profile IPOs such as Facebook, Twitter and Alibaba.

There’s one big difference, however.

Twitter was valued at $31 billion on its first day of trading, Facebook at over $100 billion.

Alibaba is expected to be valued at up to $150 billion in its upcoming market debut.

Microsft’s 1986 valuation? $500 million.

Losing money with technical analysis

Individual investors using technical analysis (TA) – the study of charts and past price action to forecast future prices – may want to think again.

A new study examined the accounts of investors at a Dutch discount brokerage over a six-year period, and found those who report using TA are “disproportionately prone” to short-term market speculation and record “dramatically lower returns”.

How much lower? On the whole, about 8.5 percentage points per year, or more than 20 percentage points for “high derivative rollers”, those who use TA and trade options.

This doesn’t necessarily mean TA is bunkum. Extremely overconfident investors are much more inclined to use TA than other investors, the study notes, while the high rollers “exhibit the same behavioural traits as investors who favour lottery stocks”.

The returns of those who use TA but who do not describe themselves as speculators are not nearly as bad; rather, TA is the “high-octane gasoline” that high rollers use “to fuel their lottery-like trading”.

Billionaires and Nazi Germany

One might expect billionaires to be unimpressed by talk of income inequality, but comparing it to Nazi Germany seems a bit over the top.

Not to Ken Langone. “You don’t survive as a society if you encourage and thrive on envy or jealousy,” said the Home Depot co-founder, who was
on the New York Stock Exchange compensation committee that authorised a $187 million pay packet for
ex-NYSE chief Richard Grasso in 2003.

“Because if you go back to 1933, with different words, this is what Hitler was saying in Germany”.

It follows venture capitalist Tom Perkins’ recent letter to the Wall Street Journal, where he referred to “the parallels of fascist Nazi Germany to its war on its ‘one per cent’, namely its Jews, to the progressive war on the American one per cent, namely the ‘rich’”.

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