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Invest in Space X?

The United States is again launching astronauts from US soil to the International Space Station. Since the Space Shuttle program was retired, the USA had to pay Russia to launch US astronauts from the Baikonur Cosmodrome in Kazakhstan. The credit goes to Space X and eventually to Boeing as Space X has passed all of NASA’s tests, including a test flight with two astronauts to the Space Station. Boeing is fixing a glitch that has put them back a step or two. You can easily invest in Boeing, but can you invest in Space X? The quick answer is that you cannot invest directly in this private company but it is still possible to do so indirectly.

Space X and Rocket Boosters That Can Be Used Again and Again

One of the keys to success in exploration of space, keeping the Space Station going, returning to the moon, or going to Mars is reducing the cost of launching a rocket. According to CNBC sixty percent of the cost of a big rocket is the booster. With the exception of the space shuttle, rocket boosters were always allowed to fall back to earth after a launch. But, Space X changed that by launching rockets, turning off the booster before all of the fuel was used, and then re-igniting the booster to fly back to earth and land! This has become standard for Space X launches and makes their system hugely more efficient than those used by anyone else.

Goals of Space X

This private company was founded in 2002 with the stated purpose of reducing the costs of space exploration and eventually going to Mars. It has succeeded in reusing boosters and has a contract to bring astronauts to the Space Station. Mars is still in sight but a ways off.

Invest in Space X - Falcon Heavy Rocket
Invest in Space X – Falcon Heavy Rocket

Can You Invest in Space X?

According to WFMJ, the original money for Space X came from the private equity group, Founder’s Fund. A later investment came from the DFJ investment group. The third round of funding came from Fidelity and Google. Since Fidelity is private the only way to invest in a company that has equity in Space X is to invest in Alphabet, Google’s parent company.

It is unlikely that Elon Musk, who is the driving force for Space X as well as Tesla will ever want the company to go public despite the huge windfall that would mean for the original investors. That is because Musk still wants Space X to accomplish its ultimate goal of going to Mars. Diluting the control of the original investors, including Musk, would endanger the fulfillment of that dream.

Alphabet has a market cap of just over $1 trillion dollars. Alphabet’s share of Space X would be worth a couple of billion or more if the company went public. Thus, if you were to invest in Alphabet to get a piece of Space X, your Space X investment would only be 0.2% of your Alphabet investment. Nevertheless, Alphabet is a pretty good investment for the long term.

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Is a High P/E Ratio Dangerous?

The P/E ratio is a time-honored way to value stocks but in today’s market P/E ratios are sky high. Is a high P/E ratio dangerous? The P/E ratio compares company earnings to its share price. Both forward and trailing P/E ratios are commonly used to assess stock valuation. Over the years, a stock that has a P/E ratio higher than other’s in its market sector is either expected to grow or is simply overpriced. The problem today is that so many stocks have high P/E ratios, which casts doubt on the value of this metric.

Why Are P/E Ratios So High?

Over the years the average P/E ratio for stocks in the S&P 500 has been between 13 and 15. When earnings go up the P/E ratio goes down. Investors buy and the P/E ratio comes back up. But, why are P/E ratios so high today? Tesla has a P/E ratio of more than 1,000. Amazon has a P/E ratio of 120. Netflix has a P/E ratio of 83. Apple has a P/E ratio of 17. Why are P/E ratios so high for Netflix and Tesla? The reason is that enough investors believe that Tesla will become the dominant company in the electric car industry and that Netflix will dominate the streaming content niche. In addition, with interest rates at historic lows, even over-priced stocks can look attractive.

Disadvantages of Using P/E for Valuation

During a bear market the P/E ratio of a stock may be misleading. When we consider the intrinsic value of a stock, we look to the future and not the immediate present when the business cycle has slowed down. And, a steadily growing stock that is coming to dominate its market niche will typically have a high P/E ratio as investors want to get in before the price goes even higher. But, if a company is really failing and its stock price is falling, the P/E ratio may mislead investors into thinking that the stock is stable.

Is a High PE Ratio Dangerous?
Stock Price and P/E Ratio

P/E and PEG Ratio

When you are factoring growth into the equation for a stock, the PEG ratio can offer more insight than the P/E ratio. The PEG ratio is the price and earnings to growth ratio,

PEG = (P/E ratio/Annual Growth Rate)

In the best of all possible worlds, the PEG of a fairly priced stock should be one. Market Watch writes about the “three stock markets” and warns that FAANG stocks with high P/E ratios are overpriced, stocks traded by the Robinhood investors are crazy, and the rest of the market has value if you can find it. Their observation is that the P/E ratio makes sense in the broader market while the FAANGs are priced too high and the choices of most Robinhood investors make little or no sense.

If you are interested in a stock like Tesla, a better approach than the P/E ratio is to compare their progress to that of companies like General Motors, Ford, and Volkswagen. The winners in the race to dominate the electric car market will necessarily be the ones that are flashy today but the ones who are most efficient and profitable in the long run.

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Are Covid-19 Vaccines Good Investments?

The new coronavirus has swept across the world, killing nearly a million people and making more than 30 million sick. The effect on the global economy has been devastating even though the US stock market is ignoring the economy. As investors look for profitable investments in this era of Covid-19, vaccine makers come to mind. There are a hundred potential vaccines under development and several in trials in the final stage before getting approved. The question for investors is this: are Covid-19 vaccines a good investment?

How Profitable Are Vaccines?

Although the vaccines under development for preventing Covid-19 may save the world from the current pandemic, vaccines are not the best money-makers for pharmaceutical manufacturers. Boost Oregon provides a bit of insight with an article asking Aren’t Vaccines Just Moneymakers for Pharmaceutical Companies? The short answer is, no. They are not.

The total global sale of vaccines by all companies for all diseases is $24 billion a year. By comparison, the total sales of homeopathic remedies and supplements are $36 billion a year and the total sales of a single drug such as one for hepatitis C are $10 billion a year. Total sales of all medicines run to about $750 billion a year. All vaccines come to about 2% of big pharma sales and the Covid-19 vaccines will be only a part of all vaccine production.

How Long Will Covid-19 Vaccines Be Moneymakers?

Despite optimistic projections by the current administration, it will take two or three years to vaccinate enough people across the globe to reduce Covid-19 to a memory. Thereafter, the virus will either go away or become another yearly vaccine. In the first case, all profit from Covid-19 vaccines will be within the next two or three years. In the other case, Covid-19 vaccinations will become a yearly occurrence and part of the yearly vaccine production which is about two to three percent of big pharma sales.

Are Covid-19 Vaccines Good Investments?

Are Covid-19 Vaccines Good Investments?

For huge companies like Johnson & Johnson, Covid-19 sales will be a tiny part of their profit. For companies like Moderna, the profit will be more significant. But, as The Motley Fool notes, Moderna is absurdly overvalued and dangerous ahead of a market crash.

There is no doubt that Moderna’s technology and progress in its vaccine race are to be commended. The issue arises when one takes a closer look at the market opportunity for COVID-19 vaccines. Right now, there are about 15 experimental vaccines in phase 2 clinical trials, nine experimental vaccines in phase 3 clinical trials, and five vaccines with early approval despite lacking efficacy data. Moderna’s competitors, Pfizer and AstraZeneca, already have a combined manufacturing capacity to produce three billion doses of their coronavirus vaccine candidates next year. The world only needs about 15.6 billion doses of two-dose vaccines for global immunity, and that’s not taking into account affordability or delivery logistics.

The next problem comes from the monetization model of vaccines themselves. After vaccination, it is unlikely a patient will need another shot for an extended period of time, cutting off the possibility of mRNA-1273 to generate recurring annual revenue.

The point is that even the front-runners in the vaccine race will share only a part of the global market in which as many as half of the world population will either refuse the vaccine or not be able to afford it. These vaccines are wonderful investments for the well-being of the human race but not so good for safe and profitable investments.

Are Covid-19 Vaccines Good Investments? Slideshare Version

 

Are Covid-19 Vaccines Good Investments? – DOC

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Does ESG Investing Work?

ESG investing is one of a class of sustainable investing practices. ESG stands for environmental, social, and governance. When you engage in this manner of investing you look for companies that are well-governed, follow positive social practices, and help (or at least do not hurt) the environment. While this way to invest is a positive social force, does ESG investing work to increase your investment assets? Or is it a way to give to charitable causes while being disguised as a way to invest? Will you make money investing this way or would you do better simply giving your money to a cause that you support?

ESG Investment Considerations

Why is anyone interested in ESG investing? Many investors and millennials especially want to use their assets to do good in the world besides making money. Thus they consider both the financial impact of their investments and the social and environmental aspects as well. The first consideration for most ESG investors is if the company causes harm to the environment or our social fabric. The next issue is honest and reliable governance. If a company does not make the grade, it is avoided. The next step is to look for companies that have a positive impact. Such investments include clean energy companies, those that work to provide necessary services at affordable rates, and those that lead in reducing toxic emissions by creating new products and processes.

Incorporating ESG Into Investment Strategies

Does ESG Investing Work?

There is no rule saying that you need to dump all of your investments and find some gold standard ESG investments in the moment. The best route for incorporating ESG into investment strategies is to look at your current investments. One by one, look at their effects on society and the environment. Are they well-governed? Any ones that obviously do not fit in your ESG strategy can be sold and the money parked as cash or short term bonds. Then, start looking for suitable ESG investments. You do not need to make a one-to-one transition but rather pick the best ESG options a little at a time as you learn the process.

Investing in ESG Funds

A useful way to get into ESG investing is to let experts pick your investments. Investing in ESG funds with companies like Fidelity and Vanguard lets you put your money to work in the right areas without having to become an immediate expert in ESG companies. Many investors are happy staying in ESG funds. Others will do more research, typically looking at the companies in the funds, and start picking ESG stocks on their own. If you have a specific interest in a cause such as green energy, this can become your next stop after starting out with ESG funds.

What Is the Difference Between ESG and Impact Investing?

Investors who want to make a difference and not just avoid “bad” investments will commonly move from ESG investing to impact investing. Here is where you will use your investments to fund new research, processes, and technique that will clean up the environment, avoid pollution, or make necessary services available to the poor of the world. Clean water, affordable health care, clean energy and more fall into this approach. The difference between ESG and impact investing is in looking for a specific result instead of simply avoiding “bad” investments.

Advantages of ESG Investing

The advantages of ESG investing are two. Your money has a positive impact on the world. And, you typically have profitable investments. So, how does ESG investing work to make money as well as to do good? The answer lies in the governance part of ESG. Well-run companies are typically profitable companies. The “performance penalty” for socially responsible investments is small. What you need to look out for are companies that have a great story but are not well-governed. These can border on being scams. Here is where you need to do your research and pay attention as you go.

The Rise of ESG Investing

Socially responsible investing dates back at least fifty years and has gained momentum as issues like climate change and social injustice have come to the fore. Back when you had to pick and choose your investments one at a time, ESG investing could be difficult but today there are reputable ESG funds and lots of useful advice available. As the millennial generation comes of age, we can expect to see the rise of ESG investing continue as money is put to good and profitable use by smart and concerned investors.

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Fixed Income Investments

What are the best fixed income investments in an era of low interest rates? It depends if you want income or security. We offer a few thoughts about how you could invest the fixed-income part of your investment portfolio. Because your approach to fixed income investments in this era of low or even negative interest rates will depend on your philosophy, we look at this issue from two directions.

Fixed Income Investments for Maximum Income

If you need income from your fixed income investments in 2020, you need to accept greater risk in return. On the extreme end, junk bonds will offer a much higher interest rate than AA or AAA bonds, but you run the risk of losing your capital. Market Watch reported in June 2020 that junk bonds sold in record numbers as companies became desperate for cash. The spread between treasuries and junk bonds has been running at about 5% while the risk of losing your investment with a jun bond runs as high as 60%. In order to protect yourself against loss in this market you need to buy lots of high yield bonds across many companies in order to get the average risk of loss and the average return. Then you can expect to get a higher return and not lose everything. If you want to take this route, the best choice might be to look at a fixed income ETF that focuses on high yield bonds. You can find a list of high yield bond ETFs at ETFdb.com.

Fixed Income Investments for Maximum Security

The most secure fixed income investments are US Treasuries. These securities always offer lower interest rates than less-secure investments but are backed by the full faith and credit of the U.S. government. The best interest rate you can currently get for a 30 year bond is just under 1.5% and for a six month bond, 0.13%. The rationale for accepting such low rates is that you can protect your capital against losses in the stock and real estate markets and even gain more purchasing power over time if interest rates go negative.

Today’s effective yield on AAA bonds is 1.58% according to YCharts. This is a better yield than US Treasuries and reasonably safe as the only AAA US corporate bonds are those issued by Johnson & Johnson and Microsoft. Considering that tech stocks are currently in a downward slide, such bonds might well be a better choice than stocks until the Covid-19 crisis subsides and business gets back to usual. If the USA follows the EU, UK, and Japan into negative yield territory, bonds purchased at 1.5% will be more valuable than their initial prices as well as being safe havens in times of economic peril. How you choose to go with fixed income investments will depend on your need for income as well as your need to protect your capital in a time when the social and economic future is doubtful. As with most investment choices, diversification may be your best protection.

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5G Infrastructure Investments

No matter who wins the 2020 presidential election, federal spending on infrastructure is likely to increase. 5G infrastructure investments will be part of that. Much has been made of bridges, highways, and airports needing repairs, but a competitive America will need high-speed internet communications and that will come from 5G networks. Which 5G infrastructure investments should you look for as you choose profitable investments?

What Is 5G?

As wireless networks have improved over the years, they have been built to progressively more rigorous standards. So far we have seen 1G, 2G, 3G, and 4G networks. The next one being developed and tested meets the 5G standard. The point of a 5G network is that it will process lots more information a lot faster and allow us to connect the “internet of things” that involves machines, devices, and objects as well as human users.
The characteristics of 5G technologies will be peak data transfers in the multi-gigabyte range, exceptionally low latency, increased reliability, better availability, a uniform experience among all users, and a huge network capacity. This will improve everyone’s user experience and bring entirely new industries into the realm of the wireless internet.

5G Infrastructure Investments

Who Is Involved in 5G?

If you watch the news at all, you will have seen that the Chinese company, Huawei, want to equip countries across the globe with 5G networks. You will also have noticed that many nations want nothing to do with a company that has close ties to the Chinese government and intelligence services. 5G networks will have the capacity to dig deep into the data available in nations across the world and funnel it back to China. So, who is involved in 5G besides the Chinese?

Western 5G Leaders

The leading 5G providers in the West will be Ericsson, Nokia, and Qualcomm. Investopedia offers a nice review of these three companies and their 5G services.

Ericsson

Telefonaktiebolaget LM Ericsson is headquartered in Sweden and trades on NASDAQ as ERIC. The company has a $25 billion market cap and has gone from $9 a share to $11 a share despite the pandemic. Their dividend yield is 0.67%. They are a leading 5G developer, working with mobile operators across the world including Verizon, AT&T, SKM in Korea, and CHL in China. They have been doing real-world testing with all of these operators. Unlike with Huawei, nations across the world are not worried about the Swedes sending data to their intelligence service!

Nokia

Nokia Corporation is headquartered in Finland and trades on the New York Stock Exchange as NOK. It has a market cap of $18.5 billion and trades at $4 a share which is where it starts the year. Their dividend yield is 2.74%. Their 5G network is being actively tested in Germany by Deutsche Telekom AG, in Japan by NTT, in China by China Mobile, and by Verizon in the USA. Nokia is planning a full rollout in the next few years. As with Ericsson, no one is especially concerned about the Fins stealing data and feeding it to their intelligence services.

Qualcomm

Qualcomm is an American company that trades on NASDAQ as QCOM. It has an $81 billion market cap and its stock has gone from $88 a share to $110 a share this year despite the pandemic and recession. Besides developing wireless communication technologies, Qualcomm develops and sells integrated circuits and software for mobile devices and wireless networks. The Qualcomm strategy for 5G is to develop a method that allows users to jump from 4G to 5G to any network seamlessly.

5G Infrastructure Investments

All three Western leaders in 5G technologies are good choices for 5G infrastructure investments. They possess strong technologies research and development capabilities. And, in the current world climate of distrust of China, all three are considered better choices by the authorities that will choose whom to install 5G in their countries.

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Market Sentiment Data

Although valuations drive stock prices in the long term, short term market movements are driven by sentiment. The stock market anticipates price movements. Positive sentiment is based on the belief that stocks will go up and negative sentiment is based on the belief that stocks will go down. By the use of market sentiment data, traders and investors find profitable points of entry into and exit from their positions. At the base, market sentiment is driven by fear of loss and greed for profits. These provide useful market sentiment data.

VIX Index
Put Call Ratio
Safe haven assets
“Risk on” assets
High / Low Index
Stock price breadth
CNN’s Fear and Greed Index

Current Market Sentiment

Current market sentiment is a mixture of bullish optimism and fundamentals-based bearish pessimism. The market crashed at the onset of the Covid-19 pandemic. From February 20 to March 23 the S&P 500 lost ground from 3,386 to 2,237. The worst-hit were airlines, hospitality, and anyone in the travel industry. Tech stocks suffered the least and have led the charge as the S&P 500 recovered to 3,580 by September 2. Along the way, the airlines, aircraft makers like Boeing and folks in restaurants, hotels, and travel have made only slight gains. Optimistic investors believe that the Covid-19 crisis will go away with vaccines while at the same time the economy is in awful shape with millions unemployed and millions more running out of money. With these factors in play, current market sentiment is a mixed bag.

Best Market Sentiment Indicators

Because the stock market always looks forward, we would like to use the best market sentiment indicators to help sort out how to invest in the coming weeks, months, and even years. The most popular indicators of market sentiment are The CBOE VIX, High-Low Index, Bullish Percent Index (BPI), and important moving averages. The VIX is also known as the fear index. It looks at options trades as a measure of how much the market is protecting against risk. The High-Low index tells us when many stocks are trading at their 52-week highs which indicates a bull market versus how many trading at their 52-week lows indicating a bear market. The use of moving averages helps put this information into perspective.

Market Sentiment Graph

For many, if not most of us, it is easier to read market sentiment data from a market sentiment graph than from a written explanation. And, on a graph, it is possible to combine information in order to give a better picture of the market sentiment data the graph contains.  As such a graph can contain information from the CBOE Put/Call Ratio, AAll Bull Ratio, Bullish ratio, NAAIM Survey, and current High/Low ratios. This snapshot gives the investor an up to date picture of market sentiment in order to guide their purchase and sale of stocks.

Market Sentiment Data - Graph
Courtesy Business Insider

Cryptocurrency Market Sentiment

Reading cryptocurrency market sentiment is a bit different than following market sentiment data for stocks. Volume and volatility of trading read at 15 minute intra-day intervals and the use of Ravenpack to see sentiment in non-scheduled news reports about Bitcoin and 6 fiat currencies. It is of note that many investors experience positive returns over time irrespective of the news and prevailing cryptocurrency market sentiment. In this respect, we can sort out cryptocurrency traders versus long term investors and the effects of current sentiment on each.

CNN Market Sentiment

CNN Money provides a useful measure of market sentiment. Their Fear and Greed Index is based on seven indicators: junk bond demand, put and call options, market momentum, stock price strength, stock price breadth, market volatility, and safe haven demand.

This composite of market sentiment data shows very clearly the greed and bullish sentiment at the end of 2019 followed by the bearish fear that came on with the Covid-19 pandemic followed by the hope and greed that drove the market back up while the economy suffered in 2020.

Daily FX Market Sentiment

Data used to indicate the daily FX market sentiment are similar to what is used for the stock market. However, the news has a broader scope than the US stock market because it has to do with currencies and nations scattered across the globe and a market that is open twenty-four hours a day on working days all year long. Global politics, as well as the relations of one nation to another, are important in FX trading as currencies are traded in pairs. Nevertheless, market volatility, volume, and moving averages work just as well as indicators in the FX market as they do with stocks.

Risk Off Market Sentiment

Optimistic investor sentiment goes with good news about the economy, industry, global politics, and steady profits. This leads to a risk on investing environment in which investors pick riskier assets in hopes of big profits. When things turn around and investing looks chancier, it leads to a risk off environment in which investors shun risk and prefer stocks over bonds and value stocks over growth stocks. Risk off market sentiment is generally easy to spot as the entire market pivots to value instead of growth and bonds instead of stocks.

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How Negative Yield Bonds Work

A bond has a negative yield when the investor collects less money when the bond is mature than they paid to buy the bond. In short, the bond issuer is paid for issuing the bond. The buyer of the bond is paying for holding the bond. The reasons for buying a negative yield bond are several. In normal times, a bond may trade at a greater price than when it was issued due to interest rate fluctuations. And, in times of deflation, money increases in purchasing power and negative yield bonds become the norm.

Why Investors Buy Bonds With Negative Yields

At times when an economy is weak, deflation may set in. Money increases its purchasing power over time instead of losing it as happens with inflation. At such times, a bond with a small negative yield might be expected to gain in purchasing power by the time it is redeemed. Likewise, when an investor expects to see a currency rise in value against others, buying negative interest rate bonds in the currency that will strengthen will result in a profit when converted into a weaker currency. Other reasons include insurance companies that must hold part of their assets as bonds no matter how poor the yield is.

Corporate Bonds With Negative Yields

Investment grade corporate bonds with negative yields have become common in the European Union and Great Britain. In June of 2020 negative yield corporate bonds tripled in value over the previous month. About 332 billion euros worth of the 3.39 trillion investment-grade bonds in the EU had negative yields. This compares to 61% of government bonds in the EU and 48% of government bonds in the UK. The companies issuing these bonds are blue chips like Siemens that issues $1.6 billion in negative yield bonds recently.


How Can a Bond Have a Negative Yield?

Because we usually think of bonds as something that gives us a safe return on our investment over a specific period of time, negative yield bonds seem like a contradiction in terms. A bond has a negative yield if you can expect to get less money back when the bond matures than you put into it when you purchased it. When this happens during normal times it is a result of interest rate changes and having to sell the bond before maturity. But, now with economies weakened across the globe, we can expect that the purchasing power of money will rise with deflation. Thus you can purchase bonds for which you will receive less money at maturity but which may give you better purchasing power.

How Do Bond Yields Go Negative?

Bond yields go negative in two ways. The first is that you purchase a bond at a low interest rate and the rate goes up. If you choose to or have to, sell the bond, you will have a negative yield. The second way, which we are seeing now, is when deflation hits an economy and interest rates fall. They may go so as to be negative. In this case, you buy a bond for which the interest rate is negative. When you hold the bond to maturity, you will receive less money than you spent to get the bond. Investors may consider this to be a safe haven investment in times when economic chaos drives down the stock and real estate markets, makes money scarce, and drives up the purchasing power of the currency.

Impact of Negative Bond Yields

There are two ways to look at the impact of negative bond yields. The first is that investors choose to lose a little bit of money instead of risking the loss of more money. They buy government bonds with a slight negative yield, secure in their belief that they will be paying a slight premium to avoid huge losses. The other view is that negative yields are a losing proposition. Which of these is true always depends on what happens next to a currency, interest rates, stocks, real estate, precious metals, and cryptocurrencies. And, all of these depend on the stability of the economy, the markets, and today on the coronavirus.


Negative Bond Yield History

Japan has years of negative yield bond history. This was first tied to the deflation that hit the country around 1990 when its economic boom collapsed in the wake of a crisis of hidden debt. More recently, negative rates have occurred in the EU and UK as well. Negative yields have always been the end result of slowing economies, progressively lower rates, and a slide into negative territory. In almost all cases, negative yields are accepted as a way to protect money against loss by accepting a small “fee” for having the government or a corporation hold and “protect” your money.

Who Buys Negative Yield Bonds?

Investors who want a safe haven in weak economies often accept negative yields as an alternative to risking a stock market or real estate crash that would result in huge losses. And, insurance companies that are required to hold a portion of their assets as bonds are also faced with the necessity of buying and holding negative yield bonds when there are no safe alternatives. When rates for investment grade debt are negative, there are also positive yields to be found if you are comfortable with junk-grade bonds.

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Risk of Greater Fool Investing

By many measures the current stock market highs are crazy. We wrote months ago about how the stock market is ignoring the economy. Unemployment is still at historic lows, congress is not coming across with another stimulus, and people are running out of money. This will result in families tightening their belts, buying as little as possible, and driving the financials of many companies downward. Nevertheless, many investors seem to be ignoring the fundamentals and trying to eke out more profits before taking their profits. This approach of trying to hang in for the last bit of a bull market is sometimes called greater fool investing. The investor knows that at some level he or she is a fool for hanging around as the market gets risky but the profits are addicting. They plan to sell to a greater fool at the last moment. The risk of greater fool investing lies in the difficulty of predicting when the hammer will fall and the market will fall like a rock.

Risk of Greater Fool Investing

Will Investors Lose Like in the Dot Com or 1929 Crashes?

Market Watch writes about the same issue in their article about a bubble like the late 1990s or 1929.

A “greater fool” stock market might be at hand if a popular valuation measure continues to press higher, potentially kicking off another bubble to rival the late 1920s and 1990s, warned a Wall Street veteran who called the market’s rally off the March lows.

Barry Bannister, head of institutional equity strategy at Stifel, noted that the cyclically adjusted price-to-earnings, or CAPE, ratio was at or near levels last seen in the final two years of the 1920s and 1990s rallies. The CAPE ratio, devised by Nobel laureate economist Robert Shiller, measures the price of the S&P 500 SPX, -0.81% divided by average corporate earnings over the previous decade. By taking such a long view, its proponents argue that it smooths out cyclical variations and gives a better view of where valuations stand versus history.

We believe that the CAPE underestimates the problem because earnings have been excellent over the last decade and earnings going forward are highly suspect as the Covid-19 virus continues to damage the economy. Many businesses will not come back to previous levels and that will come back to haunt investors who seem to believe that the big tech companies can keep making money when all of their customers run out of cash and quit buying!

We previously quoted Warren Buffett when he compared the pre-dot com crash market to folks planning to dance until midnight at Cinderella’s ball but failing to notice that the clock on the wall had no hands.

At some point, smart investors will follow Jim Cramer’s old advice which is that you do not have a profit in the market until you take a profit. Those that start taking a profit now will have done quite nicely since the Covid-19 crash and recovery but will do even better if they start hedging their bets now instead of hoping for a greater fool to bail them out at the last minute before the next stock market crash.

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