An ‘enormous’ stock-market bubble has already popped, says David Einhorn

Discussion in 'Risk Management' started by themickey, Oct 28, 2020.

  1. themickey


    ‘Our working hypothesis, which might be disproven, is that September 2, 2020 was the top and the bubble has already popped.’
    — David Einhorn, Greenlight Capital

    The top is in for the U.S. stock market after an “enormous” bubble in technology stocks popped last month, Greenlight Capital founder David Einhorn warned in a letter dated Oct. 27 to investors reviewed by MarketWatch.

    The S&P 500 index SPX, -0.30% closed at a record 3,580.84 on Sept. 2, while the tech-heavy Nasdaq Composite COMP, +0.63% posted an all-time closing high of 12,056.44. Stocks subsequently pulled back, with the S&P 500 finishing Monday down 5% from its record close, while the Nasdaq was down 5.8%. The Dow Jones Industrial Average DJIA, -0.80% has yet to return to record territory last seen in February ahead of the pandemic-inspired plunge into a bear market.

    The Nasdaq-100 NDX, +0.82% is up around 33% year to date, while the Nasdaq Composite is up nearly 28%, compared with a rise of around 5.3% for the S&P 500.

    Einhorn acknowledged that Greenlight had “prematurely identified” the bubble in a 2016 warning, one he put down in part to the notion that the height of the 1999-2000 bubble was a once-in-a-career experience and that investors wouldn’t repeat “that level of insanity.”

    “Clearly, we were mistaken,” he said.

    Bubbles, meanwhile, tend to topple under their own weight as all investors finally hop in, short sellers cover, and the “last buyer has bought (or bought massive amounts of weekly calls),” he wrote.

    “The decline starts and the psychology shifts from greed to complacency to worry to panic,” Einhorn said.

    Einhorn pointed to 10 signs that backed up his bubble call. These include, he wrote:

    an IPO mania;
    extraordinary valuations and new metrics for valuations;
    a huge market concentration in a single sector and a few stocks;
    a second tier of stocks that most people haven’t heard of at S&P 500-type market capitalizations;
    the more fanciful and distant the narrative, it seems the better the stock performs;
    outperformance of companies suspected of fraud based on the consensus belief that there is no enforcement risk, without which crime pays;
    outsized reaction to economically irrelevant stock splits;
    increased participation of retail investors, who appear focused on the best-performing names;
    incredible trading volumes in speculative instruments like weekly call options and worthless common stock; and a parabolic ascent toward a top.

    Einhorn said that if the call is correct, investor sentiment is shifting from greed to complacency.

    “We have adjusted our short book accordingly including adding a fresh bubble basket of mostly second-tier companies and recent IPOs trading at remarkable valuations,” he said.
    Real Money likes this.
  2. themickey


    When I read this above article, initially what caught my eye was the statement...."Einhorn said that if the call is correct, investor sentiment is shifting from greed to complacency."

    When I was going over looking at yesterday's Tuesday's markets, what struck me was the lack of panic or fear in the markets, as if everyone was ready to buy the dip.
    Hence why I thought Einhorn's comment above seemed appropriate at this time.

    Myself, I think the market is dangerous atm for longer term stock holders, not day traders.
    Apologetik and Clubber Lang like this.
  3. themickey


    1st week of September was the turning point when it changed from bullish to 'Time to go flat', again, for the longer term stock holders.
  4. SammyJ


    This is the same guy who’s largely been bearish the last 8 months as we skied 80% on the naz . He was wiped out in a TSLA short as it ran 6 fold in 8 months . Same with Tom Lee . He never saw the 38% decline in March . All these guys are Charletons.It’s always after the fact . They never pay for all their wrong predictions as the media glosses over it and magnify’s their current headline .
  5. Daal


    He is just trying to save his career
    Banjo likes this.
  6. themickey


    Ya, but what pricked my interest was the 'current complacency' which aligns with my detected sentiment.
    So on further mulling where the crowd is usually wrong, when fear (initially) abounds, then nothing to fear. But a complacent trading public is perhaps a more pressing problem.
    JamesJ and Bad_Badness like this.
  7. As long as there are 0-interest rates every stock that pays 1% a year is not overvalued. In that logic - no bubble.
    murray t turtle, qlai and Banjo like this.
  8. Banjo


    Talking his book. If managers are talking, they're talking their books. Ray Dalio is another practitioner of the art. Tomorrow isn't yesterday.
    murray t turtle and Axon like this.
  9. Banjo


    Chasing yield deforms past behavioral patterns.
  10. The FED is all that matters.
    They have completely destroyed price discovery in every market.
    Valuations, Earnings, Technical Analysis, Elections, War, Pandemic, etc etc are all noise.
    #10     Oct 28, 2020