As I explained on Tuesday and last week and last month and ad infinitum, U.S. stocks are in a bubble that has little to do with fundamentals or common sense and everything to do with sentiment, indexing, ETFs and the triumph of hope over experience. Investors are checking their brains at the door every morning and ignoring the lessons that hammer them time and again that stocks don’t grow to the sky.
Do not be fooled.
I repeat. Stocks are in a bubble. And that means that sooner or later they are going to drop sharply. Saying this won’t make me a lot of friends, but I have plenty of friends. My job is to make sure that the people who read me understand the truth about what is happening in the market. And the truth is that neither the economy nor corporate earnings justify a market trading at anywhere near current valuation levels.
A number of highly respected investors like Seth Klarman, manager of the highly successful Baupost Limited Partnerships, and Jeremy Grantham, whose firm has lost $40 billion in assets due to its negative views over the last year, believe we are in a bubble and prone to big losses in the near future. What you come to learn after investing as long as I have is that investors buy too late what they wish they would have bought when it was a lot cheaper and sell what they are going to need. Right now, fed by the frenzy for passive (i.e. mindless) investing, indexing and ETFs, they are doing precisely the opposite of what they should be doing.
Right now, investors should be doing two things: Getting out of overvalued, overleveraged stocks and shorting (or buying puts on) them instead. In particular, they should focus on the dying retail sector, and on other closely related sectors that will be dragged down with it – like food service and restaurants.