“If the shoeshine boys are giving stock tips, it’s time to get out,” goes an old Wall Street saying about bubbles. It needs freshening up, for at least five reasons.
Nos. 1, 2, and 3 are that modern audiences might call it ageist, sexist, and classist—and I’m not looking to score a human-resources hat trick. No. 4 is that in this era of athleisure wear for business, I’d have to replace “shoe” with “sustainably sourced wool lounger.” I’m pretty sure those get either laundered or composted, not shined. No. 5 is that the pandemic has cut into all sorts of chatty commerce: shines, cab rides, haircuts. How am I supposed to monitor Main Street stock-tip frequency to tell whether we’re in a bubble?
I might have stumbled upon a new indicator. Shares of penny stock Zomedica (ticker: ZOM) recently multiplied in value after the veterinary-medicine company received a key online video endorsement from Carole Baskin. She’s the CEO of Tampa, Fla.–based Big Cat Rescue, better known as Joe Exotic’s nemesis in the Netflix documentary Tiger King. Meanwhile, child actress turned entrepreneur Lindsay Lohan put out a video predicting that Bitcoin will hit $100,000. “I hope you all get to drive your lambos to the moon,” said Lohan, referring to Lamborghinis.
Both videos were originally published on Cameo, where customers pay celebrities to deliver custom video messages. Baskin charges $299 per message, and Lohan, $350. Could Cameo stock tips be the new shoeshine indicator? It’s early to say for sure, but if Andrew Dice Clay initiates coverage of Virgin Galactic at Strong Buy, consider a defensive crouch.
I spoke this past week with renowned value investor Jeremy Grantham, who recently wrote that the U.S. stock market is a “real humdinger” of a bubble that will pop by late spring or summer at the latest. Grantham’s critics say he declares bubbles like Wolf Blitzer uses the breaking-news chyron—more often than needed. But then, the S&P 500 index looks pricey, at 23 times this year’s predicted record earnings, and investors have seen three violent stock crashes just since 1999.
You can’t just go by the stock market’s price/earnings ratio, says Grantham. “A bubble peaks when you reach almost unbearable levels of ecstasy,” he says. His recent note points to scattered signs. Tesla (TSLA), you might have heard by now, was recently valued at $1.25 million per vehicle sold, versus some $9,000 for General Motors (GM). And you might know that last year had more initial public offerings than 2000, when the dot-com bubble peaked. But did you know that half of last year’s IPOs were so-called blank-check companies, created to shop for acquisitions to be named later? Or that the number of small companies that have suddenly tripled in value is itself triple the high of the past decade? Or that the number of small-fry options trades multiplied eightfold last year?
That’s intriguing, but relying on ad hoc indicators and gut feelings makes me nervous. I don’t want to mistake wearing flannel-lined pants fresh out of the dryer for unbearable ecstasy, and sell too early. Anyhow, I’ve given up on trying to time the market. And even if I hadn’t, the economy is on the mend, and the Federal Reserve has said it will keep short-term interest rates low for years. Doesn’t that bode well for stocks?
Bubbles always come with wonderful stories, says Grantham. Investors extrapolating low rates far into the future today are like those in the past who acted as though fast economic growth would last forever. “The market doesn’t end with some terrible burst of bad news,” says Grantham. “It ends when things are pretty darn good, but not quite as good as yesterday.”
What’s unique about the current bubble is that “the fundamentals underneath money have sucked,” he adds. Rising valuations, therefore, have to be “carried exclusively by moral hazard.” The bubble will end, says Grantham, when widespread vaccinations solve investors’ most pressing problems, triggering relief and followed quickly by the realization that economic conditions remain poor.
Grantham’s forecast is an outlier. More common now are views like one presented this past week by UBS chief U.S. stock strategist Keith Parker. The S&P 500, he reckons, will rise another 5% or so during just the first half of this year. It will be propelled by vaccinations and government stimulus, plus upside earnings surprises, as cost cuts and rebounding revenues fatten profit margins.
Results now rolling in for the fourth quarter could beat earnings estimates by 10%, according to Parker. He recently asked his firm’s analysts for their top stock picks for this year. Among them: Walt Disney (DIS); retailer Five Below (FIVE); Procter & Gamble (PG); Snap-On (SNA), the tool maker; and Alphabet (GOOGL).
Wall Street banks are almost always bullish, says Grantham—it’s good for business. Maybe so, but always being bullish seems like a good strategy. Stocks go up over the long term, right? If they’re expensive now, maybe they’ll go up less than usual over the next 10 years, but it won’t take much to beat a 10-year Treasury yield of barely 1%.
The spoiler for that thesis is Japan, whose blue chip Nikkei 225 index still hasn’t climbed back to where it was in 1989. Grantham was three years early warning about that bubble.
America, I like to think, is more innovative and open than Japan was in the 1980s. But just in case Grantham is right, what would he recommend? Bonds, he says, might be in a bigger bubble than stocks. He favors tilting away from the U.S. toward cheaper overseas stock markets. That seems reasonable, bubble or not.
I’m thinking of recommending Vanguard FTSE All-World ex US Index fund (VFWAX). I just want to check with Carole Baskin first.
Write to Jack Hough at [email protected]. Follow him on Twitter and subscribe to his Barron’s Streetwise podcast.
