Seeking Alpha

Klarman raises alarm over asset prices, cites tech “nosebleed valuations”

  • Seth Klarman is warning of an impending asset price bubble, calling out "nosebleed valuations” in high-flying stocks such as Netflix (NFLX) and Tesla (TSLA) and warning of the potential for a brutal correction across financial markets.
  • “Any year in which the S&P 500 jumps 32% and the Nasdaq 40% while corporate earnings barely increase should be a cause for concern, not for further exuberance," the Baupost Group head wrote in a letter to clients.
  • "There is a growing gap between the financial markets and the real economy... and the overall picture is one of growing risk and inadequate potential return almost everywhere one looks."
  • In a semi-rebuttal, Vanguard's Jack Bogle agrees stocks are in "risky territory" but says investors shouldn't be trying to time the market in any case, and the problem with selling stocks based on such a prediction is you won't know when to re-enter: "Will [Klarman] call you and tell you when it's time to get back in?"
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Comments (55)
  • rickymm3
    , contributor
    Comments (17) | Send Message
     
    Jack Bogle says ... "Ya never know when its going to stop goin' down....so just never let it! Keep buying!"

     

    derp.
    10 Mar 2014, 07:07 PM Reply Like
  • joenjensen
    , contributor
    Comments (708) | Send Message
     
    The moment you stop buying or expect the stock to continue to go down, that's the moment it will start going up. If you think your going to make a killing when you buy it back as it goes up, your stuck because you can't buy it back for three business days until the sold stock clears, by then you missed it.....again.
    10 Mar 2014, 09:54 PM Reply Like
  • chriff
    , contributor
    Comments (88) | Send Message
     
    This is exactly the sort of trading that Jack Bogle generally advises against.

     

    And the investment advice from Vanguard is based on asset allocation, not picking stocks or timing the market. And for the average investor, who doesn't spend too much time thinking about these thinks, it's actually a pretty strategy.
    11 Mar 2014, 12:00 AM Reply Like
  • Intangible Valuation
    , contributor
    Comments (613) | Send Message
     
    There is a mini-bubble in mobile and social stocks, for sure. There is also a semi-bubble in small caps and junk.

     

    Interestingly, many investment grade large caps are not that expensive.
    10 Mar 2014, 07:07 PM Reply Like
  • Hellz
    , contributor
    Comments (171) | Send Message
     
    NASDAQ is so horrendously overvalued - how can someone deny it? PE in the hundreds for companies with mark cap in the 10/100's of billions. 19 billions for a messenger app
    10 Mar 2014, 07:09 PM Reply Like
  • Michael Bryant
    , contributor
    Comments (5655) | Send Message
     
    There are some stocks which are still good buys.
    10 Mar 2014, 10:40 PM Reply Like
  • Land of Milk and Honey
    , contributor
    Comments (4644) | Send Message
     
    Michael Bryant

     

    Can I ask what ones?
    11 Mar 2014, 07:13 AM Reply Like
  • Michael Bryant
    , contributor
    Comments (5655) | Send Message
     
    (AAPL), (GOOG)
    11 Mar 2014, 09:57 AM Reply Like
  • leopardtrader
    , contributor
    Comments (1316) | Send Message
     
    This and aligned comments are the reasons why the market keeps rising. Some of these guys dont get it that we are in a massive bull market that could double SnP ( yes double) from here in the next few years
    10 Mar 2014, 07:22 PM Reply Like
  • AContrarian
    , contributor
    Comments (144) | Send Message
     
    Leopard - bold call, mind sharing your assumptions for GDP growth, PE multiples, profit margins?

     

    These do ultimately determine the value of equities correct?
    10 Mar 2014, 07:39 PM Reply Like
  • the_value_vulture
    , contributor
    Comments (208) | Send Message
     
    "Some of these guys don't get it"

     

    I'd seriously suggest you take a look at klarman, watsa, marks, and their investment records and methodology. This mechanisms moving this market and the distortions our policy makers have created are causing severe damage to true price discovery.
    10 Mar 2014, 08:59 PM Reply Like
  • geedee01
    , contributor
    Comments (7) | Send Message
     
    Dear the_Value_vulture, "I'd seriously suggest you take a look at klarman, watsa, marks, and their investment records and methodology" --> Where can I find their investment records and methodlogy? I would apreciate greatly for your pointers on this. Thank you!
    10 Mar 2014, 09:23 PM Reply Like
  • the_value_vulture
    , contributor
    Comments (208) | Send Message
     
    The annual letters of each are pretty interesting and give some insight into their investment philosophy. I suggest that to be a great starting point. If you type any of these investors in a search you are likely to get more information as well. I've seen a few interviews from each that are quite entertaining.
    10 Mar 2014, 10:29 PM Reply Like
  • Long Term Value
    , contributor
    Comments (190) | Send Message
     
    Howard Marks has a wonderful book called, "The Most Important Thing". Highly recommend.
    10 Mar 2014, 11:11 PM Reply Like
  • bubba1979
    , contributor
    Comments (159) | Send Message
     
    What did bogle say? 5% earnings growth and 2% dividend growth should give the broad index a 7% average return. Bonds and cash can't touch that right now, unless you are going to high risk or emerging market bonds. That could lead to PE expansion.

     

    The PE leading ratio is fairly valued, but typically gets over valued before a correction. That recomends an upward trend from these levels with difficult to time corrections in between. If you think the earnings estimates are too high, that is a good reason to sell as next year stocks would drop.

     

    Don't time the market but decide if earnings are correct.
    11 Mar 2014, 12:26 AM Reply Like
  • bubba1979
    , contributor
    Comments (159) | Send Message
     
    What did klarman return last year? The last 2? How did he do compared to the index?
    11 Mar 2014, 12:29 AM Reply Like
  • StopPrintinMoney
    , contributor
    Comments (217) | Send Message
     
    you nailed it man- these silly hedge fund managers do not understand how the markets work and why you need to be bullish all the time.
    BTFATH y'all !!!!!!!!
    11 Mar 2014, 11:51 AM Reply Like
  • StopPrintinMoney
    , contributor
    Comments (217) | Send Message
     
    start with annual letters to shareholders. that's a great start. good luck.
    11 Mar 2014, 11:51 AM Reply Like
  • StopPrintinMoney
    , contributor
    Comments (217) | Send Message
     
    without even looking at your statements, i can tell that his return was better than yours. correct me if I am wrong.
    11 Mar 2014, 11:52 AM Reply Like
  • Ford Prefect 1969
    , contributor
    Comments (2282) | Send Message
     
    Only nosebleeds I can see are the shorts getting repeatedly punched in the face.

     

    There is a form of safety in companies that actually grow.
    10 Mar 2014, 07:40 PM Reply Like
  • Dan Fichana
    , contributor
    Comments (1920) | Send Message
     
    I can see the value of TSLA and Netflix.

     

    These are both paradigm shifts in their respective industries.

     

    There are quite a number of people who've cut the cord with cable and go with an Antenna, internet and Neflix. Much cheaper to pay $40/month than $150.
    It is also removing customers from other cable providers like Time Warner and Comcast.

     

    Tesla- well, it is just a great car; what an EV should be. People really don't like car dealerships, nor do they like paying gasoline prices that are subjected to the whims of some foreign country. Plus you could in theory provide your own electricity.

     

    It really comes down to a cut the cord/fuel hose philosophy.

     

    Plus those industries that these two companies are attacking; there is alot of ill will from the customers directed at the current players. That is a good industry to enter.
    10 Mar 2014, 07:47 PM Reply Like
  • SharkDude
    , contributor
    Comments (649) | Send Message
     
    You can see the value?????? Good lord. That is the problem.
    10 Mar 2014, 08:56 PM Reply Like
  • Greencuda440x6
    , contributor
    Comments (25) | Send Message
     
    You hit it here. Netflix has Hulu covered, CBS streaming still sucks, and the rest can't seem to get onboard with the tech that Netflix is using. It is happening because the crap on TV these days is not worth anything like the $100 a month they want. Yep $40 for internet puts TV in the corner. And an antennae gets all the free tv anyone can want.

     

    TSLA has them fooled because they think of nothing but the car when Elon is about much much more. Also both the marketing model and the modern manufacturing principles are something investment guru's know nothing about but result in a huge difference. I think it is funny that you don't see a TSLA ad or salesman to buy the car. Stuff it car dealer/scammers!
    10 Mar 2014, 09:10 PM Reply Like
  • Michael Bryant
    , contributor
    Comments (5655) | Send Message
     
    (NFLX) and (TSLA) both have value. Both won't go away. Both have products in demand. I think (NFLX) can go higher. (TSLA) can't, or shouldn't.
    10 Mar 2014, 10:45 PM Reply Like
  • StopPrintinMoney
    , contributor
    Comments (217) | Send Message
     
    for all we know this person may be on some heavy drugs. a normal person wouldn't write anything silly like that.....
    11 Mar 2014, 11:54 AM Reply Like
  • dpaauw
    , contributor
    Comments (65) | Send Message
     
    I just read that New Jersey is the 3rd state to ban direct sales of automobiles. WTF? I can see banning direct sales of drugs, but cars?
    Dealers have their place but emulating a union isn't one.
    11 Mar 2014, 11:09 PM Reply Like
  • Long Term Value
    , contributor
    Comments (190) | Send Message
     
    Howard Marks made similar comments in a recent interview, especially about high yield debt. Now he announces a secondary sale of his firm Oaktree, in which all the proceeds will go to insiders selling on the secondary.

     

    Every day we read about private equity guys selling their firms to the public, or secondary sales from those already public. These folks aren't stupid. Prices are quite high.
    10 Mar 2014, 08:01 PM Reply Like
  • bubba1979
    , contributor
    Comments (159) | Send Message
     
    Hedge funds did awful last year. These guys have special rules that have let them out perform, but the playing field is being equalized partially.

     

    Klarman admitted in his statement that he has no idea how to time the market. Why are you listening to him timing the market. He always has a lot of cash to get involved in things us mortals can't. Last year it sounded like it didn't work.

     

    Don't listen to the market timers. They will only let you hear their correct predictions, they leave out their bad ones.
    11 Mar 2014, 10:48 AM Reply Like
  • snoopy44
    , contributor
    Comments (901) | Send Message
     
    vulture:
    klarman has one of the best performance records in the industry. When he talks I listen. And btw he is NOT an advocate of market timing. His job is to protect capital as much as grow it. Sometimes that means heading to the sidelines. Nothing wrong with that.

     

    S.
    11 Mar 2014, 12:50 PM Reply Like
  • Long Term Value
    , contributor
    Comments (190) | Send Message
     
    Neither Marks nor Klarman are timing the market. Both are reporting the valuation facts as they see them. Both are aware (and Marks is very explicit on this) that the exact moment of future price correction is not knowable.

     

    Marks called the last credit crisis. Called it early. Too early in fact. But paying attention to him would have kept a person from overextending into this area when prices were too high. When the crisis hit, Marks raised 10 billion to buy distressed debt. He has a 19% annualized return for two decades. He's a Buffett class investor.

     

    These guys are worth watching, imo.
    12 Mar 2014, 12:41 PM Reply Like
  • redarrow5150
    , contributor
    Comments (1027) | Send Message
     
    It's a market of stocks and not a stock market. Judas you go to Marketwatch and it seems like everyday this year they say a crash is going to happen. Why is it everyone ALWAYS points out the market is overvalued with stocks like Netflix or Tesla? Duh! If you just want to include them but most never bring up Amazon but it's getting comical and easy for everyone to say the market is overvalued.
    10 Mar 2014, 08:12 PM Reply Like
  • Mattster
    , contributor
    Comments (162) | Send Message
     
    In other words it aint over till Klarman goes long
    10 Mar 2014, 08:12 PM Reply Like
  • Ted Bear
    , contributor
    Comments (616) | Send Message
     
    You show me $100 Billion a month for several years, and I will show you one hell of a party.

     

    I will also reasonably predict one hell of a hangover.

     

    The only thing we don't really know is the timing.

     

    The massive borrow and spend MIGHT have worked, and it still might be argued that instead of high unemployment, anemic growth, and poor quality earnings we could have had unimaginable unemployment, negative growth, and no earnings--perhaps condensed into a brief period.

     

    The levitation can, and will continue, until it doesn't. Could be tomorrow, could be months or even years from now, but little by little, each increment of stimulus is having a lower and poorer quality of impact.

     

    And then we face the great unwind.
    10 Mar 2014, 08:15 PM Reply Like
  • Chris Lau
    , contributor
    Comments (2041) | Send Message
     
    Valuation metrics have absolutely no meaning in this market. That's what Klarman is trying to say - It's the Truman show. Marks echoed the same thing, and in his memo said markets will one day fall. He does not know when.

     

    Everyone's eyes is on QE/Fed policy, which will never stop buying its own debt or letting rates rise. My eye is on the divergence between the super-rich and the ordinary class. Something's got to give.
    10 Mar 2014, 08:30 PM Reply Like
  • Michael Bryant
    , contributor
    Comments (5655) | Send Message
     
    Um, the Fed started tapering, so you can calculate in x number of years the Fed will no longer be buying debt.
    10 Mar 2014, 10:48 PM Reply Like
  • AZ Desert Trader
    , contributor
    Comments (242) | Send Message
     
    Add PLUG to that list!
    10 Mar 2014, 08:37 PM Reply Like
  • Ford Prefect 1969
    , contributor
    Comments (2282) | Send Message
     
    AZ Desert Trader

     

    PLUG is a specialist trade, if you can kid the kidders then you win.

     

    Don't confuse PLUG with a proper company.
    10 Mar 2014, 09:32 PM Reply Like
  • Frank Greenhalgh
    , contributor
    Comments (2025) | Send Message
     
    Elon Musk is committed to Tesla, he risked his fortune on it. However he certainly seems to have big problems financially. Future spending required: Battery company, superchargers, E development, X manufacture, So far no word from Panasonic?
    See: http://wrd.cm/1dJlGrP
    10 Mar 2014, 08:51 PM Reply Like
  • Michael Bryant
    , contributor
    Comments (5655) | Send Message
     
    So (TSLA) is worth 1/5 of (TM)? Sounds like (CSCO) in 1999. Yes, we all knew the internet would change the world, and (CSCO) was the leading provider of routers for the internet.
    10 Mar 2014, 10:51 PM Reply Like
  • King Rat
    , contributor
    Comments (766) | Send Message
     
    "1/5 TM?" AKA 1/2 GM or F. I thank you for your insertion of logic. What I keep telling TSLA fans is that TSLA ≠ Tesla. You're saying that CSCO ≠ Cisco. Cisco's networking tools did help change the world and Cisco's revenue was expanding like mad. That did not mean, however, that CSCO was worth the $400billion it demanded 14 years ago.

     

    I see TSLA expanding quickly, but the problem is that it is not worth the near-$30billion it commands right now. The financial reality is that TSLA represents a company with extremely low leverage with customers or suppliers, operates in a capital-intensive market where it has little capital, operates in a research-intensive market where it is out-researched, many suppliers are potential competitors, and in order to break through, has alienated every single possible non-governmental partner. To keep pumping TSLA at current valuations, you have to believe in the complete and utter incompetence of all of their existing competitors, in the continued superiority of their suppliers, the superiority of only their own research, and the ability to maintain margins even when producing cars that sell for 1/2 to 1/3 the current selling price.

     

    Furthermore, to justify TSLA in March, 2013, you had to look to 2018 performance. OK, 5 years ahead, for a young growth company, fine. To justify March, 2014 prices you have to look to 2024+ performance, or 10+ years ahead, for a slightly more mature company. That's much more difficult to do.

     

    14 years on from CSCO at $400billion, CSCO is worth 1/4 of that, and the stock is flat over 4 years despite raising profits & book/share by 50% and introducing a >3% dividend.

     

    Anyway, with NFLX, LNKD, and TSLA, I have warned both longs and shorts. Shorts because they will lose money until the music stops and longs because they will lose money once the music stops, and neither of them know when the music will stop. In the mean time, longs are likely smarter because at least in the short term, they're making a profit.
    11 Mar 2014, 12:12 AM Reply Like
  • Dan Fichana
    , contributor
    Comments (1920) | Send Message
     
    There are actually 2 ways to look at it with the TSLA valuation.

     

    If you consider the current players as a dying industry whom are falling into the entrenched players dilemma; absolutely TSLA is worth its value and more since it is disruptive and may take one or two of those entrenched players out eventually.

     

    If on the other hand it is just a car company, than you have to factor in money per car, liability per car, amoung other factors (recalling 20,000 cars and costing you 20 cents each and making 20 K per car vs recalling 2 M cars each costing $300 in repairs when you only made $500 per car)
    11 Mar 2014, 05:18 AM Reply Like
  • Michael Bryant
    , contributor
    Comments (5655) | Send Message
     
    (TM) is far from a dying automaker. It invested a lot in hybrids. As for disruptive, we heard that about the internet too. And where has (CSCO) gone, to go to my original example.
    11 Mar 2014, 10:00 AM Reply Like
  • Dan Fichana
    , contributor
    Comments (1920) | Send Message
     
    I'm talking long, long term.
    Toyota I believe made a huge stumble long term by milking the Hybrid tech and pushing hydrogen. Short term, looks great. It's the entrenched players dilemma but as an extended scale.

     

    Yes Cisco did get too big for its britches back, but that is one example. Cisco had other issues related to the internet bubble.

     

    There are other examples when the new player shot up like a rocket. Google, apple (itunes), digital cameras, LCD TVs, refrigeration.
    11 Mar 2014, 10:32 AM Reply Like
  • Long Term Value
    , contributor
    Comments (190) | Send Message
     
    You are smart king rat. I like your approach to the problem. Methodical.
    12 Mar 2014, 12:44 PM Reply Like
  • greedyyetfearful
    , contributor
    Comment (1) | Send Message
     
    But Greenspan said bubbles are only in hindsight...... So there's never a bubble. Buy!
    10 Mar 2014, 09:02 PM Reply Like
  • 22643611
    , contributor
    Comments (2101) | Send Message
     
    I'm not saying the guy is wrong but he needs to get in a long line of folks who have been saying this.
    One day someone saying this will likely be correct (when we have a prolonged market correction) but just repeating what others have been saying so that one day they can say "I told you so" gets no credit from me.
    Citing some of these sky high valuations is nothing more than being a master of the obvious.
    10 Mar 2014, 09:39 PM Reply Like
  • bubba1979
    , contributor
    Comments (159) | Send Message
     
    this guy has been saying to be out of the market a while now, eventually he will be right, but its a big mistake to think he is any good at timing the market.

     

    The strange rules, down January, half the time it will be down the rest of the year. Other stat is up 25% almost never goes down the next year. So flip a coin, but what are you going to do with the money? Long bonds? Those are likely to underperform stocks, probably by quite a bit.

     

    So will some momo stocks break this year, yep. Will it be tesla and netflix? I doubt it, but I have taken some profits in each ;-) and have stop losses in on both. People have been shorting both names since I bought them, so I guess if tesla was overvalued when i bought it in 2012, its got to be overvalued now after rising 8x.

     

    Stock market normally climbs the wall of worry, and last year this same guy was worried and it climbed. Take some profits, both stocks are up a lot, but don't sell them because of fear, keep some. And don't over allocate to bonds or cash because some pundit that can't time the market has called for a bubble again. The market looks pretty fairly valued here. There will be corrections, but then it goes back up. If you pull all your winners out of the market you will miss out.
    10 Mar 2014, 09:58 PM Reply Like
  • Michael Bryant
    , contributor
    Comments (5655) | Send Message
     
    "So will some momo stocks break this year, yep. Will it be tesla and netflix? I doubt it..."

     

    (RGSE) broke out today. (FONR) has be bouncing around. (NLST) has been surging for a month or so. Glad I bought all before the latest jumps in each. Sure, I missed the initial gains, but that is what momentum investors do. We find momentum at a reasonable price.

     

    (CVRR), (RNF), and (TNH) have been strong movers over the last month or two after having hit bottom. Also, (NEWM) has been rocking since it spun off from (NCT).
    10 Mar 2014, 11:02 PM Reply Like
  • tommytomtom
    , contributor
    Comment (1) | Send Message
     
    Bogle says.... wait.. don't time the market... wait until your stocks really tank then you can be sure you waited to long and screwed up by getting out way too late.
    10 Mar 2014, 10:28 PM Reply Like
  • dhpetrescu
    , contributor
    Comments (71) | Send Message
     
    But...who has the better record over multiple decades, Bogle or Klarman? Klarman does. Now before you're amazed with his record, keep in mind he achieved it without leverage, in fact he achieved it averaging 30% cash not invested at all times. If you only look at his record for what he has invested, taking out cash on sidelines, it is even more impressive. I would listen closely to what he has to say.
    10 Mar 2014, 10:50 PM Reply Like
  • Jacob Wolinsky
    , contributor
    Comments (464) | Send Message
     
    As first appeared on VW

     

    http://bit.ly/1fCHt6X
    http://bit.ly/PmeBVM
    http://bit.ly/PmeBVO
    10 Mar 2014, 11:17 PM Reply Like
  • Seeking Beta To Your Alpha
    , contributor
    Comments (450) | Send Message
     
    Having "cut the cord" for two years to save money, I was a proud Netflix subscriber. I watched network TV through my digital tuner on my Sony Bravia flatscreen, and convinced myself that the buffered Netflix streaming movies that took hours to watch were fine, because in the end, I was saving at least $1k each year...

     

    And then I realized that Comcast was charging me more for my internet than what I would've been paying for the last six months had I opted to purchase both internet and cable from them...($65 a month for internet only vs. $59.95 a month for the double play bundle w/ no annual contract).

     

    Netflix will only last as long as Comcast and Verizon allow it to. The minute both of those companies make the decision to undercut Netflix on pricing, and as long as the law allows them to reduce the feeds of Netflix streams, Netflix won't stand a chance. Right now, Comcast is milking both Netflix and the consumers.

     

    Long story short = Comcast long and Netflix short.
    10 Mar 2014, 11:22 PM Reply Like
  • chriff
    , contributor
    Comments (88) | Send Message
     
    How come people keep saying this? I've been on Comcast internet only, paying about $30-40/month ($20 in 6 month trial) for decent internet (download speeds of 3+MB/sec).

     

    When I had Comcast internet + TV, my bill would go up every couple of months without any mention or explanation. And when it passed $70/month, I knew it would be cheaper to go internet-only.

     

    When you call them to say you want to quit TV, they always say that it won't save you money. Maybe the key is to start from scratch with internet only (Plus: BUY YOUR OWN MODEM! Pays for itself within a year and if you don't need it anymore, sell it on ebay).
    11 Mar 2014, 12:11 AM Reply Like
  • Direxion3x folly
    , contributor
    Comments (8) | Send Message
     
    I'm in Tesla and have no idea when to get out. My feeling is the market will continue to levitate until early 2015, and then watch out!! I can see a perfect storm of QE unwinding, political fracas, rising interest rates, and a complacent market (low VIX). But, like Jack Vogle says, buy low, sell high--e.g., try not to use your stocks to pay bills. I'm fortunate in that respect (and others).
    10 Mar 2014, 11:48 PM Reply Like
  • Ford Prefect 1969
    , contributor
    Comments (2282) | Send Message
     
    TSLA

     

    Too much chart gazing.

     

    Insufficient business case analysis.

     

    Somebody actually wrote above: Tesla has insufficient customer and supplier leverage.

     

    NOTHING I have ever encountered by way of business case analysis could be more completely off-base.

     

    If there is one thing that Tesla has:

     

    Absolute command of recruitment of key talent across any discipline it cares to name. (Tesla is the who's who of where did who go from Apple to Zip2 and everything in-between - Ford, Toyota, Bentley, Aston, Mazda, BMW, Mercedes, Nissan).

     

    Absolute command of the battery market - credible plans to double it (the total size of the battery market). Nobody has a juicer carrot to offer that whole industry with deep ripple effect in full play - look at the pop in lithium mining stocks.

     

    Insourcing like the auto industry has not seen in almost 70 years. You can't get higher supplier leverage beyond vertical integration - add the battery factory to that and Toyota looks like a pauper on the scale of supplier leverage.

     

    Customer leverage: Tesla has customers out of the door and around the globe on a waiting list for the products. Customers willing to effectively cash flow the company to get their hands on the product - that includes more than 10,000 reservation for products whose price has not even been announced (Model X). This kind of customer leverage is set to go off the charts of recorded automotive history with the $35K affordable vehicle. This is incomparable customer leverage to big auto that has to produce product in the hope of selling it and then beg the customers to kick the tyres with $billions in advertising.

     

    Just a hint.
    19 Mar 2014, 04:10 AM Reply Like
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