It Looks Like December, 1972

Summary

• The difference in the p/e ratio spread between the Nasdaq Index and the S&P is the second highest on record in the last 50 years.
• The buyers in the Nasdaq Index are retail investors who were not active before 2009 and marketing oriented institutional investors who trend follow.
• Insiders have been unloading these stocks in massive quantities as the Nasdaq has risen.
• The IPO market was $180 billion in 2020 versus $102 billion in 2002.

I don’t like to write something up unless I have something interesting to add to the conversation. I have been writing comments on Seeking Alpha since 2009 which are available for review on Seeking Alpha. I am a monetarist. This means I think the historical record is clear that the major factor moving global financial markets are the actions or inaction of the global central banks.

As most of you know this factor could not be more bullish. U.S. M1 is up 65% from one year prior. Other central banks need to expand their monetary aggregates or face a strengthening currency which would have a strongly negative effect on their currency and their economies.

Because of global monetary policies corporate interest rates are at 65 year lows. This too is enormously bullish for global equities. Equities trade on a spread to corporate interest rates.

But, there is a third very important factor that determines financial market investing profitability. That is valuation. Many of the indicators tied to valuation have become enormously negative.

The S&P 500 closed 2020 at 3,756. The QQQ closed at 313.74 which represents the 100 largest stocks on the Nasdaq. The p/e ratio on the QQQ is roughly 35x. The normalized p/e on the S&P is roughly 20x. That spread has historically been indicative of excessive speculation and future market risk.

The Price/Book ratio is 8.1x for the QQQ. The Price/Sales ratio is 4.7x and the sales growth rate is 11.6%. Would you buy a private enterprise at these multiples even with current interest rate costs on some portion of the purchase price??

The ARK Innovation ETF (ARKK 124.51) is up 147%. The buyers of Bitcoin (BTC 33,725) are the same groups of investors. The retail investor is going to learn a very hard lesson.

What do you do about this?

I have sold my U.S. stock holdings. I hold a significant position in a China ETF. Chinese p/e ratios are at a discount to the U.S. market. I have spent a lot of time and data accumulation studying the Japanese top of December, 1989. Why then? Why not 1 year or 4 years prior? The answer is, I think, that in December 1989 there was an alternative to buying stocks at 100x p/e or a 1% earnings yield and that was Australian government fixed income. Chinese equities are not being held by global institutional investors. Large investors who seek diversification would normally allocate based on a percentage of global GDP. Chinese equities represent an alternative to U.S. market multiples. I will not bore you with more chit chat.

Another alternative is to purchase an inverse etf on some of these indexes or buy the VIX etf with the idea that the VIX index will rise if the market has a stumble.

Intelligent human beings like to herd. They don’t feel comfortable ignoring the media and social onslaught. This reminds me of December, 1972 and the “Nifty Fifty.” (S&P 3756, Shanghai 3502, Hong Kong Hang Seng 27472, FCA 28.78)

Have a health, happy New Year and a profitable one.