Whitney Tilson’s email to investors discussing Beeple NFT fetches record-breaking $69 million in Christie’s sale; the fast-developing world of NFTs; ‘it’s probably going higher’; Doug Kass: ‘this will end badly’; not at a top yet.
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Beeple NFT Fetches Record-Breaking $69 Million in Christie's Sale
1) Things have been getting pretty crazy in the markets: the frenzy in special purpose acquisition companies ("SPACs") and bitcoin... shares of GameStink (GME) going from $2.57 last year to $483 at the end of January, to $39 by mid-February, to $281 yesterday... (Mark my words: from yesterday's close of $260, it will be down by 30% within a week, 50% within a month, and 80% within six months.)
But nothing made my jaw hit the floor more than this news in the Wall Street Journal yesterday: Beeple NFT Fetches Record-Breaking $69 Million in Christie's Sale. Excerpt:
Cryptocurrency and blue-chip art collided Thursday when a self-taught artist named Mike Winkelmann, who goes by the professional name of Beeple, sold a digital image online at Christie's for $69.3 million. That's more than anyone has ever bid for artwork by Frida Kahlo, Salvador Dalí, or Paul Gauguin – and it makes Beeple the third most-expensive living artist after Jeff Koons and David Hockney.
It's also the most expensive digital asset to ever sell with an accompanying digital certificate of authenticity known as a non-fungible token, or NFT, according to NonFungible.com.
I sent this article to a friend who owns an art gallery, and he replied: "The world we once knew has crumbled beneath a virtual avalanche."
Another friend wrote of NFTs in general: "It's like the tulip mania – but you don't even get a tulip!"
I'll have more to say about NFTs in future e-mails, but in the meantime, I suggest you read these great insights by my colleague Berna Barshay in Empire Financial Daily last week: The Fast-Developing World of NFTs.
It's Probably Going Higher
2) Even before the news of the Beeple sale broke, speaking more broadly about the markets, one friend wrote:
Between meme stocks (I'm as astonished as you about GME reflating), SPACs, numerous unprofitable companies trading (well) above 10x revenue, bitcoin, and now this... It does feel like the greatest speculative boom since 1999, and I'd argue, probably bigger.
This is what unprecedented money printing and deficit spending fuels.
This has to end badly, sooner or later.
To my reply, "But in the short run, it's probably going higher!" he wrote:
I'm counting on you telling us when we have reached the peak!
Right now it feels like a juggernaut, with so much stimulus and reopening, etc., but that can change in a hurry, as we glimpsed last week when rates started to move up quickly.
Doug Kass: This Will End Badly
3) My friend Doug Kass of Seabreeze Partners added:
I call B.S. to the wanton speculation that has consumed our markets.
In my decades of investing experience I have not seen such mindless and uniformed speculation as I have witnessed recently. Indeed, in nominal dollar terms (and led by retail traders, see chart below) it is far in excess of the dot-com boom:
Valuations Have Been Careening Higher
Under the facade of unprecedented monetary and undisciplined fiscal stimulation almost every traditional valuation metric is approaching or at all-time highs:
But I would again point out that much of the climb in price earnings ratios (to 22x) is rationalized by low interest rates – a condition that is now changing.
Sure, the risk-free rate of return is hospitable to valuations, but with rates likely climbing, the argument grows less compelling.
Today's earnings yield (the inversion of the price earnings multiple of 22x) is about 4.5%. Against that, the 10-year Treasury note is yielding 1.50%. The difference is the "equity risk premium" of 3.0% – about the same it has been for the last several decades.
If the risk-free 10-year Treasury note yield rises – stocks grow more vulnerable with a lower risk premium. And this is what has been concerning investors of late – especially of a growthy Nasdaq-kind.
Bottom Line
"The pride of your heart has deceived you, O dwellers in the clefts of the rocks whose habitation is the heights, who say in your heart, 'Who can bring me down to the ground?'" – Obadiah 1:3
With valuations soaring and with stocks making new highs, the current degree of speculation in countless gewgaws is unprecedented and, shockingly – at least to me! – is being unquestioned by the many.
We are in a bull market in "first-level thinking" and in complacency.
Pavlov's dogs, the absence of bona fide analysis of data, or any realistic view of the domestic economy's weak foundation of growth, and just general stupidity are alive, well and thriving.
Moreover, roundly ignored are the adverse consequences of the largesse of monetary and fiscal policy. The collective eyes of traders and investors are being shut to inconceivable and growing deficits and our burgeoning national debt – both of which will serve as governors to economic growth.
Market structure changes also pose underappreciated risks. As I have previously written, the dominance of passive investing, which worships at the altar of price momentum, coupled with a new generation of speculative buyers (in Robinhood and on Reddit) and the popular narration and the silly antics of icons like David Portnoy, have contributed to the least educated trading and investor base in history. Astonishingly, and as a sense and time stamp to this era's lunacy, some very well-respected commentators endorse and try to gain favor with the senselessness of the YOLO ("you only live once") trading crowd.
To those that believe that the phrase "price is truth" and that price momentum and squeezing heavily shorted stocks (just because) are the sine quo non and path to trading and investing riches – I have a message for you.
This will end badly.
Thank you, Doug!
Not At A Top Yet
4) I 100% agree that this will end badly... but, as I noted earlier, I think the foolishness still has a ways to run.
It reminds me of a joke that I heard was Ronald Reagan's favorite:
Two comrades are walking down the street in Moscow.
One asks, "Do you think we've reached the highest state of Communism?"
The other replies, "Nah, I think things are going to get a lot worse yet!"
My "spidey sense" isn't tingling yet for the entire market. It just doesn't feel like a top. Consider that – for all the foolishness in the tech sector today – the Nasdaq Composite Index, after skyrocketing 76% from its March 23, 2020, low through September 2, is only up 11% since then, as you can see in this chart:
That looks nothing like the blow-off top in March 2000, for example, which marked the end of the Internet bubble and the beginning of the Nasdaq's 80% collapse.
Best regards,
Whitney
