Whitney Tilson “Sure signs of a top; Bubble Watch”

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Excerpted from Whitney Tilson’s latest email to investors.

1) It’s a sure sign of a top when I’m getting random emails like this:


Hello, This is [name], I am a college student that started a trading account two years ago. Over the past two years I have generated over 30% each year in stagnant market conditions.  I have given rise to a trading strategy that is low in risk, nevertheless unique in nature with a worldly view on financial markets and the efficient market theory.

At the beginning of 2016 I started off  buying and selling oil futures. Over time, my trading style has matured. The Use of derivatives and uncorrelated value investments, technical markers with event driven placement is the literary overview of on world market hypothesis.

The current global market pricing theories see the world as a bunch of moving parts that make up one whole, my current trading strategy sees the world as one whole with an assemblage of moving parts. a wise man can tell the difference.

I am in the process of registering with that state of Rhode Island and FINRA to get started with a multi strategy hedge fund. I was wondering if you and your are open to me asking questions about the overall hedge fund playing field and gaining trust from investors.


Thank You,




2) Along these lines, a friend sent me this:


With companies such as Amazon, Netflix, Nvidia, Tesla, Google and Facebook trading at all-time highs — and I am not in any way suggesting that all of these companies are “the same” in terms of fundamentals or valuation — I am reminded of two conversations I had in February, year 2000.


The first conversation was in Boston.  I was marketing with the big institutional accounts for a day, and riding around between these meetings in a cab.  I was covering Internet high-fliers at the time, although not the large-caps.  I was covering the recent IPOs, the $300 million to $1 billion, mostly, companies, which seems like nothing these days, but was a real business back then.


The salesperson — I think I remember who it was — told me: “I know it’s been easy this last year. You’re a star. Everyone thinks you’re a genius. All of these stocks are up 100%-400% in barely a year. It won’t last. If nothing else changes, you will be swiftly forgotten once these companies crash. They way you’ll be remembered is if you come even remotely close to calling the top, telling everyone to sell. Will you do this?”


I said no.


I think it was the week after this, on a business trip to Silicon Valley, that I was having dinner with a long-time elderly friend in San Francisco — a legendary private investor whom I had gotten to know a decade prior thanks to an almost random circumstance.  He was one of the most fascinating people I have ever met.


We were having dinner at The Big Four on Nob Hill and he told me: “My friend, sell everything now. These valuations are insane. I’ve been in the business since the 1950s and I’ve never seen anything like it. There are simply not enough profits to support these prices. Maybe it can last a little bit longer, but it’s months — not years — away. These high-fliers will crash. Mark my words.”


In 2000, I had my investable portfolio almost exclusively in those small-ish high-fliers.  In the 12 or so months that followed these two conversations, I lost at least in the ballpark of 85%, if memory serves me right.  The crash started in March 2000 and by December 2000 it was as dark as it gets.  $40 stocks were trading at $2 in many cases.  My account was down to almost zero.  It was so bad so fast, that 2001 actually wasn’t a bad year at all.  The band-aid came off faster than I could blink.


History will not repeat itself precisely in every detail.  A lot of things are different, including market belief regarding central bank intervention.  We have been building up inflationary pressures since at least the 1990s.  Actually, 1971.  Actually, World War 2.  Actually… 1913.  You get the point — the pressure has been building for a century now, at least four full investing generations.


All that said, I think that we are on the cusp of having to go closer to market neutral by putting on some hedges, even if not selling (some of) these kinds of stocks outright.  The question is which ones.  Some of these companies are now very profitable, very cash-flow positive, businesses that — while not cheap or even market-average — aren’t trading in bubble territory.  Some of these companies could do reasonably well, and if you have huge gains, may not be worth selling in order to prevent a 25%-40% decline.  Better to hedge these things with some other instrument.


It’s pretty obvious to me that the biggest bubble in the market is Tesla.  Why?  Because it’s the company with positively the weakest fundamentals.  It’s almost comically bad.  Margins, competition, sales trajectory, capital requirements — any one of these individually would be reason to short it.  This company would be bankrupt within approximately a year or two at the most, if it couldn’t access the capital markets anymore.  Any meaningful decline in government subsidies could in turn trigger this, even aside from all the other market and technology-based variables.


It’s even more obvious when you talk to the bulls in the stock — from institutional investors to smaller players.  Very few have read the quarterly SEC filings or are even proficient in financial statement analysis.  Almost none have done comparative work on the other automakers, which may be Tesla’s biggest advantage with its investor base (“Look at all these robots! An assembly line! Unique!”).


However, we all know Tesla is up because of something else.  This is a sexy product — a car — not some dorky behind-the-scenes cloud product.  Buying the stock may even become a political statement for some.  Last December, it became a Trump stock, and so the stock went up. Then, it became an anti-Trump stock, and — you guessed it — the stock went up because of that too.  It’s all totally irrational, but nevertheless real.  It could go parabolic before it goes to zero, which it will barring a miracle.


It’s been an insanely good 1-2 years — in some cases more — in these stocks.  My mind is now focused on figuring out a way to lock in these gains, perhaps without selling the stocks outright.  Maybe the answer is to simply short Tesla and ride out what could still be a painful 9-18 months?  That’s the big question.


In the end, the history books will probably read: “Despite having seen the movie before, and having a rational argument to the contrary, he waited too long. Could have cashed in and retired, but chose the curtain and rolled the bullish dice one time too many. Rest in peace.”


3) Here’s a well-articulated case that the market has a lot more room to run, Bubble Watch, The Brooklyn Investor, http://brooklyninvestor.blogspot.ca/2017/05/bubble-watch.html. Excerpt:


Trailing P/E
Let’s put the CAPE aside for now and just look at regular trailing P/E’s. Back in 1999, that went up to 30x, and in 1987, it went up to 21.4x (this is from the Shiller spreadsheet).

We keep hearing from the bears that the market is as expensive as it was during previous peaks, so we are in dangerous territory; they say we are in a bubble.

OK. That is possible.

But in previous posts, I argued that if 10 year rates stabilize at 4% over time (it’s at 2.3% now), it is possible that the market P/E can average 25x during that period. Maybe the market fluctuates around that average, so the market can easily trade between 18x and 33x P/E without anything being out of whack. (Buffett also said at the recent annual meeting that if rates stay around this area, then the stock market could prove to be very undervalued at current levels.)

So we have a problem. This 18-33x P/E range puts the market in bubble territory according to the bubble experts. But we are saying here that if rates stay at 4%, that’s the normal range the market should trade at.

So then, how can we tell when we are in bubble territory?

Since we are using interest rates to value the stock market, we will have to interest rate adjust our bubble levels too.


4) In light of Amazon’s deal to buy Whole Foods (and the role of activist Jana Partners), I think this in-depth article is particularly interesting: The Shelf Life of John Mackey, http://features.texasmonthly.com/editorial/shelf-life-john-mackey. Excerpt:

This is the conundrum that has dogged Whole Foods for much of the past ten years. It continued to grow handsomely as it added more stores and ever more in-house dining areas and special services, but eventually the competition caught up to it. “They didn’t evolve,” says Phil Lempert, a longtime food-industry analyst and the editor of supermarketguru.com. “I think the chain really had blinders on and thought they were so far ahead of everyone else that they didn’t have to pay attention to competitors. The reality is, I can go to Kroger and buy the same or similar goods at a lower price—it’s that simple.”

The situation also provides an excellent window into the mind of Mackey. A conventional solution might be to double down on growing Whole Foods into a mega-grocer. To Mackey, though, it’s a callback to his roots. “We’re going back to being a little bit more niche than we were. We are not going to be the supermarket that everybody’s going to want to shop at.”

Fair enough, but the problem with that strategy is that it’s probably not the kind of thing that’s going to satisfy Wall Street investors, who demand never-ending growth, measured in quick-fire increments every three months when the company reports its quarterly earnings. For a publicly traded company, the reality is that the market demands that you either grow or die.


5) Speaking of activism… When Activists Enter the Kitchen, the CFOs Feel the Heat, www.wsj.com/articles/when-activists-enter-the-kitchen-the-cfos-feel-the-heat-1497259802. Excerpt:


Investors cheered last month when Whole Foods Market Inc. named a chairwoman and five independent directors. After losing more than 40% since late 2013, shares rose 2.2%.


Charles Kantor was less impressed with a different change. The portfolio manager at Neuberger Berman Group LLC, was concerned that the finance chief the company named the same day, Keith Manbeck, lacked experience, as the company is being targeted by activist investor Jana Partners LLC. Neuberger Berman owned a  2.7% stake in the upscale grocery chain as of March 31, according to FactSet.


6) An in-depth look in the NYT Magazine at one of the leading short activists, Andrew Left. The Bounty Hunter of Wall Street, www.nytimes.com/2017/06/08/magazine/the-bounty-hunter-of-wall-street.html. Excerpt:


Short-sellers of Left’s generation are following this example but cutting out the middleman. You don’t need an office in a flashy building in the Battery, they have realized, or the validation of the press. If you build enough of a reputation, all you need are some Twitter followers and a website. Left has emerged at the forefront of this new guard. Unlike Chanos, who managed billions of dollars of other people’s money, Left invests his own, which exempts him from disclosing his holdings to the public. And now that his work has brought him national attention, he has found that others are willing to make it easier, by leaking documents to him and passing tips. In many cases, Left’s dossiers against his targets are not wholly his own but built using information from a confidential source. He is, in this sense, a bit like a journalist.

He also makes it look easy. One result of Left’s fame is that today’s younger traders believe that they, too, could be him. Wuyang Zhao, a professor at the University of Texas, Austin, who wrote his dissertation on activist short-selling, told me: “People read Andrew Left, and they’re like: ‘Oh, my God, it’s not impossibly difficult. It’s not a lot of work, and you can bring down a big company.’?” One of Left’s friends recalled a visit Left made to a university to give a lecture. In the hallways afterward, the students swarmed him. “It was like he was Mick Jagger,” the friend said.

7) A creative new form of shareholder activism!

Shareholders in a zoo near Shanghai, frustrated that they weren’t making a profit on their investment, fed a live donkey to zoo tigers as a form of protest.

Video of the scene shows the donkey pushed down a makeshift ramp into the water surrounding the tiger habitat, where it is promptly pounced upon. Tigers bite and claw the donkey as it bleeds and struggles in the water. The footage has prompted protest and outrage in China.

In a statement, shareholders who invested in Yancheng Safari Park say they held a meeting and voted in favor of feeding the live donkey to the tigers to express their frustration.

Their objections center on the zoo’s debts and legal troubles, which resulted in a court freezing the zoo’s assets. For two years, the shareholders said, they have seen no profits from the zoo. They argue that the court’s decision was unfair, and that the trial is moving too slowly.

“Shareholders are very unhappy about this,” the group of investors said in the statement. “So in a rage, a live donkey and sheep will be fed to the tigers.”

The Guardian reports that zoo officials did not intervene in time to save the donkey, but managed to prevent the shareholders from sending the sheep into the tiger enclosure.

8) Interesting: Why Is Trump Causing Chaos In Washington But Not In The Stock Market?, https://fivethirtyeight.com/features/why-is-trump-causing-chaos-in-washington-but-not-in-the-stock-market. Excerpt:

Time and again in recent months, supposed experts (including me) have suggested that turmoil and uncertainty in Washington — the Russia investigation, the travel ban, the on-again off-again health care bill — was on the verge of bringing the long stock-market rally to an end. Time and again, the markets have proved doubters wrong. (The latest grim example came Wednesday, when House Majority Whip Steve Scalise and several congressional aides were wounded by a gunman in Virginia. Stocks barely budged.)

Investors’ apparent indifference to the tumultuous start to Trump’s presidency has left some experts shaking their heads. After all, we are constantly told that markets hate uncertainty. And Trump’s first months in office have brought plenty of uncertainty: He hasn’t released specific proposals for much of his domestic agenda; he has appeared to question core elements of American foreign policy, including the U.S. commitment to NATO; and the ongoing Russia investigation has led even some Republican members of Congress to discuss the possibility of impeachment.

“Washington and Wall Street cannot both be right,” Financial Times columnist Edward Luce wrote last week. “Washington and the world are in a state of fear. On the other, Wall Street sees only blue skies ahead.”

So why aren’t investors more fearful? It’s hard to know for sure — interpreting market behavior is usually a sucker’s game. But it’s possible to lay out a few, not mutually exclusive, theories:

9) Another reasonably balanced take on Trump’s impact on the economy, How Trump’s Chaotic Presidency Threatens the Economy, www.bloomberg.com/view/articles/2017-06-01/how-trump-s-chaotic-presidency-threatens-the-economy. Excerpt:

Sure, you might think: Donald Trump isn’t exactly a competent president. But it’s a long-standing truism of U.S. politics that, at the end of the day, presidents really don’t have immediate and severe effects, for better or worse, on economic performance or jobs. Instead, what really matters are larger-scale forces — say, the growth or stall of productivity, something that politicians have very little effect on in the short term. We can all play games with economic statistics and where presidencies begin and end, but most of the claims involved are partisan fictions.

But that truism was never tested by Donald Trump.

Few seem to have adequately priced in the possibility of large, unusual downside risks from having Trump in the White House. I’m not talking about normal policy differences, such as Trump’s withdrawal from the Paris climate deal, in which some will argue (just in terms of economic development) that he’s freeing U.S. businesses while others will maintain that focusing on coal mining while the future is in renewables is a poor trade-off. I’m focused here on the possibility that his chaotic presidency could produce devastating results just because normal governing might prove impossible.

Here are the five biggest scenarios I’m aware of, and how the chances of each have changed since Trump won the presidency in November.

10) This is very unfortunate – and ironic, given that the Americans who will most be hurt by a neutered CFPB will be Trump’s core voters! Trump Administration to Call for Curbs on Consumer-Finance Regulator, www.wsj.com/articles/trump-administration-to-call-for-curbs-on-consumer-finance-regulator-1497242487. Excerpt:

The Trump administration will recommend limits on the U.S. consumer-finance regulator and a reassessment of a broad range of banking rules in a report to be released as early as Monday, according to people familiar with the matter.

…It is harshly critical of the Consumer Financial Protection Bureau and recommends that the bureau be stripped of its authority to examine financial institutions, people familiar with the matter said. By law, the bureau has the authority to enforce consumer laws as well as to examine individual firms on a continuing basis.

11) Speaking of Trump, never let it be said that I can’t say anything nice about him. It’s been nearly five long months, but that day has finally arrived. This is tremendous news! (That said, Trump’s noxious, xenophobic policies toward immigrants still places Dreamers’ families in tremendous jeopardy.) Trump Will Allow ‘Dreamers’ to Stay in U.S., Reversing Campaign Promise, www.nytimes.com/2017/06/16/us/politics/trump-will-allow-dreamers-to-stay-in-us-reversing-campaign-promise.html. Excerpt:

Immigration rights activists, who have fiercely battled Mr. Trump’s travel ban and increased enforcement of other immigration laws, hailed the decision.

“This is a big victory for Dreamers amid months of draconian and meanspirited immigration enforcement policy,” said David Leopold, an immigration lawyer. “The preservation of DACA is a tribute to the strength of the Dreamer movement and an acknowledgment — at least in part — by the Department of Homeland Security that it should not be targeting undocumented immigrants who have strong ties to their communities and have abided by the law.”

12) A great piece of investigative journalism on how FINRA is failing to rein in the worst bucket shops/boiler rooms. What a total disgrace! Wall Street’s self-regulator blocks public scrutiny of firms with tainted brokers, www.reuters.com/investigates/special-report/usa-finra-brokers. Excerpt:


In three years of managing investments for North Dakota farmer Richard Haus, Long Island stock broker Mike McMahon and his colleagues charged their client $267,567 in fees and interest – while losing him $261,441 on the trades, Haus said.

McMahon and others at National Securities Corporation, for instance, bought or sold between 200 and 900 shares of Apple stock for Haus nine times in about a year – racking up $27,000 in fees, according to a 2015 complaint Haus filed with the Financial Industry Regulatory Authority (FINRA).

Haus alerted the regulator to what he called improper “churning” of his account to harvest excessive fees. But the allegation could hardly have come as a surprise to FINRA, the industry’s self-regulating body, which is charged by Congress with protecting investors from unscrupulous brokers.

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