Taking the Skeptics Head-On

 | Mar 05, 2014 | 3:18 PM EST  | Comments
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The froth police are out today big-time, telling us about how this market totally feels like 1998 going to 2000 -- I understand that on a day where the market is able to consolidate yesterday's gains, at least so far.

People are reminding me that when we have these kinds of gains, it's reminiscent of that parabolic move (that's what they call it) going into the Nasdaq crash that devastated so many investors. In fact, many of those investors, who, of course, turned out to be speculators, and bad ones at that, never came back. There's been a huge decline in interest in the market ever since, so it's important not to repeat the past because many a member of the baby-boom generation's wealth was wiped out by that decline.

There's no denying, of course, that there's a ton of froth. We have a wave of biotech companies that have come public and soared. Biotech's often linked with bubbly markets that have tended to get crushed down the road, and the more IPOs there are, the worse it is.

We have this extraordinary move in Tesla (TSLA), the car company, that's now being hailed as a savior to the entire trillion-dollar electric grid. CEO Elon Musk is being considered the next Einstein-meets-Henry Ford, even as his company continues to lose money. We keep hearing that Netflix (NFLX) might have trouble continuing to grow as it has, yet the stock has gone to $452 from $99 in the past year. Amazon (AMZN) has gone to $370 from $270 in the past year without making a profit. These stocks, as well as some of the Software-as-a-Service companies like Salesforce.com (CRM), Workday (WDAY), Concur Technologies (CNQR) and Medidata Solutions (MDSO), are wildly overvalued on earnings.

Plus, the speed of the move is breathtaking. As Doug Kass pointed out yesterday, the last time the Russell 2000 index rose by 3% to a new high, as it did yesterday, was March 1, 2000, right near the market top. It did feel blow-off-like in its power -- a really weak sign for the market.

Oh, and of course, I hear that if the Fed changed its mind and started taking up the short rates, it would be devastating for the market.

Things are so bad that many smart people, about a dozen of them in the last few days, have told me that I have to be careful talking about the stocks I like -- Chipotle (CMG), Regeneron (REGN), Yelp (YELP), Google (GOOG) and Facebook (FB), for instance -- because I'm really going to hurt a lot of people in "the end" (with quotes duly noted around "the end"). I hear over and over again from the professionals that I am reckless talking about the momentum monsters that rule the day, and I will rue the day when it all unravels.

"Why don't you have the guts to tell the truth, Jim?" is a common refrain. Let me deal head-on with these jeremiads.

First, am I willing to tell the truth? Actually, yes, and in a way that is so jarring as to put my credibility on the line.

Fourteen years ago I was bullish, even on the Nasdaq, for pretty much the whole run. I had a huge year in 1999 at my old hedge fund and was very proud. I came into 2000 long a lot of the highest fliers, I called them the "Red Hots" back then, and I stayed pedal-to-the metal pretty much the whole time, even hanging out for those last 1,000 Nasdaq composite points, including a speech I gave near the end of February recommending a ton of the frothiest stocks.

But beginning in March we began to see a lot of intraday reversals and gigantic insider selling. During those days, the only place to catch me opining was in Real Money, and in the middle of the month I did what at the time was both extraordinary and wildly reviled. I said I was selling all the stocks that had just vaulted incredibly high, taking the money and going into bonds and old-fashioned Standard & Poor's companies that had gotten very cheap relative to the Nasdaq. I also chose to short many of the stocks I had liked largely because of aggressive insider selling. I wrote it all in Real Money, the only place I was discussing my positions back then and I fully disclosed what I was shorting.

No matter. I was pilloried for switching directions -- despised even as those who didn't get the sell call still hate me to this day for talking about what had been amazing stocks, not amazing companies.

But I got it right.

One wag today said I am afraid to yell fire in a crowded theater, but before the market took its huge plunge in 2008-2009 I did yell fire, right on the Today show of all places. It was a fabulous call but, again, I was trashed by both the bulls for getting out and by the skeptics who said that I was the poster boy for keeping people in bad stocks.

No matter. I had the guts to make the call and even though it did nothing but cause me grief, I was right. And when I thought the market had stopped declining, I took my cue from Doug Kass, who had been very bearish but turned bullish that we could be at a generational bottom, and said you needed to buy. I followed up with a whole book, Getting Back to Even, where I recommended people return to the market after sidestepping the big decline that I told them to avoid.

I mention this not to tell you how right I was but because if I really thought we were going down big, I would shout it from the rooftops because I sure am not afraid to call a top.

Here's the problem: I think that some stocks are frothy, but I don't see a peak here. I think that you need to take profits in the most wildly parabolic winners, but I am not telling you to sell or short them. Plus, in many cases, like Google or Facebook, these companies are earnings gobs of money -- yes, real earnings -- and they aren't even expensive on the outyears. In fact, they are cheap, which is why my charitable trust owns them. Even Qualcomm (QCOM), the stock that was supposed to go to $1,000 per share, a call made at almost the absolute peak, is hitting highs again, yet this time it's cheap and moving up because of a huge cash hoard, a gigantic buyback and a bountiful and increasing dividend.

Plus, there are so many historically cheap areas in this market, from banks to retail to plain-Jane technology, and stocks so cheap that activists are picking on the latter two to bring out value, and they are doing so.

But the major reason I can't be as negative is the vast majority of professionals I talk to and hear from are indeed skeptical, short or in denial of the power of this bull market. The same people who are telling me to warn owners of Tesla, Netflix, Facebook or Twitter (TWTR) are the ones who desperately want me to tell people to flee from these stocks at dramatically lower levels.

So who is arrogant and complacent? I think these people are. They are arrogant because they refuse to admit they have been wrong, and they are complacent because they have not and do not seem to care how much they have cost people with their dead-wrong negativity that knows that they will be right "one day."

Unlike 2000 and 2007, when very few people were telling you it was the end of the world, the end-of-worlders represent a majority of people I hear, read about and talk to. I wish I could be as glibly negative and as giddily pessimistic, but here's the bottom line: I frankly don't see or smell fire, and the theater isn't even very crowded. If it fills up and smells acrid, I will scream fire. Right now, I will just listen to all those who have kept you out of a terrific, prosperous play and are determined to continue doing so no matter how strong and how positive this bull market continues to be.

Random Musings: More to come from Eric Oberg shortly on Bitcoin that answers the questions triggered by yesterday's brilliant analysis.

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