As I caught the news yesterday afternoon it struck me that there are an awful lot of events going on right now that could be potential market changers. Of course, this year has been a very heavy year for potential cash-causing events -- with Ukraine remaining messy, the circus that is Greece, excess oil supplies and increased production out of the Arab world crushing oil and gas prices, and now the frantic moves by the Chinese government to prop up the country's stock market. Each of these has caused short-term selloffs, but on each and every occasion bulls have found something to hang their hats on and the market has come rushing back. The resilience of the market has been impressive, and I have several friends who believe that the stock market's refusal to flush is wildly bullish.
I find myself more in the camp of James Montier, a noted value investor and strategist at GMO. Speaking in Munich last week, he told the audience at an investment conference: "This is definitely the most difficult time to be an asset allocator. It's very hard to find value." He currently holds 50% of his portfolios in cash or highly liquid securities -- the highest level since 2008. Montier said that all market scenarios are hellish right now. There is the "stable hell" we are in right now -- where rates stay low over a long period and it is hard to find anything to buy. The second is what he called "purgatory" -- where we have slowly rising interest rates. And finally we have an "unstable hell" -- where things just fall apart altogether.
Given the difficulty of finding bargains, relatively high valuations in the broad market and a plethora of potential triggers, I agree with Montier that high cash balances make a lot of sense right now, especially for new money looking for a home.
It also makes sense to me to prune some of those high-multiple market darlings that might quickly become leaders on the downside if the markets do, in fact, roll over. One stock that looks like a candidate for downside leadership to me is VMware (VMW), The virtualization software company has done well the past few years, and its price has more than quadrupled since the last market bottom in 2009. But it looks like some of the larger institutions are souring on the stock -- in spite of the recent affirmation of an optimistic outlook for the second half of 2015. The shares are trading at 40x earnings right now and are priced for perfection. Should they fail to deliver on that promise of perfection, or should markets shift south, this stock could fall substantially.
Autodesk (ADSK) is a stock that makes no sense at all to me. It is a fine company with good products -- my architect friends swear by their software. The stock has done well: It has also quadrupled since the last bear-market bottom. But I see nothing in the forecasts or projections -- much less the current operating results -- to warrant trading at 169x trailing earnings and almost 70x projections. A recent analyst report suggested that the company's earning power was far higher than the street thinks, but projections would have to multiply by at least a factor of 5 to justify current valuations. I simply cannot fathom why anyone owns the stock at this level. And I expect many fund managers will feel the same when they are reviewing their portfolio in a sustained selloff.
Interactive Brokers (IBKR) is another stock I would suggest avoiding right now. The stock has the wind at its back, as traders are pushing the shares higher, and the company could, in fact, see some benefit from higher rates. But the long period of investors' disinterest, and a quickly diminished pool of short-term traders, that generally follow any sizable market decline, would offset that. The stock trades at more than 200x trailing earnings and about 30x the always-optimistic year-ahead projections. This is a great firm and my more-active friends love it, but if any catalysts kick in and we see a downside move in the markets, this stock will likely lead the way lower. I wouldn't buy it here, and if I owned I would be peeling a little off every time the momentum crowd pushed it higher in the weeks ahead.
I have no idea what will finally lead to the dip that shouldn't be bought. It could be the current Greek mess. It could be the reveal of likely front-runner Hillary Clinton's decided move to the left in her economic policies. It could be war in Ukraine or a failure of China to reign in selling on the Shanghai exchanges. More likely, it is something that we don't have an inkling of yet. But, as Montier noted, it is very hard to find value anywhere outside of small banks, and -- as I pointed out last week -- some special, activist-guided closed-end funds.