Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

Market Insanity

Yes, the Stock Market is Bubbling

America’s stock market is in a dangerous bubble that could collapse. The S&P 500, for example, has erased the gains it made in 2020.

The S&P 500 started 2020 at 3,257.85 on 2 January 2020; rose to a high of 3,580.84 on 2 September 2020 and fell to 3.351 on 28 September 2020.  The highs are just part of the S&P 2020 roller coaster ride. The Standard & Poor’s (S&P) 500 fell to a low of 2,237.4 on 23 March 2020.

Stocks to be Afraid of

Individual stocks are far more frightening than the S&P. For example, Mr. Market paid $199.45 for Union Pacific (NYSE: UNP) shares on 28 September 2020.

The Union Pacific’s revenue growth fell by 24.16% in the quarter ending on 30 June 2020. Meanwhile, Union Pacific (UNP) CEO Lance Fritz admits the UP’s shipping volume fell by 20% in 2nd Quarter 2020. Yet Union Pacific’s stock price rose from $182.27 on 2 January 2020 to $19.45 on 28 September 2020.

Frighteningly, the Union Pacific is good compared to some overvalued stocks on today’s market. In particular, cloud computing company Veeva Systems Inc. (NYSE: VEEV) shares traded at $281.92 on 28 September 2020. However, Veeva Systems had total assets of $2.516 billion on 31 July 2020.

The Union Pacific and Veeva Systems show the dangers in today’s stock market. Old economy stocks such as Union Pacific offer no growth and margin of safety. Meanwhile, tech stocks such as Veeva have scant resources and little cash. Veeva Systems had $1.495 billion in cash and short-term investments on 31 July 2020.

Mr. Market Ignores Economic Reality

Mr. Market, however, pays high prices for both categories of stocks even as the economy shrinks before our eyes. For example, US rail traffic fell by 14.9% or 156,797 carloads between August 2019 and August 2020, the American Association of Railroads (AAR) estimates.

Moreover, America’s gross domestic product (GDP) shrank by 32.9% in 2nd Quarter 2020, the US Bureau of Economic Analysis estimates. Yet the S&P 500’s value remained the same.

Hence, Mr. Market ignores economic realities and proves Benjamin Graham’s old saying. Graham famously said Mr. Market is insane, and in 2020 Mr. Market is out to prove Graham right.

The Varieties of Mr. Market’s Current Insanity

I think the Union Pacific (UNP) and Veeva Systems (VEEVA) illustrate two varieties of Mr. Market’s insanity.

Mr. Market buys Union Pacific because it is a historic stock that has long made money. In fact, Union Pacific has traded on the New York Stock Exchange (NYSE) for 150 years.

However, being around for a long time does not guarantee safety or moneymaking capacity. Remember, the great investment bank Lehman Brothers was 158 years old when it collapsed in 2008. Age and history do not guarantee safety or profit.

Meanwhile, Mr. Market buys Veeva because it is hot and in the news. To explain, Veeva makes cloud computing systems for pharmaceutical companies. Pharmaceuticals are hot because coronavirus and healthcare dominate the news.

Just as technology, computers, and the internet dominated the news back in 1999, right before the bubble.  Mr. Market bought stocks in the 1990s because they were in the news. Similarly, Mr. Market buys pharmaceutical stocks today because those equities are in the news.

Mr. Market’s New Bubble

During the bubble, the NASDAQ fell from 5,048.62 on 10 March 2000 to 1,139.90 on 4 October 2002.

The bubble burst because panicked investors sold off all their tech stocks. Mr. Market sold all of his tech stocks because the financial media told him too. Hence, Mr. Market missed out on huge gains at companies such as Apple (NASDQ: AAPL).

I’m scared because Mr. Market fills today’s S&P 500 with two kinds of dangerous stocks.

Mr. Market first buys shaky old economy companies such as Union Pacific with rich histories but questionable futures. Second, Mr. Market loves speculative pharmaceutical and cloud companies such as a Veeva Systems and Novamax (NVAX).

Mr. Market paid $111.18 forNovavax (NASDAQ: NVAX)which claims to be testing a coronavirus vaccine, on 28 September 2020. Yet Novmax reported a -$17.03 million quarterly operating loss on 30 June 2020. Additionally, Stockrow estimates Novamax had a -49.3% negative net profit margin on 30 June 2020. Mr. Market buys Novamax because vaccines are in the news, not because Novamax makes money.

Buffett is selling

Notably in 2020, Warren Buffett’s Berkshire Hathaway (NYSE: BRK.B) has sold stock and bought other assets.

The Motley Fool’s Sean Williams estimates, Berkshire was a net seller of equities in the first half of 2020. In contrast, Berkshire Hathaway (NYSE: BRK.A) is buying physical assets and pre-IPO companies.

Berkshire (BRK.B) acquired miles 7,700 of natural gas pipelines from Dominion Energy (NYSE: D), Williams notes. In addition, Berkshire paid around $6.25 billion for 5% stakes in five large Japanese trading companies;  Itochu, Marubeni, Mitsubishi, Mitsui, and Sumitomo. Hence, Buffett is hedging his bets by moving money outside the USA that scares me.

Finally, Berkshire Hathaway (BRK.B) bought $735 million worth of the cloud data company Snowflake’s (NYSE: SNOW) IPO. Thus, Buffett thinks the cloud is a value investment.

Notable, Buffett stock sells include all of Berkshire’s Occidental Petroleum (NYSE: OXY) stake. Berkshire also sold $2.5 billion worth of Wells Fargo (NYSE: WFC).

I think Buffett sold Wells Fargo (WFC) because it is an enormous exposure to the US real estate market. I think America’s real estate market is crazier, more overpriced, and shakier than the stock market. To explain, there are many good stocks on the S&P.

Be Afraid of Real Estate and Stocks

However, there are enormous amounts of worthless but overpriced real estate in America. The worst example of America’s dangerous real estate is all the empty condos in cities, such as New York. There were a record 15,025 empty apartments in Manhattan in August 2020, CNN claims.

In addition, there are many deserted and overpriced McMansions (giant empty houses) on big parcels of worthless land out here in the United States. I think Western real estate values will collapse if the enormous Climate Change caused fires continue.

I predict the real estate collapse will devastate banks such as Wells Fargo (WFC). To explain, Wells Fargo issues enormous numbers of mortgages which could go into foreclosure. Notably, Wells Fargo claims to have deferred mortgage payments for 2.5 million homeowners and small businesses.

Investors need to fear both real estate and stocks because Mr. Market’s purchases of both categories of investment are insane and dangerous. I cannot see how America can avoid a major stock market collapse when the S&P Bubble bursts.