Global markets this morning appear to be focused on China, where February exports fell by 18%; according to a Reuters poll, the market was expecting a rise of 7%, so that's a bona fide miss. That figure will certainly tip the see-saw debate between investors on the potential for/extent of a Chinese slowdown toward the bears today. U.S. stocks opened lower this morning, with the benchmark S&P 500 and the narrower Dow Jones Industrial Average (^DJI 0.13%) down 0.33% and 0.51%, respectively, at a.m. 10:15 EDT. Meanwhile, as we celebrate the five-year anniversary of the beginning of the bull market, the greatest investor you've never heard of is warning about the possibility of asset price bubbles developing.
By way of introduction, Seth Klarman, founder of the $27 billion Baupost Group, has compounded money at 18% annually since 1983. Remarkably, he has achieved that feat with much lower risk than the broad market, at times holding as much as half his assets under management in cash. In a letter to clients, Klarman wrote, "Any year in which the S&P 500 jumps 32 per cent and the Nasdaq 40 per cent while corporate earnings barely increase should be a cause for concern, not for further exuberance."
In fairness, the S&P 500 did manage to increase operating earnings per share by 11% last year (+16% on the basis of as reported earnings), but his point is well taken -- the bulk of stock gains were the product investors' willingness to pay higher multiples to own stocks. For Klarman, those multiples are now stretched and, in some cases, stratospheric:
On almost any metric, the US equity market is historically quite expensive. A sceptic would have to be blind not to see bubbles inflating in junk bond issuance, credit quality, and yields, not to mention the nosebleed stock market valuations of fashionable companies like Netflix (NFLX 1.31%) and Tesla Motors (TSLA 0.86%).
On the back of a huge run-up in 2013 -- Tesla Motors (+344%) and Netflix (+298%) were the second- and third-best performing stocks in the Russell 1000 last year -- the shares are up another 64% and 22% year to date, respectively.
One technology stock that Klarman does like is Micron Technology (MU -0.44%), which is the firm's largest stock holding, according to Baupost's latest 13F filing of securities positions, which covers the end of 2013. Baupost added Micron in the second quarter of 2013; the shares rose 52% in the second half of the year.
We don't appear to be a in a stock market bubble at this time -- there simply isn't the sort of ambient euphoria that normally characterizes those episodes. Nevertheless, I absolutely agree with Klarman that there are pockets of speculative excess in this market. The two shares he points out are prime examples.