Stocks were up, again. Major milestones were reached for the first time—this time it was 16,000 on the Dow and 1,800 on the S&P—again. The move in the S&P this week (+0.2%) was relatively puny, but what’s more significant is that the index had been negative through Thursday and investors bought the dip, again. This is a bubble, as I explained last week, because stocks—not cheap by any measure—are propped up by the Fed-manipulated bond market (now the largest asset bubble in human history) from both a liquidity and valuation standpoint. When the Fed ends QE and—gasp!—raises short-term interest rates, as it must eventually do, there will be no technical or fundamental support for stock prices anywhere near these levels. Let me show you how it works using a recent highflier, Telsa Motors (TSLA).
Telsa makes electric cars. Its founder, Elon Musk, is something of a rock star in Silicon Valley; one of the founders of Paypal, he took Tesla public in June 2010 at $17. The stock doubled to $35 in less than six months, only to trade sideways for the next two years. In March of this year, TSLA was a $35 stock—and then it went parabolic, rising to $54 in April, $110 in May, $130 in July, $170 in September, and $190 in October. At its peak on October 1, Tesla Motors stock had risen 470% in 2013 and the company’s market value–$3.3 billion in January—exceeded $22 billion. All this for a company that lost $300 million over the last twelve months on $950 million in sales. The P/E ratio for the stock—on projected 2014 earnings, since you can’t calculate a P/E on negative earnings—was close to 200. By comparison, fast-growing, innovative tech giant Google has a forward P/E of 20, and Tesla’s fellow car maker General Motors has a forward P/E of 8. But that doesn’t matter, because valuation never matters—until the moment it does. You see, as long as TSLA was a momentum trading darling, the buyers paid no attention to valuation; they bought the stock because it was going higher, and then it went higher because they bought it. Then a funny thing happened: the momentum traders bailed. The company reported a quarter that was great but not fantastic, then there were some (largely contested) reports of fires in the cars, and that was all it took for the momentum guys to dump their shares. But with the stock so far away from any reasonable valuation, the value investors who’d been nibbling at it in the high $20s and low $30s just last year had no interest. The result? All sellers and no buyers, and a stock that gapped down from $193 to a current $120 in six weeks. That’s how it works. That’s what we’ve got waiting for us on a much larger scale—I don’t know what the trigger will be, but the air pocket between where the momentum traders are driving the market and where value investors will be will be willing to buy is growing bigger by the day.
The Family Stock Index outperformed the broader market for the first time in several weeks, but we failed to make new highs along with major averages. Oh well. If we hold on to a 25% gain for the year—at 16,988 we’re up 26.3%–that’ll be pretty darn good consider than both Zero and I are still FSX members. Losers can’t be choosers, as the saying goes.
- Charlotte (ICE) +7.4%. Charlotte got to go with super-excited Jenny to the premiere of Catching Fire last night.
- Lee (TGI) +5.0%. I got to miss the premiere of Catching Fire last night.
- Reagan (REGN) +4.9%. Reagan’s going to a birthday party for her best friend of the week, Elyse Somethingorother, and she was the one party invitee Miss Somethingorother chose for the after-party sleepover. Reagan could take or leave parties and sleepovers, but there’s nothing she likes more than being the favorite.
- Katie (CATY) +4.0%. Katie will be on vacation next week for the first time this year (excluding kid-related vacation days). I wonder if she remembered to take Friday off like she promised me last year she’d start doing. The market’s optimistic…I’m not.
- Brinkley (BCO +3.6%) and Lulu (LULU +3.7%). Katie’s also rallying this week because Lulu has dumped her in favor of Brinky. Fat One has taken to sleeping on Brinky’s pillow, and when Brinky goes to bed at night he gets all up on top of the cat—but neither of them seem to mind. I don’t know what to make of it. Lulu would rip my face off if I tried to sleep anywhere near here, and I’d throw something at her if she got fur and cat-ass all over my pillow.
- Lisa (LNCE) +3.1%. Cat-ass free since ’93. (It’s probably longer, but that rhymes and I like rhyming things.)
- Jodi Ann & Josie Ann (JOY) -2.9%. Josie Ann will be spun off into a stand-alone (or lie-there-uselessly-alone) company at the beginning of next year, but she’ll trade with her mother until then. This is the same approach I used for Brinky and Katie back in ‘10, but it looks like the market isn’t being patient this time around. Conglomerates are out of favor, and I get that investors want to be able to value the mother and infant businesses on their separate merits—I just don’t care. My spreadsheet is complicated enough as it is.
- Winston (ED) -3.7%. Winston has gotten himself in to serious trouble, and as the Florida state prosecutor’s office prepares to make a decision on possible sexual assault charges, his Heisman chances hang in the balance. Wait…what? I’ve got the wrong Winston? My bad.
- Zondro (ZQK) -3.9%. Once Brinky’s favorite pet, Zondro has been passed over for a fat, stinky, obnoxious cat. He’s still up 23% this quarter alone, and it’s hard to blame investors for taking profits.
- Lucas (LEI) -11%. Crushed yet again, Lucas traded through $1 to within three cents of his 52-week low before rebounding slightly. Even with this dismal performance extending the Q4 slide to -18%, LEI still needs to underperform ZAGG by more than a thousand basis points over the next six weeks to break Zero’s streak of three straight last-place finishes. In the end, I don’t think Lucas’ valiant effort will be enough to best (worst?) the master.