Is the Nasdaq blowing higher than the fundamentals?

By: Uri Estrin - July 10, 2020 12:03pm EST
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Markets are fickle and can turn on a dime.
Markets are fickle and can turn on a dime.

The Nasdaq these days is flirting with new record highs. This is pretty amazing and even more so if you juxtapose that against some other recent records highs, namely the unemployment figures and the continuing weekly jobless numbers which are in excess of 1M a week for the 15th consecutive week.

Perhaps the stock investors in companies like Apple and Tesla - who themselves are jostling to seek out their own record highs – view unemployment as good for these stocks. They may see unemployed people rushing out to buy new iphones and teslas. Or maybe, they are pricing in the future growth when all of the unemployed get re-employed and rush out to buy iphones and teslas. Or perhaps its based on stimulus – if so many people are unemployed  -it will behoove the government to rush in more stimulus.

Stimulus isn’t a very good long term strategy for share price growth though, despite what some analyst may purport. Stategy used to be based on some sort of fundamental like, say profit. Then it was a moving target of ‘PE’ which always justified room for more growth. Maybe they could retry more share buybacks – probably not - that has become a dirty term.

Here’s an idea – why don’t these companies set up non-profit charitable foundations. The foundation would give away product to those in need and who swear they would never have bought from the company in the first place. The company then sells to the foundation at market price. The foundation could issue bonds underwritten by the company to pay for the product. This would maintaining record revenues – which in turn would be a fundamental in turn to support their stock price growth. It’s a good idea, a win win, well - its sort of like what the Fed is doing with Government debt instruments and that’s working just fine.

Of course that sounds ridiculous – because it is. But so is the situation we are in. Exuberance in a dislocated market devoid of any attachment to fundamentals. Issuance of corporate debt to support functions other than growth and research and development. But investors are greedy and ravenous for a quick profit in a market perceived to never go down. 

This isn’t an investment strategy – well not a good one at any rate. Markets are fickle and can turn on a dime. The inherent risk of this strategy is not commensurate with the reward. One might as well go and play black or red on the roulette table (if only it were open). The stock price upside is incredibly fraught with an enormous risk of the downside.

Equity investors should look very carefully at where they expect their portfolio to go – the basis for such movement – go back to fundamentals – and an honest look at why they are still there.

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