The Daily Prophet: Even Wall Street’s Biggest Bull Says to Chill

By April 25, 2017Bitcoin Business
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It was another day of superlatives for U.S. stocks as the Nasdaq Composite Index closed above 6,000 for the first time and the Dow Jones Industrial Average reclaimed the 21,000 level in intraday trading. That cued the naysayers to again trot out the charts to back their claims that equities are grossly overvalued by just about any measure.

Although such warnings seemingly have been around for almost as long as the more than eight-year-long bull market, they are worth noting when Wall Street's most optimistic strategist lends credence to the idea that stocks have reached levels that are hard to justify. Deutsche Bank Securities Chief Global Strategist Binky Chadha said in a Bloomberg TV interview that "it's time for a sort of a pause" in equities and that "you don't want to be too overweight right now." In the latest Bloomberg News survey of strategists, Chadha had the highest year-end forecast for the S&P 500 Index, or 2,600. The benchmark closed today at 2.388.61. Here's a sobering factoid: Almost half the Nasdaq's run-up since Jan. 26, when the index first crossed 5,500, can be attributed to gains in Google parent Alphabet,, Apple, Facebook and Microsoft. The group also accounts for about a third of the S&P 500's rise this year, according to Bloomberg News' David Wilson.

The latest move higher in stocks was being tagged to optimism for the Trump administration's coming tax plan and strong earnings from Caterpillar Inc. and McDonald’s Corp., which raised optimism that first-quarter profit growth will, in fact, match the heady 14 percent growth being estimated by strategists. Stock market valuations have become divorced from reality as the likelihood of policy changes that would drive company earnings has slipped, according to David Einhorn's Greenlight Capital. "The bulls explain that traditional valuation metrics no longer apply to certain stocks," the firm wrote in a letter to clients Tuesday that was seen by Bloomberg News. "Perhaps as the prospects for tax reform have dimmed, the market has regained enthusiasm for profitless companies that aren’t at risk of paying taxes."

Don't look for cover in the bond market. U.S. Treasuries are just as overvalued, according to Franklin Templeton star bond-fund manager Michael Hasenstab. He called government debt one of the world’s biggest financial bubbles, saying investors seeking safety in the securities face the prospect of significant losses as yields rise. Hasenstab, who manages the $40 billion Templeton Global Bond Fund, cited a variety of factors behind his bearish wager, from higher consumer prices brought by a hot U.S. job market, to a Federal Reserve that’s behind the curve, to the retreat of foreign buyers. It’s a major trade he’s held onto since at least 2015, even as yields fell to record lows last year. Buying Treasuries is “like walking on a lake in April," he said. “It’s still frozen, but eventually it’s going to crack.” The market for Treasuries has now fallen in six of the past seven trading days.

It's the Canada dollar's turn to take a hit from the Trump administration's trade policies. The loonie, as the currency is known for the aquatic bird on the C$1 coin, fell to a four-month low after the U.S. slapped tariffs of up to 24 percent on imported softwood lumber from its northern neighbor. The Canada dollar is now the second-worst performing major currency this year, surpassed only by the Turkish lira. The tariff was an easy target for Trump given the long-running dispute between the two nations on the issue, according to Bloomberg News' Ben Bartenstein and Lananh Nguyen. "Protectionist tariffs weren’t in the price for the Canadian dollar and the Mexican peso had priced it out,” said Bipan Rai, senior foreign-exchange and macro strategist at Canadian Imperial Bank of Commerce. "Ahead of the Nafta negotiations, markets have become somewhat more sensitive that talks won’t be as smooth as expected previously."

It's been a while since concerns about the health of China's economy and financial system rattled global markets. That may be about to change. Lost amid all the focus on the rebound in global equities from the talk of U.S. tax cuts and a favorable outcome in the first round of the French elections has been the quiet collapse in Chinese stocks. An intensifying crackdown against leverage in Asia’s biggest economy has rocked Shanghai Composite Index over the past week, sending it to a three-month low, according to Bloomberg News reporters in the region. Chinese officials have mainly kept mainland stocks on a tight rein after routs in mid-2015 and the start of 2016 reverberated through world financial markets. Until Monday’s 1.4 percent slump, the Shanghai Composite Index hadn’t fallen more than 1 percent for 86 trading days. “The Chinese government is squeezing speculation out of the market and while investors adjust, it will inevitably lag behind other parts of the world," according to Daniel So, a strategist at CMB International Securities Ltd. in Hong Kong.

Bitcoin is approaching its record high after the U.S. Securities and Exchange Commission said it will review a decision it made on March 10 that blocked a proposal by the Winklevoss twins for a publicly traded fund based on the digital currency. That dashed hopes that a government-approved investment vehicle would lead to wider interest in virtual money. The SEC at the time refused to grant an exemption that would have let the Winklevoss Bitcoin Trust trade on the Bats BZX Exchange. That decision ended a months-long rally that pushed the price of one Bitcoin to $1,327.1926, or more than one ounce of gold. Bitcoin then tumbled as low as $939.7946 late last month before rebounding to as high as $1,286.9850 today. Tyler and Cameron Winklevoss are the brothers famed for their dispute with Mark Zuckerberg over the origins of Facebook.

Investors expecting a detailed plan when the Trump administration lays out its tax reform proposals Wednesday are likely to be disappointed. What they will get is a broad set of principles that includes calling for a cut in the federal corporate tax rate to 15 percent from 35 percent as well as consideration of a child-care tax credit, a senior administration official said. It's debatable whether that will be enough to keep investors' newfound animal spirits alive, especially after President Donald Trump tweeted on Saturday that “Big TAX REFORM AND TAX REDUCTION will be announced" on April 26. If there's one thing executives of public companies have learned, it's that the key to making investors happy is to underpromise and overdeliver. That's a lesson the Trump administration seems to have yet to learn.

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This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

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Robert Burgess at

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Max Berley at

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