Market Commentary for August 2020

"A matter of time..."

By Alan Hull

This commentary is in part or entirely created using extracts and comments from my weekly Blue Chip Report. For more information about the Blue Chip Report, including subscription details and a recent sample report, go to Blue Chip Report

Last month's commentary was pretty comprehensive, with a detailed analysis of the current state of the U.S. monetary system and the importance of Gold. So this month I am going to bring it back to the 'here and now' with a very robust analysis of our current situation.

My market analysis is based around the NASDAQ 100 index which is currently in a bubble. I am obliged by convention to express this observation as an opinion but I believe the evidence is so compelling that it would not be unreasonable to state it as a fact. There are two key charts to this 'evidence' that show the longer term exponential growth in the NASDAQ 100 index and the breach of its upper trendline on a weekly chart, thus confirming its exponential progression....

Now we can quickly review the fundamentals where the NASDAQ 100 has an average price to earnings ratio slightly north of 38. This is well and truly into bubble territory as a P/E ratio of half this would be considered to be at premium levels, as the normal range for an entire Stockmarket is 10 to 15. Of course a Stockmakret can trade at a premium P/E ratio if the outlook justifies it.

But we have a growing global pandemic (with the U.S. as its epicenter), political uncertainty as Biden is now the front runner for the Presidency, rising unemployment and foreign trade relations have never been worse. In fact it will be a miracle if there isn't a Cold War with China. So any suggestion that the outlook justifies current valuations is laughable. For instance, here is a chart of Tesla Corporation which is currently the most expensive motor car manufacturer in the world at a market capitalization of 273 Billion USD....

Tesla has just started to show a profit this year but while the stock price is trading around 1,500USD, the net earnings so far in 2020 is 58 cents per unit of stock. It has a very, very long way to go before it can justify its current valuation. This is what happens when a lot of people are stuck at home and they open a record number of online trading accounts for something to do. A rising stock price begets a rising stock price. So Tesla is in a bubble...in my opinion.

And here's another twist in the tale as the Tesla story overlaps the China story. Tesla produces only 4 models but its model 3 is now the biggest selling electric car in China with sales of 14,500 units in June...and trending higher. This is pretty cool given that Tesla's deliveries around the rest of the world have declined in 2020. Furthermore its Shanghai factory is gearing up to produce the Model Y as well as the Model 3, which it can produce in China at 200,000 units per annum. But this will all come to naught if a Cold war develops.

It is a matter of time. I don't know when this bubble will burst or how high it will climb, but it will inevitably burst at some point. So anyone who is exposed on the long side of these markets is applying the greater fool theory...I will get out of the market before anyone else gets wise. Then there are some investors who believe in absolute performance, at the expense of risk management. Thus the NASDAQ 100 has risen 18% in 2020, which is pretty good if you are prepared to ignore that it also suffered a drawn down of 27% in 2020.

The reward isn't worth the risk. That said I have been busy with selling stocks, hedging long term holdings, buying Gold and a bit of short selling with inverse ETFs. So in spite of my less than rosy outlook there are some very big, once in a decade opportunities coming our way and I plan to be first in line. This is the thrust of my new Bear subscription, which we have been advertising since March.