Is This a Bubble? Or Is This Time REALLY Different?
Also, the NRG and QXO Backstories.
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The Weekly Wrap...
▶Before we get going... With the tensions surrounding Iran peaking last night, I was thinking about a trip my wife and I took in late 2019, sailing down the Suez Canal, through the Middle East, ending in Dubai. I made sure I out early as we sailed through the Strait of Hormuz, given its historic significance and its proximity to Iran. That’s Iran's Qeshm Island in the distance....
My guess… there won’t be many cruise ships going to Dubai anytime soon.
▶Bubble, bubble, toil and trouble... Everybody has their favorite indicators on whether the market is under or overvalued – or whether we’re in a bubble. No matter what anybody says, nobody really knows and no one chart or one indicator or one technician is always right. In the end, interpreting a chart is art; some people are simply better than others. My friends at Kailash Concepts, who focus on quantamental investing, with a behavioral twist, will be the first to tell you they can be as wrong as the next guy... certainly in timing. But more often than not they can be very right – they’d probably say a bit lucky, too (aren’t we all!) – such as the time I featured their work just before the market’s April rout. The headline was “One Chart That Speaks 1,000 Words.” This was the chart...
The chart shows that the total market cap of stocks with price/sales ratios above 20x was $6 trillion. Well, Kailash is back, this time with a chart showing the market cap of stocks with a price/sales ratio of above 10x.
As you might guess, with a lower benchmark, the number is higher – nearly triple at $16 trillion. In Kailash's view, historically paying 10x “can be hazardous to your health.” Oh, and by the way, the market is higher than it was in April. Interpret at will...
▶Okay, here’s one interpretation... that the fun has just begun. Over at All Star Charts, chief strategist Steve Strazza had an interesting note this weekend suggesting the party is just getting started. Or as Steve explained (emphasis by me)...
Since the market bottomed over two months ago, the best stocks have been the riskiest ones. Of course, I’m talking about the impressive leadership from speculative growth. We’ve seen this story before, though. We’ve actually already seen it several times in the current cycle.The space also outperformed in a major way during the post-election ramp-up coming into the year. But the momentum and relative strength didn’t last in either of those cases. I think this time is different.
Then, looking exclusively at the technicals, he adds – using a chart of the ARK ETF vs. the S&P 500...
I think the second half of 2025 is going to be a lot like those periods before it. One way we’ll know is that this reversal pattern in ARKK/SPY will be a valid one. This chart will keep climbing up the right-hand side of the screen, and speculative growth stocks will continue to lead.
Now REALLY interpret at will.
▶When you fly red flags in a green flag market... I think the best thing you can do is focus on fundamentally challenged companies and avoid getting into squabbles about irrational exuberance. It’s a waste of time and energy because as the old saying goes, you can’t argue with a crazy person... or argue about a crazy stock. That was the point of my essay Friday, headlined, “Never Say Never, But...,” which gave the state of my state (of mind) as I have maneuvered through this period.
At one point last week I posted on social media that the crummiest or most speculative companies – better known as the shitcos – were rising like they all just discovered the cure for cancer. One after the other... the crummier, the crazier. Or so it all seemed. This feels like every other unhinged rally I’ve lived through. They go until they don’t and they tend to catch people when they feel the least vulnerable. Respect the Risk.
▶Moving on, the NRG backstory... I’ve been doing more work on NRG. I’m not sure if there will be a finish line, but it got me thinking about doing more backstories of how I got to the story, such as the one I did on NRG. I pegged it off a series of Heard on the Street columns my friend Jon Weil wrote for the Wall Street Journal. The hook for me couldn’t have been simpler: It was NRG CEO Larry Coben’s comments in several interviews on financial TV after his reports ran that the focus of Jon’s pieces – derivatives trading – is complicated. The implication was that Jon didn’t know what he was talking about.
The minute I saw Coben say what he said, I knew... I knew that in the wake of Jon’s stories he very well may have been prompted by crisis PR advisors to grab back control of the message. He did that by going to the financial media and casting doubt over Jon’s credibility. Except... As I noted in my piece, Jon broke the Enron story 20 years ago, in part by raising questions about its derivatives trading. Of all the journalists I know, probably no one understands better not only the basics but also the nuances of what genuinely is a complicated topic. To me... that was the story, and Coben’s efforts at casting doubts over the messenger probably is the biggest red flag of all. What does it ultimately mean? That is the question.
▶Speaking of backstories... I also wrote about how the short-term catalyst I floated regarding QXO had backfired. The backstory: The concept originally was floated by a friend who runs a fund. He’s one of those people I drop everything to listen to when we chat, because he’s that good. I like creative, contrarian ideas – and that was about as contrarian as you can get. The risks to the thesis were obvious, and I mentioned them prominently. Perhaps the most compelling was the cult of QXO, or the mantra, “Don’t bet against Brad Jacobs.” Jacobs is QXO’s CEO, whose history of making money for investors has led to a cult-like following.
▶To that point: One longtime friend whose opinions hold weight with me – and who is generally a bull’s bull, but who is not a Jacobs fan – told me he was conflicted by what I wrote because as much as he doesn’t like Jacobs, he knows what Jacobs is capable of. His point was that as others said, there are better things in life to do that bet against Jacobs. Moral of that story: My friend has been around long enough to know that with investing, sometimes you can’t let emotions get in the way of reality. P.S.: There’s no guarantee that QXO will be the home run its fans think it is, and while past success doesn’t guarantee future returns, you have to pick your battles.
▶Speaking of QXO (last time, I promise)... One thing nobody will ever accuse Jacobs of is backing away from a fight. He’s considered to be exceedingly aggressive, and if you ever had any doubt read the press releases QXO issued on its IR site as it battled its way to buy Beacon Roofing – notably the letters to Beacon’s management. Ditto the release last week announcing its bid for GMS Inc. The entire thing read like you were watching a steamroller but it was the last paragraph that snared me...
As we’ve said before, we don’t play games – we’re straightforward and we move fast. In that spirit we have put forth a highly compelling offer at the high end of our valuation range. We have the financial capacity and deal expertise to close the Transaction swiftly and with a high level of certainty, and we’re willing to commit extensive resources to complete due diligence and negotiate definitive agreements on an accelerated time frame. Our team and our advisors are standing by.
Of course now, according to a report in the Wall Street Journal, Home Depot is rumored to also be making a bid for GMS. To which I say... Grab the popcorn!
▶Finally, last week was unusually busy... If you’re new to my work, that’s the way it is sometimes, when a lot of ideas come together at the same time. Sometimes I write once a week – sometimes almost every day. Sometimes free. Sometimes premium. If you missed last week’s batch...
QXO short-term risk catalyst backfires. This is if you missed the link above. Let’s just say, you win some and lose some.
“The Real Story Behind NRG’s Sizzling Returns” – This is also if you missed the link above. This gets into the nitty gritty of what Jon already reported, but with my spin.
“Never Say Never, But...” – Again, I also linked to it higher, but if you’re still puzzled: It’s an update on the Red Flag Alerts List. It includes the full list’s performance during the market’s low in April and then, a few days ago – and why that list is my own quirky fear/greed indicator. I also explain how, after reflection, I’m refining my approach (famous last words) as well as a rundown of current thoughts on the problem children in the group.
‘Tis the season for Chinese stock scams. A few days after I wrote about stock promotions on steroids, regarding what seemed like a doozy of a China stock scam, the Wall Street Journal did a whole piece on China stock scams. The one I wrote about is a doozy. The only surprise is that it hasn’t cracked... yet!
Bonus round: If you missed last week’s wrap, you can read it here.
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DISCLAIMER: This is solely my opinion based on my observations and interpretations of events, based on published facts and filings, and should not be construed as personal investment advice. (Because it isn’t!) I do not have a position in any stock mentioned here.
Feel free to contact me at herb@herbgreenberg.com