Are We In A Bubble?

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by UPFINA

We have been following the short interest in the U.S. stock market closely because the shorts have been burned badly ever since the bottom in March 2020. This was the greatest rally in highly shorted stocks ever. Furthermore, early in 2021 a bunch of highly speculative stocks exploded partially due to social media activity. Some of those were highly shorted. This was the worst possible scenario for short sellers. Many made sure to avoid shorting or covered anything with a high short interest even if they were bearish on that idea.

Now we are back to share with you the final level of short seller doom. As you can see from the chart below, the median short interest in S&P 500 stocks is 1.5%. This is the same level it bottomed at during the peak of the tech bubble in 2000. The short selling percentage can’t go negative. Essentially, it can’t get much lower than it is now. Interesting, min-vol stocks are underperforming badly. This covers the gambit of investors not wanting to take any precautions or hedge their long exposure.

We are probably in one of the best markets for short selling in history because there are so few shorts. Keep in mind, this only shows data from the S&P 500. Most of the high opportunity shorts are not in the index. Structurally unprofitable businesses usually don’t make it to the large cap index.

Goldman Sachs came up with a checklist to determine if the market is in a bubble. As you can see, there is a new era of technology that is/are supposed to change the world, booming corporate activity, easy credit, low rates, rising leverage, frantic speculation, high market concentration, new valuation approaches (price to TAM), excessive price appreciation, and extreme valuations. The only things we don’t have, according to this list, are a late cycle economy and accounting scandals. There probably won’t be any scandals until after the bull run ends.

As Warren Buffett once said, “Only when the tide goes out do you discover who’s been swimming naked.” The tide hasn’t gone out yet. There will probably be some type of scandal if there is a sustained bear market. It would probably need to last for at least 2 years. Furthermore, there would need to be major failures. Basically, the exact opposite of today. The fact that we aren’t at the end of an economic cycle doesn’t mean stocks can’t fall into a bear market. The stock market can easily decline while the economy gets healthier. In fact, if low economic growth resurfaced for whatever reason, major market indexes, which are heavily weighted with tech stocks, might do relatively well in that environment, since tech stocks outperform in that environment.

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Massive Income Gains

It is impossible to overrepresent the massive income gains Americans will receive in the next 6 months through transfer payments and job gains. This will create a boom in consumer spending and GDP growth. It’s worth nothing that the highly speculative stocks haven’t done well in the past couple weeks in spite of the stimulus payments going out. The problem was that so many people anticipated a boom, that they bought stocks ahead of this, ending any chance of a rally. Plus, more people are spending the stimulus money on the real economy compared to the previous stimuli because there are more spending options.

As you can see from the chart below, in March personal income will surpass the peak following the April stimulus. Wage compensation has fully recovered because the people who lost their jobs are in the low income group. That being said, most of the jobs added in March will be in that group. We expect leisure and hospitality to add well over 200,000 jobs in March and the overall economy to add well over 500,000 jobs.

Vacationing Is Back

People are spending money on vacations again. The only question is how much higher hotel occupancy and flying will be than it was before the pandemic. There is about to be a boom unlike anything we have seen in decades. As you can see from the chart below, the U.S. hotel occupancy rate reached 52% in the 2nd week of March which is the highest since the pandemic started but 12 points below the peak in February. According to Alexa, Priceline.com went from the 2,460th most popular website 90 days ago about to the 1,923rd most popular website today. Expedia.com has seen a large increase in traffic since November. It had 31.1 million total views in November. That increased to 36.21 million in February. It probably increased even further in March.

Flying is also rebounding, but it’s not as close to normal as hotel occupancy is. As you can see from the chart below, the 7 day moving average of passengers going through airport security has gotten to a new post-pandemic high of about -45% yearly growth. The yearly decline since February 22nd is based on 2019 data to remove base effects. From January to February, traffic on JetBlue.com increased 10% to 7.7 million.

Retail Is Booming

Retail sales growth is about to be fantastic. Sale store sales readings for reopening companies like clothes stores will be around as strong as they were for the stay at home stores last year. As you can see from the chart below, the latest Evercore ISI retail sales reading is by far the highest in the past 4 years. There will be a much bigger spending boom than there was in January. The stimulus was larger and there is much more job creation.

Conclusion

This has been the worst year for short sellers ever. There are practically no short sellers left. There aren’t even many funds willing to hedge themselves. Short selling individual companies to increase long exposure isn’t working. Being net short doesn’t exist anymore. That’s why this is from a historical standpoint one of the best markets to short ever, depending on your time horizon. Goldman’s checklist suggests we could be in a bubble. That doesn’t mean the economy is in trouble. Incomes, hotel occupancy, and retail sales are booming. Air travel is increasing. We might get back to normal this summer in those segments of the economy.

 

 

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