Wednesday, May 14, 2014

Time to Short Sell Technology Stocks with David Einhorn?

Prophetic Short Seller Sees a Tech Bubble. But Does it Even Matter? By Market Authority

Modern finance has its share of prophets. For these widely followed investors, disclosing a new position can lead to an immediate move in share price. Warren Buffett’s prophecy is powerful enough to move a stock’s value by 10%. Some believe that George Soros caused the Asian financial crisis merely by disclosing short positions in the Thai Baht and the Indonesian Rupee.

David Einhorn is a smart man, and his legacy is growing. The founder of Greenlight Capital started the fund in 1996 with $900,000. Since then, he’s generated an average annual return of 20% and the fund’s assets under management have swelled north of $10 billion. In April 2008, he announced a short position in Lehman Brothers, accusing the firm for improperly accounting for massive illiquid real estate investments. Five months later, the firm filed for bankruptcy and Einhorn catapulted into the ranks of financial prophets capable of moving markets.

When Einhorn makes a huge tech bubble call, it would be pertinent for you to pay attention. He made the following comments a few weeks ago:

“There is a clear consensus that we are witnessing our second tech bubble in 15 years. What is uncertain is how much further the bubble can expand, and what might pop it.”

He categorized the current bubble as “an echo of the previous tech bubble, but with fewer large capitalization stocks and much less public enthusiasm.”

In an investor letter, he outlined three reasons that back his theory:

The rejection of “conventional valuation methods”.

Short sellers being forced to cover positions.

Big first-day pops for newly minted public companies that “have done little more than use the right buzzwords and attract the right venture capital.”

Nobody can ever say for certain how long a bubble will last. As Keynes infamously remarked, “The market can stay irrational longer than you can stay solvent.” Perhaps the public finally gets excited and propels tech stocks to even more ludicrous valuations. Cab drivers aren’t tipping us to buy Twitter (TWTR) like they were with Yahoo (YHOO) 15 years ago.

Yet there’s a silver lining to this cloud. Without the widespread acclaim for the tech bubble, the collapse should only hurt the 1% that has benefited from the meteoric rise in tech valuations. And this is a segment of the population that is well-insulated from a sudden income adjustment, as they’ve been the prime beneficiaries of QE. Thus, the economic fallout from a bursting tech bubble should be well contained and not dramatically impact GDP.

There are signs that the tech bubble is deflating in a self-contained manner already. Look at the 3-month outperformance of the SPY (blue line) over the tech-heavy QQQ (green line):

Not every bursting bubble needs to be as dramatic as the dotcom or housing crisis. Pay attention to who owns the assets to assess the fallout.

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