Wake up! Investors are way too complacentOctober 22, 2013: 1:08 PM ET
The opinions expressed in this commentary are solely those of Paul R. La Monica. Other than Time Warner, the parent of CNNMoney, Abbott Laboratories and AbbVie, La Monica does not own positions in any individual stocks.
The stock market may have more room to run. But it's starting to look like investors are getting a little too complacent.
If the zombie apocalypse actually were to happen, stocks would probably surge because investors would take it as a sign that the undead Fed would continue to buy $85 billion in bonds a month for the foreseeable future. Can't taper yet. Must eat more Treasuries. And brains!
The S&P 500 hit another record high Tuesday despite a relatively weak jobs report. The Dow was up again and is now only 1% from topping last month's all-time high.
All the worries about the government shutdown and possible United States debt default have vanished like Keyser Soze in "The Usual Suspects." And like that, they're gone. No need to worry about the economy as long as future Federal Reserve chair Janet Yellen keeps quantitative easing in place!
Less than two weeks ago, the index was showing signs of Extreme Fear. But now that the shutdown is over and Washington has kicked the can again on the debt ceiling, the index is doing its best Gordon Gekko and signaling Greed. Stock market momentum and junk bond demand are indicating levels of Extreme Greed.
Risk on, baby!
This is worrisome. It's never a good sign when investors are so willing to ignore the obvious.
The economy continues to merely sputter along at a moderate/modest (to use the two favorite Fed adjectives starting with the 13th letter of the alphabet) pace while earnings growth for the third quarter is expected to be meager/mediocre (Today's Buzz is brought to you by the letter M!) at best.
Want more signs that investors just want stocks to go up?
Shares of JPMorgan Chase (JPM) have barely budged lately even though the bank is said to be close to agreeing to a $13 billion legal settlement with the U.S. government over mortgage-related sins from the financial crisis.
Yes, I realize that the fine is something Chase can afford to pay. It's also something that is arguably excessive when you consider that the units responsible for many of the problems were Bear Stearns and Washington Mutual -- two companies that Chase bought/bailed out largely at the behest of the government.
Still, $13 billion is a big number. Previous (and smaller) legal expenses led to a quarterly loss for the bank in the third quarter. But shares of Chase are up 4% over the past week and 23% year-to-date. If mob boss John Gotti was the Teflon Don, then Chase CEO Jamie Dimon is the Teflon Banker in the eyes of Wall Street.
But wait. There's more!
Shares of eBay (EBAY) had a solid comeback Friday, gaining nearly 2% after tech news site AllThingsD reported that CEO John Donahoe was sorry he sounded so negative during the company's earnings conference call. The stock had fallen 4% Thursday following its earnings release due to worries about eBay's outlook.
However, Donahoe chalked up some of the negativity to the fact that he and CFO Bob Swan had colds. So their comments sounded worse than intended. Seriously?
What's next? A CEO saying to ignore weak guidance because he stubbed his toe and it was the pain talking? Or that cautious comments on the economy were taken out of context because the CFO just had a fight with their spouse and was grumpy?
It's getting a little ridiculous how investors just don't seem to care about valuation either. Take a look at Tesla (TSLA). It's a great company. There is no doubt about that. Elon Musk is an amazing CEO. Nobody is disputing that. But the stock is trading at nearly 100 times 2014 earnings estimates. That's not sustainable.
Musk conceded as much in an interview with CNBC back on August 22, saying that "the valuation we have right now is more than we have any right we have to deserve honestly." The stock is up more than 15% since that TV appearance. So clearly, the market is not listening.
But you know what? Perhaps some reason may finally be returning to the market. Look at what Netflix was doing Tuesday following its blockbuster (word choice intended since Netflix helped make that once-dominant video retailer irrelevant) earnings report.
Although shares quickly surged 10% in early trading and hit a new all-time high in the process, the stock slumped as the day wore on. Why? Maybe investors were taking what CEO Reed Hastings had to say about the stock's meteoric rise to heart.
In a letter to shareholders, Hastings pointed out how Netflix stock was the best Nasdaq performer in 2003. He noted that the stock's big move that year was partly due to strong results but that it was "compounded by momentum-investor-fueled euphoria."
Netflix is a great company. It is doing extremely well. Streaming video is no longer a niche business. It's for real. I thank Netflix for giving me another season (admittedly flawed) of "Arrested Development" and allowing me the opportunity to binge on "Breaking Bad" before the series finale.
But the stock is up more than 266% this year. Shares trade at about 100 times 2014 earnings estimates. Just like Tesla. And that seems to make Hastings nervous. He pointed out that "some of the euphoria today feels like 2003."
Euphoria eventually fades. Momentum investors/traders can be incredibly fickle. And Hastings knows that from experience.
Want to guess how Netflix did in 2004? Shares continued to rally for awhile. But they eventually hit a wall. The stock wound up plunging 55% for the year.