MW Here's what the Saylor-Buffett ratio is saying about the market right now
By Jamie Chisholm
The relative performance of MicroStrategy and Berkshire Hathaway can be a good guide to speculative excess
The S&P 500 SPX will open Friday's session less than 1% off its record closing high after calmly-absorbed results and forecasts from Nvidia $(NVDA)$ this week marked the climax of the U.S. corporate earnings season.
There are lingering uncertainties that may damp investor ardor, such as President-elect Trump's choice for Treasury secretary, and December's Federal Reserve policy meeting, for which the market's currently not very sure of another rate cut.
But those hurdles aside, many traders and analysts seem to be expecting stocks to enjoy their traditionally good run into year end.
However, Owen Lamont, senior vice president and portfolio manager at Acadian, is decidedly more wary. And he's come up with a handy gauge to reflect what he perceives as the market's current over-exuberance: the Saylor-Buffett Ratio.
"How will we know when we're in a speculative bubble? One approach is to look at the relative status of two men: Warren Buffett of Berkshire Hathaway $(BRK.B)$ and Michael Saylor of MicroStrategy $(MSTR.AU)$," says Lamont.
Saylor has been in the news a lot recently for his company's multi-billion-dollar bet on bitcoin (BTCUSD) that has seen the MicroStrategy share price surge 664% over the past 12 months.
Lamont argues that Buffett's traditional financial virtues of desiring rational valuations, strong balance sheets and solid profits are deemed unfashionable at times of speculative excess.
This leads to such headlines as those below during periods when stocks hit peaks.
This suggests that applying the phrase "lost his touch" to Buffett may indicate the market's risen too much, says Lamont.
"On the other end of the spectrum is Saylor, a sort of bizarro-Buffett," says Lamont, because MicroStrategy, like Berkshire, is unusual for a publicly traded company in that much of its value consists of its holdings of other assets. It's just that rather than companies, MicroStrategy holds bitcoin, of which Saylor is particularly evangelical.
And there are other stark contrasts. Buffett is a champion of straightforward accounting, whereas Saylor's use of the word yield in relation to its bitcoin buying is an example of GOAP: "Generally Orwellian Accounting Principles," says Lamont.
Buffett is an advocate of share repurchases, while Saylor is issuing stock by the billion dollars worth, Lamont adds.
If the reader is still unsure of the fund manger's position on the two investors, here's his character summary in full: "Buffett represents traditional business. Saylor represents futuristic visions. Buffett is folksy. Saylor is crypto-mystical. Buffett embraces the old. Saylor proclaims the new. Buffett is value and mean reversion. Saylor is momentum and exponential growth. Buffett is Apollo (order, logic, clarity). Saylor is Dionysus (liberation, imagination, infinity)."
Phew! And to illustrate his point Lamont has created the Saylor-Buffett Ratio, which is the total cumulative return on MicroStrategy shares divided by the total cumulative return on Berkshire Hathaway, starting at 1 in June 1998.
Lamont notes that the ratio peaked around February 2000, then again during the meme-stock craziness of early 2021, and in late October this year was lurching upwards once more. In fact the chart misses much of the sharp rises in MSTR over the last few weeks, and so the ratio will be notably higher than the 1.96 showed. And of course, those peaks also correspond with "Buffett has lost his touch" syndrome.
Lamont accepts that his Saylor-Buffett ratio is not a "scientifically valid measure derived from first principles," but "it sure looks like an accurate measure of speculative excess."
"The market is getting frothy," he says.
Markets
U.S. stock-index futures (ES00) (YM00) (NQ00) are lower while benchmark Treasury yields BX:TMUBMUSD10Y dip.
The dollar index DXY at one point rose to a two-year high after the euro $(EURUSD.FOREX)$ slumped below $1.04 following a purchasing managers' survey that showed the eurozone contracting in October.
Key asset performance Last 5d 1m YTD 1y S&P 500 5948.71 -0.01% 2.39% 24.72% 30.55% Nasdaq Composite 18,972.42 -0.71% 3.02% 26.39% 32.99% 10-year Treasury 4.395 -2.60 10.90 51.41 0.36 Gold 2708.7 5.50% -1.89% 30.74% 35.18% Oil 70.47 5.26% -1.70% -1.21% -6.26% Data: MarketWatch. Treasury yields change expressed in basis points
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The buzz
U.S. economic data due on Friday include the S&P flash services and manufacturing PMIs for November, released at 9:45 a.m. Eastern, by the final reading of November consumer sentiment at 10:00 a.m. The flash PMI in the eurozone fell to the worst reading in 10 months.
President-elect Donald Trump is considering appointing financier Kevin Warsh as Treasury secretary, with the understanding he could later lead the Federal Reserve, according to the Wall Street Journal.
Gap shares $(GAP)$ are up 15% in premarket action after pushing its full-year guidance higher, while Intuitive stock $(INTU)$ is off nearly 6% after the tax-software group's earnings were less well received amid lingering concerns the Trump administration may build a tax-filing app.
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The chart
U.S. healthcare XLV is the worst performing sector year-to-date, trailing every other sector by at least 3 percentage points, notes Jonathan Krinsky, technical guru at BTIG. But he says that while the trend remains "difficult to defend, from a contrarian standpoint it looks interesting heading into '25."
In particular, he observes that the S&P 500 healthcare sector has just recorded the most amount of members with a 4-week low and a relative strength index (a momentum gauge) below 30 since the spring. Such moves "are typically good for tactical bounces," he says.
Top tickers
Here were the most active stock-market tickers on MarketWatch as of 6 a.m. Eastern.
Ticker Security name NVDA Nvidia TSLA Tesla MSTR MicroStrategy GME GameStop SMCI Super Micro Computer PLTR Palantir TSM Taiwan Semiconductor Manufacturing AMZN Amazon.com AAPL Apple DJT Trump Media & Technology
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-Jamie Chisholm
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November 22, 2024 06:33 ET (11:33 GMT)
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