In today’s Money Morning… our brain’s ability to trick us into seeing things we want to see…the latest trillion-dollar stock…when patterns become problems…and more…
On Monday, my colleague Ryan Dinse pointed out the absurdity in markets, pointing the finger squarely at the insane levels of cash creation from central bankers.
If you missed his piece, please check it out here. It is filled with some great graphs and insight that may provide some much-needed perspective right now.
After all, that is the crux of what Ryan was discussing — perspective.
He even emphasised this point with a fun little demonstration of the ‘Thatcher effect’, a cognitive demonstration of our brain’s ability to trick us into seeing things we want to see — even if it’s wrong.
And while this may seem like a silly distraction, it is actually an important aspect of investing.
After all, markets aren’t the rational and logical mechanisms economists love to think they are. They are filled with people who fall prey to cognitive tricks, like the Thatcher effect. They rely on the brain’s ability to adapt and cope with the absurd to make you accept it.
If you want a perfect example, just look at Tesla…
How to Limit Your Risks While Trading Volatile Stocks. Learn more.
The latest trillion-dollar stock
In case you missed it, Tesla Inc [NASDAQ:TSLA] is now the third US company to exceed a US$1 trillion market cap. It joins the likes of Apple, Microsoft, Amazon, and a handful of others.
The reason for the recent surge is due to a key deal between Tesla and Hertz, with the car rental company committing to buy 100,000 electric vehicles from Tesla by the end of 2022.
It’s a huge win for Musk’s car company, and it is further proof that EVs are likely to continue growing in prominence.
But that doesn’t necessarily justify the perpetual insanity of Tesla’s share price…
This trillion-dollar company is trading at a P/E ratio of a small-cap growth stock. It carries a 234 P/E multiple — meaning investors are willingly paying US$234 for every $1 of Tesla earnings.
To a sound mind, that just doesn’t make sense — right?
Well, by Tesla’s standards, their current P/E ratio is actually kind of normal.
This time last year the stock was trading at a multiple of 875. Which itself is still well below Tesla’s all-time P/E record of 1,401 in January.
So, by those standards, perhaps you could argue Tesla is a bargain!
I kid, of course.
It is far too hard to justify any kind of value proposition to invest in Tesla right now. It is simply a trillion-dollar stock that trades like a speculative small-cap.
And, for this reason, the most ludicrous aspect of Tesla isn’t the stock itself — it’s the traders.
When patterns become problems
One of the funniest articles I saw this week was a CNBC piece that included several analysts’ and traders’ thoughts on Tesla stock. A quick and telling look into the minds of those who have become enraptured beyond all reason.
Here is what options trader Danielle Shay told CNBC regarding Tesla:
‘I’d look at a $1,200 price point. We’re within that range for a November series expiration, and I like to trade it with [butterfly spreads]. They’re cheap, low risk, high reward, and they make for some great momentum trades…’
In other words, not only does she believe Tesla stock will continue to move higher, she believes it will only take a matter of weeks to get there.
So what is her justification for this surge?
‘The reason I would say even December is because I love the Santa Rally plus January effect plus run into earnings in January…
‘January has been my best month of the year for many years in a row. It just seems to be a perfect storm, so I put on more risk Dec/Jan.’
Now, I don’t know whether CNBC has taken this trader out of context here or not, but this got a laugh out of me. She is saying that her reason for liking the stock and investing for potential returns is because of the market’s tendency to rise around the Christmas period…
Following up with an anecdote that January and December have been her best months for ‘many years in a row’.
But hey, maybe they know something I don’t.
All I’m suggesting is that these kinds of traders are so removed from any kind of fundamentals that they’re simply trading patterns and market behaviour. A point that, to me at least, feels like it has entered bizarro world.
Because while I think there are several reasons you could at least try to justify Tesla’s insane market cap, we seem to have moved beyond that point. It’s as if technical analysis has reached the point where traders are simply gambling on whether the chart will go up or down.
Again, just as Ryan Dinse suggests, it seems perspectives have changed.
Whether or not it will come at a cost is the real question. Because, as our resident market contrarian Vern Gowdie is saying, a lot of assets are at code red.
Maybe he’s right, maybe he’s wrong — but madness is certainly taking over markets one way or another…
Editor, Money Morning
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