David Einhorn's Advice On How To Trade This Equity Bubble (Spoiler Alert: Don't)

Tyler Durden's picture

Confused how to trade the second coming of the dot com bubble and a world in which irrational exuberance has hit irrationally exuberant levels? You are not alone. Here is some insight from none other than David Einhorn originating in his latest letter to investors.

The game of Earnings Expectation Conflation continues. It’s a bit like limbo - with a twist. Though the bar gets lowered every round, the goal is to make it over the bar, rather than go under it. Here’s what the current round looks like: At the end of June, third quarter S&P 500 index earnings were expected to grow 6.5%. In July, as actual earnings started to come in and companies lowballed the next quarter’s guidance, index earnings expectations were likewise adjusted lower. As more companies reported “beat and lower” earnings, market expectations continued to fall to the point where third quarter index earnings growth is now expected to be half of what was forecast in June. Of course, when earnings are announced in October and they “beat” the guidance set in July, everyone will celebrate with cake and ice cream. (Never mind that the earnings are actually in line with the original June predictions, or that they’ve lowballed guidance for next quarter – if anyone noticed that, they wouldn’t be able to move to the next round by lowering the December bar, which is currently set at 13% growth.) As the S&P 500 index has  advanced this year mostly through multiple expansion, the index is no longer cheap, particularly considering that we are now almost half a decade into an economic expansion and earnings growth is unexciting.


There is evidence of much more (and increasingly creative) speculative behavior. Some companies have convinced the market to embrace earnings reports that ignore what they must pay employees to show up to work every day, provided the employees accept equity rather than cash. We don’t understand how some investors view this as economically different from the company selling shares into the market and using the proceeds to pay workers. Then there’s the sizable group of companies (including a number of recent IPOs) that are apparently not subject to conventional valuation methods. Many have no profits and no real plan to make future profits. The market doesn’t seem to mind – in fact, it is hard to fall short of such modest expectations and the prices of these stocks have performed particularly well of late. Finally, there are the market participants whose investment process appears to be “bet on whatever has made money most recently.” They’ve noticed that stocks with large short-interest ratios have materially outperformed over the last year and they continue to invest accordingly. When “high short interest” becomes a viable stock-picking strategy and conventional valuation methods no longer apply for many stocks, we can’t help but feel a sense of déjà vu. We never expected to find ourselves in an environment like this again, given the savings that were lost when the internet bubble popped.

We are happy (and sad) to take the blame for #3 (see "Presenting The Best Trading Strategy Over The Past Year: Why Buying The Most Hated Names Continues To Generate "Alpha"). After all, when dealing with a stock market designed by a bunch of clueless Princeton academics specifically to cater to idiots, one must trade  accordingly.

Finally for those wondering...

At quarter end, the largest disclosed long positions in the Partnerships were Apple, General Motors, gold, Marvell Technology, Oil States International and Vodafone Group. The Partnerships had an average exposure of 109% long and 72% short.

We must say: we admire Mr. Einhorn's testicular fortitude to hold a 72% short position in a world in which all "downside risk management" has been outsourced to the politburo in the Marriner Eccles building.

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steveo77's picture

How does Bucky look?    In a solid channel for now, 1.75 years.  
Note this channel is my own creation the Bernoulli Channel.    It contains normal trading moves by channel line extensions, which also reflect the prevailing trend as a sloped channel.    Methinks this makes it superior to Fibonacci lines which are horizontal, and thus miss the point that there are tailwinds and headwinds on the market.

My early contention that we will have Currency Wars seems to be playing out.   No major currency is ramping or tanking in any way, but trading fluctutations on a mostly flat line.

Here is Bucky.    Note the bounce off the B100 channel line, and corresponding take down in Silver price, losing 5% in a day.    Metals are highly gamed in the "electronic" metal market.

 And below is a bear flag on my Risk on/Risk off indicator the NZD/JPY.    This breaking down would support US equities down also.


Aeternus's picture

Well, that just about does it for me, i'm shorting the /ES everyday for the next 365 days. Wish me luck.


Happy Halloween.



Fish Gone Bad's picture

I have said this before and I will say it again - this is the only collapse everyone saw coming and did not get out of the way.  I will update this with: and actively participated in.


Skateboarder's picture

Loved the closing line of the article. I don't think playing the stawks/bonds/digi-paper assets game is a good idea beyond Q1 '14. They're gonna do whatever they can to give them folks one last happy Wack Friday stampede.

King_of_simpletons's picture

Einhorn is just selfish. He wants all the profits for himself. He doesn't realize there is more to go around once Yellen takes control of the printing presses.

walküre's picture

It would surprise nobody. At least not if they're honest. Drug addicts and bull market apologists have a few things in common. They are in deep denial and need help. They also need their daily fix or their nails suffer.

This market cannot be traded. Only way to make money is selling into a somewhat frenzied market for as long as possible. The Momos and algos are acting confused because the true bid side has all but evaporated.

When this sucker crashes it will be a sight to behold! Guys will either jump from buildings or overdose on their drug of choice. The next collapse will be the last one and they know it.

TimTom's picture

If you didn't see the internet bubble or the credit bubble of mid 2000's coming (also called subprime bubble but that's a misnomer) then you weren't paying attention. Same sht, different day.

zjxn06's picture

Market can stay stoopid longer than you can stay solvent.

Just saying...

Running On Bingo Fuel's picture

Fuck You Bucky!

This shit started with the regional indian. Should have spanked him then cuz the cancer is spreading.


markettime's picture

We will keep the markets in this channel until elections are over. If you vote us out we will punish all of you bastards! Oh wait....we control the voting machines...nevermind....let the plundering continue!!!!!

playnstocks's picture

 Election ,, sounds like a disease you catch

Skateboarder's picture

It's a PTD, a politically transmitted disease.

waterwitch's picture

A condition that lasts more than 4 hours....

banzai401's picture

Funny that all the Tyler's in 'fight club' are moronic parrot's, funny indeed.

prains's picture

Funny that your pie hole moves when you speak, chronic bad breath though, you must do well with the water foul

Dr. Engali's picture

Been here a whole two weeks and three days and still haven't added anything constructive to the dialogue.

2bit Hoarder's picture

You need to give Ms. Yellen a chance to acclimate herself.  You can't expect her to seamlessly step into Bernanke's (MDB) shoes.

mrdenis's picture

Why ...is she going to use pink ink ? 

XAU XAG's picture



Although I agree..................carefull on the join dates.............does not mean they have not been reading................but then again judging the post may have read but never learned.


You can lead a horse to water but you cannot force it to drink!

oddjob's picture

 2 weeks 3 days and you've been here 2 weeks 2 days, thanks for the warning.

XAU XAG's picture



You have just proved my point!


Been reading for years......................but only recently joined

yofish's picture

You're right, pointing out the obvious may not lead to dialog but please, do you really think screaming 'Gold bitchzes!' by Tylerbots is enlightening? This place is a magnet for adolesent shitforbrains that obviously have a lot of time to be idle. 

StychoKiller's picture

I can think of over $17 TRILLION reasons why Au/Ag are rational choices right now...

Bearwagon's picture

So you still haven't realised that you are Tyler? Back to the front door, that is ..

Running On Bingo Fuel's picture

Trust me bro you don't want any of this. I'll level your ass so fucking quick your retinas will detach. Both of them.


Chump's picture

Are high schools now teaching that apostrophe = plural?  You do this in every.single.comment, all while criticizing the intelligence of others.  Dunce.

StychoKiller's picture

Apostrophe, it's just a comma, floating in the air!

bnbdnb's picture

The investment strategy is BUY.

PT's picture

1.  Pardon me for being so slow.
2.  Disclaimer:  I know nothing.
3.  Look at this graph
from this article

4.  In particular, look at the decaying exponential ramp leading up to the second peak.  Find the decaying exponential line of best fit.  Find the derivative of that line.  Calculate the date at which the growth rate will become unacceptable to TPTB.
5.  Depending on micro-changes in the economy, that will be the approximate date at which govt increases QE.  You may even be able to calculate the new QE and the new slope of that graph.
6.  I know nothing.  Just thought I'd better repeat that warning.
7.  Am I right?  Please let me know how I go.  I'm hoping I get bored enough to try and figure it out for myself, but I really should be looking for work at the moment.
8.  Yes, I know.  It's pointless trying to mathematically model humans who can change their mind at any time due to any amount of bizarre unknowns, but hey - this is entertaining, right?
9.  You're welcome.

lolmao500's picture

In what might be big news...

BreakingNews: Robert Ford: We've stopped a Russian arms shipment for the Syrian regime

While the POS McCain is still at it with his warmongering...

: John McCain: What is happening in is ‘no longer a civil war; it is a regional conflict’

Son of Captain Nemo's picture


And nothing on CNN and FOX regarding the latest use of American, Israeli and Saudi funded chemical weapons even though Syria meets the official deadline...



falak pema's picture

One thing about this guy and his culture :

Poker is a game for sly humans as its all about inducing doubt in the opponent, get him to second guess and make the wrong move at the right time. A game of duplicity and cleverness, not intellectual knowledge but psychic gut feeling, that feeds the lower instincts of the human psyche to predict the right moment to use the knife. The Soros instinct.

Whereas Bridge or Chess are about going for excellence and making plays based on most probable solutions; not on downside logic but upside logic; all that elevates man's psyche. Kasparov is no Einhorn although he has the brilliance and killer instinct of a Federer. 

Having said that, in this age of treasonable hubris  and overt cheating gone respectable institutionally, its ONLY normal to listen to the instincts of predators like Einhorn. He is no standard bearer of intrinsic excellence like Steve Jobs or Bill Gates were.

Ain't his hedge fundy values the mantra of today's Oligarchical zeitgeist?

Zirp, burp and make you play based on insider knowhow provided by those who leverage you. Its a buddy buddy world.

Tell us pied piper how the game is STACKED. You should know that, its in your blood.

prains's picture

swimming with sharks only works after they've eaten

Running On Bingo Fuel's picture

Bad analogy. Sharks are creatures that many people respect.

prains's picture

Respect in the order of cognition comes a distant second when choosing to be eaten or not

Ghordius's picture

excellent point. everytime I start to feel some sympathy for one of those hedgies I have to take a step back and remember how much derivatives demand they cause

and then I start to rant about the difference of investing and betting. I'd slap at least a very high sin tax on all financial products that aren't straight investing

rant start: ban those damn derivatives (again) :rant end

J Pancreas's picture

I wish I'd read this before investing my life savings in FB and ZNGA yesterday. :(

FieldingMellish's picture

Well looky there. While gold continues to get pummeled into oblivion (on highly margined paper trades), S&P is nearly green. Comedy gold.

Yellowhoard's picture

This reminds me of the late 90's.

I got out of the market and underperformed the crap out any basic index fund. I was right, but I was wrong.

forwardho's picture

Thanks for the honesty, You humbly neglect to note that when it was all over you still had your nut.

There are times when preservation of capital trumps hypothetical gains.

Each must choose as he deems prudent.

hangemhigh77's picture

Here comes the rampapalooza from POMO.  Free markets at work. Hopefully when it all comes down we hang every single asshole at the Fed.

Kaiser Sousa's picture

I have a hunch...the Dow will turn positive by 11:00 am pacific coast time...

and the phony paper price of the only 2 forms of real money will continue to b assaulted. ...

hangemhigh77's picture

At least now Buffet can make his payments on his fleet of yachts.  I was getting worried.

ebworthen's picture

"After all, when dealing with a stock market designed by a bunch of clueless Princeton academics specifically to cater to idiots..."

LOL...yup, that's why I'm not in it.

Blopper's picture

When Einhorn "discloses" (with the blessings of Tyler Durden) a 72% short position, that MEANS we should go LONG 72%.

Trust Blopper.


Long-John-Silver's picture

If you live by the bubble, you die by the bubble.