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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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Thu, 10/31/2013 - 11:08 | 4108592 steveo77
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.

Thu, 10/31/2013 - 11:14 | 4108605 Aeternus
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.

Thu, 10/31/2013 - 11:43 | 4108688 Fish Gone Bad
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.


Thu, 10/31/2013 - 12:11 | 4108782 Skateboarder
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.

Thu, 10/31/2013 - 12:43 | 4108888 King_of_simpletons
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.

Thu, 10/31/2013 - 12:13 | 4108791 walküre
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.

Thu, 10/31/2013 - 13:59 | 4109141 TimTom
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.

Thu, 10/31/2013 - 13:44 | 4109087 zjxn06
zjxn06's picture

Market can stay stoopid longer than you can stay solvent.

Just saying...

Thu, 10/31/2013 - 12:19 | 4108817 Running On Bing...
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.


Thu, 10/31/2013 - 11:10 | 4108593 SheepDog-One
Thu, 10/31/2013 - 12:09 | 4108776 Son of Captain Nemo
Son of Captain Nemo's picture

Liked that one.

Thu, 10/31/2013 - 11:10 | 4108598 markettime
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!!!!!

Thu, 10/31/2013 - 11:20 | 4108616 Dr. Engali
Dr. Engali's picture


Thu, 10/31/2013 - 11:58 | 4108737 playnstocks
playnstocks's picture

 Election ,, sounds like a disease you catch

Thu, 10/31/2013 - 12:13 | 4108798 Skateboarder
Skateboarder's picture

It's a PTD, a politically transmitted disease.

Thu, 10/31/2013 - 14:39 | 4109251 waterwitch
waterwitch's picture

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

Thu, 10/31/2013 - 11:18 | 4108611 banzai401
banzai401's picture

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

Thu, 10/31/2013 - 11:32 | 4108645 prains
prains's picture

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

Thu, 10/31/2013 - 11:35 | 4108665 Dr. Engali
Dr. Engali's picture

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

Thu, 10/31/2013 - 11:47 | 4108697 2bit Hoarder
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.

Thu, 10/31/2013 - 13:21 | 4109007 mrdenis
mrdenis's picture

Why she going to use pink ink ? 

Thu, 10/31/2013 - 12:20 | 4108818 XAU XAG
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!

Thu, 10/31/2013 - 13:13 | 4108984 oddjob
oddjob's picture

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

Thu, 10/31/2013 - 13:27 | 4109019 XAU XAG
XAU XAG's picture



You have just proved my point!


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

Thu, 10/31/2013 - 12:59 | 4108940 yofish
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. 

Thu, 10/31/2013 - 19:53 | 4110161 StychoKiller
StychoKiller's picture

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

Thu, 10/31/2013 - 11:43 | 4108689 Bearwagon
Bearwagon's picture

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

Thu, 10/31/2013 - 12:25 | 4108828 Running On Bing...
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.


Thu, 10/31/2013 - 15:09 | 4109346 Chump
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.

Thu, 10/31/2013 - 19:55 | 4110164 StychoKiller
StychoKiller's picture

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

Thu, 10/31/2013 - 11:23 | 4108626 bnbdnb
bnbdnb's picture

The investment strategy is BUY.

Thu, 10/31/2013 - 12:01 | 4108750 PT
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.

Thu, 10/31/2013 - 11:26 | 4108631 lolmao500
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’

Thu, 10/31/2013 - 12:38 | 4108874 Son of Captain Nemo
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...

Thu, 10/31/2013 - 11:27 | 4108634 falak pema
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.

Thu, 10/31/2013 - 11:34 | 4108663 prains
prains's picture

swimming with sharks only works after they've eaten

Thu, 10/31/2013 - 12:39 | 4108880 Running On Bing...
Running On Bingo Fuel's picture

Bad analogy. Sharks are creatures that many people respect.

Thu, 10/31/2013 - 12:49 | 4108899 prains
prains's picture

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

Thu, 10/31/2013 - 13:03 | 4108951 Ghordius
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

Thu, 10/31/2013 - 11:31 | 4108640 J Pancreas
J Pancreas's picture

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

Thu, 10/31/2013 - 11:46 | 4108655 FieldingMellish
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.

Thu, 10/31/2013 - 11:37 | 4108666 Yellowhoard
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.

Thu, 10/31/2013 - 12:37 | 4108873 forwardho
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.

Thu, 10/31/2013 - 11:38 | 4108668 hangemhigh77
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.

Thu, 10/31/2013 - 11:38 | 4108669 Kaiser Sousa
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. ...

Thu, 10/31/2013 - 11:37 | 4108671 hangemhigh77
hangemhigh77's picture

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

Thu, 10/31/2013 - 11:40 | 4108677 ebworthen
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.

Thu, 10/31/2013 - 11:39 | 4108679 Blopper
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.


Thu, 10/31/2013 - 11:44 | 4108691 Long-John-Silver
Long-John-Silver's picture

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

Thu, 10/31/2013 - 12:14 | 4108793 edifice
edifice's picture

Or, you retire.

Thu, 10/31/2013 - 11:50 | 4108712 GFORCE
GFORCE's picture

The bubble hasn't started yet!

Thu, 10/31/2013 - 11:59 | 4108739 Zer0head
Zer0head's picture

you're probably correct



for those who recall those heady days of the dot-com-boom

every effing morning higher highs, day in and day out, higher highs

the IPO bandwagon

then articles started to appear about burn rates

countered by stories of  the paper millionaire teenagers

stupid aquisitions by dumb as fuck CEOs

and higher and higher highs

then the flameouts began

but still higher

and then gasp! some sharp sell offs and we were told  "everybody knew" a correction was coming

and it kept correcting as the bastards of CNBC pumped and pumped

and in the end those same bastards said we told you so

Thu, 10/31/2013 - 12:22 | 4108823 walküre
walküre's picture

It's different this time. J6P is not participating. This is a FED juiced market, nothing else. The players know that too. J6P is on food stamps and not going to drop a dime into the casino. The casino needs dumb idiots willing to part with their money on a rigged game. The dumb idiots are broke and they know the game is rigged. A few might drop some coin on "inside" information but other than that, good luck finding new muppets.

Most guys I know are on the sidelines. Whatever that means. Dying to do something with their money but don't want to start a new venture or "invest". These are not big fish type of guys. Just plain vanilla leftover middle class people who escaped or rebuilt after the crash. They dabbled in the markets for a bit, lost some on the wrong side of the trade or made some and cashed in. Now they're out and won't come back. They spend on themselves or stash. Maybe that's what the Fed really wants. The corporate guys who live on selling their own free trading stock don't have any buyers except the Fed and banks. They all know there's no greater fool left to sell to.

Thu, 10/31/2013 - 13:05 | 4108954 Ivan K
Ivan K's picture

Man, you just described me on the sidelines...

Thu, 10/31/2013 - 12:51 | 4108897 Running On Bing...
Running On Bingo Fuel's picture

Agree. No froth yet. Stay long. These shorts are going to experience pain and they're bitching so soon?

If you want to short something short the Nikkei.


Thu, 10/31/2013 - 12:36 | 4108871 moneybots
moneybots's picture

"The bubble hasn't started yet!"


Greenspan says the market isn't bubbly, which is greenspeak for it's a bubble.

Thu, 10/31/2013 - 12:17 | 4108731 Mercury
Mercury's picture

Where’s the paragraph at the end that says:

That said, the actions of the Federal Reserve ( interest rate supression, risk asset inflation) continue to completely dominate US financial markets despite the actions of the federal government in general (regulatory uncertainty and private sector intervention). So, taking Occum’s Razor to the above, the most rational and remunerative strategy (until it isn’t) remains: levered beta.



Thu, 10/31/2013 - 12:14 | 4108796 PT
PT's picture

Re   "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."  :

You mean to say that now employee wages are going to be counted as profit, not expense?  WIN FOR THE EMPLOYEES!!!  Wage rises, HERE WE COME!!!

Or maybe this will finally be the trigger for hyperinflation ...

I guess it depends on how awake the accountant is while he re-fiddles the books.

Getting close to peak-CEO-desperation/foolishness? 

Thu, 10/31/2013 - 12:13 | 4108797 devo
devo's picture

There isn't exuberance, though. Everyone buying seems to know it's bad. They're just doing it because there's nowhere else to go.

Thu, 10/31/2013 - 12:39 | 4108881 Mercury
Mercury's picture

Like a lighthouse keeper on an island full of sheep...

Thu, 10/31/2013 - 12:25 | 4108829 XAU XAG
XAU XAG's picture

How to Trade the equity bubble


Not with a TEN foot barge pole.


Peeps singing on the way up and are going to be whaling on the way down when it comes.


It's a proxy for the Zirp, inflation and QE that will stop .................when it stops oneday


Thu, 10/31/2013 - 12:28 | 4108835 DOGGONE
Thu, 10/31/2013 - 12:51 | 4108903 dcohen
dcohen's picture

The good news is that Yellen does not need to buy a Halloween mask.

Thu, 10/31/2013 - 12:54 | 4108915 MeBizarro
MeBizarro's picture

Einhorn is a brilliant guy but I would bottom dollar he trades constantly on inside information. Only way he could close to generating the returns he does.

Hell he made his bones on Allied Capital on insider information and if we had any modicum of justice left he would have pursued by the SEC. Spirtzer was a glory whore with an ego second to none but at least he had some semblance to pursue crooks like Einhorn even if if was for personsk and political gain. Instead Einhorn was a major Bush contributor and made enough friends with some select contributions when Obama got elected to avoid any scrutiny.

Thu, 10/31/2013 - 13:14 | 4108986 dscott8186
dscott8186's picture

You day traders surprise me, you know the market is a bubble and then you complain about a sure thing.  The trick has always been getting out before the top or just after it.  

Ride the ZIRP until the interest rate rises then swim for shore on a raft made of Swiss Francs.  

Yum, yum, it smells like chum.

Thu, 10/31/2013 - 13:34 | 4109017 0b1knob
0b1knob's picture

I recently dug an old beta tape out of a closet.   Back in the day I used to tape the last hour of trading on the old Financial News Network, or as it was universally known, the Financial Fools Network.   The shows were taped in 1990 to 1992 period when it was on cable.   A few points:

1.)  This was a few years after the 1987 crash.   About 2 out of every 3 guests would say that the market was overpriced and headed for another inevitable crash.   This was during a bull market that ran from 1987 to 2000.  A great time to be in the market.  Everybody fixated on the '87 crash the way people today fixate on the 2009 meltdown.

2.)  Market timing was the key to everything.   Follow the Fed.   Only fools concentrated on stock selection.  

3.)  The dollar's days as world reserve currency were numbered.   The Japanese yen would replace it.   This viewpoint peaked about the time the Japanese market did.

4.)   Hyperinflation was JUST AROUND THE CORNER.   If you didn't buy gold you were an idiot.

5.)   Damn Sue Herrera used to be a babe.  Today not so much.

6.)  At least half of the people on the show were obviously insane.  Remember Andrew Lightbody, military commentator and former jet pilot.   Jeez....

I guess my point is that the more things change the more they remain the same.   Don't get locked into any position.   Keep an open mind.

Thu, 10/31/2013 - 13:46 | 4109097 Running On Bing...
Running On Bingo Fuel's picture

Read you loud and clear.


Thu, 10/31/2013 - 13:59 | 4109140 NuYawkFrankie
NuYawkFrankie's picture

What's he doing in an orange jumpsuit?

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