An independent professional's take on the latest news and trends in global financial markets

Rich valuations for the stock market’s global elite

The news that Paul Walsh, the CEO of Diageo, has unloaded a huge amount of stock (£16m) after exercising a raft of share options draws attention to the extent that the prices of high quality companies with strong global business franchises and the ability to generate cash have been bid up to very rich levels. The veteran market-watcher Richard Russell has observed something similar on the other side of the Atlantic.

What do billionaires Warren Buffett, John Paulson, and George Soros know that you and I don’t know?  I don’t have the answer, but I do know what these billionaires are doing.  They, all three, are selling consumer-oriented stocks.  Buffett has been a cheerleader for US stocks all along. But in the latest filing, Buffett has been drastically cutting back on his exposure to consumer stocks.  Berkshire sold roughly 19 million shares of Johnson and Johnson.  Berkshire has reduced his overall stake in consumer product stocks by 21%, including Kraft and Procter and Gamble.  He has also cleared out his entire position in Intel.  He has sold 10,000 shares of GM and 597,000 shares of IBM.

Fellow billionaire John Paulson dumped 14 million shares of JP Morgan and dumped his entire position in Family Dollar and consumer goods maker Sara Lee.  To wrap up the trio of billionaires, George Soros sold nearly all his bank stocks including JP Morgan, Citigroup and Goldman Sachs.  So I don’t know exactly what the billionaires are thinking, but I do see what they’re doing — they are avoiding consumer stocks and building up cash.

One obvious answer to what the billionaires are thinking has to do with America’s consumers. Consumer buying makes up roughly 70 percent of the nation’s Gross Domestic Product.  And with interest rates near zero, with jobs hard to find, with unemployment up, and with savings scarce, the billionaires are thinking that consumption is heading down and that America’s consumers are close to going on strike.

If this is true, then why is the retail public loading up on stocks?  Can’t they see the picture?  The answer is that the picture the retail public is seeing is — the Dow going up.  Nothing ignites the retail public’s appetite for stocks like a series of new record highs in the Dow. The typical stock buyer doesn’t act on his intelligence, he acts on his emotions.  And his emotions say, “Look, the market is heading higher, and I want a piece of the action.  If I’m lucky, I’ll get back some of the money I lost during 2008-09, so wait a second while I call my broker.”  And so it goes, at least that’s the way Richard Russell sees it.

These are all great businesses, but there comes a point at which even great businesses start to look expensive. Investors’ search for relatively safe homes for their money in a world of negative real interest rates, coupled with the unorthodox monetary policies of the Federal Reserve and other central banks, seems to be doing just that in the consumer staples segment of the market. Independent Investor‘s latest full length interview, with Sandy Nairn, CEO of Edinburgh Partners (“Don’t Mistake Predictability for Safety”), makes a similar point in much greater detail.