Turn cautious too soon rather than wait until its too late. In addition, marks writing that asset prices are high, quote, across the board. That there are few bargains to be had and that a growing number of investors are embracing increasing risks to achieve their returns. Here to discuss that and debate the memo, the stocks which are moving today at this hour, pete s na jaaron. Also with us is cnns leslie pi pickert going through this memo. It is from oak trees howard marks questioning whether stocks are too expensive. Jim, he says the s p 500 selling at 25 times trailing 12 month earnings compared to a longterm median of 15 he mentions the schiller cape ratio. Almost 30 versus a historic median of 15 right. Is he right he is right in concept. Now this is not bubble territory. Stocks are a little expensive. The market overall is a little expensive. I look at some of these industrial names as earnings come out, trading in the mid 20s for a multiple thats a little bit high heres the thing he is right in the concept i think hes wrong to execute right now. The reason is because of this low volatility that weve got right now. Youre seeing this market bubble higher almost every day by a little bit thats a beautiful situation that al louts ylows you to cont ride it. Then you can say get out i think you run a real risk of leaving 10 on the table. I think its better to turn cautious im quoting. Its better to turn cautious too soon and thus perhaps under perform for a while rather than too late after the down slide has begun making it hard to cut risks. You want to wait until the fires in his face. No, no, im not saying that listen, to what you just said, the difficulty of exiting isnt that difficult what you have to do is be prepared i think thats what hes saying, right . I know what stocks i want to sell there are stocks that are past my sell point and im letting them to continue to burble higher Marathon Petroleum is one weve talked about in the last week. It had a decent, not great but decent Earnings Report today it continues to trickle higher when i see that thing down meaningfully two days in a row, past my sell signal, then i get out. Be prepared. Its not difficult to exit this market its not difficult to take risk. Pete, jim mentions complacency. Yes. The vix, howard marks is talking about that, too. Says the bottom line is that last weeks vix was the lowest in its 27 year history matching a level seen only once before. Right. The index was last this low when bill clinton took office when there was peace in the world, faster Economic Growth and a small deficit. Should people be as complacent now as they were then . The answer is why not use all the tools that weve got in front of us. The reality is, have people become complacent . Probably volatilities are at a level where why wouldnt you want to own that protection, scott we talk about it each and every day. Weve been talking about it since volatility index got to 12 you know what, pete, youre wasting your money by protecting thats okay. If im protecting and the market is going up as fast as it is, that protection thats costing me very few, maybe a percent or 2, the market is up 10, 11, 12, 14 , i think ill take that risk every day and ive got protection if the storm comes, if what youre talking about we get meaningful pull backs, im still in the market but ive got protection to the down side. John, what do you make of this marks memo . Id like to photocopy it and sign it and send it out as my quarterly letter its everything i believe in right now. I believe the price is too high. I believe volatility is too low. Volatility is being set up because of thoughts like the one jim has. Everything verbal is up. Markets walk upstairs and jump out the window right now were at the top of the stairs in my opinion, and the selling of volatility, which is reflection of complacency, is something that is kind of layered nitroglycerin on top of this market. Selling a volatility has become an alternative income strategy which is completely insane where people are out there selling premiums and the najerians know how volatile that is its not going to be as easy to sell your stocks as jim thinks it is. He takes on the fangs in some respects which well get to in a moment he doesnt say that stocks are too high, he simply points out sort of where the valuations are and questions are we at lofty levels. You know, we are at lofty levels on any historical measure, were definitely at lofty measures to say its not a bubble compared to 1930s, compare it to 2000, 2007 on so he many different metrics were on those levels. John, couldnt you say loftier levels somebody could say we were at lofty levels 100 points ago in the s p, 200 points ago. There isnt a reason for stocks to go down. Its a measure of how far they can go down. Weve walked up 18 flights of stairs instead of one flight of stairs when we jump out that window, its a lot further to fall. Were saying this is expensive. What im hearing you say, john, its very expensive. Im going to put those words in your mouth if i look at the estimates on the s p 500, depending who you talk to, 130, 135 a share where does that put us somewhere 18. 5, 19. 5 times ill grant you thats not cheap. Ill grant you its a little bit expensive, but i dont think this is bubble territory i want to make this one distinction. We could have a correction at any time all of us know that. And i think and i hope thats what howard marks is talking about. I dont see the conditions for a real rip your face off, sorry, leslie, theres no prediction that would predict that. He talks about the fangs which everybody seems to be enamored with. He says, among other things, bull markets are often marked by an anointment of a single group of stocks as the greatest and the attractive legend around that group is among the factors that support the bull market you can certainly make that case in the current iteration, these attributes are being apply to a small group of stocks called the faangs, which he calls the super stocks. What happened, all the investors who are missing out the rally are saying ill buy the etf, ill go passive and if you just look at the valuations of these stocks, some of those faangs arent making money the issue is right now we havent had a correction for 12 months what weve had is 5 everybody is waiting for that pull back. Well, his point though, leslie, is sort of the higher they go up based on what could end up being some suspect metrics, no one thinks that either any of these stocks on the five on this list are dogs, are duds in any way, but if they continue to go higher on what he sees as sort of suspect metrics, as they continue to climb and climb and climb and climb and climb, the harder they potentially fall if you do get a correction of magnitude. Exactly he points to losses. The fact that a lot of these companies are not profitable, not rising on the traditional fundamental metrics that you learn about when youre doing discounted cash flows. These are companies that are driven by sentiment, theyre companies that have benefitted from the bull market whats interesting though is he does make an analogy to decades past and says, socalled, super stocks of decades past nifty fiftys, in the late 1960s. Oil stocks in the 70s tnt in the late 90s what is different about the faangs versus the companies he mentioned, they have a significant moat theyre Larger Companies any startups, weve seen this with snap chat, blue apron, any startup that tries to go into that territory and disrupt those companies has seen the repercussions in their stock prices. Lets be clear. I want to make sure we make this point clear, he says, im not saying the faangs arent great or that theyll suffer such a fate, just that their elevated status is a kind of investor optimism for which we must be on the lookout. Isnt he right i dont think anyone would argue that the question is you can find value you dont have to own all of them the big difference in these companies is they dont have to go to the Capital Markets like a lot of these other bull market stocks do. Theyre flush with cash. They are growing their earnings, the ones if you look at alphabet, you look at facebook, they are growing maybe netflix and amazon, suspect on those, but the others are growing. Another noted market watcher agrees with some of howard marks points Robert Schiller joins us live from new hach. Professor, welcome back. My pleasure he even does howard marks cite your tape ratio as one of his worrying signs do you share some of his thoughts, worries . Yeah, i have for a few years now so im wondering why he came out with it right now, and that whether thats a sign that the top might be near im wrestling with that, but its just one letter, right . Listening to your panelists, it sounds like maybe there is a feeling coming up that the market is over priced. I have a on my website you can find a stock market Confidence Index where i ask both individual and Institutional Investors whether they think the market is over priced or not, and its getting high, the percent. But i dont have it on a monthly basis. Right. I dont know about right now. But you do you do think that the p. E. Ratio of the market is, in your words, questionable and that one indicator has you lying awake worried . Those are your words yeah. Well, i am wondering about what is driving this. I think that it actually relates to worries that people have that they might not bring up in discussing the stock market. I think that were at a time when people are worried about technology you talk about tech stocks, but lets just think about what technology is going to do to your job i think thats a deep underlying fear when you hear about driverless cars, crewless ships, all sorts of things taking over what waiterless restaurants taking over normal jobs i think people are worried and they want to buy tech because thats thats theyre here to theyre taking part in the thing thats threatening them. There is this deep emotional fear which is increasing, which is having the effect of pushing up prices for now, but i dont know that its come to a culmination. Im still it might go on for years like this. You i mean, theres been a sizeable sort of debate over whether were too complacent, what the vix is telling us, whether the vix is a good read of anything anymore, if it means now what it used to. Howard marks mentions complacency. My panelists mention complacency, and they have differing views on it. You also say that low volatility could be, quote, the quiet before the storm right right. So i cant do the vix in 1929 but i can talk about actual volatility in the year 1929 just before the crash volatility was pretty low. Not as low as it is now, but it was actual volatility was pretty low then it just exploded after 1929 a news story which seemed to come out of nowhere on october 28th, 29th, 1929, was the story of the crash and depression. Its surprising to many people who go back to look what triggered that crash theres nothing. The crash kind of triggered itself, but i think there may have been underlying fierce also at that time but theyre hard to find theyre hard to document. You know, i just had this thought based on something that you said this could continue, this could go on for some time doesnt mean that these fears mean that all of this is going to end. It strikes me that maybe this is marks irrational exuberance moment where he raises the concerns but yet the market and the bull market and the rally just keeps going for what could be a number of years ahead im thinking about the peak in the Housing Market that we saw in 2006. Thats a different market completely, but if you look prior to 2006, the general public search for a housing bubble in, you know, one of those news media sources in 2005, practically nobody, almost nobody said it and then in late 2005, 2006 the word started to appear i think thats when people were reassessing. I dont know that i howard marks and your panelists makes me feel that its happening again for the stock market, but i dont yet see that on a broad scale. So this might be two or three years before the peak. I dont know it doesnt feel, frankly, like there is euphoria in the market, does it . The final stage some say of the bull market. This is still in many indications at least people characterize it as an unloved or, dare i say, hated rally. Right well, i think this is not a euphoric time. Except donald trump really you go to one of his rallies and you feel like youre living in a euphoric time. Theres some of that theres an underlying fear more than in 1929 and more than in 2007 because it just seems like theres doesnt matter what job you have, theres always some robot out there about to take it. That is just relentlessly in the media. Stories of robots or robotlike things i think that is coming to a crescendo, and that is what i think is substantially driving the market professor, its jim your cyclically adjusted price of earnings ratio is often quoted recently as saying, hey, the market is over valued. Its hard to argue with where it is versus history. Let me ask you this. You must have thought of this. If youre looking for an expansion as long as weve gotten, isnt that number still being tied down at least on the earnings portion by those years coming out of the Great Recession that were punkish . Thought about it. I have a slide in my presentation showing what will happen to the ratio after the 2009 episode is ten years past so it drops out of our moving average. And, yes, it does bring the cape ratio down somewhat, but it would still be high. There was a brief period in 2008, 2009 when earnings were very low, but it was brief enough that i dont think it has a major effect on the cape ratio. Professor, this is john if i can fickthorn how do you factor in adjusted earnings given thats such a big change when you came into the concept relative to gap earnings and how do you adjust in pro form ma net earnings. I dont factor those in i have a cape ratio that i take back to 1871 thats a long time ago and ive had trouble finding accountants who can tell me how they used to do corporate earnings in 1881, 1891 the history of accounting is a very minor field in academia and there have been a lot of changes in the way earnings are done i cant claim what i have is perfect, but i think it is the result earnings through history, the method of doing earnings accounting has changed but its usually changed in response to some factor which they think is is harming the reasonableness of their earnings so i dont think the fact that theyve changed earning methods is a bad sign. I could get into details of trying to second guess sasby im not going to do that. Thanks a lot, professor. You can do that when youre going for your second nobel or Something Like that. I wish we had the time the bottom line, lets just sum it up. Marks seems to suggest this is not going to fall out of bed overnight but that the risks are elevated and theyre growing more elevated and investors seem to be blinded to many of them and they better Pay Attention today before its too late and he feels hes better to be missing a bit of the up side than, you know, over exuberant and getting caught, you know, in the ocean with his shorts down yeah. I i agree pretty much with that that doesnt mean sell everything it needs to be diversified within the u. S. , try to pursue a Value Investing approach and then be diversified outside the country and across asset classes. Thats the standard advice and then dont worry too much about it professor, really appreciate you coming in today for us this marks note certainly got us talking and we figured you were probably the best person to kick this around with we appreciate it. Okay. My pleasure. Robert shiller up at yale he also takes on bitcoin, does marks, who says it might be a pyramid scheme yet another one of these indications of how investors are chasing all of this stuff. I think some of it whacky look, as somebody who my word, not his. As somebody who has been accused at being a dinosaur in some of the things ive invested in, weve got to acknowledge, right, these ee theer yums, bitcoins, they are going to be around it is highly unlikely it is not going to be around. He said its nothing but an unfounded fad. The question is does it get regulated . The Technology Behind these that we have to look at. Five years from now its something different, but the Underlying Technology we havent had before. You guys are mostly suggesting john, it sounds from your comments you agree with some of the risks that marks discusses and shiller sort of backs up. You guys are more on the other side you say theyre still getting to be had and its too early to ill make one quick point and then ill give up. Am i right . Yes this market is broad thr expensive stocks there are cheap stocks, financials, energy, retail, technology, you can find stocks cheaper than the overall market. Not that theyre going to stay cheap forever. I think i would add to that what professor shiller was saying, stick to what your aloe ka igs is. Dont start chasing equities. You have so much money on the sideline, sarat. The whole debate is whether that cash is going to come in from the sideline how is that not a chase given where the market is now . Right now you say the markets going up but then youre telling people dont put the money in the market. What im saying is if youre out of your allocation, get back into your allocation youve had a good run for the last five years. If youre under invested in stocks if you are under invested, go for the value opportunity. Value and value with growth every look at this earnings season, scott, from the very beginning if you go back even before the financials started to kick in but you look at what oracle reported, you start looking at the financials, how they have done overall, stock, if you go each and every week through the earnings, the fundamental story is pretty strong theres a very compelling how much these beasts and how strong some of these numbers have been whether its caterpillar facebook last night, you look at those numbers. Theyre absolutely extraordinary yet people want to shoot at them. You can pick up every time a company gets amazoned, can you look last week you look at masco, lowes, all of these companies, they got killed. Today masco had great earnings, lowes is coming back. There are opportunities. People are so focused on this whole economy becoming digital and jobs getting lost. You keep saying the word people and so much of it has become passive right. Howard marks letter is to people unfortunately 10 of the flows are driven by fundamentally based investors as opposed to the etf flows. Whats interesting that he mentions is as the flows go moore towards passive investing, that will present opportunities for active investors creating bargains in the market were seeing incredible bargains of things that arent in ets 1 of ets gets half the asset flows. Theres amazing opportunit