Key Words: ‘Young, dumb’ traders have created a ‘total nightmare’ in the stock market, fund manager warns


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‘The buying that went on in August and September is a 10-year phenomenon the likes of which we have never seen, among millennials and in the risk-taking among people that don’t want to own bonds and want to own overpriced U.S. quality businesses, it is of record proportions.’

That’s Cole Smead, president of Smead Capital Management, explaining in a CNBC interview Thursday how “young, dumb” investors have created a “total nightmare” in the current climate in terms of equity valuations.

Smead went on to say that these nosebleed valuation levels are an example of a “stock market failure” at the hands of inexperienced millennials who have gotten lured in to taking big risks in equities for the first time.

“They are buying bullish call options that expire inside two weeks. There was ($500 billion) of bullish call options bought in a four-week stretch by small retail traders,” Smead said. “In ’99 it was $100 billion, in ’07, it was $100 billion.”

In other words, we’ve reached next-level buying fever in U.S. stocks.

When it turns, it could get ugly, according to Smead, who said that despite the accommodative monetary policy, the Federal Reserve ultimately “can’t save a stock market” – especially one that’s this top heavy.

Smead told the Wall Street Journal last week that, “We spend half our time right now telling people how dangerous things are.”

It’s not just the younger generations fault, however. Smead says boomers deserve some of the blame for riding “the index to a fault” and paying unrealistic premiums for the likes of Costco
COST,
-0.39%

and Microsoft
MSFT,
-0.75%
.

“Microsoft is a wonderful company,” he told CNBC. “But at 40 times earnings, there is a 0% chance of that producing wealth for someone over the next 10 years that will meet their needs.”

Here’s a clip from the interview:

Meanwhile, stocks were bouncing off the lows of the session, but the Dow Jones Industrial Average
DJIA,
-0.12%
,
Nasdaq Composite
COMP,
-0.77%

and S&P 500
SPX,
-0.33%

were all still firmly in the red Thursday afternoon.

Contributted By MarketWatch

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