In two tweets published on Wednesday, June 24, Icahn warned against listening to so-called “permabulls,” saying the 2008 crisis could have been prevented if more people had sounded the alarm bells during the bubble years of 2007. (Source: Twitter, June 24, 2015.)
Later that day, the legendary hedge fund manager outlined an ugly picture for investors. During an interview on CNBC, he cautioned that markets are “sailing in dangerous unchartered waters” and “extremely overheated.” (Source: CNBC, June 24, 2015.)
Carl Icahn Sees Possible Stock Market Correction Ahead
Carl Icahn’s view on the stock market is bearish, to say the least. He mentions that in today’s stock market, some of the companies are selling at huge multiples. He also criticizes the fudged earnings reported by some companies. Putting GAAP aside has made earnings “completely confused.”
“I think the public is walking into a trap again, as they did in 2007. […] GAAP (Generally Accepted Accounting Principles) was set up to protect people from fudged earnings. But now corporate executives go on road shows and tell investors ‘don’t worry about GAAP, let’s talk about we think the earnings are.’”
He also warns the public about the dangers in high-yield bond markets. He gives an example: an investor can buy a good corporate bond of a company that has no chance of going bankrupt with a yield of 3.25%; a high-risk high-yield bond goes for 5.25%. Due to the high risk, investors are risking 40% for two percent. Icahn thinks that today’s high-yield bond market is very dangerous.
Icahn’s View on the Economy
Carl Icahn thinks that a large part of the growth in the real economy we see today comes from the artificially low interest rates.
“The economy is finally picking up. I’m not sure though how much of that is artificial because of low interest rates. […] I think they’re creating artificial bubbles. The longer you wait to take the patient off the medicine, the harder it will be to curtail inflation when it comes.”
His rationale is that businesses have been getting access to cheap money, and by using that money, they were able to expand their operations; creating jobs and generating revenue. However, once the Federal Reserve start to raise interest rates, which is expected to happen twice later this year, businesses will no longer have access to that cheap money.
Icahn’s Investment Recommendations
Despite his concerns of this overheated market, there is one company that Icahn continues to believe in—Apple Inc. (NASDAQ/AAPL). The billionaire investor has a huge stake in Apple, without trimming his position at all.
“We haven’t sold one share of Apple […] I’m talking bearishly about this market […] I really think if Apple goes down, I know it sounds maybe hard to believe, but if Apple does down, I’ll buy more of it.”
The reason behind his fondness for Apple is its competitiveness. Icahn says that there is a high barrier to entry to compete with Apple. This makes the company a great opportunity for a long position, according to Icahn.
Indeed, Apple has been a more-than-solid company over the years. According to its most recent quarterly earnings report, Apple’s revenue increased 27% year-over-year; net profit surged 33%; and earnings-per-share grew more than 40%. Its stock price also soared, gaining more than 40% in the past 12 months to $129.00 a share.