Greenlight Capital: Buffett's recent sales show how overvalued the stock market is

The current stock market in the United States appears to be the most expensive in decades, according to billionaire David Einhorn, president of hedge fund Greenlight Capital, writes Business Insider.

In his opinion, the level of overvaluation of US stocks is currently the highest since he founded Greenlight Capital in 1996. Therefore, it is probably not a good time for high exposures to stocks, says the investor, arguing through the recent sell-off of to Warren Buffett.

"While Mr. Buffett frequently says that it's impossible to synchronize with the market, we can't help but notice that he was one of the best timers (in the sense that he got pretty good at intuiting market movements) that ever seen," Einhorn wrote in the fund's quarterly letter. His opinion comes as Warren Buffett, through his Berkshire Hathaway fund, has recently reduced his exposure to stocks, choosing to hold cash instead. As of mid-August, the fund had a record $189 billion in cash, and since then it has continued to make gains on the stocks it has successfully invested in, according to Business Insider.

While the Greenlight founder doesn't interpret Buffett's moves as a prediction of a market crash, he points out that the "Oracle of Omaha" has a knack for reducing exposures at opportune times. For example, Buffett closed his fund before the market got too "frothy" (n.e. in the sense that prices had risen far beyond fundamentals) in the 1960s and sold holdings before the crash of 1987.

"It can be argued that avoiding bear markets has been the underappreciated reason for his exceptional long-term returns," the Greenlight Capital letter states. "Therefore, we must note that Mr. Buffett is once again selling large portions of his stock portfolio and building enormous cash reserves".

In Einhorn's view, Buffett's selloff signals that investors may be better off not having a large exposure to the stock right now until a better opportunity arises in the not-too-distant future.

That doesn't mean the market is in a speculative bubble, according to Greenlight Capital. But high Price to Earnings Ratios are worrying despite cyclical increases in corporate profits. Dividend yields are also low, says Greenlight's founder.

While many analysts draw attention to the high valuations of the technology sector, Einhorn points out that even mature names in the industry, exposed to cyclical and growth opportunities, trade at multiples of 30 to 50 times earnings, according to the letter.

Against this backdrop, Greenlight is currently conservatively positioned, with the fund reporting a 1.1% return in the third quarter, compared to a 5.9% return for the S&P 500, according to Business Insider.