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Feeling Like It's 1999


JEast
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Casual observations, but in the sandbox that I play in – it is starting to fell like it is 1999 again.  However, for you folks that had capital invested in the market during '99-'00 they were probably filled with great wonders and excitement.  I on the other hand was filled with “you got to be kidding me” as for example I still recall that Juniper Networks went to 100x times sales (sales not earnings) at one point.  We are surely not at that stage, but anecdotally the rhythm/rhyme of today’s market has that undertone.  Some random observations:

<blockquote>1. Ivy League graduates instead of wanting to go to Wall Street or consulting jobs are instead now more interested in starting their own business or entering VC. 

2. The FED making market comments that they appear a little frothy.  The last time that happened (e.g. irrational exuberance), the markets went on a tear.

3. Attended a VC conference a few months ago and there was actually some very good functional and operating tech (vs. two years ago of paper tech).  However, no one wanted capital as they were holding out.  Reminds me of holding out on the last dollar before the 2007 housing boom and broadcast shows like “Flip This House.”

4. Speaking of TV shows, does programs like “Shark Tank” at this pint hint at the possibility that VC has – jumped the shark (pun intended).

5. Much like the Business Week headline theme, is it time to sell the headline?

6. At my recent Toronto visit, and reason I like the many events during FFH week is that all the value investors attending are very open and we talk individual stocks.  Unlike all my past years (9 years), not very many hardcore value folks had any stocks to talk about this year.

7. Headlines are starting to pop up that value investing has lost its luster.  One recent headline indicated that Mark Mobius is a washed up value investor and sure more articles are in the works as the 5 and 10 numbers are starting to turn over.</blockquote>

I am sure astute board members could find (and will) more anecdotal and cautionary tales.  Sure, there is always something to do, and I am, but if any of this true, then we hardcore value investors probably have another 18 months or more of value pain.

 

Cheers

JEast

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I wasn't a value investor in the last tech bubble -- I was merely aware of its existence given that I was only in high school.

 

Were there isolated pockets of value within that market? I seem to find isolated pockets currently (autos, telecom, etc.) -- though, to be fair, I am not 100% clear that these tailwinds* won't disappear the way that CORT Furniture's tailwinds disappeared on Buffett & Munger. And if there were isolated pockets, how did they fare?

 

*except for autos, since I figure the SAAR is far from digesting the "lost" auto sales from the recession

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I wouldn't fall in love with this thesis or work too hard on looking for anecdotal measures of euphoria - when we have viewpoints we tend to latch on to the confirming. Shark Tank has been on for several years, so I don't think that's instructive of anything.

 

That being said, you will get a lot of pushback about valuations being reasonable. They aren't. Everyone and their uncle is trotting out a "reasonable" 17x forward, operating multiple on the S&P because 17 sounds ostensibly ok. They ignore the fact that forward operating multiples are not comparable to true PE multiples and should be very low. 17 for that multiple is a rare occurrence, even in the relatively high valuation period of the 90s and 2000s. This puts aside all issues with current earnings margins/ROC vs history - I don't think anyone has a firm grasp on whether or when those could revert.

 

Worse than this is that unlike the late 90s/2000 it's just hard to put together a solid portfolio with disregard for overall market valuation. Low quality stocks have high multiples, too. What was once 9x "value" might be trading at 12, 14, or 16x. 2000 was much better in this regard, because small cap value was very cheap and ignored. You could easily put together a portfolio of decent quality companies at single digit multiples. The rub was you could easily turn in NEGATIVE performance in 1999 when the market was roaring. Analytical slam dunks were there but the psychological pain was immense.

 

I also take issue that every analyst/publication justifies current valuations by comparing to 2000. Who cares? Of course valuations can be overdone without topping 2000. Just because we're nowhere near a once in a generation madhouse euphoria doesn't mean prices aren't high.

 

People like Nate (oddball) will note you can always find deep value lurking. I completely respect this viewpoint but am speaking to stocks larger than that for those who won't or can't take meaningful positions in the super illiquid. I think once you move out of that realm it is very hard right now.

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On the retail side I'm noticing a fair amount of "brother-in-law" envy, which was indicative in both 1999 and 2007.

 

The fact that it appears mathematically impossible for professional investors to beat amateur investors shows where we are in the cycle, as professionals are being cautious and indexes continue to increase risk as the market gets more expensive. One side is pushing the brake and the other pushes the gas until it goes full Thelma and Louise.

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Yeah, during the 1999 bubble there was a lot of value in the old school industries, real estate and a lot of small cap stocks. Unfortunately for me, as a teenager, I got caught up in the hype (when all you know is raging bull markets, it's easy to be fooled).

 

I thought I was a genius for buying JDSU, CMGI and a few others that I'm ashamed to admit. My dad gave me a few dollars to play with...and I proceeded to lose most of it. He still brings it up! Lesson learned.  :P

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James,

 

Was thinking the same thing about Toronto this morning, not many individual ideas out there.

 

This is an interesting market, everyone is looking at tech as the culprit or source of a bubble.  But what's fascinating to me is the different dynamic between now and the late 90s in the tech world.  There are a lot of me-too companies for sure, YikYak's etc.  But there are also a LOT of profitable companies, and the startups I'm aware of are all focused on generating profits not just revenue or eyeballs. 

 

My feeling is this.  In the 90s there were a lot of companies selling the dream, and the dream was too early.  Now the dream is true, but valuations are high.

 

One last thought on point 1.  After 2000 there was a death of CS graduates in US colleges.  I was lucky to get a job out of college with a CS degree.  No one wanted to be in tech.  Over the past decade we've experienced a significant shift in business, where a lot of things have been automated and tech is taking over the guts of places.  I know companies I've worked at have had a terrible time trying to hire talent.  There is a hole in talent from the last tech bust.  It is very hard to find good talent.  Maybe there'll be a glut in 3-5 years, but right now supply is still constrained.

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People like Nate (oddball) will note you can always find deep value lurking. I completely respect this viewpoint but am speaking to stocks larger than that for those who won't or can't take meaningful positions in the super illiquid. I think once you move out of that realm it is very hard right now.

 

Looking at a $2.5b company today that's incredibly cheap, but I do agree with you.  Even in the forgotten corners of the market value isn't as apparent as it used to be.  I'm seeing a number of dark companies trading up to book value or above for the first time in eons.  Banks are all floating higher as well.

 

I'd say look in France, a number of cheap smaller stocks over there.  A number of cheap stocks in Asia as well, although I haven't looked at many of them in detail in a while.  I saw a post by someone saying they were astonished at the quality of the cheap stocks on the AIM, some decent valuations there too.

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IMO, capital has been like water. Low rates have caused it to seep into every nook and cranny in the investment universe. This whole theory of allocating capital by measuring past correlations is going to fall apart when it becomes obvious that correlation is caused by capital allocation (it is reflexive). In 2000 all of the excess capital was in large cap tech stocks, which found its way into real estate and now it is everywhere. The overvaluation was narrow and tall and now it is wide and (relatively)short; but which is more dangerous- obvious pockets of extreme overvaluation, or an insidious overvaluation of every capital outlet?

 

Instead of one obvious bubble, there is a reverse bubble in cash...if such a thing exists.

 

If you think of capital as stored labor/consumption converted into an income stream, you will find that we have too much stored labor and not enough demand for current consumption to effectively put all of the capital to use. So either it resets to a lower value that equalizes the utility of consumption or future returns continue to be very low.

 

I read somewhere (I think Frank Martin) that capital is the most overvalued in relation to labor than it has ever been. It takes something like $2,000,000 in capital to replace one median household income in a conservative portfolio. In other words, you have to contribute a very large amount of capital to replace your labor.

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If you think of capital as stored labor/consumption converted into an income stream, you will find that we have too much stored labor and not enough demand for current consumption to effectively put all of the capital to use. So either it resets to a lower value that equalizes the utility of consumption or future returns continue to be very low.

 

I've never met anyone with a consumption problem, but I've met a lot of people with a production problem.

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Guest wellmont

There is no old economy new economy dichotomy in the markets today. there are many old economy stocks that are highly valued. utilities, reits, consumer, most stable companies that pay dividends are richly priced. there are also lots of new economy stocks that are richly valued, though not as ridiculous as things got in 1999. The 1999/2000 period was first painful, and then glorious for the traditional buffett/graham style investor. Bruce Berkowitz presciently started his mutual fund at this time. We don't have that dynamic today.

 

I would say that the bay area in ca is currently in a mega boom, not so unlike 1999. I was in San Francisco over the weekend and it was as busy and bustling as I've ever seen it. traffic was a nightmare. parking non existent. rents and home prices way above 2007 levels. I don't believe the startup mentality has changed much at all from past cycles. when this all changes (tide goes out) you will find most of the companies that VCs invested in did not have any viable way to make any real money. and many of the recent IPOs will someday be under $5 and some under $1.

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That is a good graph, liberty.

 

What I gather from that is this: even with a huge growth rate, all of ecommerce and ad revenue out there is still significantly less than yearly revenue for JUST Walmart. Furthermore, all of ecommerce and online ads are equal to about 2.1% of US gdp...retail is something like 27% of gdp...

 

http://www.retailcustomerexperience.com/news/report-says-us-retail-sales-topped-45-trillion-in-2013-outpaced-gdp-growth/

 

Ponder on that for a minute, and it might change your perspective on things. There are so many ways the chips can fall, that it is pretty baffling.

 

 

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James,

 

I have noticed similar things.  I had just gotten started investing in 1996 when Greenspan made his "irrational" exuberance comment.  In retrospect I now understand why value investing was so difficult back then.  Excepting Berk. which reached a multi-year low around or on the same day that the Nasdaq topped out. 

 

This year in Toronto there weren't many ideas.  I have been getting progressively more wary of the markets.  If a stock doesn't pay me a good dividend, that appears sustainable, its out.  I have sold virtually all of my Leaps, exited much of my US financials.  In short I have been deleveraging continuously for months now. 

 

Sooner or later I think we are in for a brief bear market (I would think sooner is the operative). I see it as being similar to 2000-2001 when the broader economy is not so seriously affected. 

 

God only knows what is going to trigger it this time: Greece exit? Russia doing something dumb? Oil prices going up too much?  UK exiting the EU, voluntarily? China?  We'll never know until later. 

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I remember going into a Starbucks in Toronto on a Saturday morning in 1999 to read the Financial Post. On the front page (the lead story) was a graph showing the rise in the stock price of Nortel Networks from few dollars to over $120. Many, many companies were trading for billions of dollars and they had no little in the way of earnings. At the other end of the spectrum, government bonds were yielding 7% and Canadian bank stocks were hated (everything old economy was on sale, including Berkshire Hathaway). I remember going home that day and saying to my wife that we were living in a stock market bubble.

 

My sales people were making more money off of their internet stocks than they were making in salary. The daily conversation in the office revolved around what hot stock they were currently riding.

 

I do not see the comparisons to today; some sectors may be in nosebleed territory but not to the same extent as 1996-1999; back then tech stocks ruled the market. The subsequent correction killed tech but the old economy stocks that were cheap in 1999 weathered the storm fairly well.

 

Today you can buy JPM for $65. It will earn about $5.85 this year, giving it a current year PE of about 11. Next year the bank will earn about $6.50. Dividend yield is just below 3% and growing nicely. It is buying back about $1.25 billion in shares per quarter. I am using JPM as an example of a stock that I think is valued very fairly today.

 

I think Buffett has provided the best summary of the current situation. If interest rates stay at current levels for the next 5 years then stock averages are cheap today. If interest rates normalize in the next 5 years then stock averages are likely mildly expensive. The asset class that is in a clear bubble today are bonds; this is the asset class Buffett would like to short.

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Uccmal, I think interest rates are the key moving forward. If Mr. Market gets confident that the Fed is going to increase interest rates meaningfully then I think we will get a big sell off in all asset classes; bonds will get hit the hardest but the panic will hit all asset classes.

 

Even if the Fed only tightens once or twice I think this will spook everyone and we could see a 20% correction in stocks and bonds. Perhaps this happens in Aug/Sept/Oct (if the data in the U.S. is decent over the summer and expectations of Fed tightening increases for the fall).

 

What gives me confidence today is the U.S. economy continues to heal itself, but not too fast. My guess is interest rates in the U.S. continue to stay low for the rest of this year and perhaps next year too. The U.S. cannot increase rates as long as Europe is weak (another point made by Buffett).

 

There is an old saying that the stock market does best when everyone is worried (it climbs a wall of worry).

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The bubble is not really in tech this time, just pick a random stock in a biotech index to see where it is.

 

I agree, bubbles don't exactly repeat themselves. They rhyme maybe. We've been immunized against dot-com and housing. It will be something else next time. But for it to be of the dot-com or housing magnitude you have to see a significant number of average middle class folks around you all saying oh something is a sure thing without any fundemental basis.

 

I think non-investor savvy people around us are the best tip-off for a bubble....

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Guest Schwab711

The bubble is not really in tech this time, just pick a random stock in a biotech index to see where it is.

 

I agree, bubbles don't exactly repeat themselves. They rhyme maybe. We've been immunized against dot-com and housing. It will be something else next time. But for it to be of the dot-com or housing magnitude you have to see a significant number of average middle class folks around you all saying oh something is a sure thing without any fundemental basis.

 

I think non-investor savvy people around us are the best tip-off for a bubble....

 

I've had 4 different friends in 2015 approach me on how to start investing. Difference is, they come with ideas and aren't interested in my help.

 

More so than the tradition bubble, I think we are approaching the fulcrum of interest rates. The delta this close to 0% is scary and stocks are finally being priced correctly relative to bonds. You either pick one side or the other and wait from here, which will ultimately result in a large number of people being hurt (through unrealized/realized losses or opportunity cost losses). Maybe this shouldn't be unexpected, we never really experienced the loss/pain of 2007-09 as much as we should have (sorry to anyone that did have a rough go of it). Next couple years look to be extremely rough from a savings perspective.

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To me Buffett summed it up best. If interest rates were to stay low for a long period of time, then the market isn't overly valued. However, if interest rates were to rise, then markets are indeed rich. We know at some point interest rates will rise. While the market may not immediately deflate, it will certainly start that process. Timing, as always, is unknowable.

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To me Buffett summed it up best. If interest rates were to stay low for a long period of time, then the market isn't overly valued. However, if interest rates were to rise, then markets are indeed rich. We know at some point interest rates will rise. While the market may not immediately deflate, it will certainly start that process. Timing, as always, is unknowable.

 

If we get into deflation the markets are also expensive because growth and revenue volume assumptions will come down. The only market where stocks may be fair valued at the moment is when inflation is stuck between 0.5-1.5% for a long period of time. I really doubt that central banks all over the world are able to get this done when you look at current currency, commodity and bond volatility.

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The market is not cheap. But is it in a bubble?

 

A bunch of people above are saying that everything is expensive. But then we have BAC/JPM/other banks trading at book value low PEs, we have (re)insurance companies trading at book value, we have IBM, AAPL trading at low valuations, we have crash in oil and commodities companies trading at book values or less if levered (of course, almost nobody here is interested, but that's irrelevant), we have large pharmas trading at "reasonable" valuations: VRX, GILD (I may disagree, but that's also irrelevant). These are huge companies in billion/multi-billion market caps. So, what bubble?

 

IMHO, people are hugely anchoring at once-a-generation-super-cheap-prices in 2009-2011. It's quite questionable whether the current prices are high or just normal with few really-cheap opportunities.

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The market is not cheap. But is it in a bubble?

 

A bunch of people above are saying that everything is expensive. But then we have BAC/JPM/other banks trading at book value low PEs, we have (re)insurance companies trading at book value, we have IBM, AAPL trading at low valuations, we have crash in oil and commodities companies trading at book values or less if levered (of course, almost nobody here is interested, but that's irrelevant), we have large pharmas trading at "reasonable" valuations: VRX, GILD (I may disagree, but that's also irrelevant). These are huge companies in billion/multi-billion market caps. So, what bubble?

 

IMHO, people are hugely anchoring at once-a-generation-super-cheap-prices in 2009-2011. It's quite questionable whether the current prices are high or just normal with few really-cheap opportunities.

 

Agreed -- I think you can find pockets of unreasonableness (CRM, Unicorns, etc. come to mind), but there are still places where value is "hiding in plain sight." Moreover, I've spoken to many people who seem to believe, as Jurgis pointed out, that in the next crash all correlations will go to 1 -- perhaps because of the availability bias that correlations largely went to 1 last time.

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The market is not cheap. But is it in a bubble?

 

A bunch of people above are saying that everything is expensive. But then we have BAC/JPM/other banks trading at book value low PEs, we have (re)insurance companies trading at book value, we have IBM, AAPL trading at low valuations, we have crash in oil and commodities companies trading at book values or less if levered (of course, almost nobody here is interested, but that's irrelevant), we have large pharmas trading at "reasonable" valuations: VRX, GILD (I may disagree, but that's also irrelevant). These are huge companies in billion/multi-billion market caps. So, what bubble?

 

IMHO, people are hugely anchoring at once-a-generation-super-cheap-prices in 2009-2011. It's quite questionable whether the current prices are high or just normal with few really-cheap opportunities.

 

Agreed -- I think you can find pockets of unreasonableness (CRM, Unicorns, etc. come to mind), but there are still places where value is "hiding in plain sight." Moreover, I've spoken to many people who seem to believe, as Jurgis pointed out, that in the next crash all correlations will go to 1 -- perhaps because of the availability bias that correlations largely went to 1 last time.

 

Indeed, there are always pockets of enthusiasm. But this isn't 1999 when Cisco was worth half a trillion and Microsoft 600 billion and thousands of companies with no profits and barely any revenue were getting funded and IPOing and 1/3 of Canada's stock market was Nortel or whatever, despite the fact that just a tiny fraction of the number of people who are online now were online then, and each of those people were spending a tiny fraction of what they are now on online-related products and services.

 

So IBB has been going up pretty fast in the past 2-3 years. Whoop-dee-doo. It was pretty much flat between 2001 and 2011. It's probably overvalued now, or maybe there's a secular trend with demographics, people getting older, etc. I don't know, but that's not 1999.

 

http://i.imgur.com/4wGIWSL.png

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The market is not cheap. But is it in a bubble?

 

A bunch of people above are saying that everything is expensive. But then we have BAC/JPM/other banks trading at book value low PEs, we have (re)insurance companies trading at book value, we have IBM, AAPL trading at low valuations, we have crash in oil and commodities companies trading at book values or less if levered (of course, almost nobody here is interested, but that's irrelevant), we have large pharmas trading at "reasonable" valuations: VRX, GILD (I may disagree, but that's also irrelevant). These are huge companies in billion/multi-billion market caps. So, what bubble?

 

IMHO, people are hugely anchoring at once-a-generation-super-cheap-prices in 2009-2011. It's quite questionable whether the current prices are high or just normal with few really-cheap opportunities.

 

I may be wrong but banks are linked to the credit cycle and look cheap at market tops. Autos the same, AAPL is hugely dependend on one product, its only cheap when they can sell more iphones every year. Maybe that happens, but i am not so sure. IBM has huge problems and still trades at an FCF/EV yield of around 6.4%, thats hardly very cheap when you compare it to JNJ,GIS or MMM (~5% FCF/EV, most consumer staples are around 4% FCF/EV.)

VRX is cheap when you believe in the story, but only the future will show if it was cheap in hindsight.

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The market is not cheap. But is it in a bubble?

 

A bunch of people above are saying that everything is expensive. But then we have BAC/JPM/other banks trading at book value low PEs, we have (re)insurance companies trading at book value, we have IBM, AAPL trading at low valuations, we have crash in oil and commodities companies trading at book values or less if levered (of course, almost nobody here is interested, but that's irrelevant), we have large pharmas trading at "reasonable" valuations: VRX, GILD (I may disagree, but that's also irrelevant). These are huge companies in billion/multi-billion market caps. So, what bubble?

 

IMHO, people are hugely anchoring at once-a-generation-super-cheap-prices in 2009-2011. It's quite questionable whether the current prices are high or just normal with few really-cheap opportunities.

 

I may be wrong but banks are linked to the credit cycle and look cheap at market tops. Autos the same, AAPL is hugely dependend on one product, its only cheap when they can sell more iphones every year. Maybe that happens, but i am not so sure. IBM has huge problems and still trades at an FCF/EV yield of around 6.4%, thats hardly very cheap when you compare it to JNJ,GIS or MMM (~5% FCF/EV, most consumer staples are around 4% FCF/EV.)

VRX is cheap when you believe in the story, but only the future will show if it was cheap in hindsight.

 

Haha. Of course companies are cheap for a reason. If there was no reason, they would not be cheap. ;) And of course there are people like you - hey, not putting you on the spot or anything ;) - who can prove in a paragraph that they are not cheap at all.  8) (Even worse: I agree with you on couple of your arguments ;) )

 

So sure, you has your moneys and you takes your choices. If you think it's a bubble, that's your choice. :)

 

Honestly, I'd be fine with 10-20% drop myself. I just don't try to predict it or call it a bubble.

 

Have fun.

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