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1999 again?


RuleNumberOne
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In 1998-1999:

- Inflation was less than 2%

- Fed rates were 4.5%

- Unemployment was higher

- And yet we had a great bubble.

 

In 2019:

- the Fed looks weaker.

- Unemployment is at 50-year lows.

- Rates are at 2.5% and headed lower because "inflation is less than 2%".

 

If we are going to have another 1999-sized bubble soon, what would you buy or sell?

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I bought some hedges and trimmed/sold some of my longs. 

 

The macro setup now rhymes with 1999 for sure, but it’s not only that, there’s also a lot of financial leverage out there like there was pre-GFC (this time via corporate debt), and on top of that we have potentially large supply-side shocks coming our way like we did in the 1970s (this time via tariffs and possibly Iran).  In a sense we have a little bit of everything from the worst recessions and bear markets in recent memory. 

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I will here suggest reading the posts recently, with links and attachments, by ajc, here on CoBF.

 

 

 

Appreciate the shout-out. One post of mine John was perhaps referring to, was this one: https://twitter.com/tonyjclayton/status/1118205158721249280.

Since I wrote that two months ago, things have become even more bubbly.

Beyond Meat's crazy run-up, the Zoom IPO, as well as the massive first day pops of Jumia, Crowdstrike, and Fiverrr, all came after. Now the We Company aka WeWork, is also going public. A recent NY Mag article on them (http://nymag.com/intelligencer/2019/06/wework-adam-neumann.html) shows just how detached from reality some founders have become.

 

I agree with fareastwarriors though that this current moment, as overvalued as it looks, doesn't feel like the utter craziness of the Dotcom era in terms of its all-encompassing giddiness.

That said, I'd urge extreme caution now and over the next 12 months. If you're not very concerned about tech stock multiples and risk already, then you need to be far more paranoid about the possible downside. After all, there's no guarantee that this boom lasts as long or goes as wild as the 1999 one. It is absolutely possible that we are already at or near the top with the Uber IPO, and there's a shaky few weeks or months from here after which things fall off a cliff.

 

The alternative I think is that we're in a mid or late 1998 situation where tech IPOs are popping and running up all over the place, but because rates are way lower now it could lead to an even bigger bubble this time. In that case, over the next year or so we could see Bytedance, Didi, Airbnb, and perhaps Ant Financial, go public at valuations substantially above Uber, and that may result in an insane blow-off top for the entire tech IPO market followed by a rapid deflation.

 

To my mind, those are basically the two potential ends of the spectrum that I'm looking at for the tech IPO market currently. Either we're already just past the top and we're still Wile E Coyote but not having looked down yet, or we're just starting the final parabolic phase where the exuberance will truly start gushing and after 6 or 12 months, we fall off a ridiculously steep ledge.

That's my 2 cents as best as I can make out, because I don't see any force right now (The Fed, POTUS, etc) that is at all trying to moderate things and suck some air out of this tech IPO boom in order to stop it going from a very bubbly place to somewhere extreme and Icarus-like.

Either way, my view is investors should be highly vigilant and fearful going forward.

 

 

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I bet the market cap percentage of tech in the Wilshire 5000 + private companies is currently greater than 1999.

 

Though P/S, P/E ratios in 1999 were crazy, the combined market cap of the crazy companies was less than what we have now.

 

If we remove the top few such as GOOG, MSFT, AAPL, FB, IBM, ORCL, INTC the P/S and P/E of the remaining companies would be crazy. Those crazy companies are the ones that have been going up every week for the past few years.

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One thing that surprises me is that we have basically all the textbook signs of a bubble: very high PE, PS, CAPE, debt load, Value under-performing growth, extreme enthusiasm for a particular group of companies (tech), old-fashioned value investors either throwing in the towel or converting (BRK bought Amazon), nonsensical public manias (Bitcoin), a plethora of unprofitable IPOs doing great, all time low unemployement........

 

But even though I do see some hubris here and there, I do not see euphoria or even as much as a healthy good old fashioned dose of optimism (except from Buffett but he's completely waterproof to herd psychology). Neither among investors, CEOs, journalists, on TV or among friends and family. Instead, I hear utter FEAR and a certain type of cynical resignation to the idea the whole world is soon going to hell (political polarization, climate change, fake news, education quality, pollution, nationalism, children being less well-off than parents, the end of our shared belief in truth, in science, in common decency, upcoming "unavoidable" wars...).

??? ??? ???

 

So who are all those optimistic people pushing the sp500 higher and investing in Beyond Meat and stuff??? Where are they hiding?

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... So who are all those optimistic people pushing the sp500 higher and investing in Beyond Meat and stuff??? Where are they hiding?

 

WayWardCloud,

 

In a humble manner I will suggest that they are perhaps hard to spot because they stand behind others. If you read the last shareholder letter by Larry Fink you'll see that he is of the opinion that there is an urgent, almost desperate, endless & ever growing/expanding need for help. If you read the shareholder letter, please bear in mind what Mr. Buffett has written about helpers.

 

Perhaps that also leads to the conclusion that those people are not optimistic, more like "un-opinionated" [<- or something like that].

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... So who are all those optimistic people pushing the sp500 higher and investing in Beyond Meat and stuff??? Where are they hiding?

 

WayWardCloud,

 

In a humble manner I will suggest that they are perhaps hard to spot because they stand behind others. If you read the last shareholder letter by Larry Fink you'll see that he is of the opinion that there is an urgent, almost desperate, endless & ever growing/expanding need for help. If you read the shareholder letter, please bear in mind what Mr. Buffett has written about helpers.

 

Perhaps that also leads to the conclusion that those people are not optimistic, more like "un-opinionated" [<- or something like that].

 

That’s probably right. The vast majority of people I know aren’t necessarily euphoric but they’re not paying any attention either and they have their investments on autopilot, which for many of them means they put pretty much of all their monthly savings in VOO (or an equivalent) without even thinking. Combine that with the massive, price insensitive share buybacks by the companies and throw in a few quant/momentum traders, and you have quite a group of buyers.

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Guest cherzeca

I see overvaluation, but many such companies are really quite exceptional ignoring valuation:  slack zoom and bynd offer real good products and services.  I expect bynd in particular to lose its first mover attractiveness, and so there will be tears I suspect for bynd high entry price shareholders, but I dont see this translating into a market bubble. same with wework; that should end badly for many shareholder but their insight that the leasing businesss is leasing office space, not just space for offices, has had a salutary effect generally.  same for tsla; great for the car industry but eventually tears for tsla bulls.

 

my point is that pointing out overvaluations in particular stocks doesn't make a bubble.  further, I would conjecture that many of the companies getting these overvaluations currently are good for the industries in which they compete.  a very good beef alternative will become ubiquitous even if bynd at some point crashes...this is my idea of a vibrant capitalist economy, not a bubble economy

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These companies are very very unexceptional in every respect. They all make losses, and will never make profits to justify their market caps. The only thing that distinguishes them from their neighbors in Silicon Valley is their IPO date.

 

Consider Crowdstrike - IPO'ed last week and trades at 60 times trailing sales, market cap $15 billion. From where I sit in Silicon Valley, I see only such companies and their investors.

 

This IPO market shows there is no fear in the stock market. There was no way you could get such valuations at any time since 2000.

 

And the interesting thing is, there is no way a big tech company will buyout these IPO'ed companies at such crazy valuations either.

 

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Just a few months ago, people snickered that the stock market would never allow crazy unicorn valuations. They were so wrong.

 

I can think of many private companies with revenue in the $100-$300 million range right now. Their venture capital valuations range from 10-25x sales.

 

But the public market for such enterprise companies is right now 60x sales.

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Yeah, who knows. If Jim Bullard or Jim Cramer get appointed as the next Fed Chair, 100x sales may become the new norm. This is not euphoric enough yet ...

 

Let me edit my comment. Just read that Kashkari announced on Bloomberg that he wanted a 50bp cut at this meeting itself.

 

Kashkari is the new front-runner for the next Fed Chair and 150x sales may become the new norm.

 

 

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For the folks who think this is 1999 all over, were you investing in 1999?

 

I can tell you, this is no where near as euphoric as then. Will the market crash? No idea but we are not in euphoria.

 

In the past 9 months we've had a 20% correction and a 6% correction (with some sub-sectors moving a lot more than that), bond yield curve is inverting and everybody is talking about a recession... Agreed, not 1999 euphoria at all.

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So who are all those optimistic people pushing the sp500 higher and investing in Beyond Meat and stuff??? Where are they hiding?

 

One of my friends bought Beyond Meat a week or two ago. He's new to investing. I think his reasoning is that the stock is going up, it's a great story, it's comparable to a tech stock, and he's confident he can get out when it starts to go down.

 

Personally, I think he has no clue how terrible the likely outcomes are of owning a stock in an industry with tiny gross margins at a P/S ratio of 80.  For a tech stock with a moat, recurring revenue, 80% gross margins, and 80%+ growth rate for several years, P/S ratios in the 20-30 range can make sense.  But not in a food stock.

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