1999 again?

[Guest cherzeca]

thread turning into 1984 rather than 1999

[UK]

https://www.brookings.edu/blog/ben-bernanke/2016/04/11/what-tools-does-the-fed-have-left-part-3-helicopter-money/

[RuleNumberOne]

Helicopter money will not generate inflation in Alabama, it would just be a one-time event. Meanwhile even fast food workers in Silicon Valley have seen their wages more than double over the last 9 years.

 

https://www.bloomberg.com/news/articles/2019-06-12/top-u-s-inflation-hot-spots-clustered-on-west-coast

 

Seeking Alpha article today says the peak valuation for Siebel in 2000 was 27x sales. 60x sales is very normal today.

https://seekingalpha.com/article/4271574-upon-time-tech

 

Even a year ago, an IPO was unthinkable for some of the companies going public now. At least in 2000, Greenspan set the Fed rate at 6% to break the bubble. Kashkari and Bullard want to cut right away to 2%.

 

 

[TwoCitiesCapital]

thread turning into 1984 rather than 1999

 

Lol

[Castanza]

You can't artificially create demand by printing money and giving it to poor people.

I’m reasonably sure most of them will spend it on their liquor of choice within a day or two.

 

But you can't be sure. And that's such a specific example lol.

 

Anyways. I agree with Stahleyp in terms of euphoria. granted I wasn't an investor during the 1999 bubble. But I have done quite a bit of reading on it. Same with the 1983 video game bubble. To me it looks more like we might have localized bubbles within specific markets (think tech subscription services and SaaS, auto industry). I do think a lot of the hype simply is being expresses with "the changing of the guard" so to speak. What I mean by that is the rapid influx of millennials and other young investors entering the market. This demographic communicates much differently and it very much driven and motivated by trends and fads. I think it's easy for this generation to latch onto IPO's etc. and then blast it all over social media and other outlets. I think a bubble does exist, but I don't see it at 1999 levels where everyone was throwing every last penny at basically every company that launched.

[Guest]

If we are at 1999 levels, we should be experiencing a 70% drop in the Nasdaq and around 43% drop in the S&P 500 over the next 34 months or so. Who wants to bet on that? ;)

 

I'm using the last days values for 1999 and bottom in 2002. The drop was a bit more if you go to the highs in 2000.

 

 

I'll also say that, contrary to seemingly popular belief, euphoria does not have to occur before market crashes. The stock market was not euphoric in 2007 (though I suppose you could say that housing market was). There was a fair amount of concern that oil prices might cause a recession (peak oil, $4+ gas). In fact, the government was concerned so it had the Economic Stimulus Act of 2008...that was passed in Feb of 2008. The market was off not even 12% from its all time high and stimulus comes in!

 

I was concerned about the market then but did not foresee how bad it would get. I was expecting a lighter recession so was fully invested. I though "well, to have those 50% drops we need a lot of euphoria like 1999". Wrong, wrong, wrong.

[scorpioncapital]

So maybe euphoria in any market can lead to crashes in another. Mortage bubble of 2008 had alot of leverage and money tied up indirectly to banks , which were publicly trsded and some even failed.

[TwoCitiesCapital]

I dunno - I witnessed a ton of euphoria on the FANG stocks two years ago. Same with NYC real estate

Same with Tesla. Same with Bitcoin.

 

One could argue that there's euphoria in the bond market if you believe that we aren't in a period of secular stagnation. Even if you do, there's a pretty decent argument to be made that there's euphoria in corporate credit.

 

I agree euphoria doesn't appear to be widespread - but it's been there in very specific, very large, and very visible risk assets even if it hasn't been in the S&P as a whole. With the exception of bonds, each of these euphoric instances has also dramatically disappointed investors over the past 12-18 months which does tend to portend broader weakness.

 

And while S&P 500 might not be euphoric, it's definitely priced for perfection.

 

Just my two cents

[mcliu]

What about euphoria in sneakers and streetwear? People are trading these like stocks.. https://stockx.com/ You can literally build a portfolio of shoes and track the prices..  :o

[Guest ajc]

 

Something I didn't include in my recent tweetstorms about a possible tech IPO bubble and growth stock overvaluation, was a graphic on first day rises of 30% or more (see image below).

Keep in mind, that data was from 2 months ago, and it's only become worse since.

Instead of being on track for 20-something companies, we may be on track for 30 or more this year.

Essentially, the only time we've had this many $1b+ IPOs rise 30% or more on their first day of trading was in very late 1999 and throughout the year 2000.

There might not be a euphoric mood in the air, but the numbers are on par with the Dotcom era.

[Guest cherzeca]

I think comparisons to 1999 are way off base simply because back then (and I was investing back then unlike some on this thread) there was substantial uncertainty as to how the internet would affect business, and whether new tech companies would replace old incumbents.  lots of talk about option value. turns out that pets.com did not replace the incumbent pets food industry because that industry could take advantage of the internet benefits to a far greater extent than any early pets food adopter of the internet.  turns out that e-commerce is just commerce.

 

now is this type of "option value/this time its different" thinking apparent now? yes in small segments such as blockchain.  ostk will fizzle and v will do quite well with blockchain because there is nothing about blockchain that v cant do far better than what ostk can do with it.  so ostk is a 1999 phantom.

 

but it is a far cry to find isolated instances of ostk-like thinking to somehow equate today to 1999.

 

as for corporate debt bubble, yes I think at today's rates an issuer would be crazy not to borrow.  and some bondholders will suffer.  no biggie for the overall market though

[Guest ajc]

 

 

I think comparisons to 1999 are way off base simply because back then (and I was investing back then unlike some on this thread) there was substantial uncertainty as to how the internet would affect business, and whether new tech companies would replace old incumbents.  lots of talk about option value. turns out that pets.com did not replace the incumbent pets food industry because that industry could take advantage of the internet benefits to a far greater extent than any early pets food adopter of the internet.  turns out that e-commerce is just commerce.

 

now is this type of "option value/this time its different" thinking apparent now? yes in small segments such as blockchain.  ostk will fizzle and v will do quite well with blockchain because there is nothing about blockchain that v cant do far better than what ostk can do with it.  so ostk is a 1999 phantom.

 

but it is a far cry to find isolated instances of ostk-like thinking to somehow equate today to 1999.

 

as for corporate debt bubble, yes I think at today's rates an issuer would be crazy not to borrow.  and some bondholders will suffer.  no biggie for the overall market though

 

 

 

I think the 1999 comparison here is more figurative, not literal. To my mind, the point shouldn't be to have an exact repeat but to take a probabilistic look at if it rhymes.

Median P/S ratios for tech IPOs have only been higher in 1998 and 1999. The percentage of tech IPOs with negative earnings has only been higher in 1999 and 2000. Growth stocks have not been this overvalued versus value stocks since at least 1999.

 

The only other time the market ever valued tech IPOs at P/S ratio's like what we're seeing today is when it was already in early 1999 (see image below).

In 1998, Yahoo grew sales at 188%, eBay at 724%, and Amazon at 312%. For that kind of growth, IPOs of that vintage were getting P/S ratio's of around 8.8x at the open.

 

Switch to 2019. The hot tech IPOs of this year, were Zoom with 118% sales growth, Slack with 76% growth, and Uber with 43%. It's not even close. What investors have gained in any increased certainty with this new breed of tech businesses, they have given up in growth. I did some back-of-the-envelope work a few weeks back (http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/why-i-think-we-might-be-in-a-significant-tech-ipo-bubble/msg367923/#msg367923) and found the median P/S at the open so far in 2019 was only exceeded by the levels we saw in 1999 and 2000.

 

People who aren't worried about the very bubbly nature of these tech IPO valuations are fooling themselves. Keep in mind too, the Dotcom crash was I believe the largest crash in a major US index since 1929. It was down 80% from peak to trough. Even from the late 1998 high, leaving out the last year completely, the Nasdaq still fell 60%. If people are expecting a bubble even bigger than 1999 so they can continue being fully invested in hot growth stocks, then they wouldn't know what margin of safety looked like if it stood right next to them.

 

Anyone wanting more chart porn on the subject, is free to look here (https://twitter.com/tonyjclayton/status/1118205158721249280) and here (https://twitter.com/tonyjclayton/status/1142741798554624000). Whether or not someone senses a general tech euphoria or thinks a Nasdaq crash is coming tomorrow, isn't what matters. What matters is according to the data we're most likely in valuation territory reminiscent of the Dotcom era, and investors should currently be thinking far more about the downside than the upside. I could be wrong but I think that was the general idea the original poster was trying to get at, and my view is he/she isn't too far off.

 

I guess as always with these things, we'll just have to wait and see how it all plays out.

Time will tell whether Zoom at 59x sales, Slack at 39x sales, Crowdstrike at 48x sales, Beyond Meat at 78x sales, Shopify at 27x sales, and many other extreme multiple growth businesses (

), were priced for absolute perfection at today's levels.

I say this as a consumer tech investor myself by the way, so I've got no beef with the companies or sector. The valuations however, are in a very dangerous place historically-speaking.

 

[RuleNumberOne]

I think more "tech" money will be lost in the next bear than in 1999. WeWork has a private valuation of $47 billion, which is 39 times the peak market cap of WebVan.

 

There was outright fraud in 1999, but the market caps involved were a fraction of what we have today. What was the peak market cap of pets.com?

 

People have become inured to the lack of earnings in cloud stocks. In lieu of a P/E, those stocks have traded on a P/S basis for the last several years. The P/S multiple keeps climbing year after year. Anything less than 20x is cheap, i mean P/S, not P/E. The "tech" is not ground-breaking either, it is just built on AWS.

[Spekulatius]

I think more "tech" money will be lost in the next bear than in 1999. WeWork has a private valuation of $47 billion, which is 39 times the peak market cap of WebVan.

 

There was outright fraud in 1999, but the market caps involved were a fraction of what we have today. What was the peak market cap of pets.com?

 

People have become inured to the lack of earnings in cloud stocks. In lieu of a P/E, those stocks have traded on a P/S basis for the last several years. The P/S multiple keeps climbing year after year. Anything less than 20x is cheap, i mean P/S, not P/E. The "tech" is not ground-breaking either, it is just built on AWS.

 

I am not so sure. yahoo’s peak market cap exceeded $100B and it was later sold for just a few billion. JDSU’s peak market cap was $125B and it lost 99% of it. Cisco was $550B and it went to a bit more than $100B. Then there are endless companies who needed 10+ years to exceed their peak before like a couple of semi companies, Dell, Sun, Compaq and MSFT even etc. If you now adjust this for expected market r turns, or just inflation over almost 18 years, the value in today’s dollars will probably not exceeded in the next downturn, but who knows?

[Cigarbutt]

Let's call this the cocktail party sentiment index and admit the limited usefulness for choice and timing of individual stock pickings.

 

In 1999, I created a malaise at a cocktail party when saying that I had just sold Nortel (low 40's before it tripled shortly thereafter), by far the largest capitalization in the Canadian market and darling among others in the tech group.

 

In 2019, I just shut up and listen (except occasionally on incognito boards) and the same people tell me that WeWork is the way to go.

 

Maybe this time is different.

 

[ValueHippie]

I am doing some econometric research on bubbles in the SP500. The code is not yet finished and therefore the periods in 2007 and 2015 should not show up.

By just analyzing the time series, it seems pretty clear that we are in a bubble right now. However, a minor correction as in December 2018 should suffice to bring my test statistic below the critical value.

 

Edit: Check the attachment!

[Liberty]

 

[RuleNumberOne]

S&P 500 does not have the cloud stocks. For example, ServiceNow has a market cap of $50 billion, the smallest S&P 500 companies have a market cap less than $5 billion.

 

Russell 1000 is a better index to look at because I think market cap is the only criterion for entry. S&P 500 requires profitability for entry.

 

The bubble lies outside the S&P 500. Uber, Lyft, WeWork, Crowdstrike, Zoom, Slack, along with FT's list of cloud stocks do not exist in the S&P 500.

[ukvalueinvestment]

I agree that there are bubbles in pockets, including VC, certain cloud stocks and other Tech.  But other markets, especially outside the US, do not seem obviously expensive.

 

In 1999, I and my college housemates maxed out our student loans to try and invest in an IPO of a UK company, lastminute.com - a sort of booking.com of its time that has since fallen by the wayside.  We were disappointed when we didn't get an allocation, but of course it was actually for the best.

 

I'm not seeing this sort of behaviour at the moment ... in the UK at least.

 

Think this current "bubble" is more US centric...

 

[Gregmal]

S&P 500 does not have the cloud stocks. For example, ServiceNow has a market cap of $50 billion, the smallest S&P 500 companies have a market cap less than $5 billion.

 

Russell 1000 is a better index to look at because I think market cap is the only criterion for entry. S&P 500 requires profitability for entry.

 

The bubble lies outside the S&P 500. Uber, Lyft, WeWork, Crowdstrike, Zoom, Slack, along with FT's list of cloud stocks do not exist in the S&P 500.

 

This is 100% spot on.

 

It seems many are confusing a bubble in certain areas with "the market" being in a bubble. I don't think many people here are buying the bubble names anyway, so its a non event as I have no interest in shorting these. But there's always areas of froth in the markets. Nothing new here.

[Guest]

I like ajc's thread but what does this chart mean?

 

https://twitter.com/tonyjclayton/status/1142741798554624000

 

Sure it looks scary but I'm not so sure. It says "value vs growth has never been this extreme." I disagree. As I posted earlier, "value" got absolutely destroyed in the late 90s. "Growth" stocks were killing it. This time, growth stocks have been doing very well and value stocks haven't been doing as well but the discrepancy is not nearly as large.

 

What does "standard deviation from the trend" mean? What is the trend here anyway?

[Guest ajc]

 

 

I like ajc's thread but what does this chart mean?

 

https://twitter.com/tonyjclayton/status/1142741798554624000

 

Sure it looks scary but I'm not so sure. It says "value vs growth has never been this extreme." I disagree. As I posted earlier, "value" got absolutely destroyed in the late 90s. "Growth" stocks were killing it. This time, growth stocks have been doing very well and value stocks haven't been doing as well but the discrepancy is not nearly as large.

 

What does "standard deviation from the trend" mean? What is the trend here anyway?

 

 

 

Thanks, Paul. There's some discussion of it in this thread -

I'm open to correction, but I believe that is the relative outperformance of either value vs growth stocks or growth vs value stocks over that time frame. I'm not a stats major, so I'll leave the standard deviation explanation to someone more qualified. I can tell you they're using data from Fama and French, and my understanding is that graphic is based on price-to-book ratios.

 

If you look at price-to-cash-flow ratios, for those who'd like to say price-to-book is no longer relevant, you get something similar (see image below). Value hasn't performed this badly versus growth, since 1951. In other words, people are paying up for cash flow growth at a higher rate versus looking for traditionally cheap cash flow stocks, than at any time during the last 70 years. That's my reading of it. Happy to have someone more knowledgeable explain it better.

 

My takeaway from it all is that now is the time to be buying traditionally and statistically cheap value stocks on price-to-book or price-to-cash-flow ratios. The opposite also applies, now is absolutely not the time to be buying stocks that trade at 33x book value like Zoom, Okta at 57x book, Atlassian at 44x book, etc. For fast-growing stocks trading at extreme multiples of cash flow, you currently also want to be avoiding them like the plague and instead should be buying traditionally cheap value cash flows.

 

[RuleNumberOne]

If you were to screen the Russell 1000 for unprofitable companies trading at a P/S of 10 or more, my guess is you would get a number higher than in 1999.

 

For example, ServiceNow with a $50 billion market cap has been excluded from the S&P 500 even though most S&P 500 companies have a smaller market cap. Any SaaS IPO of the last 8 years would fit in the S&P 500 if we were to look at market cap alone, but they have all been excluded.

 

Comparing today's S&P 500 with 1999 would require the S&P committee to use the same membership criteria today that it did in 1999. It is comparing two very different things. Maybe in 1999 S&P just used the market cap. Now it requires a track record of profitability instead of market cap.

 

 

[jschembs]

 

 

I'd love to see the underlying data. Even when you exclude industries like REITs, financials, and O&G E&P companies, whose cash flow statements are not comparable to other operating companies, you still have data integrity problems.

 

I pulled the Russell 1000 data from CapIQ. Excluding the above industries, the average / median P/FCF is 30x / 21x (25x / 22x if excluding SBC). The valuations go down when excluding SBC because of the numerous FCF negative companies, where deducting SBC makes their valuations less negative.

 

If you exclude negative FCF companies, average / median P/FCF is 48x / 22x (46x / 24x excluding SBC - 46x is lower than 48x because a number of companies have positive FCF, but negative if deducting SBC).

 

Remember, these valuations EXCLUDE the highly valued growth stocks like TWLO (24x revenue, negative FCF) and NFLX (9.5x revenue, negative FCF). Those are the ones most susceptible to the 50+% declines.

 

It's always hard to compare valuations over time, particularly when accounting rules change (no longer amortizing goodwill, now expensing SBC).

[jschembs]

 

 

I'd love to see the underlying data. Even when you exclude industries like REITs, financials, and O&G E&P companies, whose cash flow statements are not comparable to other operating companies, you still have data integrity problems.

 

I pulled the Russell 1000 data from CapIQ. Excluding the above industries, the average / median P/FCF is 30x / 21x (25x / 22x if excluding SBC). The valuations go down when excluding SBC because of the numerous FCF negative companies, where deducting SBC makes their valuations less negative.

 

If you exclude negative FCF companies, average / median P/FCF is 48x / 22x (46x / 24x excluding SBC - 46x is lower than 48x because a number of companies have positive FCF, but negative if deducting SBC).

 

Remember, these valuations EXCLUDE the highly valued growth stocks like TWLO (24x revenue, negative FCF) and NFLX (9.5x revenue, negative FCF). Those are the ones most susceptible to the 50+% declines.

 

It's always hard to compare valuations over time, particularly when accounting rules change (no longer amortizing goodwill, now expensing SBC).

 

Here's the data. I also excluded a few names that recently reported earnings where CapIQ hadn't updated their LTM financials, but the impact is insignificant.

R1K_Data.xls