1999 again?

[SHDL]

What I find interesting is that for a subject heading of "1999 again," the discussion has almost exclusively focused on valuations. The late 90s were certainly a time of euphoria in the capital markets, which gave plenty of startup enterprises a long leash of funding that otherwise wouldn't have existed. With that leash came jobs, office leases, computer equipment, consultants, etc.

 

I see plenty of parallels today. While we can argue whether or not a "pets.com" exists today, there are plenty of very questionable business models being funded, which, whenever the cycle turns (and it will), results in shuttered businesses, lost jobs, unpaid leases, and plenty of excess capital spending.

 

Even for the well-regarded business models, as growth slows and the market begins to demand profits, opex cuts will be the first place to look. The double-edged sword of high margin SAAS companies is that operating leverage cuts both ways.

 

I know I'm jaded from having graduated college around the time of the dot com bubble, and I acknowledge we're nowhere near that time, but I am honestly surprised to see little to no consideration of how these factors may play into the current cycle.

 

I agree, and this is part of what I was vaguely alluding to above when I suggested that current earnings may not be sustainable.  Like you say, one of the big risks here for investors is contagion, whereby a group of questionable businesses go bust and take down other seemingly unrelated businesses along with them.  For certain companies like, say, Google or Facebook, the effects may be especially pronounced for reasons discussed here on the GOOGL thread.

[oddballstocks]

What I find interesting is that for a subject heading of "1999 again," the discussion has almost exclusively focused on valuations. The late 90s were certainly a time of euphoria in the capital markets, which gave plenty of startup enterprises a long leash of funding that otherwise wouldn't have existed. With that leash came jobs, office leases, computer equipment, consultants, etc.

 

I see plenty of parallels today. While we can argue whether or not a "pets.com" exists today, there are plenty of very questionable business models being funded, which, whenever the cycle turns (and it will), results in shuttered businesses, lost jobs, unpaid leases, and plenty of excess capital spending.

 

Even for the well-regarded business models, as growth slows and the market begins to demand profits, opex cuts will be the first place to look. The double-edged sword of high margin SAAS companies is that operating leverage cuts both ways.

 

I know I'm jaded from having graduated college around the time of the dot com bubble, and I acknowledge we're nowhere near that time, but I am honestly surprised to see little to no consideration of how these factors may play into the current cycle.

 

I have a similar sentiment.  Graduated at the bust, studied computer science, was deep in the euphoria because getting a high flying job sitting on a giant bouncy ball coding depending on it..

 

This round is much different though.  Back then you had to purchase things to grow, purchase computers, purchase servers, lease office space.  Now we live in a rental economy.

 

Most of these idea IPO's have zero tangible assets, or the tangible assets are coffee makers and ikea desks.  Once the doors are locked that capital vanishes.  Whereas in the past that capital continued.  Some of the crazy expansion of the 90s, data centers, fiber networks, uneconomic satellite networks led to bankruptcies and viable companies purchasing said assets and putting them to use.  A lot of the fiber we use today is a result of VC funded expansion in the 90s.

 

Today we aren't investing in any of those things.

 

On the flip side the companies that took it on the chin last time were the service providers for the euphoria, Sun Microsystems, EDS etc.  It would be interesting to know how much of AWS' revenue is from money losing venture backed companies.

 

I have no idea whether we're near an inflection point or not.  These things go on much longer than anyone ever things, so might still have another 3-5 years before the truly dumb money gets involved.

 

Unfortunately if this does get dragged out before a crash it will be an enormous death blow to most boomer retirements.  They are heavy in stocks, and if you have a 50% drawdown at 75 it's really hard to recover from that, there just isn't enough time.  I wonder if something like that could precipitate an ever worse crisis at the government level.

[RuleNumberOne]

https://www.bloomberg.com/news/articles/2019-07-09/a-lehman-survivor-is-prepping-for-the-next-credit-downturn

This money manager is one of those with "active mandates".

 

"“There’s an art to knowing when to leave the party,” said the director of fixed income for Europe in an interview. “In fact it’s over -- people are desperate and they’re hunting down the after-party. We probably only have a few hours left.”

 

Like even outspoken naysayers at the time, she didn’t anticipate the violence of the downturn. Still in May 2007, Gomez-Bravo became cautious on U.S. risk and issued warnings on corporate health -- which bear echoes with the intense hunt for yield today.

 

“Everything was bid indiscriminately,” she recalls. “I knew things were heating up; there were telltale signs. It’s always difficult to leave money on the table, but as a result we avoided the blow-ups.”"

 

[RuleNumberOne]

I founded a new corporation rated AAA by the ratings agencies. All it does is issue "corporate bonds" that carry an interest rate of -0.05%. This has a wide-moat and no competitors: when I pitched the idea to VCs, they threw me out saying the big profits meant I could never IPO in today's market. Everybody wants to build and invest in the next WeWork.

 

Junk bonds in Europe carry a negative yield. So do Nestle's bonds with a negative yield of -0.15%.

 

Why go to all the trouble of making products? Just issue more corporate debt and get paid to sit on the money. At my new AAA-rated corporation, everyone just drinks at the beach all day.

 

This Charlie Munger quote explains the current bond market:

 

"I have heard of one such example. Colin Camerer of Caltech, who works in “experimental economics” devised an interesting experiment in which he caused high I.Q. students, playing for real money, to pay price A+B for a “security” they knew would turn into A dollars at the end of the day. This foolish action occurred because the students were allowed to trade with each other in liquid market for the security. And some students then paid price A+B because they hoped to unload on other students at a higher price before the day was over."

[RuleNumberOne]

https://www.wsj.com/articles/wework-aims-to-go-public-in-september-sooner-than-expected-sources-11563921401

 

Central bankers should be proud of their achievements.

 

"WeWork Cos. is aiming to go public in September, earlier than many investors had expected, after boosting a loan facility the office-space manager hopes will pave the way for the listing.

 

Indeed, one reason for the September launch target is executives at WeWork are worried that the good times won’t last, with the U.S. stock market trading near records.

 

Once it does so, WeWork will have to address questions about its yawning losses; the nine-year-old New York company’s $1.9 billion loss last year outstripped the $1.8 billion of revenue it generated and helps explain its ravenous appetite for cash."

[Guest]

If they're worried that the good times won't last, it seems like that's the opposite of exuberance.

[RuleNumberOne]

47 billion in valuation for 1.8 billion in revenue which came with 1.9 billion in losses.

 

The greedy investors are the exuberant ones, not the insiders.

 

Insiders can create more stock from thin air for themselves. Have stupid-greedy investors, will create stock and sell.

 

 

If they're worried that the good times won't last, it seems like that's the opposite of exuberance.

[Castanza]

47 billion in valuation for 1.8 billion in revenue which came with 1.9 billion in losses.

 

The greedy investors are the exuberant ones, not the insiders.

 

Insiders can create more stock from thin air for themselves. Have stupid-greedy investors, will create stock and sell.

 

 

If they're worried that the good times won't last, it seems like that's the opposite of exuberance.

 

With how ridiculous IPO's have been it's becoming tempting to try and make some short term plays with a little bit of cash. Buy a few shares, ride the wave up and dump. Find value where it's at right?  :P. I know as soon as I try this I'll get burnt. Looks like more Brk.B it is!

[jschembs]

47 billion in valuation for 1.8 billion in revenue which came with 1.9 billion in losses.

 

The greedy investors are the exuberant ones, not the insiders.

 

Insiders can create more stock from thin air for themselves. Have stupid-greedy investors, will create stock and sell.

 

 

If they're worried that the good times won't last, it seems like that's the opposite of exuberance.

 

Love Matt Levine

[Guest]

This reminds me of the Wework quote a bit:

 

"But few executives were publicly apologetic about timing their sales so well, the Journal noted, quoting Randal Kruep former senior vice president at Redback Networks, a six-year old company that went public in May 1999. "I would have gotten out faster if I could have," said Kruep, lamenting the fact that he was able to sell only $100 million worth of stock during 1999 and 2000."

 

"In March of 2000, when Kruep was in the process of liquidating his shares, Redback stock changed hands at $191.03. By August of 2002, Redback traded at $1.07 - and Kruep had a new01 job as chief executive of Procket Networks."

[RuleNumberOne]

Bloomberg is doing great journalism, unlike the FT that has become the mouthpiece of Eurocrats.

 

The bubble in the bond market is much bigger than 1999 because the sums involved are far bigger, by orders of magnitude.

 

 

This Might Be the Bond Market’s Dot-Com Moment

https://www.bloomberg.com/opinion/articles/2019-08-08/this-might-be-the-bond-market-s-dot-com-moment?srnd=premium

 

In today’s bond market, it seems as if no price is too high.

https://www.bloomberg.com/news/articles/2019-08-07/the-furious-global-bond-market-rally-shows-few-signs-of-abating

 

The ECB Is Dragging Us Deeper Into Madness

https://www.bloomberg.com/opinion/articles/2019-08-08/ecb-is-dragging-the-bond-market-deeper-into-yield-curve-madness?srnd=premium

 

 

[gokou3]

Another catalyst later in the year might yet involve Trump, just as in 2016. If China and the U.S. can fashion a trade peace, and convince the markets that they mean it, a lot of people will find themselves on the wrong side of the trade.

 

In such an environment, it would obviously be a very bad idea to hold bonds. Stocks might benefit at least initially from the sentiment that a total slowdown could be averted. But if there is something to buy for now, to protect against these eventualities, maybe it might be a bet on faster inflation through the bond market. It can, after all, be done very cheaply. And if this does indeed prove to have been the moment of revulsion, it would pay off.

 

What would be a good instrument for placing such a bet as a retail investor?  I remember around 2010 Soros or his proteges made a similar bet on interest rate increases using some derivative instruments, but I forgot what it was and I wouldn't be able to access such instruments anyways.

[Castanza]

Another catalyst later in the year might yet involve Trump, just as in 2016. If China and the U.S. can fashion a trade peace, and convince the markets that they mean it, a lot of people will find themselves on the wrong side of the trade.

 

In such an environment, it would obviously be a very bad idea to hold bonds. Stocks might benefit at least initially from the sentiment that a total slowdown could be averted. But if there is something to buy for now, to protect against these eventualities, maybe it might be a bet on faster inflation through the bond market. It can, after all, be done very cheaply. And if this does indeed prove to have been the moment of revulsion, it would pay off.

 

What would be a good instrument for placing such a bet as a retail investor?  I remember around 2010 Soros or his proteges made a similar bet on interest rate increases using some derivative instruments, but I forgot what it was and I wouldn't be able to access such instruments anyways.

 

Maybe not a perfect answer to your question but Eurodollar futures could be a decent play with the current ECB climate.

[SHDL]

Another catalyst later in the year might yet involve Trump, just as in 2016. If China and the U.S. can fashion a trade peace, and convince the markets that they mean it, a lot of people will find themselves on the wrong side of the trade.

 

In such an environment, it would obviously be a very bad idea to hold bonds. Stocks might benefit at least initially from the sentiment that a total slowdown could be averted. But if there is something to buy for now, to protect against these eventualities, maybe it might be a bet on faster inflation through the bond market. It can, after all, be done very cheaply. And if this does indeed prove to have been the moment of revulsion, it would pay off.

 

What would be a good instrument for placing such a bet as a retail investor?  I remember around 2010 Soros or his proteges made a similar bet on interest rate increases using some derivative instruments, but I forgot what it was and I wouldn't be able to access such instruments anyways.

 

TIPS are probably the most obvious candidate. I would focus on individual bonds that mature within a year or two.  If you have the inclination you can probably even isolate the inflation protection component by simultaneously shorting a (non-inflation protected) Treasury note that matures on the same day.

[CorpRaider]

What would be a good instrument for placing such a bet as a retail investor?  I remember around 2010 Soros or his proteges made a similar bet on interest rate increases using some derivative instruments, but I forgot what it was and I wouldn't be able to access such instruments anyways.

 

U said retail so:  Series I Treasury bonds have a .50% real return through November (I think).  You can buy $10K per annum ($10K per soc # for a married couple).  Get the real return rate + a floating inflation indexed rate.  Usually better tax treatment (and some other advantages) than TIPS, but obviously limited by size. 

[gokou3]

Another catalyst later in the year might yet involve Trump, just as in 2016. If China and the U.S. can fashion a trade peace, and convince the markets that they mean it, a lot of people will find themselves on the wrong side of the trade.

 

In such an environment, it would obviously be a very bad idea to hold bonds. Stocks might benefit at least initially from the sentiment that a total slowdown could be averted. But if there is something to buy for now, to protect against these eventualities, maybe it might be a bet on faster inflation through the bond market. It can, after all, be done very cheaply. And if this does indeed prove to have been the moment of revulsion, it would pay off.

 

What would be a good instrument for placing such a bet as a retail investor?  I remember around 2010 Soros or his proteges made a similar bet on interest rate increases using some derivative instruments, but I forgot what it was and I wouldn't be able to access such instruments anyways.

 

Maybe not a perfect answer to your question but Eurodollar futures could be a decent play with the current ECB climate.

 

Thanks, this seems to be a good instrument for a highly-leveraged bet... and with options, the downside is limited.

 

https://www.cmegroup.com/trading/interest-rates/stir/eurodollar_quotes_globex.html?optionProductId=4&optionExpiration=4-Q9

 

 

 

 

[Spekulatius]

Just present facts without any judgment. You researched this individual online and found out these violations. I wouldn’t even call him a swindler (which is a judgement) and you don’t know the terms of the annuity , so I wouldn’t even comment on that. Then if the customer is interested, offer further help to investigate or look at the annuity contract. It‘s then up to the customer to take action and work with you or somebody else.

 

That’s what I would do, but then again, I am not an investment advisor.

[Cigarbutt]

I just finished an 'old' book (published in 2003) this AM and this post is a link from WeWork's upcoming IPO to the general sentiment that existed in 1999.

https://stratechery.com/2019/the-wework-ipo/

The IPO documentation is interesting (I can't definitely figure out if it's a long or a short) from the general sentiment point of view and the way Stratechery frames the story makes it an interesting thought exercise.

 

https://www.researchaffiliates.com/en_us/publications/articles/715-bubble-bubble-toil-and-trouble.html

This post is not really about "we're in a bubble all over again", it's about the difficulty in discounting future developments in the technology world. In the article, there is a table listing the top ten tech market caps in 2000 and the subsequent market returns. Fascinating.

 

I just finished Stealing Time and IMO the author does a job chronological job.

https://www.amazon.com/Stealing-Time-Steve-Collapse-Warner/dp/0743247868/ref=sr_1_2?keywords=stealing+time&qid=1566737103&s=gateway&sr=8-2

Another fascinating aspect is how insiders of the company and investors at large pushed the AOL company to such heights and how very bright and savvy people made "the biggest mistake in corporate history" when the convergence merger was completed. It appears that, in 1999, not many people saw the potential loss of market share related to the eventual growth of high speed broadband providers. Who talks about AOL now? Do you remember those promotional CDs?

 

In 1999, I was slowly getting serious about investing and did not get caught up by the internet frenzy. It would be nice to say it was because of unusual knowledge and insights but it's only because a defining feature of the investing style is to invest in businesses that can be reasonably understood and where one can form a reasonable opinion about long-term prospects of the relevant industry and specific embedded moat.

 

Conclusion at a humble level: Mr. Benjamin Graham belongs in the 'fallen' category in the present era but I decided to add a new quote on my wall, an Horace quote that Mr. Graham often referred to:

“Many shall be restored that now are fallen and many shall fall that now are in honor.”

[Liberty]

New post by the always thoughtful Brooklyn Investor:

 

http://brooklyninvestor.blogspot.com/2019/09/bubble-yet.html

[RuleNumberOne]

When I started this topic on June 20, the BVP "Emerging Cloud" Index was at 1254, today it is at 1102. The upward momentum has been lost. Not sure whether that is permanent or temporary. WeWork went bust in record time!

 

If Evasive Elizabeth becomes the nominee, there would be a big crash. IMO Brooklyn Investor's article looks weakest when it addresses what happens if Lying Liz keeps advancing.

 

Leon Cooperman is right, the market circuit breakers will be triggered if Warren wins.

 

https://www.independent.co.uk/news/world/americas/us-election/warren-biden-trump-impeachment-latest-2020-race-quinnipiac-polls-frontrunner-a9124731.html

 

"Four polls used by the Democratic National Committee (DNC) to determine which candidates qualify for its debates this week gave Ms Warren a lead over Mr Biden in Iowa, the first state to hold a primary or caucus, and in New Hampshire, which is the second."

 

New post by the always thoughtful Brooklyn Investor:

 

http://brooklyninvestor.blogspot.com/2019/09/bubble-yet.html

[Liberty]

btw: I just didn't want to start a new topic, the post wasn't really in reply to anything in this thread specifically.

[WayWardCloud]

Could we please stay clear of name calling and stick to factual information? We're not 5 years olds at recess... Not particularly a fan of senator Warren myself by the way.

[UK]

https://www.institutionalinvestor.com/article/b1hjlb0qs4c807/GMO-Is-Feeling-Pain-Reminiscent-of-the-Late-1990s

[Guest]

https://www.institutionalinvestor.com/article/b1hjlb0qs4c807/GMO-Is-Feeling-Pain-Reminiscent-of-the-Late-1990s

 

Nothing like selling a better future when recent past has sucked.

[RuleNumberOne]

The S&P 500 Price to Sales ratio has jumped by 36% from Dec 2013 to the present. It is at a 20-year high.

 

https://www.quandl.com/data/MULTPL/SP500_PSR_YEAR-S-P-500-Price-to-Sales-Ratio-by-Year

 

P/S remains a good metric to avoid the use of non-GAAP P/Es everywhere.

 

As always the bubble is bigger outside the S&P 500. But no central bank or politician has the courage to raise rates anymore. Trump has beaten the Fed into submission.

 

How big can the P/S get before it blows up?