Everything looks “toppy” to me. Our DoctoRx has called it just right again. The market is overvalued and the signs around us abound. Just this morning we read that hedge fund assets are at an all-time high and IPOs in tech stocks have surged. This is what I refer to now as the “Old Paradigm” after being told ten plus years ago during the dot com boom that we were in a New Paradigm which meant that values were based on air, not profits.
The Old Paradigm of a boom phase topping out is reasserting itself. The IPO market is going nuts. It smells like the coming of a bust. This morning the IPO of Splunk doubled on the offering (SPLK +109%). Splunk offers software to organize companies’ “big data” but still loses money after 8 years in business. The Bay Area is having its own mini-boom (again). Sorry, you folks in fly-over country. But real estate is popping, both for housing and commercial property. There was this heartwarming story today about this in the Wall Street Journal:
The wave of initial public offerings by Bay Area companies, in addition to giving entrepreneurs and venture capitalists a big payday, is providing a lift to the region by creating jobs for housekeepers, cooks and construction workers. … Through March, seven Bay Area companies have completed IPOs this year, representing 3.7% of all U.S. IPOs. That is the highest rate for the region since 2000, according to data compiled by Dealogic.
This is before Facebook hits the market. I wish I had the Porsche-Ferrari dealership in Palo Alto. But, those housekeepers buy cars too.
Then we discovered today that hedge funds made a new record, now clocking in with$2.13 trillion in assets. If you wondered where all the new money created by the Fed went, I can assure you that a lot of it is parked in these funds. According to the HFR Global Hedge Fund Industry Report, released today by HFR (Hedge Fund Research, Inc.), they returned 4.94% to investors in Q1 2012, the best performance in five years. Let’s see, that would be since 2007, just before the Crash of ’08 …
Manhattan real estate is also doing quite well and restaurants are thriving there. I’ll bet there is demand for housekeepers, cooks, and construction workers there too.
Try to catch that knife on the way up.
You forget that a bubble can inflate past all reasonable bounds, then double. If we’re talking about bubbles in government credit, maybe even triple or quadruple, such is the uncalculatability of the “madness of men”.
Knowing the construction industry in NY rather well, I would compare its current state, to those fellows in that scene from “The Deer Hunter” who live in the bamboo cage, their heads being barely above water. There may be enough money sloshing around to prevent insolvencies en masse, but these times do not resemble ’99, nor the boomlet of ’05 -’07.
As a matter of fact, I would agree with Jeff Harding’s past comments that the highs that our economy receives from its monetary drug injections are less thrilling with each dosage.
I like reading DoctorRX, who is right much of the time, but you have to admit that he TOTALLY missed the recent rally from last December. He was arguing at that time that we were on the verge of a big decline, but now the S&P is 30% higher and everyone who stayed out suffered a big opportunity cost. I’m not sure if the euphoria you seem to indicate in this article is actually present in the IPO market. It certainly cannot be compared to 1999/2000 when anyone could ipo any money-losing tech business for almost any price.
Rob-
Where did I say that the stock market was on the verge of a big decline other than in spring/summer of 2011? Then the decline occurred, I turned tepidly bullish on stocks in early August after the decline, then opten for muni bonds in early October over stocks given ECRI’s recession call. I think it was around then that I started pointing out that times were so strange that anybody who thought he/she had a crystal ball about what the markets would do was bolder than I. More than once I quoted T.S. Eliot: “What you do not know is the only thing you know”.
From your post on December 9, 2011:
“But to me, the simple thesis is the following: The economically more vibrant countries that had room for further credit expansion coming out of their recessions in 2009 have completed a full economic cycle from expansion into 2008, to (generally brief) recession, to rate-cutting again recently. This rate-cutting often signifies an oncoming recession and otherwise has signified a true soft patch if not recession. The U.S. and U.K., in contrast, were already “all in” on their mega-credit cycles and very unfortunately underwent massive credit collapses in Reinhart-Rogoff ”This Time Is Different” fashion. Thus they were unable to recharge the credit cycle in usual fashion after recession technically ended, and so they undertook quantitative easing instead. The result has been what all surveys of the population show: no real economic expansion after the price illusion is stripped away, which people see through in their daily life over and over.”
Also, on December 20 there was a comment on how stocks were “dangerous here”. I enjoy reading your commentary, but it gave me an overall impression of being too negative on the stock market coming out of the last retrenchment – as late as December. I agree with you that we are in a cyclical decline. However, I find too many in our camp suffer from an information bias that prevents us from taking advantage of important market movements. I apologize if I misread you. Thanks for posting!
I live in the Bay Area. In fact, I live on the Peninsula. Last night I went to a grand opening of yet another restaurant. It was packed as are all the restaurants. The immigrant servers are the happiest people you could ever meet, never thinking they would be able to make so much in tips. In my neighborhood an old, small two bedroom house sold for $595k after being on the market one month listed at $625k. Cars are on the upscale side and newish looking everywhere you go. Traffic is heavy and both mall and main street parking is scarce. On the main streets, you see lots of young moms pushing baby strollers. I don’t feel bubble but it is definitely booming.
The macro monetary madness in the world keeps me from buying stocks for the long term.
from a very topical standpoint, the economy is fine. construction in NY may stink, but other areas of the economy are absolutely rocking — try to get a mason, carpenter or plumber in my area to return a call within a week, i dare you.
it’s all fake though, the USA is living on borrowed time with just completely absurd fiscal and monetary policy. but until that ends, we are where we are and i see no reason for it to end until it does, if that makes any sense. it seems to me the end will be a macro event of epic proportions. i think the nitpicking on forward indicators, etc. is largely useless to a micro-based asset manager, as stocks are not tied to them outside of special events like late 2008 or 1973/74. what do they mean anyway when it takes consistent increases in the money supply and $1.3T+ of annual borrowing just to keep the lights on? to me, the day-to-day data like housing starts or the ISM or whatever are the deck chairs on the Titanic.
if we ran on a gold standard or at least were prohibited from deficit spending and money printing, that would be an entirely different story, these data would mean the world. but that is not remotely the case.
i do not agree at all that valuations are out of control, for the most part. microsoft, apple, cisco the list goes on: not expensive. some of these IPOs seem pricey … but so did Google in 2004 before it lit the world on fire. Tumi makes a ton of money, as does LinkedIn and Facebook, for heavens sake they have over 800M customers, make billions in operating income and they haven’t even gone from the “cool” stage to the profit maximization stage.
it seems to me the market is at the high end of the range for what i consider fair. this is not 1983 so enough from all those clowns on CNBC who think because stocks are at 13x EPS that is historically cheap, as if there is any comparison from then to our current state. i’d argue there is more downside than upside given our fiscal and monetary mess.
but as usual, the music is playing so the people are dancing. how soon we forget.
“what do they mean anyway when it takes consistent increases in the money supply and $1.3T+ of annual borrowing just to keep the lights on? to me, the day-to-day data like housing starts or the ISM or whatever are the deck chairs on the Titanic.”
They are indicators of the cycle you are looking for, DD. If you look at the market on the basis of relative risk, the needle on your risk meter should be heading to the red zone.
thanks Jeff. i guess i just don’t feel a whole lot more fearful than i did 9 months ago. the indicators i follow seem sluggish but ok, as they have for some time.
granted, i am not an economics guru at all so i fully trust you have good reason for your position. time will tell i guess.
that said, i do see alot of shorts out there.
I don’t have a clue as to what the market will do. But the tech end is getting crazy. What strikes me, as opposed to Dot com/bomb, is that most of these guys were around then and saw the same thing happen before. They have generally been more cautious. But it is turning into another bubble, perhaps operating on the greater fool theory where the insiders cash out and dump shares on the speculators. I don’t mean to sound naive here, because I understand that the VC guys wouldn’t invest just for speculative reasons. But, my recollection tells me that the players in a bubble never see it coming, mainly because they don’t want to. As JR notes the bubble can last longer than we may think it can and lots of money can be made in the meanwhile. If an investor understands all that then go for it. OTH, understand the risk. Right now things are different than Dot Com and the housing bubble: far less stable and floating on a sea of fiat money. Keep that in mind and watch the signs.
the main difference, to me, between now and the dot.com bubble is while now may be a bubble, many, many of the IPOs are real businesses. valuation could be questioned, but the many of the business models are not that of pets.com.
i guess you could say that the sea of fiat money was released to soak up the housing/credit bubble, no?
if you don’t mind, what signs trouble you most?