“The nutshell is this: the old line economy stocks just don’t work because they have earnings and eventually rising interest rates impact earnings. New economy stocks have no earnings, so investors don’t see a need to exit.”
– Wall Street analyst on CNBC, early March 2000 (said without irony) |
The start of 2021 for the market has been quite a show.
I’m sure you’ve read about the retail investors massed on the appropriately named reddit forum r/wallstreetbets, and then pouring into in names like GameStop (GME), AMC, American Airlines and others. GameStop rose from a low of $17.00/share to almost $500/share last month (its volume was almost a billion shares traded from a monthly average of around 50 million previously) – it’s now lost two-thirds of its value since Friday. This week, those same investors have attempted to push up the price of silver as well. Of course, both the stocks they were pumping up and silver have now fallen back to earth.
This type of mania could not be more typical of a late-stage, hyper-inflated, overvalued stock market (a la 1929, 2000, 2008).
I remember the dot-com bubble well: In the fall of 1999, I was in my 1301 Intro to Finance class at SMU, and we were broken into small groups and pitted in a semester-long stock picking portfolio competition (the Top 3 didn’t have to do the final term paper). I convinced my group to use a historically vetted, statistical approach. But many of the other groups just bought the latest issues, dot-coms and tech stocks – and they could do no wrong. Our professor finally threw up her hands and said, “We might as well go home. I can’t teach you guys anything in a market like this.” I knew quite a few people who weren’t worried about graduation and were “just going to day-trade!” We all know how that ended.
And here we are again.
Investors, individuals and many professionals alike, are now convinced that one need not look at things like earnings or future cash flows (OK, Boomer…), but rather it’s only the future promise of the company that matters – the story!
The perfect example of this currently is Tesla. I love our Tesla – it’s great to drive, well designed with things I didn’t even know I wanted, and the Autopilot is fantastic on a road trip. I like Elon too. But TSLA stock? At a market cap of $830 billion (or $1.66 million for every car they produce)? Forbes crunched the numbers, and Tesla will need to capture 45% of the luxury car market (even given growth in their other business lines) to justify even a pedestrian return over the next decade – and that was last August when the stock was at half of what it is now.
The furious run-up and precipitous drop we saw in GameStop via Reddit is just a compressed extension of this fantastical line of thinking.
And finally, here’s an amazing chart that illustrates just how widespread this delusional mania has become. This is the “Goldman Sachs Non-Profitable Technology Index” (just the fact that such an index exists is telling). It includes names such as Pinterest, Roku, Teladoc, Peleton, Snapchat, Zillow, Cloudstrike, Carvana, Uber, Lyft, Slack, Wayfair, Spotify and Overstock. Many of these will likely go the way of Pets.com.
All of this is just the modern manifestation of manias that have occurred throughout history, from the Dutch Tulip Mania and the South Seas Bubble to 1929 and 2000. And it will most decidedly end the same way.
The end result with not be “different this time”. The only difference is that the Fed learned the wrong lesson from 2008 and never normalized rates when they had the opportunity in a growing economy (the only attempt to do so was quickly reversed when the market didn’t like them being raised, heaven forbid, in late 2018 and stocks dropped 20%).
Since then, we’ve had a large tax cut and a massive (although needed) stimulus (x2), with more on the way. Much of this has flowed into assets, specifically stocks. And now we’re left with what will likely be seen by history as the mother of all bubbles.
“The seeds of any bust are inherent in any boom that outstrips the pace of whatever solid factors gave it its impetus in the first place. There are no safeguards that can protect the emotional investor from himself. Having bid the market up irrationally, these emotional investors became terrified and unloaded their holdings just as irrationally.”
– J. Paul Getty, The Wall Street Investor 1962 |
The bottom line is this: If you’re on margin, consider getting off. If you’ve got large open profits from high-flying names, consider taking some off the table. Consider hedging, getting defensive and, for goodness sake, please don’t plan your future on 20-30% annual (or monthly if you read Reddit) returns.
Because recent performance, in this market, is definitely not indicative of future results.
* Thanks to John Hussman for the great quotes.
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