IRRATIONAL EXUBERANCE, THE 90s ARE CALLING…

The 1990 s are calling and they want their valuations back. First trading day of 2017 and without missing a beat, CNBC  dutifully resumes the Dow 20,000 countdown, is it time for them to start counting backwards?

“When everyone is talking about it, the party already happened” 

The last time there was this much hype surrounding the US stock markets was in the ’90s when we were told that “earnings no longer mattered” when it came to US equity valuations – raw brilliance in action. To paraphrase the great Ed Norton. “that was the worst advice since General Custer said, over the hill I think they’re friendly Indians.”

We haven’t quite heard the same earnings deflection, or justification  yet but who the heck cares about PE ratios when self driving cars and vacation homes on the moon are en vogue?

Yesterday, during a tease for an upcoming report on technology stocks, CNBC was playing the theme song from the Jetsons, a futuristic TV cartoon from the 1960s. Along with jarring some fond childhood memories, it made me think about all of the technology that has been foisted upon us in such a short period of time. Are they really effective, and do we need all this crap?

WATCH

Apart from market capitalization, revenues and earnings(or lack thereof), we need to evaluate how much of this new stuff we need, and perhaps our focus should be on perfecting the stuff we already have. I’m all for advancements in technology but I think that finding a way to feed and house the planet’s current inhabitants and fixing our current infrastructure takes precedence over new roads, self driving cars or airports on a giant hunk of cheese 238,855 miles away.

Here’s a look back at some 90s internet companies and the people who lead them. Hat tip- Business Insider: http://www.businessinsider.com/where-are-the-kings-of-the-1990s-dot-com-bubble-bust-2016-12/#joseph-parks-kozmo-was-the-frothiest-disaster-of-the-first-dotcom-bubble-according-to-wired-and-it-burned-250-million-but-like-a-zombie-it-has-somehow-come-back-to-life-11

Once again, all the focus seems to be on quantity, not quality. Who’s got the biggest market cap, what number will the Dow Jones Industrial average or NASDAQ 100 reach, how high will X company’s stock price go, etc…  All distractions from rational thought and prudent thinking, in my opinion.

The value of the NASDAQ 100 composite index in 1995 was approximately 1,000 and by the year 2000 had experienced a moon shot of its own to over 5,000! Companies were coming to market at inflated valuations and proceeding to double in some cases – on their first day of trading –  from their already ridiculous valuations, nobody cared. “It’s about momentum,” the gurus said, and – “you have to look at the future potential.” Well, the future potential was a reverse in course, a bursting of the dot com bubble and a subsequent crash which escorted the NASDAQ from about 5,048, back down to the 1,300 level over a relatively short period.

Needless to say, the NASDAQ 100, from it’s 2000 lows of about 1,300, just hit a new all time high of approximately 5,500. As Yogi Berra might say, “it’s de chez vous all over again.” For a look at a couple of insanely over valued NASDAQ stocks, refer to a recent piece I published titled “20,000 or Bust” in my “market chatter” section here: https://joealiotta.com/20000-or-bust/  Once again, there are many, many more which I will highlight in the future as well.

I mentioned Amazon and Netflix in my previous piece as examples of how great companies can be  over priced. Today I’ll add Tesla to the discussion. According to Yahoo Finance,  current market cap is 34.38 Billion, revenues of $5.9 Billion and a net income of (MINUS) $873.9 Million! –  $3.17 Billion in debt and a book value of  $17.89 per share while the stock is currently trading at $212.61 per share.  Anybody rushing to the bank to cut a cashier’s check for $34.4 Billion to buy this one? … I didn’t think so. Even at 4 times book value the stock would be trading below $80 per share.

JETSONS OR FLINTSTONES?

I can’t help but wonder which segment would feature the Flintstones theme song as a prelude. I mean, come on the Flintstones were a “modern” stone age family, not just your typical family stuck in the stone age. Granted, Fred wasn’t able to turn his bedroom lights on from the gravel pit, phone Wilma from his late model convertible or monitor his heart rate with his wrist watch, but his car never ‘self-accelerated’ into a cave, nor were his emails ever hacked by the Russians. Whether or not Bedrock’s electric grid was subject to foreign hacking is still an open issue.

Maybe the Flintstones theme song is apropos for a future segment on how current analysts and market news channel personalities can justify these astronomical valuations.  I wonder if they are still using the ‘bird powered’ projector to view financial slides, or the warthog garbage disposal to discard them… ether would make sense to me, in many cases.

THE LONG TERM MENTALITY TACTIC

Here’s a tip to determine if the ‘experts” know more than they are letting you in on. One thing that 100% of these folks worry about is is liability, and therefore are well versed in the art of CYA ( or cover your a*s). An example of this is  can be observed when they tout these high flying markets and subsequently highlight the importance of a 20- 30 year timeline when investing in equities. This way if/when the market has a significant correction they can imply that they expected it and their ’30 year’ investing strategy is alive and well – ignore the little blip. Of course this has worked out well for them with recent history as our moderator, but I believe it is misleading at the least. I’m not sure why, but bringing out the pom poms and cheering a soaring market keeps you in the cool kids club – few analysts brazenly assume the role of party pooper. Probably a ratings thing…

The ‘long term theory’ holds true, but in the reverse scenario. The time to buy shares in great companies is when they are out of favor and below ‘fair’ market values with the assumption that they will eventually adjust to higher valuations and maybe even above ‘fair’ market value – what’s then required is patience – hence the long term strategy. The exact opposite is true when it comes to over valued markets, this is exactly where investors need to have a short term outlook with a sharp eye toward a ‘trend reversal.’ The fastest way to lose large percentages quickly,  is to be on the wrong side of a new trend –  just ask the short sellers how the last 7 years worked out for them.

There’s no question we have been in a long term bull market, the potential problem is that it’s been just about the longest bull cycle in history. This tends to create a high risk scenario for people who use history as a guide – just remember, nothing lasts forever and gravity eventually overcomes all of which opposes it. “I once heard a long, long time ago that stocks make their biggest moves with the least amount of people on board,” I can’t remember where I heard that but it still holds true… then fools rush in.

A simple guideline for time horizons:  

  • When the risk disappears, time frame should be years.
  • When the risk appears high, keep a sharp eye. 

Look out for a spate of IPOs for further confirmation of a market wrought with froth.