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Dot-bombs.
Housing.
Commercial real estate.
$150 oil and commodities.
The bubble cycle in asset class after asset class has played out repeatedly in the past several years. I have laid the blame — accurately, in my view — at the feet of the Federal Reserve.
By slashing rates and flooding the asset markets with easy money over and over and over, they have provided the raw fuel for multiple asset bubbles. The failed policy started in the Greenspan era, and it’s continuing with “Helicopter Ben” at the helm.
Now, it’s becoming abundantly clear to me that we’re experiencing yet ANOTHER round of this ridiculousness. The ironic thing is, it’s actually in the tech and dot-com arena again. You’d think people would have learned their lesson the first time around. But you’d be wrong!
Tech Stock Love Affair
Smacks of 1990s-Style Hysteria!
Take a tech stock like Apple (AAPL). I know, I know. It’s Apple, the company that many on Wall Street and Main Street say can do no wrong. But the absolute adoration for this one stock has gotten so out of control, it reminds me of the late 1990s love affair with names like Microsoft (MSFT), Intel (INTC), Cisco Systems (CSCO), and Qualcomm (QCOM).
Case in point: One analyst just came out and slapped a $1,000 target on Apple. Another upped the ante with a $1,001 target. Some on Wall Street are now forecasting that Apple will be the first $1 TRILLION company in the history of the U.S. That would be an eight-fold increase in market capitalization just since 2008.
That would also top the highest valuation ever reached by a U.S. company — Microsoft at $619 billion in December 1999 — by more than 61 percent. Oh, and if Apple did hit $1,000, that would be a move of ANOTHER $350 per share from here … on top of a gain of more than $250 just since December!
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| When the euphoria wears off, AAPL is bound to take a header. |
Now I have nothing against Apple’s products. I use them myself. But this is just like what happened in 1999-2000, when some boneheaded analyst slapped his own $1,000 price target on Qualcomm … right before the Nasdaq lost more than three-fourths of its value!
Bottom line: Apple and a handful of other hot tech stocks like Priceline.com (PCLN) are now as overowned, overloved, and overbought as several other asset classes and stocks throughout history — from housing in 2005 … to silver in 2011 … to dot-bombs in 2000. Even the slightest disappointment in terms of sales, strategy, or execution could cause massive dislocations like we’ve seen in the past!
No Revenue? No Business Model?
NO PROBLEM!!
What else is bringing back bad memories of the late 1990s? Well, back in the first dot-bomb bubble, you didn’t need much revenue. You didn’t need a viable business model. You didn’t need much of anything besides a “.com” in your company’s name.
That was good for millions, or even hundreds of millions, of dollars in funding by venture capitalists, Wall Street firms, and momentum-hungry mutual fund managers.
But shortly thereafter, the bubble popped. Companies like Pets.com and eToys imploded. Trillions in stock market wealth vanished, and the economy tumbled into recession. Now, it seems we’re destined to repeat that sad, sorry experience!
Take the renewed rise of bubble-heyday stocks like Broadvision (BVSN). Back in the dot-bomb bubble of the 1990s, this tech turkey exploded from a split-adjusted $166 to $23,300. More than TWENTY-THREE THOUSAND DOLLARS!
But when the bubble popped, it crashed all the way to $8. And over a span of several years, it went nowhere. Once the European Central Bank cranked up the printing presses in late 2011, though, it climbed out of its grave like some horror movie zombie you can’t kill no matter what you throw at it! Within a few weeks, it has surged seven-fold to more than $56 from $8-and-change.
Or how about all these red-hot Initial Public Offerings? Angie’s List (ANGI). Millennial Media (MM). LinkedIn (LNKD). They’ve surged as much as 44 percent, 114 percent, and 173 percent in their first days of trading, riding the latest “social media” Internet craze.
Then earlier this week, the soon-to-be-public Facebook revealed plans to buy Instagram for the princely sum of $1 billion. Who’s Instagram? A two-year old company that has a popular smartphone application allowing you to take and share stylized photographs. It has only 13 employees and — get this — NO revenue! ZIPPO!
Moreover, Instagram had just completed a round of private financing that valued the company at $500 million. That means it went from being worth $0 two years ago … to half a billion bucks a couple weeks ago … to a billion dollars a week later.
We Know How this Movie Ends!
Don’t Get Stuck When the Lights Come On!
Folks, we’ve seen this movie before. We know exactly how the sad, sorry story plays out. And we know that if you’re stuck in your seat … holding the bag … when the lights come on and investors come to their senses, you’re going to lose a fortune.
In fact, there’s evidence the end may already be at hand …
Some of the sorrier IPOs to come out of the chute, like Groupon (GRPN), are getting shellacked. The bubble stock Broadvision that I mentioned earlier has shed more than half its value just since early March. And the broad stock market is wavering again, suggesting the “one way” trade higher since December is coming to a close.
If you haven’t already taken some profits off the table, as I have been recommending, get cracking! If you own momentum darlings like Apple and Priceline.com, sell now! Because my fear level is rising given the proliferation of late-stage bubble shenanigans I’m seeing!
Until next time,
Mike
P.S. You might also consider joining my Safe Money Report where I give members specific guidance on what, when, and how to buy and sell. Plus my Flash Alerts give you the edge you need to keep your money safe and maximize your profits. Click here to learn how to join for just 12 cents a day.
Mike Larson graduated from Boston University with a B.S. degree in Journalism and a B.A. degree in English in 1998, and went to work for Bankrate.com. There, he learned the mortgage and interest rates markets inside and out. Mike then joined Weiss Research in 2001. He is the editor of Safe Money Report. He is often quoted by the Washington Post, Reuters, Dow Jones Newswires, Orlando Sentinel, Palm Beach Post and Sun-Sentinel, and he has appeared on CNN, Bloomberg Television and CNBC.
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What you mean trees don’t grow to the sky? Apple’s profits will eventually come under attack from competitors (it always happens) and growth can’t continue at the same magnitude indefinitely. Apple IS a hugely successful company though so unlike companies like Pets.com of the previous tech bubble they have great earnings and a great business. We all know that Apple and others have benefited from globalization and the access to slave labor and little environmental standards.
I think that the general asset ramp (not just stocks) is mostly a symptom of the real bubble. The real bubble is in total debt in the system (or money if you prefer created through more debt). Government (not just US) deficits are creating massive false demand in the economy for Apple’s I-fanboi junk and myriad other consumer products.
Federal income tax revenues are down year over year, government spending has been increasing every year, and the federal deficit in February was an all-time record. If (when) this spending (even half) is removed from the system the US GDP will go from a measly 2-3 percent growth to negative. Due to the “multiplier” effect and the negative spiral of austerity the problem will actually grow worse too.
The government has successfully blown a bubble in the student loan market too. For example, tuition at Arizona state was up ~96 percent over the past 5 years and the administration there put a temporary freeze on further hikes due to public outcry. As states have been struggling to balance their budgets they have significantly cut funding to state schools and institutions have raised tuition to compensate. But the false demand created through the financialization of college education is a direct result of government policy. It has larded up students with massive debt burdens that they are unable to escape even in bankruptcy.
Housing is STILL broken, it’s STILL on (seemingly permanent) government life support (mortgage interest deduction, HAMP, HARP1-2), and therefore it’s STILL overpriced. Foreign money is flowing in and buoying prices in some regions (Miami condos), and investors are scooping up rental properties for cash. The government is assuming all the risk for the numerous low quality loans that are being backstopped by FHFA, Fannie, Freddie, HUD, VA.
So for almost no money down “home owners” can walk away if they end up underwater (or have principle forgiven through more gov cheese) and if they happen to make some capital gains when they sell they get to keep it all…no risk and all reward. It’s stealing from renters to give free money to “home owners” who are just renting from the bank. If people can’t afford they’re houses they should be booted out on the street PERIOD! If I don’t pay my rent the same thing happens to me. And since I (as a taxpayer) am back stopping “home owners” loans through the government I want equality and not to be robbed.
You truly have no clue how real estate works..you have no clue about leverage….thus, you have no clue how to leverage real estate…
You have no clue how the HARPS are pumping millions and millions into the economy..
What’s wrong with giving people who have paid all their bills and kept up on their mortgages a helping hand so they can obtain the incredibly low interest rates……HARP is NOT subprime, idiot!!..do you have a 680 or a 720 credit score???..
Why don’t you own at the lowest rates ever and the lowest price levels??..
You don’t know squat…typical young punk
I live in the DC area where the government’s overspending largely insulated us from the recession and house price declines were relatively modest (when compared to other parts of the country). And yet many of my co-workers are $50-100k under water on their mortgage with one or more spouses deeply in student loan debt. Some are volunteered to deploy to Iraq and Afghanistan 2-3-4-5 times to earn massive amounts of money (up to 80k of which is tax free) to help catch up and pay off debts. The median income in 2009 in Fairfax County Virginia was $102,000…why do you think that is? (talk about symptoms of the government bubble).
If I were to buy a house in this area today I would have to be betting that: 1) interest rates won’t go up in any meaningful way in the next 7-10 years; 2) my job is secure; or more generally government jobs in general will never undergo a meaningful cutback. So far I’ve looked like a bitter fool in my rented apartment. The government seems intent on maintaining and even growing its size forever, with ever increasing debt limits; and the Fed seems hell bent on maintaining ZIRP indefinitely. I’m betting this is unsustainable. And instead of dreaming about all the wonderful profits made by leveraging 20x on a 5% down payment on a $300,000 940 sq ft shoebox condo, I’m worried how leverage cuts both ways…I don’t want to be the next sucker that comes along and overpays to bail another sucker out of their underwater position.
You really have no clue about real etate and the HARPs….
how come you don’t own real estate when the rates are at their lowest ever and prices are where they are at??….don’t you have a 680 or 720 credit score??…
The HARPS are not subprime idiot….
I’ll explain later how HARP is pumping BILLIONS inot the economy…
Typical young punk
Hey punk! Of course it’s about putting more money in homeowners pockets…it’s more government subsidized cheese for the economy. BUT THERE’S NO FREE LUNCH!!!!!!!
Check this out:
http://market-ticker.org/akcs-www?get_gallerynr=2944
http://market-ticker.org/akcs-www?singlepost=2910774
You know who owns investments backed by mortgages? Pension funds, insurance companies, Fannie and Freddie. You know who gets screwed over: savers, retirees, renters, etc, etc. With these refinances the replacement paper that the goes into retirement funds yields about half as much.
And it’s also a backdoor bailout for banks who have billions in outstanding home equity lines and 2nd mortgages on underwater properties! In foreclosure the recovery value on these loans is close to zero as the 1st mortgage gets paid first.
AND have you heard what some of these congressmen have been saying! The way they’ve been leaning very hard on the FHFA to execute outright loan principal forgiveness…makes me sick!
http://www.youtube.com/watch?v=P36x8rTb3jI
I sold all my stocks in the market several months ago. I wrote to you and stated that apple, walmart, ups, and priceline were all sells! I am long now and very heavy long in gold and silver stocks. this gold and silver market is ready to explode like a rocket. Go to the ticker symol BGZ. Do you see the downward triangle on the weekly chart? I do and it means it is very very bearish on the entire stock market. This etf will skyrocket. I have warned you today folks. You must take bear market action NOW!
Of course you’re correct,but who knows how long govts can continue the charade?How about any retired person,over 65,who bought gold back in the late 1970’s.They likely died with losses.Even worse than what the Fed is doing is all this envy I’m seeing.All Obama talks about is how the evil rich are taking everything away from the sainted middle and lower classes.Here in California,the Democrat governor is promoting an initiative that will raise LONG TERM capital gains tax to over 13%.Add that to a higher Federal cap gains tax(20% +),promoted by Democrats,the alternative minimum tax,the Buffet 30% minimum tax rule,the extra tax on high incomes in California and proposed additional tax on high incomes for Obamacare, and we headed to a real socialist nightmare.
banks are rockin!!!…..real Estate is hotter than ever….Home Deopts and Lowes are fricking PACKED!!..
as I predicted 9 months ago, HARP 1 and 2 are pumping BILLIONS inot the economy!!…and..pumping billions into the banks in fees!!!!
Man o man…when you know you know….I’m making a killing on my Homestreet Stock…guess you all don’t know how to work hard and research…they had an awesome IPO…whne over 50 then split…
Their loan officers are taking hundreds of applications…get this!!>…72 % are purchases through 1st quarter!!!!!….
Now…do some math…hundreds of applications are from HARP 1 and HARP 2 REFINANCES…guess how many purchases they are doing>>>>…
Bears get left behind again!!!!!!!!!!!!……Gosh…even when the Boy Blunder says he’s aware of cycles, he still blows it..
Tell me again why its a good idea to sell all of my APPL??…..I didn’t sell…and I’m making a killing on my options plays right now….you know…the “covered” ones where you can make piles of money either way…AS LONG AS YOU HAVE THE UNDERLYING…i.e..AS LONG AS YOU DON”T SELL..
yer an idiot…hey everyone…sell all your APPL…
Meredith Witless ups Citi’s ratings!!!!…….better listen up Bears……ha ha, ha…
good ole Meredith…..Gee…she’s a muni-bond expert like Mike larson too??…hmmm..hmmmm…
I wonder where I made 15 % of my profits last year…Ummm…Umm…munibonds??…
There you go again, Mike. The empirical data do not support your conclusions. The trailing P/E ratios can be found here: http://www.snp500.org/sp-500-and-sector-pe-ratio-charts
Notice how the P/E trend for tech stocks is moving downward. There is no bubble! These stocks are getting cheaper!! They are underpriced given the high growth rates of the sector and the low P/E’s.
So what about Apple? Its trailing P/E is 17. Its forward P/E is estimated at 12. It has a beta of 1. Estimated PEG ratio of 0.73. Its year-over-year quarterly earnings growth is 118%!! Verify here: http://finance.yahoo.com/q/ks?s=AAPL+Key+Statistics