The Economy: “Have We Just Reached Peak Stock Market Absurdity?”
Apr 28, 2017 13:06:12 #
The Economy: “Have We Just Reached Peak Stock Market Absurdity?”
“Have We Just Reached Peak Stock Market Absurdity?”
by Michael Snyder
“Have you ever wondered how tech companies that have been losing hundreds of millions of dollars year after year can somehow be worth billions of dollars according to the stock market? Because I run a website called “The Economic Collapse“, there are naysayers out there that take glee in mocking me by pointing out how well the stock market has been doing. This week, the Dow is flirting with 21,000 and the Nasdaq crossed the 6,000 threshold for the first time ever. But a lot of the “soaring stocks” that have been fueling this rally have been losing giant mountains of money every single year, and just like the first tech bubble this madness will eventually come to an end in a spectacular fiery crash in which investors will lose trillions of dollars.
Anyone that cannot see that we are in the midst of an absolutely insane stock market bubble simply does not understand economics. Every valuation indicator that you can possibly point to says that we are in a bubble of epic proportions, and history teaches us that all bubbles inevitably come to an end at some point.
Earlier today, I came across an article by Graham Summers in which he persuasively argued that the price to sales ratio indicates that stock prices are far more inflated than they were just prior to the great stock market crash of 2008: "Sales cannot be gimmicked. Either money comes in the door, or it doesn’t. And if a company is caught messing around with its sales numbers, someone is going to jail. For this reason, Price to Sales is perhaps the single most objective and clear means of measuring stock valuations. This metric, above all others, you can point to and say, “this is definitively accurate and has not been messed with.” On that note, as Bill King recently noted, today the S&P 500 is sporting a P/S ratio that is massively higher than it was in 2007 and is only marginally lower than it was during the Tech Bubble (the single largest stock bubble of all time for most measures)."
To me, looking at profitability is even more important than looking at sales. Large tech companies such as Twitter certainly have lots of revenue coming in, but many of them are deeply unprofitable. In fact, Twitter has never made a yearly profit, and over the past decade it has actually lost more than 2 billion dollars. But despite all of that, investors absolutely love Twitter stock. As I write this article, Twitter has a market cap of 11.5 billion dollars.
How in the world is that possible? How can a company that has never made a single penny be worth more than 11 billion dollars? Twitter is never going to be more popular than it is now. If it can’t make a profit at the peak of its popularity, when will it ever happen? And guess what? ABC News says that Twitter actually just reported a decline in revenue for the most recent quarter: "Twitter has never turned a profit, and for the first time since going public in 2013, it reported a decline in revenue from the previous year. Its revenue was $548.3 million, down 8 percent. Net loss was $61.6 million, or 9 cents per share, compared with a loss of $79.7 million, or 12 cents per share, a year earlier." The only reason why financial black holes such as Twitter can continue to exist is because investors have been willing to pour endless amounts of money into them, but now that bubble is starting to burst.
In his most recent article, Simon Black discussed how Silicon Valley investors are starting to become more cautious because so many of these “unicorns” are now going bust. One of the examples that he cited in his article was a company called Clinkle: "(Given that investing in an early stage company is high-risk, investors might provide a few hundred thousand dollars in funding, at most. Clinkle raised $25 million.) The company went on to burn through just about every penny of its investors’ capital. There were even photos that surfaced of the 21-year old CEO literally setting bricks of cash on fire. At the end of the farce, Clinkle never actually managed to build its supposedly ‘world-changing’ product, and the website is now all but defunct."
Most of you may have never even heard of Clinkle, but I bet that you have definitely heard of Netflix. Netflix has revolutionized how movies are delivered to our homes, and that revolution helped drive movie rental stores to the brink of extinction. There is just one huge problem. It turns out that Netflix is losing hundreds of millions of dollars: " Netflix might be my favorite example. The company’s most recent earnings report for the period ending March 31, 2017 shows, yet again, negative Free Cash Flow of MINUS $422 million. Not only is that a record loss, it’s 62% worse than in Q1/2016, and over twice as bad as Q1/2015. Netflix just keeps losing more and more money. But even though Netflix is losing money at a pace that is exceedingly difficult to imagine, investors absolutely love the company." I just checked, and at this moment Netflix has a market cap of 68.4 billion dollars.
Sometimes I just want to scream because of the absurdity of it all. Companies that are losing hundreds of millions of dollars a year at the peak of their popularity should not be worth billions of dollars. Nobody can possibly argue that these enormously inflated stock prices are sustainable. Just like with every other stock market bubble in our history, this one is going to burst too, and I have been warning about this for quite a long time.
But for the moment, the naysayers are having their time to shine. Despite the fact that U.S. consumers are 12 trillion dollars in debt, and despite the fact that corporate debt has doubled since the last financial crisis, and despite the fact that the federal government is 20 trillion dollars in debt, they seem to be convinced that this irrational stock market bubble can keep inflating indefinitely. Perhaps they can all put their money where their mouth is by pouring all of their savings into Twitter, Netflix and other tech company stocks. In the end, we will see who was right and who was wrong.”
- http://theeconomiccollapseblog.com/
◆
Insanity, stupidity, who knows what to call it anymore.
But then at Christmas along came this:
"Looking for a unique Christmas gift for that special somebody (or the geologist in your life)? Nordstrom has just what you need with a suave, 21st Century update of the Pet Rock known as a "medium wrapped leather stone" that costs $85.
For a mere $85 at Nordstrom, this unique rock,
or "medium wrapped leather stone," can be yours.”
“Choose this over food,” wrote one reviewer. “As a single mother, it is often difficult to put food on the table for my 5 children. However, when I saw this piece of rock, I couldn’t help it but to purchase this item. Yes, no one in my family will eat this month, however I have a piece of rock. I can’t believe the rock is made by hand too! I was always told rocks were made through thousands of years of erosion, guess I was wrong.”
And they sold out!
- https://nypost.com/
- http://www.today.com/
◆
I simply don't know the words for this level of incomprehensible idiocy. $85, for a rock...
But, in the spirit of obviously successful free market capitalism, I too will jump in!
SALE! Arizona Desert Dust! SALE!
Why settle for a mere rock when you can have rare and unique "Arizona Desert Dust"? For the special introductory price of a $100 donation to the blog, payable at the PayPal link on the sidebar, we'll send you a 2 oz. vial of genuine beige "Arizona Desert Dust", authenticity guaranteed! And for a limited time we'll double your order for only $200! Such a deal! But hurry, quantities are limited by the size of the desert! Get your rare "Arizona Desert Dust" now, be the envy of your friends and neighbors! Be sure to leave your name and address shipping information in the PaylPal message to insure prompt order processing! Hurry, this offer won't last! Satisfaction guaranteed! Offer not available in stores, order now!
Words fail me sometimes at the astounding depths of human stupidity... lol
- CP
“Have We Just Reached Peak Stock Market Absurdity?”
by Michael Snyder
“Have you ever wondered how tech companies that have been losing hundreds of millions of dollars year after year can somehow be worth billions of dollars according to the stock market? Because I run a website called “The Economic Collapse“, there are naysayers out there that take glee in mocking me by pointing out how well the stock market has been doing. This week, the Dow is flirting with 21,000 and the Nasdaq crossed the 6,000 threshold for the first time ever. But a lot of the “soaring stocks” that have been fueling this rally have been losing giant mountains of money every single year, and just like the first tech bubble this madness will eventually come to an end in a spectacular fiery crash in which investors will lose trillions of dollars.
Anyone that cannot see that we are in the midst of an absolutely insane stock market bubble simply does not understand economics. Every valuation indicator that you can possibly point to says that we are in a bubble of epic proportions, and history teaches us that all bubbles inevitably come to an end at some point.
Earlier today, I came across an article by Graham Summers in which he persuasively argued that the price to sales ratio indicates that stock prices are far more inflated than they were just prior to the great stock market crash of 2008: "Sales cannot be gimmicked. Either money comes in the door, or it doesn’t. And if a company is caught messing around with its sales numbers, someone is going to jail. For this reason, Price to Sales is perhaps the single most objective and clear means of measuring stock valuations. This metric, above all others, you can point to and say, “this is definitively accurate and has not been messed with.” On that note, as Bill King recently noted, today the S&P 500 is sporting a P/S ratio that is massively higher than it was in 2007 and is only marginally lower than it was during the Tech Bubble (the single largest stock bubble of all time for most measures)."
To me, looking at profitability is even more important than looking at sales. Large tech companies such as Twitter certainly have lots of revenue coming in, but many of them are deeply unprofitable. In fact, Twitter has never made a yearly profit, and over the past decade it has actually lost more than 2 billion dollars. But despite all of that, investors absolutely love Twitter stock. As I write this article, Twitter has a market cap of 11.5 billion dollars.
How in the world is that possible? How can a company that has never made a single penny be worth more than 11 billion dollars? Twitter is never going to be more popular than it is now. If it can’t make a profit at the peak of its popularity, when will it ever happen? And guess what? ABC News says that Twitter actually just reported a decline in revenue for the most recent quarter: "Twitter has never turned a profit, and for the first time since going public in 2013, it reported a decline in revenue from the previous year. Its revenue was $548.3 million, down 8 percent. Net loss was $61.6 million, or 9 cents per share, compared with a loss of $79.7 million, or 12 cents per share, a year earlier." The only reason why financial black holes such as Twitter can continue to exist is because investors have been willing to pour endless amounts of money into them, but now that bubble is starting to burst.
In his most recent article, Simon Black discussed how Silicon Valley investors are starting to become more cautious because so many of these “unicorns” are now going bust. One of the examples that he cited in his article was a company called Clinkle: "(Given that investing in an early stage company is high-risk, investors might provide a few hundred thousand dollars in funding, at most. Clinkle raised $25 million.) The company went on to burn through just about every penny of its investors’ capital. There were even photos that surfaced of the 21-year old CEO literally setting bricks of cash on fire. At the end of the farce, Clinkle never actually managed to build its supposedly ‘world-changing’ product, and the website is now all but defunct."
Most of you may have never even heard of Clinkle, but I bet that you have definitely heard of Netflix. Netflix has revolutionized how movies are delivered to our homes, and that revolution helped drive movie rental stores to the brink of extinction. There is just one huge problem. It turns out that Netflix is losing hundreds of millions of dollars: " Netflix might be my favorite example. The company’s most recent earnings report for the period ending March 31, 2017 shows, yet again, negative Free Cash Flow of MINUS $422 million. Not only is that a record loss, it’s 62% worse than in Q1/2016, and over twice as bad as Q1/2015. Netflix just keeps losing more and more money. But even though Netflix is losing money at a pace that is exceedingly difficult to imagine, investors absolutely love the company." I just checked, and at this moment Netflix has a market cap of 68.4 billion dollars.
Sometimes I just want to scream because of the absurdity of it all. Companies that are losing hundreds of millions of dollars a year at the peak of their popularity should not be worth billions of dollars. Nobody can possibly argue that these enormously inflated stock prices are sustainable. Just like with every other stock market bubble in our history, this one is going to burst too, and I have been warning about this for quite a long time.
But for the moment, the naysayers are having their time to shine. Despite the fact that U.S. consumers are 12 trillion dollars in debt, and despite the fact that corporate debt has doubled since the last financial crisis, and despite the fact that the federal government is 20 trillion dollars in debt, they seem to be convinced that this irrational stock market bubble can keep inflating indefinitely. Perhaps they can all put their money where their mouth is by pouring all of their savings into Twitter, Netflix and other tech company stocks. In the end, we will see who was right and who was wrong.”
- http://theeconomiccollapseblog.com/
◆
Insanity, stupidity, who knows what to call it anymore.
But then at Christmas along came this:
"Looking for a unique Christmas gift for that special somebody (or the geologist in your life)? Nordstrom has just what you need with a suave, 21st Century update of the Pet Rock known as a "medium wrapped leather stone" that costs $85.
For a mere $85 at Nordstrom, this unique rock,
or "medium wrapped leather stone," can be yours.”
“Choose this over food,” wrote one reviewer. “As a single mother, it is often difficult to put food on the table for my 5 children. However, when I saw this piece of rock, I couldn’t help it but to purchase this item. Yes, no one in my family will eat this month, however I have a piece of rock. I can’t believe the rock is made by hand too! I was always told rocks were made through thousands of years of erosion, guess I was wrong.”
And they sold out!
- https://nypost.com/
- http://www.today.com/
◆
I simply don't know the words for this level of incomprehensible idiocy. $85, for a rock...
But, in the spirit of obviously successful free market capitalism, I too will jump in!
SALE! Arizona Desert Dust! SALE!
Why settle for a mere rock when you can have rare and unique "Arizona Desert Dust"? For the special introductory price of a $100 donation to the blog, payable at the PayPal link on the sidebar, we'll send you a 2 oz. vial of genuine beige "Arizona Desert Dust", authenticity guaranteed! And for a limited time we'll double your order for only $200! Such a deal! But hurry, quantities are limited by the size of the desert! Get your rare "Arizona Desert Dust" now, be the envy of your friends and neighbors! Be sure to leave your name and address shipping information in the PaylPal message to insure prompt order processing! Hurry, this offer won't last! Satisfaction guaranteed! Offer not available in stores, order now!
Words fail me sometimes at the astounding depths of human stupidity... lol
- CP
Apr 29, 2017 17:28:09 #
pafret wrote:
Anyone that cannot see that we are in the midst of an absolutely insane stock market bubble simply does not understand economics. Every valuation indicator that you can possibly point to says that we are in a bubble of epic proportions, and history teaches us that all bubbles inevitably come to an end at some point.
All 'bubbles' do, eventually, come to a very sticky end. But (oh, yes, there's always a 'but'), up to the point of popping, bubbles are highly profitable to those astute enough to get in early and get out before the inevitable crash. I believe that what we're seeing now in the stock market is the absolute mother of all bubbles. The last ten years have seen Federal Reserve currency inflation beyond insanity. Most of this new currency has been sitting in bank vaults around the world as a hedge, enabling the fractional reserve banking model to continue unabated. Since many of the debts those reserves were supposed to cover have been paid off, much of that currency is excess to requirements and is being invested in stocks and bonds where bankers are looking at a very serious payday. They know it's a bubble, because they caused it.
Here's the kicker: Stock prices are rising at such astronomic rates simply because the money in the market is being devalued by the addition of so much extra money being pumped in. As more and more money finds its way into the markets, the prices will rise because more money is chasing the same number of investments. Actual stock values may be rising, falling or doing nothing. It's impossible to know. So, yeah, it 'looks' like the stock markets are in a serious bull run, but in reality, these prices reflect so much more money being invested than previously, and not better stock values.
When the major players (hedge funds, bankers, etc.) begin taking their profits and selling off stocks and shares, this bull market is going to go south in a hurry. Expect to see 20- or 30% pared off in a single day. And then expect to see the end of the Federal Reserve System fiat experiment as we know it. It's coming, sure as there's eggs in your pudding. The only ones who know when are the ones with the lion's share of the money in the markets, because they'll be the ones who trigger the crash. Again.
Apr 29, 2017 17:59:37 #
Those staying out of the market are the stupid ones. We had heard this story from the bottom in March of 2009 all the way up to Dow 21,000. Those who stayed out, lost out on big money. You have to be able to ride out the crashes, but to stay out completely is stupid.
Apr 29, 2017 18:05:06 #
son of witless wrote:
Those staying out of the market are the stupid ones. We had heard this story from the bottom in March of 2009 all the way up to Dow 21,000. Those who stayed out, lost out on big money. You have to be able to ride out the crashes, but to stay out completely is stupid.
Sounds like Warren Buffett's advice, 'in it for the long haul'.
I would much prefer to get in after the crash, buy up the bargains, see the next crash coming and bail before it hits. Wash, rinse, repeat. Holdings grow a lot faster that way.
Apr 29, 2017 20:36:37 #
Larry the Legend wrote:
Sounds like Warren Buffett's advice, 'in it for the long haul'.
I would much prefer to get in after the crash, buy up the bargains, see the next crash coming and bail before it hits. Wash, rinse, repeat. Holdings grow a lot faster that way.
I would much prefer to get in after the crash, buy up the bargains, see the next crash coming and bail before it hits. Wash, rinse, repeat. Holdings grow a lot faster that way.
Well you tell me when to do that. I will admit to being blindsided by the 2007 crash. However, at least part of the reason I did not see it coming was that it was caused by the shenanigans in the real estate market. I do not get into investments I do not understand and there was no way I knew anything about mortgage backed securities and collateralized debt obligations, which were the toxic brew which took down the economy. They took down the stock market because stocks were the primary assets that could easily be sold for cash. The big boys had to sell stocks to cover their real estate disasters and the whole process fed on itself. For a change stocks did not crash because of overvalue in the stock market.
I watched my 401 k lose more than 40% with no end in sight. I had been jumping in and out prior to the crash and jumped in during the last dip. Unfortunately for me I caught the falling knife. It just kept going down. It took all of my courage to stay in 2007-09, but I knew if I sold like all of my co-workers were doing I would take real losses , not just paper ones. So I decided to just keep buying on the way down. I figured if it did not turn around eventually it did not matter because then the US would no longer exist as a country. Fortunately I was right and I made a killing since the bottom.
As far as another crash coming, I will give you my reasons against it. Now I believe we will have mini crashes, short term emergencies. Also there could be some unknown crisis looming out there unrelated to the stock market, like in 2007. As far as the stock market crashing because of over value we are not there yet. As long as there are people predicting a crash, that keeps some people out and restrains the bubble. Only when everyone is in and most experts see no problem, then get worried because there is no new money that can come in if a panic is triggered.
With your strategy verses mine, you will sit a very long time on the side lines waiting for disaster, and then you will not know which of the false bottoms you see are real. In the mean time like the last 8 years I will have made good money. Granted I may lose a lot in the next crash, but not as much as you will have failed to make not investing in stocks.
If you truly can see the crashes and the upturns before they happen and take advantage of them, you are the smartest man who ever lived. I look forward to you posting your predictions because I know I can't do it, and if you can I want to get rich too.
Apr 29, 2017 21:19:57 #
son of witless wrote:
Well you tell me when to do that. I will admit to ... (show quote)
Put a date on it? Not likely! If I were privvy to the inner workings of the banks and hedge funds who make these big market moves, I'd be as rich as the 'Oracle of Omaha'. Looking back, it usually takes two or three months for a really good bubble to pop, once the market euphoria starts setting in. That puts us about a month or so away from the next bust. We'll see. Right now I'm looking at industrial real estate and new and used auto finance as two major overachievers on the block. I really thought the problems Deutche Bank was seeing last year would trigger something pretty major, but then the Bundesbank went and bailed them out. Oh well, anything can happen at any time.
Apr 29, 2017 22:42:36 #
Larry the Legend wrote:
Put a date on it? Not likely! If I were privvy t... (show quote)
Again, it comes down to buyers and sellers. As long as everyone is not in, the bubble is not in danger of popping. With Congress still screwing around on Obamacare repeal and tax cuts, not everyone who has money is in. Company earnings are fueling the Bull Market. I believe we are still in the early stages of economic recovery. There is an awful lot of money sloshing around looking for a safe home. That means new buyers and new money can always come in to take advantage of dips in the market.
Real estate bubbles are easier to see. I remember before 2007 watching real estate humming along and being in awe of what could possibly be holding up that market. I saw people moving into homes that made no sense because of their income levels. I saw people flipping homes and wondering who was buying them in their over inflated states. I knew something was wrong, but it went on for so long that I figured history was wrong. I should have seen it coming, but I did not. After the fact, a lot was obvious, but again they finally ran out of new buyers.
I think that right now real estate and the stock market are not yet over valued. I do not do real estate, but considering that new homes are not being built in huge numbers yet despite the high prices being paid for existing homes, I think real estate is like stocks and good for a number of years.
I know of a home that was in bad shape, that had been left as part of an estate. I was amazed at the price the sellers got, but the buyers rehabilitated the house and I assume will do very well.
In Trump's second term the danger of bubbles in residential real estate and stocks will be more likely than now. I think that now is still good to make money. The only bubble that scares me presently is commercial real estate as in retail stores. There was way too much construction in that sector even while the economy was soft the last 8 years. With Amazon destroying the box stores I think there is the danger. Shopping malls are being mauled.
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