MorningWord 11/4/13: If you have been tuned into the financial press over the last week there appears to be a bubble forming in labeling the U.S. stock market, well, a bubble. Usually the comment is finished off with a question mark, so for the most part we are still in the exploratory bubble phase, but it couldn’t possibly be a bubble if the financial punditry were to uniformly identify it as such, right?
In just the last few days I have noted the following headlines (to name a few):
CNBC: Twitter frenzy sparks dotcom bubble memories
CNBC: For signs of bubble, look no further than LBOs
Bloomberg: BlackRock’s Fink Says There Are ‘Bubble-Like Markets Again’
WSJ: Bubble Trouble for Electric-Car Maker Tesla
BI: Here’s The Evidence That The Tech Sector Is In A Massive
While many readers know that I am tad skeptical as to the reasons why equities are trading where they are, I can’t tell you that living and trading through the dotcom bubble of the late 1990s, or as an active participant in the real estate bubble of the mid 2000s that what we are seeing now by any means resembles the sort of all out reckless speculation of those bubbles past, we merely have pockets of over exuberance among a few sectors (or even a few dozen stocks) that appear to be attracting a disproportionate amount of headlines. If it weren’t for the eye popping ytd performance and the obscene valuations of a handful of really expensive U.S. stocks like TSLA, NFLX, FB, AMZN, YELP, P, LNKD, FSLR, SCTY, WFM, SBUX & CMG, I am not sure the “B word” would be thrown around the way it has of late given what appears to be continued accommodation by the Fed. That being said the price action in some stocks that have not generally been associated with investor over enthusiasm like BA, FDX & NOC are clearly adding to fears that a virus is spreading.
And then there is the issue of new equity issuance reaching its highest levels since 2007, which could be crescendoing into year end, but highlighted this week by TWTR’s IPO, per the WSJ:
October was the busiest month for U.S.-listed IPOs since 2007, with 33 companies raising more than $12 billion. The coming week is slated to bring a dozen more initial offerings, including Thursday’s expected $1.6 billion stock sale by Twitter Inc., the biggest Internet IPO since Facebook Inc. FB -0.91% ‘s $16 billion sale in May 2012.
The 190 U.S.-listed IPOs this year have raised $49.2 billion, more than the $45 billion raised by the 132 deals during the same period in 2012.
This issuance in and of itself does not speak immediately to a bubble for the newest equity on the block, especially when you consider the years of low issuance that built up post the financial crisis, but if I asked most investors if they would rather buy TSLA here up 400% plus on the year, or Twitter (TWTR) on its opening print Wednesday morning after its IPO up 100%, I suspect the answer would uniformly be to buy TWTR (which is what I would do). Why? For one, Hope! Hope that it is the next TSLA, up 400%, cause it has no history, there is no support or resistance, it is pure speculation, we know the valuation is nuts, and the revenue model still largely unproven, but the Fed ain’t leaving interest rates at zero so we will buy bonds…..you get my point, animal spirits, good ol fashioned risk taking.
Are these some of the foundations of a bubble forming? no doubt about it, but I don’t think you have to get that granular and look to specific stocks or sectors. The Fed’s policies have created what some would call dueling bubbles in bonds and equities and when the QE jig is up (either by the Fed’s own doing, or by the fact it is no longer effective) we could see 2 asset class collapses if things don’t go exactly as planned, but come on, to steal a phrase from Indiana Jones, the FOMC is obviously “making this up as they go along”, there is no exit manual.
In the mean time, equity vol is very low, keep raising your stops, buy protection if an when it helps you sleep at night (last week we outlined a couple such strategies where you are giving up about 1% btwn now and year end here), sell calls against long stock to add a little yield and create a downside cushion to holdings, or merely consider replacing long stock with calls or call spreads and thus define your risk with most equity markets within a couple % of all time highs.
SO maybe we are in an investment Bubble, I have no clue, but if every major financial news service is able to identify it, it is likely to go on longer than we think, rarely do the pundits ring the bell at the top!