On November 22nd 2020, we were putting a piece highlighting the. excessive bullishness in the financial markets, based on surveys of investors and on the extraordinary levels of activity by retail investors in the option markets.
2020 has been a crazy year and rarely has the disconnect between the reality of the economic background and the behaviour of assets been so great.
Bond markets have been propelled to dangerously over valued levels by the artificial Quantitative Easing of Central Banks and equities have been propelled to extremes never seen in the past by a new category of investors that do not care about fundamentals, valuations or business prospects as testified by the behaviour of companies like TESLA or the unprecedented premiums at which recent IPOs such as DoorDash or AirBNB opened, taking both their investment banks and their board of directors by surprise.
AirBNB reached a valuation of US$ 100 Billion on the first day of quotation, a company that never made one cent of profits since not started its operations 10 years ago and that will lose 1.5 Billion Dollars this year.
DoorDash, the food delivery online service commands a market capitalisation of US$ 55 Billion for a company that will barely make 100 million Dollars of profits next year, an earnings yield of 0.18 % ..
TESL A just sold another 5 Billion Dollar of its overvalued stocks to investors who don’t even have a clue on why it should be worth as much as all the traditional car manufacturers put together, forgetting that these have the firepower and the technological knowhow to shift their business model towards EVs very quickly and become huge competitors to TESLA.
And the bubble in electric Vehicles is everywhere to see with much smaller companies being bid up to irrational levels.
Here is what the Wall Street Journal is writing about three IPOs that took place in the past few days.
“DoorDash Inc. delivered for investors, surging 86% in its stock-market debut on Wednesday. The seven-year-old company ended its first trading day valued at about $71.8 billion, higher than many of the restaurant companies that depend on its couriers. The San Francisco-based company has never turned an annual profit, but a surge in demand during the Covid-19 pandemic has helped to transform it.”
“A pandemic that brought global travel to a standstill couldn’t halt Airbnb Inc.’s hotly anticipated public debut. Like many Silicon Valley startups that are bleeding red ink when they go public, Airbnb has never posted a full-year profit. Its loss last year was greater than its losses in the previous four years combined.”
“Shares of C3.ai Inc. soared on their first day of trading. The artificial-intelligence software company’s stock closed Wednesday at $92.49, more than double the IPO price. Like other startups to hit public markets, C3.ai isn’t profitable. The company had a net loss of $69.4 million on revenue of $156.7 million for the fiscal year, ended April 30, according to its S-1 filing with the Securities and Exchange Commission.”
Over the past year, there have been 88 IPOs that showed a negative number on the net income line. That exceeds all other rolling one-year periods except for 2000.
The median age of a company going public over the past year is barely 5 years old. The median age of a company going public over the past year is barely 5 years old.
Investors are punting the markets like never before …
When risk appetite is high, equity investors are willing to accept ideas and concepts in lieu of revenue and profits and this is exactly what is happening today. They are throwing cash at concepts instead of investing on rationales, hoping that another idiot will bail them out at a higher price… the hallmark of bubbles indeed…
Over the past few months, speculation has accelerated fed by ever rising markets and investment banks trying to catch up by revising their targets higher.
Investors have been climbing the proverbial wall of worry and are now extremely long equities.
Only pension funds and long term investors are worried and continue to be.
The smart money has been aggressively selling into this top since early September, for over three months now. The selloff into the more dramatic February 2020 top was nothing like this. The last time this occurred was during a very similar 4-month steep selloff around the early 2000 top of the first tech bubble.
The other segment that is far less optimistic is insiders themselves.
Elon Musk and Jeff Bezos are right to sell their overvalued shares hand over fist …
The dumb money, or small trader, by contrast is buying record call options on stocks as a percentage of trading. The bull market of 2003–2007 saw an advance from 4% to 9%. This run, at 4% in 2009, has exploded to 21.6% thus far, a new record—and most of that has happened since the March 2020 crash bottom. The last time such options were as high as 20% was, again, in early 2000—at the top of the first major tech bubble peak.
The Haver Analytics Panic/Euphoria Index has gotten above a reading of 0.55 before only once and that was in early 2000. It was then at an off-the-charts level of 1.50, and it has just gotten there again. This reading is euphoric—not just highly overvalued!
Whichever way one looks at things, the writing is on the wall and all indicators are flashing bright red warnings signals…
The world’s Central banks are making the same mistake Alan Greenspan did in his Y2K days of irrational exuberance, allowing a massive speculative bubble of historical proportions to develop without intervening.
Once again, and as was the case in 1927, 2000, and 2007 the excesses of the American free wheeling capitalism will ultimately cause a disaster, whether now or in early 2021.
Trees don’t rise to the sky.
As the following table shows. the Nasdaq has risen by 35 % in 2019 and another 37 % to date in 2020…
Granted, it rose by 85 % in 1999 after having risen by 39 % in 1998, but the macro-economic conditions and profitability of corporations then were much better then than they are today…
And then the index collapsed, falling 80 % in the process.
2020 is ending with a bang for the markets and speculators …
But 2021 could be far less rosy…
No one knows how far irrational exuberance will last for, but one thing is for sure, when equity markets do turn, there will be blood on the streets.
We see two important milestones for the markets in the coming weeks.
December 14 is the vote of the electoral college in the US that will formally nominate Joe Boden as the next President of the United States of America… That is if the Supreme Court doe not invalidate the elections or the mail-in ballots in the mean time..
On January 5, Georgia will see the runoff of the two Georgia senatorial seats that were inconclusive in November, with a likelihood that the US Senate could become Democrat…
And bonds may be the catalyst …
For the first time in nearly 2 years, the yield on 10-year US Treasury notes has undergone a “Golden Cross”, with its 50-day moving average crossing above its 200-day average.
The development of a Golden Cross tended to lead to even higher rates in the months ahead, and ring rates will make equity valuations far less easy to justify.
We can only advise investors to bail-out of equity markets and cash in their profits for the year…
They may miss a little bit more upside from now till Dec 31st, but the risks are not worth the gains.
Investors should be safely invested in Cash, Gold and Treasury bills at this stage.
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