B-U-B-B-L-E?

Greenlight Capital Inc. hedge-fund manager David Einhorn came out yesterday and joined others in warning about a technology bubble in the current stock market. According to Einhorn:

There is a clear consensus that we are witnessing our second tech bubble in 15 years. What is uncertain is how much further the bubble can expand, and what might pop it.

In November of 2013, asset management firm GMO LLC came out with a similar message:

The U.S. stock market is trading at levels that do not seem capable of supporting the type of returns that investors have gotten used to receiving from equities.

Personally, I certainly believe that there are some signs that point to a potential bubble:

  1. 2013 was a great year for investors. The S&P 500 and the DJIA both returned an average of 30% for investors, their biggest jumps since over a decade ago. However, real GDP in the United States only grew around 2%, leading us to wonder if stock market valuations may be detaching itself from corporate earnings.
  2. Recent valuations of Silicon Valley companies have been mind-boggling high. For example, Facebook's purchase of WhatsApp for $19 billion and Oculus VR for $2 billion, Snapchat's valuation at $3 billion, and Airbnb's valuation at $10 billion.
  3. The Shiller P/E ratio, which is a smoothed out P/E/ ratio based on inflation-adjusted earnings from the previous 10 years, is currently valued at 25.32 against a long-term average of 16.5.

Although there is no way to know if the markets will continue to go up or down in the short-term, signs do show that the U.S. stock market, especially technology stocks, may be overvalued. Despite the fact that it may be difficult to find good bargains, the current market is certainly a good environment for short positions, and this is exactly what Einhorn has done.

Is it time to find our margin of safety abroad? How cautious should we all be of this bubble? Thoughts monkeys?

 
the_essential:

Greenlight Capital Inc. hedge-fund manager David Einhorn came out yesterday and joined others in warning about a technology bubble in the current stock market. According to Einhorn:

There is a clear consensus that we are witnessing our second tech bubble in 15 years. What is uncertain is how much further the bubble can expand, and what might pop it.

In November of 2013, Asset Management firm GMO LLC came out with a similar message:

The U.S. stock market is trading at levels that do not seem capable of supporting the type of returns that investors have gotten used to receiving from equities.

Personally, I certainly believe that there are some signs that point to a potential bubble:

  1. 2013 was a great year for investors. The S&P 500 and the DJIA both returned an average of 30% for investors, their biggest jumps since over a decade ago. However, real GDP in the United States only grew around 2%, leading us to wonder if stock market valuations may be detaching itself from corporate earnings.
  2. Recent valuations of Silicon Valley companies have been mind-boggling high. For example, Facebook's purchase of WhatsApp for $19 billion and Oculus VR for $2 billion, Snapchat's valuation at $3 billion, and Airbnb's valuation at $10 billion.
  3. The Shiller P/E ratio, which is a smoothed out P/E/ ratio based on inflation-adjusted earnings from the previous 10 years, is currently valued at 25.32 against a long-term average of 16.5.

Although there is no way to know if the markets will continue to go up or down in the short-term, signs do show that the U.S. stock market, especially technology stocks, may be overvalued. Despite the fact that it may be difficult to find good bargains, the current market is certainly a good environment for short positions, and this is exactly what Einhorn has done.

Is it time to find our margin of safety abroad? How cautious should we all be of this bubble? Thoughts monkeys?

My two cents:

1) It's possible equities could have been undervalued prior to 2013. I do agree that either this was the case or that markets are more overvalued today. The fundamentals haven't changed enough for both to be true. 2) Definitely think tech stocks are overvalued as a whole. I really don't understand how these have gotten so out of hand given we just experienced a tech bubble 10-15 yrs ago. 3) Tech, along with financials, constitute the largest part of the S&P so, to the extent that the broader index looks overvalued (which it does a bit), I think this could just be a reflection of that sector alone. Also, growth expectations are better than years past, which would help to account for this.

 

I think some people underestimate the extent of the last tech bubble. I think we may see a correction in the valuation of tech companies in the markets, but we are nowhere near the tech bubble in 1999. Consider this: The NASDAQ has yet to reach its peak more than 14 years later (actually, it hasn't even been close). Start up valuations have soared, yes, primarily due to a lot of dry powder in VC funds and thus increased competition. However, the requirements to get VC fundings are still extremely high (as tech founders will tell you) - in 1999, you could raise money if you had ".com" in your name.

I guess it depends on your definition of a bubble, but comparing it to 1999 is, in my opinion, a vast overreaction.

 
TheSanchize:

I think some people underestimate the extent of the last tech bubble..

This.

The insanity of the market in 1999 can hardly be overstated. Anything with ".com" in the name skyrocketed, many new valuation terms were invented like 'eyeballs', 32 year old sell side equity analysts covering internet stocks were making $5 million per year, some companies traded at thousands per revenue (revenue!), and on and on. It wasn't just Internet stocks that had crazy valuations, but firms like MSFT, INTC, Dell, CPQ, TXN, CSCO ($600 billion mkt cap!), and other companies that made money selling real products and servcices.

Some of these 'companies' had websites that could be better built by someone with no tech skills using a template for $50. Companies like that had $1 billion + market caps.

Truth is that if this is a bubble, get as long as you can right now because this is early stage and this has a lot of inflating to go. This would be like 1997. Personally, I don't consider this a bubble. Certainly a small amount of app companies are valued ridiculously, but it's not pervasive across the entire market.

 

we are overdued for a market correction. like the perennial elephant in the room, we are all waiting for that to happen. In the meantime, I'm trying to stay educated on the matter and keep my powder dry for when that does happen.

It's more of a question of when, than if.

i'm not smart enough to do everything, but dumb enough to try anything
 

Short term I would like to set up a Shorted tech portfolio - I really believe FB, ZNGA, KING,LNKD, etc etc are all due to for a tumble.

I believe at the end of the day, if you don't produce something that is tangible/material (unlike AAPL, MSFT), or something that is not necessary (unlike GOOG, ORCL) then the valuation of your company can drop as fast as it went up.

 
TopChedder:

Short term I would like to set up a Shorted tech portfolio - I really believe FB, ZNGA, KING,LNKD, etc etc are all due to for a tumble.

I believe at the end of the day, if you don't produce something that is tangible/material (unlike AAPL, MSFT), or something that is not necessary (unlike GOOG, ORCL) then the valuation of your company can drop as fast as it went up.

I'd add SIVB to the list.

 
BTbanker:

Boom

Plus I can't keep track of all the assholes leaving banking and PE to waste 2 years of their life making another app/website we don't need.

Yeah what are they DOING with their lives? Why on earth would they join a tech start-up and actually create something when they could be making super important powerpoints and zoning out on conference calls all day?

The nerve.

 

Everyone keeps blabbing about the bubble, the top, etc. Well then what is your target for the correction? Everyone says 'well we don't know.' How is it a bubble then and not normal market activity or a new normal? Look at the DJIA, they would have said it's a bubble since the 60s.

If the glove don't fit, you must acquit!
 
Best Response

0% chance it's a bubble. If history has taught us anything, it's A) that it doesn't repeat itself, and B) that artificially low interest rates don't push money into places they don't belong through malinvestment. Besides, 700+ P/Es makes perfect sense.

 

I don't think it's fair to call it a tech bubble. Some/many tech companies definitely have a bubble aspect. On the whole though, tech is in no way a bubble. That would be an absurdly shortsighted view.

 

Yeah, Greenlight is 18,44% in Apple and 14,22% in Micron technology and it's a bubble. Then why would they invest in it? My bullshit sense is tingling.

You killed the Greece spread goes up, spread goes down, from Wall Street they all play like a freak, Goldman Sachs 'o beat.
 

If shit hits the fan they all are going to fall no matter what P/E they have.

You killed the Greece spread goes up, spread goes down, from Wall Street they all play like a freak, Goldman Sachs 'o beat.
 

Just because there have been a handful of arguably highly-overvalued acquisitions/IPO's doesn't mean there is a bubble, or even that the market is overvalued. The Schiller index is useless without any context, so pointing to it alone doesn't mean anything at all. And regarding a tech bubble, it just doesn't exist. One could argue that the sector is overvalued but that doesn't mean there is a bubble.

 

He's shorting a basket of stocks that he thinks will collapse. By creating some hype around the bubble and announcing that he, representing a prominent investment firm, is betting against the bubble might actually create the loss of confidence in the market to help in fact pop the bubble and help realize his shorts.

If any of you are interested, Ben Horowitz added some comments here: http://news.rapgenius.com/David-einhorn-we-are-witnessing-the-second-te…

The error of confirmation: we confirm our knowledge and scorn our ignorance.
 

I had a talk about this with my PM today. US Markets are not crazily overvalued as a whole given the new corporate margins. And earnings. Also see Warren Buffet's favorite indicator (US CAP/GDP) - shows that the markets are slightly - moderatively overvalued. Nowhere near bubble levels.

That being said the tech space is getting overvalued because of new names. We had a discussion about old tech names (CSCO, AAPL, MSFT, IBM) vs new tech name (FB, TWTR, LNKD). I think there needs to be a differentiation among the tech names.

 
the_essential:
  • 2013 was a great year for investors. The S&P 500 and the DJIA both returned an average of 30% for investors, their biggest jumps since over a decade ago. However, real GDP in the United States only grew around 2%, leading us to wonder if stock market valuations may be detaching itself from corporate earnings.
  • "GDP growth and stock market returns do not have any particularly obvious relationship, either empirically or in theory."

    Source: http://www.thereformedbroker.com/wp-content/uploads/2012/08/Explaining_…

    I love that article I linked to.

     

    While I think at this level the market needs to be looked at with caution so investors don’t continue to amplify the risk of bubbles within the equity market, I don’t think we are truly at this point in a “bubble” market. Perhaps we are in what I think could be called a “pre-bubble” market, specifically within the technology sector, but most certainly there is just as much compelling evidence to suggest the market is at least somewhat appropriately priced.

    1. Yes the market has had massive gains since the market bottomed out in early 2009 (about 170% in total in the S&P). But if you track the gain from the pre-crash high in 2007, the total gain is only 20.40%, or about a 2.7% annual gain, a much more manageable rate.
    2. The estimated (by the WSJ) forward P/E ratio of the S&P is 15.70. The 50-year average P/E of the index is about 14 times earnings. If you remove the high inflationary period of the 1970’s and early 80’s, when the index’s earnings multiple fell to as low as 6, then the average rises to just under 16x. As reference, the S&P forward P/E ratio in the late 90’s early 2000’s reached as high as 21.
    3. Yes the Shiller PE ratio is on the higher side, but to be sure is nowhere near the 45x multiple it was during the 2000’s tech bubble. As someone previously mentioned, there should be scope attributed to this metric. The moving earnings average the current Shiller ratio weighs current prices against bottomed out profits across the board caused by the recession, independent of industry sector or the efficacy of company business. Thus I would say the current Shiller PE ratio may be somewhat inflated compared to more traditional economic climates. The Shiller PE ratio also hasn’t been entirely effective in forecasting all corrections or crashes (Ex. ’87 Black Monday). Jokingly, empirical evidence aside, if I recall, Shiller, and this he makes light of himself, was about 5 years too early in predicting both the tech bubble and housing bubble crashes, so perhaps we should be gearing up for a crash circa 2020.

    To be my own devil’s advocate, I would agree that there is some evidence to suggest that a frothier market has developed specifically in the venture capital/private technology sector. I’ve seen interviews and articles noting that previously successful early stage tech investors have become wary about the current valuations the market has set as precedent. I would also agree that a linear relationship could be drawn from frothiness in the VC/early stage market, to an active and Accretive IPO market, to a possible public technology bubble, hence my suggestion of a “pre-bubble market”. However, based on more market wide analyzes and data I still opine that there is room for capital gains in the current market place, however I would say that one should expect those gains to be backed by tangible, current fundamental value than high anticipated growth in the future.

     

    I live in the Bay Area, although I work in finance. Things are definitely optimistic (and crowded) here, but "bubble" implies a whole level of craziness that I am frankly just not seeing. I sense a lot of people in this thread hoping to feel some schadenfreude: I mean, are y'all mad our sector isn't the hot young thing anymore? Because I would argue that's a good thing... How many P/E "investors" do we need anyway?

    To wit:

    (1) Where is the DEMAND for technology equity coming from? To me, it seems to be coming primarily from two sources, neither of whom is your mom and dad:

    (A) Big, mature and public technology companies throwing off a fuck-ton of cash or with rich valuations themselves.

    (B) Private investors who look at the 5% return you can get in the high yield market investing in increasingly sketchy names (you want to talk about a bubble...), and think, "The fuck? I'm just going to throw some more dollars at my VC buddy. At least maybe there's a chance Apple might snatch up one of his companies."

    Now, demand from (A) seems fairly stable for a lot of companies. Where it might not be stable is for social media, since the elephant in the room is itself using richly valued equity as currency. Still, compare IPO issuance today versus '99. It's not close -- the demand isn't coming from public markets. That said, demand from (B) seems to be predicated at least in part on low interest rates for the foreseeable future, which necessarily increases the value of future earnings. That source of demand strikes me as less stable, but if you'd like to tell me when the Fed is going to raise rates then I'm all ears. I have a meeting with my portfolio manager tomorrow.

    (2) What's a "tech" company anyway? What do LinkedIn and Uber have in common, really? I mean other than the fact that they pay their engineers handsomely for 7 hour work days?

    Nominally, they are both tech companies, BUT really they're both just technology-enabled companies, one of which deals in social media and one of which deals in transportation. It's possible that the former tech subsector is a bit bubbly while the other isn't.

    (3) The cost to get a start-up up and running has NEVER been lower. Thanks to cloud technology, you can rent cheap servers that scale with your business. Thanks to modern web development techniques, a couple of developers can get a product up and running in no time. Which is to say: VC money goes a lot further today than it did in the past. And revenue-per-employee in the technology industry can be pretty damned high to boot. It's not like they're giving these guys money with no hope of getting it back.

    I would keep going, but I got to work at 4am and I'm fucking exhausted, so I'm not going to proof read this either.

    TL;DR: Don't be so worried -- or more likely so eager -- to see technology fall on its face. Envy just ain't a good look for you, baby.

     

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