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The Next Bubble Ė Donít Get Fooled Again
Steve Blank ^ | 06/17/2011

Posted on 06/17/2011 9:53:22 AM PDT by SeekAndFind

First, let us start with a definition of a tech bubble.

A tech bubble is the rapid inflation in the valuation of public and private technology companies that exceeds their fundamental value by a large margin. It is accompanied by the rationalisation of the new pricing, and then followed by a spectacular crash in value. (It also has the “smart money” investing early and taking profits before the crash.)

Bubbles are not new; we have had them for hundreds of years (the Tulip Mania, South Sea Company, Mississippi Company, etc.). And in the last decade, we have had the dot.com bust and the housing bubble. This tech bubble is unfolding just like all the other bubbles before it.

Today, the signs of the new bubble are the Linked-In initial public offering (IPO), Facebook’s stratospheric valuation and the rapid rise of early-stage startup valuation. Hiring technology talent in Silicon Valley is getting difficult, and the time it takes to drive across Palo Alto has tripled—all signs of the impending apocalypse.

Dr Jean-Paul Rodrigue, in the Department of Global Studies & Geography at Hofstra University, observed that bubbles have four phases; stealth, awareness, mania and blow-off. I contend that we are approaching the early part of the mania phase.

In the stealth phase, prescient angel investors and Venture Capitalists (VCs) start investing in an industry or market segment that others have not yet found. In the case of this bubble, it was social networks, consumer and mobile applications, and the cloud. VCs who understood the ubiquity, pervasiveness and ultimate profitability of these startups doubled-down on their investments. Long before others, they saw that these applications could have hundreds of millions of users with “off the chart” revenue and profits.

The awareness phase is where other later-stage investors start to notice the momentum, bringing additional money in and pushing prices higher. The Russian investment group, DST, is an example, with their $200 million investment in Facebook, at a $10 billion valuation, in 2009. This was followed by another $500 million investment (along with Goldman Sachs) in 2011, at a $50 billion valuation. Meanwhile, the bubble for “seed stage” startups began when Ron Conway’s Silicon Valley Angels and DST guaranteed every startup out of a YCombinator $150,000. And it was hammered home with Color—a startup without a product—raising $40 million, at a reputed $100 million valuation, from brand name VCs who should have known better. When they did launch their product, it was compared to boo.com, and entered the dot.com bubble hall of infamy. Meanwhile, smart VCs continue to invest in this segment and increase their ownership of existing companies. The technology blogs (TechCrunch, et al.) start cheerleading, and the general business press/blogs start paying attention. And all of the investors trot out explanations of “why—this time—everything is different”.

We have just entered the mania phase. The Linked-in IPO valued the company at $8.9 billion at the end of the first day of trading. It sent a signal that there is an irrational demand for tech IPOs. Silicon Valley startups are falling over each other to file their S-1 documents to go public.

Some precursors to the bubble happened when Chinese Internet companies listed on United States stock exchanges. In December 2010, Youku—the YouTube of China—went public, with a valuation of $4.4 billion at the end of the first day (on $58.9 million in 2010 sales). In May 2011, RenRen—the Facebook of China—had a first day valuation of $7.4 billion (on $76.5 million in 2010 sales).

Dr Rodrigue’s description of what happens next sounds familiar: “the public jumps in for this ‘investment opportunity of a lifetime’. The expectation of future appreciation becomes a ‘no brainer’…Floods of money come in creating even greater expectations and pushing prices to stratospheric levels. The higher the price, the more investments pour in. Unnoticed from the general public, the smart money as well as many institutional investors are quietly pulling out and selling their assets…Unbiased opinion about the fundamentals becomes increasingly difficult to find as many players are heavily invested and have every interest to keep asset inflation going.”

“The market gradually becomes more exuberant as ‘paper fortunes’ are made and greed sets in. Everyone tries to jump in and new investors have absolutely no understanding of the market, its dynamic and fundamentals…statements are made about entirely new fundamentals implying that a ‘permanent high plateau’ has been reached to justify future price increases.”

We are seeing this bubble unfold by the book.

No one doubts that social networks and web and mobile applications are reinventing commerce. Obviously, some of these companies will have hundreds of millions of customers, unprecedented revenue growth and great profits. Yet none of these companies have earned the valuations that they are receiving.

For all of these reasons, I believe this House should vote in favor of the motion before it.


TOPICS: Business/Economy; Computers/Internet; History; Society
KEYWORDS: action; affirmative; bubble; default; economy; facebook; facebookipo; feminism; stocks

1 posted on 06/17/2011 9:53:25 AM PDT by SeekAndFind
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To: SeekAndFind

bttt

“...On a short-term basis, major indices remain very stretched, expended and oversold to the downside. But again, oversold could stay oversold for a while. But I suspect the 200 day average could first provide the market with some sort of relief rally. Any rally should be sold as I BELIEVE THERE IS GOING TO BE MORE TIME AND PRICE IN THIS BEAR PHASE. ....”

Say Hello to the Bad Guy
http://www.tradingmarkets.com/stocks/commentary/say-hello-to-the-bad-guy-1577356.html
By Gary Kaltbaum | TradingMarkets.com | June 13, 2011 09:40 AM

Gary Kaltbaum is an investment adviser with over 25 years experience, and is a Fox News Channel Business Contributor. Gary is the author of The Investors Edge. Mr. Kaltbaum is also the host of the nationally syndicated radio show “Investors Edge” on over 50 radio stations. Gary is also editor and publisher of “Gary Kaltbaum’s Trendwatch”... a weekly and monthly technical analysis research report for the institutional investor. If you would like a free trial to Gary’s Daily Market Alerts click here.

It should now be obvious to you why I have been more cautious over the past few weeks. During that time, I outlined for you why I thought the market was in trouble. The simple fact is that every characteristic that usually show up near tops in the market...showed up. I outlined every single one for you. When these characteristics show up, it is time to keep an eye out for trouble. All that has to happen is for negative price and volume to confirm. Subtle signs showed up weeks in advance. Please do not listen to those who say this recent drop came out of nowhere. So, since repetition is key in becoming successful at anything, here are those bearish characteristics that I told you about that would eventually come back to haunt the market.

FINANCIALS

I have been telling you that the big financials were acting like it was 07 all over again. They sit when the market goes up and they lead down when the market goes down. Quite amazing this is occurring while the fed is just handing money over to them. This is important. Financials have always been a key to the market.

MAJOR NEW HIGHS DIVERGENCE

Every time the market went to new highs, there were fewer and fewer stocks hitting new highs...indicating strength was narrowing.

DEFENSE LEADS

Speaking of leadership narrowing, over the past several weeks, we saw DRUGS,FOOD,BEVERAGES, TOBACCO and UTILITIES lead. It is a classic sign of trouble when the most defensive of issues are being bought.

LOW LEVELS OF CASH

Mutual funds are only holding 4% in cash...a very low level...providing very little ammo for the market.

OVER-THE-TOP BULLISH SENTIMENT

I noticed one pundit call for 2600 S&P by 2013. Another calling for 20,000 DOW within 18 months. These type of calls do not occur at the lows.

Many stock splits. Stock splits do not occur at lows. In fact, they occur at highs.

Many mergers. Again, mergers do not occur at lows. In fact, they occur at highs.

MARKETS like CHINA,BRAZIL and others entered their own bear phases before our markets.

A PLETHORA OF IPOs AND SECONDARIES

This adds supply to the market but more importantly, another characteristic that does not show up at lows, but near the highs. To make matters worse, investment banks as usual, learned no lessons from the late 90s about bringing out companies public with $5-10 billion valuations that do not have even $100 million in sales and lose money. They get their fees. Investors get screwed.

SEMICONDUCTORS

Another important leading sector is the SEMIS. They have led the market for many years...both up and down. When they topped in March, I became worried. When they rolled over in mid-May, I became double worried.

Finally and most importantly, I have taught you that nothing bad happens when major indices are above the 50 day moving averages...and only bad happens when below. The final dagger occurred last Wednesday when markets dived below on volume. Since, nothing but distribution. On a daily basis, we are seeing weak closes, another important sign of a bear phase.

Do not get the urge to listen to the permabull Wall Streeters during bear phases. They will cost you a bundle. You will be hearing the terms OVERDONE,OVERREACTION,UNDERVALUED,CHEAP and all that crap. Be careful!

I am also amazed at the complacency i HAVE SEEN SO FAR.After stating my bearish stance on national Fox News tv a few weeks ago, I received a bunch of not only emails disagreeing with me but actual hate mail. People just never want to believe the market can go down. As I stated numerous times in the last bear, there is no way of knowing when a bear phase will end but just like we know the characteristics that show up during a market top, we know the characteristics that show up during a market bottom. I do believe this market has a date with the 200 day moving average which is only a couple percent lower. A break below the 200 day moving average and get the fork.. At this juncture, I am inclined to believe it will occur. And to answer the question on whether the market could have another flashcrash, I wouldn’t bet against anything as I do not believe the masses are prepared and I do believe the masses still have the buy the dip mentality.

On a short-term basis, major indices remain very stretched, expended and oversold to the downside. But again, oversold could stay oversold for a while. But I suspect the 200 day average could first provide the market with some sort of relief rally. Any rally should be sold as I BELIEVE THERE IS GOING TO BE MORE TIME AND PRICE IN THIS BEAR PHASE.

My last point is on the economy because many weeks ago, I told you and my listening audience I thought the economy had topped. Since and unfortunately, this has occurred. What did I see? Every quarter, I visit numerous retail outlets. Every quarter, I speak to select people in differing industries. These are ordinary people either running or working at businesses. To a person, they all said that things had stalled...that there was no upward trajectory. I then heard the heads of Walmart and Target say that the consumer hit a wall. HINT: Never argue with what Walmart says. I love when a pundit says the news is just limited to Walmart. They only do $400 billion in sales. Why listen? The last and most important clue...commodities topped indicating demand was indeed softening. Weeks, later, all the worsening news started to come out.

My biggest worries are simple.

The Fed is out of ammo. They are already at zero percent. Yes, they can print more money but that only crushes the dollar, lifts commodities which in turn hurts the consumer. Crushing your own currency has never worked.

This administration is in dire need of watching the Seinfeld episode where Jerry told George that if every decision he has ever made was wrong, then doing the opposite must be right. Massive deficits, massive amounts of new regulations, threats of tax increases, demonization of almost every industry and a health care joke of a bill that does nothing more than add more costs to hiring...even though they say it will lower costs and lower the deficits. There is only one outcome from assinine policy...and we are seeing it. Obama is not dealing with a sluggish economy. He is causing a sluggish economy.

So I worry. As I wrote last time, it is only bad when markets go down. It is now bad. Markets are going down...and we may have only seen the beginning as the trust factor remains very low. Markets are quite smart in the long run.


2 posted on 06/17/2011 10:53:24 AM PDT by Matchett-PI (In the latter times the man [or woman] of virtue appears vile. --Tao Te Ching)
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To: Matchett-PI

BFL.


3 posted on 06/17/2011 11:45:43 AM PDT by blam
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To: SeekAndFind

American techs. are scary. Look at who’s in charge in technologies.


4 posted on 06/17/2011 1:16:40 PM PDT by familyop ("Nice girl, but about as sharp as a sack of wet mice." --Foghorn Leghorn)
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