If it looks like a bubble, smells like a bubble and walks like a bubble, it is a bubble.
What we have in the certain stocks today is a bubble every bit as epic as the one that took the NASDAQ Composite Index (INDEX:.IXIC) to its previous record of 5048 back in 2000.
There are few certainties in this world, but one of them is that bubbles pop.
And like all previous bubbles, this bubble will pop too.
One of the key signs of a bubble is when investors and the analysts that cheer them over the cliff refuse to acknowledge facts that contradict their bullishness.
The Evidence Is Irrefutable
Exhibit "A" is Tesla Motors, Inc. (NASDAQ: TSLA). At the beginning of the year, analysts were forecasting that the company would earn $2.78 per share and had an average price target on the company's stock of $269 per share – $49 per share higher than where it was trading at the time. Since then, a series of setbacks have led analysts to radically lower their earnings estimates to a mere $0.53 per share – a reduction of 80%.
But instead of lowering their price target on the stock by a commensurate amount, analysts have only lowered it by $19 per share to $251 – a reduction of a mere 7.1%.
That is bubble thinking. The psychological term for that is denial. The Wall Street term for that is careerism.
Exhibit "B" is Amazon.com Inc. (NASDAQ: AMZN). In the first quarter of the year, the company once again managed to spend every penny it took in – and it took in a lot of pennies.
Revenues for the quarter increased 15.1% from a year earlier to $21.7 billion, but the company managed to spend every penny and more, leaving it with a $57 million net loss.
The big news, however, was that the company disclosed for the first time some financial details about its secretive cloud computing business, Amazon Web Services (AWS). AWS's revenue for the first quarter was $1.57 billion and its operating income was $265 million; analysts had been projecting annual revenue of $6 to $9 billion, so this met expectations.
Amazon has been competing fiercely with Google, Inc. (NASDAQ: GOOG), Microsoft Corp. (NASDAQ: MSFT) and International Business Machines Corp. (NYSE: IBM) to provide cloud computing services to startups and other companies such as Netflix, Inc. (NASDAQ: NFLX).
Investors are now fantasizing about an Amazon Web Services spin-off and the possibility that AWS could someday be larger than the Mother Ship at Amazon.
For its part, Amazon promised further losses of between $50 million and $500 million in the second quarter. The result – investors bid up the company's stock by $55.11 per share (14.13%) to $445.10 per share, where it is trading at an even more infinite multiple of its non-existent earnings.
That is bubble thinking.
Investors were so enamored with AWS, in fact, that they bid up cloud competitor Microsoft's stock by 10.45% – the biggest move in that behemoth in years.
Microsoft saw its stock rise by $4.53 per share to $47.87 just a couple of days after announcing earnings that failed to inspire the market (in fact it inspired Goldman Sachs Group Inc.'s (NYSE: GS) analyst to reiterate his "Sell" recommendation on the company).
What happened, of course, was that investors extrapolated Amazon's success at AWS to Microsoft's growing cloud business to add $37 billion to the software giant's market cap.
Once again, bubble thinking.
Bubble thinking also requires a total lack of memory. Investors seem to think that cloud storage is something that has never existed before, but it is merely a new version of the Internet hosting business that crashed and burned 15 years ago.
"Creative Destruction" May Not Be Enough This Time
Amazon and its competitors are already engaged in a vicious price war that is driving down the cost of cloud storage and obliterating margins and profits in this business.
The history of technology is filled with case studies of creative destruction, which is why even with its current success Microsoft's current market cap of $393 billion is 31.6% lower than what it was in 2000.
Other tech giants tell the same story…
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About the Author
Prominent money manager. Has built top-ranked credit and hedge funds, managed billions for institutional and high-net-worth clients. 29-year career.
Why don't you ever mention, for example on the NASDQ, the high with inflation built in? Marvin Newman, New Canaan,CT You know the figure.
The markets are on a steroid-infused playing field while Michael Lewitt continues to argue for rules against steroids. Until such rules are implemented, the markets will continue to rally.
Absent a change in interest rates – which will continued to be delayed as long as the economy is weak, what other event might be the pin which busts the bubble? Perhaps predicting that event would make for a more interesting article instead the constant drum-beat about the lack of market discipline.
Good points ! However, you need to consider that we are in a world wide paradigm shift due to sweeping technology. I once sold one of the first 42 inch flat panel TVs for $25,000 which was not HDTV [as the vendor had implied] nor digital [vendor implied that also]. Today you can purchase a LCD TV which is a contrived HDTV [again not a real HDTV] for $650.00 that is 60 inches ! And the dealer will give you 18 months same as cash to pay for it ! I think these shifts have some bearing on the paradigm shift we are in. I think we shall see micro-crashes of 3 to 7 % it may be that the 10 to 20% correction is long over. In the normal bubble to crash theory we are in the euphoric stage where the smart money pulls out; [$79 Billion has left the market this year]. I proffer that it is more important than ever to have great companies with sound financials. Great products, super service, and world class ODM focus. Weathering the drawdown is the key. Holding a huge percent of the portfolio in cash is even more important … again Great Proffer Mr. Lewitt well done indeed.
OK, let me explain the situation in a way that a child will get even more than most investing adults. Everything in the markets, that is how the "big" people spend and invest their money in today's world isn't much different then the act of blowing bubbles by a kid that is good at blowing bubbles. When this kid blows a bubble he needs three essential ingredients. One, the plastic hoop with handle(the FED) is the issuing structure. Two, the soap solution(fiat currency, not money) is the "solution" that is the transparent material that makes up the bubble(today's US economy). Needless to say the most essential of the ingredients, that, admittedly can take some finesse, is number three, hot air(everyone with interest in making as much money as possible from the spenders/ investors in said bubbles)…lots of hot air. From FED guidance to government officials to every snake oil salesman in stocks, bonds, annuities, reits, precious metals, and every idea of possible get rich scams, excuse me, business proposition. The bottom line is for them to increase their bottom line while reducing yours. Enough with the details, kids and the "little" adults get bored real quick and forget everything they learn even quicker. Here's the reason why kids blowing bubbles with their ingredients is good. It's usually a social gathering of relatives and friends and blowing bubbles is entertaining. And thankfully when the bubbles inevitably pop no one gets hurt. But when the "big" people blow bubbles, I must admit, it is even more entertaining and potentially more rewarding then when the kids blow bubbles. But there are reasons these bubbles get more attention. Fiat currency. Yeap, fiat currency supposedly based on the false assumption of the full faith and credit of the United States government. Bullshit, it is based on the full gullibility of the United States Citizens and United States Residents and is enabled by the peoples wealth creation. Without the fiat currency created out of nothing the ""big" adults would not have the soap solution to blow a bubble. All of today's inflated asset prices wouldn't exist, people that worked for decades would have a return on what they thought was money, the US dollar. They would not be forced into high risk assets on the verge of collapse. All their labor that they did all their life is being financialized away from them. So kids and "little" adults here's the bottom line, if you don't have a money based economy, and accept a fiat currency system, you are or will be in the future a peasant.
CHANGING FORTUNES
Yes Mike, the whole world is going to take a bubble bath some day. However, Not all countries are equal, by any means. Americans see things from the perspective of OUR economy, our experience(s), our expectations, our national circumstances. We don't look at the rest of the world as it is and thus, fail to consider other factors not common to ours. We tend to assume the rest of the world is also in a bubble and that we are still the global superpower. Well, yes and no.
In fact, many would suggest we are in decline and therefore, in a kind of transition to something else (lesser). There are many doomsayers speculating on a dramatic collapse and reversal of fortune. Conspiracy theories and paranoia are not uncommon either. Granted, times are uncertain, particularly for number one.
We have to maintain our status, while others only have to incrementally improve theirs. Fact is, we are afraid of change and our confidence has been shaken after 9-1-1 and 2007-2009. We should be more careful not more reckless.
During the 1970's high inflation created an arbitrage opportunity. A speculator could borrow money at relatively low rates, buy assets, and wait for inflation to push up asset prices for a high rate of return. The result was stagflation. Volcker's Fed stopped that practice by raising interest rates.
The current Fed has created a similar arbitrage opportunity with zero interest rates. Companies can borrow money very cheaply and use it to buy back their own stock, increasing earnings per share (and CEOs' paychecks). The remedy needed is the same. The Fed's "cure", zero interest rates, is actually the disease.
So if you take your money out of the sp500 and Nasdaq where do you invest especially with 401 ks which don't offer lots of options.
Reread the article, which isn't about "investing", but more about trying to avoid losses and protecting value you have now and worry about investing after the "bubbles" pop. So, divest high flying bubble assets and park a portion of portfolio to "safe" cash instruments, portion to precious metals and maybe some related etf or funds in these areas. Remember it is much more important and more profitable not to loose money than it is to take huge risk and lose money. If you lose 70% of your portfolio it could easily take over a decade to get back where you started.
Regarding your comments about Amazon.com Inc., you do not mention that when you add back the Depreciation for 2014 of $4,746,000,000 Amazon made a lot of money that year and the previous, and previous as it records billions in depreciation, which is non-cash item.