THE BOTTOM LINE: A market warning, the big bitcoin debate and a deep dive on tech heavyweights

This week:

  • Business Insider CEO Henry Blodget looks at President Donald Trump’s claims that he’s responsible for the record-setting stock market, and finds that the S&P 500 rose just as much over the first 11 months of Barack Obama’s second term. Blodget also provides a bearish argument, which suggests that high valuations have historically preceded periods of market weakness. He also points out that prices are high across many different asset types, which means that diversification might not help investors out right now. He then highlights a chart cited by John Hussman, the president of the Hussman Investment Trust, which shows that the expected return on a diversified portfolio is low at the moment. Business Insider executive editor Sara Silverstein goes on to say that the search for yield across all asset classes worries her.
  • In the Fidelity Insight of the week, Silverstein looks at Alibaba, which briefly overtook Amazon as the biggest company in the world, on a market cap basis. She calls back to Blodget’s interview from a few months ago with portfolio manager Bill Kennedy, in which he said Alibaba is leapfrogging many brick-and-mortar retailers and taking advantage of the huge untapped growth potential in China.
  • The discussion then shifts to bitcoin, which has seen mixed public comments from influential people lately. Blodget reiterates his long-standing view that bitcoin is the perfect example of a speculative bubble, because there’s no plausible argument for how to value it. Silverstein mentions the future use of blockchain perhaps attracting a valuation, and says that bitcoin can be compared to gold.
  • Silverstein interviews Scott Galloway, a marketing professor at NYU and author of the new book “The Four: The Hidden DNA of Amazon, Apple, Facebook, and Google.” Galloway says that the four have disarticulated who we are as people and reformulated that as for-profit companies. Speaking about Amazon, he says that whenever the company is bumping up against the other three juggernauts, it’s winning. He cites how Alexa is beating Siri, and mentions the company’s torrid pace of growth. Galloway thinks that Amazon’s core confidence is storytelling, and mentions Amazon having access to the cheapest cost of capital in history — which allows them to overwhelm the competition with brute force.
  • Galloway says that he doesn’t understand Alibaba, which has some of the worst corporate governance in the world. Silverstein asks him about Tesla, and Galloway marvels at the market cap discrepancy between Ford and Tesla, saying that the company has painted an unbelievable vision, and that people are investing in the future, not anything tangible at the moment. He calls it incredible storytelling, and marvels at how the company has been able to overpromise and under-deliver, all because the vision is so intoxicating.
  • Galloway then discusses Facebook, which he says has embraced many aspects of a media company, but seems allergic to many of the associated responsibilities. He worries that the youthful management at Facebook doesn’t have the historical context for the importance media plays in our society, citing Russia’s manipulation of it during the 2016 presidential election. He doesn’t buy the excuse that Facebook can’t possibly screen its advertisers, and says they don’t want to do it because it would hurt their profitability.
  • Galloway says that the only thing standing between Amazon, Apple, Facebook, and Google and $US1 trillion valuations is government intervention. He thinks that the most likely source of government intervention will come from Europe, predicting that huge fines will start to come out of the European Union, which he says is fed up with the companies and doesn’t have much downside to putting pressure on them.
  • Galloway cites Uber as the best example for how poor corporate governance can destroy market value. He estimates that the board’s tolerance and excuses for bad behaviour probably took Uber’s valuation down $US20 billion to $US30 billion. He also thinks that WeWork is massively overvalued, although he concedes that it’s a great company. Galloway then highlights Snap and Twitter as also being overvalued.

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