The Market Is In Bubble Mode Again


Photo: Flickr / Steve Whis

The market is sending investors the wrong message. The more I watch it rise, the more concerned I get. While others applaud the market’s gains as a sporting event I think this is a new bubble pumped up by Federal Reserve policy and it’s destined to destroy investors’ savings again.I think it is reckless and irresponsible and somewhat surprising given the recent memory of other disastrous bubbles in our economy.  I am not a “perma-bear” as some of my brethren like to term anyone that doesn’t believe Apple is going to reach a $1 trillion market valuation. I am simply a realist that values equities more highly when the risk reward dynamic appears favourable. I think the notion of being “perma” anything is idiotic, as you should be a situational opportunist not a partisan market participant. I believe the market has moved heavily towards risk and I am moving into cash and shorting technology momentum stocks. 

We Simply Circulate Asset Class Bubbles

We have yet to accept the losses from the first Nasdaq technology bubble that ended in 2002. To make up for that disaster we have circulated through a series of asset bubbles in an attempt to avoid, or, at least, defer the inevitable pain. Stock prices in the 90s rose to ridiculous levels as investor margin levels expanded dramatically driving stock prices higher. Along the way analysts found new and creative ways to value stocks to try to justify a “new paradigm” of the digital economy. Remember Dow 36,000? The Federal Reserve supported these efforts, at least tacitly, with accommodative policy until everything blew around 2001.

Investors’ portfolios were decimated and the prospects for comfortable retirements looked bleak. Some striking frauds were perpetrated by some major banks and companies like Worldcom and Enron. A few lawsuits were brought and a scapegoat or two thrown to the wolves. To reverse the situation the Federal Reserve pushed rates to artificially low levels creating a new bubble in real estate. Very quickly everyone forgot about the tech bubble and felt much comforted by the ever rising prices of their homes. Analysts came up with new ways to justify a “new paradigm” in housing to justify housing prices that went well beyond the consumer’s ability to support and the aggressive lending practices introduced to accommodate. Once again, the FED supported this, at least tacitly with accommodative policy until things again blew up in 2007. A series of frauds were perpetrated by major banks and companies like New Century and a few lawsuits were brought and a scapegoat or two thrown to the wolves.

The last blow up was the worst so far because Wall Street almost brought the entire world economy down. This time the solution was to reload Wall Street coffers with tax payer dollars, stack the stock market deck with accommodative policy making all other asset classes except for equities uninvestable, thereby triggering a massive stock rally to build back the trillions of dollars destroyed in the housing debacle.

Fast forward a few months and here we are. Stocks are way over-valued again, analysts are creating new and creative ways to justify a “new valuation paradigm” this time because of the magical powers of the “cloud” and we literally have made no progress avoiding bubbles in the last 20 years. We have saddled the population with massive amounts of debt that inflates the value of everything beyond any tangible reality and delivered another bout of false hope.

Sooner or Later we are Going to Have to Pay the Piper

This is all dirty pool and you should protect yourself from the inevitable (or better still exploit it wisely). Not only did we allow Wall Street to have a free “rebuy” after busting out, we then let them bonus themselves insane amounts of money while they blamed the losers for buying homes which they couldn’t afford with products designed precisely to work around that small detail. Unless the investors clue into this pattern and adjust their investment strategy they’ll be doomed to relive an endless string of bubbles in which most investors will end up losing money while bankers skim the profits.  Fool me twice: shame on me. We’ll we’ve been fooled 3 times. It’s time for us to rebalance the power in investors’ favour. It’s just as important to avoid losing money as it is to make it and the majority of money is made coming off a bottom not chasing momentum. Let’s plan accordingly going forward.

Don’t Buy Stupidly Overpriced Stocks

The average retail investor is a contrary indicator. After the market has now rallied 100% off the lows retail investors are finally coming back to the markets. Don’t do it now! recognise you missed this rally and there will be another after a selloff in the future. Wait it out. The only way this rally continues is if Wall Street can convince a new set of suckers to pay higher prices for the bubble of their eye – technology stocks. The momentum names leading this rally are egregiously overvalued. Check out some of these valuations in two of the hottest sectors:

Bubble Sector Company Price to Earnings Price to Sales Market Valuation Cloud Computing (CRM) 116 10.9 $18 billion Cloud Computing Acme Packet (APKT) 70 14 $4.6 billion Semiconductors Arm Holdings (ARMH) 63 20 $13 billion Semiconductors Hittite Microwave (HITT) 24 7.9 $1.9 billion*all number taken from Yahoo Finance and based on 2011 expectations

Yet analysts are raising price targets and telling you to buy these names. There is no precedent for these recommendations, don’t fall for it again. I have shown you a cycle of boom and bust that each time was pitched as a real sustainable economic event that proved not to be. I am not making this up; it’s right on the page. In past mistakes investors have let their sense of greed overwhelm and force them into markets too late. Don’t let it happen this time. Even if I am wrong and stocks continue higher there will be a better opportunity in the future. Don’t hesitate to take that opportunity, I will be shouting about it.

This Should Sicken You

If the flagrant audacity of Wall Street’s actions post financial meltdown doesn’t yet make you want to puke all over your computer, it gets worse! Not only does Wall Street expect you mortgage paying “losers” to restake them, immunize them against losses and pay them massive bonuses for this right, they expect you to pay other companies back for losses that Wall Street caused while managing companies’ pension fund investments. Southern California Edison recently announced a 7% increase in utility rates to; get this, make up for “pension fund losses”. If the American tax payer continues to put up with this it’s a shame. Ask Wall Street to use their billion dollars in bonuses to pay back the pension fund losses caused by their recklessness.

Don’t keep making the same mistakes. Tell these jokers they can buy these stocks for their personal retirement accounts – if Acme Packet (APKT) or (CRM) represent such great values at 10 and 12x revenues. I suggest you also stop buying common stocks in U.S. banks after this screwing as well. There are so many better investments why support these share prices? I am getting short a bunch of egregiously priced momentum tech stocks that the market is championing in this current bubble. When the market corrects, and it will, I will be buying the next great technology stocks at deeply discounted prices. Don’t play the fool any longer.

Read more about this and other new technology investments at

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