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zugzwang

The Day The Bubble Became Official

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Is it October '99 again, or July '07?

After five years of QE, risk is no longer priced into anything.

http://www.testoster...-was-happy.html

The Day The Bubble Became Official, And Everyone Was Happy – Wolf Richter- Testosterone Pit

November 12, 2013

By Wolf Richter

A new era has dawned: there is now a consensus that this is a stock market bubble. We're back where we were during the last bubble, or the one before it, though the jury is still out if this is February 2000 or October 1999 or sometime in 2007. How do I know it's not just some intrepid souls on the bleeding edge who are claiming this, but a consensus?

Bubble data keep piling up relentlessly. IPOs so far this year amounted to $51 billion, the highest for the period since bubble-bust year 2000, the Wall Street Journal reported. Of them, 62% were for companies that have been losing money, the highest rate on record. Follow-on offerings by companies that already had their IPO but dumped more stock on the market amounted to $155 billion, the highest in Dealogic's book, going back to 1995. And throughout, the DOW and the S&P 500 have been jumping from one new high to the next.

It's even crazier in the land of bonds, where issuers are dreading the arrival of higher interest rates – which have already arrived. And they're pushing everything possible out the door while prices are still high. So far this year, $911 billion in bonds were issued, also a Dealogic record. Emerging-market bond issuance hit $802 billion, a notch below their all-time record last year, but emerging-market bonds went into tailspin during the summer taper-talk, which slowed things down temporarily.

These ominous clouds have been billowing up on the horizon for a while, but nothing is a bubble until enough people say it's a bubble. And today, shortly before 10 a.m. Pacific Time, it officially became one.

I heard it on the last place where you normally hear this kind of thing, on KQED Public Radio in San Francisco, on Forum, a local show. Host Michael Krasny was chatting with New York Times writer Nick Bilton about Twitter as part of Bilton's book tour. This isn't exactly Max Keiser's whiplash-inducing Keiser Report. This is soft-spoken public radio.

Twitter's IPO shook up San Francisco. People are waiting for the tsunami of money. Everyone talks about it. And everyone talks about their gift to Twitter. Like all good corporate citizens, Twitter got a huge tax break from San Francisco, and that money is currently being extracted from everyone's pockets.

In April 2011, the Board of Supervisors voted to give Twitter and other companies that would relocate to Central Market Street or the Tenderloin – not the most polished areas of town – a six-year exemption from San Francisco's 1.5% employment tax. Twitter had threatened to leave and do whatever, if it didn't get it. Voilà. Corporate extortion works every time. Only new hires would be impacted. At the time, the gift was estimated to be worth $22 million.

So Twitter moved into its new digs, and the headcount jumped, and salaries went up, and there has been some turnover, and now the gift has grown to $56 million – and continues to grow. Twitter too has become a corporate welfare queen.

But not everyone is happy, given the hoopla of the IPO, the billions involved, and the soaring rents in San Francisco as newly hired employees of startups with no revenues stand in line to rent whatever is available, rent not being much of an issue with their inflated salaries. Like Twitter, these companies are under no pressure to make money. So evictions jumped 38% between March 2010 and February 2013, the last period for which data is available; "Ellis Act" evictions – named after the state law that allows landlords to evict tenants when they want to sell their property – jumped 170%. Housing has been booming!

And people are being pushed out of the city. So on Thursday, as Twitter's valuation settled on $31.7 billion, residents of San Francisco, who not only have to pay for Twitter's gift, but are now facing ballooning rents or eviction, demonstrated in front of Twitter's headquarters. "People over profit," a sign said. "No to evictions," another said. Or "$56 million in tax breaks – Are you Twittin' me?"

This conflict too – between the fake money that pushes up prices, and long-term residents who can no longer afford to live here – is a sign of a bubble. San Francisco has been there before: in the late 1990s. It popped spectacularly.

"Why is Twitter not a total fad perpetuated by yet another financial bubble in speculative tech stocks?" a caller asked Bilton toward the end of the radio show. This sent Bilton off on a tangent, away from promoting his book. There were "bubble companies" that made you wonder "how on earth" they would be "worth so much," he said.

Pinterest in San Francisco, an internet message board for images with 50 million monthly users, got $225 million in a round of funding that valued the company at $3.8 billion – though it has zero revenues. That a big chunk of the funding came from mutual fund company Fidelity, instead of venture capital funds, raised even more eyebrows. Or messaging app developer Snapchat in LA is stewing over an investment that would value it at $3.5 billion, and it doesn't have any revenues either.

"I absolutely" – emphasis his – "believe that we're in another bubble," Bilton explained. "And it is going to pop,"

Companies like Pinterest with sky-high valuations and no business model or revenues – what are they going to do? Well, they either would have to be sold, which you can't do easily at these valuations, he said, "or they're gonna pop."

That, on KQED, made it official.

Edited by zugzwang

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I think the difference is the last times the banksters had a credit limit -or they didnt, but they had to scare the central banks into keeping it open ended first. This time there is free money with absolutely no strings attached.

Yes, there will be a crash, eventually, but they wont allow it to happen until inflation has taken off, bellies go empty, and rioting takes place. Unfortunately that could be a long time. Losing 2-3% of purchasing power each and every year hasnt seemed to matter much in the last 10 years..

I guess in a way I cant blame them. If they did collapse the Ponzi before this happens any opposition, and the satanic media establishment would demand their skins.

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Yes, there will be a crash, eventually, but they wont allow it to happen

If they had that kind of control it would never happen- so I don't think the timing is something they can control at the FED level.

I read an interesting analysis of why the USSR imploded in the way it did- with relatively little disruption. The theory being that it was in effect abandoned by it's own elites as they saw that Gorbachev's perestroika was attempting the kind of reforms that would destroy their power base- they figured that they would be better off in a post USSR Russia- so they more or less walked away- and most did indeed come out it quite well.

So I reckon the crash will come when the banks decide that they have more to gain from a collapsed bubble than from an inflating one- one trigger might be attempts to regulate their activities in ways they see as threatening- at which point they may decide that a post crash environment might better suite their long term interests.

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I was in San Francisco and Palo Alto last week, and I lived there through the last bubble, and it definitely feels the same as last time.

A friend (who made a not insignificant fortune in the last bubble) is building a house near Palo Alto, and, having bulldozed the $4 million house that they recently bought, has hired an architect for the replacement house. The architect's main condition before agreeing to the project (and this is his standard demand) was that he not be forced to provide a budget or a price estimate for the house. He has a line out the door of people waiting to hire him.

I suppose it would be one thing if all this money came from curing cancer or solving world hunger, but it's blindingly obvious to everyone that it's just coming from the Federal Reserve, via a short trip through nonsense companies like Twitter and Facebook.

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The Reformed Broker

'Chilling Signs of a Market Top

As one of the original wise men of the financial blogosphere, David Merkel has always been a crucial read for me. In 2004, he had done a magnificent piece on the fundamentals of market tops for TheStreet.com’s Real Money pay site. Thankfully, Barry excerpted the post for The Big Picture back in 2006 so it exists on the modern web, outside the catacombs. Tom Brakke unearthed it this morning and I got the chills reading it just now – all of the fundamental signs of a top that David discussed nine years ago can be observed in the markets today.

It’s uncanny how things never change. Read this and tell me you don’t see these exact same things playing out as we speak.

Here’s David (via Barry via Tom, lol)…

***

Item 1: The Investor Base Becomes Momentum-Driven

Valuation is rarely a sufficient reason to be long or short the market. Absurdity is like infinity. Twice infinity is still infinity. Twice absurd is still absurd. Absurd valuations, whether high or low, can become even more absurd if the expectations of market participants become momentum-based. Momentum investors do not care about valuation; they buy what is going up, and sell what is going down.

You’ll know a market top is probably coming when:

a) The shorts already have been killed. You don’t hear about them anymore. There is general embarrassment over investments in short-only funds.

B)Long-only managers are getting butchered for conservatism. In early 2000, we saw many eminent value investors give up around the same time. Julian Robertson, George Vanderheiden, Robert Sanborn, Gary Brinson and Stanley Druckenmiller all stepped down shortly before the market top.

c) Valuation-sensitive investors who aren’t total-return driven because of a need to justify fees to outside investors accumulate cash. Warren Buffett is an example of this. When Buffett said that he “didn’t get tech,” he did not mean that he didn’t understand technology; he just couldn’t understand how technology companies would earn returns on equity justifying the capital employed on a sustainable basis.

d) The recent past performance of growth managers tends to beat that of value managers. In short, the future prospects of firms become the dominant means of setting market prices.

e) Momentum strategies are self-reinforcing due to an abundance of momentum investors. Once momentum strategies become dominant in a market, the market behaves differently. Actual price volatility increases. Trends tend to maintain themselves over longer periods. Selloffs tend to be short and sharp.

f) Markets driven by momentum favor inexperienced investors. My favorite way that this plays out is on CNBC. I gauge the age, experience and reasoning of the pundits. Near market tops, the pundits tend to be younger, newer and less rigorous. Experienced investors tend to have a greater regard for risk control, and believe in mean-reversion to a degree. Inexperienced investors tend to follow trends. They like to buy stocks that look like they are succeeding and sell those that look like they are failing.

g) Defined benefit pension plans tend to be net sellers of stock. This happens as they rebalance their funds to their target weights.

Item 2: Corporate Behavior

Corporations respond to signals that market participants give. Near market tops, capital is inexpensive, so companies take the opportunity to raise capital.

Here are ways that corporate behaviors change near a market top:

a) The quality of IPOs declines, and the dollar amount increases. By quality, I mean companies that have a sustainable competitive advantage, and that can generate ROE in excess of cost of capital within a reasonable period.

B) Venture capitalists can do no wrong, so lots of money is attracted to venture capital.

c) Meeting the earnings number becomes paramount. What is ignored is balance sheet quality, cash flow from operations, etc.

d) There is a high degree of visible and/or hidden leverage. Unusual securitization and financing techniques proliferate. Off balance sheet liabilities become very common.

e) Cash flow proves insufficient to finance some speculative enterprises and some financial speculators. This occurs late in the game. When some speculative enterprises begin to run out of cash and can’t find anyone to finance them, they become insolvent. This leads to greater scrutiny and a sea change in attitudes for financing of speculative companies.

f) Elements of accounting seem compromised. Large amounts of earnings stem from accruals rather than cash flow from operations.

g) Dividends become less common. Fewer companies pay dividends, and dividends make up a smaller fraction of earnings or free cash flow.

***

Now of course, we don’t see dividends becoming less common but we do see a much greater emphasis on buybacks. Also, defined benefit pensions are not net sellers of stock – I could argue that they have only just begun to buy, having been ridiculously underweight in the past few years.

But just about everything else on this list is already in full swing. Hard to deny it.

The question, then, is about how long these trends can continue. When and where will this end? History will disappoint you in pursuit of the answer to that question – “Eventually,” it whispers in your ear, smirking all the while.'

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This is a succinct summation of the situation.

The Reformed Broker

'Since the invention of the Dow Jones Industrial Average at the turn of the last century, there have been eleven instances in which stocks declined by more than 35% from peak to trough, .....

Some of these eleven historic crashes had proximate causes – concrete developments we could point to that began the event. Most of them began mysteriously, with no warning or historically important reason. The cause of the 1929 crash is still shrouded in fog, all we know is that markets had been running up in a speculative fever for a decade and then one day – out of the blue – people didn’t feel like playing anymore.

But it is important to remember the following before despairing over the pain that will someday come:

1. Crashes create opportunity and kings will be made during the next one.

2. Crashes clear the system of antiquated industries and business models, paving the way for new fortunes to be made and entirely new ways of doing business and improving our lives. Real estate gets cheap enough for young, innovative companies to take root and begin to change the world all over again. The latest 53% Dow crash, from October 2007 through March 2009, has arguably done exactly that.

3. There’s never been a stock market crash that the Dow hasn’t recovered from, and there’s never been a crash that’s gone on for longer than 1000 days before bottoming.

4. Crashes are extremely rare, while we’ve averaged one crash per decade since the Dow Jones came into existence, four of them have taken place in the span of one ten year period.

5. The Dow bottomed out at 30.88 after its very first crash. It revisited that level precisely upon bottoming out during the crash of 1906-1907 and then came close once again during the horrors of the early 1930′s. The amount of subsequent wealth creation that came as a result of weathering these periods cannot be overstated. Since the dawn of the index through last year, the Dow has returned an annual average of 9.4% - half from capital appreciation and half from dividends. Those who’ve attempted to dance in and out, constantly expecting a crash, have likely captured very little of that, if any at all.

Most of your favorite crash-fetishists have track records that you wouldn’t wish on your worst enemy. It is one thing to be aware of the potential for terrible things to happen, it is quite another to give up on life and opportunity altogether.'

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I was in San Francisco and Palo Alto last week, and I lived there through the last bubble, and it definitely feels the same as last time.

A friend (who made a not insignificant fortune in the last bubble) is building a house near Palo Alto, and, having bulldozed the $4 million house that they recently bought, has hired an architect for the replacement house. The architect's main condition before agreeing to the project (and this is his standard demand) was that he not be forced to provide a budget or a price estimate for the house. He has a line out the door of people waiting to hire him.

I suppose it would be one thing if all this money came from curing cancer or solving world hunger, but it's blindingly obvious to everyone that it's just coming from the Federal Reserve, via a short trip through nonsense companies like Twitter and Facebook.

Is this in Atherton? It was the home of the teardown, as I recall from my time in Palo Alto.

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