And BOOM! Welcome to 2018! What a day it was…. The Dow added 104 pts, the S&P jumped by 22 pts and the Nasdaq rallied and closed at new highs – surging by 103 pts. US futures were up in the wee hours of the morning yesterday as investors/traders awaited the dawn…. European mkts were under a bit of pressure and Asian mkts had turned in a mixed performance – so the expectation was not for the mkt to rally hard…but rally it did…led by none other than TECH…….and this sent the Nasdaq Index to a record close above 7,000 – carried by the likes of the FAANG stocks and Microsoft. (FB, AMZN, AAPL, NFLX & GOOG). These names contributed more than 67% of the juice that took the Nasdaq index from 6k to 7k in only 6 months and will be the fuel that continues to burn as investors/traders continue to look for opportunities in tech….
Now look – we have been talking all about how the tech industry has changed the way the world works – and investors have supported that discussion by jumping all in – sending the Nasdaq up nearly 28% for 2017…a move that in hindsight was spectacular…. but the index is now trading at 28 times trailing earnings – that is the highest level since 2004 leaving so many to ask if this is a bubble. I guess it depends on how YOU define bubble – for some – it is not a bubble – they only see higher prices and sunlight ahead, while others are turning a bit more cautious as they describe it ‘uncomfortably expensive’.
Investopedia defines a bubble as: ‘an economic cycle characterized by rapid escalation of asset prices followed by a contraction. It is created by a surge in asset prices unwarranted by the fundamentals of the asset and driven by exuberant market behavior. When no more investors are willing to buy at the elevated prices, a massive selloff occurs – causing the bubble to deflate’.
It’s like you buy it at a high price thinking that the next guy in is willing to pay even more for the same asset – and that works of course until it doesn’t and when it doesn’t is when the bottom falls out – again – I know this sounds like a broken record – but you only have to go back 10 yrs to recall this action.
Remember – the GFC (Great Financial Crisis) was brought about by the rapidly rising prices of homes – fueled by the ‘sub-prime’ mortgage mkt…. these teaser sub-prime loans – with no income verification requirements - drove demand for housing to levels that could not be supported and the derivative esoteric products that were created by the large investment banks to mask the risk worked until they didn’t. And then came the CRASH……and if that is not enough – then go back to 1999-2000 during the DOT COM boom and then bust……. HELLO??? Do I need to remind you? Oh yeah – everyone said then that ‘This time it’s different’……right – History never repeats itself……Does the word Bitcoin ring a bell? - Oh, I forgot – ‘This time it’s different.
It’s called ‘The Greater Fool Theory’ and this theory states that the price of an asset is not determined by it intrinsic value – but rather by irrational beliefs and expectations of other participants. One guy justifies the price he paid because he believes that there is someone that is willing to pay an even higher price crawling right up his a**…. (thus, the Greater Fool).
In the end – when the next crisis hits – I would rather have GOLD under my mattress rather than a Bitcoin – I’m just sayin…. Call me a Brontosaurus– I love that!
Now - speaking of Bitcoin - yesterday Peter Thiel took to the airwaves to ‘talk up his own book’ – making an admission on CNBC that he has a ‘significant stake in Bitcoin’ – which provided the masses with reason enough to run out buy more Bitcoin…. sending it up $1400 or so before closing at $14,784. And today he headlines in the WSJ- (great marketing!) -
“Peter Thiel’s Founders Fund Makes Monster Bet on Bitcoin” - I mean really? Can it get any more dramatic?
That’s right a MONSTER bet on the crypto currency. And because Thiel is a MONSTER name in Silicon Valley - it only makes sense that his investment would also be described as MONSTER. For those of you who do not know who Thiel is - Wikipedia defines his as a German born American – New Zealand Stanford University graduate, entrepreneur, venture capitalist, philanthropist, author, political activist and hedge fund manager who co-founded Paypal in 1999 before he sold it to Ebay for some $1.5 bil and he is now worth in excess of $2 bil. OK…so he’s got a nice resume…. I am not debating his credentials at all….and I applaud him for his insight…. but
Let’s remember that Bitcoin is still an idea really....and while it may be the most talked about ‘asset’ (I mean is it an asset?) it is a form of digital currency that has no backing whatsoever by any gov’t or central bank. It is mined in high tech computer ‘farms’ and is far from mainstream. The thought is or the BET is that Bitcoin will become the ‘cyber equivalent for gold’ and IF that is true - then it has great potential.... but that is still very much a big bet.
On one side of the coin we have Jamie Dimon (JPM) and Ray Dalio (Bridgewater Associates) and others who have called it a fraud and a bubble and on the other side of the coin you have names like Thiel who toss their hat in the ring and then go out and drive demand by telling everyone of their investment - leaving investors confused yet curious - not wanting to miss out, but also not wanting to get taken to the cleaners....It’s all very exciting to watch and play if you have the stomach for it….. Kind of like what Apple did – they slow down the old phones and introduce the new ones that are better, faster and sexier to drive demand – and drive demand they did…..…..I mean how can you leave it on the table?
It’s all very curious for sure.......and only time will tell who was right and who was wrong....and remember - in the end Thiel does admit - ‘that Bitcoin does share one potential perilous similarity with more traditional venture capital investments. The digital currency could be worth nothing, or close to it, in the end’. But you can be sure that it will be one hell of a ride no matter which way it goes….
Now again – I am not commenting on the blockchain technology at all - – I am only commenting on the irrationality of the most recent pricing action that has seen a 1300% increase in the price of this ‘asset’ that has no real intrinsic value yet. The only value it has is the value that the mkt participants give it- again go back to the DOT COM bubble…..investment banks would bring this companies public at $15 and investors would pay $100, $200 even $300 dollars on the IPO day…think about that for one min….the investment bank just brought it public at $15 and mkt participants completely ignored the analysis and assigned a price that they ‘thought it was worth’ – How’d that work out for you? It may have taken a couple of months for the irrationality to be recognized by the mkt – but in the end – it all comes out in the wash…
Now back to the mkts……Jeff Krumpelman – CIO at RiverPoint Capital – is clearly in the camp that the mkt is nowhere near overvalued – he is overweight tech and believes that the ‘increasing profitability of tech stocks means that they will continue to rise at a greater pace than the market’. And while that is all good - just the expectation that stock prices can only keep going up should be the warning flag (The Greater Fool Theory again!) Look the AAII (American Association of Individual Investors) survey shows that the ‘expectation of rising stocks prices’ has jumped to 53% - well above the historical average of 39% and when the individual investor gets this bullish – it is usually a sign that we are closer to a top than not.
OK – but now you say – Hey Kenny – slow down we just got a new tax reform plan and Donny is about to announce a huge infrastructure stimulus plan to rebuild America – to Make America Great Again…..and I agree – it’s all good – but remember – the mkt trades on future expectations…..we know this already – We know that the plan is coming – all I am saying is don’t’ get IRRATIONAL in your thinking – keep it in perspective. The problem with mkt structure today is that computers don’t have the human feel - to them it’s just numbers. (1’s and 0’s) Leaving us to wonder – Are the algorythms the 21st century version of The Greater Fool? Just a thought – do with it what you like.
Europe in focus…….
Today is the beginning of a new set of regulations in the financial services industry that comes to the mkts via the European Union. It is called MIFID II and it re-regulates how asset managers can pay for research and execution. It is the biggest shakeup in mkt regs in a decade – some describe it as ‘seismic’ or ‘colossal’ and it affects everything from investment research to trade execution.
It is a big unknown for the industry. What will it mean for current structure? Will it cause another round of layoffs and consolidation among the players? While it does not affect US asset managers or US brokers directly – it does affect us if we play in Europe or service European asset managers in the states. It is just the beginning of what promises to be a confusing and chaotic regulatory landscape. Now away from that – the only eco news out of the EU today was German Unemployment – which held steady at 5.5% - in line. Autos, retailers and industrials all leading EU mkts higher. FTSE +0.03%, CAC 40 % +0.39%, DAX + 0.45%, EUROSTOXX +0.19%, SPAIN + 0.43% and ITALY – 0.32%.
Now - US futures are UP again today… currently trading 5 pts higher as we are about to attempt to kiss 2700 once again. Recall we tried and failed back in mid-December…. but today – it feels like it is ready to go – the mkts are ignoring all the geo-political stuff happening around the world - i.e. Pakistan, Iran, North Korea etc. and focusing only on US and global growth prospects. The dollar has finally found some support and is UP today after bouncing off $91.87. Gold is up another $2 at $1,318/oz appearing to slow just a bit but still ready to challenge the summer highs of $1,350/oz. Oil is up 30 cts/ barrel – holding above $60. Watch the dollar – a sustained move higher will slow the advance of the commodity complex and may even put some pressure on the group after the most recent surge.
And finally – it is an election year…so there is a lot to watch. Eco policy and foreign policy. And while it is hard to see that any elected official would not support a US infrastructure bill – it is still a wild card…. the kickoff has begun for the November 2018 midterm elections – expect to be bombarded daily by those looking to make headlines that will elevate them in voters eyes.
So, with the mkts appearing to ignore valuation….it makes no sense to stand in front of a moving train…step aside – go for the ride and be patient. Keep your eyes on tech, financials and industrial names….…if they continue to trade higher then the broader mkt will follow….and while the path of least resistance appears to still be up – it is time to be a bit more careful….
The trendline suggests that the mkt could trade up to 2710 ish before hitting resistance...and if the mood continues – we just may get there today…. The S&P is now trading 3% above its 50 dma….and should begin to show signs of exhaustion…but irrationality is a funny thing….
Take Good Care
Roasted Cauliflower Soup
On this very cold winter day here in the northeast - try the Roasted Cauliflower Soup....
For this you need: 1 Large Head of Cauliflower, Olive Oil, S&P, Minced Garlic, Chopped Onion, Chicken Broth, lite Cream.
And to top it off: Chopped Pancetta, plain croutons, Fresh Parsley
Preheat oven to 425 degrees.
Toss the cauliflower with olive oil and season with s&p.
Spread the cauliflower onto a baking sheet, and roast for 30 to 35 minutes, stirring occasionally, until lightly golden brown and tender.
While the cauliflower is cooking, put a splash of olive oil in a pot and cook the pancetta over medium heat until lightly browned, about 4 minutes.
Add the croutons stirring to mix with the oil and pancetta. Season with s&p, toss with the parsley remove and set aside.
Now in the same pan sauté the onions and garlic over medium low heat until soft, about 5 minutes. Add the chicken broth to the onions and bring to a boil.
Add the roasted cauliflower to the pan, and reduce to a simmer for 20 minutes.
Taste, and adjust salt and pepper as needed.
Add the lite cream to the pot and then puree (in batches) in a blender or food processor until smooth and creamy.
Return the soup to the pot and keep warm.
When serving - ladle soup into bowls and top with a couple of tablespoons of the garnish.
The market commentary is the opinion of the author and is based on decades of industry and market experience; however no guarantee is made or implied with respect to these opinions. This commentary is not nor is it intended to be relied upon as authoritative or taken in substitution for the exercise of judgment. The comments noted herein should not be construed as an offer to sell or the solicitation of an offer to buy or sell any financial product, or an official statement or endorsement of O’Neil Securities, Incorporated or its affiliates.