January 25, 2011 – Touching Base With Karl Denninger



1) Touching Base With Karl Denninger. I managed to catch up with my friend Karl Denninger, the peripatetic founder of the Florida based Market Ticker, a highly entertaining and prescient, if not irreverent daily blog.

Karl is convinced that the current move up in equity markets is a load of baloney and is nothing more than a replay of the dotcom bubble of the 1990's. One of many measures he tracks is the ratio of stock prices to underlying tangible asset value. A low number is good and a high number is bad. It hit two during the nineties, rose to 4 during the crash, and has since soared to 12 today, six times the bubble peak.

Rising values today are being driven by multiple expansion and this will only end in tears. Flavor of the day 'cloud computing' companies are trading at multiples of over 100. Sound familiar? Traditional cost/push inflation, which historically takes eight months to hit stock prices, started in earnest six months ago.

To make matters worse, companies are increasingly being caught between a rock and a hard place. They can either raise prices and squeeze customers, or cut margins and squeeze themselves. To see what happens when this harsh reality hits share prices, look no further than Internet traffic routing company F5 Networks (FFIV), which plunged a gut churning 27% on a modest earnings disappointment.

Karl was the CEO and one of the founders of MCSNet, a Chicago area Internet and networking company which he sold in 1998 for a large, undisclosed sum. Since then, he has been a successful independent trader worthy of one of the larger hedge funds. He also created TicketForum, an online trading venue. In 2008, Karl received the Reed Irvine Accuracy In Media Award for Grassroots Journalism for his coverage of the market meltdown. To learn more about Karl Denninger, you can visit his website at http://market-ticker.org/ . To listen to my lively interview with Karl on Hedge Fund Radio in full, please click here.