(AMZN) Archives

Why There is No Bubble in Stocks

One couldn?t help but notice the outbreak of recollection, reminiscing and schadenfreude that took place yesterday when the NASDAQ briefly tipped over 5,000.

I remember it like it was yesterday. I am still amazed by the frenzy that took place, witnessing the kind of bubble one only sees twice a century. And I was right in the thick of it, living in nearby Silicon Valley.

Business school students were raising $50 million with a one-page business plan. An analyst predicted that Amazon (AMZN) shares would double to $400 in a year. It happened in only four weeks.

All of my attorneys quit, taking up prestige jobs as chief legal counsels at new start ups, taking stock in lieu of pay, dollar bills dancing in front of their eyes. They were replaced by the ?B? team. Other law firms started accepting stock as payment of legal fees.

I knew more than one office secretary who took pay cuts to $15,000 a year in exchange for stock, which they later sold for $2 million.

When I tried to expand my company, I couldn?t find a larger office to rent. San Francisco had run out of office space. So I bought a house for $7 million instead and worked from there. That was no problem, as everyone had $7 million then.

But what I remember most fondly were the parties. The beneficiaries of every IPO sought to celebrate with the biggest party in Bay Area history, each one eclipsing the last. An entire industry of creative party organizers sprung up, seeking to outdo every competitor.

I remember most fondly the Vodka luge carved out of a giant block of ice, where a pretty hostage poured 100 proof super cooled rocket fuel straight down your throat. By midnight, the passed out bodies started piling up on the periphery.

Those were the days!

Which brings us to today, when handwringing is breaking out all over. Investors are afraid that we are just now putting in the double top of the century in NASDAQ, with a very neat 15 years taking place between peaks.
Is it time to sell?

I think not.

Today, we see a completely different world from the one we knew in 2000. Global GDP then was a mere $32 trillion. Today it is 2.5 times higher at $78 trillion. Using this simplistic measure, the GDP adjusted value of NASDAQ should be 12,187.

The high tech index peaked at a price earnings multiple of 100 times earnings. Today it is 30 times. That means the multiple adjusted high for NASDAQ today would be 16,650.

Technology stocks then didn?t pay dividends. Today, look at Apple (AAPL), which pays a 1.50% dividend worth $11.25 billion in annual payouts. This revenue stream provides enormous support under the market, and almost makes Apple shares perform more like bonds than stocks.

Which brings me to a new investment thesis.

What if the stocks that peaked in 2000 are only now just breaking out and starting long bull runs? I am thinking of quality technology names that have completed long, sideways, basing moves. Ebay (EBAY), Broadcom (BRCM), and Cisco (CSCO) leap to the fore.

The possibilities boggle the mind.

I think that in order to get NASDAQ to really get the bit between its teeth, one thing has to happen. Apple has to stop going up.

You really only had to make one stock call in 2014. You had to be overweight Apple. If you did, you were a star. If you didn?t, then you are still probably looking for a new job on Craig?s List.

Managers are behaving as if the past were a prologue, loading the boat with Apple with their eyes firmly fixed on the rear view mirror. That explains the blowout 13% jump in Steve Jobs? creation so far in 2015, some $90 billion in market capitalization.

All you need is for investors to stop buying Apple for 15 minutes and rotate into other big tech names. That was my logic behind my Trade Alert to buy Cisco two weeks ago. If that occurs, it will be off to the races for NASDAQ once again.

Remember that old saw in technical analysis land, ?the longer the base, the bigger the air above it.?

A vodka martini, anyone?

The Endless Summer of 2014

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We have just endured three weary months of tedious range trading, typical of a normal summer?s action. The problem is that the actual summer is about to begin. Are we going to suffer another three months of tedious range trading? Is summer trading this year going to last a full six months?

Is this the endless summer of 2014?

That is the alarming conclusion of the many hardened and seasoned traders I know. I have been saying all year that 2014 might be a fourth quarter year. It?s looking like my worst nightmare is coming true. Can you blame my friends for throwing in the towel?

The fact that almost all traditional trading tools have recently been utterly worthless hasn?t helped.

Take technical analysis. In a flat market, commentators urge you to buy every false upside breakout, and then sell every false breakdown, only to see it snap back in the opposite direction the next day. You don?t have to suffer too many round trips following this strategy before you run out of money.

Economic data isn?t useful either. It has been unrelentingly positive, as have corporate earnings, with a few notable exceptions (Amazon (AMZN), Fire Eye (FEYE)). Yet, the market can?t carry out a sustained rally, frustrating bulls to no end. It seems that one day, the market is discounting an heroic? 3% GDP growth rate this year, the next day only a disappointing 2%.

Talk about a bipolar market.

The (SPX) better get a move on. The dismal Q1 report showed that the economy actually shrunk by -0.2%-0.8%. That only allows for three more quarters to stage a comeback, requiring absolutely torrid growth rates. Maybe this is why stocks can?t go down either.

Everyone knows the market will be up on the year, and they don?t want to sell positions for fear they won?t be able to get back in when the long awaited breakout finally happens. That would bring a second year of relative underperformance in a row for most portfolio managers, not exactly a career boosting move.

So while the market is tearing the petals off my own 2014 performance with a ?love me, love me not? torture routine, I think I?ll stay on the sidelines. That?s why I bailed on my last remaining position, a small long in the iPath S&P 500 VIX Short Term Futures ETN (VXX), taking yet another shaving cut on my numbers.

The only way to survive in this industry for the long term is to stay out when you don?t understand what is happening. There are times when there is just no money to be made in the market. This is one of those times.

Screaming at it, throwing your handset through your monitor, or tossing your PC out the window, all things I have seen frustrated traders do, isn?t going to improve the situation.

Go watch a season of Game of Thrones instead.

Better Than Watching the Market

AT&T (T) is Dialing a Wrong Number

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AT&T (T), or Telephone as we used to call it on the floor on the New York Stock Exchange when we hand traded its shares, enjoyed a nice little 50-cent pop yesterday, to $34, only the second day it managed to rise this year.

The move comes after a federal appeals court in Washington DC ruled that the FCC exceeded its authority when it told Verizon Communication (VZ) that it could not charge different prices to different content providers based on their bandwidth and numbers of users.

This is a reversal of the FCC's "net neutrality" rule and should allow both Verizon and AT&T to increase revenues and help protect their profits from customers who are costing them more money to service. ?Big users of broadband, like Netflix (NFLX) and Amazon (AMZN), saw their shares suffer accordingly.

You would think it would be off to the races for (T). But it won?t, as not all is well with Ma Bell. One of my first jobs at Morgan Stanley some 32 years ago was to break this company up into the seven ?baby bells? at the direction of the Antitrust Division of the Justice Department (I carried the shareholder ballots from one floor of our building to another). The company traded off its local telephone exchanges for the right to go into the computer business. I have been following it ever since.

For a start, (T) is suffering from some major internal cash flow problems. Revenues have been stagnant for years. Its hard-wired infrastructure has been corroding away for years. The capital spending needed to fix this will be a drag on any future earnings, and is unlikely to generate any real payoff. Do you know anyone under the age of 30 who owns a landline? It?s a wireless world, baby. Did I mention that their service sucks beyond belief?

Every pension fund manager in the country already owns this stock for its generous 5.30% dividend yield. One has to ask how long the company can maintain this in the face of a stagnant business in a highly competitive industry. Now that we are in a world of rising long-term interest rates, this yield will provide much less support than it has in the past.

The hedge fund community has been aware of these difficulties for a while, and has been pounding every rally. This is why (T) completely missed out on last year?s ferocious, record setting bull market, posting a zero return for 2013, versus a 26% increase in the main indexes.

AT&T is the oldest stock to inhabit the Dow 30, being a successor to a company founded by Alexander Graham Bell, the inventor of the telephone. It has long been a pillar of the investment establishment (it took a brief vacation from the index after the breakup). Its history mirrors that of American capitalism.

With 100 million customers and a market capitalization of $179 billion, it certainly occupies a big footprint. Time to put this beast out of its misery and retire it to the dustbin of history.

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