It Is March of 2000?
The Market Ticker - Commentary on The Capital Markets
2017-05-04 07:00 by Karl Denninger
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It Is March of 2000?
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There was a little company called "Micro Strategy" (by the way they still exist.)

In the first week of March the stock had skyrocketed by over 50%.  The next week it "checked back" most of those gains.

The following week the stock collapsed.

A couple of weeks later, the Nazdaq cracked big.  I was house-shopping, in a hotel, woke up to CNBC full of crying babies and chuckled.

I will note that MicroStrategy was a little dogsqueeze company.  In terms of market cap it was a nothing - literally.  Even today, 17 years later, it's a little $2 billion firm -- granted, much smaller today in market cap than it was then.

In the run-up of the previous weeks and months there had been plenty of indications of trouble.  Many companies had reported slashing prices, increasingly-saturated markets were well-understood and of course there was the "burn rate" nonsense of the period.

It's arguable that it was that MSTR collapse that upset the apple cart.  You see, when people are buying stocks of companies that have nothing but negative free cash flow as far as the eye can see or sky-high P/Es of 60, 80, 100 or more they're betting with their eyes taped over on exactly one thing: Indefinite exponential growth of the business and, of course down the line, profits.

The problem is that this is an impossible premise.  There is no way for that to ever happen because it is mathematically impossible.

Today we have Amazon, Facebook and Apple all priced in this way.  Of the three only Apple has some argument for its valuation, but even there given the recent run of almost 50% it's priced for indefinite exponential growth of a saturated product -- iPhones.

Facebook is even worse; they added 80 million users last quarter out of 2 billion, or a paltry 4%.  Yet they sell at 16x sales and 43 times current earnings.  The oft-quoted 23 P/E assumes continued strong forward expansion against a 4% user base increase.

Amazon is the worst of all.  For 10 years Amazon has sold at P/Es that are ridiculous -- currently at 177x earnings but it has traded as high as 1,000x or more.  Yes, it has revenue growth but just the other day Bezos announced yet another price cut on AWS -- their high-margin cloud server business.  The rest of Amazon actually operates at breakeven or even a loss, especially when shipping is considered.  So when you take 5 or 10 points off AWS margins what you're really doing is to destroy the entire profitability of the company!  Oh, and AWS is not the low-cost provider of these services either; I recently tried to compare their service against Digital Ocean's (where The Market Ticker currently resides after I moved it off my own infrastructure) and was unable, with ~30 minutes of study, to determine exactly what I had to buy to be equal to what I could easily understand at Digital Ocean and how much it would cost.  Amazon lost as a result and for many workloads this will continue since I can't be the only geek who throws up his hands when I can't figure out how to compare apples to apples easily.  In short AWS pricing looks a lot like trying to figure out how much your doctor is going to gang***** you for in the hospital!  The problem for Amazon is that unlike the medical system there's no protection from competition for them.

The last two, Tesla and Netflix, are even worse.

Netflix has been running perennial negative free cash flow.  The only reason they're in business at all is that the bond market continues to allow them to borrow money!  That's right, without that they're out of business immediately because they have forward commitments to spend on content but don't generate enough cash to pay for that commitment.  The market "believes" that some day all that programming will continue to generate cash flow without having to continue to spend on it.  Really folks?  Ever look at the residual fees for a TV show?  They're worth almost nothing!  So Netflix must continue to spend more and more and what's worse is that their US market is saturated and all their growth, in percentage terms, is coming from overseas.  That would great except that most of those people don't speak English and have different cultures so now you need differentiated programming for them at even more cost!  This is a company that on an operating basis has, in my opinion, negative current value as a going concern but it sells for about $155 a share.  Yeah.

Then there's Tesla.  Tesla loses money on every car they sell even with government subsidies!  In other words it's a tax farm and yet it loses money even after stealing funds for every car from the taxpayer!  Those subsidies, by the way, will eventually expire and when they do the company will lose even more money per vehicle sold.  The only reason Tesla is still in business is that it, like Netflix keeps going back to the bond market and convincing them to pour more cash on a bonfire and, by the way, their total debt load is now greater than their annual revenue!  This is a company that, on a current operating basis is an outrageous zero and exists only because it manages to convince the bond market and steal from the taxpayer.

I've seen this movie before, and by the way, most of the recent gains in the market and a huge percentage of the gains since the 2008 recession have come from these companies.

Every morning some percentage of people wake up with a raging hard-on and then buy stock.  They believe.  They believe that a company that already has 2 billion of the 7 billion people on the planet can "grow to the moon" and can increase the amount of advertising on the site without limit and not suffer a revolt.  They believe that a company that is cutting prices on what feels like a weekly basis while dozens of competitors seek to (and in many cases do) eat them from the bottom can somehow increase margins.  They believe that a company that went from a diversified computer and software company into one that is 90% one product, has found the saturation point on that product and in fact is seeing declining sales numbers in China, will reverse that trend immediately and go back to double-digit sales increases.  They believe that a company that has negative free cash flow, forward commitments to spend billions not reflected on their balance sheet and has a saturated US market with all growth coming from international consumers who need even more and different content due to demographics, language and cultural differences will manage to indefinitely get Wall Street to continue pouring water into a flushing toilet.  And finally, they believe that a company that has never turned an actual stand-alone profit, grabs tens of thousands of dollars per unit sold in tax subsidies from the taxpayer and also has convinced Wall Street to throw $100 bills into a roaring bonfire on an every quarter or two basis will continue to be able to do all of the above.

Then there are some percentage of people who wake up in a cold sweat.  They ate the red pill.  They used to believe, but today they do not.  Something changed their mind.  They recognize that Amazon isn't a zero, but it's probably only worth 10% of its current stock price.  Apple isn't a zero either, but as a commodity player it's priced at twice it's value -- so it's worth $70-75, not $150.  Facebook is worth $30 or $40, because you can't keep growing user base in a saturated market, those not on the platform are either too young, too old or make $2 a week and you also can't keep adding ads without eventually causing a user revolt.   Netflix is worth $10 for its user base but zero for anything else and Tesla is a literal zero.  They add up their shares, they multiply by the current prices, compare with the above and immediately vomit.

The day that there are a lot of the second and few or none of the first is the day the suspension of disbelief and continued buying into what is outrageously overpriced, and in many cases arguably worthless securities, ends and selling in size begins.

Is it tomorrow?  Probably not.  But today feels eerily familiar.  The vomit-inducing upward spikes have come, and now we're seeing people starting to ask questions.

All you need is something like MSTR from March of 2000 -- the one event that creates that cold sweat.

The screams, cries, and gun-in-mouth suicides are coming folks.  I can't give you a date and neither can anyone else but this is the exact pattern that I've seen play out before, and this movie ends with the protagonist jumping out of a 75th floor window.

My camera is pointed upward and I'll have film of the splat at 11.

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User Info It Is March of 2000? in forum [Market-Ticker]
Oliver1655
Posts: 90
Incept: 2012-08-02

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There will be Budd Dwyer's everywhere due to all this leverage unraveling and being multiplied in the negative direction.

Of course the vast majority don't realize the "leverage" crank turns in both directions.
Krzelune
Posts: 5692
Incept: 2007-10-08

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I will laugh my ass off for hours when people start smelling the Musk of bull****.
Flappingeagle
Posts: 2582
Incept: 2011-04-14

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Some people believe in the Flying Spaghetti Monster, I believe in the Giant Cosmic Fan.

So yes, I believe.

I believe that when Comet Poop collides with the Giant Cosmic Fan that there will be a ****-storm of trans-Biblical proportions. There will be no place to hide on planet Earth as everything has already been leveraged up 10x or more. Some goat herder in Namibia might not know it but his goats are the collateral for $3.5 billion in loans.

Yes, the feeling is eerily familiar. I (mostly) got out of the market before the 2000 crash for the same feelings that I have now. Everything I look at is priced dearly or even higher and the media are all celebrating new highs...

Flap


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Here are my predictions for everyone to see:
S&P 500 at 320, DOW at 2200, Gold $300/oz, and Corn $2/bu.
No sign that housing, equities, or farmland are in a bubble- Yellen 11/14/13
Trying to leave the Rat Race to the rats...
Ckaminski
Posts: 4051
Incept: 2011-04-08

Mass-Hole!
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I've been laying in lots of bottles of my favorite scotch in preparation for this event.

I fully expect my IRA, in MM funds since 2011-ish, to somehow go poof, but it'll be great entertainment. :-) Yup, I missed the greatest rampjob in history completely! But I slept really well every night since.

Steph4liberty
Posts: 2366
Incept: 2010-10-22

Raleigh, NC
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I was working in the trading dept of a brokerage firm back then. I can remember our traders taking part in the MSTR debacle. They raked in the cash, but only because they were nimble and didn't care whether they traded long or short.

I'm so glad those days are long behind me now...I sleep a whole lot better.

But I do see what's coming too. And "it won't be pretty" doesn't come close to what this world is about to face.

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"Man will never be free until the last Banker is strangled with the entrails of the last Politician" - unknown

"This isn't a market anymore, it's a computer game." - Drench
Quik49
Posts: 3884
Incept: 2007-12-11

ut
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Peeking at a 30 year chart of the Naz, 2000 and 2007 are going to look like a farts in the wind. My biddness is seeing the same madness as 07-08....custom homes out the wazoo...then zero overnight....been warning my peeps to be preparing for SHTF for 2 years... it cometh

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Long Vaseline....

Flyanddive
Posts: 2129
Incept: 2008-10-10

Detroit
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But Apple has the most efficient setups.


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"I've seen people go into real poverty trying to pretend to be rich."
Marquiri
Posts: 25
Incept: 2015-02-24

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So for those of us who have significant funds tied up in 401k, IRA and the like, what do you all suggest for a strategy?
Tickerguy
Posts: 148666
Incept: 2007-06-26
A True American Patriot!
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Sigh.....

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Winding it down.
Aquapura
Posts: 611
Incept: 2012-04-19

South of Canada
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Quote:
So for those of us who have significant funds tied up in 401k, IRA and the like, what do you all suggest for a strategy?


Was waiting for this question to come. I appreciate when Karl offers a bit of investment advise but that's not what I come here for and anyone who regularly visits this site shouldn't be expecting it either.

Personally I've been beating my head against a wall trying to get my father to divest from the market. He's retired mid-70's and has no business putting his retirement at risk, but he's chasing yield, which ZIRP has ****ed people his age. That said, 0% return is better than negative return.

When people say they sleep better at night that's what it means.
Steelpiston71
Posts: 5391
Incept: 2007-09-05

Michigan
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"So for those of us who have significant funds tied up in 401k, IRA and the like, what do you all suggest for a strategy?"

If you've been reading, oh never mind. There IS NO STRATEGY. Be debt free with the lowest economic footprint possible, get in shape, etc.

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"We have resolution authority under Frank/Dodd... How about we USE IT?" Karl Denninger, 10/07/10 on the Dylan Ratigan Show, MSNBC.
Krzelune
Posts: 5692
Incept: 2007-10-08

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Musk's next unicorn product... the world's first plug-in electric whole house generator. And you can get tesla financing to buy it. /sarc
Johnnyb
Posts: 30
Incept: 2014-10-21

Tulsa, OK
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I wrote a book about that, titled "MicroSecession: Simple Ways to Liberate Yourself, Your Family, and Your Community from Government Idiocy". It's available on Amazon and BN.com (Amazon may say "out of stock" but it isn't really true).
Drifter
Posts: 104
Incept: 2016-02-11

Pacific Northwest
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Last week over dinner I had Great Depression documentaries playing on the boobtoob for my teen boys-- trying to explain the 'bezzle then as it relates to the 'bezzle now.

Except one glaring difference: back then people had dignity and built their little Hoovervilles while trying to survive in an honest fashion; now, when the bubble pops, cities will burn.


Themortgagedude
Posts: 10263
Incept: 2007-12-17

saint louis
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Why doesn't Amazon just raise it's prices by 1% across the board on everything. And double their profit margins.

I buy everything from there and wouldn't even check for price. They've built a monster - why not let it eat? I just don't get it. Is profit a bad thing?

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I think its time we ask ourselves if we still know the freedoms that our founding fathers intended for us. Ronald Reagan 1964
Bagbalm
Posts: 5236
Incept: 2009-03-19

Just North of Detroit
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Marquiri - Face the fact you will be screwed out of all or most of this. You do not have the power to reform the system. The only way to beat the casino is not to play in the casino.
My wife has 'significant' funds in the retirement accounts, but she has never put in more than matching what her employer offered as free money, so she can lose half of it and she's really lost nothing. She realizes it wasn't any grand free gift at the onset.
They keep suggesting she divert a huge chunk of her income - 20 or 30% to the accounts. We're not that stupid. 3% towards this lotto ticket is plenty.
We own our home. It is the cheapest sort of home in an area of very expensive homes. That limits what they can collect because we can pay our tax easily when the owners of these multi-million dollar home will be busted by the same rate.
We don't owe anything. The credit cards get auto-paid monthly. They are just a convenience. We pay cash for our cars. Modest practical cars.
As far as I am concerned we are RICH compared to the strivers in the $1.5 million dollar house with two new leased cars and everything stuffing their Mc Mansion on credit. In hock past their ass and spinning the hamster cage so hard the bearings are smoking.
Tickerguy
Posts: 148666
Incept: 2007-06-26
A True American Patriot!
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Quote:
Why doesn't Amazon just raise it's prices by 1% across the board on everything. And double their profit margins.

I buy everything from there and wouldn't even check for price. They've built a monster - why not let it eat? I just don't get it. Is profit a bad thing?

Because it won't eat -- it will starve, and they know it.

The dirty secret with Amazon is that they simply don't have margin to grab. They get the physical sales they get BECAUSE of their price and their pricing on AWS is being FORCED downward for the same reason.

Everything THINKS Amazon is killing people AND they have excess margin they can grab. The first is true but the second is FALSE. They are killing people BECAUSE they are underselling physical goods below their all-in costs, when one looks at delivery, fulfillment, warehousing AND ADMINISTRATIVE, which for them is ENORMOUS. Look at their SG&A line and how fast it has been going up.

AWS was a cash cow to start BECAUSE they had few competitors. Now they have a LOT of competitors and many of them have MUCH smaller administrative overhead percentages -- with hardware and such being a commodity scale is not necessarily to your benefit IF it comes with an overbloated SG&A line.

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Winding it down.
Quik49
Posts: 3884
Incept: 2007-12-11

ut
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Amazon has reminded me of general contractors (mostly home builders) that low ball projects or maybe but******money away on 6ok trucks and **** like that, don't pay subs then try to outrun their costs on volume and end up in a Peter to pay Paul scenario....eventually they get caught with there unit hanging out and cut off...seen it oh so many times.

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Long Vaseline....

Parabarbarian
Posts: 41
Incept: 2013-06-05

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I do have money in stocks but nothing in Amazon, Netflix, Apple, etc. and that is largely because of reading Denninger's rants on the subject. My broker used to think I was missing out by avoiding those high-profile tech stocks but seems to be coming around.

I am almost completely debt free. A few more car payments and I will be.

I still have work to do on the getting-in-shape part.

BTW, I tried to setup a VM on Digital Ocean using the link Denninger provided and I cannot say I had an easy time of it. After taking my credit card information they put a lock on my account because of something in my profile. They would not tell me what it is and I never did get a system. I went over to Amazon and found their Lightsail servers were roughly comparable in capacity and price with the Digital Ocean Droplets so went with Lightsail instead.
Flappingeagle
Posts: 2582
Incept: 2011-04-14

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Quote:
So for those of us who have significant funds tied up in 401k, IRA and the like, what do you all suggest for a strategy?


Well, to be honest I think we are all gonna take it up the @$$. I've been wrestling with this problem for years and the best that I can come up with is the following: get 100% into short-term US Government bonds. Those are commonly called T-Bills.

Now, it is time for the disclaimer: I have no idea if that will work, will not work, or to what extent it will or will not work. Second disclaimer: If it does work I don't have any idea what there will be to spend the money on after the crash. It has turned into a roll of the dice that leads to another roll of the dice and, since we got into the 401(k) trap we can't avoid it.

Otherwise, Bagbalm above laid out a great strategy for the rest of your wealth/income.

Bottom line: Good luck to all of us because we are going to need it.

Flap

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Here are my predictions for everyone to see:
S&P 500 at 320, DOW at 2200, Gold $300/oz, and Corn $2/bu.
No sign that housing, equities, or farmland are in a bubble- Yellen 11/14/13
Trying to leave the Rat Race to the rats...
Flyanddive
Posts: 2129
Incept: 2008-10-10

Detroit
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I switched to B&H for most things over Amazon. Way better quality of service, and my packages don't arrive like they were thrown out of the airplane at FL350.

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"I've seen people go into real poverty trying to pretend to be rich."
Tdurden
Posts: 520
Incept: 2015-01-29

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"So for those of us who have significant funds tied up in 401k, IRA and the like, what do you all suggest for a strategy?"

In the future you should be much more
careful about whom you let do favors for you. One shouldn't have to have had extensive dealings with organized crime to know this. But you can take some solice in knowing that you won't be the only one breaking in a new biting stick and bottle of lube.

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"I'd like to live just long enough to be there when they cut off your head and stick it on a pike as a warning to the next 10 generations that some favors come with too high of a price." -Vir Cotto Babylon 5
Fpeachm
Posts: 6
Incept: 2010-06-11

Brookfield Ohio
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The Central Bankers and the Pension Funds will just keep buying anyway.
Tickerguy
Posts: 148666
Incept: 2007-06-26
A True American Patriot!
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When was my last upper body workout?

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Winding it down.
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