Blain’s Morning Porridge – Jan 24th 2022: Tech Stocks’ Reality Bites Moment has Arrived..
“The more you explain it, the more I don’t understand it.”
This morning: Tech stocks have taken a thumping this year – a well-timed reality check or a threat to bring down the whole market? Probably time for a clean out of all the speculative, improbable and fantastical perpetual motion machines that beguiled IPO and SPAC investors during the easy money era. Reality bites and it’s time to get real..
Apologies for short comment this morning, but got a conference call to jump on!
Let’s start the week with a statement of the downright bleeding obvious:
The Nasdaq has given up all its gains since June 2021. The Dow and S&P 500 haven’t declined quite so dramatically (where they were 4 months ago), but if squint your eyes tightly enough and draw some randomesque chartist lines it looks as if both have been range bound over the last quarter. These “facts” maybe tell us two things: Tech stocks have declined more because they were overvalued relative to everything else, and the stock market has found its top. Has it passed it? And, has it further to fall? That rather depends how the voting mechanism called the market reacts to sentiment as determined by relative value, monetary tightening, and news-flow.
With further rises in bond yields widely expected across the market, the underlying tone is looking fraxious. Hey ho – but there are few signals of a chaotic market collapse…
This time last year the WSJ published a note recording 90% of 627 market professionals polled by the paper agreed the stock market was a bubble set to pop. Unsurprisingly, a year later an increasing number of market big dogs are calling the current correction as the curtain raiser to a more chaotic market collapse. Pop?
Not so sure.. maybe, but maybe not.
This week is going to stay focused on Tech.. Tesla, Apple and Microsoft are headlining a clutch of reporting stocks – and the big names are likely to post stunning successes. Apple is 8% down this year, but could post a record $31 bln on Thursday. Microsoft is down 13% yet is expected to post $17 bln… and Tesla?
Hey… numbers don’t really matter… but Tesla is expected to post a record $2.3 bln profit, while the stock is down 21% this year. Tesla’s success has a quality all of its own.. largely of it being so massively overvalued by every single metric ever invented by stock analysts! I reckon it’s now a decent car company with leadership in EVs, but facing a future of major battery cost inflation and competition – and perhaps a $85 bln market cap might be more appropriate than its current $950 bln! Its more than 10x overvalued!
Paradoxically the reporting successes of the big tech names could cause the market to further diverge: widening the reality gap between successful, profitable firms with clear market dominance, against those who’ve traded profits for size, yet still face overwhelming competitive pressures. Buy companies that took time to build a competitive moat as well as scale. The bubble pops when a collapse in weak stocks spreads as contagion to strong stocks… which seems to be happening when the single most profitable firms in the history of capitalism are tumbling at the same rate as no hopers… (Discount Tesla from that statement…)
Reality crushed Peleton and Netflix last week. Both suffer from being stocks seen to benefit from pandemic – as it ends, their advantage withers. Both are in highly competitive sectors which are evolving at speed. Both will struggle to add new subscribers as the pandemic ends, inflation eats into discretionary spending and new ways of doing what they did better and cheaper emerge.. The are stuck in evolutionary dead-ends.
Peleton… one of its activist investors is in the WSJ this morning wanting to sack the CEO and sell the company. The stock crashed after reports its stopped production as post pandemic orders dried up. It is taking “significant actions to improve our profitability outlook and optimise our costs” which is the corporate equivalent of telling your loved ones it’s a terminal diagnosis. What’s going to cause the tech bubble to burst, like the 2000 dot.com bubble, is similar reality bites moments across all the improbable fantastical tech company aspirations we’ve seen in IPOs and SPACs.
For recent Morning Porridges on Dot.Com and ARK see:
- Theranos – little new under the sun (this note looks at comparisons to the dot.com bubble)
- Will ARK prove to be 2022’s first financial trainwreck
A moment of terror swept my thinking this morning as I read in the FT: Turks flock to cryptocurrencies in search of stability. That sounds like a catastrophe in the making – a chance for the crypto whales to beggar a whole nation of greater fools sucked into their blandishments that cryptos are better and more secure that fiat currency. What it shows is how currencies are dependent on sovereign credibility – not that crypto is better, but I am sure my in-box will be full of arguments as to why Bitcon is more credible than the Fed….. (there are massive downsides to writing the porridge.)
The Turkey story comes at a critical time as the speculative froth that drove crypto and meme stocks appears to have been blown off the market top. The louder bitcoin barkers shout HODL into a crashing bitcoin market, the less believable all the “reasons” and “justifications” for cryptos to thrive and the “truths” about mass adoption sound. There is a new narrative emerging in cryptoland: “Bitcoin was flawed, but new coins and blockchain infrastructures are being innovated that will be the New New Next Thing.” Yep.. I confidently predict new ways to lose money in Coin scams will be hitting a computer screen near you,…
Curiously, I believe blockchains will finally find a use this year. We’re working on basing a carbon credit market on blockchain to enable discrete qualifying carbon mitigation projects to be traded in a fungible manner. The proble is reconciling tangible real concrete and forest assets with a digitally based trade ledger – which I suspect underlies the failure of every other attempt to innovate blockchain into anything buy imaginary digital currencies. The real world and crypto world don’t conjoin particularly well.
As for meme stocks? Well… the coming reality bites moment is going to hurt.
Finally this morning… There are patterns of behaviours that enable us to make conclusions about people.
In 2006 a businessman bought land on Scotland’s North-East coast for $12 million and developed it into a golf resort – his second in my fine country. Five years later he valued it at $161 million. In 2014 the resort was valued on his financial statements at $436mm, and allegedly that number was used to secure significant amounts of borrowing. $436 million is an impressive valuation for a development that posted a £1.1 mm pre-covid loss in 2019 followed by a £1.3 mm loss in 2020. Turnover fell from £3.3 mm in pre-Covid 2019 to £1.1mm. The chap’s group of Scottish resorts received over £4mm in furlough scheme and grant payments from the UK government – despite it being illegal under US law, and is set to receive a further £1 million in tax rebates from HRMC.
The Scottish government is under pressure to use an “unexplained wealth order” to investigate the source of funds used to purchase the land in 2006.
No prizes for guessing who…
Five Things to Read This Morning:
Out of time and back to the day job..
Strategist – Shard Capital