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Feels Like 1999 All Over Again

Monday, October 31st, 2011

As an adult, Halloween tends not to be that scary for me usually.

But after last week’s stock market rally in the face of the deteriorating situation in Europe and the rest of the world, I am afraid…for the stock market and am reminded of fall/winter 1999.

The 4th quarter of 1999 was an absolutely fascinating and terrifying time as my naïve beliefs about market rationality and efficiency were proven patently false.

As a young analyst at Credit-Suisse, I remember the tech analysts’ valuation techniques evolving at a break-neck pace from price-to-earning ratios, to price-to-revenue, to price-to-clicks and, even, price-to-eyeballs. It was clear they were making up whatever they could to continue to sell IPOs into what we all now know was a major stock market bubble.

So many investors were intent on getting their share of the great tech revolution that they blindly bought stocks. Markets soared upward no matter the news.

Despite a rather large and well-respected contingent of investors who recognized that the markets were seriously over-valued and that their implosion was a matter of “when” not “if”, the market crushed anyone or anything that got in its way.

Many fortunes and careers were ruined shorting the ridiculously expensive tech stocks.

Remember how the popular press had deemed Warren Buffet a dinosaur, who simply “didn’t get technology”.

The only theory that explained the market mania at the time was “the greater fool theory” –which suggested that it was smart to buy stocks as long as one believed he/she could sell it to someone else at a higher price.

The market became its own boss, operating by its own rules, disconnected from the realities of economics and cash flows. The market wanted to go up and it did…until it crashed.

Sound familiar?

Here we are again. You know how this story ends: main street gets crushed and Wall Street pays record bonuses. Really, are we still that gullible? Three middle-American-back-breaking bubbles in a little over a decade.

Why don’t we just write checks directly to Wall Street? Remove the middle-man, the stock market. At least, by that method, we do not compromise the integrity of the capital markets…as much.

My horrors were escalated this morning as I listened to an excellent radio skit explaining the Euro situation as the con game that it truly is.

How does news that European leaders have further delayed a decision on how exactly to deal with their problems cause the stock market to rally? Again and again?

How does the market not reflect that an imminent recession in Europe will more than offset the precious little global economic momentum we experienced in the 3rd quarter?

Is anyone reading the signs from consumer sentiment? From the general ledger of the US economy?

Truly, anyone buying into the current stock market rally is a brave soul. At any time, the music could stop – and when it does the market will come crashing down and crush those investors playing the momentum game.

Dis­clo­sure: I receive no com­pen­sa­tion to write about any spe­cific stock, sec­tor or theme

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3 Comments

  1. varadha says:

    Terrific, yet simple analysis. I’ve always been a fan of ROIC as a measure of capital efficiency and believe that no size/growth outperformance can replace the quest for efficiency.

    Sort of like a big gas guzzling v8 that needs ever increasing gallons of fuel to keep its engine running

  2. David says:

    But Angie’s $90 per user acquisition cost is going to go away. That’s what their approach probably is. How would their outlook be if that $90 cost dropped down to a total cost of $3 per user?

  3. David:

    That would be great, but cost per user acquisition is not something that’s very easy for a company to fix. ANGI can slash their marketing budget to the bone, but then they would stop acquiring new members. They would probably lose members in fact, as their membership renewal rate is at ~75% and declining. If they cut marketing expense by ~95% as you seem to be suggesting, ANGI might be able to eke out 1 year of slight profits, but they would start shedding members and losing money very quickly. ANGI’s only hope is to keep its marketing budget high and hope it can reach the scale and brand awareness to be able to sustain its business while scaling back marketing costs enough to turn a profit. The fact that ANGI’s revenue growth is slowing down even as its marketing costs keep increasing makes it very unlikely it will achieve that goal.

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