Yes folks, we think we can declare a bull market! It has been twelve years since the last one and the footprint is undeniable. Looking at the math of FB, GRPN, and LNKD it’s like 1998 all over again.
Just as we heard the negative chorus of the financial press and others, of the valuations Internet companies reached in 1999 and 2000, we expect to hear this again in 2012 or later. We all know what happened in 2000 and 2001; a $1 trillion dollars of stock wealth in the US was eliminated from investors who invested in these securities. Why did this happen? In a nutshell, according to us, two major forces came together:
The Federal Reserve
The Federal Reserve raised interest rates and reduced liquidity (money supply) to such an extent this killed the equity market as a whole. (After pumping in liquidity into the economy for Y2K!) High convexity companies are great when the stock is going up, an amplifier, however this same math works on the downside. The Fed did such a ”good” job killing speculation and perceived excess valuation they had to significantly reverse course in 2002, planting the seeds for the US housing bubble.
Internet Companies Themselves
The other more significant item, of what went wrong in 2000, was the Internet companies themselves “got the math wrong”. Management actions with corporate finance have to be “good with the numbers”. When the numbers are wrong – look out below. When Time Warner merged with AOL, the theoretical earnings of the combined company were so great, there was no way they could earn the amount of money needed to support this merged structure (i.e., balance sheet).
The Future will be Fun, For Us and Model Price Readers! Why?
1. We have, in our opinion, the math to explain the valuation of these companies and make sense of what the market/investors are trying to say. Lots of blogging material!
2. We have seen this movie before. We followed the Internet phenomena in 1999 and 2000 with our math. Much of what we observed lead us to discover the mathematical concept of convexity which is a key component of our model price work along with our other concepts. We have had the time, since 2002, to integrate this new work in our process and we can deliver a better product as a result. Not to mention we have an extensive database of this period, which we will talk about in future blog posts, yes some golden oldies!
3. We are witnessing a start in a new industry – Social Media – with an impact on the human race we still haven’t come to grips with. (Arab Spring and Occupy Wall Street – yes, “The Times they are a-Changin”)
4. Just as in 1998,’99, when new Internet companies were being “born” we are now witnessing companies being “born” in the social media space. This to us is very exciting. Image being at the start of the railroad bull market in the 19th century or the South Sea Company in the 1700’s armed with the math to analyze the whole investment cycle – Boom to Bust. Rarely do we see this happen in capital markets. These companies are young, dynamic and changing the financial and human landscape. Mr. Market is giving these company’s unlimited amounts of capital to succeed in terms of valuation. The much harder issue for these young CEO’s will be to guide their companies through exponential growth, delivering on quarterly expectations and constantly reviewing a myriad of daily investment banking options for their company. As we said above, management actions on the corporate finance front have to be “good with the numbers” – a virtual high wire act. And that’s just the internal corporate stuff. As suggested above, these CEO’s will have to be looking over their collective shoulder at the big bad Federal Reserve as well. The Fed played a role in the 2000 tech crash and should not be discounted from making the same mistake again and again.
So here we go. Some investors will make money some will lose. Fasten your seatbelts. We hope to be there every step of the way. See Fun!