Best of the Week
Most Popular
1. The Trump Stock Market Trap May Be Triggered - Barry_M_Ferguson
2.Why are Central Banks Buying Gold and Dumping Dollars? - Richard_Mills
3.US China War - Thucydides Trap and gold - Richard_Mills
4.Gold Price Trend Forcast to End September 2019 - Nadeem_Walayat
5.Money Saving Kids Gardening Growing Giant Sunflowers Summer Fun - Anika_Walayat
6.US Dollar Breakdown Begins, Gold Price to Bolt Higher - Jim_Willie_CB
7.INTEL (INTC) Stock Investing to Profit From AI Machine Learning Boom - Nadeem_Walayat
8.Will Google AI Kill Us? Man vs Machine Intelligence - N_Walayat
9.US Prepares for Currency War with China - Richard_Mills
10.Gold Price Epochal Breakout Will Not Be Negated by a Correction - Clive Maund
Last 7 days
UK House Building and Population Growth Analysis - 17th July 19
Financial Crisis Stocks Bear Market Is Scary Close - 17th July 19
Want to See What's Next for the US Economy? Try This. - 17th July 19
What to do if You Blow the Trading Account - 17th July 19
Bitcoin Is Far Too Risky for Most Investors - 17th July 19
Core Inflation Rises but Fed Is Going to Cut Rates. Will Gold Gain? - 17th July 19
Boost your Trading Results - FREE eBook - 17th July 19
This Needs To Happen Before Silver Really Takes Off - 17th July 19
NASDAQ Should Reach 8031 Before Topping - 17th July 19
US Housing Market Real Terms BUY / SELL Indicator - 16th July 19
Could Trump Really Win the 2020 US Presidential Election? - 16th July 19
Gold Stocks Forming Bullish Consolidation - 16th July 19
Will Fed Easing Turn Out Like 1995 or 2007? - 16th July 19
Red Rock Entertainment Investments: Around the world in a day with Supreme Jets - 16th July 19
Silver Has Already Gone from Weak to Strong Hands - 15th July 19
Top Equity Mutual Funds That Offer Best Returns - 15th July 19
Gold’s Breakout And The US Dollar - 15th July 19
Financial Markets, Iran, U.S. Global Hegemony - 15th July 19
U.S Bond Yields Point to a 40% Rise in SPX - 15th July 19
Corporate Earnings may Surprise the Stock Market – Watch Out! - 15th July 19
Stock Market Interest Rate Cut Prevails - 15th July 19
Dow Stock Market Trend Forecast Current State July 2019 Video - 15th July 19
Why Summer is the Best Time to be in the Entertainment Industry - 15th July 19
Mid-August Is A Critical Turning Point For US Stocks - 14th July 19
Fed’s Recessionary Indicators and Gold - 14th July 19
The Problem with Keynesian Economics - 14th July 19
Stocks Market Investors Worried About the Fed? Don't Be -- Here's Why - 13th July 19
Could Gold Launch Into A Parabolic Upside Rally? - 13th July 19
Stock Market SPX and Dow in BREAKOUT but this is the worrying part - 13th July 19
Key Stage 2 SATS Tests Results Grades and Scores GDS, EXS, WTS Explained - 13th July 19
INTEL Stock Investing in Qubits and AI Neural Network Processors - Video - 12th July 19
Gold Price Selloff Risk High - 12th July 19
State of the US Economy as Laffer Gets Laughable - 12th July 19
Dow Stock Market Trend Forecast Current State - 12th July 19
Stock Market Major Index Top In 3 to 5 Weeks? - 11th July 19
Platinum Price vs Gold Price - 11th July 19
What This Centi-Billionaire Fashion Magnate Can Teach You About Investing - 11th July 19
Stock Market Fundamentals are Weakening: 3000 on SPX Means Nothing - 11th July 19
This Tobacco Stock Is a Big Winner from E-Cigarette Bans - 11th July 19
Investing in Life Extending Pharma Stocks - 11th July 19
How to Pay for It All: An Option the Presidential Candidates Missed - 11th July 19
Mining Stocks Flash Powerful Signal for Gold and Silver Markets - 11th July 19
5 Surefire Ways to Get More Viewers for Your Video Series - 11th July 19

Market Oracle FREE Newsletter

Top AI Stocks Investing to Profit from the Machine Intelligence Mega-trend

Desperate Stock Market Bubble Thinking Takes Hold on Wall Street

Stock-Markets / Stock Markets 2015 Apr 26, 2015 - 04:48 PM GMT

By: Money_Morning

Stock-Markets

Michael E. Lewitt writes: If it looks like a bubble, smells like a bubble and walks like a bubble, it is a bubble.

What we have in the certain stocks today is a bubble every bit as epic as the one that took the NASDAQ Composite Index (INDEX:.IXIC) to its previous record of 5048 back in 2000.

There are few certainties in this world, but one of them is that bubbles pop.


And like all previous bubbles, this bubble will pop too.

One of the key signs of a bubble is when investors and the analysts that cheer them over the cliff refuse to acknowledge facts that contradict their bullishness.

The Evidence Is Irrefutable

Exhibit "A" is Tesla Motors, Inc. (NASDAQ: TSLA). At the beginning of the year, analysts were forecasting that the company would earn $2.78 per share and had an average price target on the company's stock of $269 per share – $49 per share higher than where it was trading at the time. Since then, a series of setbacks have led analysts to radically lower their earnings estimates to a mere $0.53 per share – a reduction of 80%.

But instead of lowering their price target on the stock by a commensurate amount, analysts have only lowered it by $19 per share to $251 – a reduction of a mere 7.1%.

That is bubble thinking. The psychological term for that is denial. The Wall Street term for that is careerism.

Exhibit "B" is Amazon.com Inc. (NASDAQ: AMZN). In the first quarter of the year, the company once again managed to spend every penny it took in – and it took in a lot of pennies.

Revenues for the quarter increased 15.1% from a year earlier to $21.7 billion, but the company managed to spend every penny and more, leaving it with a $57 million net loss.

The big news, however, was that the company disclosed for the first time some financial details about its secretive cloud computing business, Amazon Web Services (AWS). AWS's revenue for the first quarter was $1.57 billion and its operating income was $265 million; analysts had been projecting annual revenue of $6 to $9 billion, so this met expectations.

Amazon has been competing fiercely with Google, Inc. (NASDAQ: GOOG), Microsoft Corp. (NASDAQ: MSFT) and International Business Machines Corp. (NYSE: IBM) to provide cloud computing services to startups and other companies such as Netflix, Inc. (NASDAQ: NFLX).

Investors are now fantasizing about an Amazon Web Services spin-off and the possibility that AWS could someday be larger than the Mother Ship at Amazon.

For its part, Amazon promised further losses of between $50 million and $500 million in the second quarter. The result – investors bid up the company's stock by $55.11 per share (14.13%) to $445.10 per share, where it is trading at an even more infinite multiple of its non-existent earnings.

That is bubble thinking.

Investors were so enamored with AWS, in fact, that they bid up cloud competitor Microsoft's stock by 10.45% – the biggest move in that behemoth in years.

Microsoft saw its stock rise by $4.53 per share to $47.87 just a couple of days after announcing earnings that failed to inspire the market (in fact it inspired Goldman Sachs Group Inc.'s (NYSE: GS) analyst to reiterate his "Sell" recommendation on the company).

What happened, of course, was that investors extrapolated Amazon's success at AWS to Microsoft's growing cloud business to add $37 billion to the software giant's market cap.

Once again, bubble thinking.

Bubble thinking also requires a total lack of memory. Investors seem to think that cloud storage is something that has never existed before, but it is merely a new version of the Internet hosting business that crashed and burned 15 years ago.

"Creative Destruction" May Not Be Enough This Time

Amazon and its competitors are already engaged in a vicious price war that is driving down the cost of cloud storage and obliterating margins and profits in this business.

The history of technology is filled with case studies of creative destruction, which is why even with its current success Microsoft's current market cap of $393 billion is 31.6% lower than what it was in 2000.

Other tech giants tell the same story…

Cisco Systems Inc.'s (NASDAQ: CSCO)'s market cap is $147 billion today compared to $466 billion then; Intel Corp. (NASDAQ: INTC) is worth $152 billion versus $401 in 2000; and Oracle Corp. (NYSE: ORCL) is worth $188 billion today compared with $232 billion during the Internet Bubble.

While all of these companies have made enormous business and technological strides over the past decade-and-a-half, they have moved backwards in market terms.

Where Bubble Thinking Takes Us From Here

Investors holding Amazon and Tesla stock should run out and sell it as quickly as possible. Those capable of taking the risk should be shorting these stocks using options to limit their downside.

The other stocks on this list – MSFT, CSCO, INTC and ORCL – have survived the tech wars and are more reasonably valued; their stocks are primarily subject to the risk of an overall market decline, which means these holdings should be hedged with the market moving into increasingly overvalued territory.

All of this – and there is much more, believe me – led the NASDAQ to rally by 3.25% or 160.27 points to close at a new record high of 5092.98 last week. Of course, bubble-heads will remind us that this is only a nominal high and that the index has much higher to go since in inflation-adjusted terms the equivalent level to its 2000 peak would be 6,900.

The Dow Jones Industrial Average (INDEX:.DJI) added 1.44% or 254 points while the S&P 500 (INDEX:.INX) gained 37 points or 1.37% to close at 2117.69. Both were new highs. All of these gains ignored another slew of negative economic reports, weak corporate earnings, and continuing dollar strength – all factors that should be suppressing the animal spirits driving stock prices upward.

Economists are now beginning to lower their forecasts for second quarter growth. The most disturbing news was a terrible March durable goods report, which showed the 7thconsecutive decline that coincides with the strengthening of the dollar.

Dollar strength is likely in its early stages and could run for several more years barring a radical change in monetary policy in the United States compared to those in Europe and Japan.

The feckless Fed meets again this week and will likely further torture the markets by giving little guidance on when it might raise interest rates. The time is long past when it should have done so.

It is becoming increasingly clear that just as the consensus (which includes both the policymakers promulgating policy and the financial media reporting on it) was wrong in thinking that lower rates would stimulate economic growth and higher spending – it has done just the opposite – it is likely to prove wrong in thinking about the impact of modestly higher rates.

Higher rates would promote economic growth by promoting investment discipline, taming speculation and creating lending incentives.

Consensus economic thinking is upside-down and until it gets right-side-up, we are doomed to massive mal-investment and all of the bad consequences that flow from that.

Source :http://moneymorning.com/2015/04/26/desperate-bubble-thinking-takes-hold-on-wall-street/

Money Morning/The Money Map Report

©2015 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules