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Stock Market Bubbles: What the Media Misunderstands

Stock-Markets / Stock Markets 2015 Aug 11, 2015 - 09:19 AM GMT

By: ...

Stock-Markets D.R. Barton, Jr writes: Since the last bona fide financial bubble, the real estate and credit bubble of 2007 to 2009, it seems like every time anyone pays a few pennies too much for a stock, there is a flock of analysts ready to start crowing "bubble!" like so many birds on a wire.

I believe that any pundit who calls a sector or market a "bubble" when they really mean "fundamentally or technically overbought" should be banished from pontificating until the real bubble appears.

That's no hollow gripe: These talking heads can do serious damage with their flawed analyses. Regular investors who heed their bad advice can end up prematurely exiting what are in fact strong, lucrative positions, leaving billions in upside on the table.

Besides, when you have the facts on your side, like we do, you can easily see that the markets are nowhere near bubble territory.

And the charts I have to show you prove it…

These Facts Tell Me to Stay Invested

I recently appeared on Neil Cavuto's show on FOX Business to argue that "bubble" is one of the most overused words in the financial media, and I also debunked the tech bubble myth.

But now we can dig a little deeper and look at three clear, easy-to-understand metrics that tell us that current tech companies may be overvalued, but are not showing the signs of excess – the very definition of a bubble.

Big tech is earning the big numbers: Practically everyone agrees that big tech is actually earning its valuations.

Apple Inc. (Nasdaq: AAPL) is certainly not overvalued; its recent drop took it down to a trailing 12-month price/earnings ratio (P/E) of 13.3. Google Inc. (Nasdaq: GOOG) has also been putting up huge earnings numbers. Even though, at 29.7, its P/E ratio is higher than Apple's, they are very different businesses (especially in terms of capital intensity, working capital, etc.), and Google remains a cash flow monster. So it's really difficult to make a case that big-cap tech is anything more than an overvalued sector.

Venture capital (VC) sees some high valuations, but no bubble: VC firms are no strangers to "overinvesting at the top," as they did in 1999 and 2000, but most experts see firms as much more savvy in managing the numbers during this more recent bull market. According to deal analytics firm Mattermark:

"Traditional venture capital deals are holding steady for traditional Series A through D, with a small set of outliers successfully negotiating for more favorable ownership or outsized rounds in the last quarter. Some VCs are simply sitting out on deals they expect will be over-priced."

Series A through D are progressive pre-IPO funding rounds for startup companies from earliest (A) to latest (D). So some of the smartest teams in the business are showing restraint, which doesn't point to bubble valuations from a VC perspective.

IPOs are of higher quality – and the rate of offerings is slowing: One of the key benchmarks for classic irrational stock market exuberance (with apologies to former Fed Chair Alan Greenspan) is the number of companies coming to the equities markets in search of funding. During highest market valuations, more and more companies seek the "easy, eager money" that becomes available.

Here we see the most compelling case against those calling the current situation a tech bubble.  Let's look at both the quantity and quality of tech IPOs that have come to market in 2015.

One of the most interesting phenomena that we see in the IPO market is a definite trend toward stronger and more established companies coming to market. We can see this visually in two very useful graphics. The first shows the median annual revenue for tech IPOs:

This clearly shows that fewer "concept companies," that is to say, those firms with a big idea but low or no revenue, are hitting the IPO market.

Here's What a Real Bubble Actually Looks Like

Even more informative is the next chart from Danielle Morrill at Mattermark. It was made in 2014, and I've got updated numbers to show you, too.

Now, this chart helps us see what a real tech bubble looks like – extreme quantities of IPOs and very low company quality coming to the IPO market as seen by very low revenue-to-expense ratios:

Look at those numbers for 1999 and 2000 – now that's a tech bubble! Since this chart was made, let's look at the number of IPOs for all of 2014 and 2015 year to date.

To quantify the smallish blue bars for the most recent years in the charts above, I'll give the numbers going back to 2012 and update 2014 and 2015 (which, again, is not on the chart):

  • 2012 had 38 tech IPOs
  • 2013 had 45 tech IPOs
  • 2014 had 55 tech IPOs
  • 2015 has only had 15 tech IPOs so far

So based on the 2015 numbers so far, we're on pace for only 26 tech IPOs this year, less than half of the number we had in 2014. Does that strike you as a bubble-like activity?

There is one area, however, where the market is getting more and more overvalued. And this is where investors can watch for signs of a real stock market bubble…

These "Unicorns" Could Live Up to Mythical Valuations

Thanks to the post-2000 securities regulation changes, companies have been taking longer to come to the IPO market, remaining private for longer. This practice has become so prevalent that in November of 2013, Aileen Lee, founder of Cowboy Ventures, coined the term "unicorn" for a private company that had capital round valuing it at $1 billion or greater.

Here is where we see a huge growth in companies reaching this elite status – and the perceived valuation levels. And it is here where things are really getting overvalued.

There are currently 127 companies worldwide that have valuations over $1 billion, according to the CBInsights' venture capital database. And among those, there are 13 companies that have reached "decacorn" status, meaning they sport valuations of $10 billion or greater.

This private funding is getting, by many estimations, pretty frothy. However, there is much less transparency in the world of private funding, so the bubble debate about companies in this realm will rage on.

Why even talk about these private companies if the average investor can't access them? Quite simply, this private equity market is growing to be an even more significant part of the capital-raising machinery in the global markets than in the past.

Private financing is even becoming a bellwether for the capital markets as companies lengthen their timelines for obtaining IPOs. So while you keep your attention on your stock investments and trades, the private equity market is certainly worth an occasional glance, as it could become a leading indicator for the public markets.

More from D.R.: Why You'll Learn to Love Volatility

When the markets bounce up and down, stocks send very distinct signals virtually invisible to the average investor. If you read them the right way, you could be pocketing cash gains in as little as two days. That's why it's vital you meet the newest member of the Money Map Press team. He's perfected his method for identifying where stocks are headed in volatile markets – and how you can make money in both directions. It's the smartest (and fastest) way to make money we've ever seen, when stocks like Tesla, Amazon, and Apple are getting snapped around. Click here to see how you can cash in…

Source :

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12 Aug 15, 03:00
Stock Market Bubbles

Dear Mr. Barton,

I agree with you. Currently, the US Stock market indexes are NOT in a bubble. The indexes are certainly very extended, however, they are far from exhibiting the extremely over extended characteristics that are found with an actual stock market bubble,

Currently, around the world there are three equity market bubbles fully inflated. These are Argentina, Venezuela and China. China has actually popped! A number of other markets are partially inflated but are not yet full-blown bubbles. In this respect, the US markets are far from being in a bubble state and therefore should weather the coming storm better than most other markets around the world. The FED ended EQ3 well before a bubbles fully formed in the US, which is good news.

In terms of individual stocks in the US, there are a number of key stocks that are themselves in a bubble and will deflate over the coming 12 to 24 months. To name a few here I state Apple (APPL), Amazon (AMZN), Google (GOOGL), Home Depot (HD), Netflix (NFLX) and Boeing (BA). There are other US stocks, but these are the stocks I have confirmed mathematically. The fact that there is a limited number (mostly momentum stocks) is one reason why the US indexes have not yet entered bubble territory. I had an article published by Market Oracle (February 08, 2015) covering my analysis on Apple Inc.

Over the last few years I have developed a mathematical model that is designed to identify and classify stock market bubbles and it is the output data from this model that has helped me understand the current status of equity markets around the globe. The model works equally well with commodities. I have gone back over the last 100 years and analyzed 20 different bubbles, covering US markets in 1929 (DOW), 1987 (DOW) and 2000 (NASDAQ), the Japan market in 1990 (NI225), Hong Kong, China, Brazil, India and Russia, and also Oil (2008), Gold and Silver (2011). Twenty distinct bubbles in all.

We are currently forming a significant stock market top in the US markets (which may well have already happened in May for the DOW and S&P 500, and July for NASDAQ) and then we could see a significant downturn both here and abroad. Additional models I have developed indicate a drop in the DOW of between 12% and 33%, perhaps more, but this will be a major correction NOT a crash. Expect to see the low in the DOW sometime in mid-2016, but almost certainly before mid-2017.

We have reached a point in time where stock market prices are at historic highs and commodity prices are at or near historic lows. This is set to reverse soon !



19 Aug 15, 15:37
Question for HarrisD

Hi David, wanted to respond to your comment.

What reasons do you see for commodities reversing and by how much? Surely china has changed its economic trajectory removing the extreme raw material usage stimulant so any bounce will be limited and not to previously seen levels?

Currently, the loss of of petro-dollars recycling into bonds appears to be raising the cost of credit ie leading to interest rate rises ultimately tempering growth [of debt], again limiting the rise in commodity demand.

The one thing that continues to rise overall is money supply though - Europe's turn with the QE now, so perhaps that influences it but overall that suggests new highs in assets and stocks?

23 Aug 15, 18:42
A Fall in Equities and a Rise in Commodities

Hi Sixpack,

If I am right then the top in US Equities is in and its down hill for equities from here. The particular pattern we are in for equities means that we will probably not reach a bottom for 8 to 10 quarters which takes us to end of 2017.

Most likely investors will head for safe heavens. That will be the usual places like US treasury bonds, Gold and Silver. So as investors pile into US bonds their prices rise and their yields fall. I am predicting a new low (below the 2012 low for 10Y) in treasury yields, sometime in the next 9 to 12 months. I believe this is the reason that the FED is holding back on a rate rise because they expect things are going to get bad again. The best time to re-mortgage or buy a house is still yet to come!

In terms of Oil, the price of Oil is most likely to bounce, since it never stays at a low in price for long. If you remember, right in the middle of 2008, when that last downturn was in full swing and global demand was falling, the price of Oil rose dramatically in a bubble formation to $148 per barrel. There was a lot of media attention about peak Oil at the time and a drop in supply (strategic propaganda by hedge funds I guess) and speculators pushed money into Oil, creating the bubble, then following crash.

Other commodities may not rise so much since in general the global economy is going to be slowing and demand will fall, so you will need to pick your commodities with care. Nevertheless, in the case of commodities that are reaching long-term bottoms their natural direction will be up as investors and speculators look to make some income away from the dire situation in Equities.

Hope this helps!



27 Aug 15, 02:10
Thanks for the response David

Many thanks for that explanation.

What is interesting is Nadeem's thoughts that the stock market is likely to reach new highs by the end of this year, which is of course quite different to your ideas.

If more stimulus arrives then stock market rises would be expected.

Do you have any thoughts on Nadeem's forecasts?


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