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
Stock Market Increasing Technical Weakness - 22nd July 19
What Could The Next Gold Rally Look Like? - 22nd July 19
Stock Markets Setting Up For A Volatility Explosion – Are You Ready? - 22nd July 19
Anatomy of an Impulse Move in Gold and Silver Precious Metals - 22nd July 19
What you Really need to Know about the Stock Market - 22nd July 19
Has Next UK Financial Crisis Just Started? Bank Accounts Being Frozen - 21st July 19
Silver to Continue Lagging Gold, Will Struggle to Overcome $17 - 21st July 19
What’s With all the Weird Weather?  - 21st July 19
Halifax Stopping Customers Withdrawing Funds Online - UK Brexit Banking Crisis Starting? - 21st July 19
US House Prices Trend Forecast 2019 to 2021 - 20th July 19
MICROSOFT Cortana, Azure AI Platform Machine Intelligence Stock Investing Video - 20th July 19
Africa Rising – Population Explosion, Geopolitical and Economic Consquences - 20th July 19
Gold Mining Stocks Q2’19 Results Analysis - 20th July 19
This Is Your Last Chance to Dump Netflix Stock - 19th July 19
Gold and US Stock Mid Term Election and Decade Cycles - 19th July 19
Precious Metals Big Picture, as Silver Gets on its Horse - 19th July 19
This Technology Everyone Laughed Off Is Quietly Changing the World - 19th July 19
Green Tech Stocks To Watch - 19th July 19
Double Top In Transportation and Metals Breakout Are Key Stock Market Topping Signals - 18th July 19
AI Machine Learning PC Custom Build Specs for £2,500 - Scan Computers 3SX - 18th July 19
The Best “Pick-and-Shovel” Play for the Online Grocery Boom - 18th July 19
Is the Stock Market Rally Floating on Thin Air? - 18th July 19
Biotech Stocks With Near Term Catalysts - 18th July 19
SPX Consolidating, GBP and CAD Could be in Focus - 18th July 19
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

Market Oracle FREE Newsletter

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

How Stocks Bull Markets End

Stock-Markets / Stock Markets 2015 Dec 04, 2015 - 11:14 AM GMT

By: John_Mauldin

Stock-Markets

By Jared Dillian

Many people think that they ring a bell at the top of a bull market. Ding-a-ling-a-ling.

That is indeed often the case. The bell was rung in 2000 at the top of the dot-com bubble—I like to think it was 3Com spinning off Palm that broke its back.

But sometimes there is no bell, no catalyst, no story to tell. A bull market becomes a bear market, and it happens just like that.


Silicon Valley has been in a food fight for about three years now. Everyone knows it’s going to end, except for the folks in Silicon Valley. These guys are funny. I met a few of them in the last cycle. They really thought it was going to go on forever.

There are now 145 unicorn companies (private companies with a valuation of $1 billion or more), with a total combined valuation of $506 billion.

We are watching the top happen right before our eyes.

Square

If you were paying attention a couple of weeks ago, you might have read the news about a company called Square going public. Jack Dorsey is the CEO of Square. He is also the CEO of Twitter. I think of this sometimes whenever I complain that I’m too busy.

Square got a round of financing in 2014 at a $6 billion valuation, and now it’s a public company. If you pull up SQ on Yahoo! Finance, you will see that the market cap is $4 billion.

As Square was making the rounds in the roadshow, investors decided they didn’t want to overpay just to make the mezzanine round investors rich. So there wasn’t much demand for Square at a $6 billion market cap. It eventually went public at a $3 billion market cap, or $9/share. (The deal performed well in the aftermarket, at least. The stock is trading at $12.)

No catalyst. No bell ringing. The price simply got too high, and people pulled back. But you know what this means. If one deal can trade below private valuations, they can all trade below private valuations.

On to the next data point…

Fidelity

You may not know this, but Fidelity owns shares of private companies in some of its funds (like Contrafund). Fidelity has to figure out how to value these things.

In general, venture capital firms have to mark their investments to “market,” whatever that means. To do this, they use the services of third party valuation firms. Those valuation guesses are probably subject to mood or opinion, and as you can imagine, there are a lot of bad guesses. The valuations don’t mean much—if you’re an LP (limited partner), at the end of the day, you care about cash in and cash out. But mark-to-market creates some interesting short-term incentives.

As for Fidelity, they also have to mark things to market, and they also use valuation firms. But valuation firm A that Sequoia is using is different than valuation firm B that Fidelity is using. And Fidelity perhaps wants its valuation firm to be more conservative.

So Fidelity has been marking its private investments to market at levels that are below the most recent funding rounds. This puts the VCs in a bit of a pickle. Do they copy Fidelity or do they press on with their own, higher valuations in the face of dissenting opinions?

None of this makes people very bullish on startups.

Uber

Uber is the biggest unicorn of all, with a $50 billion valuation. Side note: they don’t make any money.

Uber is trying to raise another billion—at a $70 billion valuation.

Now, the only reason you would invest in Uber at a $70 billion valuation is if you thought they would go public at $80 billion or more. But looking at what happened to Square, that will almost definitely not happen.

And why would you pay $70 billion for Uber when Fidelity is going to mark it in your mush? Another great question.

I don’t think anyone is in the mood to pay $70 billion for Uber. Uber is stuck. They will have to go public or take a down round if they really need the cash.

And this, folks, is how bear markets start.

Brainstorming Session

So let’s do some brainstorming on what this could mean if it really were the end of the line for Silicon Valley (at least in the medium term).

  • Since tech has been going up while energy/mining has been going down, could this trend reverse?
     
  • Could value start to outperform growth? (If I’m not mistaken, it already is.)
     
  • Could large cap start to outperform small cap? (Boy, is it ever.)
     
  • If you lived in the Bay Area, would you want to sell your house and rent?
     
  • As new tech is in the process of topping, have you seen what old tech has been doing? Check out the chart of Microsoft, at 15-year highs:

For full disclosure, I started calling the top (or at least asking hard questions) on Silicon Valley about a year and a half ago. But I think most dedicated observers saw what happened with the Square IPO and said, “Yep, that might be the top.”

The other thing I’ve learned is that even when people recognize the top, they vastly underestimate how bad the pain is going to be on the downside. “Oh, it’ll just be a quick correction.” Never is.

One last riposte: Anyone who invested at these valuations will richly deserve what’s coming to them. Those prices were cuckoo.


Jared Dillian

If you enjoyed Jared's article, you can sign up for The 10th Man, a free weekly letter, at mauldineconomics.com. Follow Jared on Twitter ;@dailydirtnap

The article The 10th Man: How Bull Markets End was originally published at mauldineconomics.com.
John Mauldin 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