A story that has gotten much attention over the past few weeks is the return of the dotcom bubble --- Bubble 2.0. I agree with the notion that it is a bubble; we see a number of signs, though the most important one from an economic perspective is the expansion of money supply; note the increase in the Federal Reserve's reported MZM. A bubble was going to end up somewhere because of monetary expansion; social networking technology, a sector that will be creating a disproportationate amount of value given its ability to more efficiently connect all aspects of our world, is a likely candidate. In this way, a healthy bull market is being transformed into a toxic, manic bubble. So as Zillow (Z) IPOs at $20, an increase from its previous target of $16 - $18 (which was an increase of its previous target in the $12-$14 range), it's important to note that money supply continues to increase -- and Zillow continues to operate at a loss (while housing prices and the mortgage industry continue to downsize).
Still, I expect there to be a big first day pop on many of these Internet stocks. I believe these stocks are for active traders only; those who are comfortable with high beta stocks (i.e. very volatile stocks) and are well-versed in some form of technical analysis so that they can control risk in the midst of this volatility will benefit greatly. As for those interested in a buy and hold strategy, the current crop of Internet offerings simply don't have it what it takes. By the time these companies get to the public market, they have already had several rounds of financing from angel and venture capital funds; witness how VC funds have grown in dollar size (in spite of a decline in number of funds, suggesting a concentration of market power). The end result of this is a handful of venture firms financing multiple rounds before handing it off to investment bankers, who in turn tack on their own hefty premium. The final price tag is then delivered to the public market. While many of these companies will excel at creating value, the financing process is too concentrated and distorted due to inflation of money supply -- the end result of which is unrealistically high valuations.
After two years of economic and financial suffering resulting from the crisis of 2008, the appetite for a promising growth story is immense and growing. But Bubble 2.0 isn't it. For the real growth opportunity in equities, see gold mining stocks. The impediment to all economic growth is the unhealthy banking industry that controls the flow of capital; this process is resolved through gold, which is why gold mining stocks are the first step in the next bull market -- and the sector that will bring us the next truly great growth investment opportunity.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
