Financial panics occur when the "blind capital" of the public floods into unwise speculative investments.
The market is perfectly unwinding from last year's action, with the dogs leaping to the front, and the (2013) winners free falling down into bottomless pits. In many ways, it is remarkable that capital would seek out names called losers just weeks ago, like McDonald's (NYSE:MCD), IBM (NYSE:IBM), and Symantec (NASDAQ:SYMC), while the hottest names that represent the future of global commerce are not only being kicked to the curb, but are also being stomped into submission. Have Amazon (NASDAQ:AMZN), Goggle (NASDAQ:GOOG), and Facebook (NASDAQ:FB) really become irrelevant overnight?
The answer is absolutely not, but that does not mean the share price of those companies were not ahead of themselves. Still, even when people were buying the high flyers at the top, it hardly qualifies as "blind capital" or unwise speculation. At some point, maybe much sooner than you think, all those high flyers will revisit those lofty perches as the underlying fundamentals bolster their claims to leadership; but the rapid rotation from leaders to laggards must contain some kind of message or story.
James River's Bankruptcy filing noted three reasons for the action, and events, which lead to the Chapter 11 Cases:|
Two reasons above would qualify under creative destruction, but one is a damn shame.
I have had several emails and tweets asking or predicting a worst-case scenario, including the next Great Depression. Even when I allow my imagination to run wild, I cannot see a Great Depression around the corner.
I can see the dangers of record government debt; $4.0 trillion on the Fed balance sheet and of a nation fiddling around with the notion there is something better than free markets and capitalism. Toss in fiscal policies that bankrupted a coal company last week, and it is not hard to imagine disaster.
Nonetheless, it is too soon to talk about another recession or Great Depression, as the economy has willed itself to stay above water driven by natural instincts and driven by the size of the greatest economic engine ever cobbled together. The debate about the stock market however, is more nuanced and open for level-head conversation. Is dumb money flooding the market? Are novices in over their heads? I do not think this is the case.
In fact, the public has been rational and if there were a debate over "blind capital," then it would be a debate focused on the smartest guys in finance.
Mark Zuckerberg is still being ribbed over his 'WhatsApp' acquisition, and I think he will come out having the last laugh. Interestingly, a woman who is a technician in television and a casual observer of the stock market told me the stock had to be a sell because of the 'WhatsApp' deal. She continued by stating, "Nothing is worth $19.0 billion." However, she guessed the value of $3.0 billion, although she did not have a clue as to what the app did, and had not heard about the 64,000,000,000 messages the app handled in a 24-hour period, which is up from a daily average of 27, 000, 000,000, from a year earlier.
Those kind of numbers, plus 465 million active daily users, are worth something. It is funny how she estimated $3.0 billion... after all is said and done; $19.0 billion might have been cheap.
I Got the Hook-Up
Last Friday, the market attempted to stave off another gut-wrenching sell-off, but stumbled into the weekend just as it stumbled throughout the week. Although it was not widely reported in the financial media, some midday weakness occurred when it was reported that IACI, run by wunderkind Barry Diller, paid $500 million for a ten percent stake in Tinder. (It was interesting that two legendary wunderkinds were letting down investors on the same day, with Jamie Dimon of JP Morgan Chase (NYSE:JPM), coming well short of earnings consensus.)
Tinder debuted in September 2012, at the University of Southern California, as a hook-up app. Since then, the app has spread like wildfire becoming infamous for turning the Olympic village at Sochi into a Plato's Retreat. The site is not fancy with all kinds of algorithms and stuff; it just cuts to the chase of matching up horny, straight adults looking to speed up the love process...or lust, if we are to be honest. The news spooked the hell out of smart investors, and I know that industry experts said this was a sign that social media valuations were now too high and out of whack.
Over the weekend, it was revealed that maybe the numbers were misrepresented. Instead of $500.0 million, Diller invested $50.0 million, which means the app with 10 million users has a more reasonable valuation of $500.0 million. That is still more per user than Facebook paid for 'WhatsApp,' but then again, Tinder brings new meaning to active daily user. Walter Bagehot made an observation of the public, as dumb money back in the late 1800s and similar assumptions have been made in the last 150 years.
Moreover, this investing public did not take the bait, and knew that Saga Candy Crush (BATS:KING) and La Quinta Inns (NYSE:LQ) were not worth owning, as both IPOs fizzled on the first day of trading. Maybe casual sex and "blind capital" will always exist to a certain degree, but right now, it is not the public throwing caution to the wind. On the contrary, they are being cautious and are more timid than expressed in the media. In fact, they are more likely to hook up with a total stranger off a hot new app, than to flood the market with speculative excess.
Citigroup (NYSE:C) posted a stronger than expected earnings report, setting the tone counter to JP Morgan (JPM) last week. Then retail sales came in at their highest level in a couple of years, and February was revised higher than anticipated. Pent-up demand obviously played a role, but one has to wonder if any of this heretofore was missing the impact of the so-called "wealth effect".
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