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  • Sign of a New Peak for Stocks?

    Posted by Carl from Chicago on September 20th, 2014 (All posts by )

    Back in the woeful years of the dot.com boom and bust I worked for a company with a dubious distinction. The value of that company in the stock market was less than the value of the cash we had on our books. What the market was essentially saying is that the sum total of all our efforts as employees was NEGATIVE – we would be worth more if we just shut down immediately and gave back the cash to investors. The fate of that company, of course, was to go bankrupt.

    Today there are some other major signs of froth in the market. Yahoo is a classic web / advertising / technology stock with a solid market capitalization of $40 billion. Yahoo’s CEO, Marissa Mayer, was a Google alumna and has been receiving a lot of press for her intelligence and drive to change the company, as well as her good looks.

    Screen Shot 2014-09-20 at 8.43.59 AM


    However, all is not as it seems.  The primary value for Yahoo isn’t its online advertising, email, or users – it is the stakes that they amassed in the hot Chinese e commerce company Alibaba (NYSE: BABA) and also Yahoo Japan.  In fact, the value of Yahoo is less than the value of these stakes, which are approximately $45B, partially due to the reason listed in this Bloomberg article:

    While the market value is large for Yahoo’s Asian assets, that doesn’t necessarily reflect the value available to investors and the company because of taxes, said Ben Schachter, an analyst at Macquarie Securities USA Inc. Yahoo, which would have made $8.3 billion by selling Alibaba shares at the IPO, only reaped around $5.1 billion after taxes.

    Taxes are ‘‘one of the big issues,” Schachter said.

    While it is true that $45B in investment value isn’t worth $45B because of the after-tax implications, it certainly implies that the market isn’t valuing Yahoo at very much at all.  It is also possible that the market thinks that Alibaba is over-valued at its current price of near $100 (after a huge run-up from its IPO price of $68, another huge sign of froth in the market) but the two stocks will generally track closely together now.  Yahoo is sort of a broken “tracking stock” for this value.

    Another sign of froth is “spec companies”.  Spec companies are stocks of companies that are created “from scratch” and their value is based on the promise of management to do certain things in the future with money contributed or raised from investors.  Generally you can’t create a spec company – you need to take over an existing listing and then you promise returns to investors who in turn value your company.  Brazil was on a tear earlier in the decade and a flamboyant billionaire created a company OSX whose IPO in 2010 was discussed here:

    (Reuters) – OSX Brasil (OSXB3.SA) slashed its initial public offering as investors balked at paying a high price for a start-up company with no revenue.

    This too recently came to an end as the company OSX filed for bankruptcy protection, but the ability of a firm to launch a start up planning to build a port and various oil and other assets and receive a high valuation should raise eyebrows.  Like many other similar plans this one ends up in dust with a recent bankruptcy filing.

    I don’t have any sort of unique forward looking view on stocks but the eye-popping valuation and initial one-day jump of Alibaba and other signs have been correlated with declines in the stock market in the past.

    Cross posted at Trust Funds for Kids

     

    7 Responses to “Sign of a New Peak for Stocks?”

    1. MikeK Says:

      When the virtual printing press runs out or slows down, we might have another 1929.

    2. dearieme Says:

      “For carrying-on an undertaking of great advantage but no-one to know what it is.”

    3. Jonathan Says:

      People want stock. Where else can you put cash? The shares of a number of recent IPOs are flying. It’s essentially a carry trade, and nobody knows when the game will end. At least it’s relatively easy to unwind stock positions, and you can use trailing stops.

    4. Dan from Madison Says:

      Jonathan is right. Until there are options that make sense, stocks will be where a lot of action is.

      As far as Alibaba goes, I always stay away from things that are on tv a lot and/or are over hyped and/or have business models that I don’t understand. On top of that you don’t really have a part of the company when buying Alibaba shares, you are just buying part of the shell company. No votes for the board (not that I will ever own enough shares of anything to alter a shareholder vote but it is still troubling).

    5. Bill Brandt Says:

      Except the stock market is one of the few games in town giving any kind of dividends – have you seen what the banks are offering?

    6. Grurray Says:

      “Except the stock market is one of the few games in town giving any kind of dividend”

      A blog that I frequently read is Political Calculations. They believe the stock market moves according to future dividend yield expectations:

      http://politicalcalculations.blogspot.com/2014/09/no-surprises-for-s-500.html#.VCAn3BZw_vA

      It’s pretty complicated, but they come up with the “Investors Focus” lines by looking at the value of CBOE dividend future options, and then doing some math that converts the data into the fractal and chaotic movement typical of stocks. As investors shift their focus from one future time period to another, stock prices should then move to that time period.

      It’s only a snapshot in time. The expectations can annoyingly change abruptly because their calculations contain some “fuzzy” factors that varies due to noise (as seen in the animation).

      However, for what it’s worth, as of now the dividend expectations for 2015 appear to be considerably lower than where stock prices are now.
      If/when investors start looking ahead to 2015, it may note look too appealing.

      Regarding next year, I’ve been thinking about the upcoming election and, while I hope and expect a GOP landslide, I’m not so sure it’s going to be so great for the stock market. Considering the Fed and other central banks have largely been responsible for keeping the bull market going, a new congressional movement hostile to the Fed and central planning wouldn’t seen to be good for the QE & loose money regime.

    7. Jonathan Says:

      Thanks for the link.

      The Obama administration is egregious but the problem is bipartisan.

      The stock mkt may be rallying partly on economic recovery and partly on inflation. The mkt is climbing a wall of worry, which is reassuring if you’re long, and this time it’s different because of ____, which is disconcerting if you’re long.