Author Topic: 1999 again?  (Read 16191 times)

SHDL

  • Sr. Member
  • ****
  • Posts: 380
Re: 1999 again?
« Reply #150 on: July 09, 2019, 04:23:51 AM »
What I find interesting is that for a subject heading of "1999 again," the discussion has almost exclusively focused on valuations. The late 90s were certainly a time of euphoria in the capital markets, which gave plenty of startup enterprises a long leash of funding that otherwise wouldn't have existed. With that leash came jobs, office leases, computer equipment, consultants, etc.

I see plenty of parallels today. While we can argue whether or not a "pets.com" exists today, there are plenty of very questionable business models being funded, which, whenever the cycle turns (and it will), results in shuttered businesses, lost jobs, unpaid leases, and plenty of excess capital spending.

Even for the well-regarded business models, as growth slows and the market begins to demand profits, opex cuts will be the first place to look. The double-edged sword of high margin SAAS companies is that operating leverage cuts both ways.

I know I'm jaded from having graduated college around the time of the dot com bubble, and I acknowledge we're nowhere near that time, but I am honestly surprised to see little to no consideration of how these factors may play into the current cycle.

I agree, and this is part of what I was vaguely alluding to above when I suggested that current earnings may not be sustainable.  Like you say, one of the big risks here for investors is contagion, whereby a group of questionable businesses go bust and take down other seemingly unrelated businesses along with them.  For certain companies like, say, Google or Facebook, the effects may be especially pronounced for reasons discussed here on the GOOGL thread.


oddballstocks

  • Lifetime Member
  • Hero Member
  • *****
  • Posts: 2232
    • Oddball Stocks Blog
Re: 1999 again?
« Reply #151 on: July 09, 2019, 05:35:09 AM »
What I find interesting is that for a subject heading of "1999 again," the discussion has almost exclusively focused on valuations. The late 90s were certainly a time of euphoria in the capital markets, which gave plenty of startup enterprises a long leash of funding that otherwise wouldn't have existed. With that leash came jobs, office leases, computer equipment, consultants, etc.

I see plenty of parallels today. While we can argue whether or not a "pets.com" exists today, there are plenty of very questionable business models being funded, which, whenever the cycle turns (and it will), results in shuttered businesses, lost jobs, unpaid leases, and plenty of excess capital spending.

Even for the well-regarded business models, as growth slows and the market begins to demand profits, opex cuts will be the first place to look. The double-edged sword of high margin SAAS companies is that operating leverage cuts both ways.

I know I'm jaded from having graduated college around the time of the dot com bubble, and I acknowledge we're nowhere near that time, but I am honestly surprised to see little to no consideration of how these factors may play into the current cycle.

I have a similar sentiment.  Graduated at the bust, studied computer science, was deep in the euphoria because getting a high flying job sitting on a giant bouncy ball coding depending on it..

This round is much different though.  Back then you had to purchase things to grow, purchase computers, purchase servers, lease office space.  Now we live in a rental economy.

Most of these idea IPO's have zero tangible assets, or the tangible assets are coffee makers and ikea desks.  Once the doors are locked that capital vanishes.  Whereas in the past that capital continued.  Some of the crazy expansion of the 90s, data centers, fiber networks, uneconomic satellite networks led to bankruptcies and viable companies purchasing said assets and putting them to use.  A lot of the fiber we use today is a result of VC funded expansion in the 90s.

Today we aren't investing in any of those things.

On the flip side the companies that took it on the chin last time were the service providers for the euphoria, Sun Microsystems, EDS etc.  It would be interesting to know how much of AWS' revenue is from money losing venture backed companies.

I have no idea whether we're near an inflection point or not.  These things go on much longer than anyone ever things, so might still have another 3-5 years before the truly dumb money gets involved.

Unfortunately if this does get dragged out before a crash it will be an enormous death blow to most boomer retirements.  They are heavy in stocks, and if you have a 50% drawdown at 75 it's really hard to recover from that, there just isn't enough time.  I wonder if something like that could precipitate an ever worse crisis at the government level.
The ultimate edge for bank investors: http://www.completebankdata.com

RuleNumberOne

  • Full Member
  • ***
  • Posts: 120
Re: 1999 again?
« Reply #152 on: July 09, 2019, 09:08:31 AM »
https://www.bloomberg.com/news/articles/2019-07-09/a-lehman-survivor-is-prepping-for-the-next-credit-downturn
This money manager is one of those with "active mandates".

"“There’s an art to knowing when to leave the party,” said the director of fixed income for Europe in an interview. “In fact it’s over -- people are desperate and they’re hunting down the after-party. We probably only have a few hours left.”

Like even outspoken naysayers at the time, she didn’t anticipate the violence of the downturn. Still in May 2007, Gomez-Bravo became cautious on U.S. risk and issued warnings on corporate health -- which bear echoes with the intense hunt for yield today.

“Everything was bid indiscriminately,” she recalls. “I knew things were heating up; there were telltale signs. It’s always difficult to leave money on the table, but as a result we avoided the blow-ups.”"
« Last Edit: July 09, 2019, 09:10:20 AM by RuleNumberOne »

RuleNumberOne

  • Full Member
  • ***
  • Posts: 120
Re: 1999 again?
« Reply #153 on: July 12, 2019, 10:48:43 PM »
I founded a new corporation rated AAA by the ratings agencies. All it does is issue "corporate bonds" that carry an interest rate of -0.05%. This has a wide-moat and no competitors: when I pitched the idea to VCs, they threw me out saying the big profits meant I could never IPO in today's market. Everybody wants to build and invest in the next WeWork.

Junk bonds in Europe carry a negative yield. So do Nestle's bonds with a negative yield of -0.15%.

Why go to all the trouble of making products? Just issue more corporate debt and get paid to sit on the money. At my new AAA-rated corporation, everyone just drinks at the beach all day.
 
This Charlie Munger quote explains the current bond market:

"I have heard of one such example. Colin Camerer of Caltech, who works in “experimental economics” devised an interesting experiment in which he caused high I.Q. students, playing for real money, to pay price A+B for a “security” they knew would turn into A dollars at the end of the day. This foolish action occurred because the students were allowed to trade with each other in liquid market for the security. And some students then paid price A+B because they hoped to unload on other students at a higher price before the day was over."
« Last Edit: July 12, 2019, 10:50:20 PM by RuleNumberOne »