We will have a much bigger report over the holiday weekend but first a few notes!
Shorter term, markets are stretched, extended and overbought from their norm. Many are talking it is due for a pullback. They are correct, but that does not mean markets have to pull back. QE markets are different. One should know that by now. Keep in mind, eventually all major indices will revert back to their 50 day moving averages. It is just a matter of when.
The NASDAQ and especially the NDX continue to lead the way as their recent pullback was contained nicely while other areas were hit harder. Speaking of hit harder, small caps continue to underperform markedly but have been coming on recently. One glance at the NDX versus the RUSSELL 2000 speaks volumes.
Strength continues to be found in important “risk” areas like BIOTECH, SEMICONDUCTORS and a decent slew of growth names. It is also important that big FINANCIALS finally caught a bid with the XLF into new high ground.
Lastly, without naming names, we have been told by many that ANOTHER pundit is calling for a crash of anywhere between 30-60%. For the umpteenth time, Wall Street is littered with these people that either call for 100,000 Dow or the next crash. This latest prognosticator forgot to mention that this prediction was also made in 2010 and 2012. We are in hopes you get the point.
GARY: You see, there is no bubble. That’s what they tell us. Just because Snapchat now has a $10 billion market cap with virtually no revenues, there is no bubble. Everything is fine, market is fine, valuations are great, everything is all well and good. Snapchat is now valued at $10 billion dollars in the latest round of funding. Just so you know this is private equity, not a public company. So let’s say someone gives them a billion dollars for 10%, well that values it at $10 billion. Snapchat has no revenues, but they are hoping to get advertising from it. Just so you know, they started out as this company where you take a picture and I guess like in Mission Impossible, it goes poof quickly. If you take one of those stupid pictures and you don’t want it on the web. You know what I am talking about, I don’t want to get into it. They vanish within seconds. But, now they are expected to get advertising and other things like being able send money to somebody else because you can’t do that with anything else.
Anyway, just so you know, we are seeing this in a lot of private equity now. So, we are just putting it in the file manager and we will see how it plays out. Just another example. That said, when Youtube was bought out at a very high valuation, I kind of sort of made fun of it and Youtube has been a cash cow. They have been doing marvelously. So you never know who is going to make it big. I just find it interesting that this company that really has no sales but does have a lot of people. Let’s see, I know I read it somewhere that 700 million snaps are sent a day. Really? 700 million photos are sent a day. 700 milion? How many people are in the U.S.? 300 million. But, I guess this is worldwide. They have no revenues. So, the good news is that if they can monetize 700 million snaps. I gather they are going to be able to somehow. We will see. Again, just making my point. $10 billion dollar market cap.
GARY: “I am bringing this up again for the umpteenth time…just in case some of you did not hear it before. THERE HAVE BEEN A BUNCH OF IPOs that have come out recently with no sales. Yes…no sales. They are mostly in the BIOTECH area. Very simply, we have seen this before. Whenever a group gets hot, the wonderful human beings at the investment banking firms will bring public anything that breathes…regardless of fundamentals. They did it in 99 with the .com and it seems they are going at it again. ZSPH,KITE,AGTC,RARE,KPTI are recent examples. There are many more. Just these 5 recent IPOs, added up together have NO SALES. I repeat…NO SALES. Yet…the market cap of these 5 names are $5 billion.
The main point is simple. Our studies of bear markets show that if…and we use the word “if” these days as we are never going to see a bear market again…but if a bear market ever occurs again, these stocks will drop markedly, some as much as 90-100%. Again, how do we know? Studies. Bear markets drop the curtains. Bear markets expose. Bear markets take the ridiculously valued to where they should be. When I started in this business, I was in penny stocks. The company I was at brought companies public at 5 cents/share with market caps of $3-5 million. Those companies had sales. In other words, the investment banks are just packaging crap better.
We are still in a bullish market. This means some of these names can continue higher. Some can go ridiculously higher. ICPT went from $70-$500 in days because of a successful trial. ZSPH just came public at $18…opened at $30 and is currently over $40. NO SALES. RARE was a $21 deal which immediately went to $69 before backing off. NO SALES.
We believe in the BIOTECH industry. We are all for it. Fabulous discoveries will come from some of the companies Some of these discoveries may cure the worst of diseases. We are not mentioning all this because of that. We are mentioning this as a word to the wise. We do not believe companies with no sales should necessarily be put into the public domain. There is too much risk. Yes, the prospectus of these companies outline these risks but in a hot market, risk goes out the window. It is when the market is no longer hot that one should be worried. Right now, there really is not much to worry about. But the curtains will eventually come down. Just don’t be the last one in.” YOU HAVE BEEN WARNED!