Practical analysis for investment professionals
13 March 2015

Weekend Reads for Investors: Signals from Silicon Valley

Posted In: Weekend Reads

US stocks reached a notable milestone earlier this week when the bull market turned six years old. As Charlie Bilello of Pension Partners notes, only twice in its history has the S&P 500 Index recorded a better six-year stretch. In both cases, 1981–1987 and 1994–2000, the end came suddenly and spared few investors. Pointing to extended valuations and invoking the statistical phenomenon known as mean reversion, Bilello says, “If trees don’t grow to the sky, the next six years will look nothing like the previous six.”

US corporations aren’t listening. With stocks near all-time highs, TrimTabs reports that companies repurchased a record $104.3 billion of their shares in February. Several big banks, including Bank of America (BAC), Citigroup (C), and JPMorgan Chase (JPM) have since jumped on the buyback bandwagon after passing the Federal Reserve’s most recent “stress tests.”

Few observers would argue that the US Federal Reserve’s zero interest-rate policy (ZIRP) — in effect for, coincidentally, just over six years — has not played a hand in the stock market’s advance. This helps explain the current fixation on the Fed’s next move. The Federal Open Market Committee (FOMC) meets again March 17–18 and Fed watchers are intently focused on the Fed’s previous pledge to be “patient” with respect to increasing interest rates. A strengthening job market and expectations for accelerating wage growth increase the chances of a rate hike in the United States as early as midyear. Any uptick in wage growth is likely to further pressure corporate earnings, and it’s worth noting that the looming profits slump is not confined to the energy industry. FactSet is expecting year-over-year declines in first quarter earnings in the consumer staples, materials, telecom, technology, and utilities sectors as well.

The technology industry was in the crosshairs of Mark Cuban when he recently argued that it’s in a “bubble far worse than the tech bubble of 2000.” What’s different? According to Cuban, in the dot-com era, stocks that went public could be easily bought and sold by the average investor. Today, however, the rise of angel investors and crowdfunding means that the general public is getting in on the ground floor, before firms go public. Like in 2000, valuations are in the stratosphere, but today there’s a lot less liquidity and investors are likely to find that out the hard way. Cuban asks, “What is the stock of a company worth when there is no place to sell it?”

Amish Shah says Cuban “has never been more wrong,” though, as a serial entrepreneur, he may be talking his book. His retort is more of a celebration of the remarkable innovation in technology and the newfound sources of funding than an effective rebuttal of Cuban’s criticisms of sky-high valuations and illiquidity.

A building boom in Silicon Valley, highlighted by grandiose new offices for Apple, Facebook, and Google, and unseen since the late 1990s, would seem to support the notion that the technology sector is, if not in a bubble, a bit full of itself.

Finally, CB Insights recently highlighted the big push that hedge funds and mutual funds have made when it comes to investing in technology start-ups. Retail clients of fund giants like BlackRock (BLK), Fidelity, Janus (JNS), T. Rowe Price (TROW), and Wellington may be surprised to learn that they are leading the charge when it comes to late-stage venture investing. When it comes time to sell, we wonder who will be left to buy.

Below are some other stories that caught my eye in recent weeks.

Strategic Thinking

High Profiles

Industry Trends

The Lighter Side

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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

Photo credit: ©iStockphoto.com/Christian Mueller

About the Author(s)
David Larrabee, CFA

David Larrabee, CFA, was director of member and corporate products at CFA Institute and served as the subject matter expert in portfolio management and equity investments. Previously, he spent two decades in the asset management industry as a portfolio manager and analyst. He holds a BA in economics from Colgate University and an MBA in finance from Fordham University. Topical Expertise: Equity Investments · Portfolio Management

3 thoughts on “Weekend Reads for Investors: Signals from Silicon Valley”

  1. Savio Cardozo says:

    Hello David
    I read with great interest your blog post on the valuation of the stock market, particularly since it is pertinent to a project I am working on.
    I think there are at least three factors that support current valuations (which, as you know, are nothing but expectations of future earnings):
    Baby boomers entering retirement, who currently have a significant portion of their wealth tied up in their homes, will be looking to invest this portion as they downsize or move into retirement homes
    Money from China and the Middle East seeking safe havens
    And the rapid pace of technological innovation affecting most industries, particularly manufacturing and healthcare
    To quote Warren Buffet from his 2014 letter “Charlie and I have always considered a “bet” on ever-rising U.S. prosperity to be very close to a sure thing. Indeed, who has ever benefited during the past 238 years by betting
    against America? If you compare our country’s present condition to that existing in 1776, you have to rub your eyes in wonder. In my lifetime alone,
    real per-capita U.S. output has sextupled. My parents could not have dreamed in 1930 of the world their son would see. Though the preachers of pessimism prattle endlessly about America’s problems, I’ve never seen one who wishes to
    emigrate (though I can think of a few for whom I would happily buy a one-way ticket). The dynamism embedded in our market economy will continue to work its magic. Gains won’t come in a smooth or uninterrupted manner; they never have. And we will regularly grumble about our government. But, most
    assuredly, America’s best days lie ahead.”.
    For everyone’s sake I hope he is right.
    I take this opportunity to wish you an enjoyable weekend
    Savio

  2. Dave Larrabee says:

    Savio,

    Thanks for sharing your thoughts and the Warren Buffett quote. Buffett’s enthusiasm for the US economy and his discipline in not overpaying for investments has certainly served him well over the years. I think his pending acquisition of Detlev Louis Motorradvertriebs, the German motorcycle equipment retailer, and his expressed hope that it would be a “door opener” to more deals in Europe suggests that he may see better values outside of the US at this time.

    Enjoy your weekend as well.

    Dave

  3. Siim says:

    I really enjoy the weekend reads. They have given me so much knowledge!

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