Weekend Reads for Investors: Signals from Silicon Valley
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.
- Howard Marks, CFA, on “luck and skill in investing.” (Advisor Perspectives)
- “Bridgewater’s Ray Dalio Explains the Power of Not Knowing” (Institutional Investor)
- Fracking king Harold Hamm on “rigs, rednecks, and property rights.” (Forbes)
- Oil industry pioneer Fred Olsen is leading a revolution in wind power. (Fortune)
- Thanks to perhaps the worst contract ever written, Max-Hervé George could own Aviva France. (Financial Times)
- “Birdman: The Pigeon King and the Ponzi Scheme That Shook Canada” (The New York Times Magazine)
- Jack Bogle argues that the investment management industry needs more stewardship and less innovation and salesmanship. (Bloomberg)
- Expect continued convergence between traditional and alternative asset managers in asset management. (McKinsey & Company)
- Cultural and technological disruption in investment management is happening now. (CFA Institute Magazine)
- According to a recent study, hedge fund alpha declines with both divorce and marriage. (Chief Investment Officer)
The Lighter Side
- Dilbert on technical analysis. (Dilbert by Scott Adams)
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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