“It’s not a bubble,” Retail Investors Are Told As The Smart Money Bails Out

Wolf Richter's picture

Wolf Richter   www.testosteronepit.com   www.amazon.com/author/wolfrichter

“Biotech Stocks’ Rout Perplexes Analysts” is how the Wall Street Journal headlined the phenomenon. The Nasdaq Biotech Index had plunged 21% from its intraday high six weeks ago, to which it had ascended in an ever steepening curve that culminated in a beautiful spike. I wrote about that craziness at the time [NASDAQ 10,000 – Or Something]. The Biotech bubble had become so glaring that even I could see it. So it’s perplexing that analysts would now be perplexed.

To add some color, the WSJ quoted ISI Group analyst Mark Schoenebaum: “Horrible day in #biotech. I’m frankly at a loss for an explanation. And it’s my job to at least know why. Humbling day.”

He has been a stock analyst following the Biotech sector since 2000. If he’d started three years earlier, he would have seen the bubble build, pick up momentum, go crazy, and pop in early 2000. He would have seen Biogen dive so fast so far it would have knotted up his stomach. He would have experienced the implosion viscerally. And he might not have forgotten – though many analysts have. But not having been through this before, he was “at a loss.”

And something is cracking.

Of the 14 IPOs planned for this week – the busiest since 2007 at the eve of the last implosion – five were postponed, pending better weather. But Farmland Partners started trading on Friday, and got plowed under. An hour before the close, it was down over 10% from its offering price of $14 a share. A last-minute rally brought it up to $12.98, for a loss of 7.3%.

“People are pretty nervous,” explained CEO Paul Pittman. “This is about building long-term value in an asset class that for all kinds of macro reasons we believe is certainly going to keep appreciating.”

That endlessly appreciating asset class is farmland. The company, which expects to get taxed as a REIT, doesn’t own or do much yet. But it’s gonna “acquire high-quality primary row crop farmland ... throughout North America ... upon completion of a series of formation transactions.” It’ll own 38 farms with 7,300 total acres, mostly in Illinois.

Farmland has been hot for long time.

Over the last 10 years, farmland prices in Iowa soared 282%, in Nebraska and South Dakota 326%. Over the last 6 months, prices still rose 7.2% in South Dakota, but in Nebraska they stalled, and in Iowa they started to fall, now down 2.8%.

Farmland has been through this before: in the 1980s, the bubble burst, and farmers who’d borrowed against their land at nosebleed valuations ran into trouble because crop prices couldn’t make the equation work, and they couldn’t service their debts and had to sell, which triggered more bouts of forced selling which drove prices down further and took rural lenders down with them. The scenario of any bubble that is unwinding. It wreaked havoc on rural America.

That Wall Street finally pushed a farmland REIT, willing to buy farmland at peak valuations, into the hands of retail investors, after a huge multi-year run-up in stocks and farmland, should send people scurrying out of the way.

“But it’s not a bubble.”

That’s what Savita Subramanian, Head of US Equity and Quantitative Strategy BofA Merrill Lynch Global Research, wrote on March 21. Then she went on to describe what exactly it was, namely a bubble:

We have witnessed a recent surge in media attention on the topic of equity bubbles, citing various signs of evidence: Biotech stocks have risen 300% over the past five years, and Internet stocks have returned more than 400% over the same period. And most IPOs this year have been for unprofitable companies trading at high valuations.... The recent sell-off in high-fliers has investors worried that the deflation of this “bubble” could take down the overall market, similar to what occurred in 2000.

But no. “We think not,” she wrote. BofA Merrill Lynch makes lots of moolah pushing overpriced stocks to exuberant retail investors who’ve been driven by the Fed’s interest rate repression into the razor-like claws of risk. And besides, “the frothy spots appear well contained,” she added in central-banker lingo. And then the old saw: “Equity bubbles rarely happen when everybody is talking about bubbles.”

In late 1999 and early 2000, just before the bubble imploded spectacularly, “bubble” was the only thing everyone was talking about. Everybody tried to ride it up all the way and then get out. With predictable results. Repeat in 2007 and 2008.

That’s what analysts are doing. They see the bubble, and they benchmark it against the bubbles that blew up in 2000 and 2007, and they pull rationalizations out of thin air why this time it’s d.... Oops, they’re not using the d-word, which would make them the laughingstock of TP and ZH readers. They’re using logical-sounding arguments that border on superstitions – “Equity bubbles rarely happen when everybody is talking about bubbles” – to explain why it’s different. Exuberant retail investors are expected to swallow it hook, line, and sinker.

Meanwhile, the Smart Money is selling.

This week, it was once again private-equity mastodon Blackstone Group which dumped one of its LBOs, hotel chain La Quinta, into the lap of mutual funds and retail investors via an IPO. Blackstone has been busy dumping its LBOs. Other PE firms have been busy too. Valuations are enormous, and PE firms need months, sometimes years, to get out from under their priced possessions. So they plan ahead. And they’ve been selling everything that isn’t nailed down for over a year.

And hedge funds are bailing out of equities. Still in an orderly manner.

“We saw net exposure come way down,” explained Jon Kinderlerer, managing director at Credit Suisse’s prime brokerage business that deals with hedge funds. Hedge fund exposure to stocks in the US is “actually at the lowest level since August 2012,” during the euro turmoil before ECB President Mario Draghi saved the day with his whatever-it-takes pledge. “Funds have trimmed exposure, and they’ve added hedges.” The sharpest cuts occurred over the past month, he said. Hedge funds are “battening down the hatches to weather the storm.”

Buried in the IMF’s Global Financial Stability Report is a doozie of a chart. It depicts the bubble in covenant-lite and second-lien loans, the same that helped blow up the banks in 2008. Only this time, they’re even worse. Read..... Biggest Credit Bubble in History Flashes Warning: ‘Seek Cover, Implosion In Sight’

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Bullwinkle Moose's picture

Yawn-------- Somebody wake me up when the show starts.

Fuh Querada's picture

The meme "record insider selling" by "smart money" to the "dumb retail investor" has been posted on ZH at regular intervals since 2009 when the S&P was below 1000.

nightshiftsucks's picture

Bullshit,Yellen cannot let this burst or heads will roll.There might be a correction but nothing too big.I'm looking for a big stimulus package and QE before the end of the year.

divingengineer's picture

Fuck em, its their banks, their reserve notes and their fake bubly economy.  They even have the govt in their pockets to turn out fake numbers to convince the muppets that things are going swimmingly.  

So fuck em, they either salvage this shit for their own self interest or they flame out and crash into the ocean like a Malaysian jet liner.

We are screwed either way, so I don't know if I really care what they do at this point.

TruthInSunshine's picture

Peeps - lend me your ears.

We are in nosebleed bubble territory here, neither the Fed nor other CBs can stop this bubble'from imploding (bubbles can't be sustained by their nature) no matter what policies they maintain or unfurl, and when "stock market investors" get burned for the 3rd time in 14 years, whatever foundation of faith that some naively placed in the "stock market" will be destroyed.

We're going to see the mother of all market crashes, rivaling the '29 and '33 crashes, and it's lights out.

The insider money has already sold off, and much of it has went aggressively short.

The next 24 months will be incredible. Grab some beer and popcorn.

Comte d'herblay's picture

Unless you too have joined the Shorts, you're prognostication is worthless.

Have you sold your children, all that you own, and can borrow or steal with impunity, and placed it all into the Triple Short Indices, like TZA, SKF, FAZ?

If not, then....meh.

DeadFred's picture

Wow it's almost as if we are seeing the same movie of the future! But maybe we are.

moneybots's picture
“It’s not a bubble,” Retail Investors Are Told As The Smart Money Bails Out


Someone has to be left holding the bag.  Smart money wants it to be retail.

Buck Johnson's picture

EXACTLY!!!!!!!!!!  It's about to burst and they are getting out before the rush.

ebworthen's picture

Ah yes.  Get people to invest, blow a bubble, get out at the top and rake the little people's chips off the table.

Run up to the dot com bubble, run up to the 2008 housing bubble, and now the 2009-Present QE bubble.

I Write Code's picture

The stock market is boring these days, being carefully (and secretly and illegally) managed to the last farthing by our bankster elite.  So a few goofy stocks got to ridiculous levels, let the kids have some fun for a while they'll get tired and come home in due course.  The whole thing may go Fukashima at any moment, but short of that it's just nice and warm and homey and bubbling right along.

The banksters bailing out of real estate is similarly pretty much a nonevent, except it signals they don't see any further sharp increases on the horizon.  The fed's printing has got average prices to within about one sigma of where they would have been if 2008 had never happened.  There are some profits to be taken, and they are being taken while the taking is good. I can't see that as the apocalypse either.

The equity markets could fall another 10% just to dance on their 200ma, it would still mean nothing.  I'd be pleased as punch if real estate markets fell a similar 10%, but that probably means they won't.  For excitement I think we need to stick to Bundy and Bitcoin.