David Einhorn: "We Are Witnessing Our Second Tech Bubble In 15 Years" - Full Letter

Tyler Durden's picture

We have been saying for about 6 months that the second coming of the tech bubble is here. We are happy to learn that none other than hedge fund manager David Einhorn agrees. From his just released letter to clients:

We have repeatedly noted that it is dangerous to short stocks that have disconnected from traditional valuation methods. After all, twice a silly price is not twice as silly; it’s still just silly. This understanding limited our enthusiasm for shorting the handful of momentum stocks that dominated the headlines last year. Now there is a clear consensus that we are witnessing our second tech bubble in 15 years. What is uncertain is how much further the bubble can expand, and what might pop it.


In our view the current bubble is an echo of the previous tech bubble, but with fewer large capitalization stocks and much less public enthusiasm. Some indications that we are pretty far along include:

  • The rejection of conventional valuation methods;
  • Short-sellers forced to cover due to intolerable mark-to-market losses; and
  • Huge first day IPO pops for companies that have done little more than use the right buzzwords and attract the right venture capital.

And once again, certain “cool kid” companies and the cheerleading analysts are pretending that compensation paid in equity isn’t an expense because it is “non-cash.” Would these companies be able to retain their highly talented workforces if they stopped doling out large amounts of equity? If you are trying to determine the creditworthiness of these ventures, it might make sense to back out non-cash expenses. But if you are an equity holder trying to value the businesses as a multiple of profits, how can you ignore the real cost of future dilution that comes from paying the employees in stock?

So what is Einhorn doing? Shorting a basket of momentum stocks of course (good luck) each of which he views as having 90% downside.

Given the enormous stock price volatility, we decided to short a basket of bubble stocks. A basket approach makes sense because it allows each position to be very small, thereby reducing the risk of any particular high-flier becoming too costly. The corollary to “twice a silly price is not twice as silly” is that when the prices reconnect to traditional valuation methods, the derating can be substantial. There is a huge gap between the bubble price and the point where isciplined growth investors (let alone value investors) become interested buyers. When the last internet bubble popped, Cisco (the best of the best bubble stocks) fell 89%, Amazon fell 93%, and the lower quality stocks fell even more.


In the post-bubble period, people stopped talking about valuing companies based on eyeballs (average monthly users), total addressable market (TAM), or price-to-sales. When the re-rating occurred, the profitable former high-fliers again traded based on P/E ratios, and the unprofitable ones traded as a multiple of cash on the balance sheet. Our criteria for selecting stocks for the bubble basket is that we estimate there to be at least 90% downside for each stock if and whenthe market reapplies traditional valuations to these stocks. While we aren’t predicting a complete repeat of the collapse, history illustrates that there is enough potential downside in these names to justify the risk of shorting them.

Finally, and tangentially, here is Einhorn on HFT, Flash Boys - in which he is featured prominently - and the IEX exchange.

Michael Lewis’s new book Flash Boys, like all of his books, is a fun read and is based on a true story. It brings attention to some areas of the market that can improve further, and a few areas of possible abuse. There are many legitimate and even beneficial aspects to computerized trading, including market making and statistical arbitrage, yet there are also some areas that are ripe for reform. Most glaring is the latency arbitrage that is used to identify the presence of large institutional orders for the sole purpose of legally front-running them.


These problems fall into the classic dilemma of concentrated benefit and diffuse harm. Lots of investors lose pennies and as a result don’t care too much about market structure; the firms who have based their business around picking up those pennies care a lot about shaping the structure. To overcome this imbalance of interests, the issue needs attention and discussion so that the many who are losing pennies can organize a response. In this regard, Flash Boys has provided a great service.


Although we believe that the abuses identified in Flash Boys don’t significantly impact us, our traders Bruce, John and Alex are incredibly aware of how market structure imperfections can add to our trading costs, and are vigilant about minimizing their impact on the Partnerships. One such countermeasure has been to support a new trading venue called IEX, which was the central focus of Flash Boys. We believe that the best response for any investors that are worried about fast computers taking advantage of them is to ask that their orders be routed to IEX, a company in which we hold a small stake.

Full letter below:

h/t blond bombshell

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Say What Again's picture

Whats a bubble?  Never heard of such a term.

15:30 -- Let the ramp beegin

HaroldWang's picture

Social stocks = bubble

Biotechs = speculation

Most others = pretty fairly valued.

So yes, a bubble in a sector or two but nothing even remotely close to like we saw 15 years ago. 

pods's picture

If you have to do a few lines to understand today's stock valuations, you might be in a bubble.


Say What Again's picture

Its possible that we will not close on the high of the session, which for a Tuesday would be a real tragedy.

I think its time to call Abe, and the rest of the gang at the BoJ and release some sort of "News" about how they are going to BUY even moar shit than ever imagined.

aVileRat's picture

Finding the needles, and then using them to max. damage is what the game is all about.

Plenty of value when a market is at 22.9x forward and most sectors who are actually growing via job growth, production/free cash flow add and no special tax/accounting breaks are growing. Over time, as I said 3 weeks ago and this week; if the governance in social media/momo stocks were applied to any real industrial sector such as chemicals, transport or biosci over 80% of the gimmick click ratios would be accounting fraud.

Ask yourself this question: if you could buy 5 stocks and you had to hold them for 100 years, would you 1.) buy LNKD & FB/Google/Yahoo/Zynga/Angie's List ? or 2.) a transport company, a company that cures cancer, a company that builds airframes/autoframes, a textile company and the mines that produce these wares ?

That's what I thought.


Pladizow's picture

Fish cant see the water they swim in!

TheRideNeverEnds's picture

If you like the tech bubble now you are going to LOVE the tech bubble when the NDX prints 10,000 in a year or two.

Rainman's picture

This pimp letter is brought to you courtesy of our sponsors, IEX

spine001's picture

Was Argentina's market increase of 10 to the thirteenth % in the last 45 years a bubble or simply implied inflation by the monetary base.

When the balance sheet of the FED is increased out of thin air by 400%, with a budget deficit in the trillions now, then any bubble talk doesn't make any sense unles you account for the implied inflation, not yet realized, but still real potential energy, not yet transformed into kinetic energy, created by this massive balance sheet increase. 

curbyourrisk's picture

There are bubbles everywhere......  you're a douche

Caveman93's picture

One of many many bubbles boss. Thanks for the heads up though..had no idea! /sarc

Hindenburg...Oh Man's picture

Yeah, no shit, good luck with those short positions.

MFL8240's picture

Is he old enough to know anything about the tech bubble and how it was created and fell?  Hey son, you can short the blue chips they are grossly overpriced too as are the trannies and small caps!!But, the paper factory is still open so be very careful.

optimator's picture

I doubt they can print three billion a day but they can wire any amout they desire to get the market up to where they can sell it.  And if you don't know who "They" are, they own you.

NoDebt's picture

<sticks fingers in ears>  It's not a bubble!  It's not a bubble!  I can't hear you!  I can't hear you!


Bathouse Barry

(Side note:  I just hope this whole thing goes down on his watch.  I know it doesn't matter, but this dude has it coming.  Something big enough he can't just sweep it under the rug with denials and pretend it never happened.)

astoriajoe's picture

bush's fault.

easy peasy.

Cognitive Dissonance's picture

Double Mint Market Gum makes for the best bubbles. Even better than 'Double Bubble' Bubble Gum.

fonzannoon's picture

August 22, 2014


Dear clients,

Congratulations on a wonderful summer. Our April letter suckered in enough other shorts to help create an epic summer short squeeze in momentum stawks. Of course as you all know we would never short them and obviously went long the sector just after releasing the letter. We whave been quietly exiting and harvesting those massive gains and will most likely move to the much less aggressive SPY for the remaining 10% end of year santa rally. 

Greenlight whatever capital

Spitzer's picture

Nobody has the balls to short now. He's in the trenches.

centerline's picture

No.  Is an all bubbles curtain call.  Tech, housing, auto loans, college debt, etc. at the same time.  Bubblenomics - full frontal.

disabledvet's picture

Is this the same guy going after Sotheby's "because their bid/ask spread phucking sucks"?

I mean you should try be a floor trader dude...let alone short.
"Here's your single share of Berkshire Hathaway. Happy churning!"

Hmmm. On the good side at least the Government hasn't gone hog wild in the debt markets as a consequence this time around!

oh, wait...

derek_vineyard's picture

the all powerful zirp

Flounder's picture

There is no more semiconductor cycle.  Look, even AMD is ratcheting up.  MU and SNDK predicting endless DRAM and flash demand due to all those indespensible smartphones and tablets.  MU going to double from here says one guy today.

Remember how Jeff Vinik got in trouble at Fido?

i_call_you_my_base's picture

All assets are in a bubble. Take your pick.

Charles Nelson Reilly's picture

I pick gold, it has a nice history to it.

Spungo's picture

"how can you ignore the real cost of future dilution that comes from paying the employees in stock?" Is Mr. Einhorn implying people don't look at share dilution or share repurchase before buying a company? That wouldn't surprise me. After seeing Twitter be worth billions of dollars, I suppose anything is possible.


Whoa, I just realized this means Maria is 15 years older than when I would beat off to her. I wonder if she takes loads on her face just to feel youthful again.

Spungo's picture

Does anyone think of a marijuana leaf when looking at the Greenlight logo?

Mr Giggles's picture

The American economy like my scooter goes, pop, pop, pop, pop, pop.

Thanx fed.

optimator's picture

Blowing dein ein horn?  Quatsch.

toros's picture

I don't know about bubbles, but unsustainable...  S&P market cap up $538B in one week?  Where is the money coming from? 

ArkansasAngie's picture

Don't you know?

Hint ... it isn't coming from you and me.

optimator's picture

Coming from wherever the FED sends it.

Flux's picture

Mr. Einhorn is a fool.

My momentum model has a forty year track record. His speculation is simply that. One should always ignore economic forcasts and all those who attempt such folly.

That includes Zero Hedge.

However, the articles are fun to read here. I get a kick out of how each day Armageddon is upon us.

optimator's picture

And you just joined up here at Zero?  To give us this message?

hairball48's picture

Einhorn is a fool huh?

I'll ask you then:

What would be the effect on the "real economy" if an outfit like Facebook disappeared off the face of the earth overnight?

JuliaS's picture

The main pillars supporting the faux economy are the mighty petrodollar, the zero interest rate policy and the QE.

Ditching the petrodollar is talked about year after year, yet what it boils down to is whether the key player - Saudi kingdoms are willing to accept dollars (and US manufactured weapons) in exchange for their vast and not yet exhausted reserves. There is no change when it comes to Saudi sentiment towards the dollar, hence no change to the petrodollar status.

There is a difference between USD priced oil and USD traded oil. Those countries (like Russia and China) that are supposedly about to go off the USD standard don't actually use USD to trade between eachother. They use the dollar price index, but spend the own cash instead of greenbacks. It makes no difference how an item is priced under such scenario. Oil can be measured in walnuts per barrel and it won't mean squat.

Zirp is here to stay also. When it comes to interest rate policy, if anyone was to dig their way out of this hole first, it would be Japan, that by now measures interest not with basis points, but by how many zeroes there are ahead of the decimal. If they raise their rates into double digits (if Fukushima freezes over), then mark your calendar, add 20 years and put an advance order for party hats. In other words - not gonna happen. Zirp is all there is. The boat has hit rock bottom and it ain't going anywhere in any foreseeable future.

QE - the only variable that's likely to fluctuate and likely to the upside. One might think that it will eventually dilute the monetary supply to the point of hyperfinlation, but things typically associated with inflation such as abundance of cash in circulation against the lack of consumer product is nowhere to be seen.

Bank runs aren't even possible in this country. What would people be withdrawing? Thier negative CC balances? Hoards of welfare dollars? Pulling stacks of EBT cards? The nation is broke. People have no savings to withdraw. No reason to flock to the local branch even if it closes tomorrow. Only people that have money worth losing already have transferred it off shore, along with friends and relatives.

So what's the end game then? No end - just more of the same for as long as people are willing to put up with it. How long is that? Well, you really have to look at the 3rd world where all the non CIA sponsored revolutinos are happenning to see where the standard of living has to be before Jane and Joe get off their assess and go marching through the streets setting things and people on fire.

We're nowhere near that point. Psychologically we're even farther behind than the 3rd world when it comes to being ready. We have a mixture of violent morons and intelligent cowards and a government skilled at channelling the anger of the former against the latter to keep everything under control.

So, we're not going anywhere. No crash, no revolution. A long an painful squeeze till things go bad... Detroit bad... and then some more.

Spitzer's picture

How come interest rates went up in the 60's ? Why didn't we zirp from 1963 on till now ?

JuliaS's picture

In the 60's the dollar was still partially linked to gold and interest rate policy dictated which direction the metal flowed. In order to finance the Vietnam that we started to involve ourselves in as early as 1959 yet keep the dollar as viable international currency, we had to tighten the monetary policy. That's how you finance wars when you can't print money at will... before you overextend yoursef and succumb to fiat temptation. As a result of irrepayable war debts and surpassing of the domestic oil peak in early 70's we did what amounted to an adrenaline shot lasing us another 30 years, but not without consequence. Even that euphoria wore out by the time the tech bubble burst. It's been nothing but a series of implosions ever since.

Raising the interest rates would be the sensible thing to do this time around, but we chose to go in the exact opposite direction. Why? God knows!

Spitzer's picture

domestic oil peak in early 70's

That was just a devauation of the USD visavi Saudi oil. It was peak nothing.

but we chose to go in the exact opposite direction. Why? God knows!

This is not something you can choose in the real world. The printing will eventually lead to capital flight, higher velocity and price infl



Ludwig Von's picture

IEX is the next bubble. 

reTARD's picture

It's different this time. This time there isn't even the illusion of a market for those who don't keep their eyes shut.

yellowsub's picture

is that the only bubble he sees?

hairball48's picture

The whole fucking country and economy are one gigantic bubble with all kinds of "bublettes" hanging on everywhere.

Real consumption in America has outpaced real production for too long--we've past the tipping point. We're fucked.

I'm just waiting on  the next bubble pricking event to happen.

DOGGONE's picture

Hey turkeys,
Get your heads out into the light.
Look at our past:

Spungo's picture

"What would be the effect on the "real economy" if an outfit like Facebook disappeared off the face of the earth overnight?"

I would go back to using the back page of the newspaper to find hookers.

yogibear's picture

Go away, we're  making too much money in the market.

MrVincent's picture

Facebook is today's Cisco. This pig is valued the same as Disney for example.

Ban KKiller's picture

Public banks are the answer to many problems. Destroy the banks with competition. What? That Congress is owned by the banksters and will NEVER allow public banks? That Congress has to kiss the ass of the FED all day, all week and all year for ever and ever? That Congress is made up of slaves? Oh, well, we can over come that right? 

Wall Street is totally rigged from top to bottom. Some great companies, no doubt, but how does one know when the books are FUCKING COOKED BEYOND BELIEF?