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Canaries In The Coal Mine, Part 1: Tech High-Flyers Fall To Earth

Tyler Durden's picture




 

Submitted by John Rubino via Dollar Collapse blog,

While the “stock market” continues to flirt with new records, there’s turmoil under the surface. High-flying social media companies Twitter and LinkedIn fell hard in late April, and now recent IPO Etsy, an online marketplace for arts and crafts, is down 50% since going public (8% of that today).

Bull markets don’t end all at once. Generally a few egregiously-overvalued sectors blow up first and are dismissed by most observers as aberrations. Instead, they turn out to be a sign of things to come.

In the previous decade’s bubble it was subprime housing that led the way, while being initially characterized by experts as too small to matter. Click here for Ben Bernanke’s ongoing attempts to convince the world to relax and ignore housing’s problems.

This time around we of course won’t know until after the fact which sector is the canary in the coal mine. But these epic fails in the bubbly social media/online marketplace region of tech certainly look like viable candidates.

So... why these companies at this time?

  • They are stock issuers rather than buyers. That is, they don’t have the ability or inclination to borrow huge amounts of money to buy back their own stock, as can, say, IBM or Apple. So their valuation is left to actual market forces to determine, and being priced for perfection, anything less than that leads to a quick, brutal revaluation.
  • The network effect may not be as powerful a force in these markets as some believe. In a nutshell, the network effect is the tendency of an online company’s value to rise along with its customer base. The more people who use Facebook, for instance, the more powerful and valuable it becomes for prospective new users. So the strong tend to get stronger. But that may not be the case in a world where everything is mobile and new smartphone apps are launching on a daily basis. Kids tend to flee their parents, so mainstream acceptance of an online service can be the kiss of death. Which means such companies have a very limited lifespan.
  • Why now? Corporate revenues are falling. Due to share repurchases this negative trend hasn’t translated into falling earnings per share, but it’s just a matter of time. As more and more investors get this, their mood shifts from euphoria to caution. Cautious people tend to shy away from speculative situations, and tech trading at huge multiples of revenue certainly qualifies.

Who’s next? Well, Uber is looking pretty rich. See Uber is now valued higher than 80% of the S&P 500, closing in on GM and Ford

So that’s the tech tank story. Now we’ll see whether it becomes the story of the market in general.

 

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Tue, 05/12/2015 - 15:04 | 6085989 Kprime
Kprime's picture

Just got my first look at DJIA today.  I'm a bit suprised. I really was expecting a 300 point run up today.  We haven't had a good fiat infusion recently.

Tue, 05/12/2015 - 15:52 | 6086237 walküre
walküre's picture

That's just it. They removed QE which was 85 billion per month at one time, then dropped and finally got pulled completely - at least officially. Now the market is fighting to stay alive to see another day.

Sink or swim and limpdick markets without infusions. Buybacks, schmybacks.

Tue, 05/12/2015 - 15:04 | 6085993 Larry Dallas
Larry Dallas's picture

Uber is only worth that much on paper. Until it goes public, its merely a mirage.

 

Tue, 05/12/2015 - 15:04 | 6085994 Mike Honcho
Mike Honcho's picture

http://www.ft.com/intl/cms/s/0/a450c634-f8b8-11e4-8e16-00144feab7de.html#axzz3Zx5YduPj

The Senate banking committee chairman has proposed the biggest rolling back of financial regulatory reform since the 2008 crisis, potentially releasing about 30 institutions from tough Federal Reserve oversight and reigniting the market for bank deals.....allowing more banks to escape the Fed’s “enhanced supervision” with its onerous requirements including annual “stress tests

Tue, 05/12/2015 - 15:06 | 6085997 Whootie_who
Whootie_who's picture

Vapourware 2.0

Tue, 05/12/2015 - 15:07 | 6086008 Frank N. Beans
Frank N. Beans's picture

When Amazon starts falling hard, run.

Tue, 05/12/2015 - 15:44 | 6086196 RyeWhiskey
RyeWhiskey's picture

Fuck them. They aren't "tech".
They are monopolistic parasitic FRAUDS.

Tue, 05/12/2015 - 15:54 | 6086243 walküre
walküre's picture

they have websites! Uhh, aah, ooh! Wait? We're not in 1999?

Tue, 05/12/2015 - 15:07 | 6086009 lasvegaspersona
lasvegaspersona's picture

So is a melt up the same as a bull market?

Tue, 05/12/2015 - 15:22 | 6086088 C.A Ahmadine
C.A Ahmadine's picture

Facebook is the big domino...until it drops, the social media bubble is still in place.  Watch Facebook to know when the end is near.

Tue, 05/12/2015 - 15:22 | 6086089 C.A Ahmadine
C.A Ahmadine's picture

Facebook is the big domino...until it drops, the social media bubble is still in place.  Watch Facebook to know when the end is near.

Tue, 05/12/2015 - 15:26 | 6086114 youngman
youngman's picture

I would say when Greece ban borrow money from the same people they are supposed to pay back.....is the kicker...

Tue, 05/12/2015 - 15:36 | 6086167 ali-ali-al-qomfri
ali-ali-al-qomfri's picture

Twit, Tweet, Twot

Uber, Under, Over

Facebook, Tracebook, Macebook

Linkedin, Linkedon, Linkedout

Tue, 05/12/2015 - 15:42 | 6086193 Hongcha
Hongcha's picture

Shorts scurried to cover this morning.  Almost a 1% corexit, best they can hope for these last six years.  Picking nickels in front of a steamroller.

Tue, 05/12/2015 - 15:48 | 6086220 Klemens
Klemens's picture
"September 13th, 2015 Will Be Big Clean Up Day."

https://www.youtube.com/watch?v=1x4Jo1PWYgE

Tue, 05/12/2015 - 15:59 | 6086261 walküre
walküre's picture

God's got nothing to do with it when those "doing supposedly God's work" pull the plug on the markets every 7 years. But it does keep them in control and always coming out on top.

More like a self fullfilling prophecy from those who wrote the current bestseller of prophecies with variations and 2 follow-up volumes.

Tue, 05/12/2015 - 16:59 | 6086520 buzzy_the_pirate_dog
buzzy_the_pirate_dog's picture

I'll wait until $TSLA shits, then I'll worry.  That thing only goes up.  Praise be for profits, someday.

Tue, 05/12/2015 - 20:15 | 6087421 Dead Canary
Dead Canary's picture

WHAT! CANARIES! WHERE!

Do NOT follow this link or you will be banned from the site!