This page has been archived and commenting is disabled.

How Bull Markets End

Tyler Durden's picture




 

Submitted by Jared "The 10th Man" Dillian via MauldinEconomics.com,

Many people think that they ring a bell at the top of a bull market. Ding-a-ling-a-ling.

That is indeed often the case. The bell was rung in 2000 at the top of the dot-com bubble—I like to think it was 3Com spinning off Palm that broke its back.

But sometimes there is no bell, no catalyst, no story to tell. A bull market becomes a bear market, and it happens just like that.

Silicon Valley has been in a food fight for about three years now. Everyone knows it’s going to end, except for the folks in Silicon Valley. These guys are funny. I met a few of them in the last cycle. They really thought it was going to go on forever.

There are now 145 unicorn companies (private companies with a valuation of $1 billion or more), with a total combined valuation of $506 billion.

We are watching the top happen right before our eyes.

Square

If you were paying attention a couple of weeks ago, you might have read the news about a company called Square going public. Jack Dorsey is the CEO of Square. He is also the CEO of Twitter. I think of this sometimes whenever I complain that I’m too busy.

Square got a round of financing in 2014 at a $6 billion valuation, and now it’s a public company. If you pull up SQ on Yahoo! Finance, you will see that the market cap is $4 billion.

As Square was making the rounds in the roadshow, investors decided they didn’t want to overpay just to make the mezzanine round investors rich. So there wasn’t much demand for Square at a $6 billion market cap. It eventually went public at a $3 billion market cap, or $9/share. (The deal performed well in the aftermarket, at least. The stock is trading at $12.)

No catalyst. No bell ringing. The price simply got too high, and people pulled back. But you know what this means. If one deal can trade below private valuations, they can all trade below private valuations.

On to the next data point…

Fidelity

You may not know this, but Fidelity owns shares of private companies in some of its funds (like Contrafund). Fidelity has to figure out how to value these things.

In general, venture capital firms have to mark their investments to “market,” whatever that means. To do this, they use the services of third party valuation firms. Those valuation guesses are probably subject to mood or opinion, and as you can imagine, there are a lot of bad guesses. The valuations don’t mean much—if you’re an LP (limited partner), at the end of the day, you care about cash in and cash out. But mark-to-market creates some interesting short-term incentives.

As for Fidelity, they also have to mark things to market, and they also use valuation firms. But valuation firm A that Sequoia is using is different than valuation firm B that Fidelity is using. And Fidelity perhaps wants its valuation firm to be more conservative.

So Fidelity has been marking its private investments to market at levels that are below the most recent funding rounds. This puts the VCs in a bit of a pickle. Do they copy Fidelity or do they press on with their own, higher valuations in the face of dissenting opinions?

None of this makes people very bullish on startups.

Uber

Uber is the biggest unicorn of all, with a $50 billion valuation. Side note: they don’t make any money.

Uber is trying to raise another billion—at a $70 billion valuation.

Now, the only reason you would invest in Uber at a $70 billion valuation is if you thought they would go public at $80 billion or more. But looking at what happened to Square, that will almost definitely not happen.

And why would you pay $70 billion for Uber when Fidelity is going to mark it in your mush? Another great question.

I don’t think anyone is in the mood to pay $70 billion for Uber. Uber is stuck. They will have to go public or take a down round if they really need the cash.

And this, folks, is how bear markets start.

Brainstorming Session

So let’s do some brainstorming on what this could mean if it really were the end of the line for Silicon Valley (at least in the medium term).

  • Since tech has been going up while energy/mining has been going down, could this trend reverse?
  • Could value start to outperform growth? (If I’m not mistaken, it already is.)
  • Could large cap start to outperform small cap? (Boy, is it ever.)
  • If you lived in the Bay Area, would you want to sell your house and rent?
  • As new tech is in the process of topping, have you seen what old tech has been doing? Check out the chart of Microsoft, at 15-year highs:

For full disclosure, I started calling the top (or at least asking hard questions) on Silicon Valley about a year and a half ago. But I think most dedicated observers saw what happened with the Square IPO and said, “Yep, that might be the top.”

The other thing I’ve learned is that even when people recognize the top, they vastly underestimate how bad the pain is going to be on the downside. “Oh, it’ll just be a quick correction.” Never is.

One last riposte: Anyone who invested at these valuations will richly deserve what’s coming to them. Those prices were cuckoo.

 

- advertisements -

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Thu, 12/03/2015 - 16:55 | 6872598 offwirenews
offwirenews's picture

welp who could have seen this last second ramp

Thu, 12/03/2015 - 17:05 | 6872645 Slimjimmy
Slimjimmy's picture

Been through two bulls and this is my 3rd. Same old story. Everyone buys into some fantasy about why the market can never fall. This time it's the FED, whatever, it always falls.

Thu, 12/03/2015 - 17:27 | 6872754 Stuck on Zero
Stuck on Zero's picture

For those of us who remember, the end of the dotcom bubble was the spectacular folly behind pets.com.

Thu, 12/03/2015 - 17:37 | 6872788 Vampyroteuthis ...
Vampyroteuthis infernalis's picture

This tech crash is going to be devastating in comparison to previous. The money is still private and trapped within these money losing unicorpses. Wall Street did not pawn these lemons onto the moms and pops of the world and the VCs are going to eat a lot of unicorn crap. Prediction, Silicon Valley will be empty in 5 years with just a few companies left standing.

Thu, 12/03/2015 - 18:01 | 6872867 Bastiat
Bastiat's picture

Makes sense -- NSA and DARPA will suck up some assets.

Thu, 12/03/2015 - 20:23 | 6873403 Stainless Steel Rat
Stainless Steel Rat's picture

I call bullish...

 

Thu, 12/03/2015 - 18:51 | 6873053 Crisismode
Crisismode's picture

 

 

"Prediction, Silicon Valley will be empty in 5 years with just a few companies left standing."

 

Couldn't happen to a better bunch of Assholes.

Arrogant, sociopathic pricks . . . all of them.

Fuck'em all.

Good and hard.

 

Thu, 12/03/2015 - 21:55 | 6873703 LowerSlowerDela...
LowerSlowerDelaware_LSD's picture

The decent ones fled to Texas already...

Thu, 12/03/2015 - 18:18 | 6872916 swmnguy
swmnguy's picture

Yes, it was.  When it was cheaper to buy a 50# bag of cat litter on the internet and have it shipped to your house than to go buy it at a store and provide the shipping yourself, it was obvious that the dotcom bubble was over.  Because you couldn't UPS a 50# bag of cat litter to yourself for less than 5x the cost of the bag of cat litter; no way.  Therefore, no matter what kind of deals they negotiated on shipping, no way was pets.com ever going  to make any money.

Thu, 12/03/2015 - 16:58 | 6872618 stant
stant's picture

What was that kondratiev thing about intrest rates?

Thu, 12/03/2015 - 17:00 | 6872625 buzzsaw99
buzzsaw99's picture

fuck bill gates and the horse he rode in on

Thu, 12/03/2015 - 17:05 | 6872647 BandGap
BandGap's picture

I believe her name is Linda.

Thu, 12/03/2015 - 17:07 | 6872659 DeathMerchant
DeathMerchant's picture

The resemblence between Paul Allen and that horse is remarkable.

Thu, 12/03/2015 - 17:03 | 6872636 KnuckleDragger-X
KnuckleDragger-X's picture

I've got friends who still work in the Gulch and there is starting to be that queasy feeling like just before the dot.com bust. I hope the VC's eat a really shitty one this time......

Thu, 12/03/2015 - 17:05 | 6872646 bid the soldier...
bid the soldiers shoot's picture

Friends, we are gathered here today

Many people think that they ring a bell at the top of a bull market. Ding-a-ling-a-ling.

The author must be referring to the DEATH KNELL at the top of our beloved market.

Do not send to know for whom the bell tolls

Thu, 12/03/2015 - 17:06 | 6872649 Rainman
Rainman's picture

Long as we're whistling past the graveyard , don't forget the bonds.

Thu, 12/03/2015 - 17:21 | 6872735 LawsofPhysics
LawsofPhysics's picture

You most definitely will get your principle back and your token interest, but the paper they are priced in won't buy you shit. 

Same as it ever was.

Thu, 12/03/2015 - 17:07 | 6872656 aliki
aliki's picture

bull markets end when people wake-up to the bull-shit going on:

1999-2000: people "woke-up" to the fact that 99% of the tech/internet companies that were fueling markets didn't make ANY fuckng $$$, in-fact LOST shitloads

2007-2008: people "woke-up" to the fact that people making $50,000 a year were buying million $ houses

now (whenver NOW ends): people are gonna "wake-up" to the notion that these governements are ALL broke and they are buying their own debt with $$$ that doesn't exist WHICH i have yet to meet a single person explain to me how that does not add to the REAL money supply and is NOT inflationary. my evidence that trucks their "no inflation anywhere" is to see rents, college, food, entertainment, toll roads, bridges, healthcare, stocks, bonds, etc. - inflation isn't "not anywhere" ITS FUCKING EVERYWHERE and ONLY a deflationary blow-up is going to re-set prices to where they actually should be & allow those endangered/extinct species known as the middle class to re-emerge.

Thu, 12/03/2015 - 18:32 | 6872963 zaphire999
zaphire999's picture

Inflation is in fact being exported to the developing world, via exchange rate inflation and lack of commodity purchases causing inflationary consequences in those said countries

Fri, 12/04/2015 - 00:04 | 6874159 Still Losing Money
Still Losing Money's picture

Really, how does a broke Itay who is getting ECB bail out money, buy ECB bonds that wre issued to bailout Spain who, despite being broke and needing a bail out, purchased debt issued to bail out Greece, who despite needing MULTIPLE bail outs, bought ECB bonds used to bail out Cypurs, who despite.............. how do you make a payment on your overdrawn master card with an overdrawn visa card? use your overdrawn Amex card?

Thu, 12/03/2015 - 17:11 | 6872678 SILVERGEDDON
SILVERGEDDON's picture

Silver is the suit I wear,

To paper, I say " Au contraire "

Market algo's don't play fair,

They fuck you in the derriere.

Thu, 12/03/2015 - 17:12 | 6872685 alexcojones
alexcojones's picture

Unicorn Meat is Good, but Fatty.

Unicorns are elusive but they succumb to Silver & Gold bullets eventually

Thu, 12/03/2015 - 17:12 | 6872687 K_BX
K_BX's picture

Money at 0 cost? this is what you get - it is OPM anyway

Thu, 12/03/2015 - 17:13 | 6872699 CHoward
CHoward's picture

Look at Amazon - not one penny in profit (but I realize in this day and age, profits are so 20th Century) - yet it's huge. 

Fri, 12/04/2015 - 00:06 | 6874165 Still Losing Money
Still Losing Money's picture

how is that even possible. talk about a cash furnace

Fri, 12/04/2015 - 23:03 | 6878887 Misanthropus
Misanthropus's picture

Exactly.

Thu, 12/03/2015 - 19:03 | 6872753 Yen Cross
Yen Cross's picture

 lol >Based on the deviation in performance between transports in equity indexes, and global macro, it's pretty safe to assume we're living on helium.

 Then we can move into consumer cyclicals, and biotec... lol

 It's all just "musical chairs", on dinky volume.

 As soon as rates even remotely normalize, the "sshhaakkee out" is going to be epic.

  I'm long "glass manufacturers'".

 Sincerely,

 Paul Krugman

Thu, 12/03/2015 - 17:33 | 6872765 Misanthropus
Misanthropus's picture

I've been trying to warn friends and family that this party is going to end, unexpectedly. But they all just go about their business. One friend thinks his "diversified portfolio" is going to protect him or the fact that he pays a hefty fee to a well-known RIA. Man's living in dreamtown. He even went so far as to borrow money from his stock portfolio to invest in the housing bubble. I asked him what he would do in the event of a 1000 point drop in the market and the inevitable margin call? He had no answer. People like this are going to be absolutely slaughtered in the coming collapse. The system will have no mercy and they will lose eveything. When the market collapses you will not be able to sell your investments, especially speculative housing, because there will be no one to buy it.

It's amazing how people just keep making the same mistakes over and over and over again and never learning a damn thing. Dot-bomb in 2000 was bad. The market collapse in 2008 was really painful. But the coming collapse, what technical traders call the thrid-wave, will "rip your soul out."  That's bankers on ledges time. That's when you know it's really over. As in over over. AS in no FRB or FCB can come to save you. Done and lights out.

Thu, 12/03/2015 - 18:08 | 6872891 zipit
zipit's picture

Bullish for nail guns (and guns in general)

Thu, 12/03/2015 - 22:12 | 6873776 Crisismode
Crisismode's picture

 

 

Couldn't happen to a nice bunch of Assholes

 

Bring it on.

 

And fuck the "investors"

In the Ass . . . .Hard.

 

Thu, 12/03/2015 - 17:31 | 6872766 bid the soldier...
bid the soldiers shoot's picture

Sometimes it's not a bell that they ring at the top.  And sometimes it's not at the top of a bull market.

15 short years ago the Wall Street Crooksters rang a bell at the top of the dotcom bubble.

And that bell they rang was one that pealed NASDAQ 5000.

I was blessed enough to have heard it. 

 

Thu, 12/03/2015 - 17:58 | 6872856 Max Cynical
Max Cynical's picture

If these's 145 companies valued over $1B, there must be thousands valued at $500M to $1B...none of which are making any money.

Thu, 12/03/2015 - 19:08 | 6873111 Stormtrooper
Stormtrooper's picture

Yeah, I hope you didn't miss out on the 100 million dollar grilled cheese company with 5 trucks.  Apple move over.

Thu, 12/03/2015 - 22:46 | 6873897 Archive_file
Archive_file's picture

I live in San Francisco. Let me guess, a company called "The Melt" or "American Grilled Cheese?" They will fail the minute they try to expand out of San Francisco because once you leave the walls of San Francisco California is like Mogadishu. Especially Fresno, Bakersfield, Barstow, Stockton,....

Thu, 12/03/2015 - 18:18 | 6872914 besnook
besnook's picture

the dollar has to devalue somehow. this is how it is going to be done. the punchbowl is being taken away even though you never saw it, let alone get a sip from it. lol. same as it ever was. these evil fucks. and just conveniently enough they have given the bottom half of the class someone else to blame it on.

Thu, 12/03/2015 - 18:25 | 6872934 Jack Burton
Jack Burton's picture

I don't follow tech stocks. But I smell a bubble. Look at SF, the housing prices, the tech companies throwing billions around like it was nothing. Tens of thousands of employees of which few can point to any solid contributions to profits. In fact, I think they hire chicks just to have fuck material all over their offices.

Thu, 12/03/2015 - 21:39 | 6873649 goldsansstandard
goldsansstandard's picture

My bud went to a startup demo. The beer and wine flowed. the waiters enticed the nerds with munchies.
Breezing through the coders was one stunning woman. A perfect Ten, head to shiney heeled toes.

Thinking that she might not fit the nerd model, my bud asked her what she was doing there.

"Oh me, I'm the Vibe Manager"

Thu, 12/03/2015 - 21:43 | 6873666 Holy Roller Empire
Holy Roller Empire's picture

Makes me wish I was 25 again.

Thu, 12/03/2015 - 19:00 | 6873073 lasvegaspersona
lasvegaspersona's picture

Only gold can reinflate the banks.

The price of gold??? It won't matter if the dollar is gone. It will be a question of 'how many units of your currency can I get for my gold?...and then...'what can I get for those units of your currency?'

All our lives we lived thinking in dollars. When we discover that a mere transactional currency should never be used to store wealth it will be too late for anything other than a good laugh. We will ask ourselves...'why did we save in a currency that the government could print at will? Why did we believe that they would not print all they needed to save themselves?' 'How could we all, the whole world (almost) have been so foolish?'..........unt finally.....'why did we not at least save some gold?'

Thu, 12/03/2015 - 22:39 | 6873874 Archive_file
Archive_file's picture

I live in San Francisco and deliver food on my 30 year old, beat down scooter 7 days a week, 8 hours a day. I go in the offices from high finance to app makers. Its all the same. Douche bags from Ivy League universities who cant even shave yet, having got their first job and one that pays 6 figures, now think they have a solid grasp on reality. They dye their hair various shades of green, red, or blue and ride razor scooters to "work" all the while vaping and listening to their ipods. Go to any intersection in the Financial District during work hours, and its a parade of people under 30 years of age and most likely from fucking Manhattan. Their jobs require nothing more than to show up and look like they know what the fuck is happening. The chicks fuck their way up the company ladder while the young men sign the documents that bankrupt entire societies.Its a true rat race. San Francisco is the only place they can get away with it. It is basically a overpriced hotel for the global jet set. There is human shit all over the street because the homeless just don't give a fuck and the city doesn't want to make the city too comfortable for the poor. What a complete joke. Well anyway gang, I'm going to crawl back to my old diesel Ford van and crash out for the evening. My scooter broke down today and it won't get picked up until tomorrow. Oh well, I guess I'll use my trusty back up to deliver food tomorrow: my bicycle...

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