David Stockman Derides The Delirious Dozen Of 2017

Authored by David Stockman via Contra Corner blog,

We have previously noted the massive market cap inflation and then stupendous collapse of the Delirious Dozen of 2000.

The latter included Microsoft, Cisco, Dell, Intel, GE, Yahoo, AIG and Juniper Networks - plus four others which didn't survive (Lucent, WorldCom, Global Crossing and Nortel).

Together they represented a classic blow-off top in the context of a central bank corrupted stock market. When the bubble neared its asymptote in early 2000, the $3.8 trillion of market cap represented by these 12 names was capturing most of the oxygen left in the casino. That is, the buying frenzy had narrowed to a smaller and smaller group of momo names.


That severe concentration pattern was starkly evident during the 40 months between Greenspan's December 1996 "irrational exuberance" speech and April 2000 (when he told the Senate no bubble was detectable). In that interval, the group's combined market cap soared from $600 billion to $3.8 trillion.

That represented, in turn, a virtually impossible 75% per annum growth rate for what were already mega-cap stocks. As it happened, in fact, $2.7 trillion or 71% of the group's bubble peak market cap vanished during the next two years.

What we didn't mention yesterday, however, is that this bubble top intumescence never really came back. In fact, the market cap of the eight surviving companies---all of which have continued to grow----today stands at just $1.3 trillion or 34% of the 17-years ago peak.

Needless to say, that's because the market no longer affords the Delirious Dozen of 2000 valuation multiples that are even remotely in the same bubblicious zip code.

Thus, the eight survivors posted combined net income of $52.3 billion during the LTM period ending in September 2017. On the far side of the 1999-2000 tech bubble, therefore, current earnings turn out to be worth 25X---not the 75X recorded back then.

We revisit the rise and fall of these turn of the century high flyers because we believe the same process of market narrowing into a diminishing number of momo names is exactly what is happening again as we reach the asymptote of this latest and greatest central bank fueled bubble.


In fact, we have identified a new roster for the Delirious Dozen of 2017 - and have tracked their course over the last 40 months. During that interval, of course, Janet Yellen did not even bother to muse in public about "irrational exuberance" like Greenspan did.

That's undoubtedly because Fed orthodoxy now holds there just plain aren't any bubbles---apart from isolated segments like commercial real estate. To the contrary, the 12 geniuses on the FOMC have purportedly vanquished the business cycle entirely, thereby insuring an economic nirvana of perpetual full employment, world without end.

We think otherwise. Accordingly, our new Delirious Dozen consists of the FAANGs (Facebook, Apple, Amazon, Netflix and Google) plus seven additonal high flyers (Tesla, NVIDIA, Salesforce, Alibaba, UnitedHealth, Home Depot and Broadcom).

Not surprisingly, their combined market cap has soared from $1.7 trillion to $4.0 trillion during the last 40 months in a pattern which is highly reminiscent of the last go round. And for our money, that $2.3 trillion gain represents the same kind of bottled air.

Thus, Amazon is now valued at $550 billion and thereby trades at 293X its $1.9 billion of LTM net income. But all of that net income is attributable to its rent-a-cloud service (AWS) which is arguably worth $100 billion on a standalone basis.

That is to say, the great Bezos E-commerce juggernaut is implicitly valued at $450 billion, yet has not generated a dime of profit from the scorched earth its has left behind in retail land. That's what we call bottled air.

Likewise, Broadcom trades at 246X net income and Netflix is valued at 194X. These companies may well be the equal of Cisco and Intel as innovators and value generators with a long life of growth ahead.

But both are challenged by ferocious competitors, and have no more chance of sustaining their current absurd valuation multiples than did Cisco (200X then, 19X now) or Intel (60X then, 16X now).

Next consider Salesforce (CRM), which is currently valued at $77 billion, and Tesla, which sports a market cap of $54 billion. Yet both had large net losses during the latest 12 months. In fact, during the last five years, CRM has posted cumulative net losses of $650 million and Tesla has lost $3.3 billion.

Even if these two do manage to avoid the fate of Nortel and Global Crossing, the red ink stained charts below suggests that earning into their combined market cap of $131 billion will take more than a few miracles.

TSLA Net Income (TTM) Chart

Even Alibaba at 55X, NVIDIA at 50X, and Goggle and Facebook each at 35X are essentially defying math and the business cycle.

The latter two companies, in fact, may be the greatest thing since sliced bread, but they are also virtually 100% dependent upon advertising revenue. During the last recession, global ad spending plunged by nearly 9%, as shown below, and by more than 14% in the US alone.

Moreover, the digital capture of market share---of which is 85% is attributable to FB and GOOG----has nearly run its course. Accordingly, no company in a cyclical 3-4% growth industry can sustain a 35X PE multiple for any appreciable period of time.

Image result for images of US advertising spend since 2006

Much the same can be said for Home Depot (HD), which is currently flying high, but is not capable of permanently sustaining a 25X PE multiple. In fact, its recent results have been flattered owing to the capture of significant market share from the collapse of Sears and due to elevated sales from a standard home improvement spending cycle that is now reaching its peak. Additionally, it has not yet been attacked head-on by Amazon (but that's surely coming).

But like much else at the current bubble top in the casino, Home Depot's elevated short-run gains have been confused for permanent growth capacity. However, the verdict on that is crystal clear: During the 11 years since the 2006 housing peak, HD's net income has grown from $6.1 billion to just $8.6 billion in the October 2017 LTM period.

That computes to a 3.2% per annum growth rate, and Home Depot's best years are surely behind it. After all, the tsunami of baby boom retires are emptying their nests, not renovating them.

At the same time, America's soon to be shrinking work force will face ever higher taxes to pay for the upkeep of the former, thereby sharply constraining the discretionary income of the overwhelming share of working households. Man caves and granite kitchen counter-tops are not likely to survive the generational squeeze looming ahead.

Accordingly, we believe that HD's days as a 25X PE stock are numbered.

In short, among the Delirious Dozen for 2017, only Apple has a reasonable multiple at 19X. But then again, Apple has been cycling along the flat line for more than three years at its towering sales level of $230 billion and $50 billion of net income.

Yet even today's casino recognizes that given Apple's monumental size, it is virtually impossible to move the growth needle; and that even one delayed or botched product cycle could cause its $50 billion of net income to take a not inconsiderable plunge.

AAPL Net Income (TTM) Chart

In short, aside from the unique case of Apple, the Delirious Dozen of 2017 are set-up for a repeat of the massive 2000-2002 deflation of bottled air. That is, in June 2014 the group (ex-Apple) had a market cap of $1.1 trillion, representing 34X its combined net income of $32 billion.

During the 40 months since then, the group's market cap has nearly tripled to $3.2 trillion, while its net income has climbed to $65 billion. Consequently, the group's PE multiple has now soared to 49X or to nearly the nosebleed level that pertained among the previous group of high flyers back in April 2000.

Needless to say, the business cycle has not been abolished and this expansion is now 101 months old. In fact, the chart below suggests it may be reaching its "sell-by" date.

But here's the thing. The bottled air resident among the Delirious Dozen of 2017 is where all the top of the bubble mania has again gotten concentrated.

So when the Black Swan, Orange Swan or Red Swan, as the case may be, finally arrives and they begin to sell AMZN, FB, TSLA or CRM----look out below.

That's where Wall Street's next central bank fueled bloodbath is hiding in plain sight.


DeeZ_nutZ Sun, 11/26/2017 - 11:54 Permalink

do you guys ever get tired of all this doom porn?  are you still buying gold and silver, which will be in shortages and shit any second now?

TrustbutVerify DeeZ_nutZ Sun, 11/26/2017 - 12:54 Permalink

Unfortunately, when the Doomers are right they are very right.  And this time...With debt levels of government, personal, and many corporations where it is, pension Ponzis where they are, health care challenges where they are, and interest rates at phony non-market historically low levels, market valuations where they are, particularly in regard to interets rates, (this is only the short list) it might pay to pay attention. It seems evident, this time it is different.  

In reply to by DeeZ_nutZ

Endgame Napoleon TrustbutVerify Sun, 11/26/2017 - 13:33 Permalink

Customers in the late-middle-age baby boomer category were the best for my home-improvement-related business during the housing bubble. One reason we got out after repaying our business loan, leaving the storefront business behind with a [little] money in the bank for ourselves, was the imminent departure of the retiring, generous baby boomer customers. Even though consumers in my generation, the Xers, were in their thirties at that point, most of the ones even close to being in the market for my product were buying more house than they could afford, leaving them with little money for superfluous “improvement” products. That trend was evident in other related businesses where I worked—very evident. In my business, you almost never see a 20-something customer and just see a sprinkling of those in their 30s. Affluent, middle-age customers are essential for it. The boomers were impossible to replace; the trade magazines predicted it and were right. Too many people were in the business, anyway, though.

In reply to by TrustbutVerify

TrustbutVerify Endgame Napoleon Mon, 11/27/2017 - 10:02 Permalink

There are two sides to life and in particular business.  One is the ever optimistic "we're doing great, everything is great," for keeping the spirits up and exuding that look of confidence.  The other side is the "where can things go wrong" work, fixing potential problems and real problems that arise before it sinks the ship.  Most commentary, to my mind, doesn't begin to present big picture scenarios of big picture danger to our economy.  Apparently, it was A-OK to export the thousands upon thousands of garment relates jobs in the late 80s and 90s.  The optimistic buzz was "those people will go to work in computer call centers" around the U.S.  Meanwhile, as jobs disappeared everyone felt a little better being able to buy a shirt of a pair of shoes at a "discount" in stores.  Of course, all were foreign made.  And of course, the call center "BS" was just that, BS.  This entire process has worked its was through so many other sectors of the economy.  So, now we have an astounding percentage of our population that have no savings, work for the same or less than they did 20-30 years ago, often in multiple jobs just to get it done.  They can't really afford healthcare so...natch, the buzz is we need socialized healthcare.  "The governments here to help you...again."  Put on your foreign clothes and go down and get in line.  But do you hear daily commentary about this hollowing out of society?  Can you tell me what you own that was made in the USA?  So many claim they care...they don't.  Americans are lazy.  And since this hollwing out begain the percentage of obese has skyrocketed, in some measure the lack of real work being done.  I have detected a bit of "fingers crossed" in regard to the number of obese that might die off before their need for Social Security kicks in.  Personally, I search out the doomsayers.  I want to hear their opinions and look for arguments that might prove the wrong.  But broadly, I find their secnarios compelling.  I tend to blame "The people" rather than politicians and Trump is an imperfect man, but I found Obama and Hillary to be dour, sullen, insular individuals.  Trump, with all his imperfections, displays a can-do attitude.  But its the people who have to make smarter decisions than they have in the past.  The results of decades of this "hollowing out" are upon us - perhaps, illustrated best by our buegeoning debt and many multiples of that debt figure in entitlement promises that in no way can be met.  

In reply to by Endgame Napoleon

Quivering Lip Sun, 11/26/2017 - 11:59 Permalink

"Come on Dave give me a break." The SNB has to "invest" their freshly counterfeited digital somewhere. Wake me up when the SNB has allocated $20,000 for every Swiss national into US equities and they own 5% of Apple.Let's not forget about the BOJ or ECB they need to park their digital fiat somewhere too.

-.- Sun, 11/26/2017 - 12:00 Permalink

The hitherto methods used to analyze, adjust, and act on financial metrics are simply as reliable as genuinely believing the EPA/Industry MPG sticker, which would be true if indeed all things were equal (ceteris paribus), but fortunately for us things are indeed not always equal.  Physically speaking, one can see the exogenous and extranneous influencing variables (i.e., human behaviour, consquential action, grey/black markets, illicit activiites, etc.) as merely the surface upon which is assumed to be flat and consistent in texture in order to guarantee the MPG sticker. As one can assume, this too is not the case as you cannot forsee the shit that another can and does toss unto the roadside that could cause you a flat or damage.  It is generally not a wise thing to go to far outside of one's personal analysis or thought patterns regarding financial markets as they are and have been designed to attempt an infinite passing of the buck via human interaction and behaviour that tends to complicate itself (investors complicating themselves) over time as it paces its own technologies.  GetFUKD.

Gorgeous Sun, 11/26/2017 - 12:11 Permalink

Lile a weatherman that reports on today's weather, Stockman tells us stocks are now high.  Thank you for that.  He still appears out of touch with cause and motive, and the driving forces of the bubble we can all see.

A. Boaty max2205 Sun, 11/26/2017 - 12:25 Permalink

I will take Stockman's numbers anytime. He should stick to his strength, i.e., macro analysis, and let others pick stocks.

Sometimes highly intelligent people simply assume others can also function at a very high level. Stockman's analysis may have a bias toward a smarter investor class than what actually exists. True communication can only occur between equals.

Take the numbers and try to anticipate how the average investor would handle it.

In reply to by max2205

Deep Snorkeler Sun, 11/26/2017 - 12:29 Permalink

Prosperity is very shallow in America.Our super-corporatist global economybenefits the elite dynasties of Golftopia.America's workers are being squeezedand cannot afford vaginoplasties.

Fantasy Free E… Sun, 11/26/2017 - 12:59 Permalink

It needs be mentioned that today's market is far more managed and manicured than in the dot. com era.http://quillian.net/blog/money-transfer-engines/The motivation to keep stocks moving higher has become like a life and death matter. Why? Any growth we have is the due to the wealth created by moving asset values moving higher. When the stock market crashes, unlike the dot.com era, it will take the entire economy and perhaps our system of government with it. Do not discount the possibility that central banks will now buy for the sole purpose of protecting asset prices. A crash in asset prices will do two things. 1.) It will create an environment where genuine economic growth can occur. 2.) It will be the most painful economic environment the world has ever known. The rich will suffer out of proportion to the poor. There is absolutely no chance central banks will not try and keep asset prices elevated. If a downturn starts occurring the central banks will stop at nothing to try and contain the damage. They are already trying desperately to prevent a bear market. They may even try and buy up controlling interests in the worlds largest corporations. The survival of the country does actually depend upon wrenching power from the central banks and deficit spending advocates. It is a certainty that either way the economy will be destroyed. The pain can be delayed but it can't be postponed forever.

Endgame Napoleon Fantasy Free E… Sun, 11/26/2017 - 13:46 Permalink

I simply do not understand why the rich cannot just take some of that capital invested in stocks, shifting it into the endeavor of creating new businesses to generate more employment in America and, in turn, more consumers and taxpayers.

I am not Stockman’s equal. I simply do not get it unless it is just human nature, with its inertia and its tendency to seek a safe haven, rather than to risk trying something new that might fail.

In reply to by Fantasy Free E…

wintraiz Sun, 11/26/2017 - 13:26 Permalink

It is not whether or not Stockman will be right the fact is that he has been screaming crash for a very long time only to see the indexes rally 500%.  I am siding more with the Shepwave posters on here.   

Treetop Sun, 11/26/2017 - 13:29 Permalink

Good article. Fair points...markets tend to be able to survive longer than individuals...That said, caveat emptor for putting new money into these stocks unless you really feel that 0 interest rates are here to stay, in which case the models are correctly pricing any gowth correctly... 

atlasRocked Sun, 11/26/2017 - 15:14 Permalink

 Two questions for Stockman:Why did you remain virtually silent while Obama inflated the economy just like Trump ….and Bush….and Clinton…..and Bush Sr…..did?And why did you tell Reagan that borrowing money would create a true recovery, when it has never happened in history before?  Why did you promote that brazen bald faced lie which every economist knows is false, because if faking money worked, every nation that tried it would have ended up healthy instead of corrupt, communist or defeated by enemies?      

GooseShtepping Moron atlasRocked Sun, 11/26/2017 - 15:47 Permalink

1. David Stockman has been writing about this for many years. His magnum opus on the subject, The Great Deformation, was published in 2013, right in the middle of the Obama administration.2. He didn't tell Reagan to borrow money and he did tell him, as Congressional Budget Officer, that supply-side stimulus would not work.I realize you don't have a dick, but that doesn't mean you have to be one to compensate. Your easily refuted slanders are not worth the air into which they are uttered. Go to hell.

In reply to by atlasRocked

truthalwayswinsout Sun, 11/26/2017 - 16:31 Permalink

Stockman is pure B.S. He blames everyone and everything but himself.He was asked to support taking NASA public to create a new age of discovery and industrialization but he and others don't see the upside because there is nothing in it for them.The same thing that doomed Rome is now firmly taking hold in the U.S.

Trezrek500 Sun, 11/26/2017 - 17:52 Permalink

Stockman is the quintessential cranky old guy, "Get off my lawn", type. Seriously, if I had listened to this guy I would have missed a huge run up. Whatever Stockman. I hear pudding is being served today at the old folks home. Enjoy.

Arthur Sun, 11/26/2017 - 20:24 Permalink

Sooner or later, Stockman will be right.   The trick is when.  Anyone shorting the market has gotten burned.  Any money sitting on the sidelines is crying.Just start taking your profits and diversify and you wil lbe fine given a long enough horizon. 

Ink Pusher Mon, 11/27/2017 - 07:44 Permalink

I don't care , I'll continue to stack bullion with my right hand and short the hell out of these bullshitters with my left until  the clock stops every time.  

Musum Mon, 11/27/2017 - 09:52 Permalink

Stockman makes logical sense but it doesn't matter because the real world is off the hinges and it's been like that for most of 20 years.