2007-2008 looks awfully similar to now
Is a huge financial crisis 9 months away? Maybe, maybe not. However, it is tough to ignore commonalities and ask if the bull rally in equities and whether the currency wars will lead to problems down the road. There are analysts, pundits, fund managers, and anyone with a microphone, keyboard, or YouTube going one way or another as far as the equities markets are concerned.
The charts and videos comparing the two times would tell an interesting tale. Now bear in mind, there are always those that will be bearish and bullish at all times (Mark Faber on one end and Bob Pisani from CNBC on the other).
Market Sentiment then and now…
2007 Videos of Those Calling a Future Financial Crisis (The Clairvoyants)
This comes from July 2007, a man named John Palme explains in lay terms what was about to happen.
This next video features Peter Schiff, who is very well known for predicting the events of 2007-2009.
2007 Cautious Optimism
Here’s a dose of some cautious optimism…
2013 Bearishness and Concern about Bull Run
An article featuring a fund manager expecting a correction in a mainstream outlet.
Then there’s Art Cashin on the fence…
2014 will be a GREAT YEAR… Bull Market remains!
Motley Fool on Dow Theory justifying 2014 continued boom in equities.
Bull Run Still Has Legs according to this article in Forbes.
Here’s Jeremy Siegel saying that 17,000 for the Dow Jones Industrial Average will be cracked in 2014.
Most hated Bull Market EVER… After 2007-2008, taking perspectives both ways has become very trendy.
The 2007-2008 Financial Crisis highlighted a bubble in the housing market that would pop. This bubble was fueled by easy money policies, bailout promises, and the wild concept that every American should own their own home. The ability to make money in the derivatives market through Credit Default Swaps and creation of Mortgage Backed Securities that had positions based on subprime mortgages helped fuel the fire further. The bubble was in a housing market that was seen to never lose value and some would posit afterward as a one-time occasion. Subprime lending issues was the tell to the general populace that something negative was afoot and was the spotlighted speculative activity of its time.
2013 going into 2014 has seen a huge equities rally and the market has been riding high in 2013. What’s the possible bubble here?
Oh, that’s right. It’s not just Twitter, however. It also is not just any social media website/app. It’s an overall problem with many trendy startups.
Then there’s this… why on Earth would this become an issue NOW? California is a high tax state and regulations are growing there and if you are a Silicon Valley businessperson wouldn’t you have known this a long while ago? Maybe, moved your business altogether out of California rather than chase the impossible? Silicon Valley is an innovative region, but changing the government of the State of California and just getting Congressional approval to completely shake up the balance of power in Washington D.C. is impossible. Just leave and don’t make it an issue. All of those innovative tech firms can go to Texas, Louisiana, and North Carolina.
Poor geographic planning aside… what about the valuations?
- Facebook: Has to place six ad impressions per page just to get to $6.8B in revenue and $1B in income. P/E: 111.90
- Groupon: Competitors have pounced and it still has not come back to IPO Price. $2.44B in revenue and a net loss. Market cap of $7.55B.
- Twitter: You really think they can beat Facebook in terms of revenue generated? Twitter is plagued by fake users and impressions. Twitter may serve a purpose, but when you generate $534MM in sales and operate at a loss… yet still have a market cap of $28.72B it raises questions. People are jumping on because of what you do and the value of the service rather than the income generated. There’s no real competitor for Twitter yet.
- Snapchat: Turned down $3B from Facebook. Their monetization is shaky at best and they have a product that could be copycatted and even has had security breaches. If valuation is based on number of users, then porn sites should be generating a lot more money. Speaking of that, Snapchat is used mainly for ahem… why else would this app be of value when the whole point of is to destroy the data created? Are you going to Snapchat those priceless moments with your Grandmother or a prank you pulled on a friend? No, you want to keep that and share it. Snapchat has a value, but trying to make it seem more family-friendly than it is would be completely disingenuous. Oh and isn’t Snapchat committing a crime whenever they destroy evidence of adult inappropriate communications with a minor?
- Whisper: Funding into an app that is about anonymously blurting out secrets to the world? Another advertiser-driven social media app that is driven by number of users.
- LinkedIn: The P/E is in the 700s, there is a clear mission behind LinkedIn but the valuation is so high.
Then there is the culture surrounding startups that makes attaining funding from a Venture Capital firm to be a major accomplishment. These firms are throwing money at firms that have no idea how they will generate income. A company goes into business to address a problem and make a profit, apparently this seems to be a lost concept.
Is startup culture good? Certainly. However, some of this doesn’t make any sense and some have noticed. The Kardashian effect has hit Silicon Valley, companies are becoming wealthy and famous just because they are famous. It’s just something to consider. The actual usage value derived from the most trendy startups is lessening, which is scary. Innovation has given way to merely attracting attention and that is a bubble sign. Attention and value are more important than profits.
The Australian Housing Bubble is another matter that is being discussed and it is not just limited to residential housing, but it also includes office building construction, renovation, and purchases made in Sydney and Melbourne. The RBA is certainly aware of the matter and has not cut rates since August 2013, RBA Governor Glenn Stevens has made it clear that he wants to drive AUD/USD to .85, but he may get some unintended consequences out of the constant jawboning. This is all perhaps to set up an interest rate hike in 2014, which is much speculated. The RBNZ has at least made their intentions to raise interest rates sometime before July 2014. There is also much foreign investment into Australia coming from private equity and real estate firms.
What do the charts say?
The charts provide possibly the least biased and opinionated similarities.
Now here’s what is interesting… The peak of the rally took place in 2000 for the bull run of the late 1990s. This peak would be eclipsed in 2006, which would be 6 years and 8 1/2 months later. The peak of the bull run of the mid 2000s was in October 2007 and it would be eclipsed in February 2013, which was eclipsed in 5 years 4 months. However, one can say that the index peaks were cracked around six years later. The dropoffs that took place in the market happened in the following calendar year of the peak. Now, we’re ending the year likely at an all-time high for the first time since the end of 2006.
Notice how much of the bubblicious talk from the pre-financial crisis environment came in mid to late 2007, not 2006. Is it a case where some investors and commentators want to be out in front now in calling a crisis rather than take the embarrassment of being bullish during the precipice of economic failure? Being bullish is the new boldness perhaps?
The Federal Reserve taper was spoke of in Glorious Revolution terms. Ben Bernanke was said to have struck the balance needed to taper on Quantitative Easing. The equities market surged and the thought process was either Bernanke saved the American stock market or that the taper just did not matter so much. It may have a latent effect on the market or maybe not.
Then there is always an article like this that could turn could turn a person’s lips into this:
Covenant-lite loans are at a high point for now. They could be going higher in issuance next year or they could crash down much like in 2008 and anything associated with 2008 is going to be viewed negatively. What’s a covenant-lite loan? It is a loan issued to a business or an investor that is very limited in terms of restrictions and expectations as to what to do with the loan and the financial decision making of the business. Lenders want to make sure that you are using their money in its intended fashion as the bank or lending institution sees to it so that you are less likely to default, in other words – REDUCE RISK. Typically, lenders want you to meet certain financial ratios whether it be a debt-to-equity ratio, debt service coverage ratio, or working capital ratio. If you violate a covenant, the whole loan can called back meaning that the entire loan must be repaid in full.
Is the end of the world going to happen? Probably not. Do we have a bubble? Possibly. Are there eerie similarities between 2013 going into 2014 and 2006 going into 2007, you better know it. Are more people financially aware post-2008? We’ll find out.
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