I was dreaming when I wrote this,
Forgive me if it goes astray.
Forgive me if it goes astray.
LinkedIn Doubles On IPO, Yandex Up Over 50%:
A couple of standout IPO's this week, that have a lot of people partying like its 1999. You remember 1999, right? While Prince wrote this song to capture the unwarranted angst being generated by the irrational fear of the calendar, it also served as a metaphor for the 1999 IPO market. Back in 1998 & 1999 we had a tech/telecom bubble, that was based on a real explosion of advancements in both fields. But as any hot-air balloonist will tell you, the balloon won't inflate without some type of fuel. Enter Alan Greenspan. Alan, as head of the Federal Reserve, decided that the markets needed some extra fuel, to make sure that when the calendar page turned everything would continue to work smoothly. Sure enough, the tech bubble inflated, and after time moved on and there were no catastrophes, the bubble popped.
Fast forward to today. We have LinkedIn trading at a $9 billion market cap, which is 30x sales and 666x earnings. We also have Russian internet search company Yandex trading at a $10 billion valuation. Sane people can argue about what the "right" valuation is for these companies, are they overvalued or undervalued. Me, I'm a firm believer that "today" stocks are worth whatever the market says they are worth. So today LinkedIn and Yandex are worth $9 & $10 billion respectively. What they'll be worth tomorrow or the next year, is anyones guess. According to fundamental analysis, a stock is worth its future stream of cash flows (earnings & dividend growth) discounted back to the present at some appropriate growth rate. This is where security analysis gets a bit tricky, assumptions. What is the assumed growth rate of the company, the prospects for the countries it operates in, the strength of their competitors, new technologies, etc? Also, what is the appropriate discount rate? The general rule of thumb, the more unknown a companies future the lower the valuation.
Well, just like 1999, 2011 is a bit out of the normal. We have a Fed that is purposefully manipulating the markets. Their ZIRP (zero interest rate policy) has created massive distortions in how capital is being allocated. If you buy US Treasuries today you get negative real returns for the next 7 years. One year paper yields 0.04%, which is about -2.50% on an inflation adjusted basis. These artificially low interest rates cause capital to be misallocated. Capital runs towards anything with the promise of higher returns. Right now it has been running to high yield and growth. Enjoy the party while the music's playing, but remember your hangover remedies.
Is The Rise In Commodity Prices Real Or Transitory?
Our Fed Chairman says that commodity prices are higher due to increased emerging market demand, but then goes on to say that these price increases are transitory. I'm not sure how he gets there. The only way commodity price increases are transitory is if you think there is going to be some huge decrease in the growth of emerging markets, or that global population growth turns negative, or that we discover some new fuel source very soon. He made these comments before last weekends non-rapture, so maybe now he doesn't expect the worlds population to shrink.
Sometimes a picture is definitely worth a thousand words, and sometimes two pictures are worth more.Here is a graph by Bianco Research showing the price level for the CRB Index (Commodity Research Bureau) going back to 1749. Notice how the upward tragectory starts to take-off in the 1940's.
This next graph shows global population since 1800. Again notice the sharp uptick around 1940.
Sometimes in this business we often tend to over think issues (my wife calls it "big-heading-it").
As the worlds population grows and becomes more and more industrialized, we use more stuff, thereby causing prices of stuff to increase. Pretty simple huh.
Enjoy your Memorial Day weekend, and please raise a glass in memory of those no longer able too.
Be careful out there, and keep the lights on,
Chris Wiles, CFA
412-260-7917
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This article contains the current opinions of the author but not necessarily those of the Rockhaven Capital Management. The author’s opinions are subject to change without notice. This article is distributed for informational purposes only. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.
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