What Snapchat tells us about the real market

The first big-buzz IPO of the year was in early March. Snap Inc. (NASDAQ: SNAP) went from a hot social media tool with 158 million users to a publicly-traded company with a newly minted market cap of $32 billion.

Now, there’s no doubt that Snapchat has a big following, but the concern is the company ends up more like Twitter than it does Facebook. Obviously that concern hasn’t been shared by a large number of investors.

This kind of blind buying — most Snapchat users are teenagers and college kids — reminds me of the dotcom buying that went on in the late 1990s.

This time it’s different — not

I distinctly remember that there were 2 mantras going into the final quarter before the crash.

The first was, “Growth is the new income.” This was actually what money managers were telling clients. That income stocks were no longer relevant in their portfolios because the tech boom was changing the rules on how to allocate your retirement money.

The second was, “If it doesn’t have a triple digit PE, it’s not worth buying.” This may seem bizarre, but many of you who were around then certainly knew people who bought into this mindset.

Both of these mantras sucked a lot of money out of investors’ portfolios because of four simple word they heard from analysts, brokers and money managers: It’s different this time.

Snapchat is no different than any other social media company, and we should not forget the slow start Facebook had. SNAP is losing money — about $514 million on $1 billion in revenue in FY2016. And it has little hope of getting to its current valuation anytime soon.

It is competing against Instagram, Facebook and Google — established companies that make unbridled growth highly unlikely — for advertising dollars

But my point here is that there’s way too much enthusiasm and way too little volatility in the stock market right now.

Don’t follow the herd

This is a heady and dangerous combination. Whenever everyone becomes bullish, the contrarian hairs on the back of my neck start to rise.

And that is what’s happening now. It’s gotten so bad now that the big online brokerage firms are in a price war. Fidelity cut its rates to $4.95 a trade and Charles Schwab matched it. TD Ameritrade and E-Trade are now at $6.95 a trade.

The low volatility tells that these trades aren’t shuffling shares around, they’re all long trades.

My tipping point

As I was becoming increasingly alarmed by the ridiculous amount of bullishness in stocks these days, I talked to a retired school teacher who worked for the Department of Defense her entire career. She has always been frugal and conservative with her money, and she doesn’t really understand the markets.

She called to ask me if she should deploy her 30 percent cash position into the stock market now. I almost dropped the phone.

Also remember, the bull can run all on its own. Individual investors are not going to stop this train since financial firms and the banks control most of the assets — mutual funds, ETFs, your IRAs and 401(k)s.

That also means a bear market is going to find individual investors as the bag holders as well.

A kindred spirit

It was then that I read an interview with Merrill Lynch’s former chief economist of North America, David Rosenberg. This fella has seen a few things.

His take on the current markets and economy fed my contrarian concerns. Basically his view is, like Ross Perot all those years ago, “The devil is in the details.”

President Trump’s rally is benefiting sectors that will profit the most from cutting regulations and revamping corporate taxes. But Rosenberg has concerns that some of the ideas are double-edged swords. And there are outliers that no one is talking about.

For example, he doesn’t see the economy doing much more than 2 percent GDP growth this year. But the Federal Reserve is planning on raising rates three times in 2017.

The border-adjustment tax could lead to trade wars with our biggest export and import partners which would not help stocks or workers. And stepped up immigration enforcement has some significant economic downsides to be considered.

Another looming reality is the fact that half of the retiring baby boomers have savings of $100,000 or less. And 1.5 million boomers will be retiring every year for the next 15 years. That is a subject which seemingly everyone is getting wrong. We are told the baby boomers are ready to retire and spend their cash. What cash? The biggest economic generation will not have anything to spend for the next two decades.

As for the market, he notes that the market has priced in 30-40 percent earnings growth, which is wildly unrealistic.

Flashing yellow

All this adds up to: Proceed with caution.

The markets can be “wrong” much longer than you can be capitalized. That means, even if the markets are set for a correction, you can’t bet the farm on them coming down soon.

So, while I’m increasingly bearish at this point, and any correction will be greater than 20 percent, it doesn’t mean you have to dump all your long-term positions.

Now, once stocks begin to roll over I would cash out your long trades and sit on the sideline. As for long-term positions, I would say the best strategy is to hold the best stocks in the best sectors. Even if they get slammed, they’ll have the best chance to rebound quickly.

Midstream energy, Facebook, Berkshire Hathaway and consumer staples will be good choices for a correction.

You don’t have to move now, but you should be prepared to move quickly when someone pulls the plug on this rally.

— GS Early

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GS Early