Thoughts of an old Analyst about the Current Financial Markets

I worked at an investment bank in the late 90’s and moved on in early 2000. Rats, it’s rumored, are the first to flee a sinking ship. In the brokerage industry, the metaphor says the analysts, the watchers of trends, are the first to exit before a big decline. I departed the firm in a wave with other analysts. The dot.com decline began a scant few months later.

The current exuberant increase in the value of various stocks, commodities and market indices isn’t the same as 2000, when the bubble burst like a ripe pustule oozing gore and leaking many people’s life savings into rapidly evaporating puddle of virtual wealth. 

No, nothing similar is going on, I mutter, without any conviction.

What happened then and what is happening now?

  • Day traders. i.e. individual retail investors with very short time horizons. 
  • Bored, excess money.
  • Another IPO every time you blink.
  • Misinformation.
  • Celebrity endorsements. No wait. That’s so 2021. Or is it? 
  • Multiples on earnings that make no sense – don’t reflect any feasible growth rate, can’t be justified by traditional economics (like how many people might buy a product).

With the involvement of hedge funds in the 2021 situation and the wild run up in a few stocks, I can’t help but think of the crash of 2008, where a series of unfortunate events collapsed value in the financial markets like a trail of tumbling dominos. The unexpected consequences of bundling securities together triggered an avalanche of decline in markets.

I’ve heard people who have profited in the past few weeks say they are looking for the deposit for a house. 2021 stock market, meet 2021 housing market.

The main difference between 2021 and 2000 seems to be the motivation of the short-term investors.1 Recently, not only have stock prices increased because a large number of buyers in the market, but some of them are apparently doing it because they’ve enthusiastic about thwarting some hedge funds. Perhaps it was the same in 2000, but we didn’t know. Now we have social media. There are no secrets in 2021. 

Fundamentally, stock markets exist to allow people to support businesses so that they can serve their customers’ needs, expand and serve more customer’s needs, while generating a profit and giving back to their investors. People buy and sell stocks on the basis of their projections of the company’s earnings capabilities. This means there is a finite value fundamental investors put on any given stock and will likely sell if they perceive the value is escalating beyond that. 

Ironically, the recent run up of several stocks are from companies with weak projected future earnings. This is counter intuitive, except in the context that they are being pushed up in a buying spree by individuals that apparently have other motives. This appears to be different than 2000. Back then, it was pure pursuit of money that lead to inexplicably high prices in certain stocks. At least, as far as we knew.

We’re seeing a plethora of IPOs and secondary offerings, with the market hungering for new investments. This makes sense, as we are seeing wide spread shifts in product demand and a willingness of people to put their money into the markets. 

Late 1999 and early 2000 saw an explosion of IPOs. That might have been a little different, as anyone who could correctly pronounce ‘internet’ and spell Unix could get an audience at an investment bank. The bar is much higher for those seeking IPOs in 2021. There must be viable businesses, well vetted and brought up through a robust VC ecosystem. Most are unicorns, with multiple rounds of investment by sophisticated money. In 1999, concepts were sufficient.

The question on many people’s minds is whether we are in a stock market bubble that will pop, leaving nothing but a slimy residue where people’s money used to be. While past performance is no indication of the future, we ask if the situation is the same as the 2000 dot.com situation. Some aspects are (high stock valuations in general, lots of IPO activity, overinflated stock prices attributed to players in the market) while some are different (more listing restrictions leading to high quality initial public offerings, atypical rationales for short term trading). 

One thing this old analyst is certain of, the stock market is a place where anyone, professionals and individuals alike, can lose a lot of money. Success depends on predicting the future and none of us can do this with certainty. This is as true now as it was in the year 2000. 

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1I’ve read so many articles about this recently which all tell a similar story. Here’s a recent one that has a great explanation of the system https://www.cbc.ca/news/business/robinhood-gamestop-1.5893812

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