iBankCoin
18 years in Wall Street, left after finding out it was all horseshit. Founder/ Master and Commander: iBankCoin, finance news and commentary from the future.
Joined Nov 10, 2007
21,907 Blog Posts

What Exactly is Going on Here?

I thought it was time to sit down and give a more comprehensive analysis of what this market is showing us.

Is this correction merely letting air out of the bag before another run or is this decline a foreshadowing of something more materially wrong with the economy? See these aren’t just stocks with morons trading them, but real companies with employees and when they plunge in value, efficient market theory states there is something to it and it will be revealed in the future. The obvious questions are: is the soft lockdowns and restrictions around the world causing growth to slow? I don’t see how any friction doesn’t cause growth to slow, although we have yet to see evidence of this.

My other question is: the exacerbated losses in smaller capped names, -15% the past month vs -1.3% for mega-tera caps, suggests widespread carnage in the retail sector. If this is so, are we now seeing the last leg down accompanied by forced liquidations (margin calls) or, again, is the market trying to tell us, aside from monopolies, the economy is about to tailspin lower?

Another thing that has raised an eyebrow for me was a Mizhuo report essentially shitting on SQ, PYPL and AFRM for their buy now pay later schemes. We all traded through the credit crisis. I cannot think of a more credit UNTRUSTWORTHY person than the impulse online shopper. Mizhuo says more than half of the poors (people making less than $75k) missed at least 1 payment. This is how Countrywide Financial imploded, slowly, and then all at once.

Some out loud thoughts.

If credit is becoming impaired and if the economy is about to tumble lower, shouldn’t we be concerned with auto-loans, notorious SHIT LOANS, and some of these fucking housing loans that have fueled this retardo housing boom?

Just last quarter the imbeciles at Zillow wrote down $304 million thanks to their “AI” auto-buy racket that caused them to bleed the fuck out in housing and cause the CEO to fire 25% of the workforce. Perhaps a company like CVNA could be a similar comparison, using their “AI” to buy cars.

In many respects, the rapid inflation we’ve been seeing has masked some of the problems in the economy, because with higher prices companies are enjoying higher profits and much of these costs are just now being passed down to Joe Public at the grocery store and we can only raise the minimum wage so high.

Out of all the sectors in the market, the one I am fixed on most is Application Software aka SAAS. They have been the darlings of Wall Street, being able to accurately predict sales and FCF growth down to a science, hammering into Fortune 500 companies with sophisticated sales tactics to annihilate their internal IT budgets in exchange for increasing the outsourcing of it. They have been extraordinary successful and a testament to this success can be seen in SHIT SOFTWARE company Salesforce.com being added to the Dow 30, truly an astonishing success considering how dreadful the product is.

Two things to consider when looking at SAAS valuations.

1. Never been higher.
2. Stocks are leading to the downside.

We are deflating valuations.

App Software stocks are trading 7x price to sales on a median scale. If we consider 2022 estimates, that number shrinks to 5.6x. From 2017 to 2020, App software valuations ranged from 4 to 5.3x, suggesting the sector needs to correct another 25-30% from already depressed levels.  Out of all the SAAS names out there I consider HUBS to be the best large cap company, vital to the industry, but also small enough to represent opportunity for tangible growth. Sporting 35-40% predictable and genteel sales growth and positive FCF, you cannot say Hubspot is a bad company without being branded a fucking liar. The stock is down 15% the past week, yet still trading at 27x sales.

See the problem?


Hubs p/s valuation

If HUBS stock did nothing for 12 months, by next year after all of their sales were tallied, the PS ratio would be 20x, still substantially higher than traditional levels.

Application software stocks, as a whole, are lower by 17% over the past month.

I used to justify the higher valuations with platitudes, such as “well the market is paying up for quality.” Truth is, we are in a bubble. We are not only in a bubble, we are in a terrible bubble, supported wholly by central bank rigging. I say “rigging” because that’s exactly what it is.

Chicken little the sky is falling.

Since 2009, barring the 2020 Coronavirus interlude, betting on decline has been a losers bet. The 2020 drop was forecasted early with the drop in leveraged loans. These declines in the shit-tier loan portfolios helped me short stocks with ease during the 2020 drop.

Charts for HYG (high yield debt) and SRLN. Weak, but not notable.

People like to malign debt because, on occasion, it caused crisis. Truthfully, without financing to the moon, the world would never have advanced so fast technologically and we’d still be using CDs to hear our music. With $18t in corporate debt publicly traded, we have $7 trillion in cash. Back in 1993, we had $255b in debt and just $24b in cash, or 10% of debt. We are at 40% debt coverage in corporate America, not due to chance, but by innovation and massive value creation, funded using debt.

Pardon for that sidebar. On the issue of what the fuck is happening in stocks, I have no choice but to conclude, without seeing signs of credit weariness in banks and/or credit, this decline should be treated as a plebeian liquidation that will pass. I am open to suggestion and can change my mind with new information.

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14 comments

  1. bintercorp

    Late fees make up more than a quarter of revenue for these SHIT buy now, maybe pay later companies. They act all nice but rape their poorer customers, who probably can’t get a credit card / are maxed out, harder than banks.

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  2. emersonlakepalmer

    That was a lot of words.

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  3. tjnyt

    In the long run, Doc, we all die off. Near term, a giant rotation is going on from TECH to value. COVID outbreaks are used as an excuse to shun old darlings, SAS. Money moving to old stalwarts. My money is on $BA, $BHP, $IP, $DOW, $DIS, $INTC, $JETS, retail, etc.

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  4. Mr. Cain Thaler

    Is it possible to have a bear market without a recession or financial crisis? I’d say “yes”.

    We are in a very unusual place. Look at how many job vacancies there are. Ask yourself “where did these people all go? Did they vanish?”

    Far from the tale of waiters and servers striking for more pay (a story with admittedly a bit of truth to it), the largest age category to leave work have been 55+.

    We cannot fox the economy without fixing the 11 million job hole.

    So why are so many 55+ quitting their jobs?

    The most likely culprit is that their 401K is letting them. Low interest rates doubled stocks in 5 short years. Most of that in the last couple.

    It’s a reassuring lie to tell ourselves that high stock prices are key to our economy but the converse is also true; they are weakening our economy.

    If stocks sell of – up to a point – the economy will strengthen more than it falters.

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    • Orson

      They may be quiting their jobs for a while. Inflation, has been, and will continue to take it’s toll. Who cares how high the stock market is if milk is $9 a gallon and bread is $8?
      When was the last time you saw a television commercial for an auto manufacturer with a purchase payment advertised?

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  5. duuude

    Has the fed siloed all the risky shit ?

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  6. tha pirate

    All of you who denounced Trump for his stupid, brash remarks (and they were) forgot to look at the truly evil/idiotic Democrat/Socialists who WANT total control over your health, your “vaccines” (bullshit), your ability to spend, buy, work, live, die etc.

    You have sold out your freedoms because you did not love your country and the freedom it stands for – you thought only of your basis points.

    You thought it was rough having a brash President who was politically incorrect. Well now the far left with bumbling ‘Jim’ Brandon are here to show you what REAL:shit is. Enjoy.

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    • tha pirate

      The Dems intentionally flood the country with “migrants” (illegal aliens) who come for the free social services, are exempt from “vaccine” mandates while place like NYC try to advance a push to let “non-citizens” vote! If you vote Dem you are destroying the land of the free – and if that doesn’t bother you, maybe losing your money to inflation and shitty markets will!

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  7. Raul3

    bubble not terr*ible, bubble terr*ific

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  8. flea

    “Is this correction merely letting air out of the bag before another run or is this decline a foreshadowing of something more materially wrong with the economy?”

    That’s about the ninth time you’ve said that in the past year. Not pointing to you really, Fly. Everyone has been saying it.

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