Discover how understanding the limitations of averages and embracing probabilistic thinking can improve decision-making and risk management in business.
Are We At the Top?
The stock market has corrected some, but things are still frothy in the financial world. Unfortunately, when things are frothy, the economic forces of gravity come into play at some point, and the pain ensures. Why do I think things are at the top?
I believe t is several things. First, the Fed has flooded the economy with funds through the CARES Act, the Main Street Lending Program, to name a few. The money has to go somewhere, and there is FOMO – Fear of Missing Out – so everyone is piling into the leading tech stocks. Further evidence is:
1. Junk bond debt issues, as shown above. The demand for yield is high as government debt, and AAA debt is offering such low yields. Thus record amounts of questionable paper have been issued to meet this demand.
2. SPACs. Look no further. Everyone and their dog is jumping into the SPAC space. These blank-check companies have raised about $41 billion, year to date, which is more than the last ten years combined, and Since July 1, about $29 billion. Currently, I understand that over 40 SPACs are looking for merger partners. As I have mentioned before, SPACs tend to overpay, reducing the returns for investors. Given that there are so many buyers right now, we can expect the prices of merger partners to rise and the quality to fall. Of course, the people who make the real money buy the founders’ shares and get the “promote.” Take the case of Alec Gores, who put just $25,000 into his SPAC when went public in January. Once their acquisition is closed, their 0.6% stake will be worth $96 million. Not bad work if you can get it. However, if the founders are doing so well, my advice is to stay away. The SEC is concerned that investors don’t understand how the incentives relate to pay in a $PAC compared to a traditional IPO. There may be regulation.
3. Is Palantir the latest WeWork? According to the Wall Street Journal, bankers have told investors that shares may start trading at $10, valuing Palantir at almost $22 billion when it goes public through a direct listing on September 30. Valued at $20 billion in 2015, Palantir has seen some increase in value. However, in the private markets, it is trading below $20 billion, and this month PitchBook valued Palantir at just $8.8 billion. As I mentioned last week, Scott Galloway in PalanThiel: The Uncola pointed out that “But at 17 years of age, and after raising $3 billion, the ‘start-up’ has never made money. In 2019, Palantir lost $580 million on approximately $740 million in revenues. The idiot client they serve (U.S. government) lost 25 cents on the dollar ($1 trillion deficit vs. $3.5 trillion in revenues) in 2019 vs. 78 cents at Palantir. The firm spent $911 million in marketing over the last 24 months, roughly half of what Tide detergent spent over the same period. The firm has 125 clients, 3 of them accounting for 28% of revenues. Palantir feels more like a services firm, with tech at its core (e.g., Accenture), but one that, unlike a services firm, is massively unprofitable.” Driving all that success if CEO Alexandar Karp, who paid himself $12 million. If the market is valuing this at $20 billion, we must be close to the top!
The Housing Market
For those that haven’t noticed, the housing market is booming. Many of us stuck inside have realized that we don’t like our homes are moving. In August, new-home sales increased at the fastest rate since 2006. All this demand is causing a supply and demand problem driving up prices.
However, not for long. As I predicted in April, many people are straining to pay their mortgages. Industry analyst Keith Jurow expects “several million” people will have gone nine months without making a payment when the Federal Housing Finance Agency’s foreclosure and eviction moratorium expires at the end of the year. In July, 17% of FHA-insured mortgages were delinquent, according to the Department of Housing and Urban Development. In NYC, 27.2% of mortgages were delinquent in July.
With so much new supply coming online soon, prices may drop, and those that bought now may find they purchased at the top.
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