Tag: macro

What World Changing Things Will Come From This Episode of Irrational Exuberance?

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I think pockets of this market are clearly showing signs of irrational exuberance. The valuations of companies with no revenue, or even products yet, is alarming. I don’t know much about Nikola, but despite a credible short report and the CEO stepping down, they have no product but a $7.6BN equity valuation. I talk about View windows later in this post because even though they have a product, they have $30MM in revenue and a $2.2BN valuation. It is laughable.

Buffett had a good point in one of his shareholder meetings in the 2000’s. He noted that some of these companies wouldn’t even be able to raise debt, but their stock valuations are huge. I see that today – that’s View, in my view.

The point of the post isn’t to argue about these names, it’s not even an argument about “market timing” because I don’t believe you can do that effectively. There are also still some cheap names out there. But I do want to lay some groundwork that there is excess.

But the main point I am wondering what infrastructure is being laid down today that we will benefit from in the future? For example, the tech bubble destroyed returns for any investor in any of the most exciting names. However, the exuberance also led to a lot of fiber cable being laid that we now benefit from today.

You could say there was a huge transfer of wealth. Investors got completely hosed, likely lost most of their money, but the infrastructure led to consumer surplus way down the road.  If you don’t want to hear me discuss the exuberance first, then skip to the end of this post.


We have a SPAC mania. SPAC’s are literally called “blank check companies.” I am giving you a check to just go out and do something — and demand has never been higher. That seems somewhat lost on people. I guess people also don’t realize this is a red hot contra-indicator. When SPACs are booming, that’s a clear sign there’s too much money chasing too few things and probably not a great time to be investing (i.e. “I don’t know what to do with this money… but YOU do… take my money!”).

The last SPAC boom was 2006-2007… was that a great time to be investing in hindsight?

We now dwarf that period. Sure, IPO’ing isn’t easy. But that doesn’t explain all of this.

I would call it desperation to “catch the next thing.” Even though SPACs have totally misaligned incentives, are paying extreme prices for “businesses” they still pop on the announcement, effectively making the deal even more expensive. With the market this wide open, do you really think the seller got the worse end of the deal in the SPAC transaction that it requires trading up?

I recently tweeted the following explanation:

We’ve all seen the huge bid ups in electric vehicle or battery SPACs.

As an aside, one of my favorite SPACs (and by favorite, I mean laughable), is View – which is being brought public by a Cantor Fitzgerald SPAC (ticker CFII). View makes “smart windows” for commercial buildings. By “smart” they mean that you can change the window tint and that helps save energy, allows people to work near windows without heat discomfort, and reduces glare. Despite being around since 2007, View only has $30MM in revenue… The valuation? Right now around $2.2BN… Given the commercial property market right now, its hard for me to imagine upgrading to these windows or choosing them outright…

I immediately thought, “so… they compete with blinds?” and yes they address that upfront. I mean, c’mon, this is kind of hilarious story. Glass is “magical material.”


Let’s look back at other speculative areas and the benefits that actually came from them:

  • The 1840s: Railway Mania. Railroads had emerged and were completely changing the transportation of goods and people. You could now bring freight across the country at a fraction of the cost. It was a clear pattern bubble in the stock market though, but all this capital flooding into the sector helped build more and more railroads.
  • The 1920s: Right before the Great Depression, there was a major stock market mania. I believe it took ~20 years (as we exited WWII and had an economic boom) for investors to break even. Why was there so much speculation? The world had seen the dawn of the automobile, aircraft, radio, and the electric power grid. It was an exciting time. It’s likely that some of this speculation lined the pockets of these manufacturers to create newer and better products.
  • Tech Bubble / Fiber Cable: “the demand seemed so obvious that scores of new telecom carriers sprung up and by 2001 had hung, buried and bored $90 billion worth of fiber-optic cable across the U.S. Optimists predicted Internet traffic would grow 10-fold every year.” That didn’t really pan out and there was a huge fiber glut. But demand for internet traffic caught up and if it wasn’t for all that cheap bubble money, who knows if our gains from the internet would have been as rapid.

So what will lead to consumer surplus in the future?

  • Is it the electric vehicle? With all the capital flowing into the sector, it seems like a self fulfilling prophecy (not that investors will make money in the next 10 years, just that the cars will proliferate at a fast pace).
  • Is it software that increases our productivity? SAAS valuations are pretty high. And I’ve seen many of them issuing equity. This too may be self-fulfilling in that we get better and better software in our lives.
  • Is it further E-Commerce? We’ve seen Amazon take over the US and with COVID 19, every company is investing in e-commerce. Will this get better and better for the consumer?
  • Is it democratization of finance? Big banks have huge barriers to entry… their competitive advantage is cost of capital. But capital is cheap right now, soooo

Tax reform’s impact on stocks – the question NOT being asked

Reading Time: 2 minutes

A lot has been written about the Tax Plan passed at the tail end of 2017. I recently wrote a post on, while I think the plan is very beneficial to US equities, some considerations we should have on the rest of our portfolio.

And not to be a debbie downer, but I am here again to discuss some questions that are not being asked here. If you’re buying individual stocks today, I think the main underlying question for investing in that company comes down to one thing: Does this company have a strong competitive advantage?

In highly competitive industries, typically those that compete solely on price or sell commodities and have little differentiation, these tax benefits may soon be competed away.

Consider a distributor, which typically sells many goods and the only value it adds is perhaps customer service. Grainger has been an example of a distributor that has faced headwinds from price competition as customers look to Amazon for cheaper products. Take a look at GWW’s stock chart over 2017 to gain an understanding of this impact (stock was down 3-4% when the S&P was up 20%).

GWW’s stock really started to recover at the end of the year, one from earnings being better than feared on low expectations, but also due to its tax rate which should decline from 38%.

Given GWW’s heightened competition, due you think those savings will be used for buybacks or high return projects, or do you think they’ll be used to compete and maintain market share? Let’s say you think that’s fine if they use it to maintain share, as they’ll be in a better position. Well, do you think Amazon and other competitors won’t also respond?

Also consider the recent hikes in minimum wage from companies and $1,000 bonuses. They are doing that to attract and retain talent, which is simply another form of competition.

Hopefully you can see what I am getting at. Low competitive moat industries likely will compete the savings away. While the tax rate will be low, returns on capital may end up being the same.

-DD