Market Activity


A stock frenzy usually only ends one way... and it's not good

Market Activity

A stock frenzy usually only ends one way... and it's not good

“Those who cannot remember the past are condemned to repeat it.” – George Santayana, The Life of Reason, 1905

February 27, 2024

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Stop me when this sounds familiar:

The dotcom bubble was a rapid rise in technology stock equity valuations fuelled by investments in Internet-based companies during the bull market in the late 1990s. The value of equity markets grew exponentially during this period.

Things started to change in 2000, and the bubble burst between 2001 and 2002 with equities entering a bear market.

The crash that followed saw the Nasdaq index, which rose five-fold between 1995 and 2000, tumble from a peak of 5,048.62 on March 10, 2000, to 1,139.90 on Oct. 4, 2002, a 76.81% fall.

By the end of 2001, most dotcom stocks went bust. Even the share prices of blue-chip technology stocks like Cisco, Intel, and Oracle lost more than 80% of their value. It would take 15 years for the Nasdaq to regain its peak, which it did on April 24, 2015.

Record amounts of capital started flowing into the Nasdaq in 1997. By 1999, 39% of all venture capital investments were going to Internet companies. That year, most of the 457 initial public offerings were related to Internet companies, followed by 91 in the first quarter of 2000 alone. The high-water mark was the AOL Time Warner mega merger in Jan. 2000, which became the biggest merger failure in history.

The bubble ultimately burst, leaving many investors facing steep losses and many Internet companies going bust.

Historically, a bubble tends to grow at its fastest pace before exploding.

The Nasdaq index peaked on March 10, 2000, at 5,048 — nearly double over the prior year. Then, several of the leading high-tech companies placed huge sell orders on their stocks when the market peaked, sparking panic selling among investors. Within a few weeks, the stock market lost 10% of its value.

As investment capital began to dry up, so did the lifeblood of cash-strapped dotcom companies. Dotcom companies that reached market capitalisations in the hundreds of millions of dollars became worthless within a matter of months. By the end of 2001, a majority of publicly-traded dotcom companies folded, and trillions of dollars of investment capital evaporated

Is AI going to end the world, save the world or just cost you a lot of money?

We’ve all seen Terminator so the first is a possible, the second is very improbable, but of the 3, the third is most likely.

We wish every company luck and of course, we hope there is no bubble. But recently Eleven Labs, with 40 or so employees and an annual revenue of about $4.5m, was valued at $100 million.

It might make it. But history tells us that most new AI businesses won’t.

When the first internet boom began in the late 1990s, early adopters said it would wipeout most existing businesses. Shares in companies that weren’t considered sufficiently up on the new game got trashed.

Some got around this by sticking .com at the end of their name and launching a website.They dotcommed or dotconned their way out of it.

That will probably happen soon with AI. Every business will claim to be an early adopter and those that aren’t will lose value while that same money is pumped into AI caused by a fear of missing out.

Most of the AI imitators will fail. Bear that in mind.

As for the values now attached to AI firms, well, some of them will grow into those values, come to earn them; many others will turn out to be fantasy valuations.


Warren Buffett and the 'three I's'


Leave it to Warren Buffett, one of the world’s richest men, to offer the most valuable advice on how bubbles burst.

There’s a “natural progression” to how good new ideas go wrong. He called this progression the “three I’s.

”First come the innovators, who see opportunities that others don’t. Then come the imitators, who copy what the innovators have done. And then come the idiots, whose avarice undoes the very innovations they are trying to use to get rich.

The problem, in other words, isn’t with innovation, it’s with the idiocy that follows. So how do we as individuals (not to mention as companies and societies) continue to embrace the value – creating upside of creativity while guarding against the value-destroying downsides of imitation?

It’s not easy, which is why so many of us fall prey to so many bad ideas. “People don’t get smarter about things that get as basic as greed,” Buffett said. “You can’t stand to see your neighbour getting rich. You know you’re smarter than he is, but he’s doing all these things, and he’s getting rich…so pretty soon you start doing it.”

The chart below shows the most amount of money ever put into any company in a single day. All of the top 10 have happened since 2020, with the top two being February 2024!

There are lots of traders who believe the bubble will burst. Buffett has moved the largest amount of capital into cash since the inception of Berkshire Hathaway. Nvidia is now the 3rd most shorted company in the S&P500 having overtaken Tesla which $18.3 billion of shares having been borrowed and sold, according to S3 partners.

This hasn’t gone well so far, but shorting never works straightaway. In fact it doesn’t work until, well, it works. The surge in Nvidia shares last Thursday has left short sellers with about $3 billion in paper losses, according to an analysis by S3, which called it an “AI-generated nightmare” for bearish traders.

The mark-to-market losses are another blow for contrarians who argued that Nvidia’s sky-high valuations and speculative fever had all the makings of a market bubble about to pop. They might be right, but what they don’t know, is when.

“The early mark-to-market losses were inescapable for many short sellers that were looking to trim their positions after NVDA’s earnings report,” Ihor Dusaniwsky, managing director of predictive analytics at S3, wrote in the note. “Shortsellers will probably wait a bit to look for more favourable exit points.”

The rally in Nvidia sparked broader gains across the US chip industry. Short sellers had a one-day paper loss of $4.3 billion from semiconductor stocks, S3 data showed. Semiconductors are the worst-performing sector for short sellers this year, with mark-to-market losses of $7.2 billion in February.

Some investors say Nvidia’s blockbuster earnings will cement optimism that AI spending is strong, justifying the big stock market gains, but the dotcom bubble was fuelled by the belief that the internet was going to change the world.

The belief was right, but that didn’t stop the crash.

Karl Marx, the German philosopher and political theorist said “History repeats itself, first as a tragedy, second as a farce”.

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