19 Jun Are we re-experiencing the Year 2000 bubble?      

Growth is In Value is Out -the New World vs. the Old World

This blog comments on an article claiming that the current risk in the market is higher than that experienced in 2008 –quoting from Bill Gross.

There is a high level of risk in the capital markets, however it is different than that experienced in 2008, and is perhaps somewhat reminiscent of the year 2000.

• Interest rate risk – in 2008 interest rates were at ~ 5%, whereas now we’re seeing less than 1%, after 8 years of zero to 0.25%.
• For this reason, the bond market is exposed to increasing rates, particularly bonds with longer maturities.
• Equity markets are indeed at all-time highs; however, it is important to note that correlation among sectors is low.

We call it “The New World vs the Old World”:

• Amazon is at an all-time high, whereas traditional retailers such as Macy’s, Target, K-Mart and Sears are struggling to stay afloat.
• Online retailers are taking share from traditional retailers – and bigtime.
• Google and Facebook control the advertising market, whereas advertising agencies, print media and television are finding it difficult to contend with social media.
• Advertising has moved from print media and television to the Internet, PC, and mobile.
• In the auto industry: Tesla’s market cap is 60 billion dollars, higher than that of GM, even though it sells only tens of thousands of cars; the auto industry is heading towards electric vehicles, and Tesla is the flagship player in the space.
• “The Cloud” – traditional servers have been replaced by cloud services; Google, Amazon and Microsoft dominate this market, whereas IBM, the company most identified with super computers and services for storage servers, is struggling to grow its business.

The vast changes in the economy over the past 17 years are apparent when comparing the lists of the largest companies; only  2 that were on the list in 2000 have lasted!!

The 10 largest companies in the world in the year 2000 and in 2017:

To summarize, there is an inherent risk in the richly priced growth companies, as those who will lose the race to first place will see a sharp decline in their valuation. Additionally, traditional “Old World” players continue to lose share to virtual newcomers.

In the bond market, an increase in interest rates could result in significant capital losses to holders of fixed rate instruments.

Unlike 2008, where valuations were artificially maintained because of leverage and miscalculation of risk, in 2017 the fast pace of technological changes creates new players and erases from the map established companies too slow to adapt.

Intel’s acquisition of Israel-based Mobileye for $15 Billion, highlights the urgency of large corporations to pay a premium for technology which could keep them in the game.

We are in 2017, indexes are at record levels; however, the world is changing fast and in a few years household appliances will communicate amongst themselves, cars will auto-drive, and many jobs held by people will be overtaken by technology.

Bill Gross used the remains of his fame to create a headline, as he represents the “Old World” of the bond market, which is struggling to survive in the current low interest rate environment.

Last year I shared with you my blog titled “Volatility is the New Interest Rate”, which points to the risk associated with fast growth.

Volatility creates yield if used to protect equity portfolios, as we have been doing with protective options.

We are experiencing an interesting time when the market is changing fast.

In our managed portfolios we incorporate the two worlds, the old and the new.

Yours,

Michael Jakoby