Who Is Getting Crushed in This Bull Market?

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By now, every tidbit about this wondrous bull market gets benchmarked against the dotcom bubble. It’s different this time, we’re ceaselessly told, even on NPR. For one, the “Tech Bubble,” as it’s officially called now, is not tied to the larger stock market this time. So its implosion will be contained. I remember hearing the same in 1999.

And “Tech” is a rubbery term, these days. It covers online retailers, anything in the social media space where the business model, if there’s one at all, is based on collecting and monetizing personal data; it covers automakers, such as Tesla which struggles to build a couple of thousand cars a month, chipmakers that have their microchips manufactured at some fab in China, or biotechs with big dreams and no drugs. The bigger the losses, the more upward momentum these stocks have. Or had. Because now they’re getting crushed.

The debacle has become part of the public debate even on NPR, which is a terrible sign. And KQED, one of our radio stations in San Francisco – a city that had been particularly impacted by the implosion of the dotcom bubble and isn’t naive about it – aired a one-hour show Friday morning, titled, “Are we in another Tech Bubble?” The discussion between the host and the guests didn’t leave much room for the title’s question mark.

The same day, we had the first hints of catharsis, albeit premature and incomplete. “I remember back in 2000 how I just watched my assets shrink on a daily basis, stuck in disbelief as an unrelenting market did permanent damage to me,” wrote The Fly, a sharp-eyed stock market blogger. This isn’t some young googly-eyed trader who hasn’t seen anything but the supernatural five-year bull market that might have culminated last year with a 30% gain, and a lot more for the highfliers. The Fly has been through this before: “It would take me more than 3 years to rebuild my business and I never forgot those lessons, until about 8 weeks ago.”

That’s what a supernatural bull market does to us, even after we’ve learned the lessons the hard way. It persuades us that the gains are our doing, that we’re smart and unbeatable, and that we know what it takes to ride this thing to the very end and then get out just in time. But before we get there, we get whacked.

“I sold almost everything today and now sit with 90% cash,” The Fly lamented. “My year-to-date losses were stopped out at about -32%, that’s another -13% for this week alone.” Then the same thoughts that everyone has afterwards: “It’s obvious that I should have sold long ago.”

If you’re down 32%, you’ve got to make 47% just to get back to where you were, not counting tax consequences, fees, anguish, a shortened life expectancy, and gray hair. While 47% may be easy when nearly everything is soaring, in the current environment it’s devilishly hard and requires boatloads of luck.

The Fly posted some of the biggest losers that once had been among “2013′s favorite stocks.” Biotech company Exelixis tops the list, down 61% from its 52-week high. It’s also down 93% from its all-time high shortly after its IPO in early 2000. In second place on the list: another Biotech outfit, Halozyme, down 60% from its all-time high in early January. It’s back where it was in mid-2013. Imperva, a Big Data security products maker, crashed 64% from its peak last year. And so on.

This sort of wholesale destruction makes the biggies look practically tame: Twitter is down only 44% from its high late last year, LinkedIn 42%, Amazon 28% from earlier this year. Amazon has the dubious distinction of having been an early warning signal during the blowup of the dotcom bubble. It started crashing in early December 1999 and was down 40% six weeks later. The bubble officially burst in early March 2000, after which Amazon continued to eviscerate traders and investors alike. Unlike many of its brethren, however, it survived and a decade later made new highs.

Internet-radio miracle Pandora has plunged 42% in six weeks, taking it back to where it had been in September. This is the nature of momentum stocks that get unhinged from reality and soar without even the sky being the limit. When the hot air hisses out of them, they plunge at three or five times the speed. Escalator up, elevator down.

The crashing highflyers have taken countless momentum traders down with them. Yet the S&P 500 remains just a couple of good days away from setting another high. And mind-numbing bullishness still rules the day.  

But risks are piling up even for staid dividend-paying stocks and for normally conservative bonds. And households are on the hook. They’re holding 34.9% of their financial assets in these kinds of risky investments, the most since the third quarter of 2000, “near the height of the tech bubble,” wrote Russ Koesterich on mega-asset manager BlackRock’s blog; and “just shy” of the record 38.4% set in the first quarter of 2000, at the cusp of the market implosion. He too couldn’t help but benchmarking the current bubble against the bubble of yore.

He fingered the Fed as the culprit. Its interest-rate repression has induced investors to embark on a frantic search for yield, and so they dove into dividend paying stocks and corporate bonds. By now, 50% of all bonds held by households are corporates – “an all-time high.”

Even the Fed started to fret about the “excessive risk-taking” that its policies engendered, and it worried about their “costs” – fears that it shared in the minutes of its December meeting. These “costs” have already whacked savers and retirees and folks who don’t want to gamble away their life savings in a market gone crazy. But now other groups have elbowed their way to the front of that line: momentum traders. And rather than losing a little money in insidiously regular intervals, like savers, they’re losing a lot of money very quickly. Behind them are other groups that are waiting nervously, or blissfully as the case may be, to get eviscerated next.

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