How This Bull Markets Ended

Watching the top happen right before our eyes.

By Jared Dillian, Mauldin Economics:

Many people think that they ring a bell at the top of a bull market. Ding-a-ling-a-ling.

That is indeed often the case. The bell was rung in 2000 at the top of the dot-com bubble—I like to think it was 3Com spinning off Palm that broke its back.

But sometimes there is no bell, no catalyst, no story to tell. A bull market becomes a bear market, and it happens just like that.

Silicon Valley has been in a food fight for about three years now. Everyone knows it’s going to end, except for the folks in Silicon Valley. These guys are funny. I met a few of them in the last cycle. They really thought it was going to go on forever.

There are now 145 unicorn companies (private companies with a valuation of $1 billion or more), with a total combined valuation of $506 billion.

We are watching the top happen right before our eyes.


If you were paying attention a couple of weeks ago, you might have read the news about a company called Square going public. Jack Dorsey is the CEO of Square. He is also the CEO of Twitter. I think of this sometimes whenever I complain that I’m too busy.

Square got a round of financing in 2014 at a $6 billion valuation, and now it’s a public company. If you pull up SQ on Yahoo! Finance, you will see that the market cap is $4 billion.

As Square was making the rounds in the roadshow, investors decided they didn’t want to overpay just to make the mezzanine round investors rich. So there wasn’t much demand for Square at a $6 billion market cap. It eventually went public at a $3 billion market cap, or $9/share. (The deal performed well in the aftermarket, at least. The stock is trading at $12.)

No catalyst. No bell ringing. The price simply got too high, and people pulled back. But you know what this means. If one deal can trade below private valuations, they can all trade below private valuations.

On to the next data point…


You may not know this, but Fidelity owns shares of private companies in some of its funds (like Contrafund). Fidelity has to figure out how to value these things.

In general, venture capital firms have to mark their investments to “market,” whatever that means. To do this, they use the services of third party valuation firms. Those valuation guesses are probably subject to mood or opinion, and as you can imagine, there are a lot of bad guesses. The valuations don’t mean much—if you’re an LP (limited partner), at the end of the day, you care about cash in and cash out. But mark-to-market creates some interesting short-term incentives.

As for Fidelity, they also have to mark things to market, and they also use valuation firms. But valuation firm A that Sequoia is using is different than valuation firm B that Fidelity is using. And Fidelity perhaps wants its valuation firm to be more conservative.

So Fidelity has been marking its private investments to market at levels that are below the most recent funding rounds. This puts the VCs in a bit of a pickle. Do they copy Fidelity or do they press on with their own, higher valuations in the face of dissenting opinions?

None of this makes people very bullish on startups.


Uber is the biggest unicorn of all, with a $50 billion valuation. Side note: they don’t make any money.

Uber is trying to raise another billion—at a $70 billion valuation.

Now, the only reason you would invest in Uber at a $70 billion valuation is if you thought they would go public at $80 billion or more. But looking at what happened to Square, that will almost definitely not happen.

And why would you pay $70 billion for Uber when Fidelity is going to mark it in your mush? Another great question.

I don’t think anyone is in the mood to pay $70 billion for Uber. Uber is stuck. They will have to go public or take a down round if they really need the cash.

And this, folks, is how bear markets start.

Brainstorming Session

So let’s do some brainstorming on what this could mean if it really were the end of the line for Silicon Valley (at least in the medium term).

  • Since tech has been going up while energy/mining has been going down, could this trend reverse?
  • Could value start to outperform growth? (If I’m not mistaken, it already is.)
  • Could large cap start to outperform small cap? (Boy, is it ever.)
  • If you lived in the Bay Area, would you want to sell your house and rent?
  • As new tech is in the process of topping, have you seen what old tech has been doing? Check out the chart of Microsoft, at 15-year highs:

For full disclosure, I started calling the top (or at least asking hard questions) on Silicon Valley about a year and a half ago. But I think most dedicated observers saw what happened with the Square IPO and said, “Yep, that might be the top.”

The other thing I’ve learned is that even when people recognize the top, they vastly underestimate how bad the pain is going to be on the downside. “Oh, it’ll just be a quick correction.” Never is.

One last riposte: Anyone who invested at these valuations will richly deserve what’s coming to them. Those prices were cuckoo.

By Jared Dillian. If you enjoyed Jared’s article, you can sign up for The 10th Man, a free weekly letter, at Follow Jared on Twitter @dailydirtnap. The article The 10th Man: How Bull Markets End was originally published at

Investors are already getting bloodied as the Great Credit Bubble implodes at the bottom. Read…  “Distress” in US Corporate Debt Spikes to 2009 Level

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  28 comments for “How This Bull Markets Ended

  1. BradK says:

    By Jared Dillian, Mauldin Economics

    I first read this as Maudlin.

  2. Vespa P200E says:

    “But sometimes there is no bell, no catalyst, no story to tell. A bull market becomes a bear market, and it happens just like that.”

    Yep seen it all before back in Feb 2000 when my office was full of over-confident new investors upset they could not get in on the IPO deals peddled by SillyCON fairy tale spinners. Hey remember etoys, homegrocer, pets and other dot CONS?

    Yep we learn history so as not to repeat and Einsten said madness is doing same thing expecting different results…

  3. Paulo says:


    Good riddance.

    Goodbye. (Hopefully)

    The ‘Something for Nothing’ crowd is way overdue on their comeuppance.

    I look forward to Uber execs throwing themselves in front of unlicensed, uninsured, taxi-scab cars.

    Twitter? Give us a break, already. Next thing we’ll hear is Amazon doesn’t make any money.


    • Nick Kelly says:

      I think Amo manages to squeeze a few million out of billions of sales- but do you want to pay 600 times that for a warehouse and trucking company.
      I wonder if Amo could transition to actually being a retailer, instead of just moving stuff?
      Maybe they are already- I’m not always up to speed on the latest.

      • Toddy says:

        AMZN isnt a retailer. It’s an infrastructure play. They use retail as a vehicle. Look, they earn more money on B2B cloud services than with the B2C e-commerce.

        • Nick Kelly says:

          Calling a warehouse infrastructure doesn’t make it the next big thing (although it is physically big )
          Cloud is already a commodity.
          My wondering about transitioning to actually becoming a retailer, a Walmart that delivered, was a Hail Mary idea for saving a business that is doomed as soon as it gets valued anywhere near reality. Its investments so far haven’t come from profit, they’ve come from selling the promise of future profit.

  4. michael says:

    Please do not try to apply any logic to what is going on here in the bay area. I will believe it when I see it fail, not before.

  5. Petunia says:

    In the days before insanity reined in the financial world, the quick and dirty way to value a company was 10 times the cash flow. This is how all private companies were priced and this was the generous upper limit for companies with upside potential. It could be more for a market leader but not much more. Everybody in business knew this was the standard. Now because they can get much more they pretend they don’t know how to value the business. All these companies that don’t make much of a profit are valued on their cash flows, it is the only thing you can measure.

  6. interesting says:

    i for one am getting sick of this “valuation” bullshit.

    a company’s value is what it’s profits are + a certain premium for future profit growth + it’s cash on hand + it’s accounts receivables + the worth of it’s equipment and real estate…..nothing more and nothing less.


    • Wolf Richter says:

      You’re like so old school. :-)

      • RDE says:

        Once upon a time valuations had to do with producing something that was actually useful. Anybody with a brain cell can see that many of the products of Silicon Valley are pure fabrications useful only as playing chips for VCs and Wall Street con artists.

        On the other hand, what about the “successes?” Would the world really be a worse place if Facebook or Twitter vaporized tomorrow? To me the harm they do as Big Brother surveillance data aggregators or just time wasters far outweighs any utility they might provide.

  7. Pete says:

    So where’s a safe place to put savings for someone in 20s looking for a retirement fund? Just jump out of equities altogether? Hold cash?

    • Toddy says:

      Some people say cash. Oil seems not terrible in the long term, but might be risky near term.

      • Peter says:

        Interesting, thanks. Trouble is, I don’t really see oil going up any time soon either though…not sure it’s bottomed out and the way I understand fracking, it’s much easier to turn the spigots back on once prices go up even a bit (plus Iran coming online with continuing weak demand, etc., etc.)

        • night-train says:

          Peter – for what it’s worth, resuming production on shut-in oil wells is always more complex than just turning on the spigot. And since the shale plays have so little history, we have little actual data on how they will perform after a lengthy shut-in period. And those which were drilled, but not completed, will require full completion investment such as fracking before they can be put into production.

    • Dan Romig says:

      Very good question Pete. My answer is to split your portfolio into thirds. One part cash, one part equities and one part Muni-bond ETFs. My Muni ETFs are: BTT, VPV, NMO, NMA & NQU.

      Live within your means and plan ahead!

    • Mark says:

      1/3 in real-estate (wait for bubble to burst and buy)
      1/3 cash (having some cash at hand is always good idea)
      1/3 in having fun (you are only 20+ and thinking of retirement).
      Remaining 10% invest in medical and insurance coverage.

  8. SquarePeg says:

    I thought the Swiss National Bank rung the bell when they decoupled from the euro…still do.

  9. prepalaw says:

    Pete – I am 50 years older than you and started with nothing. There is one risk-free investment: paying your debts down to zero and keeping them at zero. Invest ( “spend”) no more than 50% of your after-tax income.

    You have to live some place. So, why not invest in a duplex – live in one half and rent the other. Fix it up and pay it off.

    You should count on nothing from the government when you can no longer work. The last place you want to put your money is in any public market – they are all corrupt and will stay corrupt. Forget 401-Ks and other tax-postponement schemes – invest in yourself.

    Bottom line: Invest in your personal survival. Learn something professional or technical that you can do and make money at doing 50 years from now.

    And, if you are self-employed, set up a company to collect and disburse of your income and tax-deductible expenses. With your duplex and company, you will get many tax breaks – taxes will only get heavier.

    If you don’t know anything about companies, give up 200 hours of time doing things that do not produce money or have a long-term prospect of making or saving money and learn about all of this – everything is there on the Internet for free. When I started out, I was so ignorant that could not complete a 4-page income tax return or balance my check book.

    Good luck – keep you nose to the grindstone and stay focused.

    • NYC Millennial says:

      Agree on all points except “Forget 401-Ks and other tax-postponement schemes”. Between 25-100% corporate matches and “tax postponement”, this is one of the best deals out there. 401Ks, 403Bs, HSAs, 529, IRAs, etc should be maxed out, especially for those in higher income brackets or higher taxed jurisdictions and particularly in years when the market is falling and dollars go further in terms of dollar cost averaging.

  10. Cae says:

    Silicon Valley is going crazy, yet again. The timing is about right and the indicators are going off all over the place. Valuations and the absurd logic to validate them is starting to be heard everywhere. Reminds me very much of the dot bomb in many ways.
    Corrections should be here within a year.

  11. Nick Kelly says:

    And the funniest part is that the absurd valuations are just the thinnest branch of a tree that ITSELF is about to topple.
    So trying to conservatively value a unicorn is (at least) a two stage process.
    You have to figure out how much more valuable it is than a boring market plodder, and then figure out how overvalued the plodder is because in the words of Marc Faber: ‘all asset classes are overvalued’
    Who would have thought that this could happen so soon after the debacle?
    One of the most dangerous creatures right now is a financial adviser under 45.

  12. NotSoSure says:

    Last year it’s the top after the Alibaba IPO, and yet the market continued to march higher.

    I still think we’ll see Dow 30K, but the dollar has probably lost 80% of today’s value.

  13. Nicky Furlano says:

    I’m close to 100 percent sure in the near future when we look at the history books this will be deemed nothing but a bear market rally in a long term bear market that started with the dot com crash. The only so called bull market is a bull market in the FED and banker’s voodoo witchcraft. Once the bankers unload we could finally see the second shoe from the ’87 crash as the market retests those levels.

    • Nick Kelly says:

      Agree. I like military metaphors. World War II was lost at Kursk in August 1943. Germany’s string of victories ended at Stalingrad 7 months earlier but after Kursk it was clear the Soviet Union was going to beat them.

      My point is that it took another year and a half because even the inevitable takes time. Also, after nothing happened right after Kursk, the German propaganda ministry was able to sell the idea that the situation had stabilized. Sound familiar?
      Or if you prefer a sports metaphor, a boxer has to worn down.
      The Great Recession was like a hay maker punch, it leaves the world’s economies in a weakened condition. But the bout isn’t over. And as in the battlefield after Kursk, the pace of deterioration is accelerating.

      Now this is not a doomsday scenario- life will go on. But there has to be real house cleaning at some point.

      • Nick Kelly says:

        Ps to last : although far from well off I am fundamentally right-ish and a believer in capitalism.
        However, I am starting to cast a skeptical eye on the stock market.
        Is it really necessary for technology to progress. to have computer programs trading in and out of stocks thousands of times per second?
        No doubt there will soon be a mass die-off of over-extended social media stocks, but how much collateral damage will be done to companies actually producing something?
        How much damage would be done to real progress if you had to hold stock for a year?
        How much damage would it do to real estate if a unit in some developments had to be held for five years, unless ( as in hardship cases) you were willingly to sell for your cost plus commish plus the national inflation rate?

        Jees- I’m starting to scare myself- am I turning left wing?

  14. D.G. Emptor says:

    I wish I had the econ back round to fully follow/formulate this, but it seems to me that between printing money to pay for wars and the collapse of the real estate backed bubble, there is just WAY too much cash sloshing around looking for a home. Its not just silicon valley tech firms with crazy valuations: look at all the PE funding flowing into restaurants and other brick and mortar businesses. I don’t care how good it tastes, a taco is just ground beef… And what about SBUX and that craziness? Delivery services for a cup of coffee? Lots of strange things being accepted as reasonable by people who should be smart enough to know better. Maybe I’m not smart enough to see it. As someone said earlier, you can’t go wrong if you underpay for NPV of future cash plus assets on hand, it’s just hard to take the plunge when everyone else is at the other watering hole with the flashing neon signs.

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