Reality suddenly mucks up the rosy scenario.
Many of our heroic “story stocks” are getting totally destroyed. Yet not much has changed: Their business model, if any, is the same; they’re still losing money hand over fist; and they’re still trotting out the same custom-designed metrics that seduced analysts and the media once upon a time. But it’s not working anymore.
After the drubbing on Wednesday – the Nasdaq plunged 3.4% and is down 13.5% from its high – we know one thing for sure: there will be a rally someday that lasts longer than a few hours. But something big has changed.
There was the old guard of new tech. Netflix plummeted 8.6% on Wednesday and is down about 20% from its 52-week high. Apple dropped 2.6% and is down 28% from its 52-week high. Facebook lost 3.9% and is 14% off its 52-week high. The list goes on.
But the real drubbing was reserved for the new darlings, the fruits of the recent IPO boom, and other “story stocks”:
Etsy dropped 4.9% for the day to a new low of $6.99. After its IPO at $16 in April last year, it spiked to $35.74 and has gotten whacked down 80% since. Twitter plunged 4.8% to a new low of $18.68. After its IPO at $26, it spiked to $78, from which it has now plunged 76%. Shopify plunged 10% during the day and is down 48% from its high in June.
Mobileye, which makes software for camera-based systems and sensors for (self-driving) cars, plunged 10.3% for the day, and 47% from its 52 week high. And yet, self-driving car tech is one of the hottest, most hyped wonders of the day.
Oh, and GoPro! In after-hours trading, shares plunged 25% to $11 a share. But it’s an exception among our IPO heroes: it has actual profits and a real P/E ratio! And it has a real business model, even if it resembles a one-trick pony that’s getting tired. Its costly cameras have to compete with smartphones that people already have. Wednesday after-hours, it announced the consequences: an atrocious holiday season, sales way below analysts’ expectations, and job cuts. It had gone public at $24 a share, soon spiked to nearly $100 by October 2014, and has since crashed 89%.
Peer-to-peer lenders deserve a special mention. These on-line lending exchanges connect consumers and businesses to a variety of lenders, such as credit partners or even regular banks. The story goes that they’re the future of banking.
Lending Club plunged 6.4% on Wednesday. The day it went public in December 2014, it soared 67% from its IPO price of $15. This was – as these things always are – properly hyped on CNBC. CEO Renaud Laplanche said it would “transform the entire banking industry.” The company had a market value of $9 billion, the size of the 14th biggest bank in the US. Stephan Paternot, an early investor, called it a “no-brainer.” Shares made it all the way to $27.90 before the hot air was let out. They’re now down 68%.
On Deck Capital, which makes loans to small businesses, went public in December 2014 at $20 a share, then instantly rose to $23.83. It has been downhill ever since. On Wednesday, it plunged 14% to $7.33, down 70% from its peak glory.
LendingTree, oh my. It plummeted nearly 30% on Wednesday to $61.14, leaving shares down 56% from their high in August last year. No particular reason was announced. It seems the story just ran out. And reality set in.
And reality is that all these P2P lenders are losing money from continuing operations. Now the credit cycle is ending. Default rates are ticking up. Interest rates for riskier borrowers have jumped. As credit tightens, loans can’t be rolled over that easily. Liquidity dries up. And for lenders, there will be losses. But no one knows how these P2P lenders that lose money even in good times are going to make it through hard times.
This was known a year ago. Back then, it didn’t matter because what mattered was the story, which was that they’d revolutionize the banking industry, and that they didn’t need to make money in good times. Now investors are nervously glancing at reality.
Other “story stocks” outside tech that used to soar for years on a wing and a prayer with few sales and huge losses are crashing too.
A favorite “story stock” was Cheniere Energy. It borrowed billions, first to build LNG import terminals for the moment when the US would run out of natural gas, and when the fracking revolution produced a natural gas glut, it borrowed billions to build export terminals. Now that it’s ready export LNG, the story is over and reality starts. And reality is that it has $10 billion in long-term debt and practically no sales. This was known years ago, but it didn’t matter until recently. Its shares have plunged 60% off their 52-week high.
This has happened to hundreds of “story stocks.” When they crash, though reality hasn’t changed much, that’s a sign the market has changed, that investors are beginning to glance at reality, and it mucks up the rosy story. And that’s a sign that the huge stock market boom that flourished to ever higher highs during the tough economic times of the past seven years is kaput.
The end of the credit cycle has set in. With defaults rising and credit tightening, Standard & Poor’s suddenly sees the worst drop in the “net outlook bias” since the Financial Crisis. Read… OK, I Get it, this is Going to be a Mess: Standard & Poor’s Lowers Boom at Worst Possible Time
Enjoy reading WOLF STREET and want to support it? You can donate. I appreciate it immensely. Click on the beer and iced-tea mug to find out how:
Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.
Can you say 1999? Oh yeah, this time its different.
ROFL.
We need to re-create a robust manufacturing segment in this country. It needs to be re-energized through tax incentives, local demand, and tariffs (where appropriate). China sends us “least-common denominator” products and we export financial shenanigans. I’m not aware of any economy that has survived long term without a robust manufacturing segment.
West
Either are politicians are stupid or they’re crooked or they are stupid and crooked.
The U.S. consumer market is the Golden Goose and our politicians let every foreigner in with a free pass. DUMB.
Either the likes of the Clinton Foundation-tied at the hip to the “Clinton Giustra Enterprise Partnership” in Canada, whose donors are anonymous, but which shovels 100% of its money over to Bill and Hillary- exist to grease political palms or we have to say all politicians are stupid.
I have a hard time believing they are all stupid all the time.
This time it is different:
New monkeys in SillyCON valley and likely new set of lemming muppets or not as many baby boomers.
But you know what is NOT different? : history repeats and suckers born every min.
“Life is just a party and parties aren’t meant to last…”
TPTB need to go ahead with the shot directly into the heart and the paddles (QE4 for themselves and renew WPA and the CCC for us Goy).
Year 2008/09 was bad (only for those who got scared/cashed out/ took loss and margin players) but at the same time it was great buying opportunity and many made fortune.
Year 2016/17 will be the same or even better.
Cheers.
Indeed as thus I think there will be few even the old seasoned hands venturing into catching falling knives chasing dead cat bounces.
Alas – QE ammos dispensed and approaching NIRP – central bankers of the world no longer can create wealth out of thin air unlike 2008/2009…
I think people believe what they want to believe, or sometimes believe what they are told to believe. Critical thinking and deliberate decision making are pretty rare qualities from what I can see.
One glaring example is a house purchase. I once read that most people make up their mind if they want a particular house within 30 seconds, and the decision is an emotional one. ‘They’ see their clothes in the closet, their feet up in the rec room, or the barbecue party on the back lawn; while failing to adequately appraise or investigate the house for construction quality (behind the paint and under the flooring), and all the other details that make a particular house a ‘good buy’. Yet a home purchase is most likely the largest single investment a person will ever make in their life!!! The same article said that people often spend more time purchasing a pair of shoes than they do buying their house.
I think it is the same with investments. In BC, all we heard in our last election was how LNG would save the economic day, and how our Province would one day have no debt and would be able to establish a prosperity fund. I told my friends we were far too late to the LNG party and that LNG export was not viable…that it was stock hype. In a close by town, Quicksilver Resources bought up a defunct and shuttered pulp mill and erected a huge sign proclaiming it to be their LNG export terminal. When they went bankrupt I wrote our local papers and asked them why I had yet to see a story about Quicksilver’s demise and that all bets were now off on a terminal yet to break ground? I drove by the site last night and the sign is still up. My investor friend simply says that it takes a long lead time to build an LNG plant. The community was banking on it, and that was/is very scary. Thankfully, it isn’t my community any longer.
People want to believe in Tech: the facebook addicts and twitter twits have to believe the stock is worthy because it is personally important to them. My ex hometown has to believe in the LNG plant because they need it, goddamnit. People believe in their investment advisors because they just have to be right or a friend told them…., as opposed to researching viable investment firms/products.
Quick fixes and something for nothing, all the while folks go to work at their daily debt-fueled grind, too weary to ask if they really need to make that new car payment that will surely make them happy, once again.
People are herd animals, and it shows up daily on CNN Money.
Sheeple
Paulo, you speak a great truth.
Rarely in my life have I seen so much “will to believe” as in the past seven years. Every miracle cure, every stock market rally, even commodities racing upwards (and hence driving up the cost of living) were hailed as final proof the good days of 2007 were here again. I am not speaking about the sycophantic press, but about people who should know better.
2015 proved that, very much like Wile E. Coyote, you can only flap your arms for so long before gravity comes back with a vengeance.
Around here thousands got burned when AAPL crashed in September and a similar number got pounded when they bought into the Chinese stock market in May. Both categories wanted to believe they had bought a cannot do wrong investment because they believed the hype. Just yesterday I was reading, chuckling all along, another investment guru telling people China “is implementing reforms which are driving a very strong growth”.
The much hyped Ferrari IPO is already exacting its pound of flesh from yet more hapless souls who probably failed to pay attention to Zurich parking lots (in my experience the best economic indicator together with skyscrapers: the number of luxury cars peaked in 2013, collapsed in 2014 and is presently at the lowest point since 1997).
I really hope to live long enough to see if I am right, namely that we’ll see more of the past seven years, with shortening durations, until serious deleveraging will start and interest rates will be allowed to normalize to purge the enormous mass of malinvestment that’s been weighing down Main Street since 2008.
British Columbia and Alberta were (are) the kings of fraud and deception in N. America. Many people made gobs of money off the likes of Ballard Power, Bre-X, etc. in the ’90s. That made me envious but not stupid. I miss the weather there on the “left” west coast but that’s all.
Here in Ontario, in 2016 not much better. Electricity costs are going out of sight, tax grabs and a growing, massive out-of-control provincial debt is adding to our have-not status. At least she’s not running around taking selfies!
Now our little boy PM just said, “I want to legalize weed, but they won’t let me” (http://www.msn.com/en-ca/news/canada/trudeau-i-want-to-legalize-weed-but-they-wont-let-me/ar-CCvT8H?li=AAggFp5&ocid=mailsignoutmd). That and bringing in 25K Syrian refugees here by Dec. 31st last year were his big election promises that got him elected (along with his name and selfies). Can’t think of a better example of the “appearance-vs-reality” politicians we have running this country. I don’t think he ever believed he’d get elected. It was an ego trip and that would’ve been it for his political career if he lost. Now,… the horror,… the horror.
We’re in a permanent recession, much like Argentina, and these are the elected officials and their priorities. I feel so sorry for the next generations–they’re gonna be so financially squeezed if they don’t have rich mommies and daddies.
Gee another look alike left wing loonie up in Canada – looks like he is Canada’s answer to the idiot that the USA has had for the past 7 years.
You get what you deserve when your population becomes a bunch of idiots.
We had ours here in Oz with the Rudd/Gillard governments and will end up paying for it for the rest of our lives.
Dejavu Q1 2000…
When astronomical PE and for that matter profits did not matter,etc.
Today we have non-GAAP souped up #s and PE firms jumping over eachother in mad rush to give money to 20-somethings for mere idea of joke social media with LIMITED ad revenue from same pot/customers.
Glad the bold shorts I made in Oct (disclosed here) on TSLA, TWTR and AMZN are paying off though I’m still under on AMZN.
History does repeat and yeah there’re suckers born every min
Vespa, how true, good for you.
Ya, and screw Facefart too!
The only ‘success’ story in the US economy for the last 8 years was energy. Now that it has vanished back into the hall of mirrors from which it came, there is nothing left.
Don’t forget SHAK (Shake Shack). Sitting on 52-week lows (pre-IPO), after running up a couple hundred %. We had to check out the hype, I’ve had better burgers at McDonalds. It just didn’t seem like a good value.
And also GRLD, another food stock that is worthy of discussion only because it’s crazy that a fleet of food trucks serving a single product should be publically traded.
I think Wolf talking about the wonderful brewing industry might be indicative of a “beer bubble.” Goodness knows we got plenty of them here in Oregon, not to mention oceans of wine.
I’ve been talking about it for years :-)
The thing is, they still only have a 12% or so share in volume of the market in the US. It’s all a market-share game because per-capita beer consumption has been declining for decades. And those gains in market share come out of the hides of the big brands, and they know it, and that’s why they’re buying craft brewers left and right.
But you’re right – I think the valuations are in a bubble. $1 billion for Lagunitas? Sounds like a lot, though they’re privately held, and we don’t know about profits, if any.
That’s one number I’d like to have: total profits of the craft brew industry. It might be below zero for all I know … so the bubble worries, in terms of the valuations, might be well-founded.
I left a comment in the other thread, but there will be a shakeout in the craft brewery movement. It’s coming, and it’s needed. In my local nabe, three have opened in the past year. Sorry, there’s not enough beer drinkers here for all of those breweries to be successful. Cheap and risk-free capital is the bane of capitalism, and I will have to see local entrepreneurs wiped out.
Of course, the local guys are fighting the large companies that have the distribution markets cornered through onerous regulations and such, but they can’t win this battle long term on a product-vs-product basis. TSLA, if they don’t fail first, will finally crack open the direct-to-consumer model for cars.
Anyone remember “Hops”, the local brewery/eatery that has all but been wiped out?
Agree. But the shakeout has been going on for many years. I know tons of micro-breweries (the bar-restaurant type) that are now gone.
I still don’t know if any of them make any money. I would love to find out.
I mean “hate to see local entrepreneurs wiped out”
Hate is the word. Although it will have to happen to someone.
Yeah reminds me of Cripy Creme madness too.
Geesh pay exorbitant PE for mere fast food joint…
it will be different this time!
LG,
Oh YES it will.
once you have a go pro, you have one, don’t need another.
ketchup and mac and cheese get eaten, and you have to buy some more.
back to staples.
Many of these story companies are just reinventing the wheel. Amazon is in some ways an updated version of the old Sears catalog, Google, while a good company, is an updated version of the yellow pages/encyclopedia. Merely moving to the internet what you were doing off the internet is fine, but the internet is not a magic box that automatically grows forever.
Very good point. I have been waiting for 20 years for some concept that is brand new as a result of microprocessors and instant communication. Something that is not just a quicker, glitzier version of something that we could have done all along given enough time, monkeys and typewriters. If there is something out there that is revolutionary in that sense, it has so far not come to my attention. Maybe free porn.
I predict there will be a massive carnage for consumer tech companies . The more commoditized and “good enough” their existing products are the worse they will be hit.
I think the big corporate renters will be in trouble soon. They want a 7.5% increase from us for a one year lease. Our income is down 15% from last year. The math doesn’t work. They have over 100 other houses for rent in the area, many cheaper and nicer than ours, and they are still raising the rent. We are in the same boat as other people we know. I think the corporate renters will be hitting a brick wall soon. It is not hard to predict it.
Petunia,
I have seen the same crazy logic working here in Germany: The last sensible video shop closed down in our area. I was a good acquaintance with the manager there.
So, the video chain went bankrupt, and the manager was able to purchase all the contents of the shop and run the video shop on his own.
Now, shortly afterwards, the lease had to be renewed, so the manager spoke to the leaseholders about purchasing the lease for a reduced amount – considering the local and national economic climate over here.
This is a video shop with 250,000 registered members. The leaseholders refused to accept his offer, so the shop has closed. It has been 1 year now since the shop closed and the shop still looks as if it is vacant to this day!
The logic is as pathetic as what you had mentioned: Where they would rather have an empty shop, than a reduced income.
when you look at this completely mad system called the ‘markets’ you have to really question yourself as to who could be possibly buying this nonsense. But after a few years of reading articles and watching the machinations of the central bankers, this whole scheme slowly comes to light.
Apart from the usual players (wallstreet,pe, some day traders, etc…) you come to the conclusion that those players are a a very small percentage and that the ultimate players are the future generations that aren’t even born yet or have come to age. Basically, the central bankers through printed money and therefore future liabilities, are the ultimate buyers and perpetrators of these broken markets. All in the name of trying to stimulate some kind of economy using these ‘story stocks.’
It is also in a big part, the many large pension funds around the country and the world.. they absolutely NEED to make a ROI. In fact, those involved that don’t chase the vanishing unicorn will lose their jobs. And then when the SHTF they will say that NO One saw the collapses coming.. and as long as they all do it and say it, they are protected from actually having to think or act as if they truly were a Fiduciary..
Sad state of affairs we are living under.. Where the majority of money managers are forced to play a stupid game whereas the outcome will screw their clients but they can not do otherwise.. And no one ever gets in trouble for this… even though it is technically illegal to pretend to represent someone’s interest and then not.
Mortgage rates fell this week.
Well, if we know it’s (crash) coming, why not prepare to profit from it? When real estate crashed in 2008, I was able to purchase quite a number of rental properties and my ROI (rents) has been about 17%, while appreciating close to 100% (prices have more than doubled for some properties). Selfish as it may be, “one man’s misery is another man’s fortune” and downturns are a great time to build wealth.
The buying opportunity coming, as this bottoms, are when the really wealthy get wealthier.
Watch buffet and co move in, as the liquidity crunch hits their energy targets.
All those shale wells, will get turned, on, and off ,for years by their new owners, as the profit margin dictates.
The full ramifications of shale oil/gas have yet to be seen globally, as in, will it arrest and reverse the next big fear and supply reduction ploy by iran working with speculators.
The test will be can the speculators and iran dive it past 60 and keep it there.
Somehow I think not for a considerable time, by then who know’s where truly deep water plays, technology’s will have advanced to. Ther’s plenty of deep water fields, some of which are huge, the issue is how, not where..
Netflix investors need to realize that as people get poorer, they’re going to rediscover internet piracy. They’re going to wait that 15 minutes to download a torrent because they can no longer afford the convenience of instant gratification and with a torrent, it’s free.