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Planning & Economy

Topsy-Turvy

September 20th, 2021

Does anyone remember the dot.com bust?
Does anyone remember; Webvan, Boo.com, or Worldcom?
Do you remember the wild Initial Public Offerings (IPO) of the dot-com companies – companies which by going public raised millions of dollars but never showed a profit?
Do you remember folks quitting their jobs to day-trade in “the market”?
Does anyone remember the media hype associated with financial markets during that era?
And does anyone remember how it ended?

 

In a 1996 speech, Alan Greenspan, the then chair of the Open Market Committee of the Federal Reserve Board, referred to the dot-com phenomenon as “Irrational Exuberance.” Speculation is the act of making a relatively risky investment in the hope of making a sizeable short-term profit from price fluctuations; house-flipping, day-trading, cyber currencies, anyone?

Investing, on the other hand, requires a commitment to an outcome. It may be owning and developing an enterprise. It may be buying the public stock of a business that increases its dividends regularly. It often requires patience and a long-term outlook – letting the company employees work for the owner (investor) every day to provide value to customers. The likely outcome being a consistent dividend stream resulting in increased wealth.

Andy Kessler writes a column for the Wall Street Journal called “Inside View” I’m an avid reader. The following are from his most recent article, “The Stock Market Fails a Breathalyzer”:

“Used-car sales platform Carvana is worth more than Volvo, Honda, Ford or Hyundai. Airbnb is worth more than Marriott and Hilton combined. Crypto-exchange Coinbase is worth more than the Nasdaq….

…. How about those meme stocks still getting hyped on Reddit’s WallStreetBets? Those who bid GameStop shares into the stratosphere waved at Virgin Galactic Holdings as they soared by. A year ago, the stock was $6 and it is now $190—some dupes paid $483, game over. Short sellers Melvin Capital, Point 72 and D1 Capital focused on fundamentals and got their assets handed to them. Shorts lost more than $9 billion between January and June.”

Should we disparage irrational exuberance? We could, but then we wouldn’t have the dominant tech players of today: think phone, operating system, search engine and your favorite web-based shopping platform.

The beginning of the dot-com debacle came about when the Federal Reserve bank began to increase interest rates – 9/11 followed, the rest is history. Increased rates discount future earnings and so began the path back to a fundamental investment rationale. Today we find ourselves in an eerily similar investment environment.

Today Federal Funds Rate is .25%, effectively zero. As of this writing, the ten-year maturity treasury bond is yielding 1.28%: there is little or no discount mechanism to future earnings, so stocks look fairly valued based on earnings expectations, in our view. However, it is more likely than not, that interest rates will begin to creep up. The Federal Reserve has announced they will begin to tighten the money supply. As money supply tightens, in our opinion, stocks that have climbed based on speculation are likely to retreat. As the speculative trend dissipates it may begin a corrective phase to all equities.

We like companies that provide extarordinary value to their customers. As these are the companies we chose to own, we believe the gyrations of the speculators may serve us opportunities to own more of them.

 

Carlos Dominguez – CERTIFIED FINANCIAL PLANNER™, Portfolio Manager, RJFS

When you get a minute try out our risk discovery tool – tell your friends
https://windsorwealth.management/my-risk-o-meter/

 

Sources:
Image: Huey Images
https://www.investopedia.com/terms/i/irrationalexuberance.asp
https://en.wikipedia.org/wiki/Dot-com_bubble
https://www.wsj.com/articles/low-interest-rate-dow-35000-joby-aviation-carvana-coinbase-beyond-meat-investing-11631464939?mod=searchresults_pos1&page=1

Sources are being provided for information purposes only. Raymond James is not affiliated with and does not, authorize, or sponsor any of the listed sources. Raymond James is not responsible for the content of any source or the collection or use of information regarding any source’s users and/or members. Past performance may not be indicative of future results.  Any opinions are those of Carlos Dominguez and not necessarily those of Raymond James. This material is being provided for information purposes only and is not a complete description, nor recommendation. The information has been obtained from sources considered reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Investing involves risk and you may incur a profit or loss regardless of strategy selected. There is no assurance that any investment strategy will be successful. Investing involves risk and investors may incur a profit or a loss. Certified Financial Planner Board of Standards, Inc. (CFP Board) is an American 501(c)(3) certifying and standards-setting organization that administers the Certified Financial Planner certification program and oversees more than 73,970 professionals using the CFP certification in the United States. Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design) and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements. Cryptocurrencies and other related investments, such as NFTs, are highly speculative and involve a very high degree of risk. Investors must have the financial ability and willingness to bear the risks of a potential total loss of their investment. Cryptocurrencies and NFTs are not registered with the SEC and the marketplace is currently unregulated. Securities that have been classified as cryptocurrency-related cannot be purchased or deposited in Raymond James client accounts. Prior to making an investment decision, please consult with your financial advisor about your individual situation.

 

 

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