I wish I could bring you happy news in this new year, but I hate to say, as I look out my window in the Bahamas and see a dark cloud that's about to bring us a rainstorm and usher in a cold front: I am the harbringer of doom and gloom.
To quote the a song by the legendary song writer Leonard Cohen, “I caught the darkness, it was drinking from your cup.” I think that the markets will be taking a swig of the stuff in 2014.
I never again thought that we would see something similar to the 1999 to 2000 period of the tech bubble in my lifetime, but now we have the dot-com bubble, part deux. It isn’t as outrageous as the first tech bubble, but it is pretty outlandish and insane. We have companies such as Twitter
(NYSE:TWTR) trading at over 60 times revenues, Facebook
(NASDAQ:FB) at 15 times revenues, Amazon
(NASDAQ:AMZN) at 1,400 times earnings, and Yelp
(NASDAQ:YELP) at nearly 20 times revenues.
It doesn’t matter how much revenue growth these companies have in the next two years, nothing can justify these excessive valuations. The S&P North American Technology Internet Index
(INDEXSP:SPGSTIIN) gained over 60% in 2013 and is up nearly sevenfold from its 2008 financial crisis low.
Valuations and sentiment are about as stretched as I can imagine. These stocks are priced for perfection.
However, we just need a event or something that will change sentiment. Virtually everyone is bullish at the moment, and something has to change to get the ball rolling in the other direction.
Judging by the recent reaction of Tesla Motors
(NASDAQ:TSLA) jumping after it announced 6,900 in auto sales for the fourth quarter of 2013 (Toyota
(NYSE:TM) sold in the range of 2.5 million cars in the fourth quarter), the bubble mentality is still well and alive in stocks.
However, like in 2000, when everyone was bullish and tech valuations were sky-high, the bubble will burst. As a hedge I would advise that investors take a look at the ProShares UltraShort QQQ ETF
(NYSEARCA:QID). This is a good way for the average investor to protect his or her portfolio.
As protection against tech stocks falling into "the darkness," I have purchased long-dated, way-out-of-the-money put options on Amazon, Yelp (I still can’t figure out what exactly this company does), and Facebook.
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Positions in AMZN, FB YELP, QID