Uncategorized, Weekly Update

Market Manias – Bitcoins, Marijuana, and the Internet of the 1990s

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Published September 28, 2018


We are far down the road of this bull market cycle. How much further this road goes is anyone’s guess. Nevertheless, we are struck by the mania investing stories of last year and this, namely, cryptocurrencies (2017’s mania), and marijuana stocks (2018’s mania). These stories are very similar to the internet “dot.com” stories of the late 1990s, it appears to us.

A touch of background/observation: Marijuana/CBD stocks are businesses with a tangible product(s), and seem to have ever-widening potential uses. CBD is legal in all 50 states, from what we’ve read, and is an increasingly popular anxiety-fighter among people under 40. Given the increasing disposable income of this demographic and the head-on competitive challenge to alcohol sales, it’s no surprise that large spirits and beverage companies are closely watching and/or investing in this area – e.g Constellation Brands and Coca-Cola. Cryptocurrencies (e.g. bitcoin, et al), on the other hand, seem to have their popularity grounded in a more niche and, dare we say, unproven idea – that the world wants and needs an “independent” alternative currency. Wrapped up in the cryptocurrency story is that of blockchain, a revolutionary method for tracking and storing transactions. It’s very possible that cryptocurrencies go nowhere while blockchain ultimately thrives. It’s also less clear who the cryptocurrency/blockchain companies are. We see the currencies trading, but it’s often less clear which company is/can make money off these products longer-term.

In short, with marijuana/CBD stocks, you are investing in a tangible product and that’s product’s potential to expand revenue by growing and expanding into new markets. With blockchain and cryptocurrencies, you’re basing your investment on the adoption of a revolutionary new technology/concept that may or may not be adopted quickly, if at all. Both topics are “pushed” by younger consumers, predominantly, while facing resistance of varying degrees from established players, whether they be consumers, governments, and/or business interests. Much of that description also applied to the internet and related companies in the late 1990s. A key difference is that the internet was a platform for business as a whole – the potential being vast, across all of business and consumer activity, thus it drove the entire stock market. Cryptocurrencies/blockchain and marijuana/CBD are less broad in their impact and application, thus, relegated to certain companies and trading vehicles rather than the market as a whole

With that little bit of context, we shift to a brief collective of articles from Michael Batnick’s blog, the Irrelevant Investor, talking about investing in market manias:

On the day of its IPO in May 1999, EToys’ nearly quadrupled in price.
Toys ‘R’ Us did 300 times more revenue than the new kid on the block, yet after its first day as a publicly traded company, the brick and mortar Toys ‘R’ Us had a market cap that was 35% below EToys.
EToys’ $7 billion valuation was based purely on hope, a number far removed from the business fundamentals. From its founding until the IPO, EToys had sold just $30 million worth of goods, and had lost $30.8 million.

The Wall Street Journal sees parallels between the dot-com bubble and the current explosion in marijuana stocks:

The 51-year-old banker wants to focus on Qind, his San Francisco startup that organizes home parties to sell cannabis products, to get a piece of what he says could sprout into a $100 billion annual business in the U.S.
It’s possible that one day the marijuana business grows this large, but I doubt it will happen for a very long time, considering that beer sales in the U.S. were $111 billion in 2017.
With access to detailed information about every speculative bubble that humans have ever concocted, one would think that people would learn from the mistakes of previous generations. We don’t.
Harry Truman once said:
“The next generation never learns anything from the previous one until it’s brought home with a hammer. I’ve wondered why the next generation can’t profit from the generation before but they never do until they get knocked in the head by experience.”
Some lessons have to be experienced before they can be understood.

To wit:

“Russell rarely played the stock market and had little investing experience when he put around $120,000 into bitcoin in November 2017.”
This comes from a CNN money article, Bitcoin crash: This man lost his savings when cryptocurrencies plunged. From January 2017 through the peak in early 2018, Ethereum gained 16,915%.

Chart 1: The price of Ethereum, a version of bitcoin

The price of Ethereum, a version of bitcoin

Any time you have something go vertical, you just know that some people are going to get swept up in the mania. This is how the markets have always and will forever function. Jamie Catherwood, writing on the same subject today, said “Repeatedly, and assuredly, investors move from mania to mania, sacrificing long-term gains for short-term speculations.”
Ethereum is now nearly 90% off its peak in February (remarkably still up 2,000%) since beginning of 2017.
Today’s Ethereum is Tilray, a Canadian Cannabis company, which went public in July, and is already up close to 500%. This is sure to attract the same type of people looking to get in on the next big move.

Chart 2: Tilray’s stock price

Tilray’s stock price

Tilray recently reported that quarterly revenues doubled y/o/y to $9.7 million. 100% revenue growth is great, but the thing is, it now has a market cap of $11 billion with $28 million in sales over the last twelve months. Macy’s also has a market cap of $11 billion, and it does $70 million in sales a day. I know this is comparing apples to marijuanas but still, you get the point. Animal spirits has clearly taken over in this example.
There’s nothing wrong with wanting to get in on the action, but if you’re going to invest recklessly and just fling money into something you know nothing about, don’t be Russell. Only invest money you are willing to light on fire.
The unfortunate reality is that people are going to be people. Nothing can teach you the dangers of getting caught up in a frenzy like experience, and some people have to just learn these lessons the hard way.”

Back here at TimingCube (and at our broader portfolio FPResearch site), we want to prevent your investments from “learning lessons the hard way”. So we provide models that make investing simple, relatively low risk, while still quite profitable. We do so with quantitative models that avoid the muddying affects of human emotion, the emotions described above that can lead to catastrophic losses. NOT losing is also a way to win.

Market Update

Investors focused this week on the meeting of the Federal Reserve with expectations solid for another hike in near-term interest rates. Stocks opened the week fixed on another round in the ongoing trade skirmish between the U.S. and China. The latest tit-for-tat exchange of tariffs pressured stocks in Monday’s trade while oil prices scooted higher after a weekend meeting of oil producers found no agreement on increasing supply. Stocks closed mostly lower with a -0.4% slip. A downgrade of semiconductor maker Intel (INTC) offset a rise in consumer confidence Tuesday to leave stocks unchanged. The Fed meeting anouncement Wednesday sparked a negative reversal with stocks giving up early gains to close -0.3% lower. Interest rates actually slid on the Fed announcement which sent financial stocks tumbling. Stocks pushed higher Thursday as two market heavyweights, Apple (AAPL) and Amazon (AMZN), both received upgrades. The Nasdaq lifted +0.6% on the strength in those two key components of the index. Friday brought little movement either way as stocks closed out a successful 3rd quarter of the year.

For the week, the S&P 500 (SPY) gave back -0.41% while the Nasdaq 100 (QQQ) bucked the downdraft to add +1.37%. Small-cap stocks (IWM) lost -0.68% to continue their recent slide.

Warm wishes and until next week.