“Truth is stranger than fiction.”
-Benoit Mandelbrot

After a day like yesterday, I just had to bring back our boy, The Brot!

In a must-read-and-study chapter of one of the most important books that has influenced my risk management #process, The (mis) Behavior of Markets by Benoit Mandelbrot, he reviews the Cisco (CSCO) chart from 1

“You can see how enthusiastic investors extrapolated the earnings trends of 1999 into a soaring stock price. In 2000, as earnings flattened, investors started sobering up and the bubble began deflating…” (pg 205) 

Back to the Global Macro Grind … 

Is a Facebook (FB) data breach the beginning of the end? Or do Oracle’s (ORCL) cloud sales slowing matter more? Were either of these stocks bubbles? Or have there been far larger ones that gave birth to the narratives embedded in their stock prices? 

Bubbles: Truth or Fiction? - zfac

Allow me to indulge and go off the rate-of-change rail briefly this morning. I have 3 completely qualitative questions relative to the bubbles I’ve lived through and risk managed for the last 19 years: 

  1. Is “crypto” the new dot com?
  2. Is “cloud” just another word for internet?
  3. Is pot like poker? 

To suggest that crypto, cloud, and pot stocks haven’t been in some inflating formations that resemble what we know as bubbles would be fiction. The truth is that some “smid-cap cloud” stocks look a lot like the World Poker Tour’s did. 

While there’s no more bubble market cap for online poker stocks, people still play poker. If they eviscerate more of these Vancouver Stock Exchange pot or “coin” offerings, I highly doubt people stop smoking the wacky tobaccy either. 

Just because people “do something” and/or say “so…” before they tell you about the entire TAM (total addressable market) of humanity doing the same thing doesn’t mean you should pay any price for it. 

In order to measure and map the truth or fiction associated with any bubble here are 3 things I constantly consider: 

  1. Is my @Hedgeye Risk Range #Process signaling higher-all-time-highs or lower-highs?
  2. Are break-downs violating @Hedgeye TREND support on accelerating or decelerating volume?
  3. Is there going to be a rate-of-change #SLOWING in the company’s revenue growth rate? 

Yep, had to get the heck away from my biggest risk in generating short selling ideas (my brain and qualitative reasoning) and bring this all the way back to what I’ve learned matters a lot more than calling “tops” and “bubbles”…

And that’s using math, research, and Mr. Market to help me time them! 

While I don’t think ORCL and FB are The Bubble Stocks, per se, they both feed the bubbliness of it all (which you see at the top of all economic cycles btw) with a ton of market cap. Pre-open today here’s where those are at: 

A) Oracle = $215 Billion
B) Facebook = $413 Billion

“So” ... if both of those stocks A) break @Hedgeye TREND support on B) accelerating volume … all I need from here to short them is to have a competent rate-of-change analyst tell me a story about slowing revenue growth and I’m interested. 

Here are those critical @Hedgeye intermediate-term TREND signal levels: 

A) ORCL = $50.21
B) FB = $181 

That’s right, just like on the way up, for a bubble to pop you need a narrative on why the price is going down (instead of up) that is both believable and confirmed by incoming data.

As many of you who have followed my rants for a long-time know (thanks for that btw), I’m no perma-bull. You also know that staying “Long Tech” and the NASDAQ is a place where I do not want to over-stay my welcome. 

The truth about those incompetently and inaccurately calling bubble tops (zero edge since 2009) is indeed stranger than any fiction about pot or poker that I could conjure up this morning. 

Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND views in brackets) are now:

UST 10yr Yield 2.79-2.91% (bullish)
SPX 2 (bullish)
NASDAQ 7 (bullish)
VIX 15.59-21.02 (bullish)
USD 89.09-90.25 (neutral)
Oil (WTI) 59.90-62.93 (bullish)
Gold 1 (neutral)
Copper 3.05-3.15 (bearish)

Best of luck out there today,

KM

Keith R. McCullough
Chief Executive Officer

Bubbles: Truth or Fiction? - 03.20.18 EL Chart