The Blueprints for this Market (Part 4)

 | Apr 28, 2014 | 1:30 PM EDT
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There are a couple of other Internet companies that seem threatening, too. Yelp (YELP) has "collapsed," right? This $4 billion company's gone to $57 from $101. LinkedIn's (LNKD) worrisome. This $18 billion stock has gone to $158 from $257 and, at $18 billion, is truly broken.

I have my suspicions about what's happening to these, but I think the declines have eluded people. I believe that Yelp and LinkedIn are part of a wave of stocks that are being brought down by insider selling and the fear that if they don't sell now, they will give back obscene profits. These sellers are mesmerized by two events that really started the shift.

The first dates back to the Feb. 27 earnings report of, the king of software-as-a-service cloud-based stocks. If you go back to that report, you will see something amazing. beat on every single metric. Like Amazon and Facebook last week, it initially roared in after hours. And then the next day it got hammered, the whole arc taking the stock to $62 from $67.

That, more than anything else, marked the beginning of the decline in the whole cohort. That's when it became apparent that no matter what the best of the best did, the stock failed to react positively. That, in retrospect, was your moment to sell them all. There's been such a plethora of software-as-a-service stocks that I can't name them all. But if you hit up their charts you are going to see a peak in almost every single one right at the time that gapped up and then pirouetted to below where it had been before the quarter was announced. If the best software-as-a-service stock didn't rally on the best quarter, what the heck were we supposed to do with the rest of the cohort, particularly given that they are far more overvalued on an enterprise-to-sales metric? Sure, some argue, the real high fliers are growth of 150% to even 200%, higher than, but the market lumps them all together and that exercise has become a splitting of hairs. Ever since that CRM moment, the software-as-a-service stocks, or SAAS, have turned into Software-As-A-Disservice-to-your-portfolio stocks, or SAAD!

But then we had what I regard as the single-biggest accelerant of the decline: the travails of FireEye, the hottest of this era's crop of Red Hots, an Internet security company that stops hackers as a time when cyber security is even hotter than SAAS.

What did FireEye do wrong? NOTHING. At least not the company. FireEye began the year at $41 and then proceeded to double to $96 on the strength of orders, certainly not earnings, because it makes no money. At that all-time high, the company filed to sell 14 million shares, 5.6 million shares by the company and the rest by insiders.

Go look at that filing. It is incredible. The chairman and CEO decided to sell 485,000 shares, the vice chairman and CTO offloaded more than 1 million shares, the CFO 121,000, the COO 227,000 and a whole bunch of vice presidents filed to sell 100,000 shares.

The deal gets priced at $82 a share, severely in the hole, and what happens? The stock, rather than bouncing, as so many of these in-the-hole deals have, craters. And what happens when the stock is cut in half from the high? Another group of sellers, this time from an acquisition, files to sell another 13.2 million shares. That's pretty much all you needed to know. Even after the stock is down 50%, smart insiders are still willing to bail. Now maybe it's because, even down here, this stock sells at an enterprise-to-sales ratio in the 30s. But this kind of selling takes your breath away.

Now, people on air and in print or cyber print have dismissed my notion that a top can be spotted by supply and demand. But they tend to be neophytes or anti-empirical salespeople for the market. I have studied tops endlessly my whole career and I knew it was game over after the initial FireEye secondary, which came at a time of willy-nilly software-as-a-service IPOs.

Here's what I wrote in Real Money in 2005.

"I can always tell when the frenzy's about to crash by measuring supply and demand. Right near the absolute top -- it's too difficult to call the exact top although I have done that once in my life on March 15, 2000 -- the underwritings, all of which were fantastic to participate in, began to fail. Merchandise that was considered "hot," meaning that it went to a premium almost immediately after it was launched, begins to dag. Deals open up and then slip to or below their deal prices. Secondaries -- offerings of stocks already public -- begin to pop up like mad as insiders, who can sell on those deals, but couldn't sell previously because they were locked up on the initial public offerings, dump their shares. The secondaries don't stop, despite the hammering they do to the stocks because the insiders know the pieces of paper are incredibly overvalued and want to get out. At the exact top of the dot-com bubble, for example, every deal, every piece of merchandise, started failing or dropping below the level at which it was priced. None of the deals was working. That was the signal to get out. Supply had overwhelmed demand."

That's why I realized the jig was up because of FireEye. Everything since then has been downhill. Supply had overwhelmed demand.

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