It happened and even I didn't realize it. I'm talking about the oversaturation of equity from new companies and the subsequent derailing of much of the high-growth Nasdaq complex. Despite the rather robust performances by much of the stock market, the fast-growth cohort -- the software as a service companies and the cloud and digitization stories, both new and old -- have been nothing short of disastrous.
When 2019 began, many asked me what I thought could happen to this market and I begged off the question. I didn't want to qualify "the market" when I felt that there would be tremendous divisions among sectors -- not unlike 1999-2000. If you recall back then, or if you need a refresher, we had two markets, the Nasdaq composite, which was filled with pretenders like Infospace and CMGI or Worldcom and Global Crossing, and the real market made up of the underperforming Mercks (MRK) and Coca Colas (KO) , left behind afterthoughts.
During the period 1999-2000, more than 350 companies came public that rapidly disappeared but not before they could populate the universe with endless amounts of stocks, both primaries and secondaries that investors simply could not absorb.
Of course, both the telecoms and the internet stocks fell apart because of a lack of sales and earnings or because of fraudulence. At the same time, the money flowed to companies with good dividends and solid buybacks.
Now, there is a bit of a variance. The stocks being clubbed in the Nasdaq portion of the market are cloud derived, not telco or internet. There aren't as many of them. And some of them are even profitable. Money is, once again, flowing back to the companies with dividends and buybacks, provided they don't have much China exposure.
But there isn't enough capital around to handle all that's being offered. That's because, unlike the dot-bomb era, indexing has become the de facto method of investment for almost 60% of money invested -- and the individual has become a non-factor, both because of discouragement and the insane obsession by big institutions that there be no more splits in stocks.
The big money managers who still pick stocks don't want their performance to be hurt by commission friction --they still have to pay them unlike the individuals who can now get commission-free trading. So, they are demanding that companies not split their stocks because the more shares, the more commissions. If Amazon (AMZN) , for example, were to divide its stock in a hundred-for-one fashion, you would have a $17.57 split adjusted share price that could attract individuals who trade with no commissions but might cost an institution 5 cents per share. The process is, thus, biased against small shareholders.
Now, there is some hope: Friday Schwab introduced fractional shares. But I am long-winded on this issue because it is vital to understand my overall thesis, which is that at this stage in the stock market we don't have enough stock pickers or individuals to handle all the new stock that's been created.
Moreover, even as many of the current crop of junior growth stocks is cash flow positive, they tend to want to issue stock as salary, so there's a constant flood of supply, like weak shale underneath a skyscraper. It doesn't help that many of the IPOs are unicorns and some are going to lock-ups expire, including $22 billion of Uber (UBER) , four times the current float, as trenchantly pointed out in the Bear Traps Report by Larry McDonald.
You tie in the ETFs that link all of the stocks and what is the result?
It's just too darned similar to the 2000 unraveling, a veritable Gresham's law, where the unprofitable new companies bleed into the profitable, but incredibly expensive, cloud companies, causing the once-red-hot group of stocks to be trashed and burnt. The softer outlook offered by Workday (WDAY) last week, doesn't help.
So, what do you do? I think, If you don't own them, you ignore the stocks that are going down and let them go lower. Wait it out if you own good ones that are being brought down with the bad and perhaps pick -- but be mindful of the pressure that will be put on this market by the Uber lock-up and whatever else the brokers bring public that no one really wants.
I wish I could offer more reassurance but, as I said at the top, the vast supply snuck up on us and is causing the whole group to drop and it's a tsunami you don't want to fight.
