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Is Tech Money Flood Drying Up?

Friday, September 11, 2015
Money and Markets
YOUR BEST SOURCE FOR THE UNBIASED MARKET COMMENTARY YOU WON’T GET FROM WALL STREET
You can also access this issue on our website.
Is the Tech Money Flood Drying Up?
Market Roundup
Dow +102.69 to 16,433.09
S&P +8.76 to 1,961.05
NASDAQ +26.09 to 4,822.46
10-YR Yield -0.039 to 2.183%
Gold -$3.40 to $1,105.90
Oil -$1.29 to $44.73

By Mike Larson

One week ago, I wrote that “Tech Bubble II” could be the latest investor threat. Today, the Wall Street Journal warned it may now be running out of gas.

My article pointed out that billions and billions of dollars have been pouring into Silicon Valley. Venture capital firms have been throwing money at so many early stage and fly-by-night companies that more than 100 were recently valued at $1 billion or more – earning the “unicorn” nickname.

That was all well and good for the VCs, and publicly traded technology stocks, when the markets were strong and optimism reigned. It allowed companies and their private investors to “cash out” via Initial Public Offerings. That, in turn, made everyone richer and created even more wealth that could be recycled into the tech sector.

But, according to the Journal, the gravy train may be running out of track. Previous tech offerings are falling on their face, with 2015 IPOs losing 15% on average from the closing prices on their first trading days. That’s causing investor interest to dry up, forcing private companies to yank offerings or not even bother to try.

The flow of investment money into tech companies is fading.

Result: Tech offerings comprised only 11% of all IPOs this year. That’s the smallest market share since 2008, when global stock markets were crashing. The total number of tech IPOs is on track to be the lowest since 2009. We’ve already seen overall stock outflows surge in the wake of the recent market turmoil. Research firm EPFR Global just reported that investors yanked $46 billion from stock funds worldwide over the past four weeks, while Lipper said U.S. stock funds bled $16.2 billion in the most recent week alone.

Some investors use big fund outflows as a contrary indicator, and try to buy stocks when outflows jump. But there’s no way to tell if outflows have peaked … or if even-bigger ones will follow afterward.

To me, the facts suggest that investor dissatisfaction is rising fast in tech. That, in turn, means another wave of selling in the overvalued sector could be coming down the pike. So if you’re looking for a sector to lighten up on, or position for profits from additional downside if you’re more aggressive, tech could fit the bill.

What are your thoughts here? Are you concerned about the derailing of the tech IPO gravy train? Will it only hurt private equity investors and wealthy company insiders? Or will the gloomier sentiment and deflating valuations spill over significantly into publicly traded tech stocks too? Any thoughts on how you can protect … or build … your wealth if this trend gathers steam? Share them over at the Money and Markets website.

Our Readers Speak

What’s next for Federal Reserve policy? Will bankers finally start going to jail for their transgressions? Where are stocks headed next, and what should you do about it as an investor? Those were the questions you tried to answer online.

On the subject of bank perp walks, Reader GMA took a skeptical view on the move: “Isn’t it interesting that the Justice Department reached this state of resolve just as the statute of limitations ran out on those complicit in the last set of financial atrocities that brought the system to the brink? Is it any wonder voters are looking outside the usual candidate streams for future leadership?”

Reader Donald L. also warned of potential unintended consequences if the government gets too aggressive, saying: “It’s difficult enough now to get banks and financial institutions to commit to venture proposals or even normal finance operations. Can you imagine what will happen if executives are subject to the prospect of a ‘perp walk’ if some overzealous bureaucrat embarks on a witch hunt?”

Meanwhile, Reader Frebon said the following in reference to Fed policy and markets: “I think the Fed is actually going to do it next week. I think that no matter what, the play is the TBT, double-short long term bonds.

“China is and will continue to sell Treasuries to prop up their economy. Also, the velocity of money coming our way with an increase will allow the government to keep on borrowing because they have no clue how to have fiscal responsibility.”

How will markets react if Frebon is right? Reader Stu weighed in by saying: “I share your concern, Mike. Everyone should be very wary right now and position themselves for this ‘new market paradigm’ as you so aptly put it. There are many converging forces in play at present that are on a collision course. Unfortunately, it’s no longer a question of IF, it’s a question of how soon.

“Fed increase or not, the financial world as we know it will still start unraveling very shortly, beginning with the interest-sensitive derivative markets. In my opinion, next week’s release of the Fed decision will be the most important it has ever made.”

But Reader Dan M. said he is planning to power through any potential volatility for various reasons. His take: “I am typically a buy and hold investor. I have several positions with nice gains and I am in the highest tax bracket. Any sale generates a 23.8% tax.

“If I wait out the carnage for six-to-nine months, I miss the dividends, representing another 2-5% in lost income. So, if I am absolutely positive my stock will drop 40% then I would sell. Otherwise I will continue to ride it out.”

Thanks for all the perspectives. My biggest concern today is that any coming decline could be worse than many imagine, given how equities are still dramatically out of whack with where other capital markets are trading.

The huge gap between stock averages and interest rate swaps, carry trade indices, emerging markets, and so on doesn’t GUARANTEE we’ll see a major “catch down” incident. But it is definitely a significant possibility, and that’s why I’m more cautious and defensive now than I’ve been at any point since the last bear market.

Take that for what it’s worth – and feel free to tell me whether I’m crazy or spot on at the Money and Markets website.

Other Developments of the Day

BulletThe Iranian nuclear deal will not face a Congressional veto, after a procedural vote in the Senate fell two votes short of what was needed to advance that process. President Obama’s accord is therefore guaranteed to take effect.

BulletCall them the “BRICs,” the “Next 11,” or whatever else you want. But no matter the moniker, the emerging markets are sinking fast. This Bloomberg story notes that Goldman Sachs’ Next 11 investment theme is bombing in particular. Markets in the countries Goldman bundled into that group (Turkey, Philippines, Indonesia, Mexico, etc.) are falling even faster than the BRICs and developed markets.

BulletThis will always be a solemn day of remembrance for our country, given how many lives were lost 14 years ago on 9/11. But it’s worth noting that lower Manhattan has been reborn in the wake of the terrorist attacks, Osama bin Laden is dead, and so much healing has taken place since then. That is all good for America, and something we should be proud of and take great satisfaction in.

Any thoughts on this anniversary of 9/11 that you’d like to share? What about the possibility of a new tech bubble starting to deflate? Does that have you worried about falling tech stock prices? Share your thoughts on these or other topics at the website.

Until next time,

Mike Larson

Mike Larson
Mike Larson graduated from Boston University with a B.S. degree in Journalism and a B.A. degree in English in 1998, and went to work for Bankrate.com. There, he learned the mortgage and interest rates markets inside and out. Mike then joined Weiss Research in 2001. He is the editor of Safe Money Report. He is often quoted by the Washington Post, Reuters, Dow Jones Newswires, Orlando Sentinel, Palm Beach Post and Sun-Sentinel, and he has appeared on CNN, Bloomberg Television and CNBC.
The investment strategy and opinions expressed in this article are those of the author's and do not necessarily reflect those of any other editor at Weiss Research or the company as a whole.

For more information and archived issues, visit www.moneyandmarkets.com.

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