SNAP back

Snapchat owners, SNAP Inc, will launch its eagerly-awaited $US3bn initial public offering (IPO) today, the latest tech darling set to create $Billions for the founders despite the company having never made a profit during its 5-year life, only widening losses put at $0.5BN for 2016.

Furthermore, SNAP has given no promises on profits to new investors, or on just how the company will be run and if that hasn’t quite been enough to excite your speculative juices, you get no voting rights either!

If you suspect that I am “cool” towards the stock, you would be right. Yes, there will likely be a 20-40% pop on it’s day one debut, but what after that? Aside of it being impossible to actually value a stock like this, it’s the timing of its flotation that is of far more interest.

Last July’s piece on “The Madness of Crowds,” aside of reminding of financial bubbles of the past 400-years, was timed to warn of what appeared to be the end of the 35-year bull market in bonds. Thus far that looks to have been a good call.

SNAP neatly joins a rafter of warning signs that were evident at every stock-market bubble-top and evident now: excessive valuations; extreme bullish sentiment readings; historic lows of cash held within stock mutual-funds and excessive use of leverage.

On the subject of leverage, better know as debt, it’s worth a reminder just how out of whack markets can become. The following chart compares the Dow over the past 35-years, in nominal terms and in real terms, which effectively shows the Dow if the debt is stripped out

Added for good measure is the lower chart in blue, which is a standard “relative strength index” a momentum indicator where a reading over 70 suggests that the Dow is overvalued and undervalued when under 30.

Kindly note that during the 1980s and 1990s nominal and real moved together, as they did during the 2000-2003 bursting of the tech-bubble.

But then something changed, with that change being an unsustainable debt binge, larger than any other in history. The 2007/09 financial crash started a re-alignment but then the fire-hoses of “official debt” drove the nominal Dow and other markets to “valuations” unheard of.

“Stretched like a rubber band,” comes to mind, which is great fun whilst it lasts, but then the inevitable snap-back transpires, which sometimes break.