18 August 2019
NASDAQ stocks are trading at an average of 30 times price-to-earnings multiple. Photo: Bloomberg
NASDAQ stocks are trading at an average of 30 times price-to-earnings multiple. Photo: Bloomberg

Tech bubble: Who saw the first signs?

Short seller Bill Fleckenstein does not show his hand very often, but in January, the savvy hedge fund manager famously let slip that his next target would be technology stocks.

What about them? The Hong Kong Economic Journal’s EJ Tactics tries to examine the thinking behind Fleckentein’s decision.

First of all, NASDAQ stocks are trading at an average of 30 times price-to-earnings multiple.

Twice in as many trading sessions — Friday and Monday — the index fell amid abnormally high transaction volumes, a sign the market had reached a peak.

On Monday, the slide was led by Facebook Inc., Amazon Inc. and Google Inc. which lost 4.2 percent, 2.5 percent and 2.1 percent, respectively.

The losses were attributed to a Wall Street Journal report about a crisis in online advertising caused by bogus traffic figures. The impact was so swift and devastating it sent market leader Netflix Inc. down more than 7 percent on Monday.

On Friday, it was the biotech sector that experienced a bout of selling, with the sub-index tumbling 4.4 percent. The iShares Nasdaq Biotechnology ETF fell 4.7 percent, with 5.49 million units changing hands, the second highest transaction volume of the ETF since its debut in February 2001.

One characteristic of biotech companies is that they may pour tons of cash into research and development even though they have earned nothing during the past year.

Investors, meanwhile, pay attention not to the companies’ income but to their prospects of winning approval for their new products from the US Federal Drug Administration. 

Viagra, for instance, burned through Pfizer’s coffers before it was launched but eventually raked in US$1.9 billion in sales in 2013.

Ten of the 120 constituents in the NASDAQ Biotechnology Index had no income in the past 12 months and 85 made losses, putting the sub-index price-to-earnings multiple at 420 times, the highest since October 2011, according to Bloomberg.

What’s even more worrying is that there have been 24 biotech companies that have made their debut in the US this year, the fourth highest since 1999. Last year, 37 such companies were listed, an all-time high.

At the current pace, some market observers estimate that new biotech listings will top 100 this year.

No doubt that number is another indication of peak valuations.

Was Fleckenstein seeing the first signs of an unprecedented bubble from years of quantitative easing (QE) by the US Federal Reserve? What about inertia in a stock market getting used to absurd valuations?

Perhaps. The interesting thing is this bursting of the US tech stock bubble is supposedly happening at a time when the Fed is winding down QE. That can only mean short sellers are becoming active again.

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Freelance journalist

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