Dear 1999…

Several IPOs have been launched in the last few weeks at nosebleed valuations fueled by the euphoria over the perception that the Perma-Fed has our back. The latest IPO launched on Thursday was a cloud based video conferencing company named Zoom that was 20x oversubscribed at 48x revenue (more detail below). There is no better evidence of euphoria when you see deals like this come to market. We’ve seen this behavior before in the late 1990s but lets not forget that the NASDAQ doubled in 1999 despite all the crazy valuations. Perhaps, another melt-up phase is in the works but it isn’t my base for the remainder of 2019.

Are we overvalued? We only know the answer to that question after stocks decline. The chart below shows where we are in a historical context. Trillions of dollars have been raised through debt and then recycled back into the stock market through corporate buyback programs to bring us to this point. Sustainable? Will we grow into these valuations? Not at 2% GDP.

The Dumb Money Confidence index from has been climbing steadily for a month and has now reached its highest level in a decade. This is also one of the few times since 1999 that this indicator was highly confident about a market rally just two weeks into an earnings reporting month.

No doubt, the technicals are very tired and pointing to exhaustion while the fundamental backdrop weakens across the globe. The S&P 500 finished the week slightly negative and has yet to show signs of a breakout to make new all-time highs. The chart patterns indicate a corrective move may be on tap as evidenced by the wedge pattern below.

However, the continued rally over the last several weeks can’t be blamed on the Fed as they are still withdrawing stimulus from the system. Don’t forget that the program to reduce their balance sheet will remain operational through the Fall. Reducing the balance sheet is akin to raising interest rates so what is going to keep markets chugging higher into the Fall? For now it is euphoric optimism.

Chart of the Week!

New World Health Organization data has revealed that measles cases across the globe have risen 300% in the first three months of 2019 compared to the same period last year. All world regions experienced outbreaks but Africa was the worst impacted with its cases soaring 700%. So far in 2019, 170 countries have reported 112,163 measles cases compared to 163 countries reporting 28,124 cases in the first three months of 2018. 

Economic & Central Banking Snippets 

  • Vancouver’s housing market is buckling under a slew of taxes and regulations introduced since 2016 to tame years of relentless growth that made the city the most unaffordable on the continent. The slowdown is now broadening: home sales in March were the weakest since the financial crisis and benchmark prices fell 8.5% from their record last June. (Bloomberg)
  • Turkey’s central bank has bolstered its foreign currency reserves with billions of dollars of short-term borrowed money, raising fears among analysts and investors that the country is overstating its ability to defend itself in a fresh lira crisis. The issue with Turkey is their foreign denominated debt which becomes impossible to repay as the lira depreciates. This also becomes an issue for European banks that may have large exposures to the Turkish economy and banking system. (FT)
  • China grew 6.4% in the first quarter from a year earlier, slightly faster than economists expected. Industrial production, after a lackluster start to the year, surged 8.5% in March from a year earlier as the main driver came from government, which cut taxes and regulation and green lighted more local government infrastructure. (WSJ)
  • The flash US composite PMI plunged to 31-month lows in April, led by a collapse in the Services economies with a reading of 52.8 vs 54.6 last month. Chris Williamson, Chief Business Economist at IHS Markit said: “The US economy started the second quarter with its weakest expansion since mid-2016 as businesses reported a marked slowing in output, new orders and hiring….April also saw firms become more reluctant to hire as a result of weaker order book growth, pushing jobs growth to a two-year low. The survey’s headline employment index is indicative of non-farm payrolls growing by 130,000 in April, well below the 198,000 average indicated in the first quarter.”

Macro Snippets

  • Shares of the Zoom IPO priced at the higher end of their range and came out of the gate rising 72% on Thursday. That gave the company a market value of $15.9 billion! Zoom is actually profitable, earning a whopping $7.58 million in net income last year on revenue of $330 million. However, 48x revenue may be a wee bit expensive. By the way, this deal was 20x oversubscribed by the value seekers out there.
  • The grounding of Boeing’s 737 MAX jetliners continues to ripple through the airline industry, with American Airlines now joining Southwest in extending flight cancellations into August. Together, the two airlines will be cutting an average of 275 flights a day and many of them will be during the key summer travel period. (SA)
  • Goldman Sachs is in the midst of a multiyear effort to diversify away from trading, where profits have dwindled since the financial crisis. First-quarter results showed the urgency of the firm’s pivot away from unpredictable Wall Street businesses. (WSJ)
  • Since the last recession, nonfinancial corporate debt has ballooned to more than $9 trillion as of November 2018, which is nearly half of U.S. GDP. As you can see below, each recession going back to the mid-1980s coincided with elevated debt-to-GDP levels—most notably the 2007-2008 financial crisis, the 2000 dot-com bubble and the early ’90s slowdown. Through 2023, as much as $4.88 trillion of this debt is scheduled to mature. (Forbes)
  • Netflix said domestic subscriber growth slowed in the first quarter, as it gears up to face new competition from Hollywood and increased scrutiny from investors over whether it can maintain its staggering pace of growth. Netflix added another 7.9 million paid subscribers overseas in the quarter, up 31% from a year earlier. The company added about 1.7 million domestic subscribers, compared with the nearly 2.3 million added in the year-earlier period.
  • Bond sales are booming in 2019 as a pivot in monetary policy among the world’s central banks prompts a fresh binge in corporate borrowing. Global corporate bond issuance has reached almost $747bn for the year according to data from Dealogic, edging ahead of the previous record of $734B in 2017. (FT)

That is all for now until next week’s Market Update. Please reach out to me if there is anything you want to discuss about the markets or if you would like a copy of the firm’s brochure. 


Paul J. McCarthy, III

President – Kisco Capital

Paul McCarthy

Mr. McCarthy is the President and founder of Kisco Capital.