The current sell-off may end up emboldening the bulls, if the last tech bubble is a guide

The bubble isn’t burst yet.

Justin Edmonds/Getty Images

Traders at the moment seem to have as much patience with tech stocks as Kansas City Chiefs fans do for a moment of unity.

Thursday was the fourth ugly finish in five sessions, with the Nasdaq Composite

skidding 2%, and the other major indexes backtracking as well.

Andrea Cicione, head of strategy at independent investment research firm TS Lombard, said excessive leverage in the market really began in earnest in July. Cicione added that was occurring in U.S. stocks wasn’t happening anywhere else in the world.

And while he’s seeing signs of a bubble, he thinks if the selling doesn’t intensify, the bubble may reflate soon.

“The leverage accumulation so far may not be enough to burst the bubble just yet,” he writes. “If the recent selloff does not intensify further, the whole episode may end up simply emboldening the bulls to buy the dip and take even more risk.”

Between 1997 and 1998, the Nasdaq experienced three sell-offs of at least 17%, only to emerge stronger and rise four-fold to the 2000 peak. “Leverage is a key characteristic of all bubbles, and almost invariably it is the mechanism that leads to their collapse. But there may not have been enough leverage for the dot-com 2.0 bubble to burst just yet,” he says.

The reason leverage is important in bursting bubbles is because it uniquely can lead to forced unwinding. “When faced with margin calls they cannot meet, investors may have to liquidate positions against their will. The resulting fall in prices can instil doubts in the mind of others, persuading them to sell,” he said.

The buzz

Consumer price data for August is due at 8:30 a.m. Eastern.

The quarterly services survey and August budget deficit are also due for release. The Congressional Budget Office, which typically gets the budget picture pretty close to the mark, estimated the August deficit was $198 billion, and said the September-ending fiscal year gap will be the highest relative to the economy since 1945.

Database software giant Oracle

topped earnings and revenue expectations, helped by revenue from key client Zoom Video Communications
Oracle also declined to discuss whether it will buy the U.S. operations of social-media company TikTok, as U.S. President Donald Trump said Thursday there will be no extension of the Sept. 15 deadline for it to be sold to a U.S. company or shut.

Peloton Interactive
the exercise bicycle company, reported stronger-than-forecast fiscal fourth-quarter earnings and revenue, with its current year outlook also well ahead of estimates.

Jean-Sébastien Jacques, the chief executive of mining giant Rio Tinto
announced he will resign in March following the controversy over the firm blowing up ancient caves while excavating for iron ore.

Thursday marked the first day since spring when new coronavirus cases in the European Union and the U.K. exceeded the United States.

The market

U.S. stock futures


were stronger.

Gold futures

fell while oil futures

edged higher.

The British pound

continues to reel from its more combative stance taken against the European Union in trade negotiations.

The chart

This incredible UBS illustration of Tesla

shows how shares have performed compared to other tech giants since joining the $100 billion market cap club. It took Apple

and Facebook

between 4 to 11 years to achieve what Tesla did in three quarters. UBS increased its Tesla price target to $325 from $160 ahead of the company’s battery day presentation.

Random reads

Here’s the 2010 memo from a venture capital firm on an investment which valued retail software maker Shopify at $25 million. Shopify

is now worth $114 billion.

China said its U.K. ambassador’s Twitter account was hacked — after a steamy post was liked.

An experimental treatment kept mice strong in space, one that could have uses back on Earth.

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George Soros bashes President Trump, explains why he no longer participates in this market bubble

George Soros just turned 90 years old… and he’s got a lot to say.

‘We are in a crisis, the worst crisis in my lifetime since the Second World War. I would describe it as a revolutionary moment when the range of possibilities is much greater than in normal times. What is inconceivable in normal times becomes not only possible but actually happens. People are disoriented and scared. They do things that are bad for them and for the world.’

That’s how the billionaire financier, a longtime bogeyman for the right, kicked off his wide-ranging birthday interview, posted on Wednesday, with Italy’s La Repubblica.

Soros is confident the U.S. is better positioned to weather the pandemic than Europe, even though he took issue with the man calling the shots in the White House.

“Even in the United States, a confidence trickster like Trump can be elected president and undermine democracy from within,” he said. “But in the U.S. you have a great tradition of checks and balances and established rules. And above all you have the Constitution. So I am confident that Trump will turn out to be a transitory phenomenon, hopefully ending in November.”

Until then, however, Soros warned that Trump “remains very dangerous,” because “he’s fighting for his life and he will do anything to stay in power.” He added that Trump will be held accountable for his violations of the Constitution if he loses the presidency.

Pivoting to his legendary approach to financial markets, Soros acknowledged that we’re caught up in a bubble fueled by Fed liquidity, which has created a situation that he now avoids. He explained that “two simple propositions” make up the framework that has historically given him an advantage, but since he shared it in his book, “Alchemy of Finance,” the advantage is gone.

“One is that in situations that have thinking participants the participants’ view of the world is always incomplete and distorted. That is fallibility,” said Soros, who made a killing shorting the British pound decades ago. “The other is that these distorted views can influence the situation to which they relate and distorted views lead to inappropriate actions. That is reflexivity.”

He went on to say the market, which he no longer participates in, is sustained by the expectation of more fiscal stimulus along with hopes Trump will announce a vaccine before November.

And the gains keep coming. At last check, the Dow Jones Industrial Average

was up more than 200 points, while both the S&P 500

and tech-heavy Nasdaq Composite

were also firmly in the green in Wednesday’s session.

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Iran’s stock market surges past key level to record high, as analysts warn of bubble By Reuters

© Reuters. A woman looks at electronic board showing stock prices, following the outbreak of the coronavirus disease (COVID-19), at Tehran Stock Exchange in Tehran

DUBAI (Reuters) – Iran’s main stock index broke through the key 2 million point mark for the first time ever on Sunday, state media reported, amid warnings that the market is overheating.

The Tehran Stock Exchange’s benchmark TEDPIX index gained 46,844 points in early trading, the official IRNA news agency said, up 2.4%.

The index closed at 1,961,649 on Saturday after surging by over 57,325 points, or 3.01%, on the day, according to the Tehran Stock Exchange (TSE) website.

Iran’s clerical rulers have been encouraging ordinary Iranians to invest in local stocks to boost the country’s economy, which has been hard hit by the reimposition of U.S. sanctions over Tehran’s nuclear programme.

Analysts and some lawmakers, however, have warned that the move might raise the risk of a stock market bubble as the rising market is at odds with Iran’s deteriorating economic fundamentals, which are also feeling the impact of the coronavirus outbreak.

Iranian authorities have denied that there is a bubble in the country’s stock market.

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Tesla’s stock is forming a bubble and new buyers should buckle up for a crash

“Tesla is a bubble that is going to pop.” That’s the headline of a column I wrote in early February — and I’m repeating that prediction now.

To be sure, I have no expectation that this forecast will come to pass quite as quickly as it did after my early-February column. Over the six weeks following its publication, shares of Tesla

dropped almost 60% in a plunge that admittedly was caused in large part by the coronavirus pandemic-induced bear market. COVID-19 had nothing to do with my forecast then.

Instead, the prediction was based on the sheer magnitude of Tesla’s stock price runup in prior months. According to a model constructed by three researchers at Harvard, the odds of a crash increase in lockstep with how much a stock has gained over the recent past. Put simply, the higher a stock goes, the harder it falls.

How far? The table below reports the crash probabilities that the Harvard researchers calculated based on trailing two-year market-adjusted returns. They defined a crash as a drop of at least 40% over the subsequent two-year period.

Price run-up over prior two years relative to market

Probability of a drop of at least 40% over subsequent two years











When I wrote my early-February column, the odds of Tesla crashing were approaching 80%, since its trailing two-year return relative to the S&P 500

was 134 percentage points. The probabilities of Tesla crashing are even higher now. Tesla’s two-year return is 324 percentage points higher than the S&P 500.

To be sure, the Harvard researchers focused on industries rather than individual stocks. So I am going out on a limb in applying their model in Tesla. How far? For insight, I turned to another study that focused specifically on individual stocks’ crash risks. This (unpublished) study, “Overconfidence, Information Diffusion, and Mispricing Persistence,” was conducted by Kent Daniel, a professor of business at Columbia Business School; Alexander Klos of the Institute for Quantitative Business and Economics Research at the University of Kiel in Germany, and Simon Rottke of the faculty of economics and business at the University of Amsterdam.

The professors focused on those stocks for which there is a reduced amount of the selling pressure that normally keeps their prices in check. Because such stocks are therefore unconstrained, they sometimes can soar into the stratosphere, untethered from economic fundamentals. The researchers found that, after experiencing these huge gains, such unconstrained stocks on average proceeded to lag the market by a cumulative total of 53% over the five years following their price runups. That would certainly satisfy the Harvard researchers’ definition of a crash.

To identify these unconstrained stocks, Daniel and his co-researchers focused on stocks for which there are few short sellers. They did this by identifying stocks for which few shares are available in the security lending market for short sellers to borrow.

This is not the case for Tesla. But there may be another factor that just as effectively discourages the shorts from betting against Tesla: the stock’s extraordinary volatility. That volatility discourages short sellers, since it means that even if they’re right over the long term, they face the not insignificant prospect of outsized paper losses along the way. A recent article in Barron’s, for example, carried the headline “Tesla bears should hide in their caves.”

Tesla’s stock — even if it does well over the long-term — is now too far ahead of itself.

Looking at Tesla stock, it’s worth remembering John Maynard Keynes’ famous line that the market can stay irrational for longer than you can stay liquid. As evidence of the possibility that shorts are being scared away by Tesla’s volatility, consider the number of shares of Tesla stock that have been sold at various points over the last year. In July 2019, for example, Tesla’s open interest (the number of shares sold short but not yet covered) topped 40 million shares. Currently, in contrast, it’s around 15 million shares. That’s odd, since there appears to be no shortage of commentators who still think that Tesla’s stock is in a bubble. Why, then, has there been such a decline in the number of traders shorting the company’s stock?

Needless to say, there’s no way of knowing how much of this reduction was caused by fears of a short squeeze. It could well be that the erstwhile short sellers changed their minds and now believe that Tesla deserves to be the most valuable automobile manufacturer in the world.

That strikes me as an extremely long shot. Both the Harvard research and the Daniel, et. al, paper suggest it’s much more likely that Tesla’s stock — even if it does well over the long-term — is now too far ahead of itself.

Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at

Read:  Tesla shares at $2,000 is new ‘bull case’ for Morgan Stanley

Plus: Tesla’s stock soars to 4th-straight record as Wall Street’s biggest bear raises price target

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Shopify’s Hyper Bubble Put In Perspective (NYSE:SHOP)

The Bubble

Shopify (NASDAQ:SHOP) is undoubtedly in a bubble, a massive one that far exceeds a good number of those from the dot-com era. Since my last article, Shopify’s Road To $200, the stock has risen an incredible 22.3% and added more than $100 to its share price. What makes this so incredible is that it was published just over a week ago and there’s been no fundamental news during that time. They have been fairly consistently adding many times their FY19 revenue to their market cap, on a daily basis, since. With this article I hope to provide some context on just how unprecedented a bubble this is.

Shopify Vs. FAANG

While these are all very different companies and in very different situations, it’s not uncommon for bulls to suggest Shopify belongs in FAANG and I’ve lost count how many times I’ve been told it’s the next Amazon (NASDAQ:AMZN). My last article got into more detail about why this isn’t the case, namely that Shopify isn’t even a retailer to start with, but it’s pretty widely acknowledged that FAANG has some of the best growth and returns in the market. So, with that said, let’s look at a few different metrics.

Data by YCharts
ChartData by YCharts
ChartData by YCharts

It’s fairly clear that Shopify is on another planet in terms of valuation, and also that it hardly seems justified. They’re currently second place in terms of long-term projected EPS growth, still 1.83% behind Amazon while being 12.8x more expensive. You want the lowest number possible for EV/EBITDA and Shopify is completely off the charts, 40x higher than Netflix (NASDAQ:NFLX) in second place. Looking at P/S not a single FAANG stock has ever been anywhere near the level of Shopify. Amazon came the closest at 43x, but this was during the dot-com bubble and quite literally only lasted a single day. Between IPO and the bubble bursting, that was the only day they reached 40x P/S or higher. Apple, even in 2008 with the massive hype surrounding the initial release of the iPhone, never even reached 6x, roughly 10% of what Shopify is today.

Amazon’s Dot-Com Bubble

Amazon is just about the best imaginable company to benefit from the dot-com bubble. Not only did they have a website with lots of traffic (clicks drove value more than earnings) but they were going to take over retail! The euphoria during this period in general cannot be overstated, and Amazon had a far better story than most to benefit from the said euphoria. Even with all that, and during the most well-known tech bubble in history, one in which we can all universally agree was a bubble, Amazon still only managed to break 40x sales for a single day while Shopify has been comfortably sitting above 60x. Now let’s take a look at revenue growth for Amazon from IPO in ’97 to after the bubble had burst in ’01, as compared to Shopify’s growth since IPO below it.

ChartData by YCharts
ChartData by YCharts

As you can see here, Amazon was growing more than 26x the rate of Shopify in their respective 5 years after IPO. Despite this significantly better growth and during one of the most well-known tech bubbles in modern history, Amazon still only managed to reach 70% of the sales multiple given to Shopify. Within one year of the bubble bursting, the P/S fell below 1x and has remained between ~2x and ~5x for the two decades since. Below you can see both Amazon and Shopify P/S since IPO, their respective bubbles are very easy to spot.

ChartData by YCharts
ChartData by YCharts

Declining Growth

While Shopify continues to have a phenomenal growth rate of ~45%, it’s significantly lower than the ~100% rate they had in FY15 or the ~70% they had in FY17. Growth has been declining fairly consistently by an average of 17.2% per year, and guidance had initially called for an even larger drop in revenue growth this year before they pulled it in 20Q1. Guidance was initially $2.13 billion to $2.16 billion, which represents a ~36% increase YoY or ~23% lower than the 46.8% growth FY19.


Increasing Losses

Similar to their declining growth numbers, losses have been increasing at a fairly consistent rate since IPO. Unfortunately, the losses are increasing significantly faster than growth is declining or revenue is growing, averaging 66% per year.



In my last article, sourced earlier, I extrapolated Shopify’s projected revenue out to FY25. The first extrapolation was based on their 17.2% decline in growth, the second one was a “bullish” extrapolation which lowered the decline all the way to 10%. The last one is exclusive to this article and assumes a CAGR of 35% indefinitely, which is of course completely unsustainable and far better than their historical results.

Historical (-17.7% YoY)


Sales Growth

FY19 $1.57 billion 46.80%

$2.18 billion

FY21 $2.88 billion 32.08%
FY22 $3.65 billion 26.56%
FY23 $4.42 billion 21.04%
FY24 $5.10 billion 15.52%
FY25 $5.61 billion 10.00%

Bullish (-10% YoY)


Sales Growth

FY19 $1.57 billion 46.80%
FY20 $2.23 billion 42.12%
FY21 $3.07 billion 37.91%
FY22 $4.12 billion 34.12%
FY23 $5.38 billion 30.71%
FY24 $6.87 billion 27.64%
FY25 $8.58 billion 24.88%

Perfection (35% Constant)


Sales Growth

FY19 $1.57 billion 35.0%
FY20 $2.12 billion 35.0%
FY21 $2.86 billion 35.0%
FY22 $3.86 billion 35.0%
FY23 $5.21 billion 35.0%
FY24 $7.03 billion 35.0%
FY25 $9.49 billion 35.0%

The final extrapolation, using a 35% constant growth rate indefinitely, will still only achieve $9.49 billion by FY25. Assuming both outstanding shares and share price remain the same by FY25 it would still be trading at 11.3x sales by then. This is still 15% higher than Netflix, the most expensive FAANG stock by sales today. Taking it even further, an indefinite 35% CAGR would not achieve the first $100 billion until FY34, finally putting it at ~1x sales after more than 14 years.

Of course, this extrapolation is extraordinarily unlikely as it would require them to not only end their consistently declining growth but then maintain that growth rate for another five years out. Given that guidance had already called for a 23% decline in growth FY20, down to 36%, more than their 17.2% historical average, it’s incredibly unrealistic and overly optimistic to expect them to maintain a long-term growth rate of 35%.

Shopify’s Week

As previously mentioned, Shopify has flown off the charts in just the last week, adding roughly 13x more to their market cap than their entire FY19 revenue. What’s stranger is that there wasn’t any fundamentally meaningful news to support it. So what were the catalysts that led to this bubble growing even larger?

  • Monday, Piper Sandler lifted Shopify to “overweight“, suggesting revenue was poised to quadruple to $12 billion by 2025. To remind you, it added nearly double that 2025 revenue projection to its market cap just five days later.
  • Thursday, RBC raised their price target to $1,000, hilariously (and in my view unethically) suggesting a company with $1.58 billion FY19 revenue is worth $120 billion, more than 75 years of trailing sales.
  • Friday showed a collaboration with BlackBerry (NYSE:BB) to develop a contact tracing app for Canada. Of course, it was really developed by the government with input from Shopify and a security audit by BlackBerry. In any case, as of writing this, they’ve added several billion to their market cap today alone.

Does any of this news justify adding ~13x FY19 revenue to their market cap in just a week? On a near daily basis Shopify is adding 1-2x FY19 revenue almost without exception. Of course, to be fair, they are in such a bubble at this point that a minute ~1.5% move represents more than their FY19 revenue.


Shopify is beyond a hyper bubble, there are few other stocks that have ever reached anywhere near it, including anything in FAANG. Any long-term holders should be very cautious at these prices, it will very likely drop between 50% and 80% within the next six months just as Amazon did after the dot-com bubble burst. They are trading at more than 60 years of trailing revenue, have only seen one (barely) profitable quarter, growth declining and losses increasing since IPO. On Friday alone, in a single day, they added more to their market capitalization than they generated in total revenue in FY19. In the last week alone they’ve added ~13x their FY19 revenue, more than $20 billion in value added with $1.58 billion in revenue.

Disclosure: I am/we are short SHOP. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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