Is this a sign that the US bull market is running out of steam?

https://www.marketwatch.com/story/you-may-be-surprised-at-how-many-sp-500-stocks-have-fallen-at-least-50-from-record-highs-2018-10-16

The wait is over: Nasdaq sets a new record after fifteen years

S&P 500 Watch

I refer to my blog of February 20, 2015 titled "Forget the S&P 500, watch the NASDAQ Composite".

Yesterday, the NASDAQ composite closed at 5056 to finally break its high set in March 2000 at the height of the dot com boom.

Please read this story in the FT to get a succinct perspective on the tech market then and now.

Forget the S&P 500, watch the NASDAQ Composite

S&P 500 Watch

Three days ago the S&P 500 set a new record. But what about the other closely followed index on the U.S. stock market - the NASDAQ Composite index?

The NASDAQ index is a benchmark that closely follows the fortunes of US listed technology companies. The information technology companies in the limelight – Apple, Google, Facebook, and Amazon – are all listed on the NASDAQ stock exchange. The S&P 500 is more representative of all sectors of the U.S. economy – both traditional and the new.

During the height of the dot com boom, shares of technology companies soared – the benchmark setting an all-time high on March 6, 2000 of 5048.6 on a closing basis. Now the NASDAQ is within a touching distance of that all-time high – it closed at 4924.7 yesterday.

Fifteen years to come close to setting a new high is a brutally long time for any investor! Note after the dot com bust in 2000, the S&P 500 took just seven years to once again set a new high.

The point is that when it comes to investments, valuation – the price one pays for the asset - is just as important as the growth prospects of the asset (a company or a group of companies in an index). 

On March 6, 2000 when the NASDAQ closed at 5048.6, it traded reportedly on a trailing P/E (Price earnings ratio) of 175! Such extreme valuation punishes investors for an unacceptably long time. Today the NASDAQ trades at a somewhat modest valuation of 31.

Amazon's financials

S&P 500 Watch

Reference my blog of October 30 on Amazon titled " Amazon’s performance critical for investors and the tech industry ". I suggest the following articles on Amazon's financials: 

Financial Times, December 1, 2014: Amazon falls on debt sale plan disclosure and
The Motley Fool, October 30, 2014 : What Investors Need to Know About Amazon.com Inc's Cash Flows.

The future of Google

Indian Stock Market Watch
S&P 500 Watch

A day after I wrote a blog titled "Amazon’s performance critical for investors and the tech industry", on October 30, FT published an interview with Larry Page, Co-Founder of Google, which to my mind is compulsory reading to investors and those interested in the future of the tech industry. 

In my article, I had questioned Amazon's valuation, compared it with Google, and questioned the strategy of "visionaries at companies such as Google, Facebook (Amazon is an extreme example) pursuing long term profits but doing so through highly speculative, or shall I say forward looking, investments in fairly diverse industries". 

Now FT reports that Larry Page is considering changing Google's mission statement: to "organise the world’s information and make it universally accessible and useful" appears too restrictive for its ambitions and idealism.
FT  reports that Steve Jobs told Larry Page "He would always tell me, You are doing too much stuff".

It is clear that for all the things that Google wants to do it needs a different kind of corporate structure, appropriate for both its investors and the conversions of these explorations into successful businesses/industries. FT reports that Larry Page admits that there is no model for the kind of company Google wants to become.

These are fascinating times indeed!

Amazon’s performance critical for investors and the tech industry

Indian Stock Market Watch
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I know of one company listed on the U.S. Stock market which has the following data points:

Forward Price/Earnings Ratio (FY 15) shown at Yahoo Finance is 250;

Reported recently the highest quarterly loss in in about ten years of $427 million;

$ 75 billion in revenues was generated by the company in 2013.

Any guesses on which company I am referring to? Yes, it is the truly amazing Amazon.

Why would investors continue to repose faith in such a company? One, Amazon has done a great job in the retailing space in serving customers. Two, since even today internet sales account for less than 10% of total retail sales in the US, investors have felt that Amazon, despite its unsteady record of profitability over twenty years, is a true long term profit story. Three, the larger than life figure of the founder, Jeff Bezos, has captivated analysts and investors.

Amazon has now reported two consecutive quarters of losses. The stock is down about 27% from its peak late last year. But is this enough?

Google is a somewhat similar sized as Amazon - Google’s revenues in 2013 were $60 billion – but far more profitable, and yet trades at a forward P/E of only 19 compared to Amazon’s 250. Assuming my maths is correct, if Google were valued on the same P/E as Amazon, its market capitalisation would be $4855 billion instead of $370 billion, or if Amazon were to be valued at the same P/E as Google its market cap. would be $10 billion instead of $134 billion!

From my perspective, far too much seem to ride on the confidence investors have in Amazon’s ability to generate profits in the long run. Jeff Bezos has repeatedly chosen to invest, not entirely successfully, rather than pursue profits on a quarter to quarter basis. This to me makes sense if this is accompanied by focus on a particular industry. But Bezos has Amazon investing in an amazing variety of industries apart from retailing: cloud computing, smart phones, e readers, drones, TV shows … At the same time, Amazon discloses very little about the details of these investments.

And will Amazon run out of cash?

If investors lose faith in Amazon, then it could lead to loss of faith in the tech market and perhaps even the first serious correction in the US bull market since 2008. Another scenario is that investors lose faith in the Bezos model of business: visionaries at companies such as Google, Facebook (Amazon is an extreme example) pursuing long term profits but doing so through highly speculative, or shall I say forward looking, investments in fairly diverse industries. One thing appears more certain, investors will lose faith in tech companies that do not make profit and even more so if they do not have any revenues – and today we have some high profile ones with sky-high valuations. 

A perspective on the US Bull Market in stocks

S&P 500 Watch

If you are one of those (I am) who looks at the S&P 500 to calm your nerves or to get a long term view on the BSE Sensex (or Nifty Fifty), then I would recommend that you read an article by Victoria Recklaitis that appeared in the MarketWatch website on May 31, 2014. The accompanying graph is insightful. The graph follows the length and returns of bull and bear markets from the 1920s. If history is a guide, the S&P 500 is in good shape for the long run.

If any readers of this blog have come across reports of the correlation between S&P 500 and Sensex , please let me know.