Monday, October 05, 2015

Technology bubble in the works?

Among the really knowledgeable and experienced observers of San Francisco and Silicon Valley there is a dichotomy among opinions.  Some see a bubble underway with the only question being when it will pop, or go boom as some say, and then are those who are full speed ahead on the business model that has developed around delivery of everything and anything to consumers everywhere with smart phones.

The debate is focused on the companies that are not public, the so-called unicorns.  These firms seek and find late stage private investors to build their business or perhaps sustain it depending one's point of view.  The investors fueling this debate are hedge funds, private equity funds, sovereign wealth funds, family offices, and high net worth individuals, meaning only extremely high net worth folks. Retail investors, you can't play this game, as mutual funds, ETF's, and index funds are not in it.

A question is whether there is too much money chasing too few distinct ideas.  The unhealthy thought process that "one better get in before it's too late" is seen by some but others see this as a highly opportunist period and cite firms like Uber and Airbnb as examples of that opportunity.  What is clear is that this type of, at times, almost blind investing will not work well for everyone.

Certainly the behemoths of the publicly traded industry like Google, Apple, Cisco, and Microsoft are not overvalued.  A newbie giant like Facebook is almost in a class of its own with its success over only handful of years.  The question here is whether Twitter is the canary in the coal mine as even with its widespread brand recognition it is not coming of age.  A bigger question is whether a take down of the industry of late stage private investing would have widespread affects beyond just creating unicorpses, as some refer to potential flops, as the search for liquidity in a such a scenario could pull down the entire market, technology and otherwise.

This story and debate will without question evolve.  Since the Fed has little firepower remaining, there is a crazy election period underway, and a lame duck president will be in charge, it should be hoped that this possible tech market bubble can relax enough to be kicked down the road for a couple of years as happened in the late nineties.  Wishful thinking of course and, at the moment, the market is hopefully pricing in future outcomes.  "Wishful thinking" is said, as the increased share of the market by high frequency traders belies the concept of rigorous analysis.

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