Billion-Dollar Unicorns, Expensive Art & Unprofitable IPOs: The Fall '15 Stock Market Correction Approaches

For the last seven years, the risk-free lending rate has been at record low interest rates for most of the industrialized world. In fact, with nearly 30% of all European sovereign debt trading at negative interest rates for the first time in history, any economist that had been living in a cave over the past decade would have easily surmised that the world was in the midst of a global depression.

Truth be told, no one would have ever contemplated that global central banks would have ever left short term interest rates near zero percent for so long. As a result, one could argue that virtually every financial asset is now incorrectly priced and skewed to unsustainable high valuations. With global GDP slowing and domestic demand waning, all major currencies are being devalued against the US dollar in an attempt to export their way to prosperity. International investors are flocking to the safe haven protection of US dollar assets including stocks, bonds, and real estate that are now trading at or near record high prices.

There are a plethora of late-cycle indicators, both cyclical, technical and fundamental, that indicate that we are precariously close to the end of our 7 year bull market. However, anecdotally, the following 3 late cycle indicators may be even more compelling.

For the first time in history, there are currently 111 ‘unicorns‘ , or private companies valued at more than $1,000,000,000 ($1B). A subset of that select group includes 11 companies valued at more than $10,000,000,000 ($10B). These ‘decacorns’ include the popular Uber USA, who is now seeking an additional private capital funding at a super-charged valuation exceeding $50,000,000,000 ($50B).

 

It should come as no surprise to anyone that few, if any, of these 111 billion-dollar unicorns or ‘decacorns’ are profitable, or ever will be profitable for that matter. Another interesting late cycle indicator would be the current record sales of expensive artwork, including last month’s record $179 million contemporary artwork sale of Picasso’s 1955 canvas, “Les femmes d’Alger”.

Jason Goepfert, the founder of Sundial Capital Research, recently analyzed the correlation between record art sales and historical stock market bull market peaks.  As you can see in Mr. Goepfert’s compelling chart below, stocks have tended to rollover in the short months following record sales in artwork.

 

 

 

Lastly, according to Sundial Capital Research, another notable late cycle indicator appeared recently as to the new record high number of ‘unprofitable’ initial public offering companies (IPOs); a high not seen since the ‘irrational exuberance’ period of the Internet bubble top in the Year 2000 (see below).

 

 

 

Financial market cycles have been occurring every 5 – 7 years since 1973. With investor complacency and confidence running once again on overdrive and collective investor memories limited to only 2 1/2 years, a significant breakdown in the seven year bull stock market is fast approaching.

It will be said by some that it is different this time.

We too have no doubt that it is indeed different this time, with 90% of the industrialized world’s outstanding debt now trading at or near 0% for the first time in economic history.

We too have no doubt that it is indeed different this time, with the industrialized world’s outstanding government debt obligations ballooning over two-fold to over $40 Trillion in just the last 7 years alone.

We too have no doubt that it is indeed different this time, with the industrialized world’s central bank balance sheets expanding nearly ten-fold to over $10 Trillion in just the last 7 years alone.

And we too have no doubt that it is indeed different this time, with the industrialized world’s economies now having slowed to near recessionary growth levels, despite the unprecedented and unsustainable credit expansionary policies mentioned above.

What likely transpires in the financial markets ahead as we approach the end of the current economic and market cycle is not different this time. We expect the approaching downturn to be akin to the recent financial crises of the past, with significant private and public stock portfolio losses, financial illiquidity and a return to major global market volatility.

 

Kirk D. Bostrom
Chief Portfolio Manager
Strategic Preservation Partners LP

http://sppfund.com

Disclaimer: The views expressed are the views of Kirk Bostrom and are subject to change at any time based on market and other conditions. This material is for informational purposes only, and is not an offer or solicitation for the purchase or sale of any security and should not be construed as such. References to specific securities and issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. The opinions expressed herein represent the current, good faith views of the author at the time of publication and are provided for limited purposes, are not definitive investment advice, and should not be relied on as such. The information presented in this article has been developed internally and/or obtained from sources believed to be reliable; however, the author does not guarantee the accuracy, adequacy or completeness of such information.

Are San Francisco Housing Prices Foreshadowing The Next Global Financial Downturn?Are Today’s Billion-Dollar ‘Unicorns’ Comparable To Jim Cramer’s Year 2000 ‘New World’ Winners?