(January 24 – 10:10 ET ) – Present stock market valuations are rational but dangerous, say analysts at RBC Dominion Securities. DS says that the market, although it seems crazy, may well make sense.
“After such a prolonged period it is not enough for analysts simply to argue that there is a bubble, or that millions of investors are wrong perhaps even crazy. It could instead be argued that the stock market is rational, that a coherent, single explanation,” it says.
It points to the revolutionary impact of e-commerce, comparing it to the first Industrial Revolution. This impact, it argues is still uncertain so tech stocks are receiving venture-type valuations even though the companies may be large, making the valuations themselves outsized.
DS quotes at statement from Art Samberg, chairman and CEO of Pequot Capital Management in last week’s Barron’s:
“Question: In other words, it doesn’t matter what price you’re paying for anything? Art Samberg: Not right now, because we are trying to discount a revolution.”
With the impact of the “revolution” uncertain the stock prices in many other sectors are being discounted wildly. “What does e-commerce and the internet really mean for financial services, brokers, retailers, automotive companies, and perhaps even mining companies?” it asks. Valuations will not normalize until it becomes clear who is going to win and who will lose in this revolution.
DS says that chasing tech stocks should only be for those with the risk tolerance of venture capitalists. It argues that even some mutual funds have this level of risk in them because they are so dependent on techs.
DS warns: “The historical experience of other markets that were pushed to extraordinary levels because of new technologies suggests that there is great danger for the average investor, and that the day of reckoning will be savage.”
-IE Staff