The Disagreement between Equities and Bonds

Monthly Market Commentary: April 1, 2019

The Disagreement between Equities and Bonds Over the last twelve months or so, some analysts pointed out the low number of new issues as a sign that the US stock market was far from being overheated. However, I respond to this argument that instead of new public issues, privately held startup companies valued at over $1 billion - Unicorns - have proliferated at a rapid pace.

What is clear is that when privately funded companies finally list their shares on an exchange the insiders (people who funded the companies) perceive the timing and the valuation to be opportune.

The average age of a technology company before it goes public is now 11 years, as opposed to an average life of four years back in 1999. Furthermore, the number of loss-making companies that go public seems to have increased. Ride-hailing company Lyft, just tapped the public market and listed its shares at $72 giving it a market capitalisation of $23 billion. Last year Lyft posted a loss of $911 million, more than any U.S. start-up has ever lost in the 12 months leading to its IPO. The Wall Street Journal (March 25, 2019) noted sarcastically that, "Ride-hailing company Lyft Inc. is leading a parade of Silicon Valley companies to Wall Street that display an unusual quality with parallels to companies going public in the dot-com era: lots of red ink."

My friend Jawad S. Mian is the author and publisher of Stray Reflections, which I always read with interest (jawad@remove-this.stray-reflections.com). Below, Jawad makes some critical observation about the unicorns under the title: Some thoughts on Silicon Valley's endgame. We have long said the biggest risk to the bull market is an Uber IPO. That is now upon us.

Investors are enjoying and discussing the strong first quarter stock returns (S&P 500 Index up 13%), but seldom talk about the almost 13% gain of long-term US Treasuries since the November 2018 low. What does the March 22 upside breakout of Treasury bonds indicate? Recession dead ahead or interest cuts by the FED? 
The rally in long-dated Treasuries signals economic weakness. Therefore, stocks should begin to decline as corporate profits would come under meaningful pressure (sales declines and profit margin contraction). So far, this has not happened. Another mystery is the strong performance of junk and emerging market bonds.

In other words, we have US equities and high yield bonds (junk or lower quality bonds) saying that all is great while Treasuries scream "recession ahead." Something does not quite add up and unquestionably some investors or probably all investors will get hurt by adverse market movements.

In this context investors should remember the words of the late Leon Levy who said that, 
“For most people, the most dangerous self-delusion is that even a falling market will not affect their stocks, which they bought out of a canny understanding of value.” 

With kind regards   
Yours sincerely   
Marc Faber

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