The Bull Market's Final 'Inning' Could Be Starting Now

More on SNAP's outrageous IPO... 'This is totally without precedent on Wall Street'... Another sign of a top... 'Mom and pop' are returning... The bull market's final 'inning' could be starting now...


Yesterday, we highlighted the "nosebleed" valuation of Snap (SNAP), the latest popular social-media company to go public...

As we mentioned, the company raised $3.4 billion in its initial public offering ("IPO"), giving it an initial valuation of about $20 billion.

Depending on the metric, that's a 50%-100% premium to the already-rich price that investors paid for social-media behemoth Facebook (FB) when it went public in 2012. But even that comparison may understate just how extreme this valuation is...

You see, even in 2012, Facebook was profitable. It reported earnings of $1 billion in 2011, the year prior to going public. On the other hand, Snap reported a net loss of more than $500 million last year.

Once the dust settles, Snap will likely be known as the most expensive tech IPO in history. (Of course, Snap is even more expensive now... The stock rose 44% in trading yesterday, and was up another 10.7% today. At today's closing price of $27.09, Snap is trading at a mind-blowing valuation of more than $31 billion.)

But Snap's astronomical valuation isn't the only reason investors should be wary...

In fact, it may not even be the biggest reason. As Rob Cox – financial columnist for Reuters Breakingviews – explained on Thursday, the "shares" Snap investors hold carry no voting rights whatsoever...

If numbers are confusing, there are other reasons for investors to truly dislike Snap. The most important is the precedent it sets by offering stock that confers zero voting power.

That is why calling them "shares" is an insult to, well, sharing. For now, they really should be considered rights to participate in Snap's losses. The total control this IPO structure has conferred to [CEO Evan] Spiegel and his co-founder Bobby Murphy is totally without precedent on Wall Street.

Snap offers ample warnings of the risks this presents to investors, such as the ability of the founders to liquidate their positions without yielding control...

According to Cox, this isn't just a terrible deal for Snap shareholders...

It's also an example of the giddy complacency that often precedes a major market top...

The willingness of stock-market investors to ignore the precedent this sets recalls the way bondholders rolled over ahead of the financial crisis. Back then they acquiesced on all manner of conventions, not just the paltry coupons they were being offered by companies with shoddy financial prospects. They agreed, for instance, to be paid in more debt if borrowers ran into trouble. In the end, they paid dearly for their pusillanimity.

Mark Down This Date: April 21-23
Are you a copywriter who wants to work at Stansberry Research? Here's your chance. Meet at our Baltimore headquarters April 21. Details here.

In related news, investment bank Goldman Sachs warns that investors are as complacent as they've been in at least six years...

In a letter this morning, analyst John Marshall noted one of the firm's proprietary indicators suggests stock and bond investors alike have virtually stopped "hedging" positions against losses...

Since the start of the year, our macro hedging indicator has traded along with the equity market; this suggests investors are both buying equities and discarding their hedges.

Our indicator is now in-line with its most complacent level in the past six years, suggesting investors are generally unhedged across both equities and credit."

According to the note, the last time this indicator reached these levels was in July and August 2015, just weeks before the market declined by more than 15%.

Meanwhile, we're also seeing signs that individual investors are jumping back into stocks for the first time in years...

The old Wall Street adage says bull markets "climb a wall of worry." And that has certainly been the case this time.

Ever since the financial crisis of 2008, individual investors have been unusually and persistently bearish. And data suggest many folks swore off stocks altogether. But that could now be changing...

BlackRock – the world's largest asset manager – reports investors have poured an incredible $124 billion into exchange-traded funds ("ETFs") so far this year. That's the largest inflow in history. And as the Wall Street Journal reported this morning, it's largely being driven by "mom and pop" investors (emphasis added)...

U.S. ETFs accounted for $44 billion of that, pushing assets in U.S. funds to almost $2.8 trillion. Most of the money went to cheap, index-tracking ETFs...

"All of the money is going into the cheapest and most boring ETFs. This is the retail investor getting back into the market with a vengeance," said Dave Nadig, chief executive of ETF.com, an industry website owned by Bats Global Markets, newly a subsidiary of CBOE Holdings.

We wouldn't be surprised to see a pullback in the near term...

As we've discussed, stocks have soared since November's election. And the market hasn't experienced a decline of greater than 5% in more than a year. In other words, a correction is overdue.

But seeing individuals getting into stocks again could be an incredibly bullish sign...

It sets the stage for the final, most explosive "inning" of the bull market our colleague Steve Sjuggerud has predicted. As longtime readers know, no one has been more bullish – or more correct – about stocks over the past eight years. And Steve has predicted again and again that the long rally won't end until individual investors finally turn bullish on stocks again. As he explained in his free DailyWealth e-letter last fall...

YOU KNOW WHAT A TOP FEELS LIKE. You went through one in the real estate boom in 2006-2008... At the top in real estate...

  • EVERYONE was optimistic about house prices. Nobody was cautious. No one even thought that there was even any downside risk. (People felt that way about dot-com stocks in 1999, too.)
  • EVERYONE was "in" – and heck, if you weren't "in," you wanted in!
  • EVERYONE was talking about real estate at cocktail parties, sharing their "can't lose" strategies.

Everyone thought they had their own spin on it... They thought they had their own unique way of making money that was somehow special to them. They didn't realize that, whether they were "flipping" houses or "developing" houses, all the strategies were essentially the same – in that they all relied on higher and higher asset prices to succeed. THAT is what a top looks like. THAT is what a top feels like.

You might say, "Steve, but that was house prices. This is stock prices." If that's your argument, you're fooling yourself... Investors had the exact same (delusional!) feelings about tech stocks in 1999 that they had about house prices in 2006-2008.

Look, you KNOW what a top feels like – so let me ask you, does this feel like a top in stock prices? Is everyone optimistic about stock prices? Is everyone "in"? Is everyone talking about their "can't lose" stock strategies at cocktail parties?

If you can't answer yes, then this is not a top. This is not a moment like the one we had with tech stocks in 1999, or real estate in 2006-2008.

It's not... This is not what a top looks like. Don't try to convince yourself otherwise. And invest accordingly...

Today, Steve believes this final stage of the rally – what he's calling the "Melt Up" – is starting...

And he says the biggest gains of the eight-year rally still lie ahead. In fact, Steve predicts the stodgy, blue-chip Dow Jones Industrial Average could more than double to 50,000 or more before it all ends… and many individual stocks could do far better.

Steve recently prepared a presentation explaining it all… including why he's convinced the "Melt Up" is starting, and what he recommends doing with your money today. Click here to see it now.

New 52-week highs (as of 3/2/17): CBRE Group (CBG), JD.com (JD), 3M (MMM), Altria (MO), PowerShares S&P 500 BuyWrite Fund (PBP), and Two Harbors Investment (TWO).

How is your portfolio doing this year? We'd like to know. Drop us a note at feedback@stansberryresearch.com.

Regards,

Justin Brill
Baltimore, Maryland
March 3, 2017