Article contributed by DeWayne Hall of Good Life Asset Strategies.
It’s my job as a trader and speculator to recognize stock market bubbles, and I think I’ve located the next one. It’s a fairly new industry and I’ll tell you what it is in a minute.
A bubble in the stock market occurs when speculators and over eager investors push an area of the market irrationally higher to the point its value becomes disconnected from reality.
I began studying stock market bubbles with the dot-com fiasco of the late ‘90s. Over a three-year period the craze centered around taking anything, literally any noun or pronoun, add “.com” to it and sell that thing on the internet. Pets.com, Boo.com, Broadcast.com were just a few of the companies you might remember. Marketers and speculators pushed the narrative that anything that ended in .com was sure to take you to the penthouse suite. But in a span of just three short years over 4,500 dot-com companies came and went. TheGlobe.com. was a social networking site that broke the world record for posting the largest first day gain of any IPO in history when it rose from $9 to $97. But within months it eventually crashed to $.13 and closed up shop two years later. How about Garden.com? You guessed it, everything garden. In 14 months it burst from $20 to $.09 before calling it quits. There were 4,500 more just like it.
About all of them went from rags to riches to rags in three short years.
Of course several made it out alive and are thriving today- Amazon.com, Priceline.com, Yahoo.com just to name a few- but they are rare. Over 98% fell into the Wall Street black hole, like so many of the other bubblicious stocks that burst upon the scene only to eventually just burst.
The credit bubble of 2005 – 2007 is one that has been documented ad nauseam, so I’ll save us a complete rehashing. But for those of you too young to remember, suffice it to say the credit bubble was right up there with the dot-com bubble as far as a spectacular bubble burst. It was more like an explosion. Speculators pushed the credit market up so high that anyone over 18 with a fairly steady pulse could buy real estate. We witnessed time and time again people with no job and a credit score that totaled less than the temperature in New York this week being handed the keys to homes they couldn’t afford to clean, much less live in. The credit bubble took the entire stock market down with it. Citigroup went from $62 to $1 in a matter of days.
Okay, that’s enough reminiscing.
After the credit debacle came the rare earth metal stock craze of 2011. Rare earth metals are one of a set of seventeen chemical elements in the periodic table that are useful in sophisticated electronics and high-tech military weapons. Lasers, night vision equipment, satellites, precision-guided munitions and the like. They are not especially rare, but are difficult to separate from one another and so are rarely found in pure form, thus the term rare earth.
In the 1990s the U.S. mined just about all of the precious metals, but the high cost of doing business forced most of the operators to scale back and shut down operations. Enter the Chinese to fill the void. The Chinese quickly accounted for 85% of rare earth metal production, and at one point in the early part of this century controlled 97% of the market. Even today they still control the market, though the U.S., Canada, and Australia have caught a clue and are slowly catching up. Hysteria hit the rare earths starting in 2010 as speculators pushed the narrative that the world was running out of the rare earths and that prices would soar. And they did for a time, as every mining company that said they could or should or would mine the precious metals were rewarded with unbelievable stock price appreciation. The stock market suddenly went gaga for the rare earths. One stock that I watched obsessively was Molycorp, a Colorado company that was one of the few U.S. rare earth mining companies that could keep up with the Chinese. I watched the stock run from pennies to over $80 in a short period of time, then the bubble burst and everything rare earth crashed into the mountains they were mining. Molycorp went back to pennies and filed for bankruptcy protection where it has emerged and reemerged multiple times until being bought out a couple of years ago. Good by rare metal mania.
3-D printing took center stage in 2013 through 2015, when speculators came unhinged from reality by touting magic machines that could reproduce just about anything imaginable. Don’t get me wrong, the printers are amazing, and the technology will only get better with time, but the hype surrounding the machines moved way past sensible and into irrational exuberance in one short year. I followed companies like Stratysis and 3D Systems as they climbed from less than a dollar to triple digits, only to drop back into the early teens recently. And I mention those companies because they are just about the only two of the 3-D tech companies that have actually survived the bubble.
Which leads me to what I believe is fast becoming the next bubble blowing up as we speak. “Blockchain” is the underlying technology that facilitates bitcoin (or any of the other cryptocurrency) transactions transparently. It’s quickly overhauling the way digital transactions are being conducted and may one day change the way businesses conduct their business. There is little doubt it is the wave of the future.
But let’s separate the technology from the speculators that are driving the bubble in the companies that are riding the blockchain wave. Three months ago Riot Blockchain (RIOT) was a struggling biotech company called Bioptix, which was just the latest of a slew of different names its had. Riot had a lengthy list of past business failures along with a poor reputation among auditors. But on October 4 th the company threw a Hail Mary, issuing a press release that they were changing their name to Riot Blockchain, becoming “a strategic investor and operator in the blockchain ecosystem with a particular focus on the Bitcoin and Ethereum blockchains”, quoting their release. That one sentence has made their shareholders rich. In two short months the stock rose from $4 to $40. One sentence, hundreds of millions of dollars pour in. The funny thing is they have yet to invest in anything blockchain. Their actual asset is still a failing biotech product.
Just last month, the Long Island Ice Tea Company, an unprofitable Hicksville, New York tea manufacturer (yep, they make tea), rose almost 300% in a couple of days after they announced they were going to rebrand themselves as Long Blockchain and will now “seek to partner with or invest in companies that develop … blockchain”, again quoting their press release. These guys are a failing tea company, and they simply issue a one paragraph presser saying they are moving from making tea to partnering in blockchain, and their stock explodes overnight. Their symbol is LFIN if you want to look them up.
The Pareteum Corporation (TEUM) was formerly Elephant Talk Communications, a mobile networking software and services provider. Last month they announced they had completed development to add support of blockchain technology. The stock has risen from $.70 to $3.50 and it’s still going.
The list goes on. Companies that are former makers of sofas, sports bras, and juices have shelved everything and jumped on the blockchain craze. Their stock prices are rising 500, even 1,000 percent in a matter of weeks, and it doesn’t appear there is any end in sight.
Get ready gang, this bubble is going to burst.
Not the blockchain technology itself, mind you, rather the desperately opportunistic companies that are conveniently piggy-backing on the blockchain freight train are the ones that are getting ready to burst. Understand I’m not predicting their imminent demise. Bubbles can inflate for a while, and this bubble may still be in the early stages. But they are going to burst. Can a speculator make money in any of them before reality sets in and traders “chain” them up? If you are a market timer, maybe. The trick of the trade is to know when to hold ‘em, and know when to fold ‘em, because when this balloon bursts, the air will come out faster than you can hit the sell button.