Bubble Bubble Toil and Trouble

May 20, 2011

Global Macro

It is an interesting time for markets at the moment with the competing forces of Quantitative easings, inflationary pulses, moribund real economies, quietly festering currency wars, sovereign debt and austerity issues and a speculative frevour that seems to endure through all these headwinds.

The question is whether last nights listing of the LinkedIn IPO was a signal that the froth might have become extreme. The LinkedIn IPO originally sold 7.8 4 million shares at $45 each according to Bloomberg. Thisraised just short of $353 million to the owners for about a 10% stake I think.  However at one stage last night LinkedIn shares were trading just shy of $120. Indeed to close at $94.25 is  more than double the initial public offering price and a massive windfall for those who managed to get allocation. Chart Below

Now, Social media networks appear to be our economic future, or at least part of it. The interconnectedness has helped sweep social and political change through the Middle East over the course of this year and as such does, will or must have significant value at some point. But like the tech bubble leading up to 2000 there is a big difference between a great idea with lots of clicks and the ability to actually extract value from such a network.

Don’t get me wrong I’m a member of LinkedIn and its great to have lots of connections. But its value it to me as a member, or me as a member to LinkedIn and that of all my connections I’m still grappling with. Indeed FT Alphaville reports that at last night’s close LinkedIn was trading at more than 569 times 2010 earnings.

Clearly there’s plenty of upside there in terms of growing their business and the ability to extract value through time. But it’s my guess that the buyers are chasing capital gain and the scarcity value of LinkedIn shares in a classic Myskian trap. Their not worried about earnings which hints at danger.

Certainly investors want to be in on what is still essentially the ground floor of what has become a global revolution over the past five years. Indeed even though LinkedIn, in many ways, is the poor cousin of Facebook to the extent that it is still a cousin gives it a certain cachet amongst investors.

But with the LinkedIn price being fully valued and the Glencore IPO appearing similarly strongly priced could we say that chairman Bernanke’s helicopter drop of money onto the US economy, which we believe has distorted asset markets and not necessarily flowed into the real economy, is hitting a crescendo of bullishness and thus signalling danger ahead. The answer is probably yes, and as QE2 winds down and markets will have to make their own way through the myriad of economic difficulties it will be interesting to see how the northern summer price action goes.

Oh…and for those of you that can spare the time to listen to Felix Zulauf’s take on markets on FT.Com/Video here is a link . It is worth the 10 minutes.

Have a great Day


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One Comment on “Bubble Bubble Toil and Trouble”

  1. MJarvie Says:

    It feels like the Y2K symptom could be back. Overvalued stocks with no regard to PE ratios.
    There is an opportunity to make money with these stocks, but the greatest foresight will be to know when to sell.


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