The Catch-22 of Bubble Investing

Monday, 13 July 2020
Melbourne, Australia
By Greg Canavan

When I was a little kid, I remember shopping with my Mum.

That was back when places like Kmart had a cafeteria, and I’d sometimes get a pie with gravy, and hot chips in a little cup. There was newspaper-type print on the cup telling you how chips were much better served that way.

I also remember Mum putting things on ‘Lay-By’ every now and then. For all you young tackers out there, a lay-by is when you don’t have the money to buy something outright, so you pay for some of it, and the store holds it for you until you pay the rest.  

That’s how it used to work.

Ah, the good old days…

My eldest daughter is 11. Her friends have all got phones and we recently gave her one of our old ones (without a sim card). We don’t allow social media, but the whole online thing for kids is inevitable. So better to supervise, control, and educate, first.

My wife was saying on the weekend that she’s really concerned about the phone thing because it’s not how real communication works…texts, group chats, etc. There is a much greater chance of miscommunication, and kids getting their feelings hurt unnecessarily.

It’s true.

But it’s also true that every generation that has kids approaching (or in) adolescence, worries about the direction society is heading. It’s part of the generational divide.

But perhaps this time is different?

In this week’s Spectator magazine, columnist Michael Baume reflects on his 90 years in existence. I thought the following excerpt is a worthy big picture view…

As I look back over my long life, it is evident that I have enjoyed the best years of Australia, economically, politically, socially and even culturally

But our future is largely behind us; the end of the Howard government in 2007 was the turning point. Up to then, Australia had been renowned for mateship, a boisterous and often self-deprecating sense of humour, for free and lively discussion, for resilience and self-reliance when facing adversity, for a waste-not want-not ethos, for saving up to buy things, for owning your own home and for the entrepreneurial spirit that launched industries like steel, manufacturing and mining (that now almost on its own has to carry the burden of our national export wealth).

These have been replaced by hate laws and censorship by minorities desperately seeking reasons to be ‘offended’, by mob rule, by de-platforming holders of views contrary to the current woke fashion (specially at universities), by the expectation that the government will provide, by an entitlement mentality as half the population receives some sort of direct public funding (even before the Covid-19 hand-outs), by the fragility of a generation that needs safe spaces and trigger warnings, by disposables and waste rather than conserving and repair, and by an era of record credit-card debt and falling home-ownership as discretionary spending booms in what is now a society dominated not by makers of things but by providers of services.

How fitting then, that during these most tumultuous economic times, there is a bubble in ‘buy now, pay later’ (BNPL) stocks.

That it is a bubble is not in question. I’ll show you why in a moment. That few are saying so, or questioning the madness of prices in such times, is astounding. But I guess that’s what makes bubbles, right?

All bubbles start with a kernel of truth, or of underlying ‘fundamentals’. There is no doubt that BNPL is a strong growth market. But all companies involved have priced in very strong growth. This little sub-set of the market has lost its head.

Let’s take a look… 

Firstly, the stock everyone knows: Afterpay Ltd [ASX:APT]. It’s rallied 700% since the March low. It has a market value of $19.4 billion. Earnings aren’t expected until FY22. That’s when it’s forecast to generate $72 million in earnings from $1.254 billion in sales.

Based on those earnings, it trades on a PE of 248 times…

Port Phillip Publishing

Source: Optuma

[Click to open in a new window]

What about the more recently listed Sezzle Inc [ASX:SZL]? Since the March low, its stock price has rallied an incredible 1,780%. It has a market capitalisation of $1.25 billion, on forecast FY22 sales of $112 million…and a $10 million earnings loss.

But I’m sure it has lots of potential.

Port Phillip Publishing

Source: Optuma

[Click to open in a new window]

Zip Co Ltd [ASX:Z1P] has a market value of $2.8 billion. Revenue forecasts of around $540 million in FY22 will still manage to produce an expected earnings loss of $11 million.

This lack of earnings on the horizon hasn’t stopped the stock price rallying over 500% from the March low.

Port Phillip Publishing

Source: Optuma

[Click to open in a new window]

Investors have also completely re-evaluated the prospects of Splitit Ltd [ASX:SPT]. It’s up 650% from the lows. It doesn’t even have enough broker coverage to give you forecasts for future revenues or (non) earnings.

But that doesn’t matter, does it?

The company lost $20 million in FY19. But following the announcement of a deal with Mastercard recently, the company now has a market capitalisation of $570 million.

Port Phillip Publishing

Source: Optuma

[Click to open in a new window]

Finally, we have another relative newcomer, Openpay Group Ltd [ASX:OPY]. It’s a minnow, with a market cap of just $315 million.

Sales of around $60 million in FY22 are expected to produce a loss of nearly $20 million.

Clearly, you can see why investors have run the price up more than 800% from the lows.

If you’re playing in this space, good luck to you. May the bubble gods shine for just a little longer.

Given how far stock prices have run in a few months, I doubt whether there are many rational investors left.

This is the catch-22 of bubble investing.

You have to be irrational to enjoy the benefits of the bubble. But if you’re irrational, you won’t see it as a bubble and will hold on while it bursts.

Bring back the lay-by!

Continue below for Murray Dawes’ ‘Week Ahead’ update.


Commodities Catch a Bid
By Murray Dawes


There is a strong rally getting underway in commodities. It is happening across the board and there are many charts that will confirm monthly buy pivots at the end of July.

I take you through a few of the key commodities today after having a chat about the E-mini S&P 500 futures and the S&P/ASX 200 futures.

There is a huge amount of money printing going on around the world to keep everything afloat. Perhaps the inflation will show up first in commodities. Trump keeps going on about spending trillions of dollars on rebuilding key infrastructure such as bridges around the country.

The money he will use for that will be printed money by the US Fed. More dollars chasing limited resources is the hallmark of inflation. Bonds won’t give us any indication of inflation because it is printed money that is buying bonds and keeping yields low.

Gold is of course the canary in the coalmine, but other commodities could also catch a bid if the US and China both invest heavily in infrastructure with printed money.

The key metals used in hybrid/electric cars are strong, so perhaps there is also an expectation that the meteoric rise of Tesla Inc [NASDAQ:TSLA] is proof that electric cars will ultimately win out and demand will surge for copper, nickel, and rare earths for example.

Whatever the reason behind the rally, its breadth is impressive and the technical setups are compelling.

Equities are continuing to grind higher, but I don’t buy it. The next couple of weeks trading will be important. A monthly close above 3,137 in the E-mini S&P 500 futures will confirm a monthly buy pivot. If that happens I will fall on my sword and admit defeat as far as my bearish view is concerned.

But the month isn’t over yet.

My expectation is that strong buying early in the week will meet even stronger selling at some point. The big sellers are lurking up here somewhere. The retail punters have been having a field day riding bubble-like trends in key stocks such as Tesla Inc [NASDAQ:TSLA]. When the music stops it will be brutal.


Murray Dawes,
Editor, Pivot Trader