With LinkedIn’s IPO feeling every bit like a bubble (and, for the stock, it was!) the obvious question for those of us who were around in 1999 and 2000: How do you avoid this becoming a broader market bubble?
No better source on that than Bill Fleckenstein of Fleckenstein Capital, who was among the bubble watchers and bursters in the Internet age.
“Only way to prevent it is to stop the easy money,” he says. “And the easy money in 1999 is barely a rounding error versus what was printed two years ago.”
Fleckenstein, a longtime critic of the Fed’s easy money policies, added, “Bubbles are a symptom of the disease of letting the Fed run wild.”
Another idea he suggests — especially if this becomes more than a single-stock bubble, as was LinkedIn : Consider either raising margin (debt) requirements on stocks (it’s 50 percent today) or extending the amount of time before IPOs can be bought on margin to months, not days.
And then there’s the new and still untested role of secondary markets. They didn’t exist in 1999, but appear to add to the priming-of-the pump parabolic frenzy over valuations pre-IPO. “Second market did just a little more than $100 million in TOTAL volume in the first quarter, and of that LinkedIn was only the fourth highest volume of shares traded,” says Paul Hickey of Bespoke Research. “The fact that people are valuing companies based on few hundred share transactions is crazy. The lack of liquidity in the market of second markets makes the CDS market look like the Nasdaq.”
My take: Time to start talking about this is before the real bubble, not after.
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