Cotton Candy
My father would not let us eat cotton candy when we were kids. He was a dentist and cotton candy is full of sugar: “it rots your teeth” is how he would explain it to us. On several occasions, however, I was able enjoy cotton candy and I remember one instance when I was attending a ball game with my best buddy’s family at Veterans Stadium in Philadelphia. Oz and I shared some cotton candy. We both ate too much and felt sick. The initial joy of the sweet treat was short-lived, but my stomach ache lasted the rest of the day. Recently, I have been thinking that the market is giving us a “cotton candy treat.” And we are beginning to hear about the stomach ache felt by some investors.
For the past several months, the Initial Public Offering (IPO) market has been hot. Companies have issued their new shares and prices have escalated. It reminds me of the late 90’s tech boom, if you want a comparison, except I believe it is more excessive.
Special Purpose Acquisition Companies, also called SPAC’s, have been another area of rapidly rising share prices and investor enthusiasm. SPAC’s have been around for many years, have a somewhat checkered past, and this new wave of SPAC’s smacks of market excess.
And of course we can’t omit the crypto-currency arena. Prices have doubled, tripled or even more in some of the crypto-related “investments” over recent months. Until this past week.
At the risk of sounding like an old fuddy-duddy, that “giant sucking sound” you hear is the air being let out of some of these white hot markets. As an aside, “that giant sucking sound” was a catchy phrase used by H. Ross Perot when he ran for President as an independent candidate in the 1992 election. He was concerned that NAFTA (a U.S.-Canada-Mexico trade agreement) would cause jobs to disappear and our economy to suffer. Boy was he wrong!
But back to the cotton candy effect. Hot IPO’s, the interest in SPAC’s, and the crypto-currency craze are fading. Bitcoin was $58,958 on Saturday, May 8th and traded at $30,000 yesterday. Snowflake first traded at $266/share on November 20, went to $390 per share on December 8th, and closed at $185/share last Friday. Doordash debuted in December at $189, peaked at $215/share on February 10th, and traded at $112.99 last week (5/12/21). And the ubiquitous AirBnB closed at $144 on its first day as a publicly traded company in December, reached a high of $216/share on February 10th, and trades at $138 as of today. What a roller coaster!! As long term investors, most of us would rather avoid this type of wild ride.
The sell-off in many of these comes as no surprise, but it is causing pain and anguish. While several of these stories sound great, the economics behind some of the companies or the currencies are fluff, cotton candy, a sugary sweet short-term high. The truth may be that they will give you an inevitable stomach ache that you will long remember. Thanks, Oz, for being part of this teachable moment!
Ralph McDevitt
Senior Vice President, InvestmentsMay 20, 2021
Any opinions are those of Ralph McDevitt and not necessarily those of Raymond James.
Raymond James & Associates, Inc., member New York Stock Exchange/SIPC
This market commentary is provided for information purposes only and is not a complete description of the securities, markets, or developments referred to in this material. Any opinions are those of the author and not necessarily those of Raymond James. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation to buy, sell or hold a specific security. Past performance does not guarantee future results.
Bitcoin issuers are not registered with the SEC, and the bitcoin marketplace is currently unregulated.
Bitcoin and other cryptocurrencies are a very speculative investment and involves a high degree of risk.
