Financial markets are never rational, but sometimes they are especially irrational. From Karl Denninger at theburningplatform.com:
There was a little company called “Micro Strategy” (by the way they still exist.)
In the first week of March the stock had skyrocketed by over 50%. The next week it “checked back” most of those gains.
The following week the stock collapsed.
A couple of weeks later, the Nazdaq cracked big. I was house-shopping, in a hotel, woke up to CNBC full of crying babies and chuckled.
I will note that MicroStrategy was a little dogsqueeze company. In terms of market cap it was a nothing – literally. Even today, 17 years later, it’s a little $2 billion firm — granted, much smaller today in market cap than it was then.
In the run-up of the previous weeks and months there had been plenty of indications of trouble. Many companies had reported slashing prices, increasingly-saturated markets were well-understood and of course there was the “burn rate” nonsense of the period.
It’s arguable that it was that MSTR collapse that upset the apple cart. You see, when people are buying stocks of companies that have nothing but negative free cash flow as far as the eye can see or sky-high P/Es of 60, 80, 100 or more they’re betting with their eyes taped over on exactly one thing: Indefinite exponential growth of the business and, of course down the line, profits.
The problem is that this is an impossible premise. There is no way for that to ever happen because it is mathematically impossible.
Today we have Amazon, Facebook and Apple all priced in this way. Of the three only Apple has some argument for its valuation, but even there given the recent run of almost 50% it’s priced for indefinite exponential growth of a saturated product — iPhones.
To continue reading: Is It March of 2000?