3 investment bubbles that are ready to pop

Big market gains have led to froth everywhere you turn.

By InvestorPlace Nov 15, 2013 12:42PM
Credit: © luismmolina/E+/Getty Images
Caption: BitcoinsBy Jeff Reeves

Many investors are pretty pleased with themselves after a big rally in 2013, with 22% gains year-to-date in the S&P 500.


But despite the gains this year, a host of recent headlines should give investors pause and make them consider taking some profits off the table.


Consider that the “dumb money” is returning to Wall Street, with U.S. stock mutual funds attracting more cash this year than they have in any year since 2004. And the Dow Jones just set its 35th high of the year -- topping the number of new highs the index set in 2007 before stocks peaked.


Now, for some time, bears have been making noise about how the market seems to be overvalued … and that hasn’t stopped a heck of a run in 2013. But it's undeniable that parts of the market seem to be running on fumes and thus are set to take a spill at the first sign of broader weakness.


If you’re worried things might be overbought or you’re simply looking to avoid risky areas as you rebalance your portfolio and seek new opportunities, steer clear of these three bubble investments.

Recent Tech IPOs

The fact that Twitter (TWTR) gapped up more than 70% in its recent IPO is great for those early-stage investors who made a fortune on this social media stock. But for those who were left to buy it on the open market, there has been nothing but froth -- and a serious risk of collapse.


Consider that by some estimates, Twitter is trading for more than 200 times forward earnings. Also consider RBC’s $33 long-term target and “buy” rating was immediately dwarfed by the first moments of TWTR stock trading, and that Pivotal Research has already put a “sell” rating on Twitter with a $30 price target on fears it has been grossly overvalued out of the gate.


It’s not just Twitter stock, either. Tech IPOs are seeing their biggest one-month returns since the dot-com days as frenzied investors bid them up rapidly. Recent high-fliers include 3-D printer Voxeljet (VJET), which has soared 300% from its October offer price of $13, and China Internet stock 58.com (WUBA) that almost doubled from its $17 offer price just a few weeks ago.


If you’re thinking of chasing tech IPOs, think again. These kind of valuations are great for early investors who were in on the ground floor … but those retail investors buying on the secondary market could be entering these stocks right before the bubble bursts.


Euro trash

There are some reasons to be cautiously optimistic about Europe going forward. In the second quarter, a two-year eurozone recession that marked the longest downturn in four decades finally came to an end. And thanks to improving consumer and manufacturer data, things are looking up.


But it’s undeniable that the "recovery" is being led by Germany and France. Both posted growth above expectations in Q2, and these nations continue to be predicted as the drivers of economic expansion -- and slowing economic expansion at that, with forecasts for just 0.1% growth for the eurozone in Q3 overall.


So while there might be some opportunities amid the marginal rebound in Europe in the stronger regions like Germany and France, clearly there are trouble spots that need to be avoided. Those include weak countries like Spain, Italy and Greece.


After all, despite the end of recession for the continent in Q2 there was still economic contraction in Spain and Italy. And unemployment in Greece and Spain remains at staggering levels near 26% to 27%!


Investors eager to be in on the ground floor of a recovery have bid up investments in these regions. That’s why the iShares MSCI Spain ETF (EWP) and the Global X Greece ETF (GREK) have both gapped up more than 30% since July 1 to dwarf the 9% returns for the S&P in the same period.


But that snap-back now seems overdone and has already started to fade since highs set in late October. As these regions continue to struggle, the optimism will dry up and the bubble in euro trash equities will burst.


Bitcoin

If you’ve followed the digital currency at all, you know that Bitcoin has taken Wall Street by storm -- starting the year around $20 and soaring to recent highs above $400.


This simply can’t last.


Bitcoin prices crashed in July to about $70, and many wrote off the alternative currency as dead -- but now that the rally has begun in earnest again, some investors are being duped into thinking that there is nothing but upside in this odd digital alternative to money or gold.


There are plenty of people who will contend that Bitcoin isn’t a bubble, that it’s a viable alternative currency in an era of corrupt central banks and a lack of faith in gold as the hard asset of choice that it used to be.


But the reality is that any investment that tacks on double-digit gains every week and starts attractive investors simply because it goes up is by definition a bubble.


Bitcoin might stick around as an alternative currency, but these valuations will not. Speculators, particularly in China, have caused Bitcoin prices to soar, and it’s only a matter of time before those traders take their money and run … leaving those who buy Bitcoin at the top to hold the bag.


Read about a couple more bubbles in the works here.


More From InvestorPlace

Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks.

Tags: EWPTWTR
85Comments
Nov 15, 2013 6:45PM
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I guess there really is a difference between an investment that sounds good and a good, sound, investment.
Nov 16, 2013 9:47AM
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Are journalists afraid to use historical, sound economic labels?  Or, do they just not know economic principles?  Any stock/company with an inelastic demand [ya' gotta have, can't live without it] is a buy and hold.  Any company with an elastic demand [a whim, a fad] is just that - a whim quickly to disappear or, at best, plunge in value when times are tough.  Times are tough.  Example - Buffet bought $41 million of Exxon stock in May ... and, if he sold it yesterday, he made $320,000 in 6 months.  You have to have gasoline, home heating oil, and natural gas.  You can live forever without sending one another idiot one liners over twitter, facebook or any other 'social media.'
Nov 16, 2013 12:09AM
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I will be the first to admit I really don't know a lot about investing in the stock market.  But if history is any measure there will be a huge drop in the stock market, and soon.  Like the run up to the depression of the 1929, there was record highs almost every week.  Fueled in part by the newly established Federal Reserve, 1913, which kept interest rates artificially low to compete with low interest rates in Europe.   Combine the continued printing of money in order to purchase US treasuries, artificially low interest rates, massive federal, state and local debt, the increasing unemployment in the US, 91 million US workers are unemployed out of a population of 312 Million - roughly 1 in three people do not have a job, the next depression will make the 1929 depression look like the good old days.

Nov 15, 2013 8:46PM
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The Fed's free money to the banks and wall street will end. That is the bubble that will do the market in.

Then bankruptcy will correct the whole thing.

Nov 16, 2013 12:35AM
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3 investment bubbles that are ready to pop:

 

Dow Jones, S&P 500 and NASDAQ.

Nov 15, 2013 5:43PM
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Without fools we wouldn't have bubbles, and without bubbles we couldn't have capitalism. Cry havoc and let slip the sons of Ponzi!
Nov 16, 2013 7:26AM
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"Anyone who has missed the ride on any of these would probably be inclined to "cry" bubble. Maybe this author has missed out on all three. The problem is? You bubble blowers keep saying "pop" and the bulls rally on."


They own and operate the printing presses, just not the outcome. Sooner or later they have to come out of those ivory towers and be ground into hamburger. READ HISTORY, instead of filling your head with arrogance. No Bull Rally Era ever ended without claiming the lives of greed and the masses just rebuilding without them.

Nov 15, 2013 7:55PM
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I'm a poor broke bear.
Can anyone spare a dime?
Nov 16, 2013 2:20PM
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Natural bubbles are an inherent part of a cyclical  market. Contrived bubbles purposefully engineered for greedy profits ie, housing finance by investment bankers, knowing that they are doomed for failure is another issue.
Nov 16, 2013 7:30AM
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A really good indicator that all this bull is false... Goldman Sachs becomes a component of the Dow Industrial. A cardboard cut-out fake-bank that sucks from the economy, replaces tangible personnel employing manufacturing, the fundamental crux of ANY solvent nation. You've got bubble and trouble, not legs or substance.
Nov 16, 2013 11:57AM
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Well, while you all anxiously wait for the bubble to burst and you can finally say, "I told you so", I'll continue to make money in this bull market.  Just go with the flow folks!
Nov 16, 2013 10:17AM
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A lot of theories here on what the market will do, ALL wrought out of greed and emotion to extremes, and not out of objectivity!  We are fresh out of the 2nd worse economic disaster in U.S. History!  The "sling-shot" effect was/is alive and well ... and was predictable, especially with the early fiscal stimulus to "stop the bleeding" in 2008/2009; and the subsequent monetary stimulus which continues to this day!  Although this stimulus is mostly "artificial", it has had REAL positive effects on productivity and profitability in the private sector.  Employment has rebounded greatly, however, not to the degree all had hoped.  But ... the effects of this govt fiscal and monetary support has run it's course!  It has done what it was intended to do, and the private sector markets MUST sustain themselves!  The question is .... at what level???  You KNOW that even the "rumor" of the end to the bond buying/MBA's monetary policy by the Govt. WILL cause a big drop in the markets, which is overdue!  Again, the question is, "when"? and "how much"?  Are we looking at a modest 5% drop in the markets? Or a 10-15% large correction??? I was VERY tempted to rebalance my 401K away from equities at Dow 15,000, but for some reason I didn't, and I'm glad I didn't.  But I'm through pressing my luck.  The continued artificially inflated markets are just not sustainable.  
Nov 16, 2013 9:55PM
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Bubbles happen when there is no underlying profit to explain a stocks price. A company had better be making money, so always look at the PE ratio. It's great to make a killing on a tech company however your portfolio should not consist of such investments. Once you have the basics that pay dividends and makes profit then you can use play money to buy those non earning IPO types. Expect to lose everything invested in a high flyer. They can pay off big but they can fall big.       
Nov 15, 2013 11:27PM
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No one that knows what they are doing, is going to tell me.   No one keeps long term records that can be proven, by long term I am talking 100 years or so.   Talk is cheap, brokers are going to try and sell things they make the most money on. Everyone is out for number one and no one else.  The world is full of cheats, crooks and worse.

Knew three everyday people that made loads of money, one was a scrap iron dealer from the 1930, he put all his money back into scrap iron and piled it up.  Another was a gold and silver bug from 1940, he put everything he could into gold and silver.   Another was a young girl that got a big divorce pay off, she took it to young broker and told him to shoot the works, he put it all into Apple stock before anyone ever heard of Apple stock. He put 1/2 of it into some other stock several months ago, I don't know if she even knows what he bought.    She's living high on the hog.  The iron and silver men never sold, but their children are living high.     Some stories turn out OK.

 


Nov 16, 2013 7:23AM
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When you read that three primary bastions where fools invest-- the Tech Train Wreck, the Euro Bond Bong and Digital Phony Currency... you distinctly grasp that all of them are intrinsically connected by one plug in one outlet with the cord wrapped around one hand with one instruction-- PULL HARD. The key isn't timing when it gets pulled, it's bracing for the day it rains penniless fools crashing hard down to Earth. What do we do with all that wasted flesh? Fertilizer? Spare Parts? Pig Food? It fed itself well and is moist and tender like Kobe Beef, while we got GMO'd.

Nov 16, 2013 3:20PM
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Excess liquidity, cheap money and herd mentality are driving bubbles.

Not one mention of the echo-bubble in real estate in the usual suspect cities/areas?

Real estate had peaked; single digit gains year over year is the prognosis.

Fed Printing is the drug.

And the addicts will continue to get their stuff ad infinitum.  The Fed can never pull back on QE; without the $1 Trillion in QE per annum, the US government wouldn't be assured perpetual financing of the huge annual deficits.  Approximately 7% of the economic activity is due to borrowed funds but the growth rate is only 2 to 3 percent.  Stealing from the future? Indeed. 

When all of these bubbles pop, then, just maybe will venture capital be moved into real enterprises that employ real people.  Sadly, globalisation wil keep that employment from increasing in the advanced, mature economies, et al US, Europe, Japan.

Nov 16, 2013 11:15AM
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Bitcoins don't even make any sense to me, not now and probably never will...?

Are Markets being propped up? Yeah, maybe in some ways...

Are companies making money, revenues and earnings? Sure, some are doing quite well.

Do the Markets still have some room to run? Looks that way for a while.

Are we due for a correction? I would think so, anytime we have a constant bull run..

How big of a correction is anyone's guess...And we could only have a bunch of minor ones.

And in many cases, those are known as buying opportunities...

Yup, I think the glass is half or three-quarters full....IMO.

Nov 18, 2013 2:05PM
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Bitcoin is rising as it is the only currency that you can use to pay your ransom

to the crypto-locker malware hackers. It appears to me to be a way to

perform money laundering.

Nov 18, 2013 2:56PM
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Remember when the Dow went from 1000 to 2000? Doubling in a short time -- it had to be a bubble!
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