Recently Netflix, the media/entertainment technology giant, revealed that it has 104 million subscribers from around the world that are streaming its entertainment services. Analysts were blown away by these subscriber numbers which have flown way beyond their expectations. This subscriber revelation pushed the stock’s price up almost nine percent reaching a new historic high. On the surface this may appear to be a time of rejoicing. However, currently Netflix trades at over 200 times its earnings. This should be a warning sign to investors, but is anyone looking.
Never does it make sense to buy into any business simply based upon an impressive set of numbers regarding its customer base. Nor is it wise to buy in simply based upon its content quality. Yet investors seem to be doing exactly that with Neflix stock. This was confirmed by an in-depth investigation of the company’s latest quarterly report. It appears that Netflix, at an alarming rate, is bleeding out cash, despite the vast subscriber base that it has accumulated.
If you wish to get a realistic picture of what’s going on with Netflix to see if it really made any money, look at the company cash flow statement. This will give you a realistic picture once all of the accounting tricks are removed. What you will see should set off alarm bells. Netflex had a negative operating cash flow of $1.9 billion during the prior year.
Add costs associated with capital investments to this number and it rises to a negative $2.2 billion in free cash flow. To remain competitive with the likes of Amazon, Disney, Facebook, Google and the many other competitors who participate in this market, Netflix must spend additional money.
Netflix is not shy about their circumstances and admits as much. Their Investor Relations site admits that, even after they achieve global profitability, necessary aggressive investments in content and competitiveness will continue to be a huge weight on their financial shoulders. To simplify their situation, they will continue to burn their cash as they achieve massive success.
This raises an important question. How does a company make financial ends meet when it is continuously losing during very good financial times? The answer is simple – they borrow money. Their aggregate debt totals, for only the past two months, increased by a staggering 45%. The company’s debt now stands at a whopping $4.8 billion and growing.
Netflix is not alone regarding this particular set of circumstances. Take your choice and use any traditional form of measurement and you’ll discover that some of the largest firms in the U.S. that are listed with the stock markets, are tremendously overvalued.
Whichever metric you decide to use, Price to Book, Price to Earnings, Market Capitalizations or Enterprise Value they will all demonstrate that the stock markets are now as high as they have ever been, with exceptions before the great stock market crashes of 1929, 2000 and 2008.
Making more of a concern, the VIX fear gauge, Volatility Index, is trading near all-time lows. As stocks continue to become more ridiculously valued, investors seem blind to the reality or looming danger of a stock market crash.
This insane enthusiasm cannot be justified by economic fundamentals. The U.S. GDP growth last quarter emerged at a stagnant and poultry 1.4%. As national productivity is declining wages are stationary. Add this poor economic performance with the growing national debt that is being promulgated by the Federal Government just this past June, and you have a recipe for the perfect storm brewing in the form of a stock market disaster.
Let’s move to the bond market. Former Federal Reserve Chairman Alan Greenspan doesn’t paint a prettier picture and warns that the bond market is on the edge of collapse that further threatens stock prices.
In a recent CNBC interview, Greenspan stated that the prolonged period is about to end for low interest rates. What is also about to end is a bull market in fixed income that has lasted for more than 30 years.
On Squakbox Greenspan said, “The current level of interest rates is abnormally low and there’s only one direction in which they can go, and when they start they will be rather rapid,”
This current low rate environment has been the result of monetary policy by the Federal Reserve, which he led from 1987-2006. During the last financial crisis the Federal Reserve took its benchmark rate to near zero and for 7 years kept it there.
Since December 2015, the Federal Reserve has approved four rate hikes, yet government bond yields remained stuck close to record lows.
Greenspan was not critical of Federal Reserve policy, but warned that this low interest rate environment cannot last forever. Furthermore, once it ends there will be severe consequences.
Greenspan continued, “I have no time frame on the forecast, I have a chart which goes back to the 1800s and I can tell you that this particular period sticks out. But you have no way of knowing in advance when it will actually trigger.”
Regarding timing Greenspan did make one point, it will likely take the market by surprise as it happens quickly. He said, “It looks stronger just before it isn’t stronger.” What we can conclude is that no one will be able to predict when the bubble will burst and those that try will be in for a big surprise.
Greenspan is well-known, particularly for his work at the Federal Reserve, which also featured a period of low interest rates, however nowhere near present day lows. In addition to this he has become well-known for the “irrational exuberance.” speech he gave in 1996 at the American Enterprise Institute. In this speech Greenspan warned about asset prices and said it is very difficult to gauge when the bubble is about to burst.
Those comments foreshadowed the dot-com bubble popping. The phrase has found a permanent spot in the lexicon of Wall Street.
Greenspan told CNBC, “You can never be quite sure when irrational exuberance arises, I was doing it as part of a much broader speech and talking about the analysis of the markets and the like, and I wasn’t trying to focus short term. But the press loved that term.”
Is Your Retirement Portfolio Protected by Gold against the Popping of the Stock Market Bubble?
Hedges are used by investors to offset losses in other asset classes. That’s why many investors include gold in their financial portfolios. Whether it’s a decline of the dollar or falling stock prices, gold is the asset of choice to act as a hedge against these losses.
Not only is gold thought of as a hedge, but also a safe haven. A safe haven protects investors not just from ordinary ups and downs in the stock market, but against the possibility of a catastrophic stock market crash. That’s why many wise investors bought gold during the 2008 financial crisis. Gold prices continued to surge upward in response to the Eurozone Crisis, the Obamacare debacle, the Dodd-Frank Wall Street Reform Act and the debt ceiling crisis of 2011. Many invested in gold because of their fears regarding a possible U.S. economic collapse. Resulting from this economic uncertainty gold prices more than doubled. They went from $869.75 in 2008 to a record high of $1,895.00 on September 5, 2011.
In its August 14th of 2000 edition and before the crash of 2000, Fortune Magazine issued a famous last words headline, “Ten Stocks to Last the Decade.” Unfortunately these ten stocks went on to end up in spectacular failure. Enron and Nortel, a couple of the bigger ones, went bankrupt while the overall gang of 10 crashed by two-thirds of its prior value. Unfortunately for those who had their savings in these companies saw the value of their financial portfolios drop like a rock. For every $10,000 they had invested, they were left with $3,300 in value.
Five thousand years of recorded human history have demonstrated gold’s consistent ability to act as an efficient hedge for investments and retirement portfolios during turbulent stock markets as well as turbulent times. Therefore it simply makes good economic sense to have a portion of your financial portfolio in gold.
The Investors Best Strategy
Every investor is unique as to their situations and needs therefore there is no one single strategy that is best for all. But there is a best strategy for each individual investor.
For those in retirement, one suggestion is to rollover a market based IRA or 401(k) into a gold IRA or precious metals IRA that has a variety of metal assets. Before purchasing it is best to confer with a specialist to ensure the right precious metals IRA for you.
No one can predict the future and anything can happen when markets are confronted with extraordinary volatility. Nevertheless, regardless of what stocks might do, it is wise to have some of your investments in physical gold and silver in light of the risks we face today. One strategy you might consider is to have a stash of bullion on hand in addition to a gold IRA. That way you will have something that can be traded quickly in the event of an economic meltdown.
You must make the ultimate decision, but do make one. To wait is get caught unprepared.
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