Stocktake

Bursting bubbles:Investing legend Jeremy Grantham's latest quarterly letter is, as always, a must-read. A keen student of bubbles, Grantham called the Japanese crash of 1989, the dotcom implosion of 2000 and, most recently, the global financial bust.

History shows that all major equity bubbles break way below trend line values and stay there for years, Grantham notes. However, despite US equities being in a secular bear market since 2000, values have remained above their long-term historical norm during that period, apart from a three-month spell in 2009.

Grantham looked at the 10 biggest bubbles pre-2000. If the SP 500 follows the average path of those burst bubbles, it should be approximately 30 per cent lower at the end of this decade.

There is one consolation though. While lower quality US stocks are a no-no, “otherwise have a near normal weight in global equities”.

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Facebook value: Talking of bubbles, what about Facebook, which is reputed to be looking into a stock market flotation early next year that would value the company at $100 billion?

Prof Didier Sornette of ETH Zurich, the so-called MIT of Europe, has co-authored a paper that attempts to value Facebook by developing a growth model based on the historical evolution of the number of Facebook users.

Sornette is an acclaimed risk scientist who attempts to identify bubbles and forecast when they’ll peak. His work has been praised by Black Swan author Nassim Taleb as “vastly more useful to me than anything else in economics”.

The paper considered a base case, a high growth and an extreme growth scenario for Facebook. The base case scenario arrived at a valuation of just $15 billion. Indeed, even the extreme growth scenario – $32.9 billion – is only a third of the valuations currently being bandied about in the press.

It’s notoriously difficult to value youthful growth stocks, but Sornette’s conclusion is emphatic: “If Facebook is not able to raise its revenue per user, we are dealing with a bubble.”

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Headline news:Strange bloombergheadlines.tumblr.com continues to do a fine job collecting, well, strange Bloomberg headlines. We last reported on Bloomberg's overly ambitious headlines in September and it's good to see that it remains as eccentric as ever.

Some recent gems include “Gingrich Said Freddie Mac Could Be Good Model for Mars Travel”, “Colonel Sanders Devouring Little Sheep in China Signals 69% Gain”, and “Fed Pays Lip Service to Beef to Skirt Row”.

We’re inclined to give the Gubu award to “Crabs Feasting on Dead at Gallipoli Cooked in Bouillabaisse”, although some of the more subtle headlines, such as “London Mansion Resurfaces on Hedge-Fund Row”, are also worthy of mention.

“The imagery of mansions disappearing and resurfacing is intriguing,” as the blogger notes.