Echoes of CMGI in Tesla and ARKK

Without pressing the analogy too far, there a similarities between the late 1990s dotcom bubble and the late 2010s technology bubble. One of these is the popularity of ARK Investment funds, which call to mind CMGI, an incubator for Internet companies. The latter was a market darling during the dotcom bubble. Aside from owning stakes in many individual market darlings, investors considered it sort of like a fund, a way to invest in the Internet without picking individual names. Similar to how ARK funds are marketed as a way to invest in a basket of New New Economy stocks. CMGI eventually imploded in the crash and faded from investors' memories. It still exists though. Unlike other firms that went bankrupt or were bought out, the company kept going. The name of the company changed at least twice, the latest being Steel Connect (STCN). It still has the same direct mail business that it started with four decades ago:

Steel Connect, Inc. operates through its wholly owned subsidiaries, IWCO Direct Holdings, Inc. (IWCO Direct) and ModusLink Corporation (ModusLink). IWCO Direct delivers data-driven marketing solutions and offers a range of services, including strategy, creative and execution for omnichannel marketing campaigns, along with postal logistics programs for direct mail. Through its Mail-Gard division, IWCO Direct also offers business continuity and disaster recovery services to protect against unexpected business interruptions, along with providing print and mail outsourcing services.

Here is CMGI in its expansion, and what would become its bubble phase. Pay attention to its form. There is a bullish uptrend that the stock waves bye-bye to in 1998. Side note: there's a head-and-shoulders top pattern that forms but fails to complete in October 1998. That was when the Nasdaq fell about 30 percent on the Russian debt default and subsequent collapse of Long Term Capital Management. After that comes the Fed involvement that creates the melt-up phase. I have previously discussed how I believe 2018 was like the 1998 drop, and that March 2020 coronavirus is like a far larger repeat of Y2K.

There is a resistance line that CMGI adheres to. There is a series of cup-and-handle patterns that form and complete. It's a beautiful bullish chart. And then the final cup-and-handle doesn't complete.

Does that double-top look familiar? An ugly head-and-shoulders top forms and breaks. Everything back to the year 1998 is lost, as in everything with the Fed's fingerprints on it, with a symetrical crash. The brief rallies occur at prior horizontal breakout and support levels. More on charts later, but let's segue with the history of CMGI.

VentureFizz: Could CMGi Have Been the Google of Boston?

The proceeds from the sale of BookLink allowed CMGi to focus on a two-pronged strategy. It would incubate its own startup internet companies and also have an investment arm, CMG @Ventures, to fund other early stage internet companies. As the business and its portfolio grew, CMGi became a NASDAQ 100 company and market leaders like Microsoft, Intel, and Sumitomo held minority positions in it.

CMGi’s portfolio included companies like AltaVista, Engage, Lycos, GeoCities, Raging Bull, NaviSite, Furniture.com, MotherNature.com, MyWay.com, Snapfish, Yesmail, and many others.

CMGI had a strategy not unlike that of ARKK. It was assembling a portfolio of companies. CMGI was doing it under one corporate roof, but as an investment meme, CMGI was very much like ARKK. I suggest everyone read the article. There were plans for CMGI to buy Google and make Eric Schmidt the CEO of the combined firm. The idea that CMGI was a disaster is true in the sense of how things shook out, but it was more a victim of timing and missed opportunities, of Federal Reserve policy and the mass psychology of a speculative bubble, than some fatal character flaw of management.

Once the turn of the century occurred, and there was no run on the banks, the Fed feared that the extra liquidity would prove to be inflationary, despite the fact there were no signs of inflation. To counter this inflationary concern, the Fed raised interest rates six times in six months. This, in turn, caused the IPO market to shut off, leading to the market crash, and venture capital, the lifeline of early stage internet companies, dried up. It ended up being a perfect storm of events which maybe didn't need to happen at all and could have saved the industry from such an abrupt downward turn.

How is this time different? The Federal Reserve pumped far more money into the economy, the debt bubble is far larger, inflation is far higher, the economic damage from Y2K and even the previous Asian Crisis is dwarfed by the damage from lockdowns and supply chain disruptions. The macro setup is far worse for stocks today than it was in 2000.

How is ARKK different? It is even more a passenger than was CMGI. Had CMGI bought Google, it might be a $4 or $5 trillion company today. The future might have been very different. ARKK lacks the managerial control that created those opportunities for CMGI. However, that could also work to ARKK's success because if it can market itself well, maybe it buys the dip and revives its fortunes in the next decade.

How about that chart? ARKK is a fund, so the chart isn't as similar, but there is a similar burst once the Fed starts pumping.

How about a stock with CMGI-like meme support? I give you Tesla. A series of nice bases that lead to breakouts, followed by what could be a failed breakout that ends up turning into a deformed double-top.

Or how about BTC? Bulls were talking about a breakout this summer and look what that's turned into so far...

Speculative bubbles are all similar. In the late 1990s, people believed there was a New Economy. Today it is cryptocurrency and electric cars. Some of the same companies that went vertical in 1999 are back for round two such as MicroStrategy (MSTR) and Ballard Power (BLDP). The similarities extend to assets such as palladium, which I have covered several times as a useful signal for technology stocks.

I'll conclude with this comparison of Tesla and CMGI. Both periods were heavily influenced by Federal Reserve intervention following a steep correction, both experienced melt-ups when the Fed expanded its intervention. In 1999, it did too much for something that ended up being a minor technical glitch. In 2020 and 2021, it did too much in a situation where monetary policy had very limited beneficial impact. In both cases, the Fed's actions mainly served to fuel asset prices. Bullish investors believed the Fed couldn't stop the New Economy. Similar to the last period, commodities started rallying after the Asian Crisis. Crude oil fell below $10 per barrel in both periods. There was a contested presidential election...is this time different?