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Can CLOUD MANIA withstand macro fears?

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October 18, 2011 – Comments (0) | RELATED TICKERS: SKYY , CRM , AAPL

The tech-heavy NASDAQ has rallied more than 10 percent since the passing of Apple CEO Steve Jobs, a likely sign of more gains to come (barring any short-term pullbacks).

There is no coincidence in the correlation between this rally and the timing of Mr. Jobs' premature departure. In fact, such devastating news often dictates a market bottom and subsequent boom. Dig a little deeper and you find that the last significant product innovation Mr. Jobs gave us was iCloud, which was rolled out to the general public last week. Knowing how important it was to the world of tech, Steve made absolutely certain to introduce this while he knew his time on earth was limited. Investors that have reaped the gains of Apple's tremendous run since 2003 are likely to join him in the cloud - cloud computing, that is.

My gut tells me that we are on the precipice of a tech bubble similar to the one we last saw roughly ten years ago. Pre-tax corporate profits are also somewhere in the clouds, measuring 13 percent of U.S. Gross National Income as of Q3 2010 (Haver Analytics), levels that parallel those of the dot-com bubble. We know what happened then.

Salesforce.com (CRM) has thus far been the darling of the cloud computing space. Institutions can't get enough of this stock, hence why it often leads the sector higher (or lower). Now before you call me crazy for thinking that an "overvalued" stock like Salesforce.com can go higher, we must be mindful of the valuations seen in the last tech bubble. When VeriSign topped in 2000, it had a forward p/e of 963! In comparison, Salesforce.com almost seems like a bargain.

Where are we now in the lifecycle of the cloud bubble? Investors have been going for cloud stocks since the recent market bottom in October. With media attention picking up, it appears we are entering the dominant bullish wave of the cloud bubble - the mania phase where near-parabolic moves are the norm, rather than the exception. The recent market action helps confirm this thesis. Let's also take a look at another recent mania, gold, as a benchmark. The only two ETFs devoted exclusively to the cloud are less than six months young (SKYY, LSKY). This pales in comparison to the absurd quantity of products affiliated with the recent gold rush (see more). The recent introduction of these products leads me to believe that the cloud bubble is just getting started.

We are in a period when retail investors are largely demoralized and remain on the sidelines. It wouldn't be difficult to find reason to be bearish. Euro collapse? China slowdown? Jobs crisis? While these are relevant concerns, much of the likely gloom and doom may be priced in. Historically, periods of extreme bearishness have been followed by just the opposite. The so-called "permabears", of course, will remind us that we are far from the bearish readings of the last market bottom in March 2009 - but it's not 2008 redux, at least not now. In fact, the bull market of a lifetime may be just around the corner. Another "bull market of a lifetime" began in the early 1980's after the bursting of a spectacular gold bubble, and there are some reasons to believe history may repeat itself. Global growth is actually quite robust - inflation has likely peaked in emerging markets, ushering the way for decades of sustainable real growth in Latin America and in Asia.

It is important to remember that a bull market is a necessary component of nearly all speculative investment. Cloud stocks will usher in the new bull market. If there are any unforeseen consequences of the European debt crisis, the cloud boom will have to wait. An orderly Greek default, however, would likely send the market surging, potentially putting the final nail in the coffin for gold, leaving stocks the only game in town.

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