Here an amusing MarketWatch Opinion: Now that FAANG stocks are crashing, which are undervalued?
That title, by Thomas H. Kee Jr., a former Morgan Stanley broker and founder of Stock Traders Daily, says quite a bit about market sentiment.
Let’s Investigate.
Central bank capital infusions dating back to 2013 are exactly what caused this asset bubble, and the liquidity injections have not stopped. This bubble will burst, but probably not today, and the recent selling in FAANG stocks does not appear to be a precursor to an impending market crash.
Looking at the stocks as a group, their influence on the market is tangible, but they have very different relative valuation metrics. For example, Facebook has an immediate and relatively exceptional valuation while Amazon is at the other end, and has virtually no value at these prices.
In between, Apple lacks immediate value, while Netflix is fairly valued, and Google will likely demonstrate an oddity in earnings growth in calendar 2017 that will not be resolved until 2018, distorting its immediate fair value.
Bubble Mentality
I congratulate Kee for having the fourth-best-performing strategy in the world in 2016, according to HedgeCo.
At the same time, I find it interesting to note that Kee knows full well that stocks are in a liquidity bubble that will end, and he is willing to buy the alleged dip in this very real bubble.
I also find it amusing as to what allegedly constitutes a “crash” these days.
Kee labels Google’s valuation as “excessive”. I certainly agree, but here an amusing alternate P/E evaluation as provided on Nasdaq.Com, anecdotes in blue are mine.
Reflections on Bubble Peaks
- At bubble peaks, most believe there is a “new paradigm” not a bubble.
- The bubble believers think they can escape the bubble, but they cannot.
- When bubbles burst, even most bears get sucked in, buying stocks too early or getting annihilated in short squeezes due to emotion or leverage.
- At market bottoms, few like stocks.
Slow Torture
Demographics will make the next crash, assuming there is a crash, much worse. But I expect something far worse than a crash: Slow torture.
Imagine a market where stocks decline 15% year-over-year, then rise 5%, drop 15%, rise 6%, drop 5%, rise 8% then drop another 12%.
With constant Fed intervention coupled with a Boomer need to cash out for retirement, and millennials sitting the whole thing out, such a slow torture scenario should not be far-fetched, even if you believe it unlikely.
Mike “Mish” Shedlock
While I’m no stock picker, I fully agree. So many have been waiting for “the big one” the crash of all crashes when it is pretty obvious that the government and banks will instead drag this spiral out for as long as possible…or longer.
Drip
Drip
Drip
if you look outside FANG stocks (and outside the major indexes, which are getting their rise from the same FANG stocks) … “the crash” kind of already happened.
Kind of like the nifty fifty “market”, a small select group of stocks explains most if not all of the rise in market indexes. Not coincidentally, the Fed in the early 1970s was considered a partisan joke. Confidence in the crooks in Washington was a bit low (it went well past “just Nixon”). There was that unpopular perpetual war in Vietnam. Drug use (escape-ism) was prevalent state-side (I am calling it escapism to emphasize the failure/refusal to deal with reality, not the legality of whichever drugs).
The nifty fifty eventually collapsed costing a lot of people big bucks. The rest of the market, as Mish alludes, went sideways for a decade or so.
It took Paul Volcker and 15% short term interest rates to restore confidence in the clowns at the Fed. Hopefully Yellen/Bernanke won’t be allowed to do as much damage as Arthur Burns did
“Hopefully Yellen/Bernanke won’t be allowed to do as much damage as Arthur Burns did”
A couple of decades too late for that……
It would take 15% rates for a generation or two, or perhaps 75% for a bit shorter, to even attempt to reverse the dislocations put in place since Nixon doubled down on destroying everything and stealing what was left. Probably quicker, easier and cheaper to just let Latin American style criminalization, and Islamist expansionism, perform the reset for us…
Even the Volcker effect, was so short lived and minimal, partly as it was overshadowed by Reagan borrowing like a drunken sailor (by pre Reagan standards. Compared to the clowns in charge nowadays, he was downright frugal.) Burns didn’t even qualify for a sideline position on the idiotonomics team, compared to the rabble that has followed him, Volcker himself perhaps aside.
Look at Japan’s 20-25 year slow motion decline…….for a model…..
You’re right about the politicians and their cronie businesses they’ve been lavishing favors on………….They’re stealing us blind!
You’re also right about how the political, Uni-Party Elites thought they could keep the bubbles (and their personal wealth) growing by importing people. People to vote for them, work at slave-labor wages, and buoy up real estate prices, etc. Ain’t gonna work.
Why do I keep hearing a Transylvania accent when reading about the demise of the FAANGS? “I vant to drink your blood……” – a quote of the FAANG top managements?
– If the USD “goes ballistic” then I am convinced that a crash will follow.
The economy is sustained by confidence. Not the confidence inspired by sound finances and transparent and honest practices, but a confidence in the notion that the system is so corrupted that any who might try to exit in any scale, or even speak truth to power, will bring it all down for everyone. Confidence in no escape, only keep pretending, keep lying to ourselves and others in hopes that we can stretch another six months, year or decade if we are extremely blessed. But there is NO confidence that reality will save us. Reality is now our enemy.
Noncommittal economic torture drip by drip. Sounds like the perfect bureaucratic solution. Mish, I believe you are on to something.
Combine the emerging demographic problem with pension funds and interest rates of the last 12 years and you get the Alpo economy, It’ll be far worse than Japan’s decline.
The scenario you described “Imagine a market where stocks decline 15% year-over-year, then rise 5%, drop 15%, rise 6%, drop 5%, rise 8% then drop another 12%.” would take the S&P down a total of 666 points (about the value it bottomed at in 2009) equal to a 27% downside move to 1763.
With equity market volumes the way they are these days, central banks buying into everything, PPT always at the ready, what can stop them from buying up everything? The central banks collude together, interventions everywhere, and zero price discovery what can stop them?
And when it is done, the banks will own everything of value….all in the supposed effort to save us….from ourselves, from our poor choices that THEY made available to us. While I still hold the individual responsible for their actions, there is no ignoring WHO made such poor and destructive choices available, and WHO told us that they were the good and wise decision to make, and WHO NEVER sees it coming.
@Jj – Q: What can stop them? A: Shrinking profits at the underlying businesses due to consumers being maxed out on credit and/or lack of buying power. Slowing growth they can live with, but not shrinkage since that turns the whole leveraged capital thing on its head. The latest headlines I have seen lead me to believe that lowering credit standards to increase lending is the current plan of action.
To begin with, what are Fang Stocks?
Where as I understand slow tortuous price devaluation, I don’t understand how the stocks you mention would do anything but be a correct a short time correction. Amazon would be the exception. Until somebody can do what they do better or come close the corrections will be shorter. Both Walmart and Target are losing the battle and oddly enough can’t just can’t get it right and worse keep trying the same thing over and over and still giving the house away daily. Rather than invest in better logistics and better algorithms with their websites they pour moneyback into the same mistaken riddled marketing programs. Why? These are not dumb people but they sure do dumb things over and over and over. I mean they target and Walmart have dumb down to an exact science!!
Amazon has two quality control problems — both the products they sell (many of which are counterfits) and the logistics of sending packages (they rely on the US Post office to lose packages).
Other companies have dealt with counterfit products, but its not straight forward nor cheap. And its extra difficult to combat counterfeits in places like Asia — aka high growth markets.
Bezos can do publicity stunts with drones … but underneath it all the logistics of sending a package overnight sounds a lot more simple than it is. FedEx and UPS used to have a lot of competition — it turned out it is a lot easier to deliver a package in theory than in practice.
Walmart has a footprint in every town USA, and Target has a store in quite a few places… both have a huge competitive advantage over Amazon in logistics. Its silly to even suggest Amazon is even in the same league, they are not. Walmart just bought Jet.com, which has a pretty good website. That doesn’t mean Walmart will “win”, but its rather naive to say Amazon has things all wrapped up.
Amazon has well heeled, deep pocket competition — and Amazon is at a serious disadvantage in logistics.
You also ignored the competition Amazon faces from Costco. And you didn’t mention that Amazon is being forced (kicking and screaming) to collect sales tax in many states — leaving sales tax to the consumer (aka it doesn’t happen) used to give Amazon an illegal advantage over local stores.
Not saying Amazon is necessarily bad. Just pointing out a lot of it is hype and the new thing. Novelty wears off — the competition, even if Amazon prevails, is going to cost Amazon profits for many many years to come.
PS — Amazon, the online store, doesn’t make any money right now net net. All their profits come from AWS and cashflow comes from constantly issuing more and more shares. Don’t write Bezos promotion machine off, but right now they don’t even have a viable business (it makes no profits)
I typed counter-FEIT … and yet the comment posts with misspelled counter-FIT??
I don’t think spell check on my side did that? What is going on?
We are in the online retail business including an Amazon store. We also wholesale and as of 4 months ago, business has fallen off a cliff. Our Amazon store is the worst performing year to date. Almost no orders from dealers. No one is buying inventory. The market is nothing but a massive ponzi held up by cheap money and phony accounting tricks. The real economy is in recession for most businesses. This morning there were NO orders from 4 independent websites, Ebay or Amazon. Tell me that is normal…….
I assume you meant to reply to pachysite, not to my comment…
I didn’t comment about total economic activity, I only pointed out Amazon’s numerous weaknesses, and at least one area (logistics) where the competition has a huge advantage.
And I pointed out that Amazon’s web store (in total) is not economically viable — it doesn’t make money. Amazon’s profits come from AWS, and its cashflow comes from issuing new shares.
Costco and Walmart are (each in aggregate) profitable — even if they have lots of tweaking to do.
Amazon is over dependent on Bezos being a showman… and I doubt he can promote “his” stuff and “your” stuff at the same time.
@qefraud — I assume you meant to reply to pachysite, not to my comment?
I didn’t comment about total economic activity, I only pointed out Amazon’s numerous weaknesses, and at least one area (logistics) where the competition has a huge advantage.
And I pointed out that Amazon’s web store (in total) is not economically viable — it doesn’t make money. Amazon’s profits come from AWS, and its cashflow comes from issuing new shares.
Costco and Walmart are (each in aggregate) profitable — even if they have lots of tweaking to do.
Amazon is over dependent on Bezos being a showman… and I doubt he can promote “his” stuff and “your” stuff at the same time.
I use Amazon to get baseline price … OFTEN I find cheaper elsewhere.
Got this camera this morning @ Target for $99 (best buy also has it on sale at this price).
https://www.amazon.com/Nikon-Coolpix-Digital-Optical-3-0-Inch/dp/B00THKEKEQ
I haven’t looked at Barnes and Noble for books (those weird paper things we had as kids!) in years.
But when I saw Amazon’s price for one book a couple months ago — I said what the heck and looked at B&N again. They had a better price for all three books I was looking for that day.
I don’t know if it was just those 3 books — but Amazon doesn’t always have the best price.
For after market auto accessories, Amazon never has a good price. Going direct to the manufacturer lets me know I am buying USA (not a counterfeit), and the manufacturer’s website often has a better price. They always have better service if you need help figuring out which part fits your vehicle.
“Footprint in every town” is not really all that advantageous, in an era of every government of every town doubling down on kleptocracy. With the aid of “activists” taught from toddler hood that screeching crassly and excitedly in favor their masters harassing Big Bad Hobgoblins is what gets them laid.
A distribution/production/location model more flexible wrt regulatory arbitrage, is becoming a Big Thing, these days. Even someone as comfortable table dancing for the Junta as Musk, has figured that one out. Over time, just as happened with manufacturing; distribution, aside from “last mile”, will likely move offshore as well. With the last mile nominally being handled by smaller entities that is less of a honeypot for ambulance chasers and self righteous geezers on the make.
“Counterfeit” items has become a big, big problem for Amazon over the past 18 or so months. As you say, largely from Asia. And much of it isn’t even strictly illegal counterfeiting, but simply resale to Americans, of branded products intended for a lower income market.
Many manufacturers of branded goods, realize people in poorer countries are more price sensitive, so they sell “the same” product there as in the US, just not really the same. And Amazon is now bringing these products back into America, with people thinking they are getting a great deal on a product they know, but then realizing what they got, was the similarly named version, just intended for resale in Vietnam….
Manufacturers are being exactly not at all willing to help out by providing more obvious differentiation, since they very much benefit from segregating their markets based on purchasing power. While Asian resellers are loving their often substantial cost advantage for “the same” product, versus their American rivals… And Amazon itself, is philosophically committed to making commerce location agnostic, so they are loathe to intervene all that harshly. But they are certainly aware that they are starting to develop a much less stellar reputation in their home market, than they used to enjoy.
Care to elaborate? Too many items, lacking focus? Too small margins? Bad qualitys purchases (I read somewhere that a huge proportion is junk from China)
Google is in the advertising business, which grows pretty slowly (approximately the same growth rate as GDP).
For the past decade or two, Google has taken advertising market share away from the dinosaur entities (TV, radio, magazines/papers, etc). Who knows what percentage of the total advertising market they can take (and whether debt laden millennial eyeballs have the same ad value). But at some point, Google is going to capture as much market share from the dinosaurs as is physically possible. After that, Google reverts to a standard advertising company with ~3-4% growth.
Given that major radio networks like clear channel are in trouble, given the number of cord cutters and people fed up with the quality of TV shows, given that once venerable newspapers have lost all credibility … odds are that Google has captured all the market share that they can grab (or they are really close).
Its still a good company, it will still enjoy good profits — but the exponential growth that they had from taking market share from dinosaurs is pretty near done. So their P/E and EPS estimates should be pricing in more moderate growth (essentially whatever GDP is growing).
Apple hasn’t had a new product since Steve Jobs died. Tim Cook was a great #2 guy to Jobs, but he is no Steve Jobs.
Facebook is AOL 2.0… its creepy how much they monitor and now they are (by their own press releases) censoring the “news” they let users see.
Netflix is a movie rental store, plus a movie studio. Both decent businesses, but both rely on regularly producing blockbuster movies… They will probably produce some award winning stuff — just like Disney and Universal and Sony and countless others. They will have some flops too, just like all the others.
The nifty fifty has been surplanted by FAANGS — but underneath it all they are the same thing. Anyone still have some paper certificates of Polaroid?
Good point. With the exception of Apple (which makes things) and Amazon (which moves things) the other tech companies are simply hoovering up advertising and most probably double counting the clicks in the process. This is simply diverting revenue not adding to it and in effect centralising it.
Bankers have been confiscating goods from the majority, and redistributing those goods to the financial sector. Thus the stock mania. No one can predict when the mania will deleverage. Manias can sometimes go on for longer than most people would expect, which is why so many get involved with them.
Valuation correlates with long run return. Manias don’t change long run return, but they make it challenging to find good investments during them. ZIRP and lofty equity valuation mean that pension funds and 401k plans are toast in the long run. Bankers printing CPI inflation to generate the stock mania means the average person moves slowly backward.
Amazon is clearly under pressure from Walmart by their lowering ‘free shipping’ threshold to $25.
Once popular stocks such as GoPro and Fitbit are now trading at about 10% of their all time high.
I would also include Tesla here. Has it become the world’s largest automobile manufacturer in market cap yet?
They seem to be desperate to keep the bubble going. Look at the morning’s headlines: “Another bullish call for Tesla; Apple calls self-driving cars…”
FAANG Stocks…
Which even make a profit?
Which don’t have insane P/Es (700+)?
Which only survive through more and more debt and a cult following?
What would be their stock prices if they had something along the lines of a “normal” high P/E of around 30 for a “growth company?”
What can we learn from pets.com?
As market cap is never a valuation metric, market cap weighted ETFs are distorting true value of the market when they become a high % of market participants.
Company market caps held high simply by virtue of the fact that it is a high market cap and that’s where new ETF money heads. Self fulfilling.
Some will be held low – below true value – simply because they have low market cap – tthe place to look.
TECH a bubble ?? please make a post on cryptocurrencies, not Bitcoin, but the likes of RIPPLE ETHEREUM and so many others …. in a world where a +1000% YTD performance is actually an underperformance
My crypto-currency of choice is Phoneybalonium.
I see potcoin.com sending Rodman to North Korea.
Mish = Doom and Gloom ad infinitum.
Add the ETF effect.
Holdings of massive caps will track lower as their % of total market cap deflates, pushing down massive caps. Slowly deflating might be the best scenario for these as a massive step down would create mayhem as ETFs rebalance.
Another scenario is if the whole market tracks lower together and crushes the smaller cap end via the ETF effect. There is the chance of substantial mis-pricing of the smaller caps as they are wound down if no allowance for valuation is in the ETF.
Active management and Smart Beta could get a lift.
Expect the market controllers to realise this and much prefer a wind down than a massive short-term correction.
My money is on a wind down starting until something happens 2019-2020 type time frame when control is lost and shtf big time.
Someone probably has a market participant model.
With ETF participants being a substantial %, and their rules usually quite transparent, modelling outcomes for various scenarios shouldn’t be impossible.
Simulate a market shock impacting various sectors or big names and see what happens as market participants react and then see the subsequent reaction to their actions. Reflexivity.
Will they damp volatility or add to it?
What is their impact at extremes of market valuation, both high and low?
If they are partly responsible for excess valuations in mega cap now, will they be responsible for extremely suppressed small cap valuations at market bottoms?
Would have to add money flows into ETFS, obviously.
What will Mr and Mrs passive investor do when markets fall? Buy more ETF or redeem towards the bottom adding to any crush?
“I congratulate Kee for having the fourth-best-performing strategy in the world in 2016, according to HedgeCo.”
Disclaimer: Performance as of Friday, Oct. 21.These results are based on plans suggested by Stock Traders Daily, and trading guidelines associated with those plans; they are estimates as a result. Stock Traders Daily does not trade these plans, and cannot be sure if these plans have been followed by anyone.
“At the same time, I find it interesting to note that Kee knows full well that stocks are in a liquidity bubble that will end, and he is willing to buy the alleged dip in this very real bubble.”
Gotta ride the wave… no reason not to enjoy the ride.
-If you had a program that had returns like he suggested he would be running a fund backed to infinity and beyond…
As market cap is never a valuation metric, market cap weighted ETFs are distorting true value of the market when they become a high % of market participants.
Company market caps held high simply by virtue of the fact that it is a high market cap and that’s where new ETF money heads. Self fulfilling.
Some will be held low – below true value – simply because they have low market cap – tthe place to look.
I have said this before and will say it again.
Stocks are either:
a) Accurately predicting a major, hyper-inflationary (global) event in the not-too-distant future.
or
b) Insanely over-valued.
Take your pick.
It is different THIS time …