It is clearly our view that the entire 2009 – 2019 US equity bull market is in the process of ending after a 343 % advance in the SP 500 and a 735 % advance in the NASDAQ Index. We expect a last burst of activity in July 2019 and an attempt at marginally new highs – 3000 to 3050 on the SPX -before global indexes roll-over as the economy falters and corporate earnings collapse.
This is the third secular bull market in the US since 1990 and each one of them ultimately ended with a cyclical bear market.
In 2000 it was the burst of the Dotcom bubble, in 2007 it was the US sub-prime financial crisis and this time round the trigger of the fall will probably be the demise of the FAANGS.
Cyclical Bear markets usually take the indexes down at least 38 % from their peak, but the tally has been more like 49 and 57 % respectively in the SP500, and much more severe in the NASDAQ in 2000 – -82.4 % – as the .dotcom bubble bursted.
Has there been a bubble ?
Some investors and commentators may argue that there has been no speculative bubble this time round but it is a fact that the 2009- 2019 bull market was fuelled by exceptional monetary policies that have injected massive liquidity in the system and propelled valuations to extremes rarely seen
The chart below gives a very long term perspective of the CAPE ratio, the Cyclically Adjusted Price Earnings Ratio developed by Nobel Price Robert Schiller, and where we stand today.
As can be seen, there were only two occurrences in the past at or above the current level; in 1930 before the big depression and in 2000 before the bursting of the dot com bubble.
The 2009 – 2019 secular rally in US equities has been powered by what has been popularity called the FAANGs; Facebook, Apple, Amazon, Netflix and Google, to which Microsoft could be added.
Companies that have achieved such a handle on their business that they have come close or surpassed the US$ 1 Trillion Dollar market capitalisation but also, and probably more importantly have reached customer bases of 1 billion customers or more thanks to the generalisation of the internet and the increases in data-transmission speed.
The FAANGS have become mammoths spanning their activities way above national borders and controlling such a powerful array of human influence that Nations and Politicians are starting to worry significantly about their power.
The influence of the social Medias, and their potential manipulation during electoral processes were at the heart of controversies not only during the 2016 Presidential elections, but also during the French and German elections of 2017 and not one poll can go by without serious questions being asked about the spreading of fake news, targeting of dedicated audiences to influence their vote one way or another or more simply just fake advertising just destined to raise or reduce the profile of candidates.
Even today, as we enter the Second Presidential race of Mr. Donald Trump, he lashed out at Facebook and Google threatening to sue the tech giants because of their unfriendly attitude towards him.
These were some of the concerns that led us to call very early on, in March 2018, THE END OF TECH and we have started trading the FAANGS on the short side ever since.
Time has come to re-instate Strategic Short positions in these stocks…
As our readers know, contrary to the mainstream asset management philosophy whereby investors should remain invested at all times, regardless of the massive trends in asset classes, we privilege an “unconstrained” approach to asset allocation and believe the time has come to exit equity markets at large for the coming 6 to 9 months.
Moreover, we do believe that there are times where excesses provide opportunities and we have reached such a stage in the FAANGs area where valuations are unsustainable and concentration is such that the downside is considerable.
Their entire bull market has been based on extremely high growth rate, unbridled development, favourable supranational tax loopholes and the development of a new economic model selling targeted advertising by exploiting personal data and digital behaviour within an extremely loose legalframework.
Besides the clear saturation of their traditional markets, these companies and their business model has already started to hit two walls that are making lawmakers more and more vocal : Privacy and Taxation.
Governments and Lawmakers are voicing their concerns about the free-wheeling exploitation of personal data without constraints and it is only a matter of time before bills are passed in the various parliaments to rein the collection and use of personal data in many countries.
Governments and Lawmakers are also starting to address the dematerialised nature of the services provided and subject the companies to much more complicated taxation frameworks that will ultimately have a major impact on their bottom lines.
In essence, what we are saying is that the window of opportunity, the decade during which these companies and their business model have exploded, is slowly but surely, closing down and that the impact on valuations and stock prices will be significant.
In the sections below, we look at each and everyone of the FAANGs and Microsoft Corp and highlight why we are re-instating our short positions at this juncture.
Facebook had a nice rebound in June partly thanks to its great first quarter results and the launch of its new cryptocurrency project LIBRA, but the momentum is clearly ebbing and there are few catalysts to propel the stock higher in the short term.
The stock is clearly overbought and will face significant scrutiny and pressure as the 2020 US Presidential election campaign gathers steam
This Chart indicates that Facebook has actually made its secular top back in March 2018 and is failing to make new headways. Unless the stock breaches the 200level on the way up, the downside is considerable with an ultimate target price of between 80 and 100.
Although in a completely different business, Steve Job’s company was the first company ever to command a US$ 1 trillion market capitalisation, but there are significant clouds on its horizon that will make it difficult to sustain its 9x Book value.
Donald Trump’s trade war with China is having a significant impact on Apple’s supply chain with considerable unexpected costs associated to it. Less measurable but probably more significant will be the switch by Chinese consumers away form Apple’s smartphones and products towards Chinese made products. The Trade War is likely to cut off Apple from its highest growth market for the future; China.
Finally, there are no new disruptive products on Apple’s horizon that could provide a significant relay of growth and the company may, as will be the case with Google’s Alphabet, face anti-trust challenges due to its dominant position in the Apps IOS operating system sphere.
Apple Inc its rolling over and its earnings for the second quarter of 2019 may be significantly below expectations due to the heightened tariffs war started in May 2019. The Company reports its numbers on July 30th 2019
The stock is hesitant at best but a major top was recorded in September 2018 followed by a lower high in April this year that will be difficult to pass.
The long term chart is truly ugly ! Apple has peaked after multi-decade ride, it has a already completed a lower top and it is a t extremes in terms of deviation. The next stage is a re-test of the 147 support and short term moving average and a break below that level points to a potential fall towards at least 113 or more likely towards 75 at which stage the company would still be trading won 3 to 4 x book value.
The leader of online retailing is already re-shuffling its business model, expanding into brick-and-mortar outlets and cleaning up its wide array of retailers/partners. Besides the saturation of its natural markets, the launch of the 5G technology will enable hundreds of smaller competitors to enter the space and build their logistics at much cheaper cost.
Amazon spectacular growth rate of the past 5 years is probably something of the past. Falling from 340 % growth to 30 % growth will make it difficult to justify 79x earnings and 19x book value
Amazon is finding it difficult to make new headways despite its spectacular 1st quarter earnings. The company reports is 2nd quarter earnings on July 25th but defending its market share may cause unanticipated expenses that could have a significant impact on its margins
Amazon shares made a clear double top in June and August 2018 and has been trading in a massive consolidation triangle since. The fall between August 2018 and December 2018 was significant but there may be much more weakness ahead when the short term moving average is cleared on the way down.
A textbook example of a mania that has already completed the first leg of its secular bear market and is about to start the second leg.
The world leading streaming company is entering an entirely new brave world with the development of 5G as thousands of small local operators could provide similar services at much lower costs.
Netflix hiked prices almost 18 % in the second quarter and churning is bound to go higher.
justifying 107x earnings and a Price to book of 27x may be challenging
Netflix peaked in June 2018, a year ago. And since then it has found it difficult to drum-up enthusiasm despite its spectacular 1st quarter results. The stock is trading sideways with no real direction
After the January rebound, investors have failed to build upward momentum in the stocks and the downside is considerable in case of disappointment when the company’s results are published on July 17th.
Another textbook example of a stock to short ! This chart is such a compelling short that all the rest is literature…
Google Inc. ( Alphabet )
The king of search engines is facing major legal, anti-trust and taxation challenges in its business model. The winner of the internet world is facing a political and judicial backlash that is only starting. From its handle on the second operating system for Apps ( Android ) being challenged by China and the FTC, to users suing the company for refusing to protect the right to being forgotten to its opaque search and ranking algorithms to its regular confrontation with Europe and its tax regime, to the ire of President Trump for putting up all the negative press at the heart of its system, Google’s business model may be soon severely attacked.
The company’s earnings growth is sputtering and justifying 26x for a company that is facing so many challenges may be adventurous, even if it has interesting cards to play in autonomous vehicles and some other potentially disruptive businesses.
The Daily chart stinks and it is only a matter of one before the 1’000 level is challenged
The Weekly Chart stinks, and a break below the long term moving average will be an ominous sign.
A first peak in April 2018 and a failed challenge in April 2019 paint a picture that leaves a lot of downside for a company who’s earnings will grow barely 10 % per annum in the future while still commands a 26x earnings ratio.
Finally, last but not least even if in a completely different league, the surviving leader of the PC revolution :
Microsoft is the only company that is now holding above the US$ 1 trillion market capitalisation mark. However, its outdated technology, look and feel and the recent exacerbation of the US – China Trade war will favor the emergence of a Chinese competitor that may very well develop its own version of the Office suite and make it cheaper and more palatable.
When that happens the 29x earnings and 11x Price to book ratio of the company may not hold for long.
Overbought and rolling over….
Reversal and overbought, overbought, overbought…..
Wow ! What a Chart ! Anyone for some Microsoft ????? 13.9 deviation…. It could go higher ? Sure, But won’t stay there for long… Much more likely to re-visit stock prices at 77and 60.