MorningWord 08/01/14: Hey Technorati, It’s Never Different This Time

by Dan August 1, 2014 9:28 am • Commentary

Is the much anticipated correction upon us? I honestly have no idea, but I suspect that the weakening breadth, European equity under-performance and inability for rates to rise as the Fed ends QE in the coming months is likely to create market conditions that are just a tad more volatile than what we have become accustomed to over the last two years.  Trying to pick a top in a raging bull market is a bit of a fool’s errand.  Trust me, I know, I have lost plenty of money throughout my career trying to do so, but trying to find trade-able inflection points based on divergences and sentiment is what most traders make their careers on.

On more than one occasion of late, we have noted what appeared to be a dramatically narrowing rally in technology stocks, where the 5 largest components (AAPL, MSFT, GOOG/L, INTC & FB) make up about 35% of the weight of the Nasdaq 100 (QQQ).  Last Friday Enis highlighted  the heavy-lifting of a few mega-caps  As of July 18th, the Nasdaq 100 had the fewest % of components making new highs with the index at all time highs  (from Dana Lyons):

Screen Shot 2014-07-25 at 10.55.10 AM

With Q2 results of most mega-cap tech stocks out of the way, I would suggest that the Nasdaq 100 could be one of the most crowded trades that exists in U.S. equities as its fate lies with the success of Apple’s iPhone 6 launch in Sept or Oct (13.5% of the index).  We are short Nasdaq via QQQ puts (read here and here).

It’s also important to note that, despite fairly solid results among many large cap tech companies, it appears that sentiment towards the space is getting a bit defensive as investors look for the more cheaply valued, cash-rich companies like AAPL, INTC, GOOG/L and MSFT.

That being said, the amount of hero worship of Silicon Valley gods and self-gratulation by same, feels to be hitting a fever pitch.

For instance, New York Magazine’s recent peice on Re/Code’s Kara Swisher:



Or famed venture capitalist Marc Andreessen’s recent epic rant calling out almost everyone who ever talked smack about Facebook after the company reported better than expected Q2 results and the stock made a fresh all time high last week, per Business Insider (read here), but here are the first two tweets of many:



Then, on a week that saw Zillow use its ridiculously valued stock to make a $3.5 billion bid for competitor Trulia, Zillow CEO found the time to take a victory lap (after TWTR’s stock rallied 20% on better than expected Q2 results), of his sage advice to Twitter employees not to sell their stock in a Tweet back in May:



And then again Andreessen tweeting last night about LNKD’s Q2 results and post market gains, but more importantly poking fun at Fed Chair Yellen’s recent commentary:


The last tweet is the one that I find comical.  If this sort of hubris does not smack of an inflection point for public and private tech valuations I DON’T KNOW WHAT WILL.  I am not calling a top, merely identifying a potential inflection point at a time where breadth for broader tech stock participation is clearly waning. Much like the situation back in late 1999 into Q1 2000.

I would just make one more point.  These tech titans, commanding so much attention, fiercely attacking the naysayers and taking so much credit for this new found tech utopia that we little people have all been graced with, smacks very much of our former Financier overlords in the pre-financial crisis.  That didn’t end well, and I suspect just as Andreessen and Co think it is different this time, we know that it’s not. While his famous Twitter rants may continue to be right, and his arguments about valuation will hold firm for a bit, the real question is whether they last the test of time.  Just as he has been very right over the last 5 to 10 years, he is likely to be most wrong at the very top, and will need to take on a bit more of a defensive tone in the future, and unfortunately be very wrong.

Put in plain English, guys like Dick Fuld, Chuck Prince, Stan O’neal and John Thain were the darlings of the pre-crisis economy, where bank market capitalizations reached levels never seen before while making millionaires out of thousands of their employees, and investors.  No one thought it would or could end.  Well you know how it did – it almost took down our economic system as we know it.

Is the situation in Tech valuations and sentiment as extreme? By no means, but the attitude among the executives, VC investors, mom and pop investors and the media reminds me of times past, and I think it is important to note that it is NEVER different this time and maybe just maybe we are at an inflection point.