MorningWord 2/9/16: Welcome To The Jungle

by Dan February 9, 2016 9:33 am • Commentary

Last night on CNBC’s Fast Money we had on JP Morgan’s Global Head of Derivative & Quantitative Strategies, Marko Kolanovic, to talk about large cap internet stocks. He thinks there is a bubble that is beginning to burst.  Marko is wicked smart, you don’t get a tricked out title like that with a bank like JPM if you are not. While listening to Marko I had a thought running through my head over and over “Titanic Hits Iceberg!”.  Watch here:

The thesis here is that:

  1. high valuation high growth stocks like FANG (FB, AMZN, NFLX, GOOGL) are crowded trades,
  2. that we are in the midst of valuation re-rating for even the highest quality stocks
  3. there could be a near term air-pocket below these stocks that could send them down 30-35% from their recent highs.

This seems kind of obvious at this point, no?  Marko’s thesis is one that we’ve believed here for some time. And here are some of our more recent thoughts:

MorningWord 1/29/16: FANG has a Cavity $AMZN $GOOGL

Regarding FB:

The nearly $60 billion market cap move from last week’s lows at $90 to yesterday’s intra-day high at $110, (matching its all time highs) does not reflect any realistic or constructive trend in the current market environment, And to be honest, it’s a bit unsettling in what it says about the broader market. If some were uncomfortable with the concentration of performance in 2015 among a handful of mega-cap technology stocks, the loss of leadership of the innards of FANG in 2016 like Amazon (AMZN) and Netflix (NFLX) should be disconcerting, making FB an outlier and placing a massive amount of pressure on Google to deliver when they report Q4 next week. I’ve doing this whole trading thing a longtime, and I can assure you, FB’s recent stock performance is not normal, especially in the market that we are in:

MorningWord 2/3/16: Game’s the same, just got more fierce

Almost every sub-sector in tech that has seen unusually bullish sentiment has seen the lesser players fall by the wayside, far worse than that of the weakness of the broader market and the leadership from the all time highs. Sentiment bubbles have inflated and burst in many areas of tech where at one point in the not to distant future, investors were convinced that these stocks were special, that some sort of secular shift was upon us, and that mundane things like eye-popping valuation and overly positive sentiment would not outweigh fundamentals.

So I’ll leave you with this, FB and GOOGL are clearly benefiting from a similar sentiment bubble about their opportunity in online mobile ads, but also from the fact that there are few spots in innovative tech of where to put cash to work. Something has to give here, there has to be either a reversion trade, or merely that FB and GOOGL will also fall by the wayside and play a little catch up. A stock market can not rest on the strength of a handful of mega-cap special stocks and the money piling into GOOGL and FB probably has a lot more to do with what’s going on in other stocks than what’s actually happening in online and mobile advertising given the current economic backdrop

MorningWord 2/5/16: GARP Hitting a SNAG with FANG

If you think that LNKD, TWTR, NFLX, AMZN, EBAY, P, YELP, and Z’s disgusting price action means you should hide out in FB and GOOGL, think again. This is a massive unwind, a re-rating of risk which has another leg when private market values of the so called Unicorns like Uber, SnapChat and Spotify start to take hits. This will then create a feedback loop and bring even more downward volatility in public equities to raise cash given the illiquidity of the private market holdings

But there’s something even more important than a couple of big cap tech stocks finally correcting. The broader risk is that an investor exit from this small group of crowded trades leads the next leg lower in the broad market (if fears of a global economic slowdown don’t abate in the near term.)  It should surprise no one that FB and GOOGL gave back nearly all of their post earnings gains considering what we’ve seen with sentiment towards high valuation stocks over the last year. For examples, just look at much cheaper high quality large cap biotech stocks like Celgene (CELG) and Gilead (GILD) which can’t get out of their own way, neither stock seeing an uptick in months.  I’d hardly call this price action over the last two weeks in FB and implosion:

FB 10 day chart from Bloomberg
FB 10 day chart from Bloomberg

As referenced in the post from Feb 3rd, almost every other burst tech bubble in the last 2 years overshot on the downside. The ever-continuing narrowing of breadth in large cap tech was an accident waiting to happen.

Now if the market found some footing would investors come back to AMZN, FB & GOOGL? Possibly. But it will only prolong the inevitable. The infatuation with such a small subset of stocks is ultimately unhealthy. A more balanced investment landscape is what U.S. stocks need. As we have made the point on more than one occasion, there are no special stocks (think AAPL here & here) merely special rules that investors apply to them that blind them from forces like gravity.

Welcome To The Jungle: