Prior to Fast Money yesterday, I had the pleasure to meet a fella named John in the green room. John is a long-time friend of my co panelist Guy Adami. John is also a regular viewer of the program even though his profession has nothing to do with financial markets. But he is very interested in markets and invested in the stock market. Well, not really the market, but in FAANG. (Facebook, Amazon, Apple, Netflix, Google)
As you might imagine, John’s concentration in FAANG has massively outperformed the broad market over the last couple years. While he’s thrilled about that, he is becoming increasingly nervous. His main question is how much longer can this go on?
I guess at any point over the last year John could have asked the same question to me or Guy, and us two semi-pro pundits probably would have suggested taking some profits to take the pressure off. At almost any point in the last year, or three really, that would have been the wrong thing to do.
I have not been invested in FAANG in and of itself. I own mutual funds that contain those stocks, so I have participated in their gains, but have not realized the outperformance that someone like John has. That doesn’t upset me. And I’m not alone in missing out a bit. There are no shortage of market participants that are infinitely smarter than I (Warren Buffett and Chamath Palihapitiya) who just this week expressed regret about missing what now seem like obvious moves higher in stocks like Amazon and Apple.
To quote Matthew McConaughey’s character in The Wolf Of Wall Street. “Nobody knows… I don’t care if you are Warren Buffett or even Jimmy Buffett, nobody knows if a stock is going up, down, sideways, or in circles”:
Obviously I am not your broker, or your hedge fund manager. I don’t offer advice on investments. I’m here to talk risk and how views can be expressed in the options market, with a particular eye to defining that risk. And on occasion I just tell it like I see it after two decades in this business. Sometimes I can’t see what’s right in front of me, Amazon is a great example. But that’s the result of a healthy dose of cynicism that is the result of coming of age in this business during the dotcom bubble, earning my stripes during the ensuing bear market and then doing it all over again into and out of the financial crisis. What has happened since is also unprecedented several different levels, and that cynicism of the valuation of a stock like Amazon, can disconnect me from the out-performance those like John have enjoyed of late.
The only advice I gave John, is a piece of advice an early mentor in my career gave me, if you are starting to feel uncomfortable about your positioning, regardless whether a profit or a loss, move your feet, do something. Look for cheap hedges, define risk with stock alternatives. That establishes a slightly different perspective and one that might assist in locking in some profits, cutting future losses and most importantly, keeps you from having to make bad decisions the first time the market tries to spook everyone out of those names.
As for FAANG. Facebook told us on their Q1 call last week that 2017 would be a year of investment, that ad loads would top out mid-year, and after and ever so slight pause the stock is 2% from last week’s all-time highs and sports a $435 billion market cap and is up 30% on the year.
Amazon reported their 8th consecutive quarterly profit (because they chose to) when they reported Q1 in late April, but guided down for Q2, investors don’t care, they are focused on growth over profitability, the stock sports a $455 billion market cap, and is up 27% on the year.
Apple missed the all important iPhone unit sales number in the quarter by a little more than a 1 million, blamed it on press reports of the upcoming phone, guided sales and gross margins slightly below consensus for the current period but after a short-lived post-earnings dip has gained 6%, or nearly $50 billion in market cap in the last week to a smidge over $800 billion, and is up a whopping 33% ytd and up a whopping 70% from its 52 week lows last May.
You get the point, I’ll skip Netflix and Google, but there appears to be a glitch in the matrix here. I could have said the same a few months ago, but juxtaposed to 25-year lows in volatility readings, and I get a toxic combination of euphoric sentiment in a concentrated group of very similar stocks in a very complacent market.
So I offer these thoughts, not as advice but as an observation. One taken from a conversation about the trading book of John.