Another Tech Wreck Headed Our Way?
As if the Nasdaq wasn’t looking bubbly enough, yet another blatant comparison with the dot-com bubble has emerged. Will this be enough to slow down the relentless bullishness in the U.S. tech sector, or will the bulls continue to run wild.It's Friday and we had more of the same this week, a handful of tech names are driving the market higher.
Nasdaq Boom Draws Dot-Com Comparison
It’s been a terrible few months to be a Nasdaq bear on Wall Street. Although they got the collapse they’ve been calling for for years, the massive rebound left many on the sidelines and valuations even more stretched.
Just how stretched? Well, the NASDAQ 100/Russell 2000 ratio is now at the highest level that it has been since 2001 when the chickens came home to roost and the bubble burst.
Seems that, as of now, small caps’ outperformance relative to big tech was just temporary … NASDAQ 100/Russell 2000 ratio has surpassed (intraday) April levels & is now highest since late 2000 @Bloomberg— Liz Ann Sonders (@LizAnnSonders) July 8, 2020
[Past performance is no guarantee of future results] pic.twitter.com/apdtptjoLg
Massive unemployment, surging virus cases and generally weak economic conditions have done nothing to slow the Nasdaq’s recovery down. While it looks irrational on the charts, like all big moves in the stock market, it is founded in some truths.
First, the trillion giants like Amazon, Apple, Microsoft and Google are all in the tech sector. Faced with an economic disaster, investors have seemingly opted for the best balance sheets they can find.
While airlines and cruises struggle with debt and former global players like Hertz fumble with bankruptcy, Apple is still buying back shares and has billions of free cash on its books.
Faced with the U.S. Federal Reserve printing a historic amount of USD, we have once again seen money flow into asset prices. Ample liquidity has fuelled risk-taking, and it is not just the ultra-caps that have gone up hugely.
The trend is your friend pic.twitter.com/dx4Um1srjG— Sven Henrich (@NorthmanTrader) July 8, 2020
Tesla stock has enjoyed a meteoric rise, and is now worth more than $1300 a share, making it the world’s most valuable car company.
Tesla short sellers are down $18 billion this year, including another $4 billion in July https://t.co/P2FVPPMnjQ— Leo Kolivakis (@PensionPulse) July 10, 2020
Is it that profitable? No. Do fans think it’s going to rule the world? A lot of them do, yes.
It would appear that there is also a “stay at home” trade, seeing money flowing into the Nasdaq, as companies like Zoom actually benefit from lock-downs and quarantine.
Nordea Asset Management: Euphoria Starting To Be Seen In Nasdaq
Despite all the wild enthusiasm, Sebastian Galy at Nordea Asset Management believes that there could still be more upside, as the equity market consolidation continues on Wall Street, as he told CCN.com:
I had presumed that we were on the onset of the third and last phase of the Covid-19 rally, one devoid of the link to economic reality across a wide spread of assets. The reality is more of a continued consolidation linked to the expected path of global growth with worries about a W shaped recovery in the United States, given poor Health management and delays in a second fiscal package. There are elements of euphoria from Tesla to Chinese stocks or the outperformance of the Nasdaq, but they have not spread widely yet.As you can see, almost every outcome, from re-opening to re-lockdowns can be spun as a positive for the index.
Most of the Nasdaq is powered by stories of growth rather than actual profit.
This works just fine when risk appetite is good but can turn around very quickly when things go wrong. If 2000 showed us anything, it’s that at some point you’ve got to start making money. I’m looking at you Nikola.
Since March 23rd when stocks hit their low, it's been all about tech and we are now close to the 2000 tech bubble levels relative to the overall market:
S&P 500 tech sector continuing to climb relative to broader index; ratio now highest since early 2000 & not terribly far from peak during tech bust @Bloomberg— Liz Ann Sonders (@LizAnnSonders) July 9, 2020
[Past performance is no guarantee of future results] pic.twitter.com/qzELZ7eONR
The problem? Apart from being severely overbought, tech shares are far from cheap:
Continuing to climb: forward P/E ratio for the NASDAQ is at highest since late 2002 @Bloomberg— Liz Ann Sonders (@LizAnnSonders) July 10, 2020
[Past performance is no guarantee of future results] pic.twitter.com/5UAQqlekzF
And it's not just the Nasdaq. Chinese shares, especially Chinese internet shares (KWEB), have been rallying like crazy in what looks to be a classic retail bubble:
Alternate headline: We sucked in retail to sell to them. https://t.co/Szu7M1PK5p— Sven Henrich (@NorthmanTrader) July 10, 2020
Meanwhile, the news on the health front continues to deteriorate but nobody seems to care, as long as the Nasdaq goes up, everything else is irrelevant:
The United States saw a record 60,000-plus new coronavirus cases on Wednesday, the biggest single-day surge reported by any country https://t.co/rTbVp6Qe0X pic.twitter.com/ZegxrJk2gj— Reuters (@Reuters) July 9, 2020
Like I told you last month, Wall Street is enjoying its last liquidity orgy and while large cap tech stocks are partying like it's 1999, I'm afraid it will end in tears.
Of course, when exactly it ends is anyone's guess and I'm always reminded of Keynes's famous quote: "Markets can stay irrational longer than you can stay solvent."
Michael Batnick, The Irrelevant Investor, wrote an interesting comment yesterday stating while today’s tech stocks aren’t as crazy as they were back in 2000, that doesn’t mean they’re not a little nuts.
He ends by noting this:
The lesson from the dotcom bubble, and whatever we’re calling this period, is that trends can last a lot longer than we think possible. And if you’re convinced that we’re in the 9th inning of tech dominance, you should be open-minded to the fact that maybe we’re not. I encourage you to listen to this podcast with Patrick O’Shaughnessy and Brad Gerstner, who has some fascinating ideas about the future of this space.All true, but it's just the same momentum/ don't fight the Fed/ FOMO/ TINA argument stated a little more eloquently.
We know that the dotcom bubble ended in ashes, but we can’t know how this one plays out. The best we can do is be open to any outcome, and not bet the ranch on a future that might look different than the past.
I'll put it to you this way. Great Financial Crisis? Buy tech. Pandemic? Buy tech. Nuclear war? Buy tech. Always buy tech stocks no matter what, especially after big dips.
The problem is there's not much thinking that goes on with this momentum/ liquidity argument.
Moreover, astute investors are warning about the longer-term regulatory risks for tech giants:
Social Capital founder and CEO Chamath Palihapitiya explained his short case against Facebook and Google-parent Alphabet in a Twitter thread on Friday.— CNBC (@CNBC) July 10, 2020
Follow along with the latest stock market updates here: https://t.co/QI7ItnLeIR
Let me end with some nice charts:
And if you think these charts are incredible, have a look at this one:
Eat your heart out NVIDIA and Netflix!!
I don't know, these markets look totally insane to me but that's what happens when Uncle Fed rushes to increase its balance sheet by $3 trillion with little thought about market consequences.
Oh, by the way, on that note, pay close attention to this:
4th consecutive week of @federalreserve reducing size of balance sheet—this past week was largest so far (since recent peak)—but not necessarily bad as dealers are accessing cheaper funding in market & foreign banks not having trouble finding dollars pic.twitter.com/EZnwv3P2YR— Liz Ann Sonders (@LizAnnSonders) July 10, 2020
It's "probably nothing" but before you jump on the tech stocks to the moon bandwagon, you might want to wait to see if the Fed is slowly pulling away the punch bowl.
Below, Josh Brown, Ritholtz Wealth Management CEO, joined "Closing Bell" earlier this week to talk about tech stocks.
Today, billionaire macro and cryptocurrency investor Michael Novogratz, founder and chief executive officer of Galaxy Investment Partners, said tech stocks are in a classic speculative bubble and says it reminds him of cryptocurrency markets in 2017. He spoke with Bloomberg's Sonali Basak on "Bloomberg Markets: The Close."
Third, Gary Shilling says the stock market could be set for a big pullback similar to the decline in the 1930s during the Great Depression. He explains how the coronavirus pandemic will result in long-term structural changes in the economy. Great interview, listen to his insights.
Lastly, Christopher Whalen, Whalen Global Advisors chairman, discusses his outlook on bank stocks with CNBC's "Fast Money" traders, stating banks could get crushed this earnings season.
Get ready for a very interesting earnings season and it all starts next week.