Archives for August 2018

Growth/Value Back to Dotcom Bubble Peak

Under the large umbrella of the U.S. stock market, there are indices, sectors, market capitalizations and style boxes. For example, the five major stock indices are the Dow Jones Industrials, S&P 500, S&P 400, Russell 2000 and NASDAQ 100. Sure, you can argue that the NASDAQ belongs instead of the 100. We also have large cap, mid and small cap along with growth stocks and value stocks. I often write about different kinds of leadership in good times and bad times, especially on the blog.
For those not totally familiar, growth stocks are companies that are expected to grow at a rate much faster than the market. While some are profitable and some are not, those which have earnings usually see their earnings grow much quicker than the overall stock market. Growth stocks typically do not pay dividends as they plow any and all available cash back into the company for growth. Growth stocks are almost always found in the technology and biotech sector although they can be found elsewhere as well.
Value stocks are the exact opposite. Those stocks usually have earnings and their growth rates are often slower than the market’s. Their valuations are typically less expensive than the market’s and certainly the growth stocks’. Price to earnings or PE is one popular metric analysts use to determine value along with price to book value and free cash flow. Most value companies pay dividends to shareholders as a way to entice investors to buy the stock.
When companies come public, they are usually growth companies who do not have any earnings. Apple Computer in the early 1980s, Microsoft in the mid 1980s and Amazon in the mid 1990s are some of the more glamorous ones. Ford went public in the mid 1950s among a tremendous amount of hype, glory and exuberance. As companies progress and mature, they begin to earn money and more money and perhaps pay a dividend. Their growth rates peak and begin to slide and slide along with their PE ratios. In short, they go from growth to value.
Intuitively, the average person believes that growth companies have better track records of rewarding shareholders than value companies. However, the opposite is true. People are very surprised to learn that over the long-term, value typically beats growth.
Now that I have given you a brief tutorial on what growth and value are, let’s turn to the observation I was attempting to make.
I love to compare things in the market, on a daily basis, on a weekly basis, on a monthly basis. There are all kinds of trends that develop. Some even offer warning signs.
Below you can see a chart of large cap growth divided by large cap value. When the line is going up, growth is beating value. When it is going down, value is beating growth. For all of the 1990s growth trounced value, fueled in large part by technology. Eventually, growth saw two peaks in 2000 as the Dotcom Bubble was about to burst. From that 2000 peak, you can see that value led all the way to 2007 as growth gave back nearly 100% of its massive gains.
The chart above doesn’t continue to present as the indices are no longer available to me. Instead, as you can see below, I picked up two ETFs which essentially say the exact same thing although the two ETFs began trading in 2000.
Let’s start with the far left Dotcom peak and subsequent bottom in 2007. Since 2007, growth has trounced value and almost back to the nosebleed levels of the Dotcom Bubble high against value. There is nothing super special or meaningful about a specific relative price level. The growth/value relative value line could keep going up and become even more expensive than it was at the Dotcom Bubble Peak.
However, it is certainly very concerning from a relative valuation standpoint that growth has decimated value for so long. In other words, while valuation isn’t a great timing tool for the end of a trend, it absolutely does say that sooner than later, value stocks should begin to outperform growth stocks in more than just a small way and for more than just a few days, weeks or months.
The best example of today’s hot growth stocks is FAANG, Facebook, Apple, Amazon, Netflix and Google. I wish Tesla was part of that group as well. You already know that I am bearish on Facebook and Tesla for the next few years. Netflix is next when a catalyst appears. I think all three stocks can decline by at least 50% by 2021.

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Record Highs in Stocks, Record Economic Output, Record Corporate Profits

And the beat goes on. I know stocks must be close to a pause because one of my market buddies asked me if stocks will ever go down again. Of course, he was kidding, but he and I ask each other idiotic questions from time to time during very strong trends. Stocks remain strong. That’s inarguable.

Index leadership is excellent. Same for sector leadership. Sure, the banks could step up a little more and they probably will when bond yields go up for more than a few days. Junk bonds are at all-time highs as is the NYSE A/D Line. Gold reversed lower on Tuesday so this could be the real test for the bulls to put up an important fight.

This morning the government revised Q2 GDP to +4.2% from 4.1% which doesn’t mean much except that Q2 was very nice, while consumer confidence is about as high as it ever gets. People feel good about the economy and they should, for now.Q3 won’t be so easy and my recession watch begins a year from now through the 2020 election.

As I am typing this, I am arguing with someone on Facebook about how good the economy is. Besides clearly hating Trump, his feeling is that the economy is not so strong because of the income equality gap and the economy could collapse if Trump’s supposed legal troubles increase.

I flat out dismiss this. It’s pure nonsense.

If Trump left tomorrow, what economic policy would change? MAYBE the tariffs would slowly go away which would be an economic boost not hindrance. Tax reform and reduced regulations wouldn’t change at all. The country is way too concerned with give credit or blame to the person residing in the White House. Long-time readers know that I prefer to say things like the president presided over a recession rather than caused a recession. One person can only do so much.

Anyway, we have record highs in stocks, record economic output (GDP), record corporate profits, etc. No matter which side of the aisle you sit on, things are pretty darn good right now, of course, completely ignoring our national debt.

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Beware of the Rally. “EVERYONE” is in The Hamptons

Early indications are for more new highs in the stock market today as the S&P 500, S&P 400, Russell 2000 and NASDAQ 100 look to see blue skies when stocks open. This comes as no surprise since I have been writing about new highs coming all along, but especially after the Q1 correction which is now a distant memory. I still expect the Dow Industrials to join the part in all-time high territory before long.

When I look at the order of leadership, I see a very healthy lineup of NASDAQ 100, Russell 2000, S&P 400, S&P 500 and Dow Industrials. That’s typically what we see during the strongest bull moves although I continue to believe that stocks aren’t quite ready for the next blast off. They still look to be grinding higher as I wrote on Friday. In this regard, I would be happy to say I got it dead wrong.

Sector leadership looks good and getting much better with discretionary securely in front with transports just behind. Semis and banks are stepping up. If these two can break out to new highs, that could start a melt up into year-end for stocks.

With this being the final week of what we call summer, volume could be on the very light side and I would expect the pundits to question any significant move. Don’t be fooled by this analysis as it hasn’t worked at all this century. Our kids start school this week and most others have either already started or will start shortly. The whole notion of “everyone” being in The Hamptons is such nonsense.

Let’s see how stocks close today. I would have thought that a pause was coming, but I don’t have strong conviction. Gold continues to bounce hard but I still don’t think we saw THE bottom.

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Lots of New Highs as the Grinding Continues

After some fresh all-time highs in the S&P 500, S&P 400 and Russell 2000, stocks have been resting although the path of least resistance is higher, more in grinding fashion than explosive. Index leadership is good. Sector leadership isn’t bad. Junk bonds have defied my forecast that they saw their bull market peak 8 months ago and powered ahead to score a fresh, all-time high. Score another positive for the bulls.

The all-important NYSE A/D Line continues to make new, all-time highs, showing that the bull market continues to have widespread participation.

In short, bull markets do not end with this kind of underlying strength and weakness should be bought.

Finally, I have written about watching gold for signs of a low and while there was a small bottom last week, I do think the real bottom is in front of us. Gold, the metal, as you can see below, looks better than the gold and silver mining stocks. Usually, it’s the opposite at a bottom. We shall see what next week brings.

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Manafort, Cohen Guilty but Reality over Rhetoric

On Tuesday the S&P 400 and Russell 2000 hit fresh all-time highs although without strong conviction. The three indices are not far behind although the Dow may take a little longer. All is good on that front. Banks are perking up and as I mentioned the other day, the semis look to have bottomed. Discretionary hit an all time high as did the transports in somewhat of a quiet surprise. All is good on the sector front for the most part.

Junk bonds have really stepped up although few have noticed and the NYSE A/D Line is making all-time highs. Things are pretty good from purely a market perspective.

You wouldn’t think that by watching the headlines of the president’s former campaign manager being convicted and his former personal lawyer agreeing to a plea bargain with the government. For almost 20 months I have said to focus on reality over rhetoric. The markets simply do not care about the non-economic nonsense going on in DC. Unlike what was going on with Nixon, the country exudes confidence. End of story.

Oh yeah, the bull market is now the longest in history if you listen to the media today. What does that even mean? Does it really matter? Of course not. More on this topic in Street$marts.

Stocks are grinding higher but they still do not seem ready to blast off again. That day will come.

Gold is rallying but I still think there is one more decline coming before the real rally begins.

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Dollar Still King, Gold Garbage and Stocks Moving

What a change with the Dow Jones Industrials leading stocks higher. It felt like yesterday that Turkey was going down and about to take the whole world with her. Turkey remains an issue as does the emerging markets complex or at least those countries which have borrowed too much money denominated in dollars. With the dollar’s recent resurgence those debts are more expensive to pay when your own local currency declines. Anyway, that’s a big picture problem that’s only going to worsen over the coming years. The dollar may pause or pullback, but it’s not close to being done going down.

Speaking of the strong dollar, it has really caused a collapse in gold or maybe it’s coincidental. For weeks I have mentioned keenly watching gold for signs of the bottom and I didn’t expect gold to collapse this far to the point where it’s so bad, it becomes good. Smart money has been buying. Dumb money has been selling. Sentiment is at historic lows. One more trip to new lows could hammer in the bottom.

And while on the topic of the dollar, a long time client asked if I am standing by my forecast that the Euro goes to par (100) and then to all-time lows below 78 against the greenback. The short answer is yes. I am not wavering one bit.

Getting back to stocks, you have to give credit to the bulls; they have thwarted every attempt by the bears this month. Four of the five major indices (not dentists surveyed) are within a day of all-time and the laggard, the Dow, is now leading. Yet, I still do not believe stocks have begun the next 10% assault higher. They are quietly moving up but I think they will pullback before rocketing higher again.

For the next few days, besides gold, I am keenly watching to see if the semis can muster some strength and get back in line with the bulls. That would be an important short-term development.

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Turkey Burgers, US Dollar & Gold

Turkey this, Erdogan that. I would bet that the vast majority of Americans have absolutely no idea where Turkey is on a map. But, that country is in almost every financial story this week. Seeing the name so much subliminally made me order a turkey burger for lunch today!

While stocks are beginning the day much lower, I think the news about a Chinese economic slowdown may be more important. In any case, as we know, stocks can never just go down on their own. There always has to be some reason.

One my favorite myths in investing (I am about to begin an e-book on myths) is that stocks cannot go up in a rising dollar environment. Sure they can, have and will, sometimes. Here is a chart of the dollar over the past four months. Boy, does it look strong! That’s about a 9% rally which is huge in the currency markets.

If you take a longer-term look, the rally looks less and less impressive. In fact, over the past year, the dollar is essentially flat.

Most readers know that I turned very bullish on the dollar when Bear Sterns was about to go out of business in 2008. Over the long-term, I have never wavered on that optimism and still won’t today. On balance, I continue to believe the dollar is going much higher over the coming years. More on this later.

For stocks, volatility is certainly the theme of the week. I think the short-term risk is to where prices were just below their lows in late July. Emerging markets and commodities have been decimated and they need to stabilize before stocks can mount any kind of rally back near the old highs. Gold and silver are about as ugly as they ever get and I am still looking for the elusive bottom. Perhaps on Thursday.

And before you ask, no, I don’t believe the bull market is over. More new highs lay ahead!

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All Eyes on Turkey. LOL

The bulls had their wings clipped on Friday, making it three straight down days for stocks although the bears haven’t made much progress just yet. The macro concern right now is the collapse in the Turkish Lira. Similar to Greece and Cyprus, Turkey by itself has the economic output of Connecticut and the world really doesn’t care what some crazy dictator does to his country, per se.

However, any time there is a crisis in the emerging markets complex, two things spring up. Will there be contagion? And do the major global banks have exposure? The answer to the first question is probably not. The second questions is yes, and mostly in Europe where banks were all warm and fuzzy to the 20% interest rates being offered not long ago. Now, not so much!

All of the major stock market indices look like they want to trade a little lower before mounting a counter offensive. There is no clear cut leadership although the NASDAQ 100 is trying hard. Sector leadership remains unchanged with discretionary leading followed by transports. Banks are neutral and semis are on the defensive which seems odd with the tech-laden NASDAQ 100 trying to lead.

Let’s keep an eye on Tuesday as a possible day for a short-term rally to begin. I keep saying to watch gold for signs of the bottom and that remains a theme. It looks like the metal in the “puke” stage where it is being sold almost indiscriminately. A low should be forming sooner than later.

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Sell Facebook. Bull Market Peak Likely In

After writing about beloved tech giant, Apple, for so long, I thought I would keep it going and turn to another overly owned and loved FAANG stock, Facebook. As you know Facebook has had its share of triumphs, trials and tribulations since its infamous 2012 IPO, but mostly troubles this year with the personal information collection scandal at Cambridge Analytica.
For those who invested in Facebook at the opening price in 2012, you endured incredible pain as the stock plummeted by more than 50% right out of the gate. However, those who didn’t panic (hard not to) were handsomely rewarded as the stock ran in almost straight line fashion to its 2018 all-time high above $218 as you can see below.
Since Facebook’s glorious peak where it could do no wrong and was well on the way to controlling the world, a funny thing happened. Users starting saying “enough is enough”. They demanded privacy protection. I thought that was just an emotional response to the scandal and all would be fine in a few months.
Then came the release of Q2 earnings last month. All was definitely not fine as you can see below.
On the far right side of the chart you can see the long, vertical red line which I drew in. That’s to show you how far the stock dropped from the close before earnings to the open after earnings were announced. It was U-G-L-Y!
The conference call with management revealed this was not an outlier or one off event. Facebook forecast that future growth would decelerate, just about the single worst thing possible for an overly owned and loved growth stock. That was bad.
Given the news and where I perceive stocks to be in the cycle, I think there is a very good chance that Facebook has seen its peak for possibly many years to come. I think the best case is that the bull market somehow lives on into 2020 and the stock can revisit its prior high above $218 before peaking again. Worst case is that the market is in the early stages of of revaluing the company and after this rally ends, the stock not only heads below the July low of $166 but then below the 2018 low of $149 in the next 6-12 months.
Yes, I am anything but positive on Facebook. It will take an awful to change my opinion. With the F (Facebook) and N (Netflix) in FAANG on the defensive, it puts much more pressure on Apple, Amazon and Google to lead and outperform. I had envisioned the FAANG stocks holding up until the bitter end of the bull market and find it hard to believe the bull market can easily live on without the group as a whole staying strong.
Bottom line – the best strategy in Facebook is to now sell strength until proven otherwise.

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Bull Markets Do NOT End Like This

Quick update as I am trying to get a full Street$marts out today or tomorrow. The theme remains the almost same. I thought a modest pullback would materialize and take the major indices below last week’s low. However, as I mentioned on Friday, the bulls put in a strong performance, like the Red Sox did over my Yankees, and took control from the bears on Thursday. That strength continues today with the S&P 400 and NASDAQ 100 leading with the Dow ceding leadership.

The rising tide is lifting most ships as the S&P 500, S&P 400, Russell 2000 and NASDAQ 100 are very close to all-time highs. The Dow will get there but it’s going to take some time. Sector leadership remains disappointing with the semis and banks being lifted by the market and not the other way around. Discretionary has been solid as a rock with transports coming on strong.

Junk bonds are continuing their resurgence and the NYSE A/D Line is making marginal all-time highs right now. BULL MARKETS DO NOT END WITH THIS KIND OF ACTION!

Don’t forget about gold and gold stocks. They are almost so bad, they are good. Almost…

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