Live by the overvaluation sword, die by the overvaluation sword.
Market Roundup
That’s a painful lesson investors are learning these days, what with “FANG” stocks getting gored — and other overvalued tech stocks tanking.
You remember these stocks, don’t you? I wrote about the FANGs back in November when they were artificially propping up the averages. And I wrote back in September about the serious risk of a “Tech Bubble II.”
Now, we’re watching all those risks I highlighted come home to roost. Just since the beginning of the year, Amazon.com (AMZN) has fallen 27.4%. Netflix (NFLX) has dropped 27%. Alphabet (GOOGL) and Facebook (FB) have fared better thanks to strong earnings. But even there, the post-earnings pops are fading rapidly.
How about Linkedin (LNKD)? It just plunged $84, or 43.6%, in a single day after releasing lousy quarterly results. Corporate software darlings like Salesforce.com (CRM), Tableau Software (DATA) and Workday (WDAY) have plunged 31.1%, 60%, and 38.5% year-to-date.
Apple (AAPL) has lost 9.2%, while Qualcomm (QCOM) has dropped 11.7%. Even stodgier tech names like Intel (INTC) and Microsoft (MSFT) are down 16% and 11%, respectively.
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| Alphabet, or Google as it used to be known, has fared better than many other tech stocks because of strong earnings. |
What’s going on? It goes back to what I wrote at the outset. When you live by the “momentum investing/who cares about overvaluation?” sword, you die by it. You can make tons of money in the boom phase of the cycle. But if you don’t dump your shares in time, you’ll get crushed in the bust phase.
I’ve been worried about exactly this kind of action. That’s one reason why I recommended an ETF designed to hedge against falling technology stocks in my Safe Money Report months ago. That position is working out well now.
More broadly, I believe the action in the riskiest of risky stocks is another negative for the market overall. They were the “generals” who led the market advance during the boom/bubble phase of the credit cycle. Now that we’re losing them, it’s hard to see the “troops” hanging in there for long. So again, I can’t stress caution enough in this volatile market environment.
| “I can’t stress caution enough in this volatile environment.” |
But I’d very much like to hear from you at this time. Do you think the carnage in momentum stocks is a serious problem for the market? Or is this something that tends to happen at the end of a correction, rather than the beginning? Do you see value in FANG or other high-growth tech stocks here? Or do you think the sell-off is going to get even worse? Share your opinions below.
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Meanwhile, you brought up a wide variety of topics at the website over the weekend in response to my most recent column.
Reader Robert C. offered this take on the economy and the Federal Reserve’s reaction to recent data: “The Fed made a mistake in raising interest rates. Mrs. Yellen raised rates into weakness, not strength. I agree that our economy is going into recession. We are carrying too much debt. So is the rest of the world!”
Reader $1,000 Gold weighed in on the carnage in commodities, and whether there might be a bright side to it, saying: “I think you may be missing something. You’re seeing the details, but are you seeing the big picture? Is it possible this is just a classic sector rotation? Out of commodities and into … what?
“The problem is in the oil patch, but so is the solution. And the solution looks better than the problem. Let’s just hope the problem doesn’t overwhelm us before the economy can benefit from this reset in commodities.”
But Reader Anthony G. offered a more pessimistic take, saying: “I see bad oil loans everywhere. The banks are in trouble again. Cheap money and bad risk-management again.”
With regard to drug pricing, Reader Bill S. said: “The drug companies that impose exorbitant price increases are just young fools. They never learned the number of times in the past 75 years when the federal government stepped in with laws imposing price and wage controls when private industry didn’t act in the public interest. Calling members of Congress ‘imbeciles’ is going to have a strong bipartisan retaliation in the near future.”
And on that same topic, Reader Steve McN. offered a few potential solutions to rising drug costs:
“1. Stop subsidizing the rest of the world by having them control their prices, while allowing the drug companies to pass on the costs of research to the U.S. consumer. Simply tell the companies they cannot sell drugs cheaper in the rest of the developed world than they do here.
“2. Stop advertising what people cannot buy without a doctor’s prescription. Doctors usually cave to the drug demands of a patient, regardless of how needed the drug is – hence the advertising.
“3. Never prohibit any entity from negotiation. Medicare’s legal inability to negotiate prices is Congress-dictated corporate welfare for the pharma companies, and is a direct result of pharma lobbying Congress and plying them with money.”
Thanks for taking some time out of your busy days to comment. It’ll be interesting to see how Fed Chairman Janet Yellen attempts to justify the recent rate hike, and what she says about the future path of Fed policy, on Wednesday in Congress. It’s obvious from the latest market action that many investors believe the Fed committed a policy mistake.
As for the commodities carnage and the bad-debt debate, this stopped being just an oil problem a long time ago. I’m seeing broad-based deterioration in the credit markets, and widespread, nascent tightening of lending standards in the banking sector. That’s the kind of thing that can worsen an economic slowdown, and lead to widespread losses for investors.
So make sure you’ve taken steps to protect your portfolio, which I have been sharing in my Safe Money Report since last spring. Then add any additional comments you might have in the discussion section below.
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Falling bond prices, rising yield spreads, investor withdrawals – the junk-bond market has been dealing with them for the last several quarters. Now, those problems are spreading to the investment-grade bond market, and hedge funds are taking notice. Several are betting on a rise in defaults and even-bigger price declines, according to the Wall Street Journal.
The Syrian civil war is intensifying thanks to a government push on the city of Aleppo and aggressive Russian airstrikes. That’s forcing tens of thousands of civilians to head toward the Turkish border for relief. But that country is reeling under the burden of the 2.5 million refugees it has already taken in — and European officials are reluctant to accept even more migrants. It truly is a depressing situation in that part of the world.
* Former Treasury Secretary Timothy Geithner, like many ex-government workers who oversaw Wall Street activities, has gone to work on Wall Street. Now, he is reportedly borrowing money from JPMorgan Chase (JPM) to invest in a private equity fund at his new employer Warburg Pincus. Revolving doors indeed.
Finally, the Denver Broncos defeated the Carolina Panthers in a 24-10 slugfest highlighted by defensive action rather than any inspiring offensive play. Denver only racked up 194 offensive yards, the least by any Super Bowl winner in history. The two teams also combined for 12 total sacks, the highest tally ever.
Are you worried about the spreading sickness in the corporate debt market? What do you think about the intensification of the Syrian conflict, and the flood of refugees resulting from it? Any thoughts on Geithner’s career track, or Sunday’s Super Bowl? Share them in the comment section below when you have time.
Until next time,
Mike Larson
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Recommended Articles by Mike Larson:
Mike Larson graduated from Boston University with a B.S. degree in Journalism and a B.A. degree in English in 1998, and went to work for Bankrate.com. There, he learned the mortgage and interest rates markets inside and out. Mike then joined Weiss Research in 2001. He is the editor of Safe Money Report. He is often quoted by the Washington Post, Reuters, Dow Jones Newswires, Orlando Sentinel, Palm Beach Post and Sun-Sentinel, and he has appeared on CNN, Bloomberg Television and CNBC.
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thanks to you and larry i have been out of stocks aND INTO MINING SHARES I THINK THE MARKET IS DUE TO GO DOWN SOME MORE
I’m more concerned about the speculative derivative market where the big banks are playing Russian Roulette with bets they can’t cover when the derivative market implodes. They are betting trillions more than they can ever back up hoping the feds will come to their rescue. Not this time. Our government is in debt 19 trillion dollars while the unrecoverable loss from the big banks will be in the 100’s of trillions. This is what will destroy the world economy. Lord I hope I’m wrong
Agree completely about overvaluation. For the past three years, it has been clear that earnings increases did not support an average market PE of 16 plus. There is plenty of blame to go around but until the earnings situation improves, the market will stagnate or worse.
KUDOS MIKE LARSON, YOU ARE A GREAT PATRIOT OF THIS MARKET.
YOU ARE GREATLY APPRECIATED.
MY BELIEVE IS THAT JUST LIKE THE LAST TECH MARKET BUST THIS ONE IS
NO DIFFERENT. SEEMS LIKE THE TECH’S BUSTED AND THEN THE MARKET FOLLOWED. THIS TIME WILL BE DIFFERENT ONLY IN THE FACT THAT THERE
WILL BE VERY LITTLE TO RECOVER. THE MARKET SOMETIME THIS YEAR WILL COLLAPSE AND IT WILL BE MANY DECADES BEFORE ANYTHING WILL BE TO SOME SENSE OF A NEW NORMAL OF CHAOS AND MAYHEM. NOT PRETTY AT ALL. HOWEVER, I KNOW YOU ARE DOING YOUR BEST AND I WILL STICK WITH YOU. SOME WILL GET THROUGH THIS BETTER OFF AT LEAST FINANCIALLY.
BLESSINGS TO YOU MIKE LARSON.
CLIFF HOLLOWAY
OK!!! WHY ARE YOU YELLING?????
If he had hit the keys harder it would all be in bold as well
What is wrong in using CAPS? He is just trying to make a few points!
It’s not illegal to use CAPS, is it?
The FED plans to raise interest rates gradually. Once in seven years is gradual. The next rate hike should be in 2022 should the data warrant it. Why are the talking heads telling a different story?
People never learn about pie in the sky investments, just look at history. There has always been some new epoch changing invention or industry. Right after the Civil War the railroads were going to bring fantastic prosperity to every town no matter how small. Every town dreamed of being the next Chicago or Kansas City. Cities, counties and state invested in railroad bonds. The railroads would be so profitable that the revenue from the bonds and stock would pay all the government bills, no taxes. Several states went broke on “internal improvements” railroads and canals. Of course California is headed there with their no toy train set. Then came the city streetcar lines, horse to cable to electric and the Interurbans that grew out of them. Then came the airplanes, then radio, then TV, then the internet, now the dotcom retailers and the apps for all the smart phones. The not so old folk says “When will they ever learn?”
Boy, I sure hope the correction gets worse! Specifically, loans to cr*** credit risks need to be priced accordingly. I’m thinking of credit card default type rates, high twenties or even more!
We need to cleanse the system, let the too big to fail FAIL if necessary, with bond holders and stockholders taking it in the shorts!
Cheap credit needs to become ‘fairly priced’ credit in the market. What is that you ask?
Three points over inflation. Inflation seems to be running 1.5% give or take. So a fair interest rate should be 4.5%
Can’t handle “THAT”? Simple, don’t borrow. The Fed has a sh** load of paper to reel in.
I’m not a patriot, I would best be called a mercenary, at worst a greedy old geezer. So be it.
I am observing that bond prices are going UP NOT DOWN as indicated by ever lower yields! Also, in regard to whether we are riding upward momentum or downward moves in the Markets: the stock market goes up farther and for longer than it goes down, thus the continuing raise over time. All one needs do is keep a well diversified portfolio and let it go where ever it will go! Trying to time the markets is a loser, but it does sell advice and commentary!!
With high national debt how do you sustain growth? Market to me is going a lot lower with intermitten rallies. When you program a market with low interest rates this is the result of the bubbles this action creates. Sell the rally until we get to a practical level.
I’m glad I didn’t buy into many of the above ‘tech stocks’ above that Jon Markham was recommending about a year ago… I would’ve got slaughtered…
The systemic risk is extreme. The banks in Europe and government debt are outrageous. The Dragi bluff is about to be called. We will soon see if there enough ammunition left in his tool box.
The Dragi Bluff is seen for the bluff it is…The Dragi peashooter more like…get a good book…get a good gal…get a good bottle of vino or three..get a good fire…this is going to be quite a hiding…cash is king..emperor..pope and gangster…
Oil patch, China, Feds, it seems like wall street can only concentate on one thing, everything else stays under the carpet……we like to blame it on someone else, whenever possible, but what about Trillions of Junk Bonds in dsnger, a trillion in Car loans at average of 67 month duration, a lot of them sub prime, A trillion in student loans, 19 Trillion in Government debt, and a new wave of sub prime home loans, just under different names, and a big bubble in commercial real estate with inflated prices…..last not least European Banks and counties in enourmeous trouble, it’s amazing how many people only can comprehend 1 problem……..
The Fed needs to normalize interest rates and the sooner the better. Baby boomers,
retirees, pension funds etc are unable to earn any reasonable return on the savings capital and it is killing normal demand. I, for one, have stopped all of my discretionary spending. Will soon be downsizing everything unless deposit rates start to
improve. Banks, corporations, speculators, etc have had the advantage of zero interest rates for seven years ie way too long already. If the Feds inflation target is 2%, deposit rates should be equal to or greater than that.
Maybe the Fed is raising rates because they realize they can’t get their 2% inflation with low rates. If so, they will probably over-reach and get hyperinflation instead, just as they got deflation with low rates..
Art, good post,you are not alone. I recently remarked to my Dentist, when he suggested an expensive procedure that I saw as entirely cosmetic, that “maybe the government doesn’t have to live with a Budget but the rest of us do”.
Will the central banks around the world step in to buy surplus oil supplies to prop up oil prices.
They would be crazy to do that! Oil producing countries And oil companies keep producing full bore. Countries need the revenues to fund their budgets and companies have to produce everything they can to pay debt and interest. Why buy a product that is dropping in price?
Will or won’t Chesapeake go under? Jim
I’m thinking Chesapeake will go under. They still have a mess in the Barnett Shale play they haven’t cleaned up.
Mule
They owe eight times what they are worth. The “King” of shale gas. Jim
Their in black quicksand….They promise you the globe if you toss ’em a rope !
The “momentum” play in stocks appears to be dying an agonizing death. When you think about it, the momentum play was akin to jumping on a train for a free ride, and then simply jumping off when it reached your destination. Well today the train has not only picked up speed, but it is no longer a nice evenly paced trip until you get to your goal destination, and it is now switching tracks unexpectedly, and you are no longer heading toward your original destination. Smart thinkers and smart money will eventually figure out that the “free train ride” strategy has run its course, and a new strategy in needed. Staying with this tortured analogy a bit longer, the trains locomotive appears to have blown a gasket. I for one never rode that train, but I now find myself sitting in the station waiting until things clear up a bit, and I can craft a plan to get to my next destination. I may be sitting here thinking for a while.
Fangs are good investments over lower price points. I simply do not have much of a clue as to what multiples they would be attractive since their multiples have been sky high for so long on their incredible accent. Tech stocks are generally at high multiples considering their growth potential, yet high double digit and triple digit multiples are insane.
Hey Mike,
No comment on gold? Up $32. today. “Someone” is looking at the potential with the market crashing. I’m buying gold on any dips. I’d be satisfied with 10% for the year, but will probably be more for gold. I know this doesn’t make you brokers any commissions, but your customers can buy GLD on the market. My bank was paying .5% on $100,000 and will probably be less soon. Luck…
Gold $745 before this is over.
Let me know when it starts down…I want to buy GLD puts!
Retail and Banks don’t look so hot either. Jim
Keynesian economics versus Jungle economics is what we have today! So far this year, no “technical analysis” or even fundamentals with charts, graphs, moving averages etc were of any use. Easy come, (QE), easy go, (contraction) proved to be the case. 6 trillion in QE went in since 2008, expect 6 trillion to flow out! It is cause and effect, the law of karma! “What thy sow, thy shall reap the Good Book taught us! Timothy, Robert Ruben, Paulson, Bernanke, – all Goldman Sachs club members are laughing all the way to the bank, no Hedge Funds!!
Behold the age of infinite moral hazard! On April 2nd, 2009 CONgress forced FASB to suspend rule 157 in favor of deceitful accounting for the TBTF banking mafia. The problem is systemic, start to fix it in its roots!!
Get rid of Congress, you mean?
There is increasingly less fund flow into the stock market and increasingly more fund flows out!! Classical economics, as the “supply” of money on the exchange drops its value tends to increase; truth is investors want cold hard cash now.
Comment to Mike Larson:
“Yes, valuations are important. However the markets downward spiral isn’t caused by one event or one factor. The markets like stability (in Gov, in economy, etc.), predictability (in Gov, in economy, etc.), and of course growth (in the investment or company being traded, etc.), and are always about the future (not what has been going on recently, like oil prices…). Now, if the future resembles recent past, then it is accounted for in the valuations… Unfortunately the market does not like what is seeing with the economic conditions here and abroad, the growth here and abroad, maybe even the presidential candidates on both sides (again uncertainty). Now, much of this is due to changing demographics, also generational shifts in culture, and the availability of information makes it much easier for people to see/understand/react to things. Yes, the world is pretty dynamic and much easier to explore nowadays, and by many standards pretty messy!! But since no one can really predict the future (not even the market), the question is: are some (including Investors) overreacting??
Now that the stocks of FANGs and their brethren are starting to collapse, they are going to find it harder to get the loans that have propped up most of them. In fact, nearly all companies are going to have to learn to survive more on earnings – even as earnings may decline. That doesn’t bode well for the markets for some years to come. Other prices may continue the general deflation trend also. Are foreign investors really going to put their money in declining American stocks, property and such, as Larry says. Maybe the Dow will reach 31,000… someday. It may take awhile, without inflation.
Hey Mike, let’s give credit where credit is due. The BRONCO Defense dominated the panthers-completely. Case closed! Go Broncos
Von Miller beat the Panthers. Jim
Very hard to get my parties to forego dow 30,000 and sell or hedge beginning mid 2015 advisory and finally getting through with red alert warning jan 4 2016. The deal was just stand aside until q2 2017 then consider re-entry. Now Dr Doom doesnt seem so paranoid.
But still tmi for the sheeple advising physical gold at $1100 risking $850 to insure against bank bail in or even bank holiday. Even more wacko for advising to consider relocation from major metro areas to smaller cities two years too soon rather than two months too late.
The Western states drought will kill the economy. The cause is not greenhouse gases but climate cycles however the globalists will punish the carbon footprint sinners by pulling a Pol Pot purge in reverse: moving people from the country to mega cities to live in china style highrise anthills. Drought not caused by globalists but exploited by them as per
Never let a good crisis go to waste.
Enter circumpolar vortex and triple r or ridiculously resilient ridge in your search engine. If this is conspiracy theory then msm tv and popular science should be in the rubber room to. Disinformation and benign neglect is not just stoopid as Trump says to avoid the truther tag. Why cant this country have a mixed wcin
Why not a mixed economy with Sanders socialized medicine and Trump capiralist trade reform? FDR in 1932 campaign repeated over and over the depression was not due to stupidity rather a lack of THE WILL TO DO.
When FDR came to power he spoke more boldly of ECONOMIC ROYALISTS and Glass Steagle was passed. Between Sanders and Trump we have a 21st century FDR reform.
“But that country(Turkey) is reeling under the burden of the 2.5 million refugees it has already taken in — and European officials are reluctant to accept even more migrants. It truly is a depressing situation in that(Syria) part of the world.”
Hey current administration,,, anybody paying any attention to this depressing situation? Yep, I didn’t think so…
Mule
Didn’t I hear something about lower lows and lower high closes being meaningful to the direction of markets? $
Mule
Searching the ridge brings up reports that the four year old pattern has been dissipated by el niño as of oct. 2015. The question now is too little too late or can the central valley agro dynamo still recover? The precedent is the dust bowl of the dirty thirties. We can all hope.
Mike, I ‘ve made some money shorting the market.
FAZ
SPXS
But, I know I need to be cautious there is a long way down to clear the books and bad debt.
The one thing I have noticed on these rallies this year lower highs and lower lows that tells me the trend has turned.
Thanks for all of your work.
J
Today is your chance to buy on the Dead Cat Bounce. Nothing goes down forever does it??
Good luck picking the elevator KA_LANG moment as this baby hits the basement !
TQQQ up today !
IBD headline: “Worst earnings season in six years, fueled by a strong dollar.”
Newtek Business Systems, a large BDC, polled small business owners. some 73% had no immediate plans to hire or fire staff. Only 3% did plan to lay off people, while 24% were ready to add staff. It would seem to indicate that people on the scene were not too worried about business prospects, and about a quarter were ready to expand. Are they right or wrong?
960 respondents to that poll.
I hate to sound dumb but what does FANG stand for. I’m new at this web site. Sounds like a lot of people have fun with their comments. Back in the sixties I was a trader at a brokerage office. Traded from the old proverbial “Pink Sheets”. It was nerve wrecking but a lots of fun when you are thirty and using some else’s money. Peace.
M. “TPG”
What is the actual in real terms