All posts by Robbert Alexander Van Batenburg

FAANGS, Inequality and Election 2020

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Last week, the Department of Justice and the Federal Trade Commission announced their intention to investigate Amazon, Facebook, Google, and Apple for “anti-competitive behavior”.  In our view, this move is likely at the behest of President Trump in response to a number of Democratic candidates for President, who have become increasingly populist (strict) on “big tech”.  We expect this regulatory and political scrutiny coming from multiple angles to intensify as the election season progresses, which presents significant downside risk for FAANG (Facebook, Amazon, Apple, Netflix, and Google) equities.  It will be a populist political arms race and FAANG equities will be sold as public enemy number one.

The Passive Asset Management Overdose

2019: $7T
2009: $1T

*For every $100B entering passive index funds $16B (SPY) to $48B (QQQ) MUST go into FAANG stocks. The QQQ ETF is 48% Apple, Amazon, Microsoft, Facebook, Google and Netflix – Look Out.

The market concentration in these large-capitalization tech stocks, especially through ETFs, means that when the FAANGs sneeze, the whole market could catch a serious cold.

Combined Wealth of the Top 20 Richest People in the US

2019: $1.05 trillion
2009: $438 billion
1999: $570 billion
1989: $138 billion

Tech billionaires Jeff Bezos (Amazon), Mark Zuckerberg (Facebook), Larry Page (Google), and Sergey Brin (Google) make up a quarter of this $1.05 trillion in wealth. Bezos alone comprises 10%,  even after his $36 billion divorce haircut. In addition, US Financial accounts are now worth 5.3x GDP, significantly more than the 4.7x ratio in 2009 or 4.5x in 2000. Meanwhile, retail store closings are at an all-time high, compliments of e-commerce, and Silicon Valley is drooling over the prospect of autonomous vehicles, which threaten the jobs of the nearly 5 million Americans employed as drivers of some sort.

“Big Tech” Is a Populist Lightning Rod

This has made the FAANGs (Facebook, Amazon, Apple, Netflix, and Google) a lightning rod for populists and they are now under attack from all sides of the political spectrum. Nearly every major Democratic 2020 presidential candidate has promised to investigate potential anti-trust violations by “big tech”. Some like Elizabeth Warren and Bernie Sanders have made plans to limit mega-mergers, what they see as vertical integration, and potentially break some companies like Facebook up central to their campaigns.

Divergence in Consumer Staples vs. FAANGsOver the last few weeks, we’ve seen a divergence between Consumer Staples (XLP) equities and the FAANGs (FANG). This indicates that money is pouring into defensive stocks as investors sense trouble brewing.

Trump and Democrats in Tug of War on Key Voters 

We see the recent announcements out of the DOJ and FTC last week as a response from the Trump administration to populist pressure from the left. The President can direct the general focus of these agencies, and the bureaucrats within them are sensitive to the political considerations of the White House. As the 2020 election kicks into gear, we expect Trump to continue to attempt to outflank his Democratic rivals on the big tech issue — this is just the first inning so get your popcorn now.

In 2016, Trump was able to win over a populist strain of swing voters dissatisfied with their economic circumstances who Republicans hadn’t been able to sway into their camp since Reagan. Many of these voters lost their jobs or had to take a pay cut as a direct consequence of the rise of e-commerce. We’re now seeing a tug of war between Trump and the Democrats over these voters and the proxy issue is big-tech.

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Democrats and Trump Will “One-up” Each Other throughout Election

Democrats are talking tough while Trump is trying to wrench the spotlight back onto himself with antitrust news coming out of the government. We expect this dynamic to intensify as we move into the Democratic debates, or if Sanders or Warren surge in the polls.

Democratic Debates in 2019 Announced So Far:

June 26-27th
July 30-31st
September 12-13th

AMZN, GOOG, and FB Fell on Anti-Trust Announcement Last WeekFAANG stocks had their ninth-worst intraday loss ever on the back of last Monday’s antitrust news (when aggregating their market capitalizations). Facebook was down 7% on the day, while Amazon and Google were down 4.5 and 6%, respectively.  Google also broke a four-year trend channel to the downside – look out below. As the political tug of war escalates, we will likely see more announcements from regulators and more shocks to the FAANGs

FAANGs Dominate ETFs — Markets Beware!

As we noted last July in our blog The Dark Side of FAANGs,  the move into passive asset management (mostly in the form of ETFs) over the last ten years has opened the door to a cascading effect emanating from big tech and its downside risks. In 2009, FAANG stocks were a top 15 holding in just 14 ETFs. Today, that number is over 630.

FAANGs as a percentage of total S&P 500 Market Capitalization

2019: 13%
2018: 11.4%
2017: 10.5%
2016: 8.2%
2015: 7.6%
2014: 6.1%
2013: 5.2%
Market Concentration Creates Vulnerability
The rush into ETFs has created a massive concentration in a select group of large-cap equities, especially the FAANGs and other big tech stocks. According to the Wall Street Journal, in 2019, 85% of total US profits came from the top one hundred largest firms. In 1999, this was only 52% and in 1979, it was a mere 46%.
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Dollars, Elections, and Gold

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For the last five years, the Bloomberg Dollar Spot (BBDXY) hasn’t moved an inch:

June 2019: 1200
June 2018: 1200
June 2017: 1200
June 2016: 1200
June 2015: 1200

The Great Hide-Outs
Today, the crowding in US Dollar assets is the antithesis of the emerging market lovefest circa 2006-7. Prior to the Great Financial Crisis, investors were flooding into emerging markets as US data began to deteriorate, leading EM being perceived as a safe-haven. “They’re building 100 Chicago’s in China don’t you know?” The consensus view was emerging markets had ‘decoupled’ from the US. EM bulls touted that neither Bear Stearns’ collapse nor the struggling and over-levered Lehman Brothers mattered — emerging markets were the ‘safe place’. High kites indeed, last 10 years the S&P is up 267% vs. the iShares China Large-Cap ETF’s paltry 31% for the on a total return basis. However, once the US-born recession washed-over on emerging market shores, the flood of foreign capital rushing back into the US Dollar was colossal. In our view, the opposite dynamic is playing out today. A global trade triggered slowdown is causing investors to hide out in US assets (S&P 500, Treasuries, USD). We believe a capital flood out of the US is on our doorstep.

*Nine Fed rate hikes and $500B balance sheet reduction also had a ton to do with the 2018-19 dollar surge, inflicting pain across a world with over $50T of dollar-denominated debt. Remember, there’s $62T of GDP outside the USA, $18T inside. The Fed essentially blew up the global economy twice in 2016 and 2018 with an aggressive policy path. They’re attrrocious risk managers.

US Economic Risks Catching Up with the Rest of the World? 

We’ve been told time and time again that “late cycle” dollar moves have historically shown strength in the face of adversity — see 2008. Most people forget trillions of US Dollars were hiding out in “decoupled” emerging markets prior to the Great Financial Crisis. A decade ago, thanks to toxic risk assets in the US banking system, investing outside the country in emerging markets was literally considered the “safe haven”.

A decade later, we all know now the decoupling myth didn’t hold. In 2008, capital began flocking back to the USA once the crisis oozed around the world and global economic risks surged. On the other hand, the 2016-19 period has been loaded with global economic risks: currency devaluations, trade worries, and plunging PMIs (purchasing manager indices). As a result, trillions have been hiding out in the USA in technology stocks like the FAANGs (Facebook, Apple, Amazon, Netflix, and Google), passive asset management (over 600 ETFs own FAANG stocks as a top 15% holding), short term US Treasury debt. Downside risks to these assets have surfaced. Today, we’re seeing some major capital outflows from the US — the Dollar is in trouble. Case in point, the yield advantage of short-term US Treasuries (2-year bonds) relative to their German counterparts has moved from 3.55% to 2.55% over the course of the last seven months. From a yield advantage perspective, there are far fewer reasons to hang out in USD.

Elections and the US DollarHeading into the 2020 election, there are few things Treasury Secretary Steven Mnuchin, OMB Director Mick Mulvaney, and of course President Donald Trump want more than a weaker Dollar.  It’s probably not too much of a stretch to say that the Dollar’s 2014-2016 surge delivered Michigan, Wisconsin, and Pennsylvania to Trump on the back of undermined manufacturing and exports (see above, DeadZone). The President clearly knows this and it’s part of the reason for his regular tweets and comments lamenting Powell’s interest rate hikes. USD bulls — beware!

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Gold’s Move Lower into Rate Hikes
As rate hikes go, gold has plunged into every single one of them since 2015. Today, the investors are obsessed with rate cuts coming down the pike, we’ve come a long way, baby. The probability of a Federal Reserve interest rate cut this June has moved from just 5% to 30% over the course of the past week. Now that investors are anticipating a total 180-degree turnaround from the Fed, precious metals are surging on the prospects of central bank love and accommodation. Thanks, Jay (Jerome Powell, Chairman of the Fed Board of Governors)…

Stimulus in Europe and a Buoyant Euro

One development we see going forward is a US focus on monetary policy due to gridlock in Washington. At the same time, the rest of the world (RoW) is shifting toward the fiscal side. Today, in Europe, we’re seeing Deputy Premier Salvini — de facto the most popular political force in Italy — pushing a flat tax and massive deficit spending despite EU rules. Meanwhile, Germany is likely heading toward a fiscal stimulus package focused on infrastructure to make up for lagging growth in manufacturing and Southern Europe’s economic woes. Recent elections, especially those to the European Parliament — in which populists increased there vote share from 21% to nearly 30% — have shocked European leaders. As Europe’s economic engine, Germany led by Chancellor Angela Merkel is desperate to keep the economy humming along by any means necessary so as to avoid continued populist success at home and across the continent.

Fed and ECB Policy Will Run Gold Wild vs. StocksGold just loves a good Fed cave-a-thon. Take a look above at its remarkable performance against the S&P 500 during rate cutting and hiking cycles. We see more love coming for the gold bulls versus stocks.

Fast Money Approaching

Fed monetary policy expectations and fiscal stimulus out of Germany and Italy are clearly a Euro positive and thus yet another USD negative. From a technical analysis standpoint, gold has to get above the $1375 per ounce mark convincingly in order to break the back of its near decade-long bear market. After that, silver junkies will join the party and it all goes hyperbolic. To be continued…

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The Dark Side of FAANGs: Crash Warning at DEFCON One

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This blog was published on July 20th, on July 26th Facebook plunged 22% on record volume, $120B was wiped out in one day – the largest single stock incident of wealth destruction on record.

Market breadth — “a method used in technical analysis tries to determine the direction of the market. Positive market breadth occurs when more stocks are advancing than are declining and suggests that the bulls are in control of the market’s momentum. Conversely, a disproportional number of declining securities is used to confirm bearish momentum.”

-Investopedia

“If I could avoid a single stock, it would be the hottest stock in the hottest sector”

Peter Lynch, Portfolio Manager of the Fidelity Magellan Fund 1977-1990

The Fab Five: FAANGs Equities (Facebook, Apple, Amazon, Netflix, and Google)

One of the golden rules of market analysis is found in true underlying breadth.  Looking at U.S. equities today, there’s burning question; how many stocks have really been invited to this party? Every day we hear about markets hitting new highs, despite the fact that the S&P has been wrapped around 2800 since January.   Above all, beneath the surface, there’s something far more disturbing.  Our Index of 21 Lehman Systemic Risk Indicators has risen to its HIGHEST level since the summer of 2015.

Enjoy our segment on CNBC with an analysis of the FAANGs.

S&P 500 Index Price

July 20: 2800
June 13: 2800
Mar 13: 2800
Jan 16: 2800

Bloomberg terminal data

The Fatal Passive Overdose, BEWARE!

Since 1993, capital shifting into passive asset management is up 161x, this compares to only 7x for active management.  Nearly $7T is now positioned in passive asset management, over $2T of this money has arrived in the last five years.  Why does this matter?  Passive asset management is simple ownership of the market through index funds, the capital MUST be fully invested and has been the fuel behind the toxic run-up in FAANG equities.  Let us explain.

One Large Beast

Looking at the passive asset management orgy, there’s no better example than the Fidelity Magellan Fund.  Famously known as the largest mutual fund on earth in the 90s, what became of this beast is nothing short of remarkable.   With assets north of $100B back in the year 2000, today he sits as just a shell of his former at $17B.  The most shocking part of this story is found in the explosive asset formation in Fidelity’s S&P 500 (Passive) Index Fund.  Assets in this giant have climbed to more than $153B, with $21B forced into  FAANG equity ownership.  As a market-weighted, passive index fund there is no choice or selection process, this beast MUST own these FAANGs – a colossal failure of common sense indeed.  It’s NOT Fidelity’s fault, they’re just offering another index fund the mad mob wants to invest in.  This is just another example of a classic, late-cycle development often found in tired bull markets – the hot money chase indeed.  As more and more capital flows into passive index funds, more and more FAANG shares MUST be owned.  Returns appear far better than the rest of the market’s offerings, so even more capital flows in – it’s a toxic, self-fulfilling cycle – when broken the declines will be HISTORIC.

Largest Weekly Fund Capital flows into Technology Equities All-Time

Jan 2018: $2.4B
May 2018: $2.2B
Dec 2017: $1.9B
Nov 2017: $1.2B
Nov 2016: $1.0B
Jan 2012: $900m

EPFR data

While FAANGs Boom, the Rest of the Market is Left BehindIn early June, the number of NYSE stocks at their 52-week highs started to move sharply lower, breaking the trend (see above) with the price of the FAANGs equities (Facebook, Apple, Amazon, Netflix, and Google).  Since January, while Netflix and Amazon have gone up 67% and 38% respectively, while the number of NYSE stocks at their 52-week highs has declined from 341 to 177 in June – to now just 71!  Bottom line, the divergence between the few (just 5 stocks) FAANG equities, and all the rest of the market presents a crystal clear example of negative breadth. This growing disparity in the markets extends to real economic terms as well.

Profits in the Hands of the Few

According to an analysis conducted by the Wall St. Journal, in 1978 the percentage of profits coming from America’s 100 largest companies was near 46%, today we’re approaching 85%!  The inequality decade has some very ugly side effects, doesn’t she?  The clock is ticking here, G10 countries have VERY large aging populations.  Indeed there are some bills to pay.  In the U.S., Medicare will run out of money far sooner than most expected, and Social Security’s financial problems can’t be ignored either.  This month, the U.S. government said in a sobering checkup on programs vital to the middle class – Medicare’s available cash is dwindling at an alarming rate.   Per the LA Times, the report from the program trustees says Medicare will become insolvent in 2026 — three years earlier than previously forecast. Its giant trust fund for inpatient care won’t be able to fully cover projected medical bills starting at that point.  As populism continues to march forward, we expect the FAANGs to have a VERY large target on their back in the months and years to come.  Somebody has to pay for these mathematically unsustainable promises made by politicians, and we’re looking at you FAANGs.

Is that Your Fair Share Amazon?

Even with the dire straights of U.S. unfunded liabilities (Medicare, Medicaid, Social Security), only 12.9% of Amazon’s profits went to federal, state, local and foreign taxes from 2007 through 2015, per S&P Global Market Intelligence.  In ugly fashion, that’s half the average amount S&P 500 companies paid over the same period.  Look for populism’s surge to take a large bite out of Amazon in the near future.

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Jumping into Bed with a Greater Fool

At the very end of the day, an investment in FAANG equities today involves jumping into bed with the greater fool theory.   Sure, there’s always late cycle dumb money pushing prices higher, but 2018’s toxic ingredients have come together and forged an atrocious risk-reward in these overstuffed equities.

Wall St.’s Research, a Lesson in Crowded Trades

General George S. Patton once said, “if everyone is thinking alike, then SOMEONE isn’t thinking.”  Wall St.’s “brain trusts” have 182 buys on FAANG equities and just 7 sells, this gives a colossal failure of common sense new meaning.  Highly reminiscent of the late 1990s indeed.

Wall St.’s Change in 12 Month Price Target in 2018*

January vs. Today

Facebook $FB: $210 v $228
Amazon $AMZN: $1305 v $1930
Apple $AAPL: $189 v $199
Netflix $NFLX: $212 v $371
Goole $GOOGL: $1180 v $1270

*Consensus of over 35 analysts, Bloomberg data.  One of the biggest problems with Wall St. equity research is found in their favorite past time, performance chasing.  In terms of job security, they believe there is safety in numbers.  As a result, the sheep move in lockstep together.  Analysts tend to move up their price targets as the bull market picks up steam.  At the end of the day, often times the little guy is left holding the bag as price targets rise, and rise again.  More and more of the crowd gets sucked in at higher prices.  There’s little focus on risk-reward at nosebleed price levels.

Wall St., A Love Affair with the Few

“The market cap of the five biggest stocks in the S&P 500 is now almost exactly equal to the market cap of the smallest 282 S&P 500 companies. Both come to just under $5.1tn. Today’s chart of the day shows that a six-member FAANMG sector (FAANGs + Microsoft) would at this point be comfortably bigger than any of the 11 economic sectors into which the S&P is divided.”

-Financial Times

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FAANGs Crushing the Rest of the S&P 500

This speaks to fleeting market leadership and above all, a very unattractive risk/reward facing investors today. We’re talking about an indicator of market health here and for right now, even with all the glorious headlines, we’re looking at a sick patient.

In our view, the FAANG stocks are massively overvalued and thus ripe for a massive roll-over.  before year-end in our view.  Even a relatively minor downturn in the market as a whole could wreak havoc on the FAANGs.  And as stated earlier, the disproportionally high number of equities declining in price is hidden by the FAANGs.  What’s worse is that such a rollover would have massive implications for some of the market’s largest asset management firms.

Inflows of into Passive Management Funds and ETFs (Exchange-traded-funds)

There are 605 ETFs which hold FAANG equities as a top 15% position in the fund!!!!  This has to be the most crowded trade in the history of financial markets – just five stocks make up most of the ETF universe, lookout!

ETF Ownership of FAANG Equities

2018: 605
2017: 501
2016: 430
2015: 332
2014: 277
2013; 230
2012: 175
2011: 101
2010: 62
2009: 14
2008: 9

Just five stocks as a top 15 holding in 605 ETFs, think about that… ETFDB data

 In January Alone – Passive Asset Management Inflows
2018: $105B
2017: $68B
2016: $18B
2015: $22B
Each month as capital flows in, FAANGs must be purchased.
Dislocated from Reality

Around 20 years ago, nearly all of asset management was active. Fund managers would buy and sell equities using personal judgment and research.  In the last five years, trillions have flown into passive management, where managers place funds into market-cap-weighted ETFs and indices in an attempt to capture the momentum of the market, without doing research. While equally-weighted indices own all stock equally, market cap weighted-funds are more heavily weighted to larger-cap stocks (S&P (passive) Index Funds, for instance, are heavily weighted to FAANG stocks.  A closer look shows; 3.8% Apple, 3.1% Amazon, 3.1% Google A 3%, Google C 3%, 2% Facebook and nearly 1% Netflix.  That’s 16% of the index in just five stocks). Thus, the rise in passive management has made FAANG stocks more dislocated from reality, as passively-managed funds are disproportionately forced to own them. Thus, the explosion of capital into passive funds has been forcing more and more capital into fewer and fewer stocks.  This will end in tears – SELL Mortimer SELL!

Facebook’s Largest Holders
Vanguard 170m shares
BlackRock 147m shares
Fidelity 122m shares
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UK Political Risk: Points to a May Summer Exit

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Resignations in May’s Cabinet will Topple Government in Our View

This weekend was punctuated by news of major resignations from within British Prime Minister Theresa May’s cabinet by Secretary of State David Davis and Foreign Secretary Boris Johnson. These came in response to Friday’s controversial “Chequers Agreement,” which many pro-Brexit figures saw as a betrayal and an arrangement that kept the UK far too close to the EU and its regulatory power.

Bearish Bets on the Pound Mounting
Net shorts are piling in, bets against Sterling on the rise.

Elections in the Offing?

This strong rebuke from two high-profile members of the “Leave” camp demonstrates in the strongest possible manner a continued dissatisfaction amongst more hard-line Conservative MP’s on the Prime Minister’s handling of Brexit. We believe this also foreshadows a “no confidence” vote within the next three months, the removal of Theresa May from office, and potentially a new round of General Elections.

Theresa May Exit Date Odds:
Betfair: 1/1 (by Sep. 2018)
SkyBet: 10/11 (by end 2018)
Ladbrokes: 4/6 (by end 2018)
Coral: 4/6 (by end 2018)
$markets: 5/6 (by end 2018)

“The betting on her exit date has moved very sharply from a 26% chance on Betfair [Sunday] morning that she’d be out this year to a 55% chance now [on Monday].” -politicalbetting.com

UK General Election in 2018 Odds:
Betfair: 6/4
SkyBet: 13/8
Ladbrokes: 7/4
Coral: 7/4
$markets: 23/10

Pound Breaks its Recent Trend
We take a negative view on the GBP and UK Equity for the next six months. The Pound (GBP) has taken a significant hit recently on the back of uncertainty regarding the status of negotiations on the EU-UK post-Brexit agreement. The increased risk of a domestic government meltdown and a May exit will only serve to further compound this bearish trend.

No Confidence

A “no confidence” vote in the House of Commons from May’s own Conservative MP’s will have a substantial market impact, as it would hint toward a “harder,” more pro-Brexit successor. Such a person would almost certainly be more opposed to the UK remaining in the EU common market, causing even greater upset to the UK market due to greater trade worries.

If the Conservative Party (Tories) is unable to agree on a pick for Prime Minister following a successful “no confidence” vote, general elections will follow. We determine that the risk of a Labour victory will weigh on UK Equities and the Pound in such a scenario, as a government under big-government, high-tax Labour leader Jeremy Corbyn would prove unfavorable for markets. Such a scenario could also imperil the current state of affairs when it comes to Brexit negotiations, with substantial market impact.

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