Time to Short the Fangs?

Most investors know popular indexes like the S&P 500 and Nasdaq Composite are usually capitalization weighted. The biggest companies by market value have more influence on the index change. The Nasdaq leaders are commonly referred to as the FAANG stocks – Facebook, Apple, Amazon, Netflix, and Google. It’s easy to forget just how much influence these five stocks have, along with Microsoft.  This graphic shows the Nasdaq Composite’s component companies as bubbles whose size denotes their share of the index.

We see how a handful of companies dominates the index. More interestingly, those whose names are big enough to read are almost entirely tech-related. Even Amazon, a giant online retailer, is also a key technology provider through its Amazon Web Services unit. Many pundits are saying that a market so dominated by a few companies from one or two sectors is not historically normal and that this represents a bubble, similar to 2000, that is about to burst.

Let’s put rhetoric aside a take a quick closer look at the FAANGS.Stocks are evaluated on their earnings, specifically their future earnings over the next five years. Not their earnings from the past or even the most recent quarter. Yes most stocks look terribly overvalued based on this year’s earnings. But let’s look at the P/E ratio for the FAANGS based on next years earnings estimates.

For comparison, the S&P 500 forward earnings, from www.ycharts.com is 21.94

Facebook – 24.60

Apple – 26.06

Amazon – 82.72

Netflix – 56.24

Google (now Alphabet) – 28.41

At first glance 2 of the 5 FAANGs seem relatively well valued. I’d certainly pay more for both Apple and Google than for the “average” stock on the S&P 500. Neither, it would seem have been overly affected by the COVID pandemic. That cannot be said about Amazon and Netflix. Both companies have seen growth and earnings increase dramatically from the shelter in place COVID lifestyle. The question is whether we will continue to binge watch Netflix and order everything from Hershey bars to new TV’s from Amazon once we feel safe to venture out again? They seem very overpriced in a post COVID world. Facebook is a tough one. While I think their valuation is reasonable, I do not think they will fare well through the election process. They are certain to be criticized by both sides for what they do and what they do not publish on their site. If advertisers continue to leave, Facebook could be in for a tough remaining 2020. Question is whether that will carry further into the future.

Back to the point, is it time to “Short” the FAANGs? Shorting is simply a way to sell stocks now but benefitting from a future price drop. Most of us would not actually “short” the FAANGs. But we do have the option to buy a mutual fund or ETF that does (not advisable) or just not own them now to avoid potential problems later. In fact we may be seeing a rotation from the Nasdaq leading the market to either the DOW or S&P 500 taking over leadership.

This is an example of the problem with Index investing. If you own a fund or ETF that invests in the Nasdaq index your fate is tied to he FAANG stocks. Period. And there are certainly stocks to avoid in the Nasdaq beyond a couple of FAANG stocks. But there are many really good companies too. And even if these company’s stocks outperform, that performance could be wiped out by a few percentage point losses in the largest FAANG stocks. Make no mistake, the FAANGs move the Nasdaq.

Investment Outlook

At 401 Advisor, LLC we believe in proactive asset management. Too many people seem to think the only options to an investor are to hold stocks or sell them. We prefer a more subtle approach of finding areas of opportunity and selling areas the present a higher risk. We will be watching the three major indexes and if we see this rotation away from the FAANGs we are prepared to rotate our client holdings as well.

We currently hold QQQ in our client portfolio’s and may hold QQQE. Please feel free to contact Jim or myself if you have questions or would like to discuss your investment portfolio and stratgy.

Mr. DeShurko is the Managing Member of 401 Advisor, LLC an independent registered investment advisor. Jim Kilgore CFP ® is an Investment Advisor Representative of 401 Advisor, LLC. They are also registered representatives of Ceros Financial Services, Inc. (Member FINRA/SIPC).  Ceros is not affiliated with 401 Advisor.  The views expressed are those of Mr. DeShurko and do not necessarily reflect those of Ceros Financial Services, Inc., its employees, or affiliates.

Past performance is no guarantee of future results. All investing involves risk. Investments mentioned are not meant to be specific buy or sell recommendations without being taken in the context of an investors’ entire portfolio or investment objectives. Consult an investment professional before investing. 

And be sure to check out Jim’s new podcast:https://podcasts.apple.com/us/podcast/401-advisor/id1511923745

Market rally market crash

Tax Strategies for Retirement

https://www.podbean.com/media/share/pb-ku6e3-e393a8

In this episode, Jim Kilgore CFP® discusses some strategies to reduce and in some cases eliminate taxes in retirement. #cfp #retirement #taxplanning

And the Dam Bursts…

Like an Orc being washed away by the waters behind the dam after its destruction, markets shorts are finding it equally hard to find their footing.

While many market pundits keep talking down the economy and scream that the market is “overvalued” leading to crash comparisons to (you choose) 2000-2002 Tech Wreck or the 2008-2009 Financial crisis, the market continues its upward trend.

Should investors be fearful? We think not. This has the makings to the start of a truly historic bull run. It may end ugly when it ends, but that could be a long way off.

Let’s look first at the economy. Readers should be familiar with the work done at www.econpi.com as I referenced it many times in the past. Quick refresher, http://www.econpi.com does a nice graphic for where the economy is, and by looking at past graphs you can clearly see where the economy came from.

“It’s the Economy, Stupid”James Carville

First, here is where the economy was prior to the Covid 19 outbreak:

The Red MOC – Mean of all the data coordinates and the Green LD – Leading Indicator plots are in the economic expansion quad.

The average for June:

Clearly in recession for both May and June.

And here is the first week of July:

We have moved into the recovery quad. This is a big incremental change in a week. While there is concern about the closing of the economy, most seem to agree that with masks and social distancing most businesses other than bars and fitness clubs will be opening, even if on a limited basis. Many pundits claim that business will take years to return to normal. I strongly disagree. The flood of consumers to beaches, restaurants and bars indicates to me a consumer that is desperate to return to their normal lives. The biggest exception I see is the airline and cruise industries.

“Don’t Fight the Fed”

Probably the one universal piece of advice to follow as an investor. This is from Fed Chair Powell,

“The Federal Reserve is strongly committed to using our tools to do whatever we can for as long as it takes to provide some relief and stability to ensure that the recovery will be as strong as possible and to limit lasting damage to the economy… The Fed will continue to use these powers forcefully, proactively, and aggressively until we’re confident that the nation is solidly on the road to recovery.” (Congressional Testimony on 6/30/20)

How forceful? The Fed has already announced the creation of facilities to buy corporate bonds, asset backed securities, ETFs and now they have directed Blackrock to buy individual securities for the Federal Reserve account. None of which is allowed by Fed charter. And thus the above reference to the dam breaking. The Fed has literally unlimited resources to print money with the apparent adoption by this administrations of Modern Monetary Theory. There is no theoretical limit to money printing until the economy reaches full employment again. The dam has literally broken.

But let’s hear it from someone else, hedge fund billionaire and owner of the Milwaukee Bucks Marc Lasry in a Market Watch interview,

‘I know you’re not supposed to say this, but it’s a once-in-a-lifetime opportunity. You’re not going to see this again: Where you’ve actually got an economy that’s fine, and you’ve got a Fed pumping trillions of dollars in.’

Negatives? As always there are concerns, and the prudent investor needs to remain wary. Expect volatility especially over the next couple of weeks as earnings are announced for the second quarter.

The market is building up fuel like a California Forest waiting on a lightning strike to set it off. The lightning for the market? Hopefully a treatment or vaccine for Covid 19 that is actually available to the public.

Warning

How volatile the market is over the next six months is anyone’s guess. Between constant Covid 19 news, the election, riots, and protests daily gyrations could be severe. I personally think the biggest test will be if schools open and remain open in the fall. No schools and no football will be a huge psychological blow. If you have cash on hand now we strongly suggest picking and choosing several entry points over the next few months. No one can predict the short term, but the longer term outlook is looking very bullish.

Mr. DeShurko is the Managing Member of 401 Advisor, LLC an independent registered investment advisor. Jim Kilgore CFP ® is an Investment Advisor Representative of 401 Advisor, LLC. They are also registered representatives of Ceros Financial Services, Inc. (Member FINRA/SIPC).  Ceros is not affiliated with 401 Advisor.  The views expressed are those of Mr. DeShurko and do not necessarily reflect those of Ceros Financial Services, Inc., its employees, or affiliates.

Past performance is no guarantee of future results. All investing involves risk. Investments mentioned are not meant to be specific buy or sell recommendations without being taken in the context of an investors’ entire portfolio or investment objectives. Consult an investment professional before investing. 

And be sure to check out Jim’s new podcast: https://podcasts.apple.com/us/podcast/401-advisor/id1511923745

 Please email either of us with your questions and we will address them on future podcasts.

Where Do We Go From Here

https://www.podbean.com/media/share/pb-wv5k2-e1fe5f

In this episode, Jim Kilgore CFP® discusses what’s going on in the market and the traditional 60/40 portfolio.

The Good, The Bad, and The Ugly of Annuities

https://www.podbean.com/media/share/pb-5hapy-e13014

In this episode, Jim Kilgore CFP® discusses the good, the bad, and the ugly of annuities and what you should look out for when a product salesman is trying to push an annuity into your financial life.

Retirement Income Maximization

https://www.podbean.com/media/share/pb-5ak86-e062aa

In this episode, Jim Kilgore CFP® discusses ways to maximize your retirement income and the strategies and tools we use at 401 Advisor to give you the absolute best options when spending your retirement savings.

Surviving A Bear Attack

https://www.podbean.com/media/share/pb-c6964-df9886

In this episode, Jim Kilgore CFP® discusses how to survive a bear attack!  Not an actual bear attack by a grizzly or black bear but one involving the stock market.  Working with a financial planner often involves them helping you navigate the emotional ups and downs of at least a couple of bear markets.

Getting to The Zero Percent Tax Bracket In Retirement

https://www.podbean.com/media/share/pb-nhudn-dedb75

In this episode, Jim Kilgore CFP® discusses whether or not it is possible to be in the zero percent tax bracket in retirement, and if so how to do it. 

Why You Should Want A Fiduciary

https://www.podbean.com/media/share/pb-npvzz-de173d

In this episode, Jim Kilgore CFP® walks through what a fiduciary advisor’s requirements are and why it is important for you to know the difference between the fiduciary standards and that of non-fiduciaries.

Social Security-Your Most Important Decision

https://www.podbean.com/media/share/pb-6uyic-dd582a

In this episode Jim Kilgore CFP® talks about how your Social Security claiming strategy can and will have a significant impact on your benefits during your retirement and just how important the decision really is.


bill@401advisor.com • 937.434.1790

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Charles H. Dow Award Winner 2008. The papers honored with this award have represented the richness and depth of technical analysis.

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