July 23, 2020

The Demise of Neutral

Much of the current narrative regarding the broad indexes, particularly the gap between the performance of the NASDAQ and the other, has often provided as much of a gap as the market itself. Either flippantly bullish with disregard for either fundamental nor any other conditional valuations or angrily bearish because of the disregard for those same fundamentals and historically bonified valuations. Neither takes into consideration that maybe something is different this time and that by all measure the technical condition of the primary NASDAQ stocks is overbought and now is the time to be neutral and let the narrative play out. And in my opinion, I like the talk but often refrain from listening.

Technology as a group is trading down this week and Amazon (AMZN), Apple (AAPL), Facebook (FB), Alphabet (GOOGL) and Microsoft (MSFT) have a problem. However, in my opinion that problem is less about proof of valuation, much better when their earnings are clearer, but rather the enormous outperformance their respective shares made worse by the endless comparisons with so many less relevant companies. But this week those names have declined amongst increasing smug declarations of tech supremacy in their attacks. In short, there is definitely a case to sell and I feel it plays to the growing army of Pindudes and speculators hungry for exploitation. For us, I’ve been active in reducing some risk in the portfolios by trimming a few overbought holdings to the original allocations, to be clear, I’m not trimming the allocation.

While the Analyst community are finally coming to their senses regarding their reckless weekly increases of corporate price targets based on little more than the comparative momentum of the stocks they cover. But a market correction that comes the heels of the aforementioned technical condition of the broad indexes and the expectation of another stimulus package, the correlating economic deterioration has not necessarily followed. Since last week Retail Sales showed an increase of 7.5% with May receiving a positive 18% revision.  This week, on the back of demographic shifts taking place from urban to suburban living saw Housing Starts increase 17.3%. this was reinforced by yesterday’s rise in Existing Home sales of 20.7%. Today The Leading Economic Index (LEI) increased 2.0% in June, its second gain in row (3 positive months supports expansion/ 3 negative months supports recession). These are welcome outcomes of data but should be considered with uncertainty as to whether they reflect a rebound or simply catching up from a depression style low.  The latter makes more sense, since the total of economic growth is very uneven. And with so many parts of the economy yet to open even marginally there is still a lot more that has to happen with the pandemic, and as indicated in today’s rise in unemployment claims of 109K,  for the first time in 16 weeks, is what it may mean of the unemployment data to be released on August 7th, Even the experts aren’t especially reliable for comfort.

External Events
Four of the big Tech CEO’s are going to be testifying in front of congress on Monday regarding accusations of antitrust behavior. Everything from exploiting their brands to take advantage of app developers and other partners, unrestrained acquisitions to preserve dominance in social media, to spying on the competition for sales ideas. At first glance the accusations are for the kinds of behaviors that are not tame but are questionably not necessarily illegal either. Apple has a global presence and it’s been more profitable from being more aesthetically disruptive, then directly challenging its competitors (think Coke & Pepsi). Facebook was doing what I’ve watched companies do my entire career as an analyst, don’t strategize for the future, buy it. And who can argue that Amazon hasn’t had a negative impact on small retail, but most small to medium retail knew what to do and now internet sales represent a significant part of their balance sheets. There are even companies such Shopify (SHOP) and Square (SQ), with their own impressive market caps that have elevated the capability. To be clear, I’m not against the braking up of tech companies, particularly the social media companies. But overall the notion that the value of those companies is lost in a breakup, or consistent with the antitrust need for competition, the outcome would be enhanced competition and could be the source of some interesting new companies to invest in and perhaps even a quitter internet. As far as vilifying them for the purpose of political expedience, my reaction to all this is, oh my goodness, this is tech and they sound like hard core capitalists, tell me it’s not so?

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