Buy the FAANGS Baby! Slow Torture?

Here an amusing MarketWatch Opinion: Now that FAANG stocks are crashing, which are undervalued?

by Mish

That title, by Thomas H. Kee Jr., a former Morgan Stanley broker and founder of Stock Traders Daily, says quite a bit about market sentiment.

Let’s Investigate.

Central bank capital infusions dating back to 2013 are exactly what caused this asset bubble, and the liquidity injections have not stopped. This bubble will burst, but probably not today, and the recent selling in FAANG stocks does not appear to be a precursor to an impending market crash.
Looking at the stocks as a group, their influence on the market is tangible, but they have very different relative valuation metrics. For example, Facebook has an immediate and relatively exceptional valuation while Amazon is at the other end, and has virtually no value at these prices.
In between, Apple lacks immediate value, while Netflix is fairly valued, and Google will likely demonstrate an oddity in earnings growth in calendar 2017 that will not be resolved until 2018, distorting its immediate fair value.

Bubble Mentality

I congratulate Kee for having the fourth-best-performing strategy in the world in 2016, according to HedgeCo.

At the same time, I find it interesting to note that Kee knows full well that stocks are in a liquidity bubble that will end, and he is willing to buy the alleged dip in this very real bubble.

I also find it amusing as to what allegedly constitutes a “crash” these days.

Google

Kee labels Google’s valuation as “excessive”. I certainly agree, but here an amusing alternate P/E evaluation as provided on Nasdaq.Com, anecdotes in blue are mine.

Reflections on Bubble Peaks

  1. At bubble peaks, most believe there is a “new paradigm” not a bubble.
  2. The bubble believers think they can escape the bubble, but they cannot.
  3. When bubbles burst, even most bears get sucked in, buying stocks too early or getting annihilated in short squeezes due to emotion or leverage.
  4. At market bottoms, few like stocks.

Slow Torture

Demographics will make the next crash, assuming there is a crash, much worse. But I expect something far worse than a crash: Slow torture.

Imagine a market where stocks decline 15% year-over-year, then rise 5%, drop 15%, rise 6%, drop 5%, rise 8% then drop another 12%.

With constant Fed intervention coupled with a Boomer need to cash out for retirement, and millennials sitting the whole thing out, such a slow torture scenario should not be far-fetched, even if you believe it unlikely.

Mike “Mish” Shedlock

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