Weekly Comment - June 25, 2018

Jun 22, 2018 | Nick Foglietta


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Perceptions can change and when they do, valuations will matter

American BULL Markets

The following graphics were taken from the “Visual Capitalist” publication last week. I don’t follow this publication, but it is often retweeted and I thought you might find these two graphics informative.

The first graphic lists the post-WWII BULL markets.

Notice that in two months the present “post-crisis BULL run” will become the longest of all those bull markets listed.

It kind of amazes me when I hear people say we must be close to the beginning, rather than the end, of this BULL market when I see the graphic above.

The next graphic does a nice job of quantifying and chronicling the American Bull markets:

Let’s see what the future holds when it comes to the length of time left in the aged BULL from the March 2009 bottom. 

“FAANG”

The acronym stands for “Facebook, Amazon, Apple, Netflix, Google (Alphabet)” and these companies have represented an incredible change in the way life is lived in the modern world. 

Wall Street is fascinated by which one of these companies will become the first company to be worth $1 trillion by market capitalization.

What is more interesting to me is to see how much of the US stock market performance has been based in these FAANG stocks “race to $1 trillion.”

Now that type of outperformance is absolutely 1999ish in nature!

Imagine the blue line performance taken out of the magenta line performance. 

C’mon Nick, you’re not saying the FAANG stocks of today are like the “1999 FAANG” of Cisco, Microsoft, Intel, Oracle, and Nokia of 1999/2000 fame are you? Not necessarily, but let’s look at the comparison.

                                 1999 FAANG” statistics                  2018 FAANG statistics

NASDAQ level                5132 (peak)                                          7750

Market Cap                      $2 trillion                                        $3.96 trillion

P/E ratio                             120                                                    120*

*PE ratio in 1999 was GAAP earnings and without significant buybacks.  2018 is using adjusted earnings and massive stock buybacks.

So to be clear, the NASDAQ Index is only 50% higher than it was in 1999/2000 yet, the top 5 stocks make up 100% more of the market cap AND they are just as expensive on a P/E ratio basis. 

Let me include a few more statistics about FAANG stocks to grab your attention:

  • The five FAANG companies are worth 2.2 times what the entire universe of Canadian listed companies are worth.
  • The five FAANG companies are worth more than the entire German stock market or nearly the same as the entire British stock.
  • The CEO of Amazon, Jeff Bezos and the CEO of Facebook, Mark Zuckerberg have a combined net worth of $220 billion.  That number is equal to 15% of Canadian GDP.

There is no easy way to compare the two generations of technology market leaders in terms of what they actually do, but it is easy to make the case that the world cannot exist without the FAANG stocks of today. I would argue the same could have been said of Microsoft, Oracle, Cisco, Intel and Nokia in 2000. 

Maybe all the data the present tech leaders mine and sell is worth their present price tags? Or maybe not? History bares out that it is not the business models that get out of whack…it is what people pay to own those models that gets messed up.

My purpose for writing this little vignette is to make you aware. 

These stocks are ridiculously expensive as stand-alone companies compared to historical valuations. It requires a “brave new world” data driven scenario to allow these companies to grow into their price tags.

That said, never underestimate the ability to grow a bubble higher!

Let me just throw one little change at you for an example of how fast this could change. 

What if China said tonight that it would no longer supply Apple with all the components needed to build their phones and computers? 

Wow, would that be a crazy thing?

Anyway, point being is that perceptions can change and when they do, valuations will matter.

A Few More Charts

Doug Short updates the following chart quarterly.  It is considered “Warren Buffett’s favourite chart relating to long term value for US stocks.” The components are listed in the top, left corner of the chart if you wish to understand how it is created.

The next chart is a five year picture of the “smart money index” (SMI) in the US. The smart money index is created with the “belief” that smart money trades in the first and last hour of any given day. The formula used to create the chart is:

Today’s SMI = yesterday’s SMI – opening gain or loss + last hour change

My comment is simply something changed at the start of 2018.

The next chart is from the Ned Davis group, and it shows how large of a percentage stocks make up of a household’s net worth (pension included). Again, this is making the point that we are near all-time extremes in this measurement of household asset mix.

The next chart changes gears a little bit.

The US has been an incredible job creator over the past 30 years, but how those jobs have been created has changed drastically. Check out the chart below to see how the job engines in the US have shifted up to larger and larger companies.

Finally, let’s take one more look at the flattening yield curve in America. I have written a lot about the fact that the 1-year US bond yield is catching up to the 10-year US bond yield in past months, so this is just an update of the ratio for you.

Note: the top section of the chart shows the US 10 year bond yield – the US 1 year bond yield. The bottom shows the graphic representation of the yields of both bonds individually.

 

Have an awesome week!

Nick