Markets in Turmoil (Not Really)
Can you keep a secret?
Just between us, I love everything about this tech selloff.
Let me count the ways to my heart:
- I love that it came after the Nasdaq-100 rallied 6% from the May 18 low to Friday’s high
- I love that it came exactly a month after the strong earnings results by market darling Nvidia (NVDA), one of my best picks to date. At Friday’s high, Nvidia was up 64% in a month and riding several new sell-side price target increases, including one touting its processors as essential gear for mining virtual crypto-currencies
- I love that the apparent prompt for the selling was a piece by the “chief equity strategist” at Goldman Sachs comparing today’s tech valuations to the Nasdaq bubble and warning of “positioning extremes, factor crowding and difficult-to-decipher risk initiatives”
- I love that this was seized upon by trading algorithms, which proceeded to immediately do their thing, and then by the charlatans over at Zero Edge, who eventually proceeded to do theirs
- I love that some of the money liberated from those awful cash-hoarding techs was immediately rotated into the lagging, perpetually cash-poor energy sector
- Finally, I love this quote: “The euphoria’s gone,” said … a portfolio manager… “We went to the party and really whooped it up, and now we have a hangover.”
Well, OK, cheating a little on that last one. That was actually said by someone after the Nasdaq fell almost 4% (vs. a pedestrian 1.8% Friday) on Feb. 1, 1999. As we now know, that was an omen of the things to come; specifically the Nasdaq not gaining more than the 86% it actually gained that year. Five months earlier the Nasdaq dropped 8.6% in a day amid the fallout from the Russian debt crisis. President Clinton was briefed. Naturally, CNN wondered whether the decade-long bull market was over.
My goal here is not to mislead you into expecting an 85% annual gain, nor to suggest that Friday’s action is necessarily irrelevant. It’s to remind you that sometimes big declines really do end up not mattering for long.
That’s especially true of profit-taking in the hottest sector while the rest of the market keeps chugging along, of selling premised not on real news like sales and earnings but sketchier concerns about positioning, sentiment and the rate of the advance, which were so prevalent on Friday.
Have some large-cap techs become a crowded long among hedge funds and other institutional investors? Sure. But there’s an alternative school of thought that no matter how popular they’ve become with masters of the universe they remain under-owned by Main Street as well as whatever street all the insurance portfolios live on.
Large insurance and retirement fund portfolios, along with many Baby Boomers, Gen-Xers and Millennials, are notoriously underexposed to equities. And that’s especially painful with the 10-year Treasury bond yielding 2.2%, vs. 6.7% at the end of 1999.
In fact, compare those yields with the free cash flow yield of the leading techs provided by Goldman’s skeptic Friday, and it’s really no contest. I’ve circled the relevant metrics on the Goldman table below because, for me at least, they are a key reason (along with contributing factors less flattering) for the 43% rise over the last 16 months by the Nasdaq-100.
The 5.6% free cash flow yield for today’s leading techs is the cash they stockpile after subtracting the cost of all their investments. It’s more than double the 10-year Treasury’s current riskless rate. And that’s quite the turnaround from the dot-com heyday, when Treasury rate (at 6.7%) was more than four times higher than the FCF yield of the leading techs.
The author of Goldman’s report certainly isn’t forecasting a market top – in fact, he predicts further gains, albeit at a slowing pace amid wage gains that will eventually force interest rates higher. I think the market will let us know when it’s done, and this almost certainly isn’t that moment.
The market will also let us know when the tantrum’s over, and in the meantime there’s no need to aggressively buy this tiny dip. Let the algorithms have their fun.