Is FANG dead? Sorry, I just wanted to get in front of tomorrow's story line because the FAANNG obit's being written again, this time with two As and two N's as in Facebook (FB) , Apple (AAPL) , Amazon (AMZN) , Netflix (NFLX) , Nvidia (NVDA) and Google (GOOGL) , which is now Alphabet.
I think FAANNG's decline is always well heralded and is always a crisis on these down days.
So let me explain why we get these periodic declines and why everyone frets so deeply about the periodic bouts of selling.
First, let's take it from the top down, or the macro. Today interest rates went higher, which I think is a consequence of the economy doing better and a tax bill that could make things really heat up.
When you consider the big hole in the already holy deficit you know the government is going to have to borrow a lot of money and that means a huge amount of supply could hit the market.
I get that. Why not? The government has to pay its bills and the Republicans and Democrats are more familiar with, a radical low tax high spend budget that, unless the economy really soars, will bring about higher interest rates simply because supply will overwhelm demand.
Normally i would worry about that. But the worry de jure is what's known as a flat yield curve where the short-rates the Fed controls and the longer rates the market controls are roughly the same. This kind of selling by the government makes long rates higher. And if Jay Powell were to sell the Fed's store hold of bonds then long rates, which are around 2.4% for the ten year, might go up yet again.
So why am I not afraid? Because I want the banks to lend more. Lending has been punk and if they made more money lending, meaning if they were to pay you very little for your deposits but lend out at a higher rate that's based off the ten year, they would make more money. That incentive will work.
But there are consequences. When we see rates go higher, we think inflation. And when we think inflation the value of any future earnings stream diminishes. Given that FAANNG represents a big bet on the future earnings of high growth companies, their stocks almost always sell off when rates go higher.
Now, let me simplify it, higher rates often means lower prices for the most juiced stocks out there and FAANNG is king of the juice.
Worse, when the economy's humming who needs high-growth stocks which will most likely not show gigantic gains year over year when the industrials might give you just that given how strong the economy is? Remember that stocks go higher when they beat estimates. FAANNG traditionally beats estimates by a pretty set amount. But if this economy has a full head of steam -- and with this tax bill I think it might -- then the industrials should crush the estimates. Not only that, but the components of FAANNG don't benefit nearly as much as the industrials or, for that matter, domestic taxpayers, under the bill. So they just don't have what it takes to roar higher here.
Remember I am giving you the bear case against FAANNG, not the bull case, so, if you own them you know what you are up against at least when it comes to those who do no real homework but can stick their fingers in the air as well as anyone and feel the ill-winds of the bond market.
Now let's deal with the components. I will give you the bear case for all of these, two. First, I am hearing that Facebook will simply "do the number" and not much more than that because there's no acceleration or new product that is taking the Facebook world by storm. It's become same-old-same-old great and that's not enough for this market. I am not kidding. That's the rap!
Amazon? There was an upgrade of Walmart (WMT) today that talked about how it has figured out the omni-channel. If that's the case then you could easily say that any additional sales that would have come from Walmart will not go Amazon's way. Plus, Amazon hasn't destroyed anyone lately. Even Best Buy (BBY) is doing well. I think Amazon's doing fabulously and, amazingly, is still in expansion mode. Not only that but its Amazon web services remains the gem of the cloud. Any real weakness and I will pound the table.
Apple? We caught a downgrade today from a firm that said the supercycle of iPhones is getting long in the tooth and the service revenue stream is not enough to offset the waning phone biz. I don't know, I mean, honestly, how many times have we heard this? My reaction? What are you going to do? Sell it here and in the $170s and get back in when it trades to the $150s if it does that at all. I say own it don't trade it. Every trading call has been wrong. This piece did not change my mind.
Netflix? Simple. That's Disney (DIS) . It's putting together a rival to Netflix and enough people think it could hurt Netflix's growth that sellers have materialized everywhere. Candidly, this one's tough. I always think what would it cost to duplicate Netflix's business and I think it would be more than the $80 billion it trades for. That said I think it is the most vulnerable of the FAANGS.
What's the matter with Nvidia? What's always the matter with it as it is one of the most expensive stocks in the world. So why own it? Because Nvidia is the dominant chip when it comes to servers, to gaming, to autonomous cars and to artificial intelligence. Will its mantle be challenged? All of the time. Does that mean you should sell it? I think it has periodic swoons and this one has lasted a long time, ever since it reported. I believe it is digesting the move and this stock like the other FAANNGS may be suffering from tax motivated selling. Starting next year if you want to sell stocks you can no longer name your lot, meaning if you bought Nvidia at $50 and then bought it again at $150 you would be able to sell the $150 and pay a lower tax on this $196 stock.
But, under the new tax bill, if you wait until next year you will be automatically selling the lowest low, the first lot, and unless there is some last minute change, that's pretty onerous.
Google, now Alphabet? I think it is gaining share and has about $100 billion in cash to fall back, on. It also has a swell web services business that is doing fantastically and an autonomous car business that is second to none. Go ahead and sell it. Make my day.
Now, could this be it? The end of FAANNG? I think that we have pronounced these stocks dead so many times that you have to wonder how they even exist let alone thrive.
But I will tell you that in all my years in the business we have seen super-growth stocks go in and out of favor. However, unless you think they have actually suffered a blow that they can't recover from -- and in all of the bear cases I just outlined you don't have one -- you just have to wait until they come down and you are given still one more chance to buy them.These stocks always inflict a lot of pain on those who own them. But if you look back, say, at Apple's stock, for example, how many times would you have bought high and sold low over the years or look back and say "Why did I get shaken out of this stock?" The same could be said for the rest. And the answer invariably is some downgrade from some analyst you never heard of or some rotation out of high growth that's been covered by the media in obituary form. Do you know at one time I actually wrote obituaries for a living? But I never wrote a premature one and until see a coroner's report from real competitors of the FAANNG components I'll let someone else write it and I'll issue the correction during the next big tech rally.