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  1. Home
  2. / Investing

Kass: Living in Cathie Wood's World

ARKK is an excellent proxy for the exaggerated speculation in large cap disruptive technology.
By DOUG KASS
Feb 13, 2021 | 08:30 AM EST
Stocks quotes in this article: ARKK, TSLA, CSCO

In every stock market cycle there is a dominant investor who captures the market's zeitgeist by incorporating and reflecting the ideas and beliefs of the times.

But there is an inevitability of every market cycle that the optimistic expectations will be over exploited, valuations will go to extremes and a painful bust will follow.

Today's market cycle seems no different than others in the past.

Cathie Wood's ARK Innovation (ARKK) may be this cycle's bank trust department (think late 1960s, early 1970s) or the Janus 20 (of the dot.com bubble period):

ARK Invest's 5 Active ETFs, Combined AUM...
Feb 2016: $32 million
Feb 2017: $66 million
Feb 2018: $1.0 billion
Feb 2019: $2.4 billion
Feb 2020: $3.6 billion
Feb 2021: $55.7 billion

Data via @ycharts pic.twitter.com/XWpCGOtG2g

- Charlie Bilello (@charliebilello) February 11, 2021
"We Invest Solely In Disruptive Innovation"

As their investment catchphrase goes (see above) Ark Invest only invests in disruptive technology.

But, in every market cycle the dominant investor's (e.g., ARK) moat is considered impenetrable - that their assets under management will never go out of style, or they can never pay too much for the constituent investments of the strategy and that their style, like investment trees, will grow and soar to the sky.

As night follows day, the dominant investor's (e.g., ARK) hubris spreads like the wildfire of the valuation of their investments. From ARK's website:

Invest In The Future Today

ARK identifies more innovation evolving today than ever before. We believe it is changing lives and businesses across the globe dramatically, creating opportunities to own the next big thing by investing in the future today.
Take Advantage Of Market Inefficiencies...Make The World A Better Place

Bank trust departments 50 years ago couldn't pay enough for the Nifty Fifty:

"In the United States, the term Nifty Fifty was an informal designation for fifty popular large-cap stocks on the New York Stock Exchange in the 1960s and 1970s that were widely regarded as solid buy and hold growth stocks, or "Blue-chip" stocks. These fifty stocks are credited by historians with propelling the bull market of the early 1970s, while their subsequent crash and underperformance through the early 1980s are an example of what may occur following a period during which many investors, influenced by a positive market sentiment, ignore fundamental stock valuation metrics."

The Janus Funds (and Janus Twenty in particular) got hit by the turmoil as the dot.com bubble burst in the early 2000s. Its concentration in technology stocks led to a rapid rise and steeper fall when the boom turned to bust. Janus' assets peaked at $325 billion in the first quarter of 2000, before shrinking by over -60% over the next three years. (Here is some more background information on Janus' fall from grace, see here and here.)

No worries, though, as ARK's CEO is certain, in an interview yesterday, that there is no bubble in equities nor in here portfolio:

"Ark CEO Cathie Wood said stocks are not in a bubble but bonds are."

LOL, OKAY GENIUS. WELL I'M SURE WHEN THAT BOND BUBBLE BURTS YOUR ENTIRE PORTFOLIO OF PROFITLESS PUBLIC SEWAGE WILL DO JUST FINE! pic.twitter.com/5ugeJZDGEK

- Stanphyl Capital (@StanphylCap) February 12, 2021

Here is another Wood interview in which she dismisses bubble talk and Tesla (TSLA) skeptics.

One of the key features of the bank trust departments who suggested that there was no multiple for Polaroid or Eastman Kodak that they would not pay for or Janus' same conviction in Cisco (CSCO) - were their outlandish predictions. And ARK's Cathie Wood is loaded with them:

* Wood interview which predicts and explains how the price of bitcoin will trade at $400,000.

* Wood is highly confident that Tesla (ARK's largest investment) will hit $7,000/share by 2024 and eventually hit $15,000/share.

Here is what I recently wrote about my ARKK short:

Feb 01, 2021 ' 07:21 AM EST DOUG KASS

Trade of the Week - Short ARKK ($140)

* I am shorting ARKK in the pre- market above $140/share

* Will Cathie Woods and holders of ARKK need an ark if my concerns regarding speculation are realized?

* Sic transit gloria

For those that are looking for a relatively conservative and diversified way to short a basket of what I believe are some of the most overpriced gewgaws extant - the ETF (ARKK) (ARK Innovation ETF) might be appealing to you.

Led by a near 11% holding in Tesla (TSLA) , here are ARKK's Top 10 Holdings.

Besides an 11% holding in Tesla, some of ARKK's portfolio of top 10 names includes a 7% holding in Roku (ROKU) (27x sales), Square (SQ) (320x PE), Twilio (TWLO) (40x sales and Shopify (SHOP) (700x PE), etc.

ARKK is probably the largest actively traded ETF and is managed by superstar Cathie Woods - who recently predicted that TSLA would trade at $7,000 by 2024 and ultimately hit $15,000/share. In other words, Ms. Woods believes Tesla is worth between $7-$15 trillion.

I probably could stop here but I won't!

From Mike Lewitt's The Credit Strategist on Woods' view and comments on Tesla:

"In normal times this would be crazy talk. Actually, in any age this should be considered the utterings of a shaman. But today it just blends into all the other crazy talk and people just nod their heads like a bunch of bobble heads and let it pass."

Money has poured into this ETF - causing more and more of the underlying stocks to be purchased by ARKK. In fact, ARKK doubled in size in 3Q2020 to nearly $9 billion.

As I discuss in my opening missive (coming up) I believe we are now experiencing "Peak Speculation" and shorting ARKK (a proxy for speculation) is a call that the sizeable inflows of the last few years will become outflows in the year ahead.

I am shorting ARKK - the hippest ETF extant - in the pre-market above $140/share.

Sic transit gloria.

Fame is a fleeting thing.

Bottom Line

Stock market cycles almost always go to the extreme.

Currently the popularity of ARK Invest and their constituent investments are benefiting from a virtuous cycle.

But, virtuous cycles are such - they turn into less virtuous cycles and, sometimes, even vicious cycles.

As in the Byrds "Turn, Turn, Turn":

"To everything turn, turn, turn
There is a season turn, turn, turn
And a time to every purpose under heaven

A time to be born, a time to die
A time to plant, a time to reap
A time to kill, a time to heal
A time to laugh, a time to weep..."

But, in the extreme when looking at the future, Barry McGuire's "Eve of Destruction" might be a reasonable foreshadowing of events to come facing ARK Invest:

"But you tell me over and over and over again my friend
Ah, you don't believe we're on the eve of destruction."

To this observer, ARKK is an excellent proxy for the exaggerated speculation in large cap disruptive technology.

It is one of my largest shorts.

(This commentary originally appeared on Real Money Pro on February 12. Click here to learn about this dynamic market information service for active traders and to receive Doug Kass's Daily Diary and columns from Paul Price, Bret Jensen and others.)

Get an email alert each time I write an article for Real Money. Click the "+Follow" next to my byline to this article.

At the time of publication, Doug Kass was Short TSLA (large), ARKK (large).

TAGS: ETFs | Investing | Markets | Stocks | Trading

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