"(as Denethor runs by) So passes Denethor, son of Ecthelion"
- Gandalf, J. R. R. Tolkien 's novel The Lord of the Rings
"That reminds Doug Kass of Seabreeze Partners of the once-hot funds, such as the former Janus Twenty. "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," he writes in his blog. And that there is no price too high to pay for those concepts, in this case disruptive technologies, most notably Tesla (TSLA), ARKK's largest holding."
- Barron's, Up and Down Wall Street (Today's Stock Mania Differs From 1999's, but That Might Not Matter)
The last poker table is when the seats are all inhabited by the sharks. They soon start to devour each other. In the markets, we caught a glimpse of this in the GameStop (GME) circus - a likely foreshadowing of what might occur in other asset classes and stocks.
"If you've been playing poker for half an hour and you still don't know who the patsy is, you are the patsy."
- Warren Buffett
In life and in markets, history may not repeat itself but it rhymes.
Throughout every stock market cycle there is a repetitive pattern in the world of money management.
Sure, the names change - Gerry Tsai's Manhattan Fund, Kevin Landis' FirstHand Funds, Tom Marsico's Janus Funds, Ryan Jacob's Internet Fund, etc.
But the outcome almost always has the same outcome. Too much marketing, an exponential rise in assets under management (AUM) - and then a spontaneous combustion.
In last week's, "We All Live in Cathie Wood's World (But That Could Change Quickly" I wrote that in every 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 overexploited, valuations will go to extremes and a painful bust will follow.
Today's market cycle seems no different than others in the past.
* In this market cycle, ARK Invest (ARKK) is at the forefront of investing in disruptive technology
* But I hear the echoes of the "Nifty Fifty Era" and The Dot.com Boom in today's current market conditions
* ARK is not the first to shoot lights out in the market and to gain massive assets under management
* We should look at the bank trust departments in the late 1960s/early 1970s and the Janus Funds (especially the Twenty Fund) during the dot.com era to remind ourselves of boom/busts in money management
* ARK may be an intriguing short for those that believe stocks, and technology in particular, are currently overpriced
ARK Invest's 5 Active ETFs, Combined AUM...February 11, 2021
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
Too Much Demand at Tesla? Not!
Which brings me to ARKK and Tesla (TSLA) .
Wednesday (February 17), as TSLA shares tested the 50 day moving average (not seen since November), Cathie Wood appeared on CNBC and waxed enthusiastically about the outlook for Tesla.
Tesla's shares were down to $765/share (-$31/share) on Tuesday morning before Cathie Wood's CNBC appearance and closed +$2/share higher on the day.
On the above weakness Tuesday, ARKK added about 130k shares of Tesla into their portfolio. The Tesla position now represents approximately 10% of ARKK.
Meanwhile, Tesla's fundamentals are deteriorating as the company announced that it has reduced its Model 3 and Model Y prices.
ARK's investment strategy appears to literally drive 200 miles per hour as long and until the proverbial wall (of outflows) is hit.
Lost in the euphoria is that ARK's superior investment performance is, in a relative sense, newly minted, and the byproduct of only two exceptional years - in 2017 and 2020 and not by decades of strong relative and absolute result.
To be sure, no one is paying ARK/Wood to be in cash - she is following an aggressive strategy of taking massive inflows and buying into momentum-driven story stocks. This is what she will keep doing until higher interest rates (or other adverse factors) shatter the valuation bubbles of her universe and redemptions come pouring in.
Of course my short of ARKK is anathema to the momentum types - who question the sanity of shorting ARK's momentum in a reflexive and Pavlovian backdrop.
But the drool (and explosion of AUM at ARK) are self evident.
Perhaps the bell has not yet rung - as higher asset prices beget higher asset prices and ARK ETF inflows.
On the other hand, the bell may be close to ringing as the drool (of assets flowing into ARK) is evident as the ever higher asset prices for disruptive tech stocks beget ever higher asset prices as it attracts more buyers. Relatedly, check out Divine Ms M's observation about some potential "issues" with the Nasdaq this morning (February 18).
To me, history is my teacher - and I have seen the ARK phenomenon before.
Years from now we may be asking the question... "Remember ARK?" just as we do the same today with Gerry Tsai's Manhattan Fund, Tom Marsico's Janus, Ryan Jacob's Internet Fund, and Kevin Landis' The First Hand Funds.
The names just change and it always ends badly.
Yesterday (February 17) ARKK traded as high as $159/share and as low as $147/share - closing -$3 lower, for the first time since my Bar Mitzvah, at about $152/share.
In early premarket trading, ARKK was indicated down by another -$3 plus/share to under $149/share.
S&P futures were down by -18 handles (at 6:40 am and Tesla was also trading lower by -$21/share to approximately $778/share in the premarket.
Unlike the broad (and expanding) consensus, at today's prices, I remain Bearish on the U.S. stock market, Tesla and ARKK.
(This commentary originally appeared on Real Money Pro on February 18. 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.)