What needs to happen to get us out of this bizarre malaise where the Dow Jones industrials seem to be flirting with their highs while so many tech and healthcare names continue to rollover?
How is it possible that the same companies can continue to see their prices increase while a whole cohort of higher growth stocks keep flaming out?
The first thing I need you to do is put out of your mind this concept of value versus growth that you keep hearing so much about. There is not value versus growth rotation. That's nonsense. There's stocks of companies that are growing fast right now and could grow even faster if we pass an infrastructure bill, and there are stocks of companies that continue to grow but no faster than expected. Once you recognize that growth versus value is a false dichotomy than we can figure out what's ailing so much of the market.
First, there is way too much speculation. We are still seeing lots of money pour into areas that are very hard to value or are related to cryptocurrency in one form or another. You can see these stocks if you look at what's known as the crawl underneath the people on television. I am not saying these companies are worthless. I am saying that the amount of volume they have should make you nervous because they are signs of excess speculation. A little speculation? Okay. A lot like now, self-defeating.
Second, there's too much greed. One look at the newly launch Ark Space Exploration and Innovation Fund, launched today, tells you all you need to know about how managers just can't resist creating new funds even if there really is no need for them. Sure this Space Exploration and Innovation fund has some genuine item companies: Trimble (TRMB) , L3Harris (LHX) and Kratos Defense and Security Solutions (KTOS) . They can all pass as space related companies although I would say that L3 is pretty attenuated, and I say that because they have been on the show and they are pretty much a high-tech defense contractor. But it also includes Amazon (AMZN) , Alphabet (GOOGL) , parent of Google, and Netflix (NFLX) . How about some Chinese e-commerce companies? JD.com (JD) and Alibaba (BABA) and Tencent (TME) will work. Deere's (DE) in there, too. Yes, the agricultural company. How about some more defense contractors? Lockheed (LMT) and Boeing (BA) have space components. They work, too.
Maybe, just maybe, you can conclude that anything works and why not? There's an expense ratio of .75 percent, so why not sling together a bunch of stocks that have something to do with space in an actively manage ETF as if Cathie Wood, the fund manager, doesn't have enough to do.
Or how about the ridiculous amount of leverage all sorts of banks exposed themselves to with this Archegos hedge fund. The billions in losses Wall Street took, especially the hits that the reckless Credit Suisse (CS) and Nomura (NMR) took, could have been avoided. How do we know this? Simple: because Achegos didn't ensnare everyone. JP Morgan (JPM) considered working with Archegos and passed. They exercised judgment - something that seems to be in very short supply on Wall Street - and decided the fund wasn't worth the risk. Good call. Everyone else chased the almighty dollar in the form of commissions and the two foreign firms, so desperate to show that they are go-to for the hedge funds that need the most leverage, didn't get dinged. They got crushed.
Or how about the endless SPACs? So many really are blank checks for people who I wouldn't trust with the money in my wallet let alone tens of millions of dollars. There is no gating here, no government examination like you have in an initial public offering, which allows you to make projections that are so aggressive that they will attract investors like flies to honey. The SEC should immediately end the process of making projections.
Or how about the NFTs, the non-fungible tokens. These are unique digital items, made unique by blockchain or digital ledger? Got me? All I can say is that I wish I had some unique digital items to sell because, while they can go up, of course, there's a bit of the old PT Barnum involved here. It's possible that there could be some real value here. I know that when Warhol first put out his soup cans and his Marilyn Shot Reds there was a sense that they might be worthless and they ended up being worth millions. Maybe that could be the same with NFTs. Perhaps we will look back at the Saturday Night Live spoof and think how could they be so clueless. But perhaps not.
Third, there's too much supply and not enough demand. Wall Street syndicate desks, so eager to make more money for their firms, are simply unwilling to push back. They will put their names on anything. We need to digest the deals they have already thrown at us. The stocks that are sagging are sagging in part because investors are selling existing merchandise to buy new merchandise. The brokers aren't creating stocks that are participating in the re-opening of America. There's a genuine scarcity to those. That, alone, creates value. Instead it is more and more of the same kind of software as a service, crypto, gaming fintech equities that are often of very low quality. We don't need them. We don't want them. But nobody will exercise the discipline to stop them. Only when the spigot on these closes will many of the losing stocks lift.
Fourth, I am beginning to wonder if people who own these highest growth stocks, the ones that sell at a multiple to sales, really know what they do. Can the owners of JFrog (FROG) explain what they own? How about Datadog (DDOG) ? Do you know how Snowflake (SNOW) makes its money? How you doing with Splunk (SPLK) ? Can you tell the difference between Wix (WIX) and Wex (WEX) ? How about Fiverr (FVRR) and F5 (FFIV) ? Is this the moment you want to be in Bill.com (BILL) ? Is it time to buy HubSpot (HUBS) ? Many bought these stocks for one reason. They were going higher. Now that they are not, lots of people are unsure what they even do. We saw the same thing in 2000. It's a recipe for disaster.
Finally, Fifth, we need to get rid of a lot of these companies. The best way to do that is to have mergers where companies are consolidated by a some behemoths - the worst way is for them to run out of money.
Now I know it is a tall order to eliminate these pestilences from the marketplace. They all have a momentum of their own and it isn't like there's some Grand Inquisitor out there who can stop it let alone a regulator or two who can cool things off. We know that Congress is concerned with Wall Street but it is mostly in regards to gamificaton, specifically the gamification of GameStop (GME) . I rebel at that because there's been plenty of speculation done by big time hedge funds, witness Archegos, but when some more rowdy individuals come up with a vehicle they believe in, GameStop, and there's a real crew at the helm that might be able to create value, they are castigated as gamifiers. Seems unfair to me.
So things have to play out because we are too far down the road to just have the issues I described go away. There's no off switch to speculation or greed. There's no handbook of learning for people caught in stocks of companies they don't' understand. And Wall Street's never going to regulate itself to the point where there's deal pushback. Too much money being made.
There's a solution. You can stick with the boring old companies that are doing really well because of low rates and stimulus and better than expected earnings. I mean really better than expected. Otherwise you need to be in siege mode. Because it's a siege that you are taking part in and sieges last a very long time before they are resolved.