That’s a painful lesson investors are learning these days, what with “FANG” stocks getting gored — and other overvalued tech stocks tanking.
You remember these stocks, don’t you? I wrote about the FANGs back in November when they were artificially propping up the averages. And I wrote back in September about the serious risk of a “Tech Bubble II.”
Now, we’re watching all those risks I highlighted come home to roost. Just since the beginning of the year, Amazon.com (AMZN) has fallen 27.4%. Netflix (NFLX) has dropped 27%. Alphabet (GOOGL) and Facebook (FB) have fared better thanks to strong earnings. But even there, the post-earnings pops are fading rapidly.
How about Linkedin (LNKD)? It just plunged $84, or 43.6%, in a single day after releasing lousy quarterly results. Corporate software darlings like Salesforce.com (CRM), Tableau Software (DATA) and Workday (WDAY) have plunged 31.1%, 60%, and 38.5% year-to-date.
Apple (AAPL) has lost 9.2%, while Qualcomm (QCOM) has dropped 11.7%. Even stodgier tech names like Intel (INTC) and Microsoft (MSFT) are down 16% and 11%, respectively.
|Alphabet, or Google as it used to be known, has fared better than many other tech stocks because of strong earnings.|
What’s going on? It goes back to what I wrote at the outset. When you live by the “momentum investing/who cares about overvaluation?” sword, you die by it. You can make tons of money in the boom phase of the cycle. But if you don’t dump your shares in time, you’ll get crushed in the bust phase.
I’ve been worried about exactly this kind of action. That’s one reason why I recommended an ETF designed to hedge against falling technology stocks in my Safe Money Report months ago. That position is working out well now.
More broadly, I believe the action in the riskiest of risky stocks is another negative for the market overall. They were the “generals” who led the market advance during the boom/bubble phase of the credit cycle. Now that we’re losing them, it’s hard to see the “troops” hanging in there for long. So again, I can’t stress caution enough in this volatile market environment.
|“I can’t stress caution enough in this volatile environment.”|
But I’d very much like to hear from you at this time. Do you think the carnage in momentum stocks is a serious problem for the market? Or is this something that tends to happen at the end of a correction, rather than the beginning? Do you see value in FANG or other high-growth tech stocks here? Or do you think the sell-off is going to get even worse? Share your opinions below.
Meanwhile, you brought up a wide variety of topics at the website over the weekend in response to my most recent column.
Reader Robert C. offered this take on the economy and the Federal Reserve’s reaction to recent data: “The Fed made a mistake in raising interest rates. Mrs. Yellen raised rates into weakness, not strength. I agree that our economy is going into recession. We are carrying too much debt. So is the rest of the world!”
Reader $1,000 Gold weighed in on the carnage in commodities, and whether there might be a bright side to it, saying: “I think you may be missing something. You’re seeing the details, but are you seeing the big picture? Is it possible this is just a classic sector rotation? Out of commodities and into … what?
“The problem is in the oil patch, but so is the solution. And the solution looks better than the problem. Let’s just hope the problem doesn’t overwhelm us before the economy can benefit from this reset in commodities.”
But Reader Anthony G. offered a more pessimistic take, saying: “I see bad oil loans everywhere. The banks are in trouble again. Cheap money and bad risk-management again.”
With regard to drug pricing, Reader Bill S. said: “The drug companies that impose exorbitant price increases are just young fools. They never learned the number of times in the past 75 years when the federal government stepped in with laws imposing price and wage controls when private industry didn’t act in the public interest. Calling members of Congress ‘imbeciles’ is going to have a strong bipartisan retaliation in the near future.”
And on that same topic, Reader Steve McN. offered a few potential solutions to rising drug costs:
“1. Stop subsidizing the rest of the world by having them control their prices, while allowing the drug companies to pass on the costs of research to the U.S. consumer. Simply tell the companies they cannot sell drugs cheaper in the rest of the developed world than they do here.
“2. Stop advertising what people cannot buy without a doctor’s prescription. Doctors usually cave to the drug demands of a patient, regardless of how needed the drug is – hence the advertising.
“3. Never prohibit any entity from negotiation. Medicare’s legal inability to negotiate prices is Congress-dictated corporate welfare for the pharma companies, and is a direct result of pharma lobbying Congress and plying them with money.”
Thanks for taking some time out of your busy days to comment. It’ll be interesting to see how Fed Chairman Janet Yellen attempts to justify the recent rate hike, and what she says about the future path of Fed policy, on Wednesday in Congress. It’s obvious from the latest market action that many investors believe the Fed committed a policy mistake.
As for the commodities carnage and the bad-debt debate, this stopped being just an oil problem a long time ago. I’m seeing broad-based deterioration in the credit markets, and widespread, nascent tightening of lending standards in the banking sector. That’s the kind of thing that can worsen an economic slowdown, and lead to widespread losses for investors.
So make sure you’ve taken steps to protect your portfolio, which I have been sharing in my Safe Money Report since last spring. Then add any additional comments you might have in the discussion section below.
Falling bond prices, rising yield spreads, investor withdrawals – the junk-bond market has been dealing with them for the last several quarters. Now, those problems are spreading to the investment-grade bond market, and hedge funds are taking notice. Several are betting on a rise in defaults and even-bigger price declines, according to the Wall Street Journal.
The Syrian civil war is intensifying thanks to a government push on the city of Aleppo and aggressive Russian airstrikes. That’s forcing tens of thousands of civilians to head toward the Turkish border for relief. But that country is reeling under the burden of the 2.5 million refugees it has already taken in — and European officials are reluctant to accept even more migrants. It truly is a depressing situation in that part of the world.
* Former Treasury Secretary Timothy Geithner, like many ex-government workers who oversaw Wall Street activities, has gone to work on Wall Street. Now, he is reportedly borrowing money from JPMorgan Chase (JPM) to invest in a private equity fund at his new employer Warburg Pincus. Revolving doors indeed.
Finally, the Denver Broncos defeated the Carolina Panthers in a 24-10 slugfest highlighted by defensive action rather than any inspiring offensive play. Denver only racked up 194 offensive yards, the least by any Super Bowl winner in history. The two teams also combined for 12 total sacks, the highest tally ever.
Are you worried about the spreading sickness in the corporate debt market? What do you think about the intensification of the Syrian conflict, and the flood of refugees resulting from it? Any thoughts on Geithner’s career track, or Sunday’s Super Bowl? Share them in the comment section below when you have time.
Until next time,
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