Technology Stocks As A Proxy For Market Risk

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Question = Can you explain the rationale behind many technology company valuations and recently sharp price moves upward notwithstanding the recent sell-off? Especially interested in FAAANG-CMT?

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For Those Unaware…The Acronyms = Facebook [FB], Apple [AAPL], Amazon [AMZN], Adobe [ADBE], Netflix [NFLX], Google [GOOGL] – Salesforce [CRM], Microsoft [MSFT] and Tesla [TSLA].

In the current market environment Revenue Growth = The Most Appreciated Financial Metric…Irrespective Of Whether That Translates Into EBITDA and/or Profit Growth.

And all of the companies mentioned above are growing revenue…some generate cash [i.e. FB/AAPL/ADBE/GOOGL/MSFT] while some generate very little cash…if any [i.e. AMZN/NFLX/CRM/TSLA]…while most also PREFER to present their financial statements in a less strict/more financially favorable alternative format [Non-GAAP]…in addition to GAAP [Generally Accepted Accounting Principles].

But ALL share the same trait of “rich” valuations [EV/EBITDA].

Even EBITDA, though, is presented in GAAP/Non-GAAP format.

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However the MOST IMPORTANT factor driving equity valuations = Global Liquidity = Central Bank Money Printing [U.S. U.K. E.U. S.N.B. Japan and China]…In Order To Acquire Financial Assets Collectively = 40% of Global GDP for the 1st 4 months of calendar ’17…and at least 25% of Global GDP EVERY YEAR SINCE ’09.

Despite The Fed’s Anticipated Balance Sheet Reduction…that no legitimate market professional believes will ever amount to their $2T trimmed goal…There Is Little Indication The Global Printing Presses Will Halt Anytime Soon.

Nevertheless…The Market Red Flags Are Mounting:

  1. Historically Low Actual/Expected Equity Volatility
    2. Excessive Equity Valuations: EV/EBITDA
    3. All-Time High Equity Trading Margin Application
    4. The Lack of Any Meaningful Equity Capital Draw-Down
    [last 18 months] reflecting a robotic Buy Any Market “Dip” Mentality…As The Draw-Downs = Increasingly Shallow
    5. The Advent Of Black Box/Passive Investing = Top Heavy + Capitalization Weighted Structure

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Still…another SIGNIFICANT FACTOR contributing to the seemingly insatiable risk appetite = The Perception That Central Banks Have Trapped The Bears.

That an uptick in global economic growth will be greeted positively by the equity markets while any slowdown will be met with more Money Printing…further propelling stocks.

Hence, no matter the future economic outcome = it can only be positive for stocks. That precept is certainly debate-able but it does seem to be a Consensus Belief…and in its own right…is just another sign of the market excesses.

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It could even be said that the Global Central Bank’s Greatest Achievement, in this 8 year economic cycle, was NOT their ability to positively impact asset prices but their ability to Intentionally Destroy Moral Hazard = Lack of Incentive To Guard Against Risk Where One Is Protected From Its Consequences.

Because If You Believe This QE Driven Economy Is A Function of Unadulterated Capitalism and Animal Spirits…then you are Very Badly Mistaken.

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Article by Global Slant

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