Big techs saw double digit returns in 2017, leading the market indices higher. But this year has been a very different story as FAANG stocks hit bear territory for the first time. Is this tech apocalypse or just a correction that was long-time coming? Kim Parlee talks to David Prince, founder, Harbinger Capital Markets Research.
But this year, it's been a very different story. Facebook is 40% off its 52-week high, and Netflix is not far behind. And even Apple is down 20%. Is this tech apocalypse, or just a correction that was a long time coming?
Here to join us and give us a sense of that very question. We're joined by David Prince. He is the founder of Harbinger Capital Markets Research. A pleasure to have you here.
Nice to be here.
I wish it was under better circumstances.
Well, for me, this is sort of the game I play.
I'm very happy to be here.
You're one of the few people I know who's smiling in this market, right now. But that's good. You know, for every buyer, there's a seller. And again, if you know these markets, it's a great time to trade.
I want to start with a chart we have of the FAANG index. Let's bring that one up, and tell me what you see here and what the heck is going on?
Yeah. I think that, for a lot of the viewers, first I'll explain what it is. It's nothing but one of those ETFs that comprises now 10, as opposed to just the 5 that mostly people believe that FAANG is all about.
But it does incorporate the fact that you've got the Netflix, which is the big success story and the disruptor that we're seeing in the broadcast area. But more importantly, when you look through it, a lot of very worried faces have developed this week, because we are seeing a bit of a technical move in the market.
Because when markets get very volatile, people can't rely on fundamentals in a short term market such as this, so they look at the charts. And what's scaring a lot of people is that that big move that we saw in the FAANG stocks, which you alluded to earlier, has certainly been halved in a lot of cases.
And in a number of cases this year, they have numbers that-- you talked about-- are frightening people. So when you look at the overall pattern-- and we'll put that chart back up, again-- but I want to really highlight the fact that people are starting to realize that as we came very, very close down to this particular area yesterday, I can assure you, there were a lot of people that were truly involved with this market that were waiting to short even more.
And so there was a feeling of-- well, how do we deal with this market? So there's a number of things. First and foremost, the big moves that you're seeing on the index-- they're driven out of these big cap weighted stocks.
Big cap weighted stocks had not corrected meaningfully over the course of this last year and a half. Now, we're dealing with a situation where each one of them have been correcting, and when they are unified-- such as what they were yesterday-- it's a pretty scary moment in the market.
So you still have a tremendous amount of market cap. People have realized that we've lost, in these names alone, almost $1 trillion. That does matter. That's US dollars, so it really does matter.
And the point being that that takes away a buying power for other people. Now, why is that important? It's important because so many of the ETFs have the biggest weighting in these stocks.
So those comfy cozy ETFs that everybody's been hiding.
They have only been going up, though.
Well, they got a rude awakening-- sometimes they don't. and I think that that's one of the problems that the market's trying to adjust to. We've had liquidity contraction. That's as simple as it can be.
So in this-- and again, I'm going to bet this is not a simple answer-- is this a buying opportunity?
Well, it is for traders, right now. But as for long term investors, I think the risk reward is still unknown. And for me, I'd rather get a little more comfort and understand what's going on on the trade side-- being the trade with China and the United States, what are the conditions there?
Because the fallout from all of this nonsense has really affected things like the cryptocurrencies. Boy, remember last year when they were all talking about cryptocurrencies?
Then we got talking about the FAANG stocks, et cetera. And this year, in Canada, of course, it's been the marijuana stocks that everybody had to own. And that's not worked out so well in this last couple of weeks.
So you're in that volatile environment. It's not exactly the safest for long term investors. But certainly, there are better bargains, given what's happened in the last couple of weeks.
My own belief is I'm going to trade a lot in this market. And you know me, and this is fun for me. But I try to be as flat at the end of the day as I possibly can.
And every morning, you wake up to a new dilemma. You never know what's been Twittered overnight. You certainly do have to be very cautious. So that's where we stand on that.
Some of the other names, though, that spilled out of this-- people were looking at cryptocurrency. I was one. It certainly was an area that had big wins. Well, stocks like Palo Alto Networks-- which is a real favorite-- it's had a huge decline in price.
Netflix, obviously, as we talked about earlier, had a big one. But what was bigger-- and I think was right to take as much attention-- was the fact that Nvidia really got hit.
And it got hit again, today.
So we're not at the bottom for this whole thing. I think that when you see-- there is a perfect example. There's the Palo Alto Networks.
And you can see that that was approximately 240, and we're down at about 170, at this stage. That's a pretty good kick.
Do you have a sense-- I mean, again, because you've seen these markets for a while, in terms of-- you talk about the liquidity getting pulled out of the market. I mean, when do you kind of get a sense that it's stabilizing a bit? I mean, is that--
That's a good question. And what people are seeing is a bit of it. So there hasn't been that complete capitulation. Where the liquidity has best been taken out of is in the high yield.
And so the high yields are still spiking higher, because people are recognizing the risk inherent. Until that stops and gets back to a more normalized spread-- being 200 or 300 basis off of what you're seeing from the treasuries, as opposed to, in some cases, we've got 500.
And in the case of the energy, there's 700 basis points in some of these things. So that's not comfortable for me. That means liquidity. So somebody has to sell something else, because that asset's worth less.
So what you've got is still that liquidity contraction, and the easiest way for people to do that, of course, is to sell ETFs, take the money out of there, plow it into the bond market, and just sit for a while.
And given what you're yielding on T-bills, that's not bad either.