Below we look at the last new trading vehicle to emerge from the crypts of Wall Street, the NYSE’s FANG-Plus index, or NYFANG.
Once again, these markets just never stop to fascinate veteran cynics like myself. The creative instinct to build more vehicles of profit and destruction—from the MBS to the CDO—just never stops pouring out of the dark caverns of Wall Street.
I’m thinking of those architects of free-market destruction hiding behind fancy titles, like good ol’ Larry Summers who put his pen to deregulating the derivatives markets just before those very markets tanked our markets (and a bit of our Harvard endowment) in a memorable “08 Moment.”
Other illustrious names come to mind, like the then junior economist, Alan Greenspan, who along with the equally acclaimed geniuses Freidman and Melamed, helped bring leverage destruction to the otherwise sleepy MERC, and turned an honest exchange for farmers into a casino for margin-addicted traders gone wild.
And speaking of 2008, remember those pesky little sub-prime mortgages which everyone was on a terror to buy in 06 and 07? And why not? After all, really smart guys like Bernanke had promised investors that their risk was “contained”? And then there was ol’ Greenspan, chiming in with the equal assurance in early 08 that housing prices had never experienced any national declines, so just go ahead and keep buying those clever packages of sub-prime gold.
And to make it even easier for us in a housing bubble, the exchanges got their clever thinking caps on and created this wonderful little device called the ABX Index, which began stuffing those ever-increasing mortgage contracts under one roof so we could trade to glory.
But fast forward to the autumn of 2008, and that same ABX wonder-vehicle was sinking faster than the Titanic as geniuses like Summers and Greenspan quietly stepped into a life-raft otherwise reserved for women and children.
And after a few minutes bobbing in the frigid waters of a post-ABX iceberg collision, investors, pundits and talking-head financial salesmen told the world, “never again” will such blind stupidity take us down.
Well, never say never…
In fact, dumb just returned to center stage of this crazy, bacchanalian market mania, and it’s called the FANG-Plus Futures, introduced by the Intercontinental Exchange (parent to the NYSE) and trades under the symbol NYFANG.
The NYSE FANG-PLUS, like the ABX, is a vehicle designed to let Johnny-Come-Lately’s ride the tail (and most destructive) end of a speculation wave right into the rocks.
Equally-weighted and drunk on the embedded leverage (i.e. risk) of the futures market, the FANG-Plus consists of the 10 most momentum-colored/speculative stocks on the globe and wraps em up into a nice, neat package of popular crap sold as temporary gold—just like the ABX of yesterday…
Package of crap? Oh behave! We’re talking about the NYSE FANG-PLUS (Facebook, Amazon, Netflix and Google) plus Tesla, Twitter, NVIDIA, Baidu, Alibaba and Apple, arguably the most successful growth trades of our era? We’re talking about an index up over 120% since the autumn of 2014? How could this be “crap”?
First, the NYSE FANG-PLUS trade is on its face an obvious case of buying at a top, not a bottom—the cardinal mistake made during irrational bull trends. (Remember Cisco, Juniper, Yahoo and Microsoft at the height of the last tech bubble?)
Secondly, if you just look under the hood of this fast car, you’ll see the engine is leaking oil and its spark plugs are corroded. Of course, most people seduced by a flashy paint-job and new tires rarely look under the hood. But here at Signals Matter, it’s our job to get our hands dirty. And here’s what we found.
This hotrod has a market cap of $3.5T (a figure which has ballooned up from $1.5T in 2014), so this alone tells you in neon-flashing-red that you have already missed the “growth” entry moment. But perhaps there are those who think this beast can continue to tear upwards? Perhaps, sure. But for how long?
Kind of late, no? And this is the Index (unleveraged). To join this circus, would you leverage this trade?
Nope.
Let’s look closer. Of that $3.5T market cap, $1.3T of it is attributable to Google, Baidu, Twitter and Facebook. And these companies are really nothing more than advertising platforms. That’s where nearly 100% of their revenue really comes from. Unfortunately, the global advertising industry is in flux, going digital, and total ad spend by an increasingly stretched (indebted) buy side sector has grown by only 3.5% a year since 2007.
Given that the above four names comprise a $1.3T market cap, yet report a combined net income (i.e. profit) of only $37B, there seems to be, again, a “wild and crazy disconnect.” It just seems a little brash to assume that companies reliant upon a slow-growth industry should be bought at 36X net income, no?
In short, that party is gonna end four these four horsemen of the online advertising bubble, and the downside bet is far more attractive than the upside trade…
But let’s look behind the carburetor and check out some of the other names. Another $1T of the market cap of this NYSE FANG-PLUS beast comes from the E-commerce bubble—namely: Amazon and Alibaba.
It might help to remind ourselves that only $11B of net income actually comes from those mega-caps…This means you’re buying into a dynamic duo trading at 100X earnings. Does that feel prudent to you?
More importantly, and as I’ve written at length elsewhere, nearly all of AMZN’s paltry profits comes from AWS (cloud services), not E-commerce. And as for AWS, AMZN is heading for some stiff headwinds.
Meanwhile, Alibaba is less an E-commerce play and more of a financing services/customer-lending platform, and if you think China’s world is about to get a reality-check, perhaps Alibaba’s future won’t be quite so bright as its bubble-driven past. Regardless, the simple fact remains that these two components of the NYFANG E-commerce flank are grotesquely over-valued and loaded with more downside than upside direction.
And then, of course, there’s TESLA… I’m not even sure why it’s even here—but then again Indexes often mix the good with the bad and the ugly…
Well, I just can’t say enough about this one. As I wrote elsewhere, TESLA is the ultimate symbol of an “investing DUI”—yet one the pundits still chose to debate. Who knows, perhaps a miracle awaits this bloated debt monster, but for now, let’s consider reality rather than speculate.
Tesla has a market cap of $50B, yet in the last year has reported a $1.4B loss and negative free cash flow of $5B. And since 2007, that number actually amounts to a combined negative total of $10B. This is, well: crazy.
As for Apple, at least this company is actually making a widget people are buying, and of the entire package of names in the FANG-Plus basket, has some merit. With a current market cap of $900B and a PE multiple of 19, it’s certainly a little more reasonable, on its face, than its peers. Still, it might be worth noting that AAPL sales and net income numbers for this year are less than the numbers it posed for 2015…
In short, like everything else about this FANG-Plus monster, the trend points south, not up and to the right. That’s why the exchange is offering it up now—as they did with pre-08 ABX—to collect a few more suckers before the bubble pops. In short: bad supply meeting reckless demand.
Finally, please keep in mind that this FANG-Plus vampire is built upon quarterly futures contracts, which are inherently levered by 20% or more. This means when this creature of the night starts to fall, it will fall faster and harder than its individual parts. Anyone who thought they were buying an All-Star team will be taking it in the gut like they never knew possible…
In sum, this FANG-Plus bites…
If the above fundamentals are not enough to scare you from this FANG-Plus, money-sucking vampire, just consider the larger picture. For the NYFANG vehicle to work, it requires that the next few years of growth and momentum resemble the last few years, themselves absolute stimulus-drunk, and inherently unsustainable, markets.
Meanwhile, the horizon looks cloudy. The Fed is demonetizing, the Trump Bump is under reconsideration—along with its already priced-in and daily thinning tax reform bill, and global markets, from the RUT to the credit markets, are like a baseball rising and rising and rising yet now starting to tire near a top and begin their slow (or rapid) arc back to earth.
This NYFANG vehicle, as we see it, is a bad bet, the equivalent of going long Microsoft, Dell, Cisco, Intel, Yahoo, Juniper et al at the dying height of the last tech bubble in 2000.
Introduced (unearthed) only last week, this latest basket of internet/media stocks is a classic case of history repeating itself. In short: look out below.
Whatever one thinks of the various companies that comprise this new basket of horrors, it’s hard to deny their clear over-valuation, and hence risk, nor the larger macro risks in which this FANG-Plus vehicle was introduced. If you wish to ride this wave, be very careful.
We think it’s the next big short. (Whereas long-volatility is the next big long…)
Be patient. At Signals Matter, we watch the fundamentals and the technicals, the flows and the trading bands. NYFANG will be in our gunsights, not our long list. The trick here is to be a patient investor, not an impulsive gambler.
