The One-Time Buying Burst That Will Not Be Repeated

I recently posted the below chart on Twitter and said the NASDAQ was giving me another chance to make an ass of myself. I didn’t expect it to only take a few days.

The chart shows the NASDAQ making highs in February, followed by the same highs in April and June. Each sell-off found support at a higher low. I viewed the convergence of these trendlines as bearish, for reasons I will explain below.

From a technical perspective though, you have punters buying the dip but then selling at the highs. Not a lot of conviction.

Yesterday though, the index broke out to new all-time highs again.

Thanks to the fall in long-term bond yields in recent weeks, investors are back buying ‘growth’ stocks. Lower bond yields mean a lower discount rate, which means higher valuations for stocks with distant growth prospects.

It’s a win-win for tech!


Source: Optuma

[Click to open in a new window]

But hang on a minute…

While the market might be back putting high valuations on future, potential, dreamed-of profits, there is also the little matter of near-term earnings for the tech giants that form the bulk of the NASDAQ and the S&P 500.

As Fred Hickey of The High-Tech Strategist reminds us:

Prior to last year’s 13% increase in global PC unit shipments (per IDC), PC shipments had fallen for seven consecutive years. The market was saturated. IDC recently reported PC shipments in the first quarter soared 55.2% year-over-year to 84 million units, led by Apple Mac PCs, which skyrocketed 111.5%. Apple’s iPad revenue had peaked in 2012 and more recently had fallen for six consecutive years. Apple’s iPad revenues jumped nearly 79% year-over-year in Q1. Global smartphone shipments soared 25.5% in Q1 to 345 million units, up from 275 million units a year earlier. Global smartphone shipments had dropped by single-digit percentages in each of the prior three years again due to market saturation. Apple’s iPhone revenues in Q1 climbed 66%. Apple CFO Luca Maestri on last week’s conference call warned of a “sequential decline steeper than usual” in the current quarter. “So when you look at our normal seasonality, and you’ve mentioned a percentage that is really an average of several years, what we’re saying is that we believe that the sequential decline is going to be higher than that.” At over 30 times earnings and a market-leading $2.2 trillion valuation, Apple’s stock was priced for continued high growth which is not likely to continue.

Covid-19 created a one-time burst of buying that will not be repeated. By now, most people have bought new computer equipment for working at home or for kids’ schooling at home and now some will start heading back to the office and schools. The PC (and tablet and smartphone) markets will be even more saturated and the year-over-year comparisons later this year will become horrendously difficult. When will the stock market begin to anticipate this? Maybe now.

Maybe not just yet, Fred.

The NASDAQ may have just broken out to a new all-time high, but the move isn’t unanimous. For example, Apple, Netflix, Amazon, and chipmaker Advanced Micro Devices are all trading below their highs.

While Amazon is close to its high, the peak actually occurred back in September last year. That was the peak of small business destruction (Amazon’s competitors), following one-size-fits-all lockdowns last year.

Meanwhile, Microsoft, Facebook, and Alphabet (Google) all made new highs along with the NASDAQ.

As the Northern Hemisphere continues to open up, it will be fascinating to see whether the NASDAQ can continue to rally, or whether more subdued demand (and resultant slowing of earnings growth) will pull the index down.

The quarterly conference calls that kick off post the end of the June quarter will be interesting indeed.

And while the Northern Hemisphere opens back up, we’re shutting things down. There’s been an ‘outbreak’ in Sydney. Our panic-stricken neighbours have ‘slammed shut’ their borders, ignoring the fact that we are one country.

It’s not surprising though. Fear is a powerful motivator. What I find strange is the broad willingness to agree with freedom-eroding lockdowns.

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Which brings me to an interesting article I read in The Spectator recently. Toby Young writes:

The question I’ve puzzled over…is why the global elite became such enthusiastic supporters of the heavy-handed, statist approach to managing the coronavirus crisis — stay-at home orders, business closures, face masks — and passionate opponents of less draconian alternatives, such as those set out by the signatories of the Great Barrington Declaration.

…supporting non-pharmaceutical interventions is a high-status indicator, a way of advertising that you’re in the same club as tech titans like Bill Gates and Jeff Bezos and eminent public health scientists like Anthony Fauci and Neil Ferguson. It’s a sign of your membership of the cognitive elite. You may not be a virologist or an epidemiologist, but you’ve picked up enough of the lingo — herd immunity, R number, vaccine escape — to give a plausible impersonation of an expert at dinner parties.

Perhaps more significantly, challenging Covid orthodoxy is a low-status indicator. In the eyes of our meritocratic overlords, there is no intellectually respectable opposition to the policies embraced by nearly all western governments, bar Sweden.

The reason Davos Man has outsourced his opinions on the pandemic to the World Health Organisation is not because the policies recommended by Tedros Adhanom enrich him. Rather, it’s because they cost him nothing. He can just as easily work in the shepherd’s hut at the bottom of his garden as he can from his corner office. His children are provided with a full timetable of lessons via Zoom, courtesy of their private school, and if he feels like a holiday abroad he can charter a private jet. Becoming a cheerleader for lockdowns is a way of signalling that he is among the tiny elite of successful people for whom there is zero cost associated with them.



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Greg Canavan,
Editor, The Rum Rebellion

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