"The Bubble Is About To Burst": BofA's 10 Reasons To Sell Tech Stocks

In a report that explains the recent market volatility as having nothing to do with Trump-induced nausea and everything to do with the Fed ("We believe the simple reason that risk assets are struggling in 2018 is the Fed. Investors have been forced to acknowledge a tightening cycle is well underway"), BofA's Michael Hartnett moves away from listing the latest tactical and cyclical market drivers which we covered earlier, and lays out what the Chief Investment Strategist thinks are the three big secular trends threatening investors in 2018.

These are as follows:

  • Regime shift from Quantitative Easing to Quantitative Tightening
  • War on Inequality trade, immigration & redistribution policies
  • Occupy Silicon Valley policies

Combining these, the result over the next few months could be nothing short than the second bursting of the tech - or technically e-commerce - bubble.

Recall that two weeks ago, we first showed that according to BofA, we are now witnessing the third biggest bubble in history created by a central bank. As Hartnett wrote, "the lowest interest rates in 5,000 years have guaranteed a melt-up trade in risk assets", which Hartnett has called the Icarus Trade since late 2015, and points out that the latest, "e-Commerce" bubble, which consists of AMZN, NFLX, GOOG, TWTR, EBAY, FB, is up 617% since the financial crisis, making it the 3rd largest bubble of the past 40 years, and at this rate - assuming no major drop in the 6 constituent stocks - the e-Commerce bubble is set to become the largest bubble of all time over the next few months."

The problem is that lasting even a few months with a "major drop" in the e-commerce bubble may prove very problematic, largely due to what Hartnett calls "Occupy Silicon Valley", which he explains as follows:

The economic & social disruption of technology is unlikely to stop. It has many beneficial economic & social impacts. But the sector’s growth, power & visibility make it extremely vulnerable to increased regulation & taxation, most especially if recession wrecks government finances.

Which brings us to the core of Hartnett's latest research note: "10 reasons why global investors should reduce tech allocations in 2018" which are as follows:

  • 1. Excess returns & fancy valuations: US tech is best performing sector in QE era, up annualized 20%; ex tech the S&P500 would be 2000 not 2600 today
  • 2. Bubbly prices: US internet commerce stocks (DJECOM) soared 624% in 7 years at their peak, 3rd largest bubble of past 40 years (see chart above)
  • 3. Fat market caps: US tech market cap ($6.4tn) exceeds that of Eurozone ($5.0tn); FAAMG+BAT market cap of $4.9tn exceeds Emerging Markets ($4.6tn).
  • 4. Earnings hubris: tech & eCom companies currently account for almost 1/4 of US EPS (Chart 6); this level that is rarely exceeded, and often associated with bubble peaks; note there are currently just 5 “sells” out of 250 FAAMG recommendations

  • 5. Politics: privacy becoming policy issue as equivalent to entire global population searches Google every 2 days; last year 1579 “data breaches” exposed 179 million records of personal names plus financial or medical data; pending US & EU regulation threaten 4% of tech revenue.
  • 6. Wage disruption: IMF says 50% of the decline in labor’s share of income is attributable to technology (25% due to globalization); number of global industrial robots by 2020 will be 3.1 million (was 1 million in 2010)
  • 7. Tech is cash-rich, tax-light: sector has $740bn of cash overseas (larger than all other sectors put together ($510bn); effective rate of tax on US tech companies is 16.9%, lower than the 19.3% paid across the S&P500
  • 8. Tech most lightly regulated sector: just 27K regulations (Chart 7) for tech; by comparison manufacturing regulated by 215K rules, financial sector by 128K.

  • 9. Tech & trade: US tech has highest foreign sales exposure (58%) of all US sectors
  • 10. Occupy Silicon Valley: tobacco (1992), financial (2010), biotech (2015) industries illustrate how waves of regulation can lead to investment underperformance.

Finally, putting it all together, is this chart which suggests that it is only a matter of time before the government bursts the third biggest bubble ever created by central banks.

Comments

cougar_w Stuck on Zero Mon, 04/09/2018 - 17:40 Permalink

Correct, and now they will sell cheap Chinese crap to the Chinese, and keep the profits and jobs at home thanks.

You guys have zero clue at all how this shit actually works. You already have no buying power and if you have a job it's about to be given to a robot -- in China. The only way out of this now is to invent a new global consumer class, and the only one that really works for this is Mr. and Mrs. Worldwarthree.

And they will eat your entire family because your kids for lack of jobs and affordable college likely already joined the military, and if not will be required to.

And that is how this shit works going forward. Think whatever else you want to, the US consumer base is going to be devoured by personal debt and global conflict.

In reply to by Stuck on Zero

resistedliving Mon, 04/09/2018 - 15:56 Permalink
  • 8. Tech most lightly regulated sector: just 27K regulations (Chart 7) for tech; by comparison manufacturing regulated by 215K rules, financial sector by 128K.

Most profitable, growing, and hiring....is it me this is just a coincidence?

Endgame Napoleon analyser Mon, 04/09/2018 - 19:29 Permalink

With greater automation, deflation-to-end-all-deflation will come, anyway. On the Alibaba site, I once saw those book covers that used to sell for $20 a piece in book stores for 1 cent a piece. What set of robot workers churned those out? What volume would you need to sell to make a profit, selling products at 1 cent in 2018? Chinese workers, no more or less than Americans, will not compete with robotic productivity that enables 1 cent retail prices or even 1 cent wholesale prices.

In reply to by analyser

Consuelo Mon, 04/09/2018 - 16:34 Permalink

I can tell you this much - cause I live it, and live here as well:

Any announcement (leak, most likely) of Layoffs at any of the FAANG's will be akin to a ground-zero strike, with the attendant blast wave of fear at 500 mph rolling across the Bay Area, leaving no industry or sector untouched.   Fast-following secondary effects to be felt in commercial and residential real-estate.   The initial shock will give way to scrambling HR departments to reshuffle staffing requirements and Real estate agents to 'close those F'ing deals ---- NOW...!!!

 

Don't you feel like Chris Matthews right about now...?

 

divingengineer Consuelo Mon, 04/09/2018 - 18:46 Permalink

Can't bring myself to shed a tear. Landlords have been absolutely out for blood these last 10 years, kicked into hyperdrive for the last 5. They are making life an absolute misery for 85% of the population in their quest to make sure they extract every last cent from the Tech employees.  Problem is, they only account for 15% of the workforce here and nobody gives a shit if you can't pay, get the fuck out. 

What started out as a great place to live has evolved into anxiety every year when the lease comes up for renewal.  10-15% rent hikes a year on what is already the highest cost of living area in the country has decimated every other sector of the economy. Unless you were lucky enough to have gone into tech and make $240,000 a year with a bachelors degree that would normally pay about $100,000.  

 

In reply to by Consuelo

adr Mon, 04/09/2018 - 16:57 Permalink

You mean the sector made up of 20-30 somethings who don't have business plans or an idea of how to make a profit, yet were handed billions in VC and unmeasurable P/E ratios is a bubble?

You don't say. Wow. What a mind job.

 

cougar_w Mon, 04/09/2018 - 17:35 Permalink

Low information content.

Mostly apples vs oranges.

The world changed. Nothing is the same as it was 30 years ago, not even people are the same. We are in uncharted waters now, for better or worse you can't just draw a chart and say "look at this". Half of the OP's points made me go "yeah so what?" and the rest made me think "fine, we'll see".

So yeah, we'll see.

divingengineer cougar_w Mon, 04/09/2018 - 18:52 Permalink

Envy, greed and resentment are real.  The underclass may not deserve a dime, but they will vote themselves someone else's money if they can, and they can in CA. 

That is the reality now. Come in over $150,000 gross adjusted household income and see what happens on your tax return. Bend over and grab your ankles, that's what. Every deduction you used to have goes out the window and you feel like you were just fucked by a train. 

It will get worse. 

In reply to by cougar_w

Let it Go Mon, 04/09/2018 - 21:31 Permalink

After years of central bank stimulus, many investors have become convinced of the idea that "central banks will never let markets go down." The so-called FANG stocks have accounted for much of the stock market rally we are witnessing, however, it might be wise to step back and question the fundamentals behind the upward movement of these stocks.

It is logical that these so-called bright spots that have pulled the market higher also have the most room to fall as valuations retreat. Signs that central banks are becoming more concerned about asset bubbles growing as a direct result of their actions is in the air. A massive surge in debt across the globe as consumers, businesses, and governments have thrown caution to the wind setting up a scenario that ends in tears. The article below explores why the FANG stocks may suffer most.

http://FANG Stocks Have Potential To Really Bite Investors.html