FANG Becomes GA

Via Doug Kass,

* On Monday I warned that earnings disappointments in the FANG stocks represents an immediate risk to this league leading sector and to the markets

* Netflix and now Facebook have both experienced sub add misses

* FANG market dominance (shades of 1999) - with too many on the same side of the investing boat - will likely morph into shades of early 2000 (which represented the end of the boom and the start of a market correction)

* The markets are likely headed for a FANG-Over

After the close, Facebook dropped a bombshell of disappointing subscriber/user and advertising news and a guide to a slowing rate of revenue growth - its shares fell in the after hours by almost 20%.

The risks to FANG's elevated revenue/profit expectations, FANG's dominance in portfolios, and investors' ebullience toward the acronym were some of the primary market warnings that I wrote about in "Investors Are No Longer Being Compensated For Riskthree days ago.

FAANG's Dominance Represents an Ever Present Risk.

"Yes. They (FAANG- Facebook, Apple, Amazon, Netflix and Alphabet's Google) are great companies, but ETFs may have accentuated the flow of capital into those stocks...

Things that are most hyped produce the most pain... A conspicuous number of ETFs are concentrated in the same stocks. When things go cold ... who is going to buy it?...

If and when it ends, it will end worse for the stocks that have had momentum and for the ETFs that hold them than for the rest."

- Howard Marks, Delivering Alpha Conference (July 28, 2018)

The dominance of FAANG stocks in the increasingly popular passive market (read: ETFs) makes the acronym (and market) risky as many of the ETFs are using the same "momentum" factor. Consider that just five stocks (FAANG) are a top 15 holding in 605 ETFs:

ETF Ownership of FAANG Equities

2018: 605
2017: 501
2016: 430
2015: 332
2014: 277
2013; 230
2012: 175
2011: 101
2010: 62
2009: 14
2008: 9

Source: Lawrence McDonald

Back to Howard Marks:

"The real big money in the investment world - the dependable money, the safe money - is made not betting that the things that have gone up a lot will continue but on betting that the things that have gone down and become unloved will rebound."

The dominance of products and strategies (quant machines and algos) that worship at the altar of price momentum also represents a near term risk to the markets. As Marks says, whenever investors/traders are on one side of the boat, problems often arise.

Today the boat could capsize from the overwhelming weight on that side - should an inflection in momentum begin to occur.

That positive price momentum can change from numerous influences - here are some immediate and potential catalysts:

* Amazon's (AMZN)  aggressive vertical and horizontal strategy could be challenged by the President through a more modern interpretation of the Sherman Antitrust Act (which protects trade and commerce against unlawful restraint and monopolies).

* An earnings disappointment of any FAANG member. (Already Netflix (NFLX)  has recently whiffed on sub ads).

* Tesla (TSLA) might have a liquidity issue.

* Investors may begin to get worried about the large insider selling of FAANG (particularly in FB).

And, on July 9th I wrote and asked a very important question, which "bears" mention:

If Only This Were Fake News

Jul 9, 2018 ' 12:41 PM EDT

The Washington Post is reporting that Twitter (TWTR)  has killed 70 million suspicious accounts over the past two months.

My question -- what the heck does that mean for shares of Facebook, which is trading at record highs despite its current enormous hiring of new staff to handle privacy and content issues?

Bottom Line

"There is nothing like price to change sentiment."

- Helene Meisler (The Divine Ms M)

Some are surprised that the overall market has not immediately fallen and that the VIX did not rise in response to the large miss at Facebook.

I am not shocked (there was some "positive" trade news late in the day) - but more importantly, tops are processes.

For years there has been a narrative to stay bullish - to not see or respect any turns (as significant). It was like that in 1987, 2000 and 2007-08 as the market ramped until the day it began to rollover.

It is no different today.

This week may represent a seismic change in investor perceptions - as it relates to FANG and possibly the broader markets.

The markets are likely headed for a FANG-Over.

Position: None