US markets bounced back overnight. There was no reason in particular. Probably just that, on consideration, the previous day’s falls might have been a little excessive.
Still, the market feels a little bit like the proverbial cat on a hot tin roof. That is, edgy, nervous, and ready to jump if need be. The cat, as it were, may have an eye on the unpredictable Donald Trump. He has managed to unsettle the market by kicking off a trade war and by tweeting the boot into Amazon.
Amazon is a big boy though, and knows the game of American-style capitalism better than anyone. As the Financial Times reports:
‘Amazon has assembled the biggest lobbying team of any technology company in Washington as it expands into new lines of business and faces a barrage of attacks from President Donald Trump.
‘The online retailer has doubled its number of in-house lobbyists from 14 to 28 since Mr Trump’s victory, giving it greater firepower than Google’s 13-person operation and more than Facebook and Apple, which each have 8 in-house lobbyists, according to data compiled by the Financial Times.’
Parasites on parasites…
Despite the tech jitters seen over the past few months, it does appear that the Financial Review’s resident bear, Karen Maley, is getting a little overexcited. She writes:
‘Welcome to the tech wreck, 2018 style.
‘As investors rush to dump their tech stocks — and particularly the FAANG stocks (Facebook, Amazon, Apple, Netflix and Google parent Alphabet) — some analysts are drawing comparisons with the collapse of the dotcom bubble almost two decades ago.
‘They fear the sector’s tumble could portend a rerun of March 2000 when high-flying dotcom stocks saw their share prices plummet, which led to a broader market sell-off.
‘There are some striking parallels. As they did two decades ago, investors once again piled into the fashionable “zeitgeist” stocks, which seemed to epitomise the new economy.’
True, except this time around the zeitgeist stocks have genuine economic value, even if they are overvalued. That is, while their share prices will likely correct significantly should sentiment continue to turn negative, comparing them to the internet stocks of 2000 is a little excessive.
Take Amazon, for example. It has a market value of US$700 billion. Net profit for the year to December 2017 was US$3 billion. The stock is hideously overvalued. But probably not as overvalued as a price-to-earnings ratio of 233 implies.
That’s because Amazon’s strategy is to focus on revenue growth (which means taking market share from others) and worry about earnings growth later. It thinks that by creating a technology-led retail infrastructure, and undercutting competitors to win business, it will grow, and grow, and grow market share until it has market dominance. And then the profits will flow.
In 2017 it grew revenues by 38%. Given the US economy (including inflation) probably grew around 5%, that’s a significant increase in market share. Operating cash flow came in at US$18 billion for the year, so current earnings clearly understate the economic value of the company.
Having said that, Amazon clearly has a ‘zeitgeist’ premium built into it. When revenue growth eventually falters, the share price will plunge. But it’s a serious business. It won’t disappear.
Let’s take one other stock — Apple. Based on 2018 earnings forecasts, it should generate nearly US$58 billion in net profit this financial year. That sees it trade on a price-to-earnings multiple of 14.7, and a return on equity of nearly 33%. That combination reflects good value, not an expensive stock.
Moreover, it’s reinvesting nearly 80% of its profits back into the business, which then compound at a relatively high rate of return. That’s a great business, and it’s not an expensive one. It’s why Warren Buffett and Charlie Munger own it.
So I get that tech stocks look a bit frothy here, and some are clearly overvalued. But to compare the current environment to the tech wreck of 2000 is a stretch.
Gold to Breakout to New Highs?
But perhaps comparing gold today to that same era is not? Granted, gold was in a bottoming process from 1999 to roughly 2002, whereas today it’s been on the rise for a few years, but it then launched into a major, multi-year bull market.
It could be on the cusp of another bull market rally. Bloomberg reports that commodity guru Rick Rule is thinking what I’m thinking…and that gold could soon breakout out to new highs:
‘In the 40 years I’ve been involved in the gold market, the most important determinant of the gold price has been international confidence in the US dollar and in particular, the US dollar as expressed by the US 10-year Treasury… The fact that the US seems to be bound to engage in a zero-sum trade war has begun to strike people as something that’s bad for everybody in the world, not just the US. The potential for a winnerless trade war certainly gives cause to some concern.’
In my view, the risk of a trade war is higher than many people think. Don’t forget, free trader Gary Cohn has left the White House. National Trade Council adviser Peter Navarro is still there. In 2011, Navarro wrote a book called Death by China, which outlined the ways China was crushing US jobs.
A year later it was made into a documentary. On the films’ website, none other than President Trump endorses the content…
‘Death by China is right on. This important documentary depicts our problem with China with facts, figures and insight. I urge you to see it.’
Trade war, anyone? Do you want gold with that? Click here to see how to play it.
Editor, Crisis & Opportunity