Most of us love acronyms, especially Americans. They’re easier to use, especially in today’s age of rapid-fire texting.
Does anybody grow tired from the excessive use of ‘LOL’ (laugh out loud)?
Kentucky Fried Chicken changed its corporate name to KFC. Many people know IBM as a computer company without thinking of its full name, International Business Machines Corporation.
And who cares that NASDAQ stands for National Association of Securities Dealers Automated Quotations? It’s enough to know it’s a stock exchange; the first US exchange to abandon floor trading and go electronic.
So it’s no surprise that US investment banks have come up with an acronym for high-flying tech stocks that have led the current bull market.
It stands for Facebook, Apple, Amazon, Netflix, Google.
Or FAAMGs, which uses Microsoft instead of Netflix.
I prefer FAANGs. The acronym reminds me of the sabre tooth and other tigers. I have fond memories of the Asian ‘tiger economies’ that led the bull markets of the 1990s before the tech boom took over.
The 20-year cycle is at work. Back in the 1990s, it was buying tech stocks for the promise of making money.
Now it’s buying tech stocks when they are making money. And they promise to make a whole lot more.
The FAANGs were the big story in US stocks on Friday, 9 June. The weekend press was ablaze with fearful headlines of tech stocks leading a crash. There were stories of too many bets focused on overweight tech names in index funds.
Here’s a look at a daily chart of Facebook, Inc. [NASDAQ:FB]:
[Click to enlarge]
The social media giant was down by 5.8% at the day’s low before finishing down by 3.8%.
And here’s a chart of fellow tech heavyweight Apple Inc. [NASDAQ:AAPL]:
[Click to enlarge]
At the low on Friday, Apple was down by 5.9% from its morning high on heavy volume. It recovered to finish down by 4.0% at the close.
And here’s Amazon.com, Inc. [NASDAQ:AMZN]:
[Click to enlarge]
At one stage, Amazon had lost 8.5% before closing down by 3.4%.
We won’t go through the rest. We think you get the picture.
Why the sudden fall?
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The press put it down to a bearish report from investment bank The Goldman Sachs Group, Inc. [NYSE:GS].
The study fired some warnings on valuation with concerns that volatility has become ‘extraordinarily low’.
Goldman left out Netflix for Microsoft. It said the FAAMG names have increased market capitalisation by $600 billion this year — the equivalent of the GDP of Hong Kong and South Africa combined.
We get suspicious when the press blames a single report for a big move in the markets. There’s usually another story.
As we do on a regular basis, we spoke to a big fund manager in New York.
He reminded us that Friday, 9 June — the day of the big moves in FAANGs — was the second Friday of the month. This was a week before US option expiry on the third Friday of the month.
And it’s quarter-end, so it’s triple witching hour.
Triple witching hour occurs on the third Friday of the month at the end of each quarter. This is when stock options, stock index options and futures markets all expire at the same time.
It’s also when the arbs play their games. The arbitrageurs are powerful players. These guys are very clever and have deep pockets.
Some of them borrow $1 billion and more to buy stocks every quarter. They cover their stocks with trades in futures and options. This locks in a position that will make money regardless of market direction for the next quarter.
But profit margins are skinny, especially in a low interest rate environment made worse by low volatility.
The arbs make moves to protect and profit from existing positions that will soon expire.
They also try to trigger an event that leads to greater volatility. Higher volatility helps to generate larger returns in positions that will be set for the next quarter.
The target for a weak spot was the FAANGs or FAAMGs. The Goldman report was used as a catalyst, perhaps by design although we don’t know for sure. Certainly, heavy selling by deep pockets put the ball in motion.
They’ve taken some profits already, some as soon as Friday afternoon and more on Monday. The game continues until triple witching hour and for a few days after.
The FAANGs had a little wobble but haven’t lost their teeth.
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In particular, Phil understands the real estate cycle like few before him. He knows that property prices generally rise. And sometimes property prices collapse.
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