Steps to the Moon

RANCHO SANTANA, Nicaragua – Stocks sold off on Friday. The Dow fell 211 points. Leading the retreat were tech stocks with the Nasdaq, where they tend to hang their hats, down more than 3%.

“Tech sector leads sharp sell-off,” said a Wall Street Journal headline.

 

1-Nasdaq CompositeNasdaq Composite, weekly – the ride has become bumpy – click to enlarge.

 

“Did you see what happened to professional social network company LinkedIn?” asked Exponential Tech Investor editor Jeff Brown, who was down here with us at Rancho Santana.

 

passive-aggressiveOutwardly calm Linked-In shareholder last Friday.

 

“It was a disaster. The company announced earnings, which were pretty much in line with what the market expected. But its forward guidance was down a little.

“Investors dropped it like a hot potato. The stock dropped by almost 50% – and investors lost about $11 billion – in 20 minutes of trading.”

 

2-LNKDLinked-In (LNKD), weekly since its IPO – a social media company selling the opportunity to make and maintain professional connections – click to enlarge.

 

Jeff is a believer in new technology: self-driving cars. Virtual reality goggles. Artificial intelligence.

“Computers are already smarter than PhDs,” he reported.

“In what discipline?” we wanted to know. “There are Cocker Spaniels that are smarter than PhDs in economics.”

“There is a huge difference between a regular company and a company that is on the cutting edge,” he went on.

“The difference is exponential. A regular company may grow 5% to 10% per year. A good tech company grows exponentially, at 100% a year or more. Just imagine that you are walking. You get somewhere by putting one foot in front of the other. If you are like a regular company, you grow… one step at a time.

“At a step a day, you’ve gone 30 paces in a month. But if you are able to walk exponentially – one step, then two steps, then four steps… in a month – you could have covered the distance from here to the moon.”

Many tech investments don’t go anywhere, Jeff admitted. But when you get it right, you get a moonshot. That may be true. But it is also true that from time to time, investors feel they have gone too far. That seems to be the case now… with a broad sell-off in the entire tech sector.

 

0527-linkedin-HQ-760x400Linked-In headquarters in Mountain View, Ca.

Photo credit: Shutterstock

 

Look Where No One Is Looking

There are “facts and dreams,” said Churchill. Many of those dreamy, techy satellites… launched into space in the Bubble Epoch… are beginning to fall to Earth. Look out below!

Also present here in Nicaragua is our old friend and super stock picker Chris Mayer. The occasion was the Family Wealth Forum, a meeting for our premium family wealth advisory, Bonner & Partners Family Office, in which we discuss both sides of the “family money” formula.

“There are two things you need in order to have family money,” we say gravely, “family and money.” Several people spoke to all the things that could go wrong in a family. Chris was speaking to what could go wrong with the money.

“Right now, hundreds of billions of dollars are being invested in the stock market by investors who don’t know anything about the companies they own. They buy exchange-traded funds [ETFs] – passively managed groups of stocks – that typically track the performance of a stock market index. These ETFs distort the market.

“Some well-known stocks are so heavily bought by ETFs that their prices are completely out of line with the real value of the company. And the ETFs are set up in such a way that there is no judgment at all involved. They are bought automatically, almost regardless of what is actually going on in the companies themselves.”

Chris believes that the opportunities for serious investors are increasing simply because there are so many non-serious investors in the market. ETFs favor the big companies in the big indexes, such as the S&P 500. That leaves the lesser known companies often unstudied and unbought.

 

3-SPY and QQQTwo of the largest stock market ETFs: SPY (S&P 500) and QQQ (Nasdaq 100). Mindless buying? You bet. It has long been known that passive investment vehicles mimicking cap-weighted indexes are artificially skewing capitalization levels with their trading activity, which involves no judgment whatsoever. It is literally “mindless” – and mindless buying can easily turn into mindless selling – click to enlarge.

 

“Even though stock prices are generally high,” said Chris, “there are many stocks that are actually cheap. You just have to look where the ETFs are not buying.”

 

Not Your Grandfather’s Investor

This was the second time in the last few days we had been alerted about the effect of ETFs. nEarlier in the week, my colleague David Stockman warned that a market sell-off would trigger a rout in ETFs… which would collapse the value of many overbought stocks… and potentially wipe out the leading market makers in the ETF sector – Vanguard, State Street, and Blackrock.

“Yes, ETFs add a new danger,” said Chris.

“The ETF buyer is not your grandfather’s stock market investor. He was drawn into the market by greed. He’ll be driven out by fear. And when he exits, the ETFs will be forced to sell stocks at any price.

“We could see some of the steepest crashes in history.”

How to protect yourself? On high alert, we hereby take the “passively managed” fund concept to a whole new level. We propose a new category of investment – a “passive aggressive” fund. It won’t do anything with your money. Just sit on it and sulk. And maybe “forget” to take out the trash.

 

ravenLogo of the upcoming passive-aggressive Raven fund – guaranteed to sit on your money and sulk, and won’t take out the trash.

Cartoon by Jim Benton

 

Charts by: StockCharts

 

Chart and image captions by PT

 

The above article originally appeared as “These Popular Investment Vehicles Could Crash Hard” at the Diary of a Rogue Economist, written for Bonner & Partners. Bill Bonner founded Agora, Inc in 1978. It has since grown into one of the largest independent newsletter publishing companies in the world. He has also written three New York Times bestselling books, Financial Reckoning Day, Empire of Debt and Mobs, Messiahs and Markets.

 

 

 

Emigrate While You Can... Learn More

 


 

 
 

Dear Readers!

You may have noticed that our so-called “semiannual” funding drive, which started sometime in the summer if memory serves, has seamlessly segued into the winter. In fact, the year is almost over! We assure you this is not merely evidence of our chutzpa; rather, it is indicative of the fact that ad income still needs to be supplemented in order to support upkeep of the site. Naturally, the traditional benefits that can be spontaneously triggered by donations to this site remain operative regardless of the season - ranging from a boost to general well-being/happiness (inter alia featuring improved sleep & appetite), children including you in their songs, up to the likely allotment of privileges in the afterlife, etc., etc., but the Christmas season is probably an especially propitious time to cross our palms with silver. A special thank you to all readers who have already chipped in, your generosity is greatly appreciated. Regardless of that, we are honored by everybody's readership and hope we have managed to add a little value to your life.

   

Bitcoin address: 12vB2LeWQNjWh59tyfWw23ySqJ9kTfJifA

   
 

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • The Gold Sector Remains at an Interesting Juncture
      Technical Divergence Successfully Maintained In an update on gold and gold stocks in mid June, we pointed out that a number of interesting divergences had emerged which traditionally represent a heads-up indicating a trend change is close (see: Divergences Emerge for the details). We did so after a big down day in the gold price, which actually helped set up the bullish divergence; this may have felt counter-intuitive, but these set-ups always do. Consider now the updated chart below...
  • Confronting the Dragon with Peter Navarro
      Of No Real Use A young man might go to business school believing he is obtaining some sort of academic training that will enable him to make a comfortable living.  His degree may gain him entry into a large corporation, where he can work his way up to a good income.  This may even put him on the fast track to what he envisions as success.   Don't knock it: Being useless can lead to unexpected career opportunities... [PT]   But his academic training likely won't...
  • Trouble in Paradise
      Impressive Zeal for Faded Ideals Uncompromising independence, rugged individualism, and limitless personal freedom were once essential to the American character.  According to popular American folklore, they still are.  We have some reservations.   Rugged individualists suffer mid-life identity crisis. [PT]   The principles that gave rise to the American character died long ago.  Freedom.  Liberty.  Independence.  Limited representative government. Sound...
  • Gold – Macroeconomic Fundamentals Improve
      A Beginning Shift in Gold Fundamentals A previously outright bearish fundamental backdrop for gold has recently become slightly more favorable. Ironically, the arrival of this somewhat more favorable situation was greeted by a pullback in physical demand and a decline in the gold price, after both had defied bearish fundamentals for many months by remaining stubbornly firm.   The eternal popularity contest...   The list of gold fundamentals that have improved is...
  • The United States of Terror
      Bombs Away! Two recent articles* have again demonstrated that the greatest “terrorist” entity on earth are not the bogymen – Russia, China, Iran, North Korea – so often portrayed by Western presstitutes and the American government, but the United States itself!   This is an old cartoon, but still a good one. It perfectly describes the trigger-happy Western political class and the depth of its “thinking”. By happenstance we recently reviewed the Libya intervention...
  • Capitulation and Currency Pain - Precious Metals Supply and Demand
      Waving the White Flag The price of gold rose two bucks last week, though the price of silver fell 10 cents. We have seen several analyses recently predicting big price drops, in one case by at least $500 in gold by the end of the year. Is this what capitulation looks like? It’s said they don’t ring a bell at the top, but they don’t ring a bell at the bottom either.   The give-up moment arrives... [PT]   We have also seen technical analysis arguing that...
  • Maurice Jackson Interviews Rick Rule – Investing in Natural Resources
      Contrarian Investment Opportunities in Natural Resources Maurice Jackson of Proven and Probable has recently interviewed Sprott U.S. Holdings CEO Rick Rule, a well known specialist and “old hand” in the natural resource space. This is quite a wide-ranging and interesting interview, so we decided to present it to our readers. Below you find a summary and our comments on the main topics discussed, a video/podcast of the interview,  as well as a download link to a PDF file of the...
  • The True Sport of MAGA
      Chest Bumps One of the more extraordinary things that investors have seen in living memory is unfolding at this precise moment. This goes for business leaders, money managers, veteran Wall Streeters, value investors, 401(k) holders, momentum traders, FX guys, gold bugs, technical gurus, chartists, pork belly speculators, quants, astrologists, Larry Summers, put option sellers, dweebs and geeks, millennial index fund enthusiasts, and everyone in between.   Pork belly speculators...
  • Black Holes for Capital - Precious Metals Supply and Demand
      Race to the Bottom Last week the price of gold fell $17, and that of silver $0.30. Why? We can tell you about the fundamentals. We can show charts of the basis. But we can’t get into the heads of the sellers.   Other people's fiat: in the global race to the bottom, it was recently the turn of emerging market currencies to tank. [PT]   We can say that in the mainstream view, the dollar is rising. The dollar, in their view, is not measured in gold but in rupees in...
  • US Money Supply and Fed Credit – the Liquidity Drain Becomes Serious
      US Money Supply Growth Stalls Our good friend Michael Pollaro, who keeps a close eye on global “Austrian” money supply measures and their components, has recently provided us with a very interesting update concerning two particular drivers of money supply growth. But first, here is a chart of our latest update of the y/y growth rate of the US broad true money supply aggregate TMS-2 until the end of June 2018 with a 12-month moving average.   US TMS-2: y/y growth rate with...

Support Acting Man

Item Guides

j9TJzzN

The Review Insider

Dog Blow

Austrian Theory and Investment

Archive

350x200

THE GOLD CARTEL: Government Intervention on Gold, the Mega Bubble in Paper and What This Means for Your Future

Realtime Charts

 

Gold in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Gold in EUR:

[Most Recent Quotes from www.kitco.com]

 


 

Silver in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Platinum in USD:

[Most Recent Quotes from www.kitco.com]

 


 

USD - Index:

[Most Recent USD from www.kitco.com]

 

Mish Talk

 
Buy Silver Now!
 
Buy Gold Now!
 

Oilprice.com