U.S. tech stocks are viewed by investors as the biggest market bubble right now, according to a Deutsche Bank survey released last Tuesday.
The survey, which is based on responses from 627 market professionals between Jan. 13-15, found that the vast majority of investors (89%) think some financial markets are in bubble territory.
Out of those bubbles, Bitcoin and U.S. tech shares are top of the list. Bitcoin was viewed as a more extreme case, with half of respondents giving the cryptocurrency a rating of 10 on a 1-10 bubble scale, but the bubble has already burst since the survey.
U.S. tech stocks were seen as the next largest bubble, Deutsche Bank said, with an average score of 7.9 out of 10 and 89% of respondents giving it a tech bubble rating of 7 or higher.
Investors also think that electric car manufacturer Tesla is more likely to halve than double over the next year.
As our readers know, we have been of that view for quite some time and are short both Bitcoins and US Tech stocks in our MODEL PORTFOLIO.
In our various publication over the last few months we have highlighted the risks associated with holding these extremely overvalued Tech stock, and we are nearing the tipping point.
Take a Look at the Charts … They Never Lie …
Anyone thinking of buying or holding these stocks at these levels is taking an IRRATIONAL risk and accepting a highly NEGATIVELY SKEWED Risk/Reward ratio.
These stocks have very little upside from here and massive downside…
Investors must take the perspective view of asking why these stocks traded within logical appreciation trends for a decade, and suddenly saw their prices increase multiple folds in the past 12 or 18 months.
The answer is : definitely NOT the growth of their underlying business or profits but
just a liquidity bubble, the infatuation of investors, FOMO, and an unsustainable valuation expansion.
Valuation does Matter …
At current levels, the earnings yield – Profits / Market Capitalisation – of these companies is LOWER than Inflation.
This has NEVER occurred in history and usually precedes major bear markets
Once again, these are extremely good companies the products of which we use every day but the issue here is NOT the quality of the underlying businesses but the fact that it will take holders of these companies at these levels decades to recoup the premium they are paying to hold them.
Let’s take Apple Inc. as an example
At US$ 124 ,
Apple trades at 30x book value.
Its Market capitalisation is US$ 2.08 Trillion
Total Assets of the Company are 323 Billion
Total Liabilities of the Company are 258 Billion.
The 2020 Net equity of the company – including intangibles – is only US$ 65 Billion.
This very low net equity comes from the fact that the management has consistently been using its cash flow and profits to buy back its own shares – boosting the stock higher – instead of paying dividends to shareholders or paying down its debt.
As a result the company is extremely leveraged and its large stock of debt makes its profits dangerously exposed to a rise in interest rates in the future.
With US$ 258 Billion in Debt, a 4 % increase in interest rates would wipe aout Apple’s annual profits….
Moreover, using net profits and cash flows to buy its own shares at multiples from their book value is clearly not in the best interest of investors, it is solely in the best interest of a management that is incentivised by stock options.
Shares buy-backs boost the stock price temporarily by reducing the number of shares, but contrary to dividends that are paid out or debt that its paid back, nothing guarantees that the stock price will remain high.
Meaning that if the stock falls below the price at which the company has been buying its own shares, the money used to pay those shares has been thrown out of the window for good.
At current market capitalisation, the premium paid by investors over the actual value of the company is US$ 2 Trillion – ( 2070 billion minus the 65 Billion net asset value )
The company should generate 86 Billion of profits in 2021 ( more than its net equity, illustrating the level of leverage of the company.)
It will make the same amount of profits in 2022 – no earnings growth expected in 2022.
It will therefore take 23 years of accumulated profits ( 2 Trillion divided by 86 Billion ) for the Net equity of the company to reach 2 Trillion, or a Price to book ratio of 1x.
The true earning yield of the Company, Annual Profits divided by Market capitalisation – or the price we invest in – is 86/2079 = 4.1 % only, and 4.26 % using the Earnings per share.
Inflation is running at 4.2 %…. That means that investors in Apple shares are getting a ZERO real yield on their investment. and the profits of the company are not growing.
To put things in perspective, the cheapest company in the investable universe of large caps, China Railways Construction Corp 1186 HK trades at 2.5 x next years earnings and at 0.29x its book value against 30x for Apple.
Its market capitalisation is US$ 15 Billion
Its Net equity is US$ 50 Billion
Its total assets are US$ 194 billion and
Its Total Liabilities are US$ 145 Billion.
The company will generate US$ 3.75 Billion of profits in 2021 and 4.15 in 2022
That represents an earnings yield ( profit / market cap ) of +27.6 % to be compared to Apple’s 4.2 %
The point we are making is that when putting together the dangerous technicals and lousy fundamentals, holding these bubbly US Mega caps today is extremely dangerous.
And contrary to the rest of the market, the coming correction will probably be the first leg of their secular bear market rather than just a correction.
We are often asked by our Readers what is the best way to hedge one’s portfolio and protect against the popping of this bubble.
Investors usually use the SPXS or thee SQQQ to hedge their portfolios,
These traded ETF’s deliver three times the inverse daily performance of the SP500 Index and the Nasdaq 100 index.
Indeed, the US tech mega caps represent extremely high percentages of the main indexes due to their overblown market capitalisations, so the indexes will fall with them in tandem once these stocks break down.
The market cap of the SQQQ is 1.73 Billion and the one of the SPXS is 383 million, they are highly liquid instruments and we have been using them regularly ourselves in our Model Portfolio.
But these instruments present two disadvantages :
. The first one is that the investment bubble is concentrated in only a bunch of US tech Mega caps and not the entirety of the 500 stock of the SP500 or the 100 stocks of the Nasdaq 100 index.
There is therefore no point in selling short the entire indexes when the bulk of their components are actually good stocks worth owning.
. The second is that by reflecting the DAILY moves of the indexes and not an absolute rate of move over an extended period of time, these instruments loose intrinsic value almost every day.
This is why at Mechelany Advisors, we have created the Mechelany Advisors US TECH SHORT PORTFOLIO and asked EXANE to issue a straight forward Index certificate giving 2 X the performance of the basket.
The portfolio consists of the world’s 10 most overvalued US tech companies in the investable universe – see the charts above –
it is down only -2.78 % since we launched it in March 2021.
BUY Exane Leveraged tracker Short on Mechelany US TECH SHORT Portfolio @ US$ 36.5
With a leverage of 2.7 x at current levels and a straight one to one dollar sensitivity to the stock prices rather than daily movements,
This instrument is by far the best to short the US tech bubble.
Rather than using the SQQQ or the SPXS and shorting 500 stocks that are not in bubble territory, this instrument focuses neatly on the situation.
It can be bought easily by using its ISIN # CH0590403132.
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