07.07.2020 – Special Report. Exuberance on Wall Street: The US high-tech stock market has set new records. The Nasdaq Composite rose to 10,433 points and the Nasdaq 100 climbed to 10,606. And some big tech stocks have taken off to incredible heights. At the same time, a second corona wave is threatening in the USA and the economy is down. But no matter: the government support and the Fed are keeping prices up. The alarm bells should go off for experienced traders: This looks a lot like an artificial liquidity bubble. Or is there a fundamental recovery behind it?
Crisis winners Big Tech
These are very interesting figures that are currently reaching us from the high-tech stock market: Amazon has broken the $3,000 barrier for the first time ever. Alphabet is back to a market capitalisation of one trillion dollars. Both companies are crisis winners from the Corona pandemic, as a lot is currently being bought and searched for over the Internet.
Price rocket Tesla
And another stock catches the eye: Tesla has risen to the 1,400 dollar mark. The e-car manufacturer has now reached a market capitalization of 254 billion dollars. We’ll let that melt in our mouth: This is a company that will not be included in the S&P 500 because it does not meet the stock market’s requirement for positive net income. Currently, Tesla would be the 15th largest stock in the composite index. And the company is more valuable than Bank of America (202 billion dollars), Walt Disney (203), PayPal (208), Netflix (210), AT&T (214), Verizon (226) or Intel (250). At Tesla, one of the reasons for this is the hope for the implementation of the electric car. But there is above all the Federal Reserve, which supports the market with its trillions.
„Breaking Bad“ at the Wall Street
According to a broker, the high-tech stock exchange currently resembles a “Liquidity Meth Lab”. Investor Sven Henrich of NorthmanTrader warned that the markets are currently nothing more than an artificial giant, created by the money injections of the Federal Reserve. We add: If we stick to the lab analogy, we are dealing with a methamphetamine lab that makes tons of money, like in the cult series Breaking Bad. But it doesn’t produce any really important consumer goods except drugs.
Trader warns of the bubble
Tech shares are looking increasingly dangerous, all this is a bubble, Henrich warned on CNBC. Apple’s price-earnings ratio, for example, had risen from 16 to over 24 within a year. Amazon’s PEG-ration (Price Earnings Growth) had risen from 1.32 to over 3.0. At the same time, the bank index has already fallen by about a third this year, the investor explained.
But the analysis has become obsolete on Wall Street, fundamental figures irrelevant. The state of affairs is this: The unemployed and the poor are dependent on government support, the middle class has to live in constant fear of losing their jobs and only the top 1 percent of billionaires who invest in stocks are sponsored by the Fed. And all this against the background of the worst economic crash in decades.
Government money
In fact, more than 661,000 companies have received money from the Paycheck Protection Program (PPP), as the recently published figures show, most of them restaurants. These loans do not have to be paid back to the Small Business Administration if they are used for salaries and rent. So the economic situation is indeed disastrous. By the way, a lot of money went directly to Wall Street. According to the famous blog “ZeroHedge” a total of 1,436 Investment Advisors received money from the Paycheck Protection Program. This support is also an excellent way to speculate and inflate the bubble.
“Rocket Ship” Economy
However, there are also voices that are fundamentally good. For example, Jeff Saut, Chief Investment Officer of Capital Wealth Planning. He is also a regular guest on CNBC and has just raised his year-end target for the S&P 500 by a loose 400 points to 4,000 points. And this, even if the Fed should abandon its support.
Saut believes in the buying frenzy of consumers in the real world. The figures for the second and third quarters should therefore come as a positive surprise. As an example, he cited, of all things, the bagged gastronomy sector: restaurants in New York City or in St. Petersburg in Florida are full again. “The economy is doing a lot better than most of the economists think,” Saut said. And then the investment veteran pointed to 5 trillion dollars parked in money market funds. “We may stall here for a while…but I think you’re gonna get a rocket ship coming in the fall this year,” Saut said.
Bubble or messenger of the upswing
Our conclusion is mixed: On the one hand, experienced traders and investors are likely to be experiencing a deja vu at the moment – given the stellar valuations of some tech stocks, everything looks very much like the dotcom bubble of the 2000s. Then the stock market could be heading for a bad end analogous to the development in “Breaking Bad” – for example, the conservative chemistry teacher Walter White, who mutated into a freezing cold drug producer after his cancer diagnosis, died in a bloodbath.
On the other hand, the support of the Fed and government aid programs may indeed have averted the worst. And that people no longer want to be quarantined is something we are also seeing in this country. Perhaps the big shopping frenzy is yet to come and people are making up for the life they missed. Especially if effective drugs bring the recession to an end. In that case, tech stocks would be the early harbingers of the coming broad-based upswing.
The Bernstein Bank keeps an eye on the matter for you – and wishes you successful trades and investments!
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