August, 2018
“If you are shopping for common stocks, choose them the way you would buy groceries, not the way you would buy perfume.”
– Benjamin Graham
Up until recently, the word “fang” usually described things to be left alone…
like rattlesnakes, vampires and the IRS. Leave it to Wall Street to create a new type of fang everyone would want…and hope it would never bite. After July, the Street is using a new word: “FAANG-over”.
Maybe we should start at the beginning.
In 2013, TV guru Jim Cramer invented an acronym for a group of stock market leaders: Facebook Amazon Netflix and Google. FANG. Later Apple was added and the spelling changed to FAANG.
(Note: After Cramer invented FAANG, Google changed its name to Alphabet. Investors stayed with FAANG because FAAAN sounds more like Bambi than a pool of stocks.)
How important are FAANGs to the market? A few FAANG statistics:
- Just those five stocks make up 27% of the entire NASDAQ.
- If FAANGs were a country, they would be the fourth largest economy in the world.
- These five stocks, plus Microsoft, accounted for 99% of this year’s S&P 500 profits through mid-July.
(Statistics source: MarketWatch)
In July the psychology changed. FAANG earnings came in and the FAANG stocks – as a group – went down. Now Wall Street is experiencing a FAANG-over.
The reports:
Facebook: Earnings were up slightly, but revenue was down. The number of Facebook daily average users declined. The stock lost 20% (a loss of $120 billion).
Amazon: Earnings were great, doubling Wall Street’s expectations. The stock surged on the news, then faded and dropped 6% from the highs.
Netflix: Fewer subscribers. The stock dropped 14%.
Google (Alphabet): Beat estimates. Smashed estimates. The stock dropped 4.5% five days after the announcement.
You’ll note we left out Apple above, the last FAANG stock to report. On July 31st, Apple also beat Wall Street estimates. Contrary to the other FAANG stocks, Apple shares rose on the earnings news. (So far, anyway.)
Conclusions: Analysts are viewing the last two weeks of July 2018 as a major turning point in the market, a “rotation of leadership” from growth to value. At the very least, the FAANGs may no longer trade up and down together.
Let the FAANG-over begin.
A few selected charts from July 2018: Market Summary – July 2018
S&P 500 Index, +3.6%, Source Bloomberg
Dow Jones Industrial Average +4.71%, Source Bloomberg
Gold Generic Contract -2.46%, Source Bloomberg
WTI Generic Contract -7.27%, Source Bloomberg
Consumer Mortgage Rates – up a little, Source Bloomberg
We opened Watching the Tape with the quote from Benjamin Graham, who is considered the greatest “value” investor in stock market history.
With market leadership rotating from growth to value in July, we thought it would be worthwhile to share a few observations from Ben Graham’s book “The Intelligent Investor”:
“The intelligent investor is a realist who sells to optimists and buys from pessimists.”
― Benjamin Graham, The Intelligent Investor
“Those who do not remember the past are condemned to repeat it.”
― Benjamin Graham, The Intelligent Investor
“While enthusiasm may be necessary for great accomplishments elsewhere, on Wall Street it almost invariably leads to disaster.”
― Benjamin Graham, The Intelligent Investor
“Buy cheap and sell dear.”
― Benjamin Graham, The Intelligent Investor
The schoolteacher asks Billy Bob: “If you have 12 sheeps and one jumps over the fence, how many sheeps do you have left?”
Billy Bob answers, “None.”
“Well” says the teacher, “you sure don’t know your subtraction.”
“Maybe not,” Billy Bob replies, “but i darn sure know my sheeps.”
― Benjamin Graham, The Intelligent Investor
