Welcome to real visions trade ideas today. We’re sitting down with Larry McDonald of the bear traps report
It is great to have you here. Thanks Justine. So
The thing stocks and specifically a lot of the tech giant’s have been fueling at the market rally that we’ve seen this year
Whether it’s Microsoft Apple Amazon Facebook, they’ve accounted for about 20% of the S&P 500 rally
And that’s about the same that we saw in 2017 and for a lot of 2018
So do you see this trend continuing that thing stocks that tech giants will power the rally?
Absolutely not
But there has to be a reason in turkette at a catalyst. I mean
Perma bears are not popular people and I don’t want to be perceived as a perma bear
But there is a political firestorm coming at us that is unprecedented
inequality has
Exploded over the last decade not not just mr. Trump’s ball President Obama and mr. Trump more central bankers have created a
vicious cycle of inequality and
you have
left-leaning politicians
on the Democratic Party side that are going to do a number of debates this year and you have a
president in the White House that is
Captured the populist vote of America and there’s really a competing mechanism between the White House and Democrats
The Democrats lost these middle class voters to trump and in the
2016 election the Democratic Party wants those people back and
What you’ll see is
tremendous noise and pressure from the Democrats Bernie on all the fangs through the through the
well, not just the primaries but the debates very public and
President Trump will see this and we’ve already seen this in the last month
We’ll will start to really fight back and make more noise on his populist agenda against the fangs
So the the backdrop on that alone is it’s going to be extremely difficult for the banks to make eyes from here
So do you think it’s going to just be noise or is it going to be actual action?
That’s that’s thing president Trump one. He’ll have to two punches, right the first punch is noise
And that’s what he’s been doing the last month even last like two weeks ago
He hosted a social media summit where he really came after Google and Facebook
but the next step is just looking at inequality looking at the percentage of forgiveness that
in say the
1950s 1960s the percentage of profits that were coming out of the top hundred companies was like 45 50
50 percent now we’re up to 86 percent
Within Google and Facebook in particular. Those are the two primary bad actors you have
Just a real problem coming at them from the DOJ
FCC FTC and and you’re gonna see real action because that’s president Trump’s antidote to Democrats
It’s not just talk but following up with action because the different Democrat
Democratic Party obviously is in control of the wall is not in control the White House
So he’ll counter there noise with action his administration very aggressive action of Linux as you head toward the election
Against I think we think Facebook and Google
Okay, so would it be specifically regulation or do you think you would be breaking them up?
I mean, where do you see this potentially going for Facebook and for Google? Well, if you remember with Microsoft, there’s there’s multiple
Parts to this trade Microsoft and the 90s
I lived through that in the perception the
entire like first three four years was break up and in the end there was a regulatory solution that
Microsoft dealt with pretty well, but the original
Like one thing I’ve learned and spending a lot of time in Washington
Our partner a CG analytics has done a great job. We take the clients around the hill our institutional clients and
There’s this noise that comes out of the initial Washington reaction. That is
The bark is a lot worse than the bite. So in the end, they won’t be broken up. Most likely but the
Perception of a break up will go from like a 10% probability
To maybe an 80% probability in the markets then back to zero over zero over the course of five years
No, just to play devil’s advocate here
you know, a lot of these tech companies are competing against other tech giants in Asia and China specifically, do you see
The government wanting to prop up these tech giants for national security issues
The big thing that they’re going to focus on is Huawei and China
And so the government and the US government’s gonna make it a lot of noise on this and this bipartisan support
So, although there’s you know incredible
differences between the White House and Congress in so many ways
There’s one area of the most bipartisan support is in intellectual property in Huawei
so I think that’s where you’re gonna see if the president doesn’t do enough on this China trade deal to really
pound home and and penalize Huawei for their
Intellectual property violations, you’re gonna see real action out of Congress
So it’s it’s much more going to be focused on intellectual property and not so much defending US companies
okay now in terms of Facebook and Google specifically
Beyond the threat of regulation. Do you see them as overbought? Anyway, what metrics are you looking at their price the sales?
I mean you want to you want to buy fangs when they’re
Three four or five times sales and sell them when they’re ten times sales
If you look back in the last ten years right now, they’re at the high-water mark that right around ten times sales again
And the other great lesson for young people watching us right now
The one thing I’ve learned over my career is when you have a sector that’s close to 30% of the sp500 its market capitalization
That’s just a natural
Risk reward sell signal ten years ago. I
Was when I wrote my book
colossal player of common sense
But one of the things that we talked about in that book is the financials
Eleven years ago were close to 30% of the ESPY of market capitalization and the financials and then the tech stocks. Oh, by the way,
Were less than nine percent. So at eleven years ago the most popular sector for investors watching it was us
right now 10 10 11 12 years ago was the financials and we know what happened there and the least popular sector a
Decade ago is tech and now it’s completely reversed. You know, financials are a joke
Staples are joke – energy is a joke energy has gone from you know
20% of the SP to less than 8% of the SP market capitalization
So the bottom line is you just have a very crowded trade too many people globally are hiding out in things
So many people have come into the u.s
fangs are being treated almost like a money market fund where you can just
They’re so liquid and there’s just so much capital there and it’s it’s the most crowded trade. We’ve seen this year
So then how would you go about trading your thesis here?
Well at the beer Trappe support, we have institutional clients for the most part 85 90 % institutional hedge funds asset managers
There we do a long short combination and for our financial advisors
We just recommend underweight tech in overweight telecom, but I would structure the trade simply
either long the qid ETF which is short bank stocks the
Qqq’s which is that’s that index of large cap tech stocks is almost 50%
Thanks. So literally you have an index which is
qqq’s which is like
50% eight stocks which is insane and by itself
But the the hedge funds that were that our clients were recommending short your Google your Facebook
versus long telecom and why
Specifically, are you looking at telecom to go long? Well, two things number one
5g this is literally this is you’re talking about
The most exciting technological advance since the internet you’re talking about
speeds on your phone a hundred to a thousand times faster over the next
Five years all that infrastructure all that’s gonna be built out and the telecom space is in a prime position
To benefit but most of all is just the underperformance of telecom
Telecom has been such a poor performer over the last five years
They’ve been practically kicked out of the SP. Like you talked about energy going from 20% of the sp500 market capitalization to eight
Telecom is gone. It’s so it’s so bad for telecom that a good chunk of telecom stocks been kicked out of the SP
So it’s a very small component you’re talking about
underperformance versus big tech of
200% of underperformance over the last five years so your big tech stocks are up 190 percent in telecoms essentially flat
So that’s the type of risk reward that we like looking at over the next five years where you have a major?
Technology advance catalysts. You’ve got electric vehicles. You’ve got so many things they’re gonna be powered by 5g in this country
so much so much excitement will come in and innovation will come into this 5g space and
telecom stocks are really in a prime position to be to capture a
Massive amount of profitability relative to where they’ve been in the last five years are there specific levels that you’re looking at for this trade?
especially for going short of thing stocks, which seems like it’s
Somewhat risky trade sure, especially if looking back for the past two years
Well in the last week, we’ve had a big fan mess
So one of them Netflix had a colossal missed then we put the report out about two weeks ago
So we’ve got one Fang down. We’ve got several more to go but
net net I mean if if say you got a China trade deal and
And you just have things come together this summer with the market in the market. It goes on to two new highs
the Fang index which we track on Bloomberg is
Substantially underperforming this appeal by the way, so it’s technical but if that index were to make new highs
We’ll take the trade off, but right now you’ve got lower lows
And you’ve got a real ugly technical backdrop for the Fang stocks as a large basket as a whole interesting
So what would your timing be on this trade? Do you see this playing out in the next few months or is this more a
Yearly, you know five-year trade I think in the next six months, you’re definitely gonna have some some downward action
but it’s a five-year trade for sure, but it’s really a
lection trade between now and the
2020 election
you’re gonna have to see you’re gonna see action out of the Trump White House all the warning signs are there the tweets
We track president Trump’s tweets relative to some of these and you can see that you know
They make new highs and then he comes up at the tweet
Don junior Sweeting about this Trump’s entire kind of, you know close-knit group of
loyalists are all talking about inequality and and the bank stocks and
So you’re gonna see a lot of action out of the White House, but net-net
I think you’ve got ten percent if you’re short the fangs here versus long telecom
You’re you’ve got 10 to 12 percent downside and 50 percent upside over the next two years
So these are two totally different kinds of stocks iyc has a much higher yield than the faying stocks do
How do you see the Fed decision that’s coming up at the end of this month?
potentially impacting that the Fed has a very high high bar because
In recent weeks you’ve got different Fed governors governor williams
john, williams and alike this just different mister mister clara de have hinted around at this 50 basis point cut and
the Fed
His is really playing catch up with them with the world
in other words
most of the global central banks have acted and the feds could have have to play catch-up so number one if the Fed
goes aggressive which which we think they will that’s gonna really help the telecom space because once again, I
am or accommodative fed lowing rates that juices dividend plays and
That’s where telecom has a major advantage over over over bank stocks
So what do you see as the potential biggest risk to this trade?
Biggest risk is just more crowding passive asset management. So
You know, it’s really I don’t want to call it an ignorant crowded trade, but you’ve you had one trillion dollars in
Passive asset management say six seven years ago. Now you have seven eight trillion dollars
It’s a freight train where and then let’s describe what passive asset management is
It’s just index funds
So when I was growing up people would put their money in the fidelity Magellan fund
And people would that’s an actively managed fund where a human being decides what to buy and sell
Now you have index funds like the QQQ like the SP why?
that have
Literally over the last decade have gone from practically no assets
you know less than a trillion to seven eight trillion dollars and as
the money flows in from
Investors all around the US as that money flows in there’s no there’s no buy. There’s no human being there making a decision
It’s there’s no thought to it
it’s it’s it’s really quite scary and
it’s gotten to the point now where
Menisci flowing in stuff
those Fang stocks have to be bought so it could
There’s definitely this there’s always a chance that this freight train runs further than you think. All right
Can you break down your trade idea in 30 seconds?
The most crowded trade in the world right now is long the bank stocks. There’s a political backdrop
historic populist backdrop
Fueled by the ugly stains of inequality which will lay a sword
Through this group of thanks talks in the next six to nine months. Great Larry
Thank you so much for breaking this down for us. Thank you. So Larry is bearish on big tech specifically
He likes shorting the Fang stocks and thinks the QQQ ETF has significant downside risk over the next few years in
Addition Larry is bullish on the telecom sector
he believes the
Telecommunications ETF I Y Z will begin to outperform as we approach the 2020 elections as a parish trade
He likes shorting the QQQ versus iy z
Just remember this is a trade idea and not investment advice. You should do your own research
Consider your risk tolerance and invested cording. Ly for real vision. I’m Justine Underhill