Handling the FOMO: Part 2
Acorn: Addressing those marching hammers of 'Big Tech'.
Handling the FOMO: Part 2
On Monday, we contemplated another depressing (for value curmudgeons like the 🐿️) year in which the market generals of US large cap tech companies continue to march ahead, leaving every other CUSIP trailing miles behind.
The 🐿️ also warned that the recommended diet may be unpalatable but is probably necessary.
Regular readers of Blind Squirrel Macro will know that I spend much of my life looking for reasons why the dominance of large cap US technology stocks might eventually end. I hope that you find me sufficiently honest about my biases and hope that some of you have profited by fading them! Perhaps this acorn is even your cue to fade their rediscovered strength since last November.
So, what has your 🐿️ learned?
Attempting to dismiss the Artificial Intelligence revolution as a passing fad is a mistake. Knowing how to value this revolution will only be known with hindsight. What we do definitely know is that it will boil down to an arms race where the strongest balance sheets are in the best position to prevail. Guess who has those?
US large cap tech is also proving itself to be immune from elevated interest rates. They may even benefit! In FY 2023, the ‘Mag 7’ generated a total of $16.5bn in interest and investment income, contributing to $312.8bn of free cash flow to the group, of which $205bn was spent on repurchasing their own shares.
In the current earnings season, we are learning that these businesses have only started to tweak the multiple levers at their disposal with which they can improve operating leverage.
We discussed Big Tech’s antitrust risks in Seeing Red over Red Tape back in October of last year:
“Away from the Kabuki theatre of Congressional budget negotiations, FTC Chair Lina Khan finally launched her much anticipated antitrust suit against Amazon last week. After recent losses against Microsoft (attempting to block the Activision merger) and Meta (attempting to force divestiture of WhatsApp and Instagram), this firebrand Millennial regulator is hoping that third time’s a charm in her latest ‘Big Tech’ face-off. Sadly, the 🐿️ does not fancy her chances in court.”
I was already pretty dubious that these giants would be reined in by the courts. I now strongly suspect that their hired guns on ‘K Street’ will be playing the ‘national security card’ to ensure that the group remains sufficiently powerful to cement US leadership in AI. Antitrust risk can be discounted aggressively.
Finally, let’s not forget that momentum is not a four-letter word. While the inner intellectual snobbery of a value investor naturally drives him or her towards mean reversion trades like a moth to a flame, never forget that riding a powerful trend has always been the most effective way to generate P&L.
The Plan
“So, like around March I could feel it coming. I just – I had to play. I couldn’t help myself. And three times during the same week I pick up a – don’t do it. Don’t do it. Anyway, I pick up the phone finally. I think I missed the top by an hour. I bought $6 billion worth of tech stocks and in six weeks I had left Soros and I had lost $3 billion in that one play. You asked me what I learned. I didn’t learn anything. I already knew that I wasn’t supposed to do that. I was just an emotional basket case and couldn’t help myself. So, maybe I learned not to do it again, but I already knew that.” ‘The Druck’ reminiscing about buying the 2000 top in tech stocks while at Soros.
It is tough not to hear the words of legendary trader Stan Druckenmiller bouncing around in the back of the 🐿️’s mind as we buy the latest breakout in tech. In the event that it turns out that we have been sucked in at the top, we need to ensure that the loss will be a ‘paper cut’ rather than a sucker punch.