Huge Political Risks for FANG and Big Tech (w/Larry McDonald)

Huge Political Risks for FANG and Big Tech (w/Larry McDonald)


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 so 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 well 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 You You

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16 thoughts on “Huge Political Risks for FANG and Big Tech (w/Larry McDonald)

  1. Trump hates when the stock market tanks tho. I can't see him doing anything that is going to harm it that much. He's basically bullying the Fed into supporting it. Democratic debates can do damage though.

  2. Comparing to the Internet, 5G is just a small incremental improvement. I cannot see how 5G changes the picture for telecom in a dramatic way.

  3. Ok total BS on telecoms. Its the same as big pharma. Just because there’s a high demand doesn’t mean that the companies will do well when they’re run by corrupt inept monopolies who refuse to innovate. You might as well invest in Venezuela

  4. Populism is not a threat at all. Populism is productive. We can actually recover the Tech Giants if they stop spamming Cable Network News. Why must the Communist Propagandists insist on destroying all business? Make YouTube Great Again! They just can't compete in the realm of ideas.
    They are past the expiration date in a new age of politic.
    They don't have to destroy the Platforms because it's not Cable Network News. Here's a thought! Try letting a Communist Propagandist outlet like Fox News fail and bring in some real talent! The Nepotism and idiocy is shocking. It's an issue of National Security. For the Nation to be Secure, it must be Secure in the Spirit of its Law. If they had been wise enough to leave well enough alone, we would already be innovating new tech and new systems.
    Inept, greedy and lacking creativity. No one wants to destroy a good business. The problem is some unknown external pressure exerting what is clearly some corruptive influence. We can tell some force is undermining the Free Spirit that makes America exceptional. It's becoming painfully obvious who the crap actors are. Get a job you lazy nepotistic Communist scum!

  5. Larry had me for about seven and a half minutes. Then he started to sound stupid. Why must everyone always be toting and touting the Mainline Market nonsense! News flash! They're rigged. It's algorithmic trading. Just go back to analog markets and have your old unemployed propagandists tote around the paper. It'll go a long way in keeping Two Billion Chinese off our lawn!
    We know Obama sold America to the Chinese! For heavens sakes our business leaders don't have to act like it! And would it be too much to ask for a Politician with an actual idea, instead of the wet farts they call brains? It's like after an election they go out to lunch like they're tenured and the elections are rigged… Just a little honesty and the whole lot of you can instantly do better.
    Good talk. Thanks.

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