Queen of the Bubbleheads

Wood's ARKK plummets as high flying, capital destroying tech stocks crash back to earth

(Source: Getty Images)

Bill Bonner, reckoning today from San Martin, Argentina...

You don’t necessarily get what you want or expect; but you usually get what you deserve.  

Corollary: What should happen usually does happen. But not necessarily when it is s’posed to happen.

When the feds went into full moron mode in 2020, it was easy to forecast that inflation would be coming. But it was impossible to know when.  

In the space of 18 months, the Fed increased its balance sheet by $4 trillion.  And the federal government handed out trillions in its various gimme/stimmie programs. Businesses, meanwhile, were closed. Output was discouraged.  

Was this not a recipe for inflation?  

Only a Fed economist wouldn’t have seen it coming. And now, inflation is here… at levels not seen since the 1970s.

Another thing that was obviously going to happen was that the high flying, wealth-destroying tech companies were going to fall to earth. Investors wouldn’t pay extravagant prices for money-losing companies forever. Eventually, the bubble would pop. And it seems to be popping now.

Sinking ARRK

Cathie Wood is the queen of the bubbleheads. Look what’s happening to her. The Wall Street Journal:

Shares of the popular ETF, which is known by its ticker ARKK, have declined 45% so far in 2022—including 21% in April alone—as rising interest rates punish stocks that are valued on the prospect of robust future growth.

With few exceptions, people do not invest in stocks for fun. They invest to make money. In an honest market, they make money from earnings, either paid out as dividends or retained by the company. But in the fraudulent market of 2009-2022, many billion-dollar companies earned no money at all. They took in capital – either as equity or debt – and gave nothing back.

Zoom, for example, hit it big time when the feds shut down the economy. All of a sudden, ‘zoom’ became a verb! And everybody wanted to do it. They zoomed in the morning. They zoomed at noon. And then they just kept zooming until late at night. With business associates… with family members… with friends.  

Trapped down in Argentina, we zoomed along with everyone else. But, along with other zoomsters, we paid nothing for the privilege. Zoom was a great service. The challenge for the company was how to make money at it.

As long as the Fed was mainlining credit into Wall Street arteries, it didn’t matter how much money a company earned. Prices rose. And investors hoped to make money from capital gains, not earnings.  

Face to Face Losses

But now, the Fed is no longer buying bonds. It is letting its portfolio of bonds ‘run off;’ they are expiring at maturity. And the Fed is also talking tough, threatening to raise interest rates, which would make it harder for these money-losing companies to raise more debt-financing. 

Also, with the economy returning to normal, zooming is becoming less attractive. Now, we can have meetings face to face.

What should happen in these circumstances? The high fliers should crash. And they have.

In terms of price-to-sales, Zoom sold for as much as 124. Now it is available for 7. Palantir was at 46; now at 15. Lemonade at 107, now trading for 9.  

RobinHood made its reputation by allowing low-cost, rapid stock trading. The price rose to 26 times sales. Now, it’s only 4.

All across the spectrum of promising tech start-ups, the up-and-comers are up-and-coming apart. Teladoc is down 77%. Block, minus 57%. Exact Science has lost 85%. Unity Software has fallen 58%. And Twilio, down 66%. 

Another way to look at this is this: people usually get what they’ve got coming. So, we have to ask ourselves: who has what coming next?

Stay tuned...

Bill Bonner

Joel’s Note: Remember that old saying, “a rising tide floats all ARKKs?” (Or something like that…)

And Buffett’s folksy corollary? “Only when the tide goes out do you discover who’s been swimming naked.”

We don’t like thinking about naked investors, be they octogenarian billionaires or captains of sinking ARKKs. But the point stands. When liquidity drains from the system, as the federales take the bung out of their bond portfolio, we’ll likely see a lot more “tech wrecks.”

But there will be opportunities, too… for those who waited patiently on the sidelines, with plenty of gold and dry powder (cash) ready to deploy. If Dan and Tom are right in their analysis, we’re still in the early days of this trend. “The Generals [S&P 500 mega caps] could easily fall 50% or more,” warned Dan in last Friday’s market note.

So what’s the flip side, the opposite of expendable, wealth destroying businesses with paltry or no earnings? Dan again…

“This is something Tom and discussed privately over the week, as he prepares the next Monthly Report. What businesses have pricing power, even with higher inflation? In what industries will demand stay steady, or even grow, with higher prices? And what is the present value of those future cash flows, given the price action in the stock market outside ‘The Generals’?”

Tom’s next Monthly Report comes out tomorrow. If you’d like to receive all of Tom and Dan’s research, including twice-weekly market notes, monthly issues with all their buy recommendations and macro analysis, plus private events with Bill and his personal network of investors, feel free to jump on board right here…