On this week’s show, Karl discusses how much longer growth stocks can continue to outpace value stocks. In addition, Facebook, the tech bellwether, fell hard this week. Is it a sign of things to come?
Karl Eggerss: Hey everybody, welcome to the Eggerss Report. It’s your investing playbook. Thanks a lot for joining me. My name’s Karl Eggerss, and I come to each and every week to try to help you make sense of what’s going on in the markets, to help you a little bit in the financial planning realm, and answer your questions, which we are going to get to a question here in a minute. I thought it was a pretty good question, so we’re going to discuss that. If you’d like to get ahold of us, our telephone number is 210-526-0057. Our website Eggersscapital.com. E-G-G-E-R-S-S capital.com.
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All right. Hey, before we get started, I did want to give a shout out to Operation Interdependence. This was something that we had sponsored through a local San Antonio radio station. And basically what they do each year is for several weeks, they collect all types of things and they ship it overseas to our military families. And they’ve been doing this since 2001. They shipped over two million civilian rations worldwide. It’s called Operation Interdependence. And we are a proud sponsor this year. We were one of the collection stations here in our office, and had a box and so forth, and then they had a drive obviously down at the station as well. So it was really successful once again, so look forward to probably do that again next year. And thank you all who participated as well.
All right, well we had a really, really busy week in the markets. I mean there was something every day. And probably the thing that got the most attention, and was really probably the biggest deal was the Facebook news, or the earnings and the subsequent drop in Facebook shares. Now keep in mind, and I’ll give you some information in a minute, but this was a drop of about, I think it was around 18-20%, 25 after hours at one point. But it was the biggest market cap drop for any stock ever. So that was a big, big deal. But keep in mind, and I’m not defending this stock, but it does take it only back to where it was in May. Now here’s the interesting thing about it, since all this stuff came out about Facebook, and they’ve had these really dopey commercials saying, Hey, we’re going to do a better job of not spying on you and all this stuff, you know, and they’re being forced to do this. Their expenses are going up, and users growth is slowing a little bit and not a big shock. You know, you talked to some of your friends and they say, “Hey, I don’t use Facebook anymore. I don’t trust them. I don’t want that stuff.” And the course of the kids aren’t using Facebook anymore. They’ve moved onto other things.
So this was the one, if you recall, last weekend I told you of the Fang stocks, this was the one that I felt like … this, and Netflix are more vulnerable than Google, now called Alphabet, and Apple and even Amazon. I felt like Netflix and Facebook were the two that I was concerned about. Just because of the types of businesses they have, the valuations, et cetera, and you can see what happens. I mean the stock drop 20 percent in one day. Now that doesn’t mean that it’s going to go down forever, but it is as we move through the Stock Market, and the market’s is more mature than it was in ’09 coming out of the financial crisis, the cycle is more mature, you have to be more careful in what you own. And we’re going to talk about that a little bit later. But it’s a good example of what can happen if a stock is overpriced. Sometimes it’s an overreaction, right? Every stock that goes down doesn’t necessarily justified. I think Facebook’s was justified. And we saw some follow through on Friday, so that was probably the biggest news of the week.
But we started the week on Monday, The 10 year interest rate, 10 year bond, was pushing three percent, hasn’t quite gotten above that and stuck in a while. So that is something to continue to watch, but that was kind of Monday. Tuesday we saw Chinese stocks surge, and that really has sent a boost, a much needed boost to International stocks, merging markets especially. And they’re basically saying we’re going to do some things to get our economy going. Some easy measures they call it. And so that was a little injection. Of course, we saw Bitcoin go back above $8,000. Now Bitcoin made news later in the week because the Winklevoss Brothers, their ETF was turned down, and so we will not be seeing a Bitcoin ETF from them, at least now. So you’re seeing kind of Bitcoin back in the news a little bit. That was Tuesday. We saw Bitcoin back above $8,000.
We saw big gap up in Small Caps and Tech, only to see it reverse and finish lower. Dow and S&P did okay. But, and again, you saw this little rotation in to Materials, in to International. So it’s kind of interesting to watch because that was kind of a precursor on Tuesday what was going to happen later in the week. And of course, Wednesday market was weaker most of the day towards the close, the president said he had struck a deal with Europe on tariffs, and boom, market jumped 200 points pretty quickly. He reached an agreement with Juncker, aimed at averting a trade war they said. Now we saw on Friday, that there’s still some details to be worked out of course. Actually, the president spoke to him on, on Friday, so we’ll see. But that was again, this pattern that we’ve seen, which is we’re going to slap tariffs on, we’re going after you, we’re coming after you guns a blazing. You fast forward a few weeks or a few months. And then there’s a deal struck that’s maybe lays the groundwork for what will happen with Japan.
But certainly as I’ve been talking about this governor on the stock market, holding this thing down is primarily because of tariffs and the threat of tariffs. Remember, a lot of this is threats and these threats are causing some companies to go, hold on a second, maybe I don’t want to build a new factory just yet, don’t want to hire the new employee just yet. Let me see how this shakes out. So just the talk of tariffs is keeping a governor on the markets, and maybe at some point the economy. But that was some good news that boosted the market. Now Wednesday was the day, of course that we saw this after hours Facebook debacle and you know, look, again, cashflow going down, costs, going up to clean their act up. And again, we discussed it last week, 124 billion dollar decline in market cap. It’s the biggest loss ever of value in one day for US traded company. So that was a really big deal. And again, that was probably the underlying note of the week was Facebook.
Automobile stocks, really the only way to describe them is they suck. I mean, I hate to use that language, but that is pretty much where they are. And, and you know, they’re not expensive stocks. I mean, you could argue that companies like Facebook are more vulnerable than General Motors, Ford, some of these other ones. And full disclosure, we own Ford, and a couple of our strategies, and you’re getting a big, fat, juicy dividends. So do I think it’s probably better than a bond? Yes. The problem is not that they’re expensive stocks. The problem is some of the things they’re not executing on. Auto sales flattening out potentially. But also I think the main thing is just there’s not a lot of growth there. And we know in this market, there’s one thing about this market right now, it’s rewarding companies growing, and it’s punishing companies that are not growing. Even if they’re undervalued, they get punished because they’re not growing, and the automobile companies are not. So again, do we give up on them right now? No, I don’t think so. I think if it’s part of a portfolio, you know, having a six percent dividend type stock is fine, it’s better than bonds, but there may be other things that may grow a little faster. So it’s kind of the timing thing. I wouldn’t necessarily add to it right now. But that was really a whole slew of those earnings came out.
And again, we’ve had big earnings. I mean this was a really heavy week for earnings across the board. So not only was it in technology, but it was in the automobiles. It was across the board a lot of earnings. Of course, we saw Thursday … Of course Facebook was down after hours on Wednesday, but Thursday is when we really saw it affect the market. So we had this big divergence where the Dow is up, but the NASDAQ got hit. And so because again, remember we’ve talked about it, when you have one of the Fang Stocks go down that much, that is the index. They’re so heavily weighted. So we saw this big divergence, where the overall market was fine, but if you own some select technologies stocks specifically Facebook, you got hurt. And, and like I said earlier on Thursday, after the bell, the SEC came out and rejected the plan by Tyler and Cameron Winklevoss. The founders of Crypto Exchange Gemini, and they wanted to list this Bitcoin ETF. And basically they said, “No, you can’t.” So they may file an appeal, we’ll see it. And the SEC was clear that they’re not talking about Blockchain, they’re not even talking about Bitcoin, but they’re saying this particular one, we’re not comfortable with it. So again, for right now, there’s not a lot of ways for people to invest, and there is demand for this, right. There is demand for these types of investment products, but we’re still kind of in the Wild West where the SEC is saying, “Slow down, we need to see what’s going on here, and we don’t like what we see just yet.” Go fix some things maybe, come back to us. Who knows? That was Thursday. Then Friday morning, of course, we got the GDP report that came in at 4.1%. You look at that and go, “4.1%, man the market must have taken off.” No, market was pretty weak. Why? Because this has been priced in. In fact, the estimates were for 4.2%. Remember, they used to call it the “Fed Put.”
It basically went something like this. Don’t worry. You can invest in stocks because if the market gets weak, the Fed’s going to lower rates, inject some money, do quantitative ease. They’re going to do something, and it’s going to boost the market. If the economy is good, great, it’s good because we want it to be good. It was a no lose situation. It was the famous David Tepper argument, and it worked for a few years. Now, it almost feels the opposite, right. We get a 4.1% GDP print, the fastest pace since 2014, and the market goes down and yawns. Why? Because it’s almost the opposite.
Well, if it’s a good report, the Fed’s going to raise rates, right. We don’t want them to raise rates, and yet, they’re going to do that if the economy is good. Well, what’s the alternative? The economy being bad. It’s either the economy is good and Fed raises rates, or the economy is bad. Those two things are not a good combination. That’s at least the theme right now, right. Now, how do we overcome this? In other words, does this mean we need exit all stocks and sit on the sidelines? No. Again, what we pay attention more to is the investors and what they’re doing with their money.
Right now, as we’ve said, we’re still in a bull market. We are still seeing much more demand than supply. By the way, I’ll get to this in a second, but we focus on that, right. Now, if the Fed doesn’t do this correctly and they raise rates faster than what the economy can support, that’s a problem. If they’re raising rates and the economy has grown at a reasonable pace, we can get by here, and earnings can continue to go up. Speaking of the economy though, what I was going to mention is that I talked to a CEO this week of a logistics company and a trucking company. He said, “Business is so good, the economy is so strong right now it’s scary.”
He said, “It seems like it’s too good to be true.” He’s having to turn down business. Boots on the ground, there is good stuff going on. Now, there’s a difference though between the economy, what investors are doing, the stock market. Those are all different things. As we dissect this, we know what’s going on right now. What’s happening is value stocks are not being rewarded. Growth stocks are being rewarded, but the growth stocks, some of them are very expensive. I went through on Friday, I went through about, I would say, somewhere around 200 to 300 different companies and didn’t take a huge deep dive but did some quick glancing at their charts for fundamentals and so forth.
There’s not a lot of attractive things out there of name brand. The things that have worked are very expensive. Number one on the list would be companies like credit card companies, some technology companies. They’re way overpriced, and that doesn’t mean they go down tomorrow, but you’re playing with fire owning these things. I’m telling you. They’ve been studs. They’ve been beasts the last several years. You can’t argue with that, but what’s happening is it’s not that the earnings are going up. They’re still not going up, they’re going up. It’s that the stocks are going up at a faster pace, and it makes the stock too expensive relative to all the fundamentals, the profits, cash flow, all those things.
On the flip side, there are still good deals in the market. This is where owning individual stocks makes sense because you can cherry pick what you own. Even if you don’t want to do that, even if you don’t want to do that and you say, “I don’t do that. I like funds or ETFs,” fine. Look for funds that have a value bent or a fund manager who tends to lean that direction. How much do they own Facebook? Do they own Netflix and Google and Amazon and all those things? Do they own those or not? Do they own some of the high flyers, or are they looking in these cheap areas? Same thing on the ETF front, you can find ETFs that have screening processes.
You can have ETFs that have more of a value tilt. I think as we move along here, it’s not that you want to abandon growth but try to find some growth at a more reasonable price. I think if you do that, it’s a way to continue to participate in the market without being stunned because again, I think we could see a rotation in almost this bear market that doesn’t take the whole market down, but there’s pieces of it that get hit real hard where we could see the credit card companies get hit really hard but maybe financials and international things like that continue to do well. This week was pretty interesting because again, the international complex looked pretty good.
It’s a little bit of a change. If you look at the things that worked well this past week, it was steel. It was the grains did well, railroads, international stocks, airlines. Those are all areas that have been beaten up quite a bit. They had a pretty good week. Mexico did well. We’ve been talking about that lately. Financials, energy, all that stuff did very well. If you look at what didn’t do well, home construction, biotech, small caps, retail, all the things that had been working got hit this week. Again, technology was interesting because technology overall, point to point, didn’t get hit as hard as you would’ve thought because it started the week off all right.
It was later in the week that it got hit. It was a jam packed week, full of earnings, but again, know what you own and don’t paint a broad stroke on the stock market and say, “Well, it’s expensive.” Look at what you own. Yes, a big part of the S&P 500 or the Dow Jones or the Nasdaq or the Nasdaq 100 are controlled by a few stocks. That we know, so just if you don’t want to own those, you don’t have to own those. There are ways to get around that. As we move forward, pay attention to what you own versus these indices. You may want to do something different because it is dangerous right now, some of these.
Look, Amazon, if you want to call it dangerous just because it’s gone up a lot doesn’t meant it’s dangerous, but some of these stocks are way overvalued. They just are. Again, that doesn’t mean they go down tomorrow. They could go up for another year that way. Again, know what you own. I did want to get to a listener question. This comes from K.J. We’ll use the initials K.J. Comes from Colorado. “I just finished listening to your Saturday podcast.” This was last week’s. “Something you talked about a while back came to mind.” He said, “Recently, you’ve been talking quite a bit about the bull market will continue, and there’s underlying positive breadth of the equity market.
Several months ago, you were discussing the possibility of a protracted sideways equity market due to high valuations.” I don’t remember talking about that specifically. We’d have to go review the tapes. “That may be the scenario we are in right now when we’re reaching the top of the range. Much of the overall equity markets appear to be at a critical point, and we may soon see a reversal to the sideways range we’ve been in or a substantial breakout to the upside. Talks about basically a book he finished called, Trend Following, wanting to know what I thought about that.”
Says, “The philosophy is to invest heavily in equities when they have broken out to all-time highs. Charting shows there’s a lot of validity to the strategy. I’ve always appreciated your insights and would like your opinion on this topic.” Basically, I answered him. I said, “Hey, K.J., thanks for listening and participating.” I put, “While there are pockets of the market that are very expensive, i.e. growth stocks, there are other areas that are very cheap, value stocks and international. Therefore, I think it’s very important not to paint the entire market with the same brush,” as we just talked about.
Having said that, overall, the market is less expensive now than it was earlier in the year simply because while the stocks have moved sideways, as you’ve mentioned, earning have continued higher. It’s certainly not a cheap market, and it’s an old bull, but an old bull doesn’t always translate into a bear. We don’t see any signs of an imminent bear market. There’s not enough distribution … yet. because it will probably come at some point. In terms of trends, I think there will be a big chunk of money that comes in if and when we break out to new highs, to validate his point. Not far from it, but close isn’t good enough for trend followers.
If you zoom out, the trend is still your friend, and we’re still going up. Got ahead of itself late last year and seems to be back on track after a pullback, grinding higher as it climbs the wall of worry. Overall, I believe in a portion of the portfolio to be safe and income producing, a portion that stays in the market at all times, a core, and a portion in areas of value, and a portion dedicated to tend following. I think that balance allows investors to sleep at night without feeling left out when it’s going up or too heavily invested as it’s falling. Of course, every investor and situation is different.
Those are just my general thoughts. I hope this helps. He wrote back and said, “It did.” Look, but all those things that he was touching on are things we’ve been discussing, which is let’s break this down. The market isn’t cheap overall. Stock market is not cheap. If you strip away the expensive stuff and you strip away the inexpensive things, you’re left with some things you can buy. If you are trying to find some good deals, some of you may be riding that momentum train, and it works. You got to know when to get off. My point was the market’s getting cheaper because of the fact that earnings are going up and the price has moved sideways for seven, eight months.
Now, as we get close to these old highs, if we break out, yes, there is a new round of buyers that will say, “Okay, I was wrong because I thought it had topped.” That’s the psychology behind it. That is one of the negatives. Look, one of the negatives right now of this market is that it hasn’t made a new high in several months, since January. That’s a negative. We can go down the list of negatives. We’ve had some cyclical economic slowdown lately. And again, that’s a negative in the short term. What we’re looking for is if this is persistent or not, and I don’t know if it’s persistent yet. But that is something that we have seen in the last, oh I don’t know, maybe last few weeks. We have seen some things start to look a little weaker, but it hasn’t made a trend just yet.
And remember, we got that 4.1% GDP, but it’s rear-view mirror looking. It’s like, “That’s already happened, what’s going to happen in the future?” So here’s kind of some negatives and then we’ll go to the positives. As I said, the negatives are we have oil prices rising, we’ve got kind of this slow down and some of this cyclical economic indicators. We have the 10 year yield not moving up. I mean, yeah, it’s just sitting there around 3%, but it should be going higher, right? If things were great.
Rotation into defensives recently, right? Money going back into utility stocks and REITs and things like that and consumer staples. And then as I said, the market has not really made any progress in about six or seven months. And internationally we’ve had a bit of slow down, so those are some of the negatives.
The positives that we’re seeing is we still see PMIs, these manufacturing indices stronger. We still see breadth doing very well. We seeing leading economic indicators making new highs, which is a really big one. Consumer confidence is high. Earnings have been doing great. I think the beat rate is 70-some odd percent. Was 90, as of course, as more companies reported that number went down a little bit. Oil prices rising. You know, that’s a negative for some people and it’s a positive for others.
Then we have just the overall backdrop of supply and demand is still good and that’s really the bottom line. So let’s acknowledge the negatives, let’s acknowledge the positives, but realize that this is a market right now that I think will get a little choosier and you know, you just have to pick where do you want to be. For me, I still see more value internationally than the US. I see value in things like commodities that are out of favor and people hate them. I mean, they hate them, and when there’s blood in the streets, as Mr. Buffett said, that’s when you have to go sniff around and buy some.
You know, you look at things like Amazon or Facebook, that’s the opposite of blood in the streets. Everybody loves it, they can see no reason why it would ever go down, and then poof, then you get down 20-25% in a day. So that can happen and it can happen persistently for a while. So I think we could see a rotation more than the overall market blowing up and that’s why I continue to caution you guys that are listening that have this mentality of all or none where you’re saying, “I’m out, I’m sitting on the sidelines until we get this … the market drops.”
I mean, I’ve heard some of you say that the last several thousand DOW Jones points and so you have to balance it out. You don’t have to fully participate, that’s why I’m an advocate for having income producing investments, for having some powder dry, for selling things at times. And owning things that look undervalue that you have to wait on. I mean, again, it’s called a portfolio and look, this is why we also have alternative investments, things that are not correlated with the stock market.
One other thing I was going to mention too is you’ve got to rely on the facts of what the market’s telling you, not the ‘what ifs’ and ‘could bes’. You know, I think what the market’s telling us right now, whether it’s right or wrong, is it’s telling us that the tariffs have been an issue, which is why we have it advanced to new highs. I think the consumer staple stocks coming back in recent weeks, and you’ve seen them, since May, they’ve been going up, in fact, the basket itself is up about 9% and we’ve had utility stocks kind of working their way higher. We’ve had things like the REITs working their way higher.
I think it’s telling us that at least investors are worried that the growth is going to slow down in the next several months and that we’re not going to continue at 4%. You know, the President said, “If we have a four handle on the GDP report, we’re happy.” Well, we’re all happy with that. But we can’t just stop at a quarter. It has to be quarter after quarter after quarter, and so if the best is behind us, economically, the market will start picking that up and people will start selling all of that stuff.
So are we seeing some of that? Maybe slowly, but again, we haven’t seen it in a big, major way. We’re not seeing trends yet, we’re simply seeing some vibration in different areas. And again, the bottom line is what is the supply and demand picture look like, and it’s still healthy. People are still buying stocks, so there’s a lot of people, again, we’re going into a … One other negative I forgot to mention was the flat yield curve, but a lot of people believe that’s telling us that the economy’s getting weaker. But the evidence suggests right now that that’s just guesstimating. You’re saying, “I think that’s going to happen.”
What we know is people are still buying stocks in a big way and again, it doesn’t always show up on the prices, but the supply/demand picture looks very good right now and we’ve got a pretty broad based rally where we have seen consumer staples continue to come back now, the financials have bounced a little bit, so we had the death of retail bounce back, we have energy stocks bouncing back, so it’s been pretty healthy, and it continues to be that way, but we got to be on our toes and watch this, and so right now, just again, adjust the portfolio if need be from things that are over-valued and have had a great run to things that maybe are under-valued.
This value versus growth is pretty extreme now. I mean, it’s pretty extreme. It’s almost as extreme as just saying, “I’m going to sell all my growth funds and buy value funds.” I mean, if you’re doing that in your 401K or whatever, you’re almost to that point where it’s that simple. And I don’t mean simple meaning you’re going to make a ton of money from it. It’s simple meaning when you see stuff this stretched and you go back and you say, “This has only happened a handful of times in history,” that there’s this big of a divergence between one group of stocks and another group of stocks, sometimes you got to bet on that other one and get rid of the one that’s running and that’s kind of where we are, but you have to hedge yourself and continue to own some growth, probably, but maybe do it in individual stock fashion, to be a little safer.
So that’s kind of where we are right now, but man, it was a very busy week with all these earnings coming up fast and furious. You know, again, as these earnings continue to come in, the companies that are hesitant, they start mentioning tariffs, and we said that was going to happen. We said that on the Eggerss Report weeks ago that they usually blame weather. Well, now they’re going to blame tariffs. But some of it is legitimate, right? There’s some companies being affected by tariffs, but most of these companies aren’t affected just yet, but they think they maybe affected, and so they’re saying, “Well, this is why we’re struggling right now.”
So again, the longer this goes on, the more frustrated investors will get and the risk of the full blown trade war and the tariffs continue to escalate is a big concern and it should be a big concern, but if we can get deals with Europe, if we can get a new NAFTA deal and if we can get a deal with China, then I think the market does advance higher. I think it advances much higher, because I still think the economy is good.
All right, that was a lot of information, wasn’t it? If you want the ask me a question, feel free to do so, just email me directly. I answer my own emails. Karl@eggersscapital.com. And you can always contact you if you want. Telephone number is 210-526-0057 and our website is eggersscapital.com. And again, like it, share, do all that different stuff. We put a lot of energy into doing this on the weekends for you and bigger the audience, helps us out and makes us continue to do this, and we really appreciate the loyal audience that we have always had.
I’m reminded by, each and every week, when we get some email from somebody or phone call from somebody that says, “I’ve been listening X number of years,” and that just continues and it still amazes me that you guys are that loyal. So appreciate it. And some of you we never hear from. Give me some feedback, good or bad, because we want to continue to improve the show and make it really relevant for you and we try to cover a lot of different topics, again, in the financial planning realm, things we see with clients and also in the investment realm as well.
So I hope that’s helpful. Have a wonderful weekend and we’ll see you next week back here next week on The Eggerss Report. Take care, everybody.
Speaker 2: This show is for entertainment only and information provided by the host, guest and this station should not be deemed as advice. Your investment decisions should be based on your own specific needs. You should do your own research before you make those decisions. As president and CEO of Eggerss, Karl Eggerss may hold securities mentioned in the show for himself and his client. Just don’t buy or sell anything based on what you get from radio or TV. Use your own judgment or get yourself a trusted advisor.