A Worrisome Sign for These Market Darlings
A big win for AT&T and Time Warner... Prepare for a new wave of deal-making... A worrisome sign for these market darlings... Investors are piling in... Insiders are bailing out... Another reason to expect more volatility no matter what happens next...
Well, it's official...
As expected, shortly before 5 p.m. Eastern time yesterday, U.S. District Court Judge Richard Leon ruled on the Justice Department's government's lawsuit to block the merger between telecom giant AT&T (T) and media behemoth Time Warner (TWX). And the decision was overwhelmingly in favor of the deal...
Judge Leon not only put no conditions on the terms of the merger, he also warned the government that any request for a stay would be denied. "The court has now spoken and the defendants have won," he said.
The ruling was a rare defeat for the U.S. government – and as we noted yesterday – could lead to a wave of additional mergers and acquisitions ("M&A") activity, particularly in the media industry. As news service Reuters reported...
[The ruling] brings an end to a six-week antitrust trial in which U.S. regulators argued that the $85 billion deal would give AT&T undue leverage against rival cable providers that relied on Time Warner's content.
The judge's strong approval, and scathing opinion that urged the government not to seek a stay if they opposed the ruling, will give telecommunications providers the confidence that similar types of acquisitions will also have a shot at clearing regulatory hurdles, and could spur other copycat mergers this year, industry analysts and dealmakers said.
As we've discussed, booming M&A activity – along with surging stock buybacks – has been a big driver of higher stock prices of late. So while history shows these types of blockbuster deals often don't work out well for shareholders, the news could keep this long bull market running awhile longer.
However, not everything is so rosy today...
In fact, we could be seeing the first signs of trouble in the market-leading technology sector.
According to Bank of America Merrill Lynch, more money flowed into big tech stocks in the last quarter than any other sector. More impressive, a massive $2.3 billion flowed into these stocks last week alone... This is the second-biggest weekly inflow in history.
But it isn't just the so-called "FANG" stocks – Facebook (FB), Amazon (AMZN), Netflix (NFLX), and Alphabet's (GOOGL) Google – and other big tech names that investors love right now. They're also piling into technology initial public offerings ("IPOs") like there's no tomorrow. As Bloomberg reported on Monday...
Successful initial public offerings by closely watched companies like Dropbox (up 43% through June 8) and Spotify Technology (up 30%) have helped boost excitement for U.S. tech debuts of all sizes and from all regions...
The group's best-performing stock is Guangzhou, China-based Huya, which operates a live-streaming game platform and has risen 191% since its May IPO. Other top performers include Internet security firm Zscaler (up 153%), digital subscription billing platform Zuora (up 109%), electronic signature firm DocuSign (up 100%), and Chinese video streamers iQiyi (up 82%) and Bilibili (up 65%).
These fledgling IPOs have risen 66% on average, weighted by offering size, according to data compiled by Bloomberg. Listings in other sectors have returned an average of 11%... In total, 80% of 2018 U.S. tech listings are trading above their respective IPO prices. "There seems to be no differentiation between the good ones and the bad ones," said [Triton Research CEO Rett] Wallace, whose firm analyzes Silicon Valley companies preparing to go public. The deals have raised about $8 billion so far this year.
Why is this concerning?
Because it's a sign of a bullish sentiment extreme... the kind of extreme that often precedes at least a short-term pullback in the market. More important, it's the exact opposite of what insiders at tech companies are doing with their own money today. As Bloomberg reported yesterday...
Insiders at tech heavyweights led by Facebook's Mark Zuckerberg are selling stock at the fastest pace in six years, cashing in on buoyant equity markets.
Senior executives and directors of Facebook, Amazon, Netflix, and Google parent Alphabet have disposed of $4.58 billion of stock this year, according to data compiled by Bloomberg. They're on track to exceed $5 billion for the first six months of 2018, the highest since Facebook went public in 2012...
Of course, insider selling isn't always a bearish signal...
While corporate executives typically only buy shares when they're bullish on their company's prospects, they can sell for a number of other, more benign reasons.
Still the pace of selling among these insiders is concerning... and bears watching closely during the market's next pullback. As Jonathan Moreland, director of research at InsiderInsights.com noted to Bloomberg...
If they continue to sell into that weakness, then that'll be a strong indicator of insider sentiment. [During the tech bubble two decades ago] the real tell was... when the stocks were down 20%, 30%, 40% and insiders were still selling.
Regular readers know we've been cautious on the broad market...
For weeks now, we've warned that the recent correction may not be over just yet. Stocks have continued to drift higher... Yet outside of the small-cap Russell 2000 Index and the tech-heavy Nasdaq Composite Index, many stocks still remain well below their January peaks.
Meanwhile, in addition to the "caution signs" in technology stocks we just mentioned, several other broad market sentiment indicators suggest another short-term pullback is likely.
For now, our advice remains the same. Stay long, but stay "hedged"... and keep a close eye on your trailing stops, just in case.
In the meantime, we are sure of one thing...
Whether the long bull market resumes... or a new bear market begins... history suggests higher stock market volatility is likely here to stay.
First, as our colleague Steve Sjuggerud has pointed out many times, during the last market "Melt Up" in the late 1990s, the Nasdaq suffered five different corrections in 1999 alone. And the market's "fear gauge" – the CBOE Volatility Index ("VIX") – spiked above 25 more than 10 times along the way.
Back in March, we shared a chart of the U.S. Treasury yield curve and VIX that also suggests much higher volatility in the months ahead. From the March 5 Digest...
The dark blue line is the spread between two- and 10-year interest rates. It has been flipped upside down – so that the line moves higher as the spread moves lower toward zero – and has been pushed forward by three years. The light blue line is simply stock market volatility, as tracked by the CBOE Volatility Index ("VIX").
The relationship isn't perfect, but you can see that the large spikes in the dark blue line tend to line up with the big spikes in the light blue line over the past 30 years. What this means is a big decrease in the yield spread tends to be followed by a big increase in volatility roughly three years later.
Today, we'll share one more...
The following chart shows a different measure of volatility. The light blue line is the number of days in the past year that stocks have moved more than 1% in either direction...
As you can see, this chart tells us three things...
First, this measure of volatility is now turning higher from a 50-plus-year low. Second, when this measure turns up from a low, it tends to keep moving higher for years. And finally, rising volatility has often – but not always – coincided with falling stock prices.
In other words, no matter which way the market is headed, we should expect an increasing number of large daily moves in stocks in the months and years ahead.
New 52-week highs (as of 6/12/18): Automatic Data Processing (ADP), Amazon (AMZN), Alibaba (BABA), CBRE Group (CBRE), First Trust Nasdaq Cybersecurity Fund (CIBR), WisdomTree U.S. SmallCap Dividend Fund (DES), Eaton Vance Enhanced Equity Income Fund (EOI), Fairfax Financial (FRFHF), Fidelity Medical Equipment Fund (FSMEX), Grubhub (GRUB), ETFMG Prime Mobile Payments Fund (IPAY), Ralph Lauren (RL), VF Corporation (VFC), and Verisign (VRSN).
A quiet day in the mailbag... What are you seeing out there? Let us know at feedback@stansberryresearch.com.
Regards,
Justin Brill
Baltimore, Maryland
June 13, 2018