The FAANG-nary In The Coal Mine

Two weeks ago, I issued a report to Peak Prosperity's premium subscribers, warning of an immiment downwards re-pricing of the FAANG stocks. I even made a rare recommendation for taking an active short position against them (one now up 18%).

That report proved quite timely. Over the past 10 days:

  • Netflix (NFLX) is down 10% after issuing disappointing subscriber growth and Q3 guidance
  • Facebook (FB) is down 20% after  delivering lower user and revenue numbers than the Street was expecting
  • Amazon (AMZN) is flat despite posting blowout Q2 EPS yesterday, offset by a revenue miss
  • Google/Alphabet (GOOGL) only managed a meager 3% rise after reporting earnings & revenue beats that were tempered by rising costs and a record $5 billion EU anti-trust fine

This sudden weakness among key FAANG members is extremely significant. Much more so than most investors realize.

Confidence In The FAANGs Ran Supreme (Until Now)

Over the past few years, investor capital has been increasingly concentrating into the FAANGs while the rest of the market has been deteriorating: 

ETF With FAANG Equities Within Top 15 Holdings

2018: 605
2017: 501
2016: 430
2015: 332
2014: 277
2013; 230
2012: 175
2011: 101
2010: 62
2009: 14
2008: 9

Source: Lawrence McDonald

As portfolios have become more and more FAANG-dominated, more and more investors have come to see those five stocks as "unstoppable". They have unnaturally performed as both "risk-on" and "risk-off" havens for years -- delivering consistent share price growth when markets move higher, while holding steady when they don't.

As a result of this piling-in by investors, the five FAANG stocks collectively now have a whopping market capitalization of $4 trillion.

They comprise nearly half of the NASDAQ index's market cap.

The FAANGs are the largest five companies in the S&P 500. And they were responsible for ALL of that index's growth over the first six months of this year (without them, the S&P 500 would have had a negative return in H1 2018):

In short, the FAANGs now ARE the market.

The Canary In The Coal Mine

The FAANGs are the last remaining stocks pulling this 9-year bull market higher.

Remember that they're collectively worth $4 trillion? Well, they were all worth only $1.2 trillion in 2013. They've nearly quadrupaled in just 5 short years.

The ramp-up in the FAANGs is largely responsible for today's record highs in the equity indices, none more so than the NASDAQ:

Which is why it's essential to appreciate how bull markets end. They end by one thing and one thing alone: a reversal in sentiment.

And a reversal of sentiment is exactly what we're beginning to see with the FAANGs. Investors have suddenly discovered that these companies are not impervious. They can lose 10% or 20% overnight, just like any other overvalued stocks.

As my fellow co-founder Chris Martenson recently quipped: "If NFLX was the canary in the coal mine, then Facebook was the first miner dropping to his knees."

To that, I would add that Amazon's cross-current results is a second miner suddenly feeling dizzy with hypoxia. 

And even though Twitter isn't technically a FAANG, it's often lumped in with them. Having dropped 20% after releasing earnings last night, TWTR is now lying face-down, comatose on the mine floor.

Which is why after years as do-no-wrong darlings, the FAANGs suddenly find themselves beset on all sides by skeptics.

As an example: here's the latest outlook from Doug Kass, who recently revealed that he's sold all his long positions and adopted a portfolio positioning very similar to the one Peak Prosperity has been advising: heavy cash + precious metals + some shorts:

"There is nothing like price to change sentiment."

- Helene Meisler

Some are surprised that the overall market has not immediately fallen and that the VIX did not rise in response to the large miss at Facebook.

I am not shocked (there was some "positive" trade news late in the day) - but more importantly, tops are processes.

For years there has been a narrative to stay bullish - to not see or respect any turns (as significant). It was like that in 1987, 2000 and 2007-08 as the market ramped until the day it began to rollover.

It is no different today.

This week may represent a seismic change in investor perceptions - as it relates to FANG and possibly the broader markets.

The markets are likely headed for a FANG-Over.

FANG market dominance (shades of 1999) - with too many on the same side of the investing boat - will likely morph into shades of early 2000 (which represented the end of the boom and the start of a market correction)


And from Oaktree Capital's Howard Marks:

Yes. They (FAANG- Facebook, Apple, Amazon, Netflix and Alphabet's Google) are great companies, but ETFs may have accentuated the flow of capital into those stocks...

Things that are most hyped produce the most pain... A conspicuous number of ETFs are concentrated in the same stocks. When things go cold ... who is going to buy it?...

If and when it ends, it will end worse for the stocks that have had momentum and for the ETFs that hold them than for the rest."


Even Morgan Stanley, a bastion of Wall Street "business as usual", has uncharacteristically issued a twin pair of reports warning investors to get out the markets generally and the FAANG stocks in particular. 

Calling the escalating trade disputes between the US and rest of the world a 'vicious cycle' that will put downward pressure on risk markets (i.e. stocks and bonds), MS predicts the Tech equity sector will be the one most affected:

"...we do think that 2Q earnings season will bring an inevitable acknowledgement from companies that trade tensions increase the risk to forward earnings estimates, even if managements don’t formally lower the bar. Throw in the fact that these stocks have rarely, if ever, been so over-loved and over-owned, and the risk of a proper rain storm in this zip code increases significantly."


When a white-shoe sell-side firm like Morgan Stanley (i.e., "Must...always...keep...clients...fully...invested...") is admitting that these stocks are "over-loved and over-owned", you know the party is truly over.

Also, a quick glance at insider selling by FAANG management shows that execs are pulling money out as fast as they can. The transaction volume of insider selling is the highest it's been in at least 6 years, with over $5 billion offloaded so far in 2018:

FANG Insiders Are on Track to Sell More Than $5 Billion of Stock (Bloomberg)

Insiders at tech heavyweights led by Facebook Inc.’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, Inc., Netflix Inc. and Google parent Alphabet Inc. 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 and pushed first-half insider sales to $14.3 billion.

FANG insiders are on pace to sell $5.2 billion of shares in the first half of 2018

This data adds support to Charles Hugh Smith's hypothesis about distribution; that insiders have been using the string of rallies in 2018 to frantically sell their overvalued shares to the "dumb money" in advance of a material price correction.

Existential Risks

The obvious question for these stocks, some of which sport forward P/E ratios of over 100 and/or have more than doubled in price within the past 9 months is: What possible rationale is there for them to go materially higher from here?

Leaving that aside for a moment (and to be sure, there are still renown investors who remain bullish on these stocks), each of the FAANGs is facing one or more existential risks. Here are just some of them:

  • Facebook: facing greater regulatory scrutiny in the wake of user privacy scandals like Cambridge Analytica, which resulted in a mass "quit Facebook" movement. Younger generations do not use the platform (only 9% of Gen Z, the age cohort following Millenials, uses Facebook)
  • Amazon: facing greater anti trust concern from the Trump administration, which just appointed a longtime Amazon critic to the FTC and is pursuing an Internet sales tax.
  • Apple: seeing slowing iPhone sales as device prices hit $1,000. It's foreign sales and supply chainsare highly predicted to be big causualties of the current trade wars.
  • Netflix: massive negative $3-4 billion cash flows this year as content production costs increase. Competing platforms from other big content players will define the future landscape. Disney is pulling its wildly popular content from Netflix in 2019.
  • Google: how is having 90% of the search market not a monopoly? Expect more anti trust restrictions and massive fines on Google (and YouTube for that matter) in the future.

These are big risks. Will they be the downfall of these giants? Who knows? But they for sure argue for healthy skepticism of 100+ P/E ratios...

How Bad Will Things Get?

The FAANGs are so important because as they go, so will go the rest of the markets.

They've served as the favorite and last bastian of hope for bullish investors for so long now that there's nothing left to advance a bull market narrative should they roll over from here.

And it's indeed looking like a rolling-over may be in progress:


As we've detailed repeatedly (most recently in our report A Hard Rain's a-Gonna Fall), a price correction of 40% or more for stocks could be in order when the current environment of sky-high asset bubbles bursts.

And that's only looking at the current (over)valuation of the equity markets.

Many of the hottest real estate markets are now showing signs that they peaked last year or are currently nosing over. And despite the blip up in GDP for Q2, risks of the US returning to recession are multiplying -- and today's trade wars (which alone could shave 20% off of the S&P) and rising interest rates are exacerbating the odds.

Should those three things -- a market crash, a housing bust, and a deep recession -- all converge at the same time (as is likely, as they are reinforcing factors for one another), we could easily see another crisis on par with the Great Recession (or worse).

And as bad as that will be, the response from our governments and central banks will make things even worse.

Why? Because they'll be 'fighting the last war', using the same playbook they used to staunch the 2008 liquidity crisis. Except this time, the crisis will be one of valuation.

In Part 2: The Coming Valuation Crisis, we explain the underlying dynamics of how the next crisis will unfold, and why the central planners' efforts are likely only going to serve as pouring gasoline on the fire.

The sad reality is we likely won't have to wait long to see this story play out. With the sudden weakening of the FAANGs, the last rampart holding back the long-overdue market correction is falling.

Click here to read Part 2 of this report (free executive summary, enrollment required for full access)

This is a companion discussion topic for the original entry at

This data adds support to Charles Hugh Smith's hypothesis about distribution; that insiders have been using the string of rallies in 2018 to frantically sell their overvalued shares to the "dumb money" in advance of a material price correction.
First, I would say caveat emptor to those who may have bought these overpriced shares. I will shed zero tears for any fools that bought companies with overly stretched valuations in the hopes of getting rich selling to a greater fool later on. Somebody has to be the last fool. Second, the "greater fool" was, in many cases the companies themselves! Falling into the there outta be a law! category is the idea of company insiders both voting for company share repurchases while simultaneously selling their own shares. If a company is actively repurchasing its own shares fiduciary duty seems to suggest that they really should not be also allowing insiders to dump their own shares.

As an aside, many financial analysts are warning of the downside of passive investing, i.e. owning indices rather than actively picking sectors or (gasp) individual stocks, anathema to many as these are presumed to be “risky” compared to “low-risk” index funds (passive investing).
To Adam’s point, owning any passively invested ETF or fund = putting most of one’s eggs in the FANG basket without really being aware of that concentration in “growth” stocks as opposed to “value” stocks.
One of the risks in passive investing is when an investor sells the ETF/fund, the managers have to sell all the stocks in the fund/basket. If a great many investors decide to lighten up (sell their ETFs and index funds), there’s a potential for a feedback loop to take hold–selling begets more selling, good and bad companies alike, as the index/basket fund has to sell all the stocks in the basket.

“The most important quality for an investor is temperament, not intellect.”
- Warren Buffett

New price target of $2200.00 a share on no earnings. Show me the money! I know they push credit harder. What could posible go wrong!

Awefully good timing on your FNDG buy.

With the FAANGs weakening, the risk of the long-overdue market selloff finally arriving rises dramatically, as there’s no other sector of ‘strength’ for capital to move to.
That means the dominoes should start falling at a quickening speed from here.
If you want to understand what the likeliest implications will be, that’s exactly what we’ll be diving into deeply at our Peak Prosperity Summit in New York City on Sep 16th.
And as a reminder, this event will be uniquely special as David Stockman(!) will be presenting with us.
He brings an invavluable insider’s knowledge of what Wall Street and Washington DC players are planning, and what we can do to avoid the worst of their machinations.
If you’re interested in joining us, as well as many other like-minded PP members, for the day – register now:
Sunday, Sep 16, 2018 – 10am-4pm EST

The Early Bird price for this event expires soon, so act soon to take advantage of it. We hope to see you in NYC! cheers, Adam

I won’t hold my breath waiting for the SEC to criminally charge any of the Facebook insiders.

There’s an easy way to fix a valuation crisis, where prices accross the board are excessively elevated. The answer is to devalue the currency. To do that on a global scale means raising the cost of living and wages for the little guy, thus maintainig the post-fiat, postive nflation model. What better way to inflate an econmoy than with back firing trade tarrifs. And to get incomes rising, simply increase minimum wage limits and impose a living wage on everyone.
Historically when modern governments can no longer naturally garner postive inflation or growth they turn to money printing and market interference. Printing trillions of dollars has goosed the high end of the economy so now perhaps it’s time to balance valuations against CPI by introducing trillions of dollars of reflected global tarrifs and maybe a living wage.
Tighten security, wrap up censor in some kind of anti-terrorist law and voila you have control of dissention. Put a (different) patsy government in place, one willing to be hated, long enough to start the trade war then replace it with an extreme left nannycrat who wins the presidency on the bribe of a base wage for all. An electorate driven by media and desperate for a change will swing in the opposite direction as sure as a pendulum changes sides, and vote for anyone.
It’s not a conspiracy therory it’s just business as usual for the clientellist, dysfunctional, full-suffrage, Hollywood driven global political system we erroneously call democracy.

Hey Adam,
As you certainly know, these inverse funds decay with time if the underlying stocks are stable. They only gain value when there is full-on panic selling.
Keep us appraised as to when you see the panic phase mellowing out and when you would be ready to sell.

I’ll second sand-puppy’s request - please let us know when you decide to sell. I haven’t dealt with any stocks whatsoever since 2000 but decided to dabble with a very small amount since Adam’s reasoning was so compelling. Of course, reason has had little to do with it (so far).

I’ll offer an opinion here, and it’s just that, an opinion, and one of many I’m sure. If I had a position in FNGD, that I acquired recently and “comfortably” in the 23-24-ish range, I would have sold my position today (or at least locked in a portion of the profits) in the 28-29-ish range. A roughly 20-25% gain is nothing to sneeze at and having some funds to live another day is not a bad choice; again, that’s just me. If one believes a significant correction is in the cards soon, hang in there and hope “the greater fool” is still out there when selling feels right. Things can happen fast. Keep your index finger on the left mouse button, ready to pounce like a feline (or have your stops and limits in place). Leveraged funds are typically not long-term buy and hold items, they all “bleed out” or degrade over time.

Will do, SP (and Goodsalt and DennisC).
First off, I absolutely agree that you have to be very careful holding onto leveraged ETFs as their performance quickly deviates from the underlying securities.
I also wholeheartedly agree that a 28% return in less than 3 weeks is a great score. For most investors, I recommend locking that win in now. Sell and pat yourself on the back. Remember: hogs get slaughtered.
As for me, I may hold on for a bit longer. Pulling back, the recent drop in the NASAQ hardly registers:

I want a portion of my portfolio positioned for the fall that I predict is coming, which I think could easily take the NASDAQ well below 2015/2016 levels.
With that said, I may still end up selling soon. If I do, I’ll announce so here.
And it would be with the intent to take another short position quickly thereafter. I would kick myself were a big drop to happen while I did not have some sort of short position in place.

BIG FAT DISCLAIMER: This is NOT personal financial advice. The investment choices I've made are based on my own unique situation, financial goals and risk tolerance. And I may change these choices at any moment given new market developments. What's appropriate for me may not be for you, so DO NOT blindly duplicate what I'm doing. As always, we recommend working with a professional financial adviser to build an investment plan customized to your own needs and objectives. (If you do not have a financial adviser or do not feel comfortable with your current adviser's expertise in the market risks we discuss here at, consider scheduling a free consultation with our endorsed adviser)

I was talking to my friend today who has gotten rich off debt fueled exuberance over the last 10 years and investing in stocks. He also has a retail store chain which has done well but personally he has bought of real estate on debt band watched it skyrocket. He wants to pull out another $100K in debt to throw in the stock market. I asked, what if the market goes down, and he said it might go down but it always goes back up. Maybe he’s right. If it tanks and they fix this by printing money like there’s no tomorrow then stock prices will go back up. Everything will go up. Except his debt. He will still only owe $100K which he would easily be able to pay off, unless it somehow got repriced. Assuming he can stay solvent during the crash.
Who knows, maybe it will work out for him. After all these years I’ve been the one who thought I undertood how things worked. I stayed out of the markets because I knew they were rigged. He didn’t understand this and jumped in with the hysteria and has gotten rich. Who am I to judge? I’m the one living paycheck to paycheck, and he’s living like a king. Turns out I didn’t understand the market as well as I thought.

Tesla is up more than 9% today on the news yesterday after the market close that TSLA loses more money by selling more cars.
They are literally making it down on volume, so to speak.
You just cannot make this up!
But…I feel like I’ve been here before…

Yep, we have been here before. :wink:
The fact that TSLA is going up on a ruined balance sheet, negative earnings and a promise of future greatness, all while sportiong a +$50 billion market cap tells us “not yet.”
The ““market”” is not ready to give up the dream. Yet.

Adam/DennisC/SP - Your posts were enough of a reminder for me and I got out completely - best not to get too greedy. Being as allergic to the markets as I am - I bet very little and made even less - but hey a win is a win. So I’m swearing off for another 18 years by which time I’ll probably be playing my golden harp. Thanks again!

This would likely be my “choice”.…

I am glad I am not short TSLA today,a nd feel sorry for anyone who is/was.
I went through lots of simialr pain as I shorted the home builders back in 2007. I would track all the data, know which ones were going to suck wind on earnings, and then I’d nervously sit out the most counter-intuitive, illogical short-screwing ramps that would always accompany a crappy earnings report.
That was TSLA today for sure. It poured on an astonishing $9 billion in market cap, for a 16% gain.

I’m going to go out on a limb here and call this TSLA’s ‘last hurrah.’
The earnings were awful and the balance sheet erosion was stunning. I’ve heard nothing positive coming after the huge “5k/wk or bust!” Model 3 fiasco which seemed to be both rigged and costly in terms of burning out the staff.
The cult following for this stock amuses me on some levels, concerns me on the others. I beleive there will be lawsuits for fiduciary irresponsibility when various pensions and such get burned on this one.
Because he’s continuing to support this isanity, Jerome Powell now gets to add his name to the wall of ignomy that already has Greenspan, Bernanke and Yellen on it.

This summer we’ve taken a break from TEOTWAKI prep and talk here at Chateau Snydeman, and I’ve been heavily ‘invested’ in the work of renovating our kitchen so that my wife can have the kitchen she’s always wanted. Despite this being, likely, a short-lived and spurious joy, I got my Pioneer Princess, so she gets her new kitchen. I’ve gutted the floors, taken the walls down to the studs, rewired some seriously screwed up electricity pathways, and learned a metric ton about how to deal with a house built in the 60s by a pack of Oompa-Loompas. My garden has suffered a lot due to my split attention, but what I’ve learned with the house has given me confidence that I can learn most basic skills if I put my mind and energy to it, and I’ve also discovered that my garden has decided to grow volunteer plants where I never expected (several tomato plants where I swear I never grew tomatoes)…so nature marches on regardless of my efforts. Heavenly, that!

My “orbit of concerns” has continued to shrink as I begin to disconnect from larger “goings-on” and focus on what I can affect here, locally, in my zone of control. I believe this may be what one PP member (Grover? Treebeard?) means when he says - often - that we should “settle our mares:” focus on what you can do directly and in your own tiny corner of the planet, for as many people as you can do it. Get your shit in order before the storm hits.

Either way, I am so glad I am not invested in this current market. Granted, I shall never become wealthy with fiat currency because I own no real stocks/bonds, but I am also not moved by the market when things go sour. Good luck to those of you who are. This whole ““market”” thing seems like a real shitshow of a carnival ride, at best.

When this comes crashing down around our ears, will you be ready? Will you care? Why? Has this current system brought true happiness, akin to the type our ancestors felt eons ago, or has it just brought material prosperity at the expense of lost connections with each other and the natural world we live in? I can’t answer this for anyone here, but I’ve found that the less I care about material wealth the richer I feel. I’ll take an hour barefoot in my garden over 100k any day of the week now, but maybe I’m nuts.


Now, back to tending the tomatoes I never planted, and figuring out how much amperage I need in the south wall of the kitchen…

Snydeman wrote:
My "orbit of concerns" has continued to shrink as I begin to disconnect from larger "goings-on" and focus on what I can affect here, locally, in my zone of control. I believe this may be what one PP member (Grover? Treebeard?) means when he says - often - that we should "settle our mares:" focus on what you can do directly and in your own tiny corner of the planet, for as many people as you can do it. Get your shit in order before the storm hits.
Outstanding advice. Focus on what you can affect locally.