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Felder: “Same Old Greed In A Shiny New Wrapper”

Courtesy of ZeroHedge. View original post here.

Authored by Jesse Felder via,

The flows into tech funds of late have been absolutely astounding if not totally surprising.

The FAANNG stocks have been the market darlings for quite some time now so it’s understandable investors would chase this performance just as they do during every bull market.

Flows following flows. Money going into tech is on course for a record $37bn this year. Via BofAML:

— Tracy Alloway (@tracyalloway) June 25, 2018

It’s not just tech-focused funds overweighting the FAANNG stocks. There is a huge number of non-tech-focused funds that own these stocks, as well, and in a significant way further supporting their popularity in the marketplace. You can find them represented in size today in everything from consumer discretionary, retail, media and entertainment to momentum, cloud computing, internet and social media. In fact, without Amazon and Netflix, the consumer discretionary sector would be down on the year rather than up.

The market cap of the entire S&P 500 Consumer Discretionary index has gained $318bn so far this year, of which Amazon and Netflix on their own account for $375bn. Strip out these gains and the rest of the index has dropped $57bn in market cap for the year.

— Jesse Felder (@jessefelder) June 23, 2018

What’s more, in many cases, the ownership of these companies in many funds appear to be clear violations of their implicit if not explicit mandates. To demonstrate, let’s just run through the FAANNG stocks by market cap beginning with the biggest: Apple. There are fully 92 ETFs, according to, that not only own the stock but also have an overweight (relative to the S&P 500) allocation to the shares. So not only are Apple fans and traditional passive investors buying tons of Apple stock, these other ETF investors are even more aggressively acquiring shares.

What I found notable in this case was that Apple was found in both value and growth-focused ETFs. I guess this isn’t really much of a stretch theoretically. A high-growth stock can become cheap just like any other. What is strange in Apple’s case, though, is that the stock now trades at its highest price-to-free cash flow in years. At the same time, the company’s 5-year average revenue growth is now the lowest in its history. Still, these systematic funds somehow find reason to not just own it but to overweight it as both a value stock and as a growth stock.

Apple's free cash flow yield – UST yield = 2.93%. In other words, since $AAPL became a FCF machine it's never been less attractive, perfect timing for a pair of 90 yr old guys that like railroads & farms to go all-in.

— J Pierpont Morgan (@pierpont_morgan) May 4, 2018

Next we have Google. Here we have over 100 different ETFs that see fit to overweight the stock in their portfolios.

Included in this group is at least one “low volatility” ETF. According to Yahoo!Finance Google shares have a beta of 1.31 currently meaning they are 31% more volatile than the broad stock market. Yet this fund somehow sees fit to classify it as a “low volatility” stock. Alrighty then.

Turning to Amazon, again we have over 100 different ETFs that have overweighted the stock.

Included in these are several funds that purport to only invest in “best employers” or companies that demonstrate “employment equality.” This is certainly ironic considering this company has become the poster child for income disparity. Jeff Bezos is the now the richest man in the world with some of the lowest paid employees in the country and yet these ETFs somehow justify owning it and in greater size than the index.

The average #amazon employee would have to work 1.2 million years to match #jeffbezos increase in fortune in 2017 #ceopay #incomeinequality

— (@inequalityorg) June 19, 2018

Facebook also benefits by roughly 100 ETFs that have somehow tweaked their algorithms such that they can overweight the shares. One such fund claims to invest only in companies with a positive ESG (environmental, social and governance) impact. As for the “E” there’s not much I can say but when you are charged with fomenting violence and even death in places like Myanmar and others around the world and you have also become the poster child for some of the worst governance practices in corporate America it’s hard to see how these can fit within a “positive ESG impact” framework.

‘The idea that there should be an autocrat in charge of a gigantic public company is an anachronism. It harks back to the 19th century when you had these robber barons who were autocrats and dictators.’

— Jesse Felder (@jessefelder) June 27, 2018

Netflix has a very curious holder of its own among the more than 100 ETFs that choose to overweight the shares. The stock currently pays no dividend and, to the best of my knowledge, never has. It might be difficult for the company to do so while it sustains losses in terms of free cash flow into the billions of dollars per year. Still, one “dividend advantage” fund not only owns Netflix shares but also in a size that is triple the index weighting.

Finally, Nvidia can be found as an overweight position in fully 140 different ETFs. By this measure it wins the popularity prize even if it isn’t an original FANG stock. One of these funds carries “ecological strategy” in its title. I assume it seeks to invest only in companies that meet some ecological test yet Nvidia chips have powered the Bitcoin mining boom, perhaps the single greatest waste of energy in human history. It’s very hard to call cryptocurrency or anything associated with it ecologically friendly. Still, this fund sees the core of the cryptocurrency mining mania as supporting a sound ecological strategy.

‘ Ifind it interesting that most of the people in bitcoin are climate people… I don’t quite get the connection. We’ve got this rogue currency that we’re all going to support that’s destroying the climate[?]’

— Jesse Felder (@jessefelder) December 13, 2017

The point of all of this is simply to demonstrate the absurd extremes of the current mania in the stock market. The only way to explain any of it is to chalk it up to shameless performance chasing. Own these stocks in your ETF or suffer outflows that put its existence in jeopardy. Offer a dividend or a socially conscious or low volatility fund that beats the market via oversized FAANNG weightings and watch the inflows make you rich.

It’s the very same sort of insatiable greed on the part of Wall Street serving the insatiable greed on the part of investors that has driven every speculative mania throughout history. Only this time it comes in a brand new, shiny wrapper that people can use to call themselves 'passive investors'…

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