Category Archives: Quarterly

There’s Still Time to Take the Road You’re On, but It’s No Guaranteed Stairway to Heaven

“There’s still time to change the road you’re on”

Led Zeppelin

‘Stairway to Heaven’


Stairway to Heaven

Led Zeppelin

There’s a lady who’s sure
All that glitters is gold
And she’s buying a stairway to heaven
When she gets there she knows
If the stores are all closed
With a word she can get what she came for
Oh oh oh oh and she’s buying a stairway to heaven

Key Takeaways

  • Just four stocks have accounted for 84 percent of the S&P’s upside in 2018.

  • Defensive sectors account for a historically small part of the S&P’s current market cap.

  • The large gap between growth and value stocks is not sustainable long-term.

  • Growth stocks have outperformed value stocks for extended periods six times since 1945….each time, that run was followed by a significant recovery in value stocks.

  • Even if the yield curve inverts, there should be plenty of opportunities for savvy investors.

The first chart to start this quarter’s letter looks more like a stairway to hell. It depicts the composition of traditionally defensive sectors (utilities, telecom, pharma, consumer staples) as a percentage of the S&P 500 index. Representing a record-low 11 percent of the index’s total market cap today, defensive sectors have sunk below levels last seen during the internet bubble era of early 2000.

In my early adulthood, it was a safe bet that you were staying out too late when the rock classic “Stairway to Heaven” came on the bar’s sound system at closing time. But, as an almost-50 year old reading Led Zeppelin’s iconic lyrics today, I can see why “Stairway to Heaven” is a perennial fixture on classic rock Top-10 lists.

As longtime advocates of sector rotation, you could say our firm’s investment philosophy is driven by the Zeppelin refrain: “There’s still time to change the road you’re on.

Throughout my Firm Letters over the past three years, I have defended the bullish case against Trump election doomsayers, mini-bubble procrastinators and comparisons to the 1999 tech crash.  However the conclusion of my Q4 Letter of 2017 (It Ain’t Over, but the Fat Lady is Warming Up) hinted that the bull market was entering its “euphoria stage.” And now in the second half of 2018, it’s clear we are seeing a historically large spread between growth stocks and value stocks.

As tech weightings in indices move higher, defensive sectors are halved

Equity markets: The relative weight of defensive stocks (such as utilities) in the S&P 500 continues to trend lower. As you can see in the chart below, there has been a clear break through the Internet Bubble lows of 2000.

The last time we saw such a giant gap between defensive sectors and the rest of the market, that spread was erased quickly during the unraveling of internet stocks at the beginning of this century. Unlike the dot-com era, we do not have a rampant IPO market of zero-revenue “story stocks” today, but we do have massive gaps such as FAANG stocks (Facebook, Amazon, Apple, Netflix and Google) outperforming traditional value sectors by over 700 percent during the last five years.

As some of you may know, I started my trading life in 1997 at an earnings momentum shop that focused on tech stocks. My introduction to Wall Street was trading tech stocks and other high growth sectors during the internet bubble. As mentioned in my past letters, we are not experiencing anything like the internet bubble today. If anything, that risk is found in the venture capital and private equity world today, not in the hands of public market investors. However, we are experiencing a historically large spread between value stocks and growth stocks that will eventually revert to the mean.

The last giant gap between growth and value stocks

When gaps between growth and value form like they did during the dot-com boom (see chart below), they are reflected in valuation spreads.

Spread between growth and value hitting record highs

 2007-2017 Russell 1000 Growth +182% vs. Russell 1000 +96%

Right now, U.S. growth stocks are trading at a 59-percent higher price-to-book ratio than U.S. value stocks are, and they’re trading at a 67-percent premium to U.S. small cap value names.

The largest spread right now is an almost 80-percent price-to-book premium for U.S. growth stocks over emerging market value stocks. The majority of capital asset pricing models (CAPM), which are strictly math-based, predict that emerging markets will be the highest performing asset class for the next 10 years–if you can stomach the volatility. Emerging market valuations are relatively cheap and middle class growth projections are positive, but debt levels in U.S. dollars are high, hence the recent 20-percent correction around a 7-percent rally in the U.S. dollar relative to other currencies.

Source: Vanguard

During my early trading days in the late 1990s, there was talk about a new world order in which value-oriented Benjamin Graham advocates were no longer relevant. Today there’s talk about a new world order in which technology-driven whiz kids will dominate the markets. Artificial intelligence, robotics, internet of things, intelligent agents and virtual reality are all part of the “fourth industrial revolution” that is changing the world. But, as often happens, there may be far more losers than winners in this race to the top.

As the market continues to narrow and a small number of names drive all the alpha, you start to hear comments like these from new world order investors:  Value investing is a lost cause.  That’s not surprising when just four high-flying tech stocks–AMZN, MSFT, NFLX and AAPL–have been responsible for 84 percent of the S&P’s entire upside for the year-to-date.

But, as Barron’s predicted in March, the big valuation gap between growth and value funds indicates a value comeback.

Growth manager vs. value manager

On the other side of the aisle is mid-cap growth fund manager Michael Lippert, who has a 7 percent weighting in Amazon (AMZN) in his $308 million Baron Opportunity fund (BIOPX). Value investing is a lost cause in today’s high-tech, winner-take-all economy, according to Lippert. “The world we live in today—is haves and have-nots, and there are way more have-nots,” he said. “There are so many industries being disrupted by the digitization of the world; it’s hard to make cyclical bets on have-not value stocks.”

Those conflicting viewpoints have led to a stark contrast between the valuation of Baron Opportunity’s and Heartland Value’s portfolios—and their respective performance. According to Morningstar Direct, Baron Opportunity’s stocks have an average trailing 12-month price/earnings ratio of 42, compared to Heartland Value’s 7. Baron Opportunity’s five-year annualized return of 14.2 percent is double Heartland’s 7.1 percent. Small wonder, as market darlings like Amazon, Alphabet (GOOG), and Tesla (TSLA) dominate Lippert’s portfolio.

Bloomberg ran a story last year about Goldman’s Death of Value Investing report. Just last week, Barron’s ran an article about the demise of value investor David Einhorn: “For ‘King David’ Einhorn, a Steep Fall.”

Headlines like these remind me of late 1999 when Barron’s asked: “What’s Wrong, Warren?” The article suggested that legendary value investor, Warren Buffett, was losing his magic touch. During the 20-month period ending in February of 2000, the Nasdaq was up 145 percent, while Buffet’s Berkshire fund was down 44 percent — a mind-bending 189 percent streak of underperformance for the Oracle of Omaha, at least compared to Nasdaq’s growth-oriented technology stocks.

My good friends at Alpha Architects explained why. Growth stocks have outperformed value stocks for extended periods six times since 1945….and each time, that run was followed by a significant recovery in value stocks. Timing this rotation is impossible, but we are getting close to record spreads in valuations with interest rates rising and unemployment at record lows.

Growth has outperformed value six times since 1945

Many believe that an inverted yield curve, in which short-term interest rates are higher than long-term rates, is a reliable indicator of a forthcoming recession. The difficulty with the inverted yield curve is that stocks tend to do really well when the curve flattens, as is the case today. Stocks also tend to do well shortly after the curve inverts. But, today the defensive sectors that are lagging now have huge outperformance in a down market.

We highlight quickly that none of our 5 recession indicators are flashing yellow or red…Then discuss how momentum is a sector/asset class rotation strategy

Chart shows sector performance when yield curve inverts (Fortis #1 recession signal).  Even in recessions, the sector divergence is striking.  The past 4 defensive periods show healthcare and consumer staples outperforming the S&P 500 Index by 40.5% and 33% respectively.


The difficulty with reversion to the mean is that you can go broke waiting for market to express itself fundamentally back toward value.  Right now, our five recession indicators are all green with none showing signs of an imminent implosion. What’s more, our technical momentum indicators all point to U.S. growth stocks maintaining leadership.

At Fortis we believe in evidence-based academically-backed research. With this philosophy leading our investment thesis, we conquer the challenges discussed in this Letter by combining momentum stocks and value stocks. The reasons behind this strategy require a much longer discussion, but please feel free to contact me any time (610-233-1074) to discuss in more detail.

In the end, there are “two paths you can go by” in market-growth or value. Right now we are experiencing historic spreads between the two. As has happened throughout history, the new pundits arrive singing the death of one path–in this case value–due to the permanent triumph of the other, in this case growth.

Remember back in 1999 when the “talking heads” were predicting the end of Warren Buffet’s value strategy? Remember after the 2008 crash when the S&P hit a generational low 650 and the same talking heads were predicting the end of growth in America?  The Stairway to Heaven for the last decade has been growth stocks, but every elevator has a top floor.

As Warren Buffet likes to say, “Predicting rain doesn’t count, building Arks does.”

If there’s a bustle in your hedgerow
Don’t be alarmed now
It’s just a spring clean for the May queen
Yes, there are two paths you can go by
But in the long run
There’s still time to change the road you’re on
And it makes me wonder

Stairway to Heaven

-Led Zepplin

Topley’s Top 10 – July 12, 2018

1.The Ultimate Question-Can Earnings Keep Rising?

Can Companies Keep Up Strong Beat Rates in Q2 Earnings Season?
Jul 11, 2018

One thing we’ll be watching closely this earnings season is whether companies can keep up the extraordinarily high beat rates seen over the past two quarters.

Over the past two earnings seasons, even though analysts had to up their estimates quite a bit due to the Trump corporate tax cuts, companies were easily able to beat expectations.  Since 1999, 62.1% of earnings reports have reported EPS that were greater than consensus expectations.  As shown below, though, the last two quarters saw much higher than average beat rates.

Not only have bottom line EPS beat rates been strong, but top-line revenue beat rates have been strong as well.  Revenue beat rates over the last two earnings seasons were higher than any quarter since Q4 2004.

The chart below takes the average of each quarter’s earnings and revenue beat rate.  When looking at the strength of both the top and bottom line beat rate each earnings season, the only other two-quarter period that showed stronger beat rates than the last two quarters was back in Q4 2003 and Q1 2004.

Needless to say, investors have gotten used to stronger than expected earnings reports over the last six months.  If companies aren’t able to keep up the pace this season, we think the market will struggle.

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Topley’s Top Ten – April 11, 2018

1.Interesting …Not Sure If Tech Fits this Bucket

“Tobacco (1992), financial (2010), biotech (2015) industries illustrate how waves of regulation can lead to investment underperformancenoted BofA – “As Facebook has grown, people everywhere have gotten a powerful new tool to stay connected to the people they love, make their voices heard, and build communities and businesses,” Mr. Zuckerberg says, in prepared testimony released by a House committee on Monday. “But it’s clear now that we didn’t do enough to prevent these tools from being used for harm as well.”

From Dave Lutz at Jones

Continue reading

Fortis Wealth 1st Quarter Letter 2018

Technology Faces Its Machivellian Moment

Tech stocks have been letting the good times roll for five years

Good Times Roll – The Cars

Let the good times roll
Let them knock you around
Let the good times roll
Let them make you a clown
Let them leave you up in the air
Let them brush your rock and roll hair


  • Despite the headlines, technology sector remained the top performing sector in Q1 2018.

  • Is the tech sector expensive, or just FAANG stocks?

  • The volatility we’ve experienced in 2018 is NOT abnormal from a historical perspective.

  • Sector rotation to defensive companies has not yet happened.


Remember Sonny the Boss in the movie “A Bronx Tale”? A big fan of Machiavelli, Sonny asks the ultimate Machiavellian question: “Is it better to be loved or feared?”

Sonny made his choice in the movie, as all of us must, and it depends on your circumstances. To my way of thinking, in Sonny’s line of work (organized crime), it is much more important to be feared. Sometimes you can be both loved AND feared, but only for a short period of time. Eventually the single dominant characteristic (loved or feared) will surface.

The just-completed NCAA Men’s Basketball Tournament was a great example of a team that was loved then feared. Loyola of Chicago, a private Catholic University rarely mentioned among the nation’s elite college basketball teams, knocked off one heavy favorite after another on an unlikely

run to the national semifinals. The Ramblers captured hearts of sports fans everywhere with an undersized roster of humble, selfless players including two lightly recruited guards that have played together since 3rd grade.

Then there was Loyola’s telegenic spiritual advisor, Sister Jean, a 98-year-old wheelchair-bound nun who confounded the basketball experts and lit up the national TV cameras after each game with her smile, moxie and bold predictions. Last weekend, on Easter Eve, the Ramblers had joined big blue chips Michigan, Villanova and Kansas in the national semi-finals, marking the school’s first appearance in the Final Four since 1963.

Ultimately, the Ramblers didn’t win it all, but as but as they busted their way through the brackets, the “Cinderella” team wasn’t just lucky. It used steel tip boots and a killer instinct to sink fear into the hearts of much better known, better funded opponents. In short, the Ramblers were easy to love—unless you had to play them.

The way I see it, in today’s stock market, the technology sector is going through the same tug of war between being feared and being loved. As Sonny’s character says: “It’s nice to be both; but it’s very difficult.”

The technology sector has led this epic nine-year bull market in concert with consumer discretionary stocks. Tech stocks now account for a whopping 25 percent of the S&P index weighting. (source:

More importantly, the five largest technology and internet stocks account for more than 14 percent of the S&P 500 index weighting. Investors are struggling to reconcile their love of tech products (and earnings) with their fear of tech’s lofty valuations. That’s the conundrum. Is the entire tech sector overvalued or just the dominant FAANG stocks (Facebook, Apple, Amazon, Netflix and Google)?


Source : Daily Forex


Source: Semper Augustus Investments Group LLC


The volatility we experienced in the year’s first quarter may have been unsettling, but many investors are out of practice feeling nervous. In my opinion, the volatility was actually quite normal in light of the exceptionally calm year we had in 2017. At the end of the day, market returns come down to earnings. Nearly 90 percent of tech stocks beat their revenue estimates in the 4th quarter of 2017—tops among all sectors. In fact, it was the best quarter for tech stocks in five years and CIO expectations for tech spending were at the highest level in 14 years, according to a Sanford Bernstein survey of chief information officers.

Is it better to be loved or feared?  For technology stocks, 2018 will tell the story.

It appears based on technology stock revenues and earnings, the near term looks positive for the sector. But it seems that the same Wall Street pundits and analysts touting international economic growth are the ones tilting negative on tech valuation. That’s further puzzling since the tech sector gets over 50 percent of its revenues from international markets.


Tech valuations do not appear to be significantly richer than the overall S&P 500 index.


I started my career in 1997 on a trading desk during the height of the Internet bubble. My firm was a small-cap tech-oriented shop, so my introduction to the world of trading was a technology-stock version of baptism by fire. Regular readers of this letter know I don’t like making predictions, but I have to get this one off my chest: If you ask me, today’s market is absolutely nothing like the 1999 bubble!

I remember those exuberant dot-com days like they were yesterday. Once, while waiting for my car to be serviced in 1998, the mechanics kept running off the shop floor to check their diagnostic computers in the main office. At first, I feared my car was in big trouble, but I later learned the mechanics were using the office computers to day-trade stocks.

Back then we heard stories of landscapers routinely leaving their jobs to day-trade at 100-to-1 intraday leverage. And today, we believe these same investing amateurs, having been burned, keep all their money at Vanguard and swear by passive indexing.

Granted, tech sector valuations are not cheap today, but I find it’s tough to support an argument that we’re in bubble territory. The P/E for technology stocks is 19-times next year’s earnings. Compare that to a 17.7x multiple for the S&P 500 index and a 54x multiple for tech stocks during the March 2000 bubble. Even after a torrid start in 2018, tech stocks trade on par with their 20-year price-to-book ratios relative to the S&P 500. And based on price-to-earnings ratios, tech stocks carry a valuation that is 22 percent below their 20-year historical average relative to the S&P 500.


This article in MarketWatch helps put tech valuations into perspective


         PICTURE 1 (1983-2000)                       PICTURE 2 (2000-2017)



The debate over offense vs. defense is not just for basketball in March. The most offense-minded sector (technology) has pulled off one of the biggest blowouts in market history relative to the defensive-minded consumer staples sector. As the chart below shows, over the past half-decade, Tech has outpaced Consumer Staples by a whopping margin of 158 percent to 33 percent—reminds me of a UCLA basketball score from the late 1960s and early 1970s.


The chart below shows the tech sector in red and the consumer staples sector in blue.

See Eddy Elfenbein, Crossing Wall Street for more


See sector leadership history below when the yield curve inverts



When the next bear market hits, it’s likely defensive sectors will take leadership and new sectors will spearhead the next bull market. Markets are an exercise in rotation. The way I see it, there is always a bull market somewhere–timing and emotion is what matters most.  When will value stocks take leadership over growth stocks?  Will international outperform domestic over the next three years?  When is the next sector leadership rotation?  Will techfall from the top sectors?


So, is it better to be loved or to be feared?  The jury’s still out on that question, but as Sonny the Boss would say, “It’s tough to be both.”

Technology stocks may be over-loved at the moment, but paralyzing fear is what prevented most investors from buying them when they were at bargain basement prices a decade ago. Right now, it seems tech valuations are high, and investors are following classic behavioral finance patterns:

They’re “following the herd.” For instance, in the first quarter of 2018, tech had the highest sector inflows since 2000.

We live in a global technology driven world in which many jobs and tasks, not to mention employees, are being replaced by technology. This has led many people to question whether the five dominant FAANG stocks have become modern day monopolies.  The conundrum is that the rest of the tech sector aside from FAANG stocks is expensive–but not in a 1999 Bubble kind of way. How do you rectify this in a world that’s being rapidly divided into learners and non-learners?  Especially when the learners are technology driven.

Is the tech leadership real or an illusion?  We shall see in 2018 if the good times continue to roll.

Good Times Roll – The Cars

If the illusion is real
Let them give you a ride
If they got thunder appeal
Let them be on your side

Let them leave you up in the air
Let them brush your rock and roll hair
Let the good times roll
Won’t you let the good times roll-oll
Let the good times roll

Let the good times roll
Won’t you let the good times roll
Well let the good times roll
Let ’em roll (good times roll)













Infatuation – Bubble Spotters are Obsessed with Another Debt Crisis


Oh no not again
It hurts so good
I don’t understand

Rod Stewart

Key Takeaways

  • Total student debt, credit card debt and auto loans have each passed the $1 trillion mark in the U.S.
  • Eventually we will have a good old fashioned cyclical recession with a secular bull market—a crash or bubble burst is not likely.
  • Don’t let the headlines or recency bias cloud your thinking. Stick to your long-term plan.

Oh No, Not Again.
It Hurts So Good.
I Don’t Understand.

American Investors Have a New Obsession with Bubble Spotting.

In classic Wall Street storytelling, a Master of the Universe makes a fortune for himself and a small group of investors through an unpredictable cocktail of IQ, testosterone and hubris. This strategy is usually executed through huge bets placed on certain companies, bonds, real estate, etc. that work in exponential fashion, thus catapulting the Master to celebrity status in American culture. Remember “Greed is good”? Remember Michael Lewis’s novel about Wall Street traders that wagered $1 million as a side bet on a game of “liar’s poker” during the work day while tens of millions worth of bonds were traded around them? Americans love to hear how down-to-earth stock pickers like Warren Buffett and Peter Lynch choose their winners. Americans also love the Wall St. antiheros like “Predators Ball” junk bond raiders, or Jim Cramer, host of the frenetic CNBC show “Mad Money,” that is part vaudeville part, mad scientist act.

During the 2008 financial crisis, the titans of The Street were no longer bold traders, but a group of unknown hedge fund managers that made a fortune betting against the market. Books and movies would follow about how those savvy contrarians who predicted a short circuit to the American Dream—a disaster that took the mightiest country in the world to the brink of complete financial chaos.

Most citizens have no idea how close we came to the temporary collapse of the banking system and world capitalism. This terrifying scenario was driven by an enormous mountain of debt attached to a pillar of the American Dream—people’s homes. The crisis also led to a new financial super sport called “bubble spotting.”  After the crisis, every young MBA/CFA/hedge fund manager wanted to be the next Michael Berry or Steve Eisman who could find the next “Big Short.” Meanwhile, the second biggest bull market in history emerged from the crisis, and passed half of the nation’s investors by as they remained shell-shocked from the near-meltdown of 2008-2009.

I just finished reading Roger Lowenstein’s fabulous biography of Warren Buffet (Buffet – The Making of an American Capitalist) featuring thought-provoking descriptions of Buffet’s personal life that formed his controlled temperament for investing. One part of the book made me muse over today’s market—did you know that that it took Wall Street veterans 25 years to become bullish again after the 1929 crash. That’s right. Twenty-five years! The scars were so deep from the Great Depression that even Buffet’s hero, Benjamin Graham, the scion of value investing, questioned his entire thesis about putting one’s money into low-cost value stocks. Echoes of 1929 have followed the most hated bull market in history as it roars through its eighth consecutive year. Yes, valuations are on the high end of the spectrum and a correction may be due. But a bubble-like crash is another story.

Most of “today’s crash” predictions revolve around debt implosions that are due to a simple behavioral finance ailment called “recency bias.”  Recency bias is a phenomenon in which people are significantly more affected by recent events in their lives than they are about past events. The 2008 financial crisis left people’s homes, stock portfolios and work lives at half-mast. The debt bubble in housing is still so fresh in the minds of American citizens that they are acutely sensitive to anything that seems like excessive debt.

Our firm is working with a consultant to help us tell our story. It may surprise you that the consultant wants us to share negative (not positive) stories about our clients’ lives. The idea is to tug at heart strings and to find a connection through negative events. Human psychology (and the news media) dictates that “if it bleeds it leads.” Just look at the recent July 4th holiday. We live in the greatest country in world, and even on our nation’s Independence Day, the news was full of negative stories. As always, people can’t turn their eyes away from a car crash. Our financial car crash is now bubble spotting: Muni debt, Japan debt, China debt, student loan debt, car loan debt, credit card debt, etc.

Today I want to tackle three current bubble spotting myths.

A Trillion Here a Trillion There. Pretty Soon We Are Talking Real Money.

Student debt, credit card debt and car loan debt have each crossed the $1 trillion mark in the U.S. Not that long ago, one billion dollars was considered a lot of money. But, that’s like comparing Magic Johnson’s $2 million a year NBA salary from the 1980s and 1990s to Steph Curry’s $80 million annual pay today.

Let’s tackle each bubble myth one at a time and apply some second level thinking. Big numbers like $1 trillion grab headlines, but the truth lies in the details.

1. Student Debt

Many believe these lazy generation Y kids (born in the 1980s or early 1990s) will never move out of their parents’ basements because they are so sacked with student debt and useless undergrad degrees in philosophy. Personally I think philosophy is a great major, but that is beside the point. We are graduating the highest percentage of college students in U.S. history and we have a majority of women not only graduating from college, but doing so at the top of their class. This isn’t a just good thing; it’s an awe-inspiring movement to a more educated society. It also means we are preparing a work force for an increasingly complex, tech-driven service economy. While this progress could make the class divides in our society even greater, that is a topic for a different paper.

Most articles written about the dangers of student debt start with a scary chart like the one below. You’re supposed to think to yourself: “Oh no. Another crash is coming!” My favorite is when the media overlays the student debt chart with the NASDAQ 1999 chart.
Instead, this chart below is a reflection of the largest generation in American history coming into its prime college years. It also shows the democratization of education in America. But, the media will paint the picture more negatively, inevitably describing a tale of woe about a 20-smething waiter who has no career path and $200,000 in student debt. But, how many of these extreme examples exist? Again, the devil is in the details.

Underneath the daunting $1 trillion chart is a much more manageable number–two thirds of student loans (66%) are smaller than $25,000. What’s more, the average monthly payment on a $25,000 student loan is a manageable $280. And, the current unemployment rate for college graduates is a stunning 2.5 percent. Even more salient is the fact that 85 percent of student borrowers owe less than $50,000 on their loans.

Unemployment for college grads 25 and over 2.5 percent and the first wave of Boomers turns 70 this year, so Millennials will be replacing their parents in the workforce for the foreseeable future.


Is student loan debt an issue? Yes. It will delay homeownership and household formation for many young graduates. But, calling student debt a bubble that’s big enough to threaten the U.S. economy is a stretch. Comparing student debt to the 2008 housing bubble or the 1999 dot-com bubble is an absurdity.

2. Credit Card Debt

Credit card debt also hit the $1 trillion threshold this year, but consumer debt service is at all-time lows while sub-prime mortgage debt has disappeared from the landscape. Americans’ finances are actually in the best shape they have been in years. As a group, the debt-to-income and debt-to-asset ratios of American households in the first quarter fell to their lowest levels since the early 2000s. A prolonged period of low interest rates has made that debt easier to bear. The Federal Reserve reported recently that households’ overall debt-service ratio—the share of after-tax income going toward debt payments—is near historic lows.

Yes, we have more credit card debt than ever. Just remember that 70 percent of GDP is consumer spending and the economy is still humming along with personal balance sheets that are not yet stretched. At some point, we will have a recession, but until then, credit is helping to drive consumption. It’s true that charge-offs from credit card companies have ticked up. But, calling today’s credit card situation a threat to the economy is tough to fathom as charts like the one below demonstrate.

Low interest rates and the re-set from mortgage crisis leaves consumers debt service at historical lows.

3. Car Loans

Americans have had a love affair with their cars ever since President Eisenhower signed the Federal Highway Act in 1956. That’s what many say opened the suburbs to the urban masses and sparked commuting across the U.S. via family sedans. Car sales have ebbed and flowed with the economy ever since they became a big part of our free market system. Today’s consumers aren’t much different from those in the 1950s. But, here we are at $1 trillion mark in auto debt and a recent uptick in sub-prime auto delinquencies has sparked a spate of bubble headlines.

Those stories usually include misleading bubble charts like the one below.

There is a major problem with the sub-prime auto bubble thesis, however. Although borrowers with lower credit ratings make up 20 percent of the auto market today, they are a pimple on the rear end of the U.S. economic elephant. In 2014, roughly 14 percent of mortgage debt was delinquent or in foreclosure. In other words, around $1.5 trillion of debt was considered “troubled.” By comparison, lenders reported that about $23.7 billion in auto loan debt was delinquent at the end of 2016. That’s 1.4 percent of the sub-prime mortgage debt crisis and less than the total NBA salary cap. Warren Buffet alone is sitting on $100 billion in cash, so he could take down an implosion of sub-prime car debt all by himself in just one hour.

The growth of subprime auto loans is significant, but not a threat to larger economy.


As Howard Marks, my favorite Wall Street second level thinker says, “Most things will prove to be cyclical.”  American pundits have a new obsession with bubble spotting that’s reminiscent of the post 1929 crash. Although we are closer to the end of the economic and bull market cycle than the beginning, be wary of the soothsayers selling crash theories. Exponentially more people lose money by missing the 100 percent gain that typically follows a correction than who avoid the 20 percent loss that accompanies a correction. Over the past 70 years the S&P 500 index has experienced 12 corrections of 20 percent or more and the index is still up 15,000 percent over that period. Yes you read that correctly—UP 15,000 PERCENT!

The market has had corrections of at least 5 percent in 88 out of the past 89 years and has had 10-percent corrections in 67 out of the past 89 years. So, statistical probabilities favor a pullback in the near future. But, instead of worrying about tiny bubbles, just understand that our next crisis will be a good old-fashioned cyclical recession in a secular bull market.

At Fortis, we are closely watching the yield curve for signs of a recession, as well as accelerating inflation, rising initial jobless claims and rising inventory-to-sales ratios. We are ignoring all bubble oracles as they have swept MBA schools with tales of 2008 short-selling glory and have created a thundering herd of financial asset blimp astrologers.

One thing does scare me, however. I don’t know anyone who is bullish right now.

Caught me down like a killer shark
It’s like a railroad running right through my heart
Jekyll and Hyde the way I behave
Feel like I’m running on an empty gauge

Oh no not again
It hurts so good
I don’t understand

Tiny Bubbles – July 2017

Key Takeaways

  • Politics change, management teams change and taxes change, but human nature never changes.
  • The U.S. will see another 1999-type bubble, but those conditions do not exist in today’s tech market.
  • Only one thing scares me right now about the stock market: Everyone I know is bearish or waiting for a pullback rather than seeking out opportunities.

“Tiny Bubbles”

Tiny bubbles (tiny bubbles)
In the wine (in the wine
Make me happy (make me happy)
Make me feel fine (make me feel fine)

Don Ho


This long-running hot streak in the tech sector has led to forecasts of another 1999 bubble. It has sparked future doom from a host of soothsayers, who have been waiting for their gloomy predictions to come true since the global financial crisis ended in 2009. Since the crisis, today’s Wall Street Masters of the Universe are not the traders popularized in Michael Lewis’s original book “Liars Poker.” Nor are they the superstar investment bankers of the Internet boom. Instead, they’re a bunch of unknown hedge fund managers that predicted a crash in 2008 and made a fortune in its aftermath.  Since that event, headline grabbers on Wall Street have shifted from tireless cheerleaders of the rising bull market to pessimists predicting the next crash.

I just finished a fabulous Warren Buffet biography by Roger Lowenstein titled Buffet-The Making of an American Capitalist that provided many thought-provoking descriptions of Buffet’s personal life which help explain his controlled temperament for investing. One part of the book that made me muse over today’s market was the observation that Wall Street veterans took 25 years to become bullish again after the 1929 crash. The scars were so deep then that even Benjamin Graham, the scion of value investing and Buffet hero questioned his entire thesis about value investing. Echoes of 1929 have followed the most hated bull market in history as it roars through its eighth year. Valuations are indeed on the high end and a correction may be due in the near future, but a bubble crash is another story.

I started my career on the trading desk in 1997 during the height of the Internet bubble. My firm was a small cap tech-oriented shop, so my trading introduction was baptism by (technology stock) fire. I will deviate from my mantra of not making predictions right now and just say that today’s market is absolutely nothing like the market we had during the 1999 bubble. In 1998, I remember one day waiting patiently for my car to be serviced and the mechanics kept running on and off the shop floor to check the computers in the main office. They weren’t looking at diagnostics for my car. They were day trading stocks and landscapers were leaving their jobs back then to be day traders at 100-1 intraday leverage. Today these same citizens, hopefully wiser, have moved all their money to Vanguard and now swear by passive indexing.

Today’s tech sector valuations are certainly not cheap, but it’s a tough argument to say they fit the bubble label.  The P/E ratio for technology stocks is now 19-times next year’s earnings, vs. 17.7x for the S&P 500. Compare those ratios to a 54 PE during the March 2000 bubble. Even after the torrid start to 2017, tech stocks trade on par with their 20-year price-to-book ratio relative to the S&P 500. But, based on price-to-earnings, they carry a relative valuation that is 22 percent below their 20-year historical average relative to the S&P 500.

In 1999, the Nasdaq doubled in value as investors bought tech stocks at the expense of every other sector and the index dropped at least 2 percent on 40 different days that year. That’s a very different environment from the record low volatility we have today. In 1999, people were cruising around my parking lot at work with personalized license plates boasting ticker symbols like QCOM (Qualcomm). Do you really see that today?

IPO Market Comparison

Let’s start by comparing IPO markets of the dot-com era to today. In 1999, we had 446 tech IPOs and in 2000 we had 333 tech IPOs. By contrast, we had just 98 IPOs in 2016.

The average first-day returns for the 1999-2000 IPO market were 64 percent compared to 14% between 2001 and 2015.  In 1999 and -2000   three out of four (75%) new offerings were tech stocks compared to just one in four (27%) today. Also the small company IPO market (for companies with under $50 million in sales) has almost disappeared from the marketplace as private equity has filled the gap. In 1999 and 2000, three out of five IPOs (60%), were for companies with under $50 million in sales. Today that number is closer to one in twenty (5%) of deals.

Average First Day Returns IPO Market


Average First Day IPO Returns

 Top 1-Day “Pops” in 1999.  When was the last opening day IPO that looked like this table below?

Here is the latest 2017 tech IPO that came with no profits- Blue Apron (APRN). Expected price $15-$17…Opened at $10, sold off to $7.50


Tech Versus the Market

Tech just overcame the defensive consumer staples sector on a 5 year basis at the end of 2016.  In 1999 and 2000, money stopped flowing to any sector but tech. Every other asset class was undervalued except technology stocks: Bonds, housing, value stocks, dividend stocks, international equities etc.  Today, you could make a sound argument that defensive areas of market are the most overvalued–U.S bonds, dividend payers and low volatility stocks are trading at record valuations.

On a 5-Year basis….Tech just exceeded the performance of consumer staples this year.

XLP Consumer Staples ETF vs. XLK Technology Sector ETF-Tech just took the lead at the end of 2016.

What did tech look like in 1999 vs. consumer staples? Try a 5x valuation. 

Tech vs. Consumer Staples 1999        

Tech: End of the Bubble or Start of the Secular Recovery?

Tech bubble predictions begin with the FANG stocks (Facebook, Amazon, Netflix and Google) which are driving a large part of the sector’s outperformance. But, they are also growing revenues and (in some cases) earnings at double digit rates.

Could FANG stocks suffer a 20-percent correction at any moment? Of course, I would expect tech to correct more than broader market would in the next sell off. But, a short-term correction of an overheated sector is certainly not the same as a secular technology bear market. What does the big picture look like for tech today compared to conditions that lead up to the 1999 bubble?

1984-2000 Nasdaq +1800% versus 2000-2017 +24%

Picture 1 (1983-2000).  Picture 2 (2000-2017).

Tech is just Breaking Out of a 20 Year Consolidation.


Most of my readers have heard me repeat that the crisis of 2008 left the biggest investing hangover in the U.S. since the crash of 1929. Plus, it created a new cottage industry of bubble spotters including fresh MBAs who want to devote their time to finding the next crash instead of recommending the next AAPL. Behavioral finance will tell you that both paths are equally difficult to follow, if not impossible. So as investors, we are better off staying focused on a disciplined strategy.

Politics change, management teams change and taxes change, but human nature never changes. In my lifetime, the U.S. will see another 1999-type bubble, but those conditions do not exist in today’s tech market. Expect a correction in technology stocks especially FANG names, but put that in perspective of the NASDAQ’s 78 percent drop from peak to bottom in 2000.

You might be interested to know that in 88 out of the last 89 years, we have seen a market correction of at least 5 percent, and in 67 out of the past 89 years, we have experienced a 10 percent correction or more. I don’t lose sleep worrying about the next pullback. Only one thing scares me right now about the stock market–everyone I know is bearish or waiting for a pullback. On another note, until Vanguard stops buying $3 billion per day of FANG stocks, I’m don’t see how they will go down in value.

So, grab a cocktail at the beach and stick with Don Ho–leave the bubble pushers in the hot city.


So here’s to the golden moon
And here’s to the silver sea
And mostly here’s a toast
To you and me

Don Ho Tiny Bubbles