ETFs on the Road to Serpentdom*

WHAT, ME? I NEVER WORRY…

John Mauldin of Mauldin Economics is one of the finest aggregators of investment information   The Author Rob has read Mauldin since at least 2005.

The Author Rob will pay Mauldin the highest compliment he can pay a financial guru. He writes in the tone of the author. Funny, acerbic, and with some knowledge of what he is talking about. (Well, that last part is more what the Author Rob does.

A RISING TIDE LIFTS ALL BOATS. EVEN A FEW THAT SHOULD REALLY BE LEFT TO SINK. AND HEAVEN FORBID THAT SOME WILL BE BAILED OUT.

Mauldin discussed some writings by Doug Kass, the president of Sea Breeze Management. What a nice name. “Sea Breeze.” Desert of the Real Economics was not taken. But the Author digresses.

Kass notes the “band wagon effect” of ETF funds and passive investing. 

“The stratospheric ascent of passive indexing is having side effects that I suspect will make markets sick at some point. Passive investing is perverting the financial markets’ core economic function, i.e., efficient capital allocation. In terms of stimulating buying interest, a company’s fundamental business prospects are now much less important than its presence in (or absence from) popular indexes.’

We’ve created this environment in which badly managed companies can still see their stock prices rise along with those of well-managed companies. The actual facts about a company don’t mean all that much in a passive-investing world. Capitalization-weighted indexes aggravate this already problematic phenomenon. Money is pouring into stocks like Apple (AAPL) and Amazon (AMZN) simply because they are big. The resulting higher prices make them bigger still, and they pull in yet more capital. Here’s a look at the five largest stocks in the S&P 500.”

“FANGS” ARE NO LONGER FOR VAMPIRES ONLY

The FANG stocks are Facebook, Amazon, Apple, Netflix and Google. These companies are mammoth and would make monopolists like Rockefeller and JP Morgan bend a knee. They are among five stocks that compose 42% of the NDX (NASDAQ 100) and13% of the S&P 500. Apple alone is 12% of the NDX and 4% of the S&P 500. 

So when the selloff begins, and it will, the losses for passive investors will be big. Price discovery will kick in and the valuations of the hanger- on stocks on the NDX and the QQQ will plummet as investors leave the indexes and the values revert.

*The Author once noted that a Monitor lizard, which can effectively count to six, was sharper than a broker that said that the market declines in 2008 was "only paper."

AS THE CIRCLE JERKS SANG IN THE DESERT OF THE REAL, “WE ALL GOTTA DUCK, WHEN THE [STOCKS] HIT THE FAN.