The Zigmont Report (Daily Market Recap for 7/26/18)

Mike Zigmont

Mike Zigmont, author of the Zigmont Report, is a partner at New York-based Harvest Volatility Management, a hedge fund with over $12B AUM, offering volatility management solutions to its investor base worldwide.  Mike has been publishing his daily newsletter (Monday-Friday) privately for the firm’s investors and his personal contacts in the investment business since 2008, sending it daily shortly after the market close.


The opinions expressed below are my own and do not necessarily represent those of Harvest Volatility Management, LLC.

Ring-fenced.  Facebook’s disappointing results last night shaved 10% off the stock.  The lowered growth guidance from the conference call didn’t go over well either.  FB was down 20% today.  The NASDAQ was down 1%.  The S&P was down 30 bips but was almost flat around noon.  The Dow was up the whole session.

Facebook was the 4th biggest company by market capitalization yesterday.  They took a 20% hit and the equity market didn’t give a hoot.

Is that a sign of equity market health or equity market delusion?

Obviously the answer depends on whether you’re a long or a short.

Facebook’s drop today isn’t the end of world for FB.  The company’s business has grown very quickly and will continue to grow quickly…. But the stock dropped because the stock investors finally wondered about the *valuation* of the stock.  Something like this happened with Netflix earlier in earnings season but not to the same degree.  Google’s results were strong enough that investors didn’t question its valuation.

So in the FANG stock complex, we have 2 disappointments and 1 positive surprise.  Amazon announces tonight to complete the results for the foursome.

FANG stocks, and to a lesser extent growth stocks, have been the unambiguous leaders of the bull market this year.  Two of those stocks have stumbled but the bull still runs.  This is a very surprising change in *narrative.*

The story just changed from FANG-centric to FANG-who?

FANG was the vanguard of this investor/company compact:

If you

  • Deliver expected growth *AND*
  • Continue expected growth guidance

The market will

  • Expand your valuation

That is not an absurd arrangement by the way.  Investors have been willing to pay for growth at any price and that’s just the nature of the equity environment right now.  It is what it is, regardless of whether I like it or whether is goes against certain valuation models etc.

But *usually* when this arrangement exists, once the cycle is broken, investors *revisit* the compact across the *entire* market.

That didn’t happen today.  It looks like it’s not going to happen any time soon.

I say that this is a big flashing warning signal that the market is cherry-picking news and results.

Anyway, AMZN just announced.  Big earnings beat, modest revenue disappointment, guidance appears to be below expectations…. Stock is up about 4% in after hours trading.

Hmmmm.

See you tomorrow,
-Mike