Juggling Dynamite

When asset prices halve, financial management starts coming to the fore once more. As shown below, Meta (Facebook) shares are, so far, back to where they were in 2018. Further downside is likely while a global liquidation cycle runs its course.

As the frenzy of free money comes to an inevitable end, wake-up calls abound for investors and stock-linked employee compensation alike. Back to some math and reality folks, see Meta employees left to do their own laundry as perks get cut:

Lavish onsite perks may be a thing of the past for employees at Meta, who will now have to do their own laundry due to company cutbacks.

The parent company of Facebook informed its employees it would be cutting down on various perks including free laundry, dry cleaning and valet service, as well as delaying the daily free dinner by half an hour from 6pm to 6.30pm, the New York Times first reported.

The pushed-back dinner service means fewer employees will get to eat on campus, as the company’s last shuttle bus departs the office at 6pm. As a result, employees will now have to decide between a free meal or a free ride home. It also will make it more difficult for employees to stock up on free food to bring home as leftovers.

Another generation is learning the hard way:  it’s not how much income we make or how much stocks go up that matter most in the end; it’s how much net equity we retain over the complete cycles (expansion and contraction) within our lifespan.

The chart below summarizes the S&P 500 total drawdowns during bear markets since 1929 and the duration from peak to trough. The COVID-19 decline over 15 trading days was a crash but not a cyclical bear market in terms of time. Historically, starting valuation and leverage levels set up the depth of bear markets that follow. Ala 1929 and 2000, we began the current downturn from the highest in history for both.

This documentary offers important context to the ongoing fight in Ukraine.

In just 93 days, what started as peaceful student demonstrations became a violent revolution. Netflix documentary Winter on Fire brings you the story of Ukraine’s fight for freedom from the frontlines of the 2014 uprising.  Here is a direct video link.

Notwithstanding yesterday’s bear market bounce, the tech-heavy Nasdaq 3000 index opens today-18% from its November 18 peak–a market cap loss of over $5 trillion in the past four months.

Under the averages, the individual carnage is broad and more significant. As highlighted by Robin Wigglesworth for the Financial Times yesterday (see Tech wreck looks more like another dotcom bubble bursting), nearly two-thirds of the Nasdaq’s 3,000 plus members have fallen at least 25%, 43% by more than half, and almost a fifth over 75%– the most since the 2008 financial crisis. Here’s the visual.

So far, the two most expensive Nasdaq companies by market cap, Apple (making up 12% of the top 100) and Microsoft (10%), have softened the index losses with relatively mild declines to date (-13% and -17% as of last night’s close). Adjusted for market cap, about 30% of the Nasdaq is down more than 25% so far, much less than the 80% plus who took that beating in the 2008 bear market (see below). But then, this bear market is only just started.

Since 2019, we noted that stock indices were extra vulnerable because their gains were being driven by a handful of widely adored and over-bought leaders. The top five most expensive companies in the S&P 500 (Apple, Microsoft, Amazon, Alphabet and Facebook) accounted for a whopping 23% of the index in 2021, compared with a peak concentration of 18% (for Microsoft, GE, Cisco, Intel and Wallmart) at the 2000 market top. After weaker companies have been taken out on stretchers, bears come for the most expensive, widely held ones.  Then the selling intensifies.

Repricing of Amazon (-26% as of last night’s close), Alphabet (-11%) and Meta (Facebook -50%) is well underway. At 12% of the Nasdaq 100 and 7% of the S&P 500 market caps, the bullish dreams of index-tracking funds and portfolios are now dependent on Apple more than ever.

As shown below from my partner Cory Venable since 2019, from $158 today (-13% from its $182 high), the next downside tests for Apple are at the $150 and $95 areas (-47% where it topped in January). As extreme leverage and concentration unwind, a 47% decline would be milder than historically typical. A peak to trough loss greater than 60% would be more normal and stock indices will tumble for the ride.  Early dip buyers should be aware.