The Winners of The New World Redux

The New “Winners of the New World”

Do you remember Jim Cramer’s February 29th, 2000 speech, “Winners of the New World?

“You want winners? You want me to put my Cramer Berkowitz hedge fund hat on and just discuss what my fund is buying today to try to make money tomorrow and the next day and the next? You want my top 10 stocks for who is going to make it in the New World? You know what? I am going to give them to you. Right here. Right now.

“OK. Here goes. Write them down – no handouts here!: 724 Solutions ( SVNX), Ariba ( ARBA), Digital Island ( ISLD), Exodus ( EXDS), ( INSP), Inktomi ( INKT), Mercury Interactive ( MERQ), Sonera ( SNRA), VeriSign ( VRSN) and Veritas Software ( VRTS).

“We are buying some of every one of these this morning as I give this speech. We buy them every day, particularly if they are down, which, no surprise given what they do, is very rare. And we will keep doing so until this period is over – and it is very far from ending. Heck, people are just learning these stories on Wall Street, and the more they come to learn, the more they love and own! Most of these companies don’t even have earnings per share, so we won’t have to be constrained by that methodology for quarters to come.

“We try to own every one of them. Every single one. And if I had my druthers, I wouldn’t own any other stocks in the year 2000. Because these are the only ones worth owning right now in this extremely difficult, extremely narrow stock market. They are the only ones that are going higher consistently in good days and bad. I love every one of them, just as I loathe the rest of the stock universe.

“How did this stock market get like this, to where the only people who can make a dime in it are the people who are interested in the most arcane subject, the moving of data from one space to another, via strange new machines and software? How did it get to the point where nothing else matters, most particularly the 90% of the stock market I have studied for the last 20 years? How did all of that knowledge become totally irrelevant and the only stocks that work are the stocks of companies that didn’t exist five years ago and came public in the last two or three years?

So, if you can’t own the retailers, and you can’t own transports, and you can’t own banks and brokers and financials and you can’t own commodity makers and you can’t own the newspapers, and you can’t own the machinery stocks, what can you own?

“A-ha, that just leaves us with tech. That’s why we keep coming back to it. That’s why, despite the 80% increase in the Nasdaq last year, we are looking at another record year now. It is by that process of elimination that I have picked my top 10. And my next 10 and my next 10 after. Only those companies are worth owning. The rest?

“You can have them.”

It’s easy to laugh at Cramer today. His speech was only a couple of weeks away from the all-time high in the Nasdaq, and his 10 stocks were absolute disasters.

Yet, let me assure you – in the moment, the market was gobbling up his spiel with a zeal that is tough to describe. Cramer wasn’t some raving lunatic, but a prophet who epitomized the dotcom mania. Fading the wall of buying seemed like absolute lunacy. And for the next couples of decades, I never again saw that sort of “just get me in” panic. Until now…

Before you condemn me as some sort of perma-bear who doesn’t understand the current market, please take the time to read a couple of my pieces deriding all the bearish hedge fund managers – Betting against historyIt’s too easy to write bearish pieces, or Billionaire Bears Club. I have long held the belief that a stock market melt-up was just as likely as crash.

But I have a problem. I hate being in the majority. It was easy for me to speak about the possibility of a stock market spike higher when everyone was bearish. Yet the trader in me cannot stand sticking with that position in the midst of an epic squeeze.

I don’t think the market will crash (although with every passing day the froth scares me more and more.) So I am not some doomsdayer predicting some catastrophic disaster. Yet I am a trader that knows markets look best at the top.

Back to Jim Cramer’s speech at the peak of the Nasdaq madness. Yesterday one of my favourite market pundits wrote a piece that was so eerily reminiscent of Cramer’s “the inevitability of dot com stocks to levitate to the moon” fame, I had to double check the author’s credits. I think Josh Brown from Reformed Broker fame is indisputably one of the good guys, and he has correctly remained steadfastly bullish in the midst of every hedge fund hyperventilation of the coming crash. Yet I respectfully have to take the other side of Josh’s Just Own the Damn Robots piece.

Take a moment to read Josh’s post. It’s compelling, well written, and makes you want to run out and write some big blue tickets.

“In Kurt Vonnegut’s 1952 novel, Player Piano, we are introduced to a future in which only engineers and managers have gainful employment and meaningful lives. If you’re not one of the engineers and managers, then you’re in the army of nameless people fixing roads and bridges. You live in Homestead, far from the machines that do everything, and are treated throughout your life like a helpless baby. The world no longer has a use for you. Anything you can do a machine can do better, and you are reminded of this all day, every day by society and the single omnipotent industrial corporation that oversees it all.

“He wrote this 65 years ago. It couldn’t have been more apropos to what we’re witnessing now than if had he written it this morning, right down to the nostalgia-selling demagogue who seizes the opportunity to foment rebellion amongst the displaced and disgruntled. When millions of people start seeing their purpose begin to erode and their dignity being stolen from them, the idea that there’s nothing left to lose starts to creep in.

“In the book, the result is a violent rebellion against the machines. In the real world, we’ve resigned ourselves to investing in them instead.

“We could be in the midst of the first fear-based investment bubble in American history, with the masses buying in not out of avarice, but from a mentality of abject terror. Robots, software and automation, owned by Capital, are notching new victories over Labor at an ever accelerating rate. It’s gone parabolic in recent years – every industry, every region of the country, and all over the world. It’s thrilling to be a part of if you’re an owner of the robots, the software and the automation. If you’re a part of the capital side of that equation. If you’re on the other side, however – the losing side – it’s a horror movie in slow motion.

“The only way out? Invest in your own destruction. In this context, the FANG stocks are not a gimmick or a fad, they’re a f***ing life raft. Market commentators rhetorically ask aloud what multiple should investors pay to own the technology giants. That’s the wrong question when people feel like they’re drowning.

“What multiple would you pay to survive? Grab a raft.”

This sort of “it doesn’t matter what you pay for an asset” is the type of thinking that prevails at tops. The idea of a new paradigm also permeates market participants’ thinking:

“The disruptor’s credo, say it with me: Your profit margin is my opportunity. Put another way: Your profitable small business is basically a market failure. But only for now, because we’ve got investors, motherf***er.

“Friend of a friend owns a small chain of grocery stores in New Jersey. A few years ago, when Amazon got into groceries, he changed his mind about investing in the growth of his own business. He started buying Amazon shares with his investment capital instead. He saw what happened to Circuit City and Tower Records, Borders and Barnes & Noble. So he bought some Amazon and then he bought some more.

“This wasn’t retirement investing. This was something else. What should we call it? Disruption Insurance?

“I don’t know. Anyway, long story short, Amazon is up over a thousand percent over the last ten years, and he don’t need the stores no more.

“Of the people actively looking for jobs right now, 96% of them are currently employed, as of the latest labor report. This, of course, excludes tens of millions of working age folks who have stopped looking, are working off the books or who have otherwise just given up. A great deal of them come from industries or vocations that no longer exist. This is not a new phenomenon, it’s been going on since the beginning of time.

“What is undeniable, however, is that the pace of this process has increased to breakneck speed. It also seems to be perennially advantaging those for whom advantage has already accrued. Winners keep winning. A momentum strategy, but for people. You would expect the folks on Wall Street to be celebrating all time record highs for asset prices. It’s the opposite – it’s making them miserable. Head counts and fund closures are this bull market’s accoutrements, not lavish parties and cocaine. It’s never been like this before.

“For the last fifty years, we’ve invested for retirement. For the last two or three years, we might be investing for a whole other reason. What price is too high to pay for a company’s stock if the company spends every waking minute trying to replace you?

“So what else is left to do? Just own the damn robots.”

Owning an asset regardless of price is what created the dotcom bubble. It didn’t work then, and it won’t work now. Chasing momentum after an epic 5-year monster bull run, regardless of how compelling the narrative, is not my idea of smart investing. Let’s see – feverish froth, frantic “I will miss the new era” buying and New Yorker magazine covers that reek of “even my Grandmother is now aware of this trend” is not a great setup.

So although Josh’s words seem convincing, remember that Jim Cramer’s recommendations once seemed just as wise. Josh’s advice has been spot on for quite some time, but I wonder if he isn’t a little overconfident with this latest piece. I just can’t help but feel that this is the sort of stuff you see near the top.