🔴Huge Political Risks for FANG and Big Tech (w/Larry McDonald) | Stock Trade Ideas - YouTube

Welcome to real visions trade ideas today. We're sitting down with Larry McDonald of the bear traps report

It is great to have you here. Thanks Justine. So

The thing stocks and specifically a lot of the tech giant's have been fueling at the market rally that we've seen this year

Whether it's Microsoft Apple Amazon Facebook, they've accounted for about 20% of the S&P 500 rally

And that's about the same that we saw in 2017 and for a lot of 2018

So do you see this trend continuing that thing stocks that tech giants will power the rally?

Absolutely not

But there has to be a reason in turkette at a catalyst. I mean

Perma bears are not popular people and I don't want to be perceived as a perma bear

But there is a political firestorm coming at us that is unprecedented

inequality has

Exploded over the last decade not not just mr. Trump's ball President Obama and mr. Trump more central bankers have created a

vicious cycle of inequality and

you have

left-leaning politicians

on the Democratic Party side that are going to do a number of debates this year and you have a

president in the White House that is

Captured the populist vote of America and there's really a competing mechanism between the White House and Democrats

The Democrats lost these middle class voters to trump and in the

2016 election the Democratic Party wants those people back and

What you'll see is

tremendous noise and pressure from the Democrats Bernie on all the fangs through the through the

well, not just the primaries but the debates very public and

President Trump will see this and we've already seen this in the last month

We'll will start to really fight back and make more noise on his populist agenda against the fangs

So the the backdrop on that alone is it's going to be extremely difficult for the banks to make eyes from here

So do you think it's going to just be noise or is it going to be actual action?

That's that's thing president Trump one. He'll have to two punches, right the first punch is noise

And that's what he's been doing the last month even last like two weeks ago

He hosted a social media summit where he really came after Google and Facebook

but the next step is just looking at inequality looking at the percentage of forgiveness that

in say the

1950s 1960s the percentage of profits that were coming out of the top hundred companies was like 45 50

50 percent now we're up to 86 percent

so

Within Google and Facebook in particular. Those are the two primary bad actors you have

Just a real problem coming at them from the DOJ

FCC FTC and and you're gonna see real action because that's president Trump's antidote to Democrats

It's not just talk but following up with action because the different Democrat

Democratic Party obviously is in control of the wall is not in control the White House

So he'll counter there noise with action his administration very aggressive action of Linux as you head toward the election

Against I think we think Facebook and Google

Okay, so would it be specifically regulation or do you think you would be breaking them up?

I mean, where do you see this potentially going for Facebook and for Google? Well, if you remember with Microsoft, there's there's multiple

Parts to this trade Microsoft and the 90s

I lived through that in the perception the

entire like first three four years was break up and in the end there was a regulatory solution that

Microsoft dealt with pretty well, but the original

Like one thing I've learned and spending a lot of time in Washington

Our partner a CG analytics has done a great job. We take the clients around the hill our institutional clients and

There's this noise that comes out of the initial Washington reaction. That is

The bark is a lot worse than the bite. So in the end, they won't be broken up. Most likely but the

Perception of a break up will go from like a 10% probability

To maybe an 80% probability in the markets then back to zero over zero over the course of five years

No, just to play devil's advocate here

you know, a lot of these tech companies are competing against other tech giants in Asia and China specifically, do you see

The government wanting to prop up these tech giants for national security issues

well

The big thing that they're going to focus on is Huawei and China

And so the government and the US government's gonna make it a lot of noise on this and this bipartisan support

So, although there's you know incredible

differences between the White House and Congress in so many ways

There's one area of the most bipartisan support is in intellectual property in Huawei

so I think that's where you're gonna see if the president doesn't do enough on this China trade deal to really

pound home and and penalize Huawei for their

Intellectual property violations, you're gonna see real action out of Congress

So it's it's much more going to be focused on intellectual property and not so much defending US companies

okay now in terms of Facebook and Google specifically

Beyond the threat of regulation. Do you see them as overbought? Anyway, what metrics are you looking at their price the sales?

I mean you want to you want to buy fangs when they're

Three four or five times sales and sell them when they're ten times sales

If you look back in the last ten years right now, they're at the high-water mark that right around ten times sales again

And the other great lesson for young people watching us right now

The one thing I've learned over my career is when you have a sector that's close to 30% of the sp500 its market capitalization

That's just a natural

Risk reward sell signal ten years ago. I

Was when I wrote my book

colossal player of common sense

But one of the things that we talked about in that book is the financials

Eleven years ago were close to 30% of the ESPY of market capitalization and the financials and then the tech stocks. Oh, by the way,

Were less than nine percent. So at eleven years ago the most popular sector for investors watching it was us

right now 10 10 11 12 years ago was the financials and we know what happened there and the least popular sector a

Decade ago is tech and now it's completely reversed. You know, financials are a joke

Staples are joke - energy is a joke energy has gone from you know

20% of the SP to less than 8% of the SP market capitalization

So the bottom line is you just have a very crowded trade too many people globally are hiding out in things

So many people have come into the u.s

fangs are being treated almost like a money market fund where you can just

They're so liquid and there's just so much capital there and it's it's the most crowded trade. We've seen this year

So then how would you go about trading your thesis here?

Well at the beer Trappe support, we have institutional clients for the most part 85 90 % institutional hedge funds asset managers

There we do a long short combination and for our financial advisors

We just recommend underweight tech in overweight telecom, but I would structure the trade simply

either long the qid ETF which is short bank stocks the

Qqq's which is that's that index of large cap tech stocks is almost 50%

Thanks. So literally you have an index which is

qqq's which is like

50% eight stocks which is insane and by itself

But the the hedge funds that were that our clients were recommending short your Google your Facebook

versus long telecom and why

Specifically, are you looking at telecom to go long? Well, two things number one

5g this is literally this is you're talking about

The most exciting technological advance since the internet you're talking about

speeds on your phone a hundred to a thousand times faster over the next

Five years all that infrastructure all that's gonna be built out and the telecom space is in a prime position

To benefit but most of all is just the underperformance of telecom

Telecom has been such a poor performer over the last five years

They've been practically kicked out of the SP. Like you talked about energy going from 20% of the sp500 market capitalization to eight

Telecom is gone. It's so it's so bad for telecom that a good chunk of telecom stocks been kicked out of the SP

So it's a very small component you're talking about

underperformance versus big tech of

200% of underperformance over the last five years so your big tech stocks are up 190 percent in telecoms essentially flat

So that's the type of risk reward that we like looking at over the next five years where you have a major?

Technology advance catalysts. You've got electric vehicles. You've got so many things they're gonna be powered by 5g in this country

so much so much excitement will come in and innovation will come into this 5g space and

telecom stocks are really in a prime position to be to capture a

Massive amount of profitability relative to where they've been in the last five years are there specific levels that you're looking at for this trade?

especially for going short of thing stocks, which seems like it's

Somewhat risky trade sure, especially if looking back for the past two years

Well in the last week, we've had a big fan mess

So one of them Netflix had a colossal missed then we put the report out about two weeks ago

So we've got one Fang down. We've got several more to go but

net net I mean if if say you got a China trade deal and

And you just have things come together this summer with the market in the market. It goes on to two new highs

the Fang index which we track on Bloomberg is

Substantially underperforming this appeal by the way, so it's technical but if that index were to make new highs

We'll take the trade off, but right now you've got lower lows

And you've got a real ugly technical backdrop for the Fang stocks as a large basket as a whole interesting

So what would your timing be on this trade? Do you see this playing out in the next few months or is this more a

Yearly, you know five-year trade I think in the next six months, you're definitely gonna have some some downward action

but it's a five-year trade for sure, but it's really a

lection trade between now and the

2020 election

you're gonna have to see you're gonna see action out of the Trump White House all the warning signs are there the tweets

We track president Trump's tweets relative to some of these and you can see that you know

They make new highs and then he comes up at the tweet

Don junior Sweeting about this Trump's entire kind of, you know close-knit group of

loyalists are all talking about inequality and and the bank stocks and

So you're gonna see a lot of action out of the White House, but net-net

I think you've got ten percent if you're short the fangs here versus long telecom

You're you've got 10 to 12 percent downside and 50 percent upside over the next two years

So these are two totally different kinds of stocks iyc has a much higher yield than the faying stocks do

How do you see the Fed decision that's coming up at the end of this month?

potentially impacting that the Fed has a very high high bar because

In recent weeks you've got different Fed governors governor williams

john, williams and alike this just different mister mister clara de have hinted around at this 50 basis point cut and

the Fed

His is really playing catch up with them with the world

in other words

most of the global central banks have acted and the feds could have have to play catch-up so number one if the Fed

goes aggressive which which we think they will that's gonna really help the telecom space because once again, I

am or accommodative fed lowing rates that juices dividend plays and

That's where telecom has a major advantage over over over bank stocks

So what do you see as the potential biggest risk to this trade?

Biggest risk is just more crowding passive asset management. So

You know, it's really I don't want to call it an ignorant crowded trade, but you've you had one trillion dollars in

Passive asset management say six seven years ago. Now you have seven eight trillion dollars

It's a freight train where and then let's describe what passive asset management is

It's just index funds

So when I was growing up people would put their money in the fidelity Magellan fund

And people would that's an actively managed fund where a human being decides what to buy and sell

Now you have index funds like the QQQ like the SP why?

that have

Literally over the last decade have gone from practically no assets

you know less than a trillion to seven eight trillion dollars and as

the money flows in from

Investors all around the US as that money flows in there's no there's no buy. There's no human being there making a decision

It's there's no thought to it

it's it's it's really quite scary and

it's gotten to the point now where

Menisci flowing in stuff

those Fang stocks have to be bought so it could

There's definitely this there's always a chance that this freight train runs further than you think. All right

Can you break down your trade idea in 30 seconds?

The most crowded trade in the world right now is long the bank stocks. There's a political backdrop

historic populist backdrop

Fueled by the ugly stains of inequality which will lay a sword

Through this group of thanks talks in the next six to nine months. Great Larry

Thank you so much for breaking this down for us. Thank you. So Larry is bearish on big tech specifically

He likes shorting the Fang stocks and thinks the QQQ ETF has significant downside risk over the next few years in

Addition Larry is bullish on the telecom sector

he believes the

Telecommunications ETF I Y Z will begin to outperform as we approach the 2020 elections as a parish trade

He likes shorting the QQQ versus iy z

Just remember this is a trade idea and not investment advice. You should do your own research

Consider your risk tolerance and invested cording. Ly for real vision. I'm Justine Underhill

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