Netflix at a 76% discount – a buy?
I have some good news and bad news for the bulls. The good news is stocks are recovering some of their huge losses! Huge bounces last week pushed up tech in particular (the much-battered Netflix has gained 20% off its 12 May lows). The bad news? They are being teed up for one almighty crash ahead.
As you know, I am using the progress (and otherwise) of the push to Net Zero by governments around the world (not all, of course!) as a proxy for the state of social sentiment regarding the future global economic scenario. In a strong bull market )which we have lived through several decades of until recently, all sorts of fantasy goals are widely held by those in power. The sky’s not even the limit. The bull market has been created by extremes in the belief in fantasy ideas.
But when the bear starts to take charge, these ideas start to crash on the rocks of the reality of a bear market. I personally saw that when I worked as a scientist for NASA in the early 1970s. After the great success of Apollo in 1969 the dream was to go to Mars (costing 20 times the already huge cost of Apollo). But that was at the start of a bear phase in stocks and economic reality reared its head and that dream was shelved. I stated at the time that we would not achieve manned Mars missions in my lifetime – and so far, that is one prediction I nailed (among several big failures including stating that rock ‘n roll wouldn’t last!).
In another stealth roll-back of the UK government’s Net Zero pledge/law, the National Grid was asked last week to ‘prepare for coal’ in a move to restrict dependence on NatGas whose supply is seen to be highly uncertain this winter. Last week I noted here that the EU has audaciously re-classified NatGas as ‘green’ – and presumably a whiter than white energy source now (previously it was Enemy Number One and rapidly destroying the planet). Presumably, the End will now come sooner than even the eco-zealots have been forecasting. So where is Greta when you need her? Has she grown up? How dare her! (Apologies to grammar pedants).
But any success of the Net Zero goal was always at the mercy of real-world economics – and physics/engineering. At present, wind and solar are just too unreliable as national energy sources without a crippling investment in massive banks of batteries. Backup must still be provided by fossil sources. Musk insists he can build such batteries and there is some success in Australia (abundant in both wind and solar). But Europe is a different animal, especially the economically dominant Northern Europe where the sun is seen only on special days.
No, the fairy story of Net Zero was a landmark culmination of the decades-long Great Asset Mania where pie-in-the-sky dreams were rife and stocks always went up. especially tech which was the future. But reality is starting to dawn.
On of the beneficiaries of this mania was Netflix where everyone would be watching its ever-growing output of its streaming services of very high quality programming on demand. And the pandemic was a godsend for the company as furloughed workers at home had nothing better to do than watch TV (and play the meme stocks such as Ganestop on Robinhood). But how times have changed!
And now the shares have collapsed from $700 in November to the recent low at $160 – a crash of a Fibonacci 76% in just six months.
Investors who had been brought up on the ‘Buy the Dip’ mentality and who bought on the 20%, 30%, 50% and even the usually reliable Fib 62% ‘dips’ are all under water. But have they abandoned this philosophy where there is no dip that is not buyable? Of course not. I see no signs of panic selling and most still cling to the idea that shares will come back soon.
But at this massive discount, Pro Shares members have been advised to go long here.
Reliable measures of US retail share trading still register a near-record high holdings of shares minus cash in portfolios. But at the same time, many say they are feeling a lot more bearish. But feeling is not the same as acting. Most still are holding as they expect consumer and producer price inflation will moderate and the Fed is always there with its ‘put’ waiting in the wings.
But the Fed has been relaying in no uncertain terms they intend to ramp up rates by 50 bps chunks several times this year. So there is a cognitive dissonance with retail investors (and many pros). They simply cannot accept interest rates will push up that high soon and expect the Fed to pivot in the summer.
Whether they do or not is almost immaterial. The major trend in shares is well and truly down and the more shares rebound in such talk, the more fuel is added to the bearish fire when the next round of crashes materialises.
The Fed is notorious for being late to the party – and if they do ever pivot on rates, it will occur when shares are trading much much lower with them in panic mode. With indexes currently down by around 20%, they have not lost enough ground to worry the official Fed line yet – or many investors. The Buy the Dip mentality lives!
And we are in such a dip recovery. A week ago when the Dow was plunging to new lows, I advised my VIP Traders Club members to watch out for a sharp relief rally and suggested taking some of the huge profits on their shorts taken from much higher up. And last week, we are seeing such a rally playing out with Friday’s close particularly strong.
This was the S&P chart roadmap I posted on May 14
It was a clear signal to expect a relief rally in a three a-b-c up. And here is that chart updated to Friday 28 May
My roadmap was almost correct! But my ‘c’ wave has carried much much higher than I imagined and even more has justified taking some profits earlier.
But where will the relief rally end? Because when it does, it will herald the greatest and most savage bear phase yet. It will make the collapse off the Nov/Jan ATHs will look like a minor dip. So here is my long range roadmap on the Russell 2000 (similar for all other indexes). Remember, the Russell is an index of US smaller cap shares with few in the tech sector – most are companies that serve the real world. This index has displayed excellent wave patterns on the way up and on the way down. And excellent tramlines!
With the MSM headlines universally bearish as they cite the ‘obvious’ negatives including the very visible surge in price inflation, surging energy costs contributing to the cost-of-living squeeze, wages lagging inflation, rising interest rates and so on.
But as the legendary trader Joe Granville once said: “When everybody believes something is obvious, it is obviously wrong.”
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So what to expect next week and into June?
The recently awarded ‘green’ status NatGas (see last week’s blog) pushed up last week to 98 – a price last seen in 2008 – 14 years ago. That is the extent of the problem facing us as users – and a big headache for the UK government that last week announced a support scheme for energy customers. But it may not be enough to prevent a massive hit to disposable incomes this winter. More dosh may be needed (provided by we taxpayers, of course).
I have long believed that if a government starts life on the ‘conservative’ side, they always end up extreme socialists. Simply because when times get tougher, the voting public will always vote for more hand-outs and over time, this ratchet effect of more benefits and higher taxes becomes irresistible to most politicians.
We are seeing this in spades in the UK. The so-called Conservative government is now out-taxing and out-spending the socialists who traditionally have been slaves to this policy. And Australia has thrown out a reasonably ‘conservative’ government and installed a radical socialist one who promises to ‘lead the world in the eco transition’. Good luck with that one.
Even the USA – once a bastion of go-getting entrepreneurial activity – is basically socialist (over 50% of inhabitants are on benefits).
But has the UK public had enough of their huge utility bills with a 20% ‘green’ levy on top? One straw in the wind is the precarious position of our PM (Partygate) – a leading Net Zero proponent. If he is in serious trouble, will a less eco-zealous leader take over later this year and begin a roll-back of the more extreme ‘green’ policies now hampering economic development (and enriching elite landowners with wind farms on their land)? Watch this space.
I do not believe the ‘c wave rally phase is yet over. We should see more ‘bullish’ news appear in the headlines (or less bearish). This wave should have one more down/up sequence before it terminates before a large wave 3 of 3 gets started. Remember, this wave is one of the strongest in the book and should results in a lot more 1,000 pt down days in the Dow.
As for commodities, if US Crude can push above the current $114 next week, it will likely go on to test the old $128 high and move even higher. I have a similar outlook for the ags. In terms of the tropicals, the one commodity that has been missing out of the great commodity boom as been Cocoa and we have just started a major campaign. this could be a big winner for us later in the year. Coffee has already staged a massive bull run and there should be more to go.
Yes, there is plenty of great interest to traders with opportunities galore. I am as excited about these as I have ever been!
