Joke my son told me when he was in 6th grade.
Q) Why did the man stare at the frozen orange juice can?
A) Because it said concentrate
Picture courtesy Walt Disney: (Click Here)
This is the most concentrated market since the dotcom era and before that the Nifty Fifty
Take away the 17% of the stock market that is comprised of Facebook, Microsoft, Apple, Amazon, Netflix and Alphabet, which is equal to $17 trillion, and the stock market has barely budged this year. No matter how you cut the mustard, the 6 largest cap stocks make up most of the stock market’s gains. Every time you see the market indexes rise, these stocks are causing that rise to happen. Sure the complete list of FAANG stocks and some other tech and growth leaders play a part of this trend, but vast number of stocks has not been advancing.
The very nature of the stock market makes this a self-fulfilling prophecy. After all, we live in a stock index driven stock market. And the largest representatives in these indexes are the above large cap growth stocks.
Many of these companies are monopolies in their fields. Here are some:
Alphabet – GOOGL: If one wants to perform any type of internet search. Here is a chart of internet searches:
Chart courtesy ComScore: (Click Here)
Yesterday Google – GOOGL – broke out to a new all-time high. GOOGL’s search engine monopoly has enabled it to dominate the world of search and advertising. The earnings generated by search advertising revenues have allowed GOOGL to laugh at the European Union’s $5 billion fine which is chump change in the scheme of things.
GOOGL is not sitting on its merits. For instance, GOOGL has made huge inroads into the field of driverless cars with its subsidiary WAYMO. I am very concerned about GOOGL’s intrusion into our lives via the collection of personal data. The EU’s fine and antitrust talk is coming to the fore front. I suspect that any change in American political party leadership may be a regulatory or antitrust risk.
Netflix – NFLX has an effective monopoly on streaming video. The competition is going through a phase of mergers and acquisitions in order to combat NFLX, but right now NFLX has a tremendous lead. NFLX Achilles heel is its lack of profits, slowing subscriber growth and negative cash flow.
Right now NFLX price is correcting after a lofty parabolic run
Amazon – AMZN – Is dominating the world of online sales and delivery. AMZN was unprofitable for years because it plowed all of its gross profits into growth. AMZN has wreaked havoc on the entire retail world as we know it. The only risk to their monopoly right now is regulation and antitrust.
I can go on and on with a laundry list of monopolies such as Microsoft – MSFT which controls our CPU desktops, Facebook – FB which control social media and so on.
The hallmark of the bull market over the past ten years has been the growth of index trading via ETF’s such as the SPYDR – SPY and the QQQs.
The largest purveyor of index related products is Blackrock – BLK. – https://www.blackrock.com/ – Last quarter BLK announced that it had an astonishing $6.32 trillion of assets under management – AUM. That is not a typo. Although BLK is only in the top ten hedge funds in the world, its AUM is comprised of all of its ETF products under the I-Shares label such as its S&P 500 ETF.
Just to give you an idea of BLK’s growth, there was “only” $17 billion AUM in 1992: “In 1992, the firm adopted the name BlackRock. By the end of that year, BlackRock had $17 billion in assets under management; at the end of 1994, the figure was $53 billion.
Every stock market cycle is different. Here are today’s stock market characteristics:
1 – Today’s bull market is dominated by enormous growth companies that have concentrated monopolistic power.
2 – Exchange trade funds – ETFs and index investments dominate the stock market. The desire for individuals to save for retirement in as safe an investment vehicle as possible has overcome stock picking and mutual fund investing.
3 – The institutionalization of ETF investing through 401K, IRA and pension plans has changed investing into a form of savings. Every paycheck has a deduction for investments in a menu of retirement assets.
4 – Any stock that is included in an ETF must be purchased regardless of the company’s prospects. Stocks jump up in price when they are added to ETF’s.
5 – Stock market leaders like AMZN, FB, and GOOGL as members of major indexes must be purchased every time people add to their retirement savings. That makes for a self-fulfilling prophesy. The larger these companies get, the larger their percentage impact on the major stock indexes they have. Therefore, as long as people save for retirement, these stocks have to go up as their power is more and more concentrated.
In my opinion, the only things that can stop their concentrated growth are a general drying up of investment capital caused by a general economic slowdown or a drastic change in their business prospects. So as long as the current bull market continues, these companies are likely to leave the rest of the stock market behind. That is why the old industrial companies in the Dow Jones Industrial Average – DJI have lagged. It is also why stock market breadth has been poor. All of the money is flowing into the few growth monopolies.