Friday, July 20th, 2018 MST

High tech analyst bearish on stocks, bullish on gold

“My precious metals positions are my largest positions, by far,” wrote Fred Hickey in his June High-Tech Strategist newsletter.

Why would an analyst of high-tech stocks make his largest investment position be in gold?  Because he is a bear on stocks, especially high-tech stocks, and because he recognizes a bubble when he sees one. Although he didn’t talk about it, gold is obviously undervalued.

Hickey takes many of the same positions that David Stockman takes, asserting that the FAANG stocks (Facebook, Amazon, Apple, Netflix and Google/Alphabet) are grossly overvalued.  In his letter he openly talks about his short positions in those stocks.

He notes that Netflix recently was valued more than Disney, despite Disney’s income nearly equaling Netflix’s total revenue.  Additionally, this year Netflix will burn through $3 billion in cash, which it will borrow.  And, think of all the wonderful movies that Disney has produced over the decades, movies than can be released to generation after generation.

Hickey asserts that greed is pushing stocks higher.  I agree.  No one likes to leave a good party, and Wall Street has been a great party since it bottomed in early 2010 as the impact of the trillions of dollars the Fed and other central banks printed in a Keynesian effort to bring us out of the Great Recession. And, the party got even better with Trump’s election.

Hickey compares today’s investor fascination with that of the dot com bubble in 2000, when “everyone owned Cisco,” the leading network equipment supplier.  Of 37 bank analysts following the stock, not one had a sell recommendation.  Sound familiar?  The stock had a price/earnings ratio of 120 based on year 2000’s estimated earnings.

In a year and a half, Cisco’s stock dropped 90%.  Other “can’t miss” favorites with valuations in the world’s top 20, such as Sun Microsystems, EMC and Nortel, fell 96% to 99%.

Hickey sees precious metals on a launch pad.  “We’ve seen more than $100 an ounce rallies following the December 2015, December 2016, March 2017, June 2017, and the December 2017 rate hikes. With gold currently just below $1300, another $100 an ounce rally would put gold above the critical $1365-$1370 level from which it’s been rebuffed several times.  The only rate hike that didn’t result in a $100+ gold rally was the March 2018 quarter-point increase, but even then there was a decent rally that ended just short of the breakout point.  Also note that throughout the prior Fed rate hiking campaign 2004 – 2006 (17 rate hikes), gold rallied by nearly 50% (and the dollar fell 4%.)”

It has long been a successful investment axiom to sell over-valued assets and buy under-valued assets.  Hickey is doing just that, making gold his biggest position.

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