‘Our Strategy Is Our Strategy’

It’s time to sell the rips in tech.

Hold that thought.

“So, if you’ve never seen this before, where there’s appreciation but your strategy isn’t working, do you change your strategy?”, an inquisitive Taylor Riggs wondered, while interviewing Cathie Wood earlier this week.

Riggs was responding to Wood, who said she’s “never been in a market that’s up and our strategies are down.”

“Our” was, of course, a reference to Ark’s products which embody “hyper-growth,” an informal thematic designation applicable to everything from behemoths like Tesla to smaller companies vying for attention (and capital) with pie-in-the-sky elevator pitches.

Detractors have long predicted Ark’s demise, to no avail. Wood, like the centibillionaire would-be Martian on whose coattails she rode, kept winning. Money talks, as they say, and Wood’s bespectacled affability belied a God-mode penchant for amassing AUM.

Fast forward just 10 months from the “money tree” moniker, and Cathie is reeling. I mean, she sounds ok, and having attended one of Ark’s launch parties what seems like a lifetime ago, I hope she is ok. But Ark’s flagship is struggling mightily (figure below).

If December’s losses hold, ARKK will be down 22% for the year, having fallen in seven of 12 months. Insult to injury is the S&P’s near 25% gain.

In the same Bloomberg interview, Wood reiterated how anomalous that is. “[It’s] never happened before,” she said.

Fortunately (or not, depending on your outlook for hyper-growth shares in an environment of elevated inflation and progressively, if incrementally, tighter Fed policy), Wood reminded Riggs that Ark has “a five-year investment time horizon.”

Generally speaking, market participants expect five rate hikes (give your take) over that period. Irrespective of whether you think the Fed will actually manage to get policy back to neutral, it’s almost impossible to imagine real yields falling much further than they did during the latest easing cycle. That, in turn, suggests high-multiple growth stocks will almost surely de-rate at some point. By definition, companies with no profits (or thin profits or unpredictable profits) have a difficult time compensating for multiple compression.

There are two important caveats. First, some of this could be an exercise in question-begging. If you think the Fed will be constrained in its capacity to raise rates by the read-through for high-multiple growth stocks, some of which are disproportionately represented at the index level, then the problem solves itself. However, the Fed likely believes quality growth will be resilient — that any fallout from rate hikes will be confined to corners of the market that needed to de-rate anyway. Second (and relatedly), some corners of the market seen as susceptible to higher yields and a shift in the macro environment already “de-frothed,” in some cases to the detriment of Ark’s performance. So, you could argue the worst is over.

Still, it feels dicey. I’m not a fan of overlay charts. More often than not, they’re dubious. However, they’re also amusing. If I still went to dinner parties, I’d call them conversations starters. Consider the familiar figure (below) for example.

That’s an updated version of a chart BofA’s Michael Hartnett has employed countless times previous. It speaks for itself.

As you can see, Hartnett thinks the bubble has already popped. “Long-duration tech is trading like post-bubble 2000/01,” he said, in the latest installment of the bank’s popular weekly “Flow Show” series.

Hartnett went on to call the divergence within tech “epic.” Two-thirds of the Nasdaq’s YTD gain is attributable to just five stocks (pie chart on the left, below).

That brings us full circle. For Hartnett, it’s time to sell the rips in tech. He noted that post- the March 2000 bubble top, the Nasdaq staged nearly a dozen dead cat bounces of 10% or more (table on the right, above).

As for Riggs’s query about the viability of Ark’s strategy, Wood didn’t waver. “Our strategy is our strategy,” she said.

Indeed.

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Postscript

For new readers, I’ll rekindle my brief Ark story. It’s true, the best of my recollection which, admittedly, isn’t saying much considering how drowned my synapses were in Balvenie at the time.

I have a very foggy memory from around eight years ago of attending a small gathering to inaugurate a new investment management firm dedicated to innovation and generally focused on “the future,” broadly construed.

If I recall that evening correctly, it was a quaint event held on the second floor of a nondescript address in Manhattan. I only attended because a friend of mine in advertising never missed an opportunity to network. For whatever reason, she thought it might be beneficial if I tagged along.

There were tables set up around the room and each one had marketing material discussing a different investment theme. I wandered around long enough to take full advantage of the free drinks.

My friend introduced me to Cathie. I shook her hand, thanked her for the drinks, and promptly left.

I muttered something totally unnecessary like “that’s never going to be anything,” as I stumbled off towards Grand Central to catch the Harlem Line to the Tuckahoe station.

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