- Why I don’t recommend ETFs…
- A Fed Coin will help keep us competitive…
- “My fingers are itching to sell everything… ”
Dear Reader,
Welcome to our weekly mailbag edition of The Bleeding Edge. All week, you submitted your questions about the biggest trends in technology.
Today, I’ll do my best to answer them.
If you have a question you’d like answered next week, be sure you submit it right here.
And before we turn to today’s questions, I’d like to remind readers that today is the last day to watch the replay of my Pre-IPO Code Event. If you haven’t watched it yet, you can go right here to do so.
I don’t want anyone to miss out on the opportunity to invest in exciting companies… before they go public. This is a solution to a problem I’ve been investigating for over five years now.
While high-net-worth individuals and institutional investors have been able to enjoy the best returns by investing early… before companies go public… regular people have been held back and given the table scraps.
If you’d like to find out how to turn the tables, though, I share all the details during my presentation. It goes offline at midnight. So go right here before then to learn more.
And now let’s turn to our mailbag questions…
The downside to ETFs…
Let’s begin with a question on investing in exchange-traded funds (ETFs):
The TQQQ trend line over the past 10 years continues to go up. Obviously, it goes up and down, but the up far outweighs the down.
Speaking just philosophically, with all the new technologies in the near future and tech advancing exponentially, why would this trend line do anything but continue in the same general direction? At least, that would be the worst-case scenario. Even if some of the bigger name companies take a hit, the newer technologies should more than make up the difference and pull the Nasdaq in this general direction.
I am not asking for investment advice. This is general and nonspecific. Does my thinking have any flaws?
– Robert R.
Thanks for sending in this question, Robert. You bring up an interesting topic.
As you noted, I can’t give personalized advice. There’s nothing wrong with your thinking. ETFs can be very reasonable investment vehicles for some investors.
However, I have never recommended an ETF in any of my research. And there are some reasons for that.
The companies that create ETFs are in that business for the fees. They like to see the number of assets increase because it increases their fee base. They’ll make money even if investors lose money.
And, if the ETFs are technology- or biotechnology-focused, these fund managers often have little understanding of underlying technologies or the context for companies’ competitive positions in their respective industries.
The one you mentioned, ProShares UltraPro QQQ (TQQQ), aims to outperform the Nasdaq 100. But the first thing I would note is that its holdings cover more than just exciting technology companies. While the Nasdaq 100 is highly concentrated in the technology sector, it also includes companies in health care, retail, media, and telecommunications.
Looking under the hood, TQQQ holds some big tech and biotech names – Apple, Microsoft, Tesla, Facebook, Amazon, Google, Intel, Moderna, Zoom, and Netflix. And those sit right alongside some picks that fall outside of technology – Costco, Starbucks, Dollar Tree, Lululemon, Kraft Heinz, and so forth.
If we as investors are truly aiming to position ourselves in the technology sector, then this doesn’t make much sense.
We can look closer at the tech names it does include. While there are companies that have good or even great potential on TQQQ’s list, there are an equal or greater number that I would never recommend for a portfolio.
As I’ve written before, some of these are good companies simply trading at ridiculously high valuations. Zoom currently has an enterprise value (EV)-to-sales ratio of 56.
Moderna is even higher at 200! In general, an EV/sales of 10 or greater is where things start looking expensive. While these companies could be good investments after a pullback, right now they simply don’t make sense as investments. On any negative news or earnings miss, they will drop sharply.
Some of TQQQ’s other tech holdings are simply way past their prime. They aren’t innovating anymore. Instead, any success they’ve had in recent years is based on simple brand familiarity. Intel is one such example of this. As I’ve shared previously in The Bleeding Edge, it is fading away into irrelevancy.
These are some of the reasons I don’t recommend ETFs. Instead, I thoroughly research my recommendations in order to help my subscribers invest in the cream of the crop in technology and biotechnology, at a reasonable valuation, rather than a mixed bag of stocks.
And there is one final point I will bring up about TQQQ specifically – this is a leveraged ETF. That makes it more volatile than the index it tracks. As the fund itself states:
This leveraged ProShares ETF seeks a return that is 3x the return of its underlying benchmark (target) for a single day… Due to the compounding of daily returns, holding periods of greater than one day can result in returns that are significantly different than the target return, and ProShares’ returns over periods other than one day will likely differ in amount and possibly direction from the target return for the same period… Investors should monitor their holdings as frequently as daily.
As such, anyone who does decide to invest in a leveraged ETF like this should be prepared to take a more active role in this particular investment.
The reality is that with an ETF, the performance above the market has to be significant enough to be greater than the rate of inflation. It also needs to be high enough to compensate for the additional fees from the ETF. Otherwise, simply buying an inexpensive index fund would be a better approach.
One application where I do like ETFs is as a simple way to gain general exposure to a particular high-growth sector. It’s not perfect, but it is possible to time entry and exit points into sectors in a way that outperforms the overall market.
That said, picking the best stocks in that sector will always outperform an ETF that has a large number of stocks. Each individual name is “diluted” in terms of its impact on overall ETF performance.
Is our reserve currency status at risk?
Next, a reader wants to know more about how a Fed Coin would affect our reserve currency status:
Hi Jeff,
I have some questions and comments regarding this possible Fed Coin. The control benefits of it are obvious for sure. Controlling and monitoring all citizens in a country is good for a government. The current U.S.D is mostly transacted in digital form and monitored by the SWIFT system and FINTRAC, etc. Most big transactions are monitored already.
The real power of the U.S.D is world reserve currency status. I don’t see how China or any country having a centralized, controlled tracking currency threatens U.S.D hegemony. No business, person or entity would voluntarily choose a one-way mirror currency controlled by any government. If anything, this ensures that U.S.D will maintain its reserve status. Would other foreign companies and countries want to use a currency that another government could freeze instantly without notice?
Call me a skeptic, I don’t see a Fed Coin unless the U.S. plans to give up dollar hegemony. This would be a scenario with greater political losses involved as well. (One party globalist control?) Maybe I am missing something. As always, I appreciate your analysis technology information.
Kind regards,
– Eric B.
Hello, Eric. Thanks for being a reader and for sending in your question. Especially as China progresses with its own central bank digital currency (CBDC), this topic will be on many people’s minds in the coming year.
For newer readers, a CBDC – something we’ve referred to as a “Fed Coin” – is essentially a digital version of a “real” dollar. It will run using blockchain technology. And in the most likely scenario, the Federal Reserve will manage a U.S. CBDC just like it does the dollar today. It will control the money supply as it sees fit.
The Fed will even have new ways to implement monetary policy because it will now be able to deposit funds directly into consumers’ digital wallets. That would have been a huge help at the start of the pandemic – and again this year – when the government sent out stimulus checks.
On the flip side, a CBDC also makes things like negative interest rates possible. The Fed could deduct interest from our digital wallets each month to encourage spending in hopes that it would stimulate the economy.
Plus, the Internal Revenue Service (IRS) – the tax agency of the U.S. government – must be excited with the plans for a FedCoin. A digital dollar would allow it to monitor and tax every transaction we make. Doing business “off the books” won’t be possible with the digital dollar.
So transitioning to a CBDC will be a major change. But it is coming fast.
That said, the U.S. won’t be the first to launch a CBDC. As we have discussed before, China is on track to be the first major country to transition to a 100% digital currency system. The idea has gained traction in other countries around the world as well.
And one thing to make clear is that transitioning to a fully digital currency and removing paper bills and coins altogether doesn’t affect the value of a currency. CBDCs are ultimately designed to replace, not supplement, the existing fiat currency design.
The value of any given currency will be based on monetary policy and the strength of any given economy. When a country increases its debt to unsustainable levels and just “prints” money to artificially manage its debt, you’ll see that gradually – and then suddenly – things will turn out very badly.
If the U.S. continues to lead the world economically, then its CBDC will be the reserve currency. If China’s economy overtakes the U.S., and China requires its trading partners to transact in its own CBDC, then the tides could change.
One of the biggest concerns about CBDCs – other than an increased ability for governments to confiscate our hard-earned money – is that “printing” money becomes even easier.
And if a government is not transparent with its own monetary policy and how many new units of currency it is creating, its citizens will not know that their currency is being actively devalued, and their savings are effectively eroding away.
Monetary debasement through excessive money printing is called a stealth tax for a reason. It creeps up on us slowly until some day, there is a crack, and we suddenly realize how much has been taken away.
A voice of reason in uncertain times…
Let’s conclude with a question about best- and worst-case scenarios this year:
Hi Jeff,
So to say that the country is in flux would be an understatement. People’s hair is on fire with all of the uncertainty and unrest going on. My fingers are itching to sell everything right now.
I’m looking for a voice of reason while I weigh my options going forward. I would love to hear your “best-case scenario,” and let’s just talk honestly about the worst case, shall we? Please and THANK YOU!
– Kelly K.
Hi, Kelly, and thanks for writing in. I hope I can provide some clarity for you, though I am prohibited from giving any personalized investment advice.
Yes, many people have been feeling strained by current events. We’ve experienced a lot of political and social turmoil over the past year – much of it spurred on and made worse by the media – and we’ve just inaugurated a new president. In uncertain times, it can be easy to panic and hit the sell button.
But in general, I don’t think we need to resort to such drastic measures. The crash last March can provide us with a good example of why. As you’ll recall, the fear-induced selling at that time was one of the fastest crashes in history. Everyone rushed for the exit all at once due to uncertainty surrounding COVID-19.
In contrast, my recommended course of action was to sit tight, hold our positions, and even remove our stop losses. Not only that, but I also continued to recommend new positions during the crisis.
I chose that course of action for two reasons: One, I knew this was a temporary situation that would pass. And two, I knew that the large institutional money and hedge funds were taking the market down. We would have been selling into their panic, only to have them turn around and buy the market right back up to where it was trading.
And our choice proved correct. Over the following months, we enjoyed excellent success. In The Near Future Report last year, our average return on closed positions was 124%. And on December 31, we had an average return of 80.1% on our open positions. These returns wouldn’t have been possible if we’d sold in the wave of fear and panic.
While it’s possible that we will experience a second crash in the coming months – particularly if the new Biden administration decides to enforce a second COVID-19 lockdown – I don’t think it’s likely. It would simply be far too devastating for the U.S. economy to endure another prolonged lockdown, which would likely result in protests and civil unrest.
And there are already three vaccines and several therapeutic options for treating those with symptoms of COVID-19. Locking down would be about the dumbest and most illogical path forward that I can think of.
That said, my analysts and I will continue to monitor the situation and let readers know if that situation changes. After all, politicians are certainly known for making very bad decisions for all the wrong reasons.
So the very worst case would be an irrational lockdown that serves no purpose whatsoever. What’s the best case?
The U.S. economy remains remarkably strong. It was so strong in February of last year from the prior three years of fantastic economic growth, that it took the March crash in stride and continued with strength. This has obviously been reflected in the markets.
And we know that the new administration will print more and more money. Trillions of dollars of stimulus and a guarantee to keep interest rates at near zero. This is an environment that is good for stock markets.
It can cause a speculative environment, and we are already seeing some of that now. It can also ultimately result in horrid inflation down the line, but 2021 has the potential to be a great year for the markets as the world returns to its new normal and vaccines are widely administered.
At Brownstone Research, we’ll continue to focus on companies supporting key trends like remote work, biotechnology, online commerce, and cloud computing. Companies in these sectors have flourished over the past year and will remain strong in 2021.
So while it’s natural to be concerned about the state of the world and the markets, we are as prepared as we can be for the coming months. And in the event of any market pullbacks, I’ll be looking for great companies trading at attractive valuations.
That’s all we have time for this week. If you have a question for a future mailbag, you can send it to me right here.
Have a good weekend.
Regards,
Jeff Brown
Editor, The Bleeding Edge
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