MW 'Irrational excitement' over AI will wipe out tech stocks, says contrarian investor who has nailed prior selloffs
By Barbara Kollmeyer
Critical information for the U.S. trading day
Tech stocks are ready to bounce after yet another Tesla twist, but our call of the day says the sector is doomed to repeat history.
Steven Jon Kaplan, True Contrarian blog and newsletter's chief executive who also manages $120 million, predicts a top exchange-traded fund that tracks the Nasdaq-100 - Invesco QQQ Trust Series QQQ or the QQQ - will tumble from the current 427 to under 300 within a year, and his three-year forecast is worse.
"I think it's going to go below 100, because I believe that what we are going to do is basically repeat what you saw in 1999 and 2000 for almost the same reasons," he told MarketWatch in a Tuesday interview.
Two decades ago, "irrational excitement over new technology" - the internet - prompted a tech stock correction, and artificial intelligence is about to do the same, said Kaplan, who nailed a couple of tech selloffs in recent years.
Companies like Microsoft $(MSFT)$ and Apple $(AAPL)$ have been gobbling up AI chips, in the belief that will create more profits, but "so far, the results have actually been lower profits because they have to hire expensive AI engineers," he said. Even when they learn how to use these chips, they may be more efficient or different, but not necessarily more profitable, which means investors are likely paying too much for these companies.
As an example of how AI may not turn into profits, he points to law firms that could use AI to pull a brief together in 3 hours over what would normally take 30, billing clients for a lot less.
Kaplan said he began shorting - speculating on a decline - the QQQ in February, repeating that in March and April. One part of his strategy includes watching what hedge funds outside of the headline big names - the remaining 90% or so - are doing. Recent record highs for AI-related shares recently saw record buying, he notes.
Those hedge funds tend to initially to crowd in on a hot asset, wait as the market cools, then when it falls 20% from a recent extreme, "significantly" start shorting those positions. The QQQ's most recent 52-week high was around 449 toward the end of March - a 20% drop would leave it around 360.
"So whenever the QQQ gets to around the 360 area, you're going to see this massive selling wave that's probably going to push it below 300 because that's just how hedge funds work," said Kaplan, who sees gold (GC00), which has recently given up a piece of a massive rally, headed for a similar fate.
He said investors can track what hedge funds are doing via Commodity Futures Trading Commission data or The Market Ear blog.
So what will tempt Kaplan back into tech stocks? Actual buying by corporate insiders who have been big sellers, and big outflows from U.S. stock funds. The latter proved a "strong" signal to start buying tech back in March of 2020, he said.
"When I see a bunch of insiders buying and lots of average people kind of getting out of the market, and that gives me a really good clue that it's time to close out the short positions and probably buy whatever is cheap at that time," he said.
As for where he's putting his and clients money, he's keen on one "boring investment." He recently bought the iShares 20+ Year Treasury Bond ETF TLT when it dropped below $90, saying it could reach $140 or $150 for a gain of 60% to 70%. "I think people don't appreciate how undervalued the Treasurys are, how high the yields are."
He also sees a "huge rebound," coming at some point for the Japanese yen, which has been trading at a 34-year low due to government efforts to keep exports afloat. He has exposure to the Invesco Currency Shares Japanese Yen Trust FXY.
The markets
Stock futures (ES00) are mixed, with tech (NQ00) higher, while Treasury yields BX:TMUBMUSD10Y BX:TMUBMUSD02Y move up. Sellers are hitting gold (GC00) again, the dollar DXY is up and oil (CL.1) is down. Check out MarketWatch's Live Blog for all the market action.
The buzz
Tesla $(TSLA)$ stock is up 10% after profit and revenue missed estimates, but Elon Musk he'll speed up production of cheaper models, though thousands more jobs are getting axed.
Opinion: A cheaper Tesla car really won't be that cheap
Boeing $(BA)$, Biogen $(BIIB)$, AT&T $(T)$ and Baker Hughes $(BKR)$ are reporting ahead of the open, with Meta (META), IBM $(IBM)$, Ford $(F)$ and Chipotle $(CMG)$ after the market close.
Visa (V) is up after an earnings beat and says consumers are still spending. Upbeat results are lifting Texas Instruments $(TXN)$ and Mattel $(MAT)$ shares. Enphase Energy (ENPH) is slumping on a disappointing outlook.
The Senate passed legislation that could lead to a nationwide TikTok ban if the video-sharing app continues to be controlled by its China parent, ByteDance.
Durable-goods orders are due at 8:30 a.m.
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The chart
Troy Ludtka, senior U.S. economist at SMBC Nikko Securities, says new-home prices may be about to slide. That's with mortgage rates at a 24-year high and a glut of new homes out there.
"In other words, the supply of homes is expected to greatly increase while high mortgage rates restrict demand. If new home prices come down, existing home prices will follow," he said, adding that builders are aware of this as permits have been slowing.
Top tickers
These were the top-searched tickers on MarketWatch as of 6 a.m.:
Ticker Security name TSLA Tesla NVDA Nvidia NIO Nio AAPL Apple META Meta Platforms AMC AMC Entertainment SMCI Super Micro Computer TSM Taiwan Semiconductor Manufacturing AMD Advanced Micro Devices AMZN Amazon.com
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-Barbara Kollmeyer
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April 24, 2024 06:43 ET (10:43 GMT)
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