Facebook shares plummeted by 23% in after-hours trading when the company reported its quarterly earnings and held its conference call after the market closed. The company’s revenue and active users came in below analyst estimates. The big miss is the catalyst that will start a tech stock Armageddon. It virtually assures that all of the major US stock indices will reach new 2018 lows by year end.

To put the decline in perspective, the $145 billion decline in Facebook’s market cap from the market’s close is equivalent to the combined total market caps of IBM, McDonald’s and Nike. The share prices of the other three FANG stocks including Amazon, Netflix and Google also declined by 1.3% to 2.1% in after-hours trading. At the close of the markets and before Facebook’s infamous conference call and earnings report, its share price had closed at an all-time high. The share prices of all three of the other FANG companies had closed up earlier on the day.

Investors and analysts were completely surprised by Facebook not meeting estimates for its just ended quarter. Facebook also guided its estimates down for its next quarters. Gene Munster, a technology analyst who attended Facebook’s conference call and who was interviewed by CNBC stated:

• Analysts and investors were to blame and not Facebook for the massive sell-off of Facebook shares after hours. He reminded CNBC’s viewers that Facebook had warned of the possible softness during each of its last three quarterly conference calls.
• Facebook’s revenue growth could slow to 13% to 15% annually within 12 months. He and the CNBC anchor broached on the subject that Facebook at 2.1 billion users may have reached its saturation point.
• Facebook’s guide down for its projected sales and earnings was unprecedented.

CNBC’s audio clip of Mark Zuckerberg extolling the virtues of Instagram in the conference call, which has grown to $8 billion in annual revenue was telling. The tone of Zuckerberg’s voice and his emotion about Instagram, a business which represents a fraction of the parent company’s total revenue, confirmed to me that he sees the handwriting for Facebook on the wall.

With two of the FANG (Facebook-Amazon-Netflix-Google) stocks, Facebook and Netflix, missing their user growth estimates for the June 30 quarter the bloom is now off the rose for the FANG stocks. The FANG stocks, which have accounted for most of the market’s gain over the last year will no longer be the default investment vehicle.

The psychology has changed regardless of how well Amazon’s earnings come in. Google beat its quarterly estimates significantly earlier this week. Netflix’s share price spiked down after it reported its most recent earnings.

Facebook’s share price were steadily making new highs over the past couple of months after its earlier in the year election campaign interference issue, which required that it change its business model spoke volumes. What were investors thinking by bidding shares up before Facebook’s new business and revenue model had been proven? Investors then bidding Facebook shares to a new all-time closing high on the eve of the earnings announcement after they had been warned three times that there might be difficulties is INSANE.

There are 2,848 institutional investors who hold 74% of Facebook’s shares. They and the vast majority of the analysts who have “buy” or “strong buy” recommendations on its shares should be admonished.

Based on this fiasco, I am predicting the following for the markets.

• FANG has been de-fanged and will no longer be a place for passive institutional investors to hang out.
• Facebook shares will not eclipse the all-time high they made today for many years if ever.
• The S&P 500 will fail to exceed the new all-time highs that it made earlier this year and for the secular bull market which began in 2009.
• The recent all-time high that the NASDAQ made earlier this month will prove to be its all-time high for bull that began in 2009.
• The index for the FANG stocks (NYFANG) that was created in September 2017 will become infamous for the craziness that occurred at the top of 2009-2018 Secular Bull market. The period will vie with the roaring 20s.
• All US stock indices will reach new lows for 2018 by the end of 2018.

With the volatility due to pick up now that the S&P 500 and Dow 30 indices are close to their all-time highs my February 6, 2018 article “BULL DEAD, BEAR DOB 01/31/18: Expect Stock Market Decline of at Least 50%”) about the new bear market being born on January 31, 2018 is highly recommended.

For those investors who do not want to take even minimal risk and yet have the potential for their portfolios to grow I am recommending the deployment of a 90/10 Crash Protection Strategy. For information on the strategy which is the only fail-safe strategy that one can utilize to protect their liquid assets from crashes, recessions and depressions view video below entitled “Profit From the Crash”.

The signal for the Bull & Bear Tracker has gone to RED. The signal had been GREEN since June 1, 2018. See my article ​“Two signal changes for Bull & Bear Tracker since May 23rd”.  The signal switched from GREEN to RED due to the volatility of the US Dollar Japanese Yen exchange rate increasing over the last 48 hours.    

For the period that the signal had been GREEN the S&P 500 went from 2,718.70 to 2803.00 today July 20, 2018 at 2:00 PM US Eastern time.  During the period that the signal was green the S&P 500 increased by 3.1%.

The trading vehicle that I recommended to trade the GREEN signal which is the SPXL performed significantly better than the S&P 500 and increased by 7.5%.  The SPXL which is a triple leveraged long ETF derivative for the S&P 500 went from $45.26, as of the close of June 1st to $48.66, on July 20, 2018.  Now that the signal is RED, the recommended vehicle to trade the signal is the SPXS, a triple leveraged short ETF derivative for the S&P 500.   The SPXS is presently trading for $24.12 per share.

To learn about Dollar Yen exchange rate volatility being a leading indicator of the direction of S&P 500 and why the potential for a market crash is heightened while a RED signal is in effect watch the 2-minute video below entitled “Dollar/Yen Leading indicator for S&P 500 Direction”.   Also, my article “NIRP Crash Indicator Renamed “Bull & Bear Tracker”; Signal Now GREEN” is highly recommended.  Finally, there are charts and graphs at BullsNBears.net which provide additional information about the intimate relationship between the Dollar/Yen and the S&P 500.

For those investors who do not want to take minimal risk and not be exposed to a potential crash and yet have the potential for their portfolios to be safe and to also grow I am recommending the deployment of a 90/10 Crash Protection Strategy.  For information on the strategy which is the only fail-safe strategy that one can utilize to protect their liquid assets from crashes, recessions and depressions view video below entitled “Profit From the Crash”.

For alerts and updates about the Bull & Bear Tracker’s signals and to ensure access to all of my articles, reports and alerts go to www.bullsNbears.net.  My February 6, 2018 article “BULL DEAD, BEAR DOB 01/31/18: Expect Stock Market Decline of at Least 50%”) about the new bear market being born on January 31, 2018 is highly recommended.  

Research subjects covered by BullsNBears include Crashes, Crypto Infrastructure, Secular Bull & Bear Markets, Tesla, Markets & Economy, Tariffs, Perfect Shorts Research, $Yen Indicator, Digital Economy, Startups & Microcaps, Non-Public Markets and Digital Tax Impact.

Its been a month since the United States Supreme Court ruled to allow US States and municipalities to collect sales taxes from products and services that are purchased from online sellers.  Over the last 20 trading days the shares of Wal-Mart increased by 4.5%. From June 21st to July 18th the shares of the world’s biggest retailer out performed the S&P 500 which increased by 1.2%. 

Its only logical that Wal-Mart’s shares would outperform.  it’s the biggest beneficiary of the court’s decision since the consumer no longer gets a price break when purchasing goods online instead of at their local Wal-Mart store.  Fedex is the biggest loser and its share price decline of 8.1% reflects this. Due to the decision there obviously will be a reduction in the growth rate of online retail sales.  This will result in less items being shipped.

Ebay is also another logical loser with its share price being down by 4.8% versus Wal-Mart.  Many of its independent marketers will be burdened. They will subject to escalating costs due to having to collect sales taxes and distribute them to more than 1400 municipalities.

Finally, the new digital tax is a negative for the stock market.   It reduces the growth rate of the digital economy and the overall PE multiple for tech stocks.  The tax puts a damper on the technology sector which has been leading the market.

The University of Michigan Consumer sentiment survey which has been published since 1960 is a great barometer that can be utilized to predict recessions, economic recoveries and also secular bull and bear markets.   As depicted by the chart below the results from the Michigan survey has predicted all recessions and economic recoveries since it was originally published.

In April of 2018, Consumer Sentiment reached 100.0 for the first time since January of 2001.  In July 2018, the reading was 97.8, the third consecutive monthly decline.

Due to our discovery about consumer sentiment being a leading economic and market indicator BullsNBears.com will continue to monitor this economic metric very closely.  Its especially since the recent high could prove to be the peak for the current nine-year economic expansion that began in 2009.

On Friday July 13, 2018, Stuart Meissner, an attorney representing a Tesla whistle blower put out the following tweet about Tesla.

When Mr. Meissner was asked as to whether he was short Tesla’s shares he stated that he did not but should based on what he and everyone else now knows.

According to an article by Tyler Durden entitled “Tesla Whistleblower Attorney Says ‘I Would Short Tesla Based On What I Know”  that was published by Zero Hedge on Friday July 13, 2018, Meissner Associates, a law firm representing Martin Tripp, the former Tesla employee who had been accused of sabotaging the company and who Tesla had filed a lawsuit against on June 20, 2018, filed a SEC whistleblower claim against Tesla.  In his article Mr. Durden further stated that from his sleuthing of the claims that were included in the whistleblower filing that Mr. Tripp had alleged that Tesla had:

• Placed batteries containing dangerous puncture holes in vehicles which proceeded to the end of the assembly line in a process known internally at Tesla as “Containment AR622” and which input into vehicles was tracked until the end of the assembly line process;
• Overstated to investors the number of Model 3 vehicles being produced each week by as much as 44%. The whistleblower alleges that the famed factory board which reflects a daily Model 3 production count and often referred to by Tesla is inflated;
• Lowered vehicle specifications impacting upon safety such as placing battery cells too close to one another and which were not properly affixed, risking future combustion; and
• Systematically reused parts already deemed scrap/waste in vehicles without regard to safety.

Above bullet points above excerpted from Zero Hedge article

The events and drama including the allegations of sabotage and the filing of a lawsuit against a former employee are in further support of my thesis that Tesla does not have a scalable manufacturing process and that its founder Elon Musk has become fanatical about maintaining Tesla’s share price and valuation.   See my two recent articles about Tesla:

• Unscalable manufacturing process Revelation causes Tesla share sell off, July 6, 2018
• Tesla China Announcement and Timing Suspect, July 12, 2018

The filing of the whistleblower claim against Tesla should be taken very seriously.   Meissner & Associates is a law firm which specializes in Whistleblower cases. Further, since Musk has been an aggressive promoter of his company if there is any truth to Mr. Tripp’s claims both Tesla and Mr. Musk could be charged with serious allegations by the SEC.  The result could be Mr. Musk having to step down as CEO and Chairman of Tesla. Should this happen it would be devastating for Tesla and Musk.

Tesla is the most overvalued company that I have come across in my 42 years that I have been in the capital markets.  Based on its most recent valuation of more than $50 billion it has the highest risk and lowest reward ratio of any investment opportunity that I have ever come across.   Holders of Tesla shares should either sell them or purchase put options to protect themselves against significant downside risk.

Tesla’s share price increased by $4.00 and by approximately 1% on Tuesday July 10, 2018, after the company announced that it had entered into a memo of understanding with the Shanghai government to build a factory to produce 500,000 autos per year in China by the 2022 or 2023.  The timing of the announcement was suspect for three reasons:

• There was no material information in the announcement.  Tesla did not provide details about how much the factory would cost or how it was going to raise the capital to pay for the factory.   
• Tesla’s share price had been under pressure for all of last week and had declined by 17% from its high for the week that it made after it announced that it had made its goal of producing 5,000 autos per week by June 30th.  See my June 6th article “Unscalable Manufacturing Process Revelation causes Tesla’s share sell-off”.
• Tesla’s sales have recently dropped and it accounted for only 14,000 of the 500,000 electric cars which were purchased in China in 2017.   

What is very disconcerting is that Tesla’s founder and CEO Elon Musk has been increasingly fanatical about Tesla’s share price throughout June and July of 2018.  From my 40 plus years of experience a CEO’s becoming obsessed with a company’s share price is a bad omen. It generally means that the CEO is not paying attention to the business and that the shares are headed to a 52-week low instead of a high.  Below are the recent two instances of Mr. Musk’s fanaticism:

• Prior to Tesla’s making its production goal of 5,000 autos he called out a Goldman Sachs analyst who had been negative about the company.  See June 27, 2018, Bloomberg article “Musk Says ‘Rude Awakening’ Awaits Bearish Goldman Sachs Analyst”.
• Musk attacked Linette Lopez, a reporter for Business Insider who broke the story about the company ceasing its testing of the brakes for the cars that it produced.  See July 6, 2018, Newsweek “Elon Musk Attacks Media for ‘Relentlessly Negative’ Tesla Coverage”.  

The reason why Mr. Musk is sensitive about the share price is because Tesla has generated negative operating and free cash flow for it last four consecutive fiscal years.  It has also generated negative free cash flow for its last four consecutive quarters. The probability is high that the company will soon have to sell shares to raise capital.  Mr. Musk needs Tesla’s share price to be as high as possible to minimize dilution. It’s because part of his compensation is based on share price performance. The simple conclusion is that Tesla’s China announcement and its timing was to prop up Tesla’s shares.  

The foundational support for the US stock market is now quicksand.  According to recently released data pertaining to shares and ETFs investor the churn rate for the markets has increased significantly.  More than $2.9 trillion worth of the shares of the S&P 500’s member companies in each of the past two quarters.  The last time the amount was this high was during the first half of 2008.

Emerging market shares and ETFs are also experiencing churn at levels not seen since 2008.

The elevated churn should be taken seriously.  It indicates that shares are being sold by long term investors and are being purchased by short term traders.

When long-term investors exit the stock market shares go from strong to weak hands.  After an investor has made the decision to take their long-term capital gains they generally do not get back in until share prices decline substantially and after a recession has begun.

A short-term trader is only interested in producing cash profits as soon as possible and could care less about waiting to take a capital gain.  Thus, as soon as they are ready to take a profit the buyers of their shares after the long-term investors have left the market are other short-term traders.  Because short term traders are extremely disciplined to utilize stop losses orders to protect them against substantial losses a stock market that is dependent short-term traders for stability has a quicksand foundation.  This is exactly what happened during the first eight months of 2008 before the market began to crash in September 2008. See also recent June 30, 2018, article “Global equity funds suffered their second largest outflows ever this week” which further supports that long term investors are exiting the markets.

Tesla shares traded as high as $361.50 on July 2, 2018.  This was after its founder Elon Musk declared that Tesla was finally a “real car company”.  The declaration was prompted by Tesla’s meeting its goal to produce 5,000 Model 3 sedans per week for the quarter ended June 30, 2018.  Since then most of Tesla’s fans and shareholders have been perplexed. The share price did an about face and closed for the week ended July 7 at $308.91 representing a price reversal of more than $52 per share from the week’s high.

Tesla’s shares selling off on the good news did not surprise me.  The explanation that Tesla gave to USA Today for its July 3, 2018 article entitled “Tesla dropped new car braking test in final days of production goal” about Tesla’s ceasing its quality control for brakes on the assembly line was telling.   The company explained that the brakes did not require assembly line testing since Tesla has had a policy of in place that every car that it manufactures be test driven.  Upon any savvy investor learning about the policy they would have sold shares. It speaks volumes about Tesla’s manufacturing process not being scalable. Assuming that Tesla can eventually produce the same annual volume of vehicles as Ford or General Motors which produced 6.6 million and 9.6 million vehicles respectively in 2017, it will need to do the following:

• Hire drivers to test drive the 38,000 cars manufactured every day.
• Purchase real estate to build hundreds of race tracks near its factory to test its cars.

Tesla’s not having a scalable manufacturing process is a big issue for any investor.  It’s especially since Tesla’s market cap is in between the market caps of Ford and General Motors.

Tesla’s test-driving-of-all-new-cars policy begs two questions:

• What other quality control issues does the test drive address?
• Is the cost of test driving the vehicles and fixing the problems accounted for in its Cost of Goods (CGS) or Sales, General and Administrative (SGA) expenses?

A high reading for the “Main Street Meter”, a stock market gauge that was developed by institutional investor James Paulsen of the Leuthold Group is indicating that the stock market will go much lower.  Readings for the meter are calculated by dividing the consumer confidence reading by the unemployment rate.  A high reading indicates that consumers and investors are optimistic. This is certainly the case now due to unemployment being at 3.9% which is the lowest level since 2000.  Also, consumer sentiment is now at its highest levels since the 2008/2009 Crash and Great Recession.

The meter is a good measure for the markets.  A high reading comprised of low unemployment and a high level of consumer confidence indicates that that everyone has a job and a positive outlook.  A low reading indicates that a lot of people are out of work and a pessimistic outlook prevails. When the reading is high reading investors are less fearful and greedy.  When the reading is low investors are more fearful and less willing to take risk. Both of the readings coincide with market highs and lows respectively. The meter is a great contrary indicator to predict market peaks and troughs.  The chart below compares the S&P 500 with the meters actual and projected readings from 1962 through 2023.

On Tuesday of this week General Electric, the oldest of the 30 members of the Dow Jones Industrial (DJIA) average was replaced by global drugstore chain Walgreens Boots Alliance.  General Electric was one of the original dozen companies which comprised the Dow Jones Industrial Average (DJIA) in 1896. For complete history of DJIA go to http://www.dow-jones-djia.com/history-of-dow-jones-industrial-average-index/.  

In hindsight the timing for Walgreens Boots to replace General Electric in the DJIA, the most famous stock index in the world was horrible.  GE shares increased by 7.8% on Tuesday after they announced that they would spin off most of their businesses.

On Thursday June 28, Walgreens Boots got out of the wrong side of the bed.   The company in its quarterly report before the market open announced that its same store sales had declined versus the year earlier same quarter.  It got even worse after Amazon later in the morning announced that it had acquired PillPack a mail order pharmacy with licenses to dispense drugs in all 50 US states.  PillPack was a perfect fit for Amazon. It sells and delivers packets of prescriptions drugs to its customers in their homes. It has software that verifies when a refill is due and determines co-pays and confirms insurers.  The acquisition is going to enable Amazon to wreak havoc on the drugstore industry. Walgreens Boots shares declined by 9.4% for the day.

My guess is that the stewards of the DJIA probably would not have picked Walgreens had they known about Amazon’s intentions.  Its shares will surely be a Dow laggard and will underperform versus all the rest of the 29 members of the DJIA. Amazon will decimate its customer base by providing more convenience and lower prices.   The DJIA has a history of replacing its members who have deteriorating fundamentals with companies that have strong fundamentals. It stewards thought that they were doing that when they replaced General Electric.      

My prediction is that Boots Walgreen will not last long as a member of the DJIA.  More importantly, now that Walgreens Boots is a member of the DJIA will make it all the more difficult for the venerable index to eclipse the all-time high that it made in January 2018.  The inability for the Dow to make the new high will be bull fodder for the baby secular bear that was born in January 2018.