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Internet Bubble vs. Cryptocurrencies: What's The Difference?



In the late ’90s, investors believed the internet sector was going to change the world. In turn, investors paid extremely high valuations for these companies, and the returns were spectacular for those that were invested. I remember vividly investors arguing that “this time was different” for the internet sector.


In 2017, many investors claimed that cryptocurrency, ICOs and blockchain stocks were going to revolutionize the world. Many investors pleaded that these coins were going to transform the way money is stored, exchanged and transacted in society. Similar to the internet stocks of the late ’90s, last year, crypto assets soared.


Unfortunately, both internet stocks and the cryptocurrency space blew up in spectacular fashion as investors realized this time was not different.


Amazon is currently one of the market darlings. Does anyone realize that Amazon fell 93% when the technology bubble bursted? If you purchased Amazon (AMZN) in March 1999, it would have taken you eight years to break even on your money. I doubt many investors would have held on to that mark-to-market loss. My mentor has repeatedly told me that timing is everything in this business.


Most cryptoassets are down between 50-75% in 2018, and I believe there is a reasonably high probability that the majority of the ICOs will eventually disappear. I don't doubt that blockchain will have meaningful impact on how transactions are done in the future. That doesn't mean, however, that investing in cryptos will be a good risk/reward.


No, This Time It’s Not Different


This year, Facebook, Apple, Netflix, Alphabet and Amazon are the market leaders, and I am hearing once again that these stocks “are different” and can withstand any market environment. The most famous words in finance: “This time is different.” The sad reality is that this time is never different.


The ratio between U.S. large-cap growth stocks and U.S. large-cap value stocks has sharply risen in recent years. When looking at the spread since 1980, the only other period where this ratio was higher was during the 2000 technology bubble. Timing the market top is extremely difficult, and very few investors are able to do it on a repeatable, scalable and systematic basis.


Source: Bloomberg, Astoria Portfolio Advisors


Look At The Big Picture


This year, we have seen a series of events that market pundits argue are “one off or isolated incidents.” It began in Q1 with the collapse of the VIX ETP marketplace.


Later in Q2, the Chinese equity market declined 20% on trade war concerns. Then, the South Africa, Venezuela and Indonesia currencies plummeted. As previously mentioned, the crypto space has tanked. Each of these events, market pundits have argued, are isolated, and are small relative to the size of the global economy.


At Astoria, we don't think these events are isolated, but are in fact part of a broader trend that is bubbling under the surface.


In the 2008-2009 recession, the same arguments were made when the Bear Stearns subprime mutual fund collapsed. Pundits argued it was an isolated incident and too small to have any material impact on the economy. Bear Stearns eventually went bankrupt.


Despite the credit cycle beginning to turn, the S&P 500 marched higher. Credit eventually dried up and global liquidity evaporated, leading to the worst recession since the 1920s. Very few investors profited from the 2008 crisis, which means the majority of investors ignored the numerous signals the market was sending.


There is no doubt that every cycle is unique and the causes and effect vary from one cycle to the next one. However, in Astoria’s view, the risk/reward balance has asymmetrically changed in 2018—unfortunately for the worse. The culmination of this year’s “one-off events,” coupled with the Federal Reserve hiking rates, and increased public policy volatility, indicates that the rate of change is turning.


Time To De-Risk


So, what’s the bottom line from a portfolio construction standpoint? On a short-term tactical basis, Investors should be de-risking, turning more defensive, increasing their credit quality, shortening duration, hedging interest rate risk, diversifying across factors, trimming growth stocks, increasing their exposure to value and quality, and including more alternatives in their portfolios.


To that end, in recent months, Astoria’s MARS ETF Portfolio has significantly increased exposure to U.S. stocks via the SPDR MSCI USA Strategic Factors ETF (QUS) and the WisdomTree U.S. Multifactor Fund (USMF). We still own the Energy Select Sector SPDR (XLE) and the Invesco KBW Bank ETF (KBWB), which we view as late-cycle value plays. We sold our position in the Alerian MLP ETF (AMLP), reduced some of our international exposure in the Alpha Architect International Quantitative Momentum ETF (IMOM) and the Alpha Architect International Quantitative Value ETF (IVAL) and trimmed our exposure to gold in the iShares Gold Trust (IAU).


On commodities, we swapped out exposure from the GraniteShares Bloomberg Commodity Broad Strategy No K-1 ETF (COMB) to focus more on the energy/oil complex through the Invesco Optimum Yield Diversified Commodity Strategy No K-1 ETF (PDBC). And we increased our exposure to alternatives via the IQ Hedge Multi-Strategy Tracker ETF (QAI) and the SPDR Bloomberg Barclays Convertible Securities ETF (CWB).

On fixed income, our goal was simple: underweight fixed income, shorten duration and increase the credit quality of the portfolio. And that’s just what we did. We currently own the SPDR Blackstone / GSO Senior Loan ETF (SRLN), the iShares Short-Term Corporate Bond ETF (IGSB), the Vanguard Mortgage-Backed Securities ETF (VMBS), the Vanguard Tax-Exempt Bond ETF (VTEB), the Invesco Variable Rate Preferred ETF (VRP) and the  JPMorgan Ultra-Short Income ETF (JPST).


The time to be outright long beta was during the "Great QE Revolution," when central banks gobbled up $15 trillion of financial assets. Those days are over, and the rate of change, which ultimately drives financial assets, has turned, in Astoria’s view.


Any ETF holdings shown are for illustrative purposes only and are subject to change at any time.


This article originally appeared on ETFcom.


Hope you all enjoy it.


Best, John Davi

Founder & CIO of Astoria


For full disclosure, please refer to our website: https://www.astoriaadvisors.com/disclaimer

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