2023-04-13 15:44:30 ET
Summary
- If the Big Tech 2.0 boom is over, ProShares UltraPro QQQ ETF will be a future loser for investors, mimicking 2022's dismal performance.
- Overly bullish investors hoping for a quick return to the bubble years of 2020-21 in 2023 may be sorely disappointed.
- Daily decay (costs) in futures and swaps to create market leverage works horribly in flat to down markets like 2022.
- A looming recession and difficulties getting inflation under control may mean Big Tech names languish for another year or two.
I know numerous investors and pundits want to believe a new bull market has already begun in early 2023, so why not leverage the optimism with ProShares UltraPro QQQ ETF ( TQQQ ). An astounding 3x leverage of your favorite U.S. Big Technology names is available, creating upside potential (with the daily rebalance and compounding feature) even greater than standard margin accounts buying the Invesco QQQ Trust ETF ( QQQ ).
And, following the straight up moves in the market during 2020-21 (after the pandemic struck and the Federal Reserve flooded markets with liquidity), I cannot blame you for pining for the "good old days" to resume this year. Jumping on board TQQQ is tempting, because the stock market never stays down for long is the argument.
The problem is low interest rates can only come back if we get a serious recession to drop inflation back to 2% or lower, the Fed's long-term target rate. Unfortunately, if we experience a deep recession, earnings for corporations including Big Tech concerns will plunge. In all likelihood, QQQ and TQQQ would come under major selling pressure under this scenario.
The other soft-landing scenario where business earnings stay at current levels may also be a non-starter for bulls, because we still have 5% CPI inflation, and crude oil just reached a 5-month high yesterday, not yet part of the latest calculation. The core rate in March stood at an unacceptable 5.6%, meaning any unexpected spike in commodities could bring us right back to 6% or 7% CPI in theory this summer. If inflation and interest rates do not come down, Big Tech growth names are way too expensive with P/E's of 25-50x.
Clearly, (at least in my opinion based on 35 years of trading the markets) the risk of something going wrong in the economy or equity market has an abnormally high chance of occurring. Whether we witness a new black swan geopolitical event like a war between China and Taiwan, or Russia using a nuke in Ukraine, or Russia invading the Baltic nations of NATO, or Israel attacking Iran's nuclear program, or a long list of other potential problems in the world, outlier negatives on top of an economy sliding into recession mean TQQQ is far from a low-risk investment today. (Remember the crazy inverted U.S. Treasury yield curve over the last six months and its excellent track record predicting future recession.) In fact, this exchange-traded fund ("ETF") may be one of the highest real-world risk ideas out there.
Boom to Bust Results
I last mentioned TQQQ as a Sell in April 2021 here , a little early granted with the Big Tech names rising into October-November. Yet, today's price is a solid -50% lower than the $53 price two years ago. You can see how the long-term tides changed for the worse over the last year and several months on the table below.
Seeking Alpha Table - TQQQ Returns, April 12th, 2023
For sure, the +2,197% total return gain over 10 years grabs your attention. It also fills your mind with dreams of a repeat performance the next decade. Nevertheless, the stock market is notorious for changing colors every 5 to 10 years. More than likely, the worst performing sectors on Wall Street the last decade will be where you want to be sitting the next 10 years. Trees do not grow to the sky. There are limits and speed bumps in money flows and "competition" for trading or operating business income. The technology leaders of today have not repealed the laws of physics or economic competition, although many shareholders will argue otherwise.
You can review below how "timing is everything," especially with a leveraged ETF product. TQQQ fell -80% between its November 2021 peak and the January 2023 low a few months ago.
YCharts - TQQQ vs. QQQ, November 2021 to January 2023
And, when we look at the round trip of nuttiness created by the Fed's record money printing effort after the pandemic, TQQQ is not much higher than your basic QQQ investment measured from the April 2020 bottom in U.S. equities to April 2023, after a year of record Fed interest rate increases to soak up the problem of too much liquidity.
YCharts - TQQQ vs. QQQ, April 2020 to April 2023
Lastly, a 5-year chart of total returns argues TQQQ does not actually deliver outsized gains during wild swings up and down in the Big Tech marketplace.
YCharts - TQQQ vs. QQQ, April 2018 to April 2023
The only and best times to own the 3x leverage are when you nail a market bottom and ride it higher for a spell. So, you better be darn sure nothing can go wrong in the world of economics and political stability if you own TQQQ right now. Those lucky enough to own it over the last month of Big Tech gains have actually made a nice short-term profit. But will such a ride continue next month? Predicting month-to-month swings are tantamount to gambling on your favorite NBA team's next basketball game score.
YCharts - TQQQ vs. QQQ, March 2023 to April 2023
Final Thoughts
My personal experience is "don't fight the Fed!" The Fed is raising rates and needs a stock market decline to right the ship (bring inflation lower) and rebalance the economy. Don't be a hero is my suggestion.
When I weigh all the pros and cons for TQQQ, I keep coming back to my flat to lower market outlook. Until we get a recession with lower corporate income in the economy, the Fed cannot lower interest rates to create a new bull market. Why would I want to own TQQQ with this horrible macroeconomic backdrop? I could be become bullish on another -10% to -20% decline in the U.S. equity market that brings down interest and inflation rates. But, I cannot put the cart in front of the horse. First things, first.
The material rise in gold and silver quotes in March-April is hinting at more economic and financial market turmoil, which is the first step to getting to a concrete, long-term bottom to buy. I will remain patient, holding plenty of precious metals and cash until a classic market bottom situation develops. It's not easy or fun, but keeping my regular equity weightings on the low side in my portfolio design is the best course of action for my money (plus I am earning 4%+ on my cash, guaranteed not to decline).
Like I have been explaining since late 2022, the stock market and Fed are stuck in a holding pattern until something breaks sending prices lower, which could reshuffle the variables necessary as an excuse to ease monetary policy aggressively. Until then, I suggest readers Avoid or Sell TQQQ.
If you must own Big Tech, please stick with the plain vanilla Invesco QQQ product, or a smattering of your favorite names. I personally prefer Alphabet-Google ( GOOG , GOOGL ), Qualcomm ( QCOM ), Micron ( MU ), Adobe ( ADBE ), PayPal ( PYPL ), eBay ( EBAY ), Activision Blizzard ( ATVI ), and a short list of large technology stocks as longs, which I have discussed on Seeking Alpha in previous articles over the past year.
Thanks for reading. Please consider this article a first step in your due diligence process. Consulting with a registered and experienced investment advisor is recommended before making any trade.
For further details see:
TQQQ: More Risk Than Reward In 2023