I’d say I could think of worse developments for a fragile market at a critical juncture than sweeping antitrust inquiries into some of the most important companies in America, but that wouldn’t be entirely true.
To be clear, it’s been obvious for at least 14 months (i.e., since last March, when privacy concerns and some presidential posturing towards Amazon rattled big-cap tech) that antitrust scrutiny was likely in the cards for everyone’s favorite tech high-fliers. But just because something was well-telegraphed, doesn’t mean it will be digested with alacrity when it finally comes calling.
Long story short (and I think the short version is all anyone needs for right now), the FTC and the Justice Department are going to tag-team a review of possible anti-competitive practices among big tech companies. That includes Facebook (NASDAQ:FB), Amazon (AMZN) and Google (GOOG). Apparently, Apple (AAPL) will be scrutinized as well, under the DoJ’s jurisdiction.
Unfortunately for these companies, the notion that they should be looked into for anti-competitive practices is shared by some of the most influential politicians on both sides of the aisle. Indeed, it’s pretty rare that Elizabeth Warren and President Trump agree on something, and while they may differ in terms of exactly why some of the companies listed above should be “looked at” (to quote the president), they have each called for heightened scrutiny. For his part, Trump has repeatedly insisted that Goggle is biased against conservative media and Warren explicitly called for Google, Facebook and Amazon to be broken up in a high-profile March post on Medium.
I’m not going to delve into the merits of these burgeoning probes or weigh in on the political angle – believe it or not, this is one issue where the politics of the situation are of little interest to me.
What does interest me, though, is the extent to which this news hits at the worst possible time. Markets are trying desperately to cope with escalation after escalation on the trade front and the global growth outlook is darkening by the day. Big-cap tech has been a pillar of support for the market for years, and these names are so widely owned, that a mass liquidation of the shares could be nasty indeed. Remember, Q4 was characterized by rolling routs in tech and that was not digested well – at all.
Do you recognize that date? If not, let me assist you, via this handy tweet from this afternoon:
June 9, 2017, was the day when Goldman released their infamous “FANG mispriced” note which suggested, among other things, that factor-crowding was a risk to markets. I wrote about that for this platform at the time in “Goldman’s Big FANG Call: They’re ‘Mispriced’, ‘Factormageddon’ Looms“.
Goldman’s analysis still applies, by the way, but I don’t want to get too far down the rabbit hole on that. Rather, I just want to make a couple of simple observations and then talk a bit of macro.
First, these companies are too important to suffer some kind of existential crisis on the eve of a possible economic downturn in the US (and by “existential crisis”, I just mean in terms of everyone being forced to sort out what the future might look like under different regulatory regimes).
Even if you assume a benign outcome in the trade war, this cycle is long in the tooth. If you swear by the yield curve, we’re somewhere around a year out from a recession (that’s debatable, but I’m speaking in generalities here). At the same time, corporate profitability in the US has likely peaked, at least for this cycle, and margin headwinds from rising labor costs and the tariffs are likely to materialize going forward.
The following snapshot from a recent Goldman presentation (current through May 24) neatly encapsulates how critical these companies really are (note, for instance, the top-line growth numbers for FAAMG versus the S&P as a whole, and the same comparison for margins):
Now, have a look at the top 10 names in Goldman’s hedge fund VIP list, which shows, quote, “the 50 stocks whose performance will largely influence the long side of many fundamentally driven hedge funds”:
Let me just say, again, that trying to pen something on this subject which is simultaneously succinct and comprehensive in terms of capturing i) the myriad issues surrounding how the government might go about addressing critics’ concerns when it comes to Amazon, Google and Facebook, and ii) the potential impact on the market from a wholesale rethink of how these mammoths are treated in Washington, is impossible. My point here is simply to remind everyone that when it comes to how much these names matter to the market, it goes well beyond the common sense assessment that because these companies are ubiquitous, they are important.
This latest bit of disconcerting news (at least from the perspective of anyone who cares only about the near-term direction of stocks) comes on a day when market participants where digesting the predictable daily dose of ominous trade war headlines. On Sunday evening, The New York Times reported that the Trump administration pondered slapping Australia with tariffs last week, and early Monday morning, China’s education ministry issued a warning to students and scholars about studying in the United States.
Neither of those two developments are trivial.
The Australia news is disconcerting for obvious reasons (it means we very nearly got even more tariffs last week on top of the Mexico situation and in addition to the Trump administration’s decision to do away with GSP status for India), while China’s warning to students validates long-standing concerns among analysts that the Sino-US dispute is now spilling over into areas that have little (if anything) to do with economics and trade.
Around the time Hu Xijin, editor of the Global Times, first tweeted about the notice to students, 10-year yields in the US fell to 2.07%. That, folks, is incredible, considering where we were in September, and it underscores just how acute global growth concerns have become. Later in the session, ISM manufacturing printed the lowest of the Trump presidency. The gap between stocks, on the one hand, and ISM and bond yields, on the other, isn’t even close to closing, which, to the pessimists among you, suggests equities have further to fall.
Expectations for Fed cuts have now gone into overdrive. On Monday, chatter revolved around the extent to which Jerome Powell needs to cut this month, if he wants to orchestrate a dovish surprise. That is a worrisome setup, because it suggests the Fed simply cannot catch up to market expectations (i.e., there’s no way to be dovish enough). That, in turn, means that anything short of, say, a 25bp cut this month or an indication that July’s meeting is likely to bring a 50bp preemptive, insurance cut, runs the risk of coming across as a de fact rate hike relative to market expectations. Nomura’s Charlie McElligott said just that in a note out Monday morning.
The quandary for the Powell Fed is that cutting rates risks a scenario where the White House is emboldened to press ahead with still more tariffs knowing that the central bank is effectively providing cover. More tariffs presents further upside risk to inflation and more downside risk to growth, meaning that paradoxically, were the Fed to cut now in an effort to head off a trade-related downturn, it could end up making things immeasurably worse if an insurance cut ends up being viewed by the administration as a green light to escalate the trade war.
And with all of the above in mind, I’ll leave you with one last chart, this one from Bloomberg’s Ye Xie, who kindly posted it on Twitter:
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Source : Google News