Talking Points:
- Facebook stock slides after Federal Trade Commission launches probe of data scandal
- Amazon loses $53 billion in market cap after President Trump looks to target the giant
- Google could owe Oracle billions after an appeals court found the company violated fair use of Java
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The climb by capital markets - and especially US equities - since the Great Financial Crisis low was set nearly 9 years ago has grown long in the tooth. While the recovery was initially well-founded through a massive global response by global central banks, governments and even speculators preying on discounted assets; we have more than made up the shortfall and accounted for the economic recovery since. Whether we choose to establish value in some reference to GDP, forecasted dividends/yields, projected revenues or nearly any other measure; the markets look richly priced. Below, a rudimentary measure of ‘risk-reward’ is used. It is the combination of G10 government bond yields (10-year maturity) over the FX market’s volatility index. Simple yet indicative. And, far removed from the assumptions of value we see in stretched benchmarks like the S&P 500.
It may be an overused maxim (evoked for good reason, it’s insightful in its truth), but ‘markets can remain irrational longer than we can remain solvent’. Speculative appetite or a more benign shift in focus can send markets well beyond a point of theoretical value, whether approaching from a discount or premium. Eventually, though, gravity kicks in; and for themes of this influence and depth, it is worth plotting the course. The question we face with benchmarks that lead broader sentiment trends like the S&P 500 does is: what will trigger the rebalance? Is it monetary policy, a full blown financial crisis, political risk, trade war or something more mundane?
One of the most banal prime movers to systemic trend changes is the course reversal for trendsetters. While the climb over the past years has been broadly based, there are certain areas where markets have outperformed in notional terms, the attraction of capital and in the headlines. The technology sector is a particular standout in this bullish epoch. Look at the major sectors breakdown of the S&P 500, we can see tech (light blue) has readily outpaced the other areas of the market and has surpassed the peak it had set back during the Dot-Com boom and bust. That is a dubious distinction.
Looking more closely at the tech sector, there are certain stocks that have grown equally in market cap and fame. Among the most headline worthy have been those firms that have become members of a famous acronym FANG (Facebook, Amazon, Netflix and Google). Below is a chart of FAANG (adding in Apple), and the retreat is certainly palpable. In terms of scale, it is perhaps more heady with momentum in its more recent developments, but is closer inline to the tech-heavy Nasdaq than the S&P 500. Yet, if this is a catalyst that will spread through the wider system; we would see the concentrated wealth of the FANG turn the technology sector’s tide which in turn could force the wider risk boat to list dangerously towards capsizing. So what is motivating the FANG members recently? That is what we discuss below.
The week began with a sharp drop in Facebook’s share price after the Federal Trade Commission announced it is investigating the company’s data practices after Cambridge Analytica’s leak of 50 million users’ information. The stock has dropped from March highs near $185 and now rests significantly lower near $153 a share. Although the stock rebounded slightly on Wednesday, there remains a “Delete Facebook” movement that continues to pressure the social media giant. Chief Executive Mark Zuckerberg denied summons to testify before UK MPs but is expected to testify before Congress about privacy and data-use standards within Facebook.
Amazon
Amazon lost $53 billion in market cap after a source near President Donald Trump claims he wants to “go after” the e-commerce mogul. Trump has discussed altering the company’s tax treatment because the company is hurting retailers and causing job loss in the US. In a White House press release, Press Secretary Sarah Sanders said the President has long wanted to level the business playing field in the US.
Netflix
One of the least harried of the FANG so far. After the appointment of former US ambassador to the United Nations Susan Rice to its Board of Directors, Netflix has faced its own negative press. Rice was thrust into the spotlight during the 2012 attack on the US consulate in Benghazi and many critics are calling for her to step down, threatening subscription cancellation.
As a years-long battle between software giants Google and Oracle comes to a close, Oracle has emerged the temporary victor. The US Court of Appeals for the Federal Circuit has ruled Google violated Oracle’s copyright of Java code which was used in Android operating systems on mobile devices. The case, first filed in 2010, is expected to cost Alphabet Inc. billions of dollars. Oracle had been seeking $8.8 billion, but the number is not finalized. The case is a huge win for Oracle but the battle is not over with Google likely to ask for a review or approach the Supreme Court for an appeal. The Supreme Court declined to review a case in 2014 dealing with similar copyright maters.
