“Nobody could ever have seen this coming” is the normal comment after sudden share price falls. And its been earning its money over the past week as “suddenly” share prices of some of the major “story stocks” on the US market have hit air pockets, as the chart shows:
- Facebook was the biggest “surprise”, falling 20% on Thursday to lose $120bn in value
- Twitter was another “surprise”, falling 21% on Friday to lose $7bn
- Netflix has also lost 15% over the past 16 days, losing $27bn
- Tesla has lost 20% over the past 6 weeks, losing $13bn
These are quite major falls for stocks which were supposed to be unstoppable in terms of their market advances.
Of course, their supporters could say it was just a healthy correction and a “buying opportunity”. And they might add that so far, other “story stocks” such as Alphabet, Apple and Amazon are still doing well. But others might say a paradigm shift is underway, and these sudden shocks are just the early warning that the central banks’ Quantitative Easing bubble is finally starting to burst.
They might have a point, looking at the second set of charts:
- Twitter stopped being a major growth story as long ago as 2015, since when its user growth has been relatively slow, even going negative in some quarters
- Facebook stopped showing major growth in active users 18 months ago – and in 2018, it has been flat in N America and losing subscribers in Europe, whilst Asia and the Rest of the World are also heading downwards
- Tesla, of course, has been a serial disappointment. Its founder, Elon Musk, was brutally honest when founding the company in 2003, saying it had a 10% chance of success. Since then, it has mostly failed to meet its production targets. It was supposed to be making 5000 Tesla 3 cars a week by the end of last year, but according to Bloomberg’s Model 3 tracker, it is currently producing only 2825/week. Around 0.5 million buyers have paid their $1k deposits and are still waiting for their car – and Tesla needs their cash if its not to run out of money
- Netflix is another “story stock” now seeing a downturn in subscriber growth. Yet at its peak it had a market value of $181bn, with net income for this quarter forecast by the company at just $307m. Like Tesla, it was valued at a higher value than comparable businesses such as Disney, which have had solid earnings streams for decades.
The common factor with all 4 stocks is that they have a great “narrative” or “story”. Elon Musk has held investors spellbound whilst he told them of unparalleled riches to come from his innovation. This seemed to be the same with Facebook until the furore arose over the data user scandal with Cambridge Analytica. Twitter and Netflix have also had a great “story”, which overcame the need to show real earnings even after years of investment.
THE LIQUIDITY BUBBLES ARE STARTING TO BURST AS CENTRAL BANK STIMULUS SLOWS
In other words, reality seems to be starting to intrude on the “story”, just as it did at the end of the dot-com bubble in 2000, and the US subprime bubble in 2008. The key, then as now, is the end of the stimulus policies that created the bubbles, as the 3rd set of charts shows:
- Slowly but surely, the US Federal Reserve is finally raising interest rates back to more normal levels
- And more importantly, China’s shadow bank lending is declining – H1 was down by $468bn versus 2017
Even the European Central Bank and the Bank of Japan have signalled they might finally be about to cut back on the combined $5.75tn of lending, often at negative rates, that they pumped into the markets between 2015 – March 2018.
The issue is simple. All bubbles need more and more air to be pumped into them to keep growing. Once the air stops being added, they start to burst. And for the moment, at least, Facebook, Twitter, Netflix and Tesla are all acting as the proverbial canary in the coal mine, warning that the great $33tn Quantitative Easing bubble may be starting to burst.
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President Trump no longer tweets regularly about new record highs for US financial markets.
The tweets were a core activity in the first year of his Presidency, when he was still feeling his way into the job.
But now, as last week’s sackings of his Secretary of State and National Security Advisor confirm, his focus has returned to the promises made in his Gettysburg speech, before the election:
“I will begin taking the following 7 actions to protect American workers (my emphasis and status unpdate):
FIRST, I will announce my intention to renegotiate NAFTA or withdraw from the deal under Article 2205 – UNDERWAY
SECOND, I will announce our withdrawal from the Trans-Pacific Partnership – DONE
THIRD, I will direct my Secretary of the Treasury to label China a currency manipulator – TRADE WAR NOW BEGUN
FOURTH, I will direct the Secretary of Commerce and U.S. Trade Representative to identify all foreign trading abuses that unfairly impact American workers and direct them to use every tool under American and international law to end those abuses immediately – UNDERWAY
FIFTH, I will lift the restrictions on the production of $50 trillion dollars’ worth of job-producing American energy reserves, including shale, oil, natural gas and clean coal– UNDERWAY
SIXTH, lift the Obama-Clinton roadblocks and allow vital energy infrastructure projects, like the Keystone Pipeline, to move forward – UNDERWAY
SEVENTH, cancel billions in payments to U.N. climate change programs and use the money to fix America’s water and environmental infrastructure – WITHDRAWN FROM UN CLIMATE CHANGE PROGRAMME”
Trump knows he faces a tough fight in November’s mid-term elections, when the Democrats could win control of Congress. So he is refocusing on the issues that won him the White House in 2016. As I noted before his Inauguration:
“If President Trump pursues the policy program on which he was elected, we are therefore about to live through a paradigm shift in America’s role in the world. This is his right as President, and America’s right as a free country. But it is critical that all of us recognise the change about to take place.”
This programme is quite different from the historical Republican platform focused on free trade and sound money.
The comparison between President Reagan’s 1986 tax reform and Trump’s tax cut last year highlights the different agenda. Reagan built consensus over 3 years, and ensured his reform was revenue neutral. Trump simply used the Republican majority to force through the tax cut, and ignored warnings that it could add $1tn+ to the deficit.
FINANCIAL MARKETS HAVE BEGUN TO TUMBLE AS THE FAANGS’ MARKETS MATURE
Wall Street has had a great run, as the chart of Prof Robert Shiller’s CAPE Index confirms.
Its Price/Earnings ratio peaked in January at 33.6 – even higher than 1929’s top of 32.6. Only the dot-com bubble at the end of the Boomer SuperCycle was higher, at 44.2.
Essentially, markets have been operating on the “5 Everyone concept”© . There are 3 core “Everyones”:
- “Everyone knows” stocks are over-valued, but believes they are clever enough to spot when it is time to exit
- “Everyone believes” the Federal Reserve will always rescue them, if markets did happen to tumble
- “Everyone assumes” that every correction is therefore a buying opportunity, as markets can never fall
But since January, the benchmark S&P 500 Index has seen these “3 Everyones” start to be questioned:
- It peaked at 2839 in January, and by February “Everyone assumed” its 2581 level was a “buying opportunity”
- But the March peak was just 2783, and prices then tumbled to 2588 on Friday
- If prices now go below 2581, then they risk trending much lower, with “lower highs and lower lows”
The key issue is the growing doubt over the outlook for the super-hot tech sector, and the FAANG tech stocks. This challenges the 4th “Everyone” – that “Everyone agrees” Facebook, Apple, Amazon, Netflix, Google (and Chinese companies such as Alibaba and Tencent), will dominate the global economy for decades ahead.
Last year, as the Financial Times chart confirms, the world’s Top 7 companies by market value were all tech-based.
But what if this idea is wrong? Can tech really continue to grow to the sky, or are its markets starting to mature?
- We know, for example, that the smartphone market has peaked, as I discussed last month
- Price competition is also intensifying as companies focus on market share, not profit
- Apple CEO Tim Cook is also very worried by the potential impact of trade wars
- Can Apple and its rivals continue to increase their earnings, given these challenges?
Similarly, the growing political storm over Facebook suggests its days of stellar revenue and profit growth are ending.
Questions are also being raised about the viability of tech’s business model, which depends on users giving up their personal information for free.
After all, history shows that even the highest-flying companies and markets eventually mature. At that point, Price/ Earnings ratios begin to drop, and investors start to refocus on dividend payments instead.
Unfortunately for Wall Street, it seems that Trump’s attack on free trade may turn out to be the catalyst for their discovery that tech’s days of exponential growth are over.
INVESTORS FACE 5TH “EVERYONE” CHALLENGE, AS “EVERYONE REALISES” MARKETS HAVE PEAKED
Trade wars are not normally good for business. Nor is political uncertainty – which is certain to rise as President Trump energises core voters ahead of the mid-terms. His Gettysburg policies set out, after all, “to protect American workers“.
If Trump’s initial focus on financial markets was indeed purely tactical, markets now have a bumpy ride ahead. The risk is that gradually, a 5th “Everyone” will become apparent – that “Everyone realises” markets have peaked.
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