As we head into tomorrow's very high stakes election, global asset prices were up on the day. The broad stock market was up over 1%.
But big tech was down.
Amazon was down 1.8%. Apple was down 1%. Facebook, down 1.4%. And Twitter was down another 5% (after getting taken apart on Friday for more than 20%).
Remember, last week we talked about the big technical break down in the key tech stocks, following a day that the leaders of Google, Facebook and Twitter were grilled by the Senate. And we talked about the potential valuation tipping point for big tech, as we've now breached the 1999 levels of tech representation in the S&P 500 index. Will this election serve as the catalyst, or "pin" to prick the bubble in big tech? Maybe.
This sets up for a rotation. In a Trump win, a rotation into energy, infrastructure and value stocks. In a Biden victory, a rotation into the stocks that benefit from the democrat “clean energy” plan.
Let's talk about the probable scenarios from the election:
In the case of a Trump win, we should expect a more aggressive opening up of the economy.
In the case of a Trump win, and an aligned Congress, we should expect a more aggressive opening up of the economy AND another stimulus package that would fund an aggressive infrastructure spend, with “bringing the supply chain home” as the centerpiece.
In the case of a Biden win, in a “blue wave” we will, no-doubt, get a monster, multi-trillion-dollar second stimulus package, to fund his/their very aggressive economic transformation/ “clean energy” plan.
In the case of a Biden win, and split Congress, I suspect he may hold the economy hostage, through tighter virus mitigation, so that the Republican-led Senate will relent and do a second stimulus package (which will fund the clean energy plan).
In the case of a pro-longed period of uncertainty, surrounding a contested election, we will likely get more Fed action, and a second stimulus package.
The common theme in these four scenarios is: economic fuel.
We talked earlier this week about the test of the big technical trend line in the S&P 500.
Here's how the chart looked on Monday …
And here's how it looks today …
And we've been watching Apple's test of a similar line, as the proxy for big tech and for the broader stock market …
As we discussed yesterday, that line gave way too, after an earnings beat on Thursday.
Amazon? Same chart …
Same chart for Facebook. Also worth noting, while the Twitter looks a bit different, was down 21% on the day.
So did the Senate hearings this week pour cold water on the big tech trade? Or is a top IN for big tech, and is there a changing of the guard coming?
For those that believe a Trump victory is coming, the big tech regulatory noose looks to be in the cards, which would certainly challenge the lofty multiples these companies have enjoyed.
For those that believe a Biden victory is coming, the global capital that has fueled the lofty multiples in big tech, will likely be moving OUT, and IN to the next big secular trend to be determined by big government "stimulus" allocations. That is, the “clean energy revolution.” Just as Obama blessed this eras tech giants with gobs of money from the 2009 Recovery Act, Biden would do the same with the Heroes Act – allocating as much as a trillion dollars to clean energy companies, and in the process anointing the winners and future billionaires (if not trillionaires).
Yesterday a few of the most powerful people in big tech were getting grilled by the Senate. Today they reported earnings.
If you needed more convincing that big tech is eating the world, seeing their earnings through a government-imposed "work at home world" should do it.
Google grew revenue by 14% compared to the same period a year ago. And they grew operating earnings by 22%.
Facebook grew revenue by 22%, with operating earnings up 12%.
Twitter grew revenue by 14%, and grew operating earnings by 27%.
Keep in mind, this is a quarter where most companies, while beating dialed down estimates, are still only putting up only a fraction of the revenues and earnings of a year ago.
So, these numbers hit as Congress is mulling over ways to tame these platforms, and as the DOJ is suing Google (Alphabet) for abusing its dominant position in search.
This only amplifies the scrutiny. As we discussed earlier this week, this all sets up for higher regulatory costs coming down the pike, and less "wild west" in their business models. That is a threat to the lofty multiples on these stocks. And this comes at a time where technology, as a sector, has recently exceeded its 1999 proportion of the S&P 500.
With all of this said, picking a top in big tech has been a fool's errand. The billionaire investor David Einhorn, has many wounds to lick from his failed attempts at shorting his "bubble basket" of tech stocks. But he wrote in his recent investor note that he’s convinced the bubble has finally burst – as of September 2. We will see.
As a key barometer of tech, remember we looked at this Apple chart earlier in the week …
This big line that comes in from the March lows, has broken in after hours trading, following an earnings beat.
Stocks, commodities, and currencies were all down big today.
Was it news that Germany and France might be moving toward another lockdown?
Was it because three of the most powerful big tech CEOs were being grilled by the Sentate today, with the future of their business models in jeopardy?
A bit of both.
Plus we get this big technical break in stocks today.
This is an 8% decline in stocks since October 12 (just twelve trading days).
Now, with two of the top five S&P 500 constituents (Google and Facebook) at risk of being regulated down to mere mortal status, it would make sense that the market might consider how these companies would be valued if the liability shield of section 230 were to be taken away (which was the topic of discussion at today's Senate hearing).
This is contemplated at a time when the techology sector has recently surpassed 1999 levels in sector composition within the S&P 500. According to the WSJ, tech made up 37% of the S&P 500 market cap in 1999. It is now 40%.
As for the Senate hearing today, if you've listened to any of these (today or in the past) it is perfectly clear that these platforms are too big to manage, with unintended consequences that are dangerous to society (if not an existential threat). We have former computer programmers, turned entrepreneurs, turned information gatekeepers, turned (some of) the most powerful people in the world.
The leaders of these companies (in most cases, founders) don't know how to tame the monsters they've created. Zuckerberg, of Facebook, admits it. Dorsey, of Twitter does not.
The politicians: they don't know how to regulate them.
Tomorrow all eyes will be on the Senate hearing with the heads of Facebook, Google and Twitter.
The hearing is titled, "Does Section 230's Sweeping Immunity Enable Big Tech Bad Behavior?"
Arguably, the last U.S. election was won by Trump's use of Twitter. And this time around, he may lose it by the use of social media against him.
Here is what is protecting big tech from any recourse from bad behavior on behalf of the actions of their users, or from bad behavior their own actions.
This is from Section 230 of the Communications Decency Act …
This was written in 1996. Clearly, the world, technology and the internet have changed a bit. There was about 45 million people in the world using the internet when this law was written. Today, that number is 4.5 billion.
If these companies lose this privileged status, the business model changes. That means the multiple changes (i.e. lower multiple). Right now, Google trades at 35 earnings (ttm). Facebook trades at 35 earnings (ttm). Twitter trades at around 27 times earnings (pre-crisis full 2019 earnings).
But this would be far from the end of the big tech giants. Ironically, if this rule were to be revised, to hold these big platforms accountable, it would only strengthen their competitive moat. There will never be another dorm room startup that could conceive of competing with them. The cost of regulatory compliance, in house content management and enforcement, and the liability would preclude any new competition.
With eight days until the very high stakes election, the market seems to be coming to the realization that a second fiscal stimulus/ aid package isn't coming.
With respect to the stimulus, both parties should just take the deal in front of them, and then work to reallocate funds (to the extent they can, to meet their own policy objectives) after the election. In the event of a split Congress (highest probability), both candidates would not see another stimulus penny, unless the economy melts down again.
On the election front, what are the prospects of a drawn out vote count, or even contested election?
These scenarios would likely come into play if Trump were to win the key toss up states. Why? Among those states, six out of eleven require that mail-in ballots only to be postmarked by November 3rd (PA, NC, OH, MN, TX and NV). That would create a window of several days where there would be an unknown outcome. And if the election day outcome were overturned with mail-in votes, it's pretty safe to say the election would be disputed, with the potential of ending up in the hands of the Supreme Court.
Now, as we know, stocks are not only a barometer of confidence, but also can influence confidence in the economy. With that, stocks test this big trendline today — the line coming in from the March lows. This chart will be key to watch in the coming days.
While down 2% to open the week looks shaky for stocks, there does not appear to be a significant "flight to safety" underway. Gold is flat on the day. And the 10-year U.S. yield (Treasuries), which traded as high as 87 basis points last week, holds in around 80 basis point this afternoon. So the bond market, which has been reflecting an improving economy, isn't telling a very different story to start the week.
China was actually mentioned in the debates last night — fifty-five times, to be exact.
For a country in turmoil from a virus that originated from China, and further thrown into discord from disinformation campaigns from China, it sounds reasonable to ask both candidates for the next President of the United States what they plan to do about China.
Add to that, as we discussed yesterday, given that a communist country is on the doorstep of becoming the global economic superpower, dealing with China and fighting off China’s ambitions for world domination, is what this election is all about.
So, last night, we got this question: Would you make China pay for not being fully transparent in regards to the virus (i.e. sanctions)?
Sadly, we didn't get much of a response.
Biden said he would coordinate with allies and make China "play by the rules" (economically). Leveling the economic playing field (playing by the rules) has been the hallmark of Trump's two-plus year trade fight with China. Trump had nothing meaningful to say on the “what are you going to do about China” question. The moderator moved on.
We did, however, get this today …
As we’ve discussed, since Pompeo made his speech at the Nixon Library in July, where he called the Chinese Communist Party a threat to the future of the free world, he has been out alliance building. He has Japan on board. He has Australia on board. He has India on board. And he’s working on Vietnam and South Korea. Who hasn’t been so eager to align with the U.S. against China? Europe. Europe has a lot of economic interests with China, which include huge investments from China, into Europe, surrounding the 2011-2012 European sovereign debt crisis — which helped Europe stave off massive defaults, a collapse in the union and in the common currency. So, this meeting U.S./EU meeting looks like a big step. Of course, in two weeks, Pompeo could be a lame-duck Secretary of State (in the midst of a major national security crisis), and we could have a lame-duck Treasury Secretary, in the middle of an economic crisis. That doesn't sound good.
As suspected, and consistent with the evolution in 2016, the gap in the national polls has been narrowing into the final two weeks before the election — though it remains wide at +7.9 Biden (wider than the +4.6 for Clinton at this stage).
We've talked a lot about the China national security threat this week. But as we've also discussed, we've heard practically nothing on this topic in the debates and town halls. With big media in complete control of the election narrative, it's seems to be a forbidden topic. Not surprisingly, big tech (social media) and traditional media both rely heavily on Chinese investment, ad dollars and the lure of market opportunities in China.
Even the FBI report last night on foreign election interference, while calling out Russia and Iran, made no mention of China. Remember, Twitter alone removed over 170,000 accounts back in June, tied to Chinese disinformation schemes.
Forget everything else, dealing with China is what this election is all about.
Why? What rational person thinks it's a good idea for a communist country to become the global economic superpower?
If they do, I suspect they won't be promoting democracy.
You can see in this survey from Pew Research, from last December, China is nearly there (i.e. global economic superpower) …
We talked yesterday about the significance of the Chinese Communist Party (CCP) in this Presidential election, and the related propaganda wars being run through traditional and social media.
There are big stakes, and plenty of influence is being peddled.
Trump stands between China and the success of their multi-decade plan to become the economic superpower of the world.
The finish line has been in sight for the CCP. But Trump has spent the past two years trying to stop and reverse it, using the leverage of tariffs to force China into long-term compliance on "fair trade."
With this in mind, earlier this month we also talked about the two other major forces at work against Trump, which are likely contributors to the propaganda war.
In addition to threatening China's path to global power, Trump has also threatened the careers of D.C. politicians.
After four years in D.C., he remains an outsider. And he's an equal opportunity career destroyer. Democrate or republican, if you're against him, he will destroy you.
As we've discussed, it’s safe to say they will do anything and everything to get rid of Trump.
The other force fighting against a Trump re-election, with everything they have? Climate change activists.
As we've discussed here in my daily notes, climate change activists believe that climate change is an existential threat to the world. And the financial backing is nearly unlimited. A group called Climate Action 100+ has the most powerful investors in the world (representing $32 trillion in assets under management). And they have been dictating how major energy companies are deploying capital on new projects – forcing the pivot to climate responsible initiatives. Major global government entities/cooperatives are also largely behind the activist movement, feeding the effort with cash and subsidies.
With that, one of the top investors in Silicon Valley today said this on Twitter …
He's right! The Biden plan will be driven by a multi-trillion clean energy plan that will completely transform the U.S. economy. Many trillions of dollars will follow the government money.
The biggest investors in the world have placed their bets (in on the relative ground floor), and the payoff will be huge. They are all in, and near the finish line. Standing in the way has been Trump. They view Trump as a climate change denier, and therefore have explicitly said he (Trump) is an existential threat to the world.
With that, to what extent would they go to, to remove Trump? Whatever it takes.
The Wall Street Journal's top story of the day is an opinion piece from a retired Navy admiral. It's titled, Biden Will Make America Lead Again.
If you have a subscription, you can find it here. Here are my observations …
What's interesting in this piece, from a former top U.S. military leader: Not one mention of China.
Sadly, the media has done its job framing this election as a personality and character contest. Even the admiral has taken the bait.
With that, there has been little-to-no discussion about dealing with China on the debate and town hall stages.
Remember, just three months ago, Pompeo made speech at the Nixon Library that sounded like a war speech. He called for a "new grouping of like-minded nations, a new alliance of democracies" to take action against the Chinese Communist Party (CCP). He then said, if they don't act, the "CCP will erode our freedoms and subvert the rules-based order that our societies have worked so hard to build. If we bend the knee now, our children's children may be at the mercy of the Chinese Communist Party, whose actions are the primary challenge today in the free world" (speech transcripts, here).
Pompeo has since been alliance building in China's neighborhood. Australia, India and Japan are on board, and he has been working on Vietnam and South Korea.
With all of this, nothing about the threat from the Chinese Communist Party in the American election narrative. It's seemingly off the table for traditional and social media industries, that rely heavily on Chinese investment, advertising dollars and market opportunities.
So, with days until the election, the media and social media platforms have successfully distracted the American people from the real issues — even an imminent threat to the country.
Remember, the CCP is in in the late innings of a three-plus decade plan to become the economic superpower of the world. China has grown 37-fold since the early 90s, while the U.S. has grown just three-fold. Thanks to nefarious economic policies like currency manipulation, it’s been at the expense of the entire world – not just the U.S.
So, China can see the finish line, overtaking the U.S. as the world's economic leader, and therefore global power. Then came Trump. He has threatened to blow it all up, through forcing China into compliance with "fair trade."
With that, to what extent would they go to get rid of him? We're seeing it.
Worse than the virus, has been the sophisticated propaganda and subversion tactics used by the CCP (made easy by social media). Twitter shut down more than 170,000 accounts back in June, that were spreading and amplifying misinformation. Who knows how many have been removed since, and who knows how many continue to operate, and how big the network is.
So, we've been in a multi-decade economic war with China (and losing). We've been in a trade war with China (and losing). We are very likely, currently, in a disinformation and psychological war with China (and losing). What's next? Pompeo has been trying to take the CCP case to the American people, but has been ignored by the media. In a Biden presidency, he doesn't appear to have any intent on stopping, much less reversing the threat.
