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Why We Won’t See Another Big Silicon Valley Internet Giant

November 2, 5:00 pm EST

If you are a regular reader of my daily notes, you’ll know I’ve suspected we are seeing an end to the “wild west” days in Silicon Valley.

I think we’ve finally seen it play out in the stock market in the past month.

The media has spent the past month pontificating about big macro economic stories and how these risks have driven this correction stocks. But the intermarket correlations don’t support it. Despite the sharp slide in stocks, money hasn’t fled to the safety of bonds. The currency market has shown little to no stress. And gold has been relatively quiet. This is all antithetical to what you would find in a world shaken from elevated global risks.

Ultimately, this correction has been about repricing the tech giants. And one of the power players in Silicon Valley said about as much this week.

Peter Theil, founder of PayPal and the first investor in Facebook said he doesn’t expect to see another innovative breakthrough consumer internet company. I agree (for a number of reasons).

With that, I want to revisit my note from March of 2017, as Trump was just getting his feet wet as President:

TUESDAY, MARCH 7, 2017
“A big component to the rise of Internet 2.0 was the election of Barack Obama.

With a change in administration as a catalyst, the question is: Is this chapter of the boom in Silicon Valley over?

Without question, the Obama administration was very friendly to the new emerging technology industry. One of the cofounders of Facebook became the manager of Obama’s online campaign in early 2007, before Obama announced his run for president, and just as Facebook was taking off after moving to and raising money in Silicon Valley (with ten million users). Facebook was an app for college students and had just been opened up to high school students in the months prior to Obama’s run and the hiring of the former Facebook cofounder. There was already a more successful version of Facebook at the time called MySpace. But clearly the election catapulted Facebook over MySpace with a very influential Facebook insider at work. And Facebook continued to get heavy endorsements throughout the administration’s eight years.

In 2008, the DNC convention in Denver gave birth to Airbnb. There was nothing new about advertising rentals online. But four years later, after the 2008 Obama win, Airbnb was a company with a $1 billion private market valuation, through funding from Silicon Valley venture capitalists. CNN called it the billion dollar startup born out of the DNC.

Where did the money come from that flowed so heavily into Silicon Valley? By 2009, the nearly $800 billion stimulus package included $100 billion worth of funding and grants for the ‘the discovery, development and implementation of various technologies.’ In June 2009, the government loaned Tesla $465 million to build the model S.

When institutional investors see that kind of money flowing somewhere, they chase it. And valuations start exploding from there as there becomes insatiable demand for these new ‘could be’ unicorns (i.e. billion dollar startups).

Who would throw money at a startup business that was intended to take down the deeply entrenched, highly regulated and defended taxi business? You only invest when you know you have an administration behind it. That’s the only way you put cars on the street in NYC to compete with the cab mafia and expect to win when the fight breaks out. And they did. In 2014, Uber hired David Plouffe, a senior advisor to President Obama and his former campaign manager to fight regulation. Uber is valued at $60 billion. That’s more than three times the size of Avis, Hertz and Enterprise combined.

Will money keep chasing these companies without the wind any longer at their backs?“

Again, this note above was from about 18 months ago. And administration change has indeed become a problem for these emerging monopolies.

Trump’s scrutiny has come, and so has the regulatory scrutiny. But admittedly is has taken longer than I expected.

Still, it has become clear now to lawmakers (in the U.S. and abroad) that the lack of regulatory oversight of these companies (if not regulatory favor) has created a “winner takes all” environment. And the power transfer into so few hands has quickly become a big threat.

Now these companies look forward to the next decade of regulatory purgatory. But given the maturity of these tech giants, higher regulation only strengthens their moat. That means there will never be a competition to Facebook emerging from a dorm room or garage. The compliance costs will be too high.

But regulation on the tech giants also creates the prospects for those “old-economy” competitors that have survived, to bounce back.

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This Market Decline Is A Gift To Get Involved

November 1, 5:00 pm EST

We talked about the potential bottom in stocks on Monday, based on this big trendline we had been watching. That, of course, also coincided with a similar line in the Dow, which represented a 10% correction on the nose.

That indeed does look like the bottom.

You can see in the chart of the S&P 500 above, this big line dating back to the oil price crash lows of 2016 held beautifully, and we are now up more than 5% from just Monday of this week.

And today we have this …

We’re getting a break of this sharp downtrend of the past month (circled).

And we have a very similar pattern in Japanese stocks (the Nikkei).

Most importantly, the biggest mover of the day in global stock indices (and nearly all markets) was emerging market stocks. The MSCI Emerging Markets Index was up 3.3% today. And the strength in emerging markets was well underway before the news today that the U.S. (Trump) and China (Xi) has some constructive talks on trade.

What gets hit first and hardest when global risk elevates? Emerging markets. EM was down 21% on the year earlier this week. But this is also where the biggest gains can come as the dust settles, and people realize that a hotter U.S. economy, will translate into hotter growth in emerging markets. As I’ve said, this market decline has been a gift to get involved.

Don’t Make This Mistake

October 31, 5:00 pm EST

As we discussed yesterday, it’s very dangerous to let political views influence your perspective on markets and investing.

And I suspect we are seeing plenty of people make that mistake.

That means many will be left behind on a stock market recovery, again. That probably means the bull market for stocks still has a ways to run. John Templeton, know to be one of the great value and contrarian investors of all time, said “bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.”

Incredibly, after a more than four-fold run from the financial crisis bottom, the stock market continues to have a LOT of skepticism. Does this mean we are only half way through this cycle? Maybe.

The arguments for the stock market bears and pessimists on the economy have many holes, but the biggest is the lack of context. That context: the global economic crisis, and the aftermath (up to present day).

You can’t evaluate anything about this economy without taking into account where we’ve been over the past decade, the role central banks have played throughout, the coordinated intervention that has taken place globally (along the way) to avoid a global depression, and the interconnectedness of global economies that continues.

Without this context, the skeptics like to call it “late in the cycle” for an economy that (on paper) is in the second-longest expansion in U.S. history. With context, we’re probably closer to “early cycle,” given that the decade of ultra-slow growth was manufactured by central banks.

Pro Tip: Don’t Let Your Political Views Influence Your Market Views

October 30, 5:00 pm EST

This violent repricing of the tech giants came with clear warnings (i.e. the tightening of regulatory screws).

Now that we have it. And it is very healthy, and needed.

As we discussed yesterday, I would argue we are seeing regulation priced-in on the tech giants, which can create a more level playing field for businesses, more broad-based economic activity, and a more broad-based bull market for stocks. This is a theme we’ve been discussing in my daily note here for quite sometime.

And I suspect now, we can see the areas of the stock market that have been beaten down, from the loss of market share to the tech giants, make aggressive comebacks.

On that note, here’s another look at the big trendline we’ve been watching in the Dow …

Again, this line holds right at the 10% correction mark. And we’ve now bounced more than 700 dow points.

As I’ve said, it’s easy to get sucked into the daily narratives in the financial media, and it’s especially easy and dangerous (to your net worth) when stocks are declining. They tend to influence people to sell, when they should be buying.

And as someone that has been involved in markets more than 20 years, I can tell you that it’s also very dangerous to let political views influence your perspective on markets and investing. And I suspect we are seeing that mistake made in this environment (by pros and amateurs alike).

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Closing The Jaws On Old Economy Versus New Economy

October 29, 5:00 pm EST

Stocks continue to swing around today. But I think we may have a bottom coming in.

Remember, we looked at some key charts on Friday. Among them, we had this chart of the Dow, where a touch of this big trendline from the 2016 lows would give us a 10% correction on the nose.

As you can see in the updated chart, we hit that level today, traded below it, but bounced back aggressively into the close.

So we now have an official correction in the Dow (down 10%) and we have an official bear market in the FANG stocks (down more than 20%). These labels have significance because it the plays into market psychology and price behavior.

With this in mind, if you are a regular reader of my daily notes, you’ll know we’ve talked about the big disconnect between the performance of the tech giants, relative to the Dow for much of the year. The FANG stocks were UP as much as 50% at one point this year (equal weighted). Meanwhile, the Dow has dramatically lagged all along the path of the post-correction recovery of earlier this year.

This was a market pricing the tech giants like monopolies that would destroy all industries, despite the clear threats that were coming from Trump and from Europe (i.e. promising to ramp up regulation on those that have gained advantages from the lack of regulation).

The great proxy for this trade, as we’ve been discussing for the better part of the past six months, has been Amazon versus Walmart.

Remember, we looked at this chart several times earlier this year …

This chart clearly represents the regulatory favor that has been given to the tech giants. The regulatory favor has not only disrupted industries, it has nearly destroyed them, and created monopolies in the process.

But with regulation coming, I’ve expected the “jaws to close” on this chart, and for money to start moving back into value stocks and back into the industries that have been nearly destroyed by the tech giants.

We now have this … the jaws have closed.

This violent repricing of the tech giants, and now bear market, is finally signaling the outlook for a more level playing field for businesses, more broad-based economic activity, and a more broad-based bull market for stocks.

Re-Pricing Of The Tech Giants, Continued …

October 26, 5:00 pm EST

With this morning’s third quarter GDP number, the economy is officially growing at the fastest pace since 2006.

And yet stocks are now flat on the year.

Let’s look at some key charts as we head into the weekend.

We’ve looked at this big trendline in the S&P 500 futures. We got very close today.

We have a similar line coming in here for the Dow. A touch of that line would be a 10% correction on the nose.

Remember, the core of this correction is about a re-pricing of the tech stocks. We looked at this chart on Amazon earlier this month.

And now we have this…

Amazon topped the day it crossed the trillion-dollar valuation threshold and is now down 20%. But also remember, at the peak, the stock had more than doubled in a year. Even after this decline, and after blow out earnings, the stock still trades at 161 times earnings.

As we know, Trump is leveling the playing field internationally,and domestically. And the tech giants, which have been priced like monopolies, are coming back down to Earth.

This correction gives us a chance to buy the broader stock market into a 10% correction, at 15 times earnings (cheaper than the long term average) in a 3% economy, with 20% year-over-year corporate earnings and corporate sales growth running double the rates of the past twenty years. Don’t run out of the store when stocks are on sale.

Finally, among the many interesting charts this week is gold. In the chart below, you can see gold has held the big trendline from that dates back to the inception of QE. With inflation finally showing some life, and with signficant wealth in Saudi Arabia looking for a safe hiding place, gold should be the natural winner.

How Low Can It Go? Watch This Big Trendline

October 25, 5:00 pm EST

Yesterday we looked at this big trendline support in stocks (the yellow line).

We had a good bounce today, but experience tells me that we will make a run at that trendline, and things will look a little messy before we bottom.

We still have seven trading days before the mid-term elections. A stock market in correction is not as easy to promote as one at record highs (as we had just earlier this month). With that, I suspect there are plenty of interests (China among them) to keep the pressure on stocks in hopes of dividing U.S. Congress come November 6th.

When the dust clears from the elections, market folks will realize that stocks are incredibly cheap at 15 times next year’s earnings estimates, in an economy growing better than 3%.

On that note, we have our first look at third quarter GDP tomorrow. The market is looking for 3.6% growth, which would give us 3.22% annualized growth averaged over the past four quarters. That would be the best growth since 2006.

Catalyst For Both Corrections This Year Has Been Saudi Selling

October 23, 5:00 pm EST

As we discussed yesterday, despite all of the drama about China, Italy,
Brexit, rates and the elections, what seems more likely to have driven the recent correction in stocks is Saudi selling.

In fact, I think it’s clear that there has been a Saudi liquidation (of U.S. and global assets) which was the catalyst for the correction in stocks earlier this year, and this recent decline.

Remember, in November of last year, the Saudi Crown Prince Salam, successor to the King, ordered the arrest of many of the most powerful Saudi Princes, country ministers and business people in Saudi Arabia on corruption charges. Over $100 billion in assets were claimed to be under investigation (a third frozen) in what was called the “Saudi purge.”

These subjects were detained for nearly three months. The timing of their release and the market correction of early this year is where it all begins to align.

They were released on Saturday, January 27. S&P futures open for trading on Sunday night. Stocks topped that night and proceeded to drop 12% in six days. And rallies in stocks were sold aggressively for the better part of the next seven months.

Fast forward to this month, and we have the murder of the journalist that was a public critic of the Crown Prince Salam. As the details of story pointed back to Salam, on Oct 3, U.S. bond markets got hit (to the hour of news hitting the wires) and stocks topped that day, and have proceeded to drop by more than 8%.

Clearly, the destabilization in Saudi Arabia has put considerable assets in jeopardy. With that, those in control of those assets have likely been scrambling to protect them, as U.S. Congress pushes for sanctions, which could include freezing Saudi assets.

This Market Correction Is Driven By Saudi Liquidation

October 22, 5:00 pm EST

As the events surrounding Saudi Arabia continue to unfold, it is beginning to look more and more like the market shakeup of the past three weeks was triggered by Saudi selling.

The top in stocks and the heavy selling came just as news was hitting wires that Khashoggi never exited the Saudi consulate in Turkey – disputing the story of the Saudi government.

Stocks put in a top that day.

And that was the day the bond market also made it’s move — the 10-year yield spiked from 3.08% to 3.18%.

Here’s what hit the news wires that triggered the selling in bonds/rise in market rates – to the hour.

So, was the catalyst for this market correction triggered by money from Saudi Arabia moving to escape a potential asset freeze? It looks possible.

We constantly hear predictions of impending corrections, pointing to all of the clear evidence that should drive it, but corrections are often caused by events that are less pervasive in the market psyche. The Saudi story would qualify.

China’s Rapid Ascent To Economic Power Is Being Knocked Off Path

October 18, 5:00 pm EST

Last week, we talked about the signals coming from China, that the economy is running dangerously slow, and their backs are against the wall.

They cut their bank reserve requirement ratio last week for the fourth time this year. And they have been continually walking down the value of their currency (the yuan).

The PBOC pegged the yuan to another 21-month low today. Most importantly, it’s getting closer and closer to the 7 yuan per dollar level – a level we haven’t seen since the pre-financial crisis days.

As we’ve discussed, they have two options. They can play ball on trade concessions with the U.S. If so, the economy slows. They can continue to holdout/pushback on trade, and the trade sanctions may take the economy off the cliff. Both scenarios mean China’s rapid ascent to economic power gets knocked off path.

If holdout is their long term strategy, I suspect we will find that global trading partners will join Trump’s fight against China’s rigging of global trade via its weak currency advantage. That’s not a good outcome for China.

More likely, China is trying to holdout to see the outcome of the November U.S. elections. And as we discussed earlier this month, they are likely trying to wield some influence: “they can sell Treasurys, in an attempt to ignite a sharper climb in rates. And a fast move in rates (at these levels) has a way of shaking confidence in equity markets–which has a way of shaking confidence in the economy.”

It appears that it may be playing out, but worse for Chinese stocks, which are now down 25% for the year.