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February 3, 2022February 3, 2022

A slow-motion train wreck

Facebook parent Meta’s shares fell 20% after hours as it said revenue growth will slow, partly because users were spending less time on lucrative services. (WSJ)

Facebook lost about half a million global daily users in the fourth quarter of 2021 compared to the previous quarter, according to the quarterly earnings report of Meta, its parent company. That might not seem like a major drop relative to its under 1.93 billion total daily active users, but it represents a low point for a metrics-driven company whose user base long grew at a rapid pace across its different apps. The statistic shows how Meta has struggled to stay relevant to younger users, many of whom are drawn to competing apps like TikTok. (Vox)

Facebook/Meta’s dissapointing performance is not an isolated problem. Tesla (TSLA), the darling of retail investors — trading at 22 times sales and 93 times forward earnings — is also staring into the abyss. Breaking primary support at 900 last week, TSLA quickly recovered — indicating a false break — but is again testing the 900 support level. Trend Index peaks below zero warn of selling pressure. Breach of support at 900 for a second time would confirm a primary down-trend. Initial target for a decline would be 600 — a 50 per cent fall from its recent peak of 1200.

Jesse Felder shows how precarious the market situation is, with the median price-to-sales ratio at a record 3.5 times. Compare that to the Dotcom bubble, with a peak of just 2.0.

Warren Buffett’s favorite market valuation metric of market-capitalization-to-GDP is not quite as alarming, when you compare to the Dotcom peak in 2000, but nevertheless sounds a grim warning.

We consider MarketCap/GDP to be the most accurate long-term valuation metric available. By focusing on total stock market valuation relative to output, it avoids distortions caused by the financial trickery of stock buybacks and fluctuating profit margins caused by factors like the current supply chain issues.

Conclusion

This is like watching a slow-motion train wreck. The worst I have seen in nearly forty years in financial markets. The Fed may be able to postpone a market crash by several months but the eventual outcome is inevitable. The draw-down has the potential to be truly eye-watering, overshadowing the Dotcom Crash and Global Financial Crisis.

We are overweight Gold (including gold miners), defensive stocks, and key commodities and underweight high-multiple growth stocks.

October 5, 2021

Facebook (FB) in trouble over hate speech

“It’s easier to inspire people to anger than other emotions…..Facebook has realized that if they change the algorithm to be safer, people will spend less time on the site, they’ll click on less ads, they’ll make less money……It’s one of these unfortunate consequences, right? No one at Facebook is malevolent, but the incentives are misaligned, right? Like, Facebook makes more money when you consume more content. People enjoy engaging with things that elicit an emotional reaction. And the more anger that they get exposed to, the more they interact and the more they consume…” ~ Frances Haugen, Facebook whistleblower

January 11, 2019

It’s a funny kind of bear market

The US economy continues to show signs of robust good health.

Total hours worked are rising, signaling healthy real GDP growth.

Growth in average hourly wage rates is rising, reflecting a tighter labor market. Underlying inflationary pressures may be rising but the Fed seems comfortable that this is containable.

The Leading Index from the Philadelphia Fed maintains a healthy margin above 1.0% (below 1% is normally a signal that the economy is slowing).

But market volatility remains high, with S&P 500 Volatility (21-day) above 2.0%. A trough above 1% on the next multi-week rally would confirm a bear market — as would an index retracement that respects 2600.

The Nasdaq 100 is undergoing a similar retracement with resistance at 6500.

The primary disturbance is the trade confrontation between the US and China. There is plenty of positive spin from both sides but I expect trade negotiations to drag out over several years — if they are successful. If not, even longer.

I keep a close watch on the big five tech stocks as a barometer of how the broader market will be affected. So far the results are mixed.

Apple is most vulnerable, with roughly 25% of projected sales to China. Recent downward revision of their sales outlook warns that Chinese retail sales are falling. AAPL is testing its primary support level at 150.

Facebook and Alphabet are largely unaffected by a Chinese slowdown, but have separate issues with user privacy. Facebook (FB) is in a primary down-trend.

While Alphabet (GOOGL) is testing primary support at 1000.

Amazon (AMZN) is similarly isolated from a Chinese slow-down although there may be a secondary impact on suppliers. Primary support at 1300 is likely to hold.

Microsoft (MSFT) is the strongest performer of the five. Their segment reporting does not provide details of exposure to China but it appears to be a small percentage of total sales.

The outlook for stocks is therefore mixed. Be cautious but try to avoid a bearish mindset, where you only see problems and not the opportunities. Even if China does suffer a serious slowdown we can expect massive stimulus similar to 2008 – 2009, so the impact on developing markets and resources markets may be cushioned.

Best wishes for the New Year.