Over the last decade the rise of what has been called “Big Tech” and in particular the “Silicon Valley model of all that makes absolutely no business sense” seemed unassailable, till now.
Cash burning unicorns, deca-corns and IPO’s facilitation of public companies with valuations of $10’s of Billions that couldn’t buy a candy bar unless they borrowed for that also, has suddenly reached that moment in time where the fantasy narrative is falling on deaf ears. Not to mention tightening wallets.
In other words the “Crying Towels” I argued for have not only arrived, but they’ve been flying off the shelves like hotcakes. As hot of an investment thesis as that was going on 5 years ago. It would seem the demand that’s been steadily increasing since 2017 has only started and is about to be ratcheted up to 11. Why? Hint: impending anti-trust investigations.
Can you say, Uh Oh?
If you think the Uber™ IPO debacle (remember when this was once touted as some impending religious event for the IPO faithful?) and subsequent price action has been vomit worthy? Just wait until the idea of P/E ratios of the fantastical meet the cold hard dawn of anti-trust legislation. The reasoning is simple:
All ideas of growing into those future P/E models is now made null and void until, at the least, deliberations are finalized and court decisions/verdicts rendered. Think Amazon™, Facebook™, Twitter™, Netflix™, Apple™, Google™, __________________(fill in your own here) as possible examples.
Google, (or Alphabet™) as of this moment, is not only in the cross-hairs of the U.S. authorities, but has already been held accountable for its accused anti-trust violations by the E.U.
I believe this E.U. fining is just the beginning for continuing extractions of anti-trust fines/penalties with its $9 Billion (and counting since 2017) judgements on Google alone. Do you think Facebook isn’t next in line? Then___________?
Think about this very carefully, whether you agree with the decisions or not.
As impactful as the above might be, some will say, “Well, that’s in the future not now, so it doesn’t matter until it happens.” To that I will say: Ah, not so fast mon ami.
Remember: valuations paid yesterday and today are priced on future earnings assumptions. Change or alter the growth story of future profits and you alter the price people are willing to buy, hold or sell at – today.
To reiterate: Where’s the growth to propel the growth assumptions already priced into these stocks if the growth is either (a) fined away destroying any and all profit assumptions. Or (b) can’t continue to do business there because of “a.”
Or said differently: whatever valuation that was presumed on growth, whether laughable or not, is now meaningless and needs to be set lower. And in most cases this means much lower. And for those in the “laughable growth” metric business? (Hint: Amazon, Netflix et al. ) Let’s just say “lower for longer” seems to fit.
This increasing regulatory initiative will not be an isolated instance with just a handful of the current or so-called “obvious” tech behemoths. It’s going to encompass far many more. And as I implied: it’s just getting started.
The entirety of social itself is going to awake to a far different world once DoJ (Department of Justice) turns its resources away form the Mueller probe and begins to focus like a laser-beam on exactly how, why or if free speech, of any type, protected under the Constitution has been systematically, intentionally or otherwise hindered.
The argument for absolution such as “these are private companies and can do what they want” becomes a fool’s argument when it is regurgitated as if it resides in a vacuum. Free of any and all other laws that dictate fair and equal business practices for legal and protected commerce.
This was the same type of argument used to absolve businesses (and more) from adhering to any civil rights arguments and judgements. Hint: it didn’t hold up then (as it shouldn’t have) and it won’t hold up now.
To be clear: I have used the above argument (i.e., private companies…) myself and believe in it. However, what has happened today is that many have forgotten the second part of the above, which is: as long as it doesn’t violate any laws.
And laws, we do have a plenty, as the old saying goes.
To give an example I use what I call the “No shoes, no shirt, no service rule.”
A business can decide to not allow patrons on their premises if they are not wearing shoes or shirts, because of the implications or ramifications that can happen for either injury or sanitation concerns.
What can’t be done: is refuse patrons from entry or service while there is a clearly visible barefoot and half-naked party going on in the back under the guise of “those are friends.”
The courts have ruled over, and over again this type of “commerce” is unacceptable and will either fine it, shut it down, or both.
This is where social is in very, very, very (did I say very?) big trouble. For as much as it wants to say “it’s just a platform” – the more it’s been caught with its engineering fingers in the algo-jar to prove the contrary.
The moment you step in to “filter” you have opened the door to legal ramifications on par to what is known as – being a publisher, not just a platform. And publishers have quite the bar to hurdle as to continually prove and remain clear of court ordered fines for reporting misinformation and more.
In other words: free speech violations come with a hefty cost and price tag called fines. And this is not isolated to just content – political advertising, in all its variations, are the most protected.
Mess with how one applies the availability, rate charges or anything else, not to mention any form of shadow banning, and the entire weight of the judicial system under any administration is an inevitability. Hint: I believe that too is now here.
And here’s another: what about collusion?
No, not that one, the other one that has been rampant across much of the tech space and is not some well kept secret.
As a matter of fact, it’s been heralded by many in “The Valley” as their latest and greatest tool for altering things they don’t like, you know, like other constitutionally protected rights. And they’re not alone…
As recently as February in 2018 CNBC™ anchor Andrew Ross Sorkin penned an article for the NYT™ laying out how banks could control gun sales if Washington won’t. (and many wonder why I say CNBC has been a joke ever since…) And since then many of the “Big Tech” names that are unrecognizable to many have been following this script.
Some have pressured banks and credit card companies flooding their social feeds with anti-this or anti-that screeds as to pressure them from doing business. Sadly, some have taken this baiting.
But there may be a problem even greater than the original threats in their social feeds. e.g., anti-trust.
You now have organizations like Salesforce™ CEO Mark Benioff touting that his company will no longer allow the sale of firearms on his platform. The reason? It’s political – he doesn’t like it.
It’s a fair point, but the issue here is: is he (or others at the firm) pressuring other vendors or users who may be connected in other ways, even remotely, from doing business on his platform because their political views don’t align with his?
If so? There’s a problem there.
And the problem for Salesforce (aside from its abysmal profits) is that the DoJ just might want to take a look at how Mr. Benioff’s political views are being administered to lawfully protected commerce. The same may be said for many a credit card company and others.
What’s been going on across all “tech” and “Silicon Valley” as of late is going to come under fire of which there might be repercussions so overwhelming, so vast, and so punitive, many of today’s most outspoken Valley-types may find themselves (and their company) on the wrong end of a growing list of subpoenas.
Don’t think someone (or someones) at the DoJ isn’t just chomping-at-the-bit to see either way. As a matter of prudence, I would be counting on it. Hint: don’t confuse the DoJ with the SEC (Securities and Exchange Commission) that would be like confusing the local cops with Seal Team Six.
The E.U. is already enforcing $Billions of fines – and they’re just getting started. The U.S. is only now just starting to look and act aggressively, and what’s not in “Big Tech’s” favor is they (DoJ) now seem to have the time available.
If there’s one thing for sure that’s a precursor to imply just what any future earnings projections may be, it is this: Possible investigations.
“Crying Towels” anyone?
© 2019 Mark St.Cyr
As I type this the markets are beginning to roil in many different areas across the globe. The latest tariffs announced last night for Mexico seems to have caught everyone by surprise, especially for those thinking their month end positioning was fairly stable. Hint: it’s not – and that’s a very big problem if it becomes a self-fulfilling negative feedback loop.
So in that light let me put up what I see as a possible path for these “markets” if there isn’t some sort of “deal” or emergency action via the Fed et al. To wit:
The above is the S&P 500™ futures as of this writing represented via weekly bars/candles. I have notated areas and projections that I feel speak for themselves.
Will this happen? No one knows, however, if many of the reasons for caution I have been calling for and warning about progress, than this is a very plausible scenario. Again, plausible, possible, probable, __________(fill in your own here) because no one knows. And if they say they do? Don’t walk, but run – and fast.
The real implications of the above are for the reasons I’ve been warning about for what now seems like forever. i.e., How different of a business world are we in should the above play out as hypothesized?
For some it will be devastating. For others, like those of you that have taken my calls for caution and have been preparing, this is where the next round of true opportunities will be born.
As always, we shall see.
© 2019 Mark St.Cyr
For those following my prognostications (e.g., where are we now updates) over the last few weeks. Here is the latest as of this writing, because I feel it’s material. To wit:
As one can see we are now below the line that puts what I deemed “everything on the table” now on said table. A place that just a few months ago was said to be “crazy talk.” And yet, here we are.
To see the chronology you can start by clicking (here)
And, as always, we shall see.
© 2019 Mark St.Cyr