Facebook, the Fed and French bureaucracy

Posted On Mar 21, 2018 By Dave Gonigam

  • Facebook’s slide: It’s rubbing off on other tech stocks
  • The Fed’s choice: Keep punishing savers or choke off the recovery?
  • Trump prepares next volley in trade wars: How will China respond?
  • French baker fined for working a seven-day week in high season
  • Crude approaches $65… steel buyer sees trouble ahead… reader seeks advice from The 5 on political activism (!)… and more!

“Sometimes, investors need an excuse to sell,” says Agora Financial chart hound Greg Guenthner. “The Facebook debacle is beginning to look like one of these critical events.”

For the moment, FB has arrested the free fall that began the moment trading opened Monday morning. Shares are holding steady just above $168.

But ouch — they were near $185 on Friday before all hell broke loose with the Cambridge Analytica story. (Considering the nearly 24/7 coverage the story’s getting, we won’t rehash the details here. You’re welcome.)

Here’s the thing: FB shares already appeared to be in trouble last week before the news emerged.

“It was the only member of the FANGs that had failed to post double-digit gains so far this year,” Greg says. “While most stocks in the tech space blasted higher, Facebook shares were stuck in neutral.”

Thus the excuse to sell. “The Facebook revelations have triggered a wave of anti-tech sentiment that’s playing out in real-time. Reports detailing Facebook’s slide and its potential impact on the ‘overvalued’ tech sector are the top stories on virtually every finance site.”

Now comes the spillover effect: “The selling is already spreading to other social media stocks that have little to do with the Facebook scandal,” Greg goes on.

“Twitter Inc. (TWTR) and Snap Inc. (SNAP) are now both dropping in sympathy with the mighty Facebook. Twitter cratered more than 10% yesterday, while shares of SNAP lost nearly 3%.”

Social Media chart

As it happens, Greg urged his Rude Awakening PRO readers to buy Twitter back in late October — a trade that proved prescient. “The social media also-ran that never did anything right had doubled its share price in just six months and even booked its first profit earlier this year.” Snap also delivered strong quarterly numbers and found new channels to attract ad dollars.

Back to the present: “I thought Facebook’s days of bullying Twitter and Snap shares had ended as these two stocks posted impressive comebacks,” says Greg. “But that’s clearly not the case. The social media sector is burning. As contagion sets in, we’ll have to adjust our strategy while the Facebook drama continues to play out.”

Thus, Greg is cutting loose that TWTR trade today. Yes, the drop on that chart yesterday was painful… but it’s still a 50% gain in five months. “For now, we’re going to stay away from the social media space and wait for the storm to clear. This social media nightmare could get a lot worse before all is said and done.”

[Ed. note: Typically, Greg’s Rude Awakening PRO is offered only as an “add-on” to other subscriptions. But it’s a fine service on its own merits. It offers daily trading guidance — stocks only, no options. It’s a quick read that hits your inbox about a half-hour before the opening bell. Really, it’s an unbeatable value.]

The major U.S. stock indexes are treading water in advance of the Big Fed Announcement due this afternoon.

The Dow is down slightly around 24,700. The Nasdaq is up slightly at 7,389. Gold is staging a rally at $1,320 and crude continues to power higher — a barrel of West Texas Intermediate now only 20 cents away from $65.

As we suspected last week, the scare over Google’s pending ban on crypto ads is proving to be short-lived; bitcoin is back above $9,000.

The only economic number of note is existing home sales — up 3% from January to February, which is on par with expectations. Supply remains thin at only 3.4 months.

But again, it’s all about the Fed today. The Fed’s Open Market Committee will issue its every-six-weeks policy statement around the time this episode of The 5 hits your inbox. Jerome Powell will deliver his first press conference as Fed chairman a short time later.

It’s a lead-pipe cinch the FOMC will jack up the fed funds rate another quarter point. The only drama is whether the pooh-bahs will signal two more rate increases this year or three.

For perspective about what’s at stake, we present two charts of the fed funds rate — one that goes back three years and another that goes back a decade.

A Matter of Perspective

Yes, interest rates are rising. But in the context of the pre-2008 era, they’re still at epic lows. Savers are still being punished relentlessly.

“Savers — particularly retirees and those approaching retirement age — are hurt by lower interest rates,” says income maven Zach Scheidt. “After all, low rates make it tough to get enough cash flow from your savings to pay for day-to-day expenses. The Fed is under pressure to raise rates to help with this problem. And another reason to hike rates now is to give the Fed some room to lower rates later if the economy pulls back.”

On the other hand, raising rates could choke off the economic boom that’s underway. (We’ll leave it to others today to debate the strength of that boom, but it’s a boom nonetheless.)

“Higher interest rates would make it harder for small businesses to get access to the capital they need for growth opportunities,” says Zach. “And that could cut into hiring and new opportunities for employment in the U.S.”

Consumers could likewise suffer: “If rates trend higher, it means payments on credit card balances and lines of credit could increase. Homeowners who have adjustable-rate mortgages will see their mortgage payments go up. And it could be tougher for individuals to buy new homes if mortgage rates are increasing.”

So there’s some context to chew on for when the Fed’s decision comes out. We’ll follow up tomorrow…

Here comes the next round of China-targeted trade penalties.

Several financial media outlets report the White House will make an announcement tomorrow. The details are murky, but it appears the idea is to push back against the alleged Chinese theft of “intellectual property” — i.e., technology patents.

“Chinese theft of U.S. intellectual property has amounted to a much larger attack on the U.S. economy than subsidized steel and solar panels,” says our macro authority Jim Rickards. “Official estimates of the value of intellectual property stolen by China from the U.S. exceed $1 trillion.

“Trump’s proposed remedy for this theft involves massive monetary fines rather than tariffs. Still, the means of collecting those fines from China operate economically like a tax or tariff on Chinese goods.”

How will Beijing respond? “China will retaliate for U.S. sanctions not with their own tariffs, but with asymmetric financial warfare,” says Jim — “including diversifying reserves away from U.S. Treasuries into gold and European bonds, and with restrictions on U.S. direct foreign investment in China. Both sides can continue the trade war in cyberspace with ongoing reciprocal theft of intellectual property and intrusions into critical infrastructure.”

What a stereotypically French business story.

A baker named Cedric Vaivre has been fined 3,000 euros — nearly $3,700 — because he worked a seven-day week last summer.

In France, a day of rest isn’t just something God prescribed in the Garden of Eden — it’s man’s law. And it’s enforced.

Vaivre’s bakery is in the small northeastern town of Lusigny-sur-Barse. Tourists flock there in the summer, with Orient Forest Regional Nature Park nearby. Vaivre understandably figured he’d work a little extra to accommodate the crowds.

Vaivre is appealing, in hopes the fine will be reduced or cancelled. The townspeople are behind him. “Let’s have some common sense,” says Mayor Christian Branle. “We’re in a small rural community with no other baker. Furthermore, his business is critical to the important tourist trade.”

For better or worse, we poked a stick back in the hornet’s nest of tariffs in yesterday’s mailbag… and generated still more response.

“I am not sure where your reader is basing the cost of steel from,” a reader writes. “I am guessing raw material. People don’t understand that 25% tariff does not equate to 25% increase in material costs.

“I am a project manager for a subcontractor in the steel industry on the West Coast. December cost of fabricated rebar was in the range of $0.45 /pound. That same fabricated rebar today is costing $0.75–0.80 /pound.

“You can see that is not a 25% increase.

“Supply and demand is going to play a big part in cost of material. At this point, we don’t know where the bottom is — where developers are going to mothball projects.

“Eventually, the end user is going to pay for the increase. At some point construction will stall, just as it did in 2008.”

“About those tariffs and Fed’s inflation target — perhaps they go hand in hand!” a reader speculates.

“It looks like POTUS has found a way to pay for those tax cuts after all. ‘What one hand giveth the other takes away.’ There is almost nothing that doesn’t use steel or aluminum either directly in manufacturing or indirectly in transportation (ships, trucks, trains and planes) — all require mass quantities.

“Without steel and aluminum you can kiss petroleum products and electricity goodbye. Direct-use products will see near-term price increases. Indirect will take longer or not at all if the tariffs are short-lived. If not, then no increase until lifecycle replacement. Then everything jumps in price and the inflation genie is out of the bottle, or can in this case.

“No matter what it looks like, the tariffs will throw the Fed the inflation bone it’s been wanting. POTUS indeed appears smarter than he is given credit for and is in one respect a hell of a politician after all. Who else could give everyone a tax cut and then take it away via tariffs all while being applauded for doing so by all the ‘Joe the Plumber’ types? Unless it really ends up costing significant jobs this is a political win for POTUS. The only ones really b*tching about it are the big, bad, evil corporations that don’t share their wealth with the peasants. That will be the spin anyway.

“There is, however, a simple way this can backfire! All those countries can just preemptively raise their pre-export prices by the same exact 10% and 25%. POTUS still gets his political win and the Fed gets its inflation genie, but there is no new revenue inflow and thus no tax cut offset. Where it really goes south is when someone points out (and they will) that POTUS just handed all those countries a big, fat income increase at U.S. taxpayer expense.

“I can hardly wait to see how this finally plays out.”

“I’ve been a subscriber for a while. I like your product,” a reader writes.

[Here comes the “but”…]

“I’m antsy about getting into the political arena but still want to try to do some good. Any ideas you have about how I could start doing that would be greatly appreciated.

[What?!]

“Second, I’d like your opinion about an idea I have: Why doesn’t the business world scout potential employees the way athletic teams scout athletes? I.e., every student is required to take general prep classes and then they get aptitude-tested (the way the military tests for rate training), and the end-user businesses have scouts that go out and offer promising students in their realm a scholarship for the rest of their training.

“The catch is that they have to agree to work for that company for a ‘payback’ period (military style again).”

The 5: If you’re looking for advice on political activism, you’ve come to the wrong place, brother. And we question how long you’ve been reading us!

Our position has long been that there’s little you can do about the actions of politicians and central bankers — other than navigate the land mines they’ve strewn in your financial road as best you can. That’s what we aim to help with.

We’re not sure what you’re getting at with your second idea. Suffice it to say that government incentives have turned higher education into a massive racket extracting wealth from the middle class — maybe even worse than health care, if that’s possible…

Best regards,

David Gonigam

Dave Gonigam
The 5 Min. Forecast

P.S. As you know, Jim Rickards isn’t the biggest fan of cryptocurrencies.

But he’s big on the concept of the blockchain. And he’s especially keen on one crypto he believes has harnessed next-gen blockchain technology. He believes you could transform a small grubstake into a $2.7 million fortune.

Check it out right here — no long video to watch.


Other Articles In 5 Min. Forecast

New Daily Issue Posted 3 Days Ago By Dave Gonigam

While it’s unlikely the leisure suit will make a comeback anytime soon, “stagflation” is lurking in the shadows — ready to make its presence felt at the very time Donald Trump would be seeking a second term.

Read This Daily Issue

New Daily Issue Posted 7 Days Ago By Dave Gonigam

The takeaway from Zach Scheidt’s discussions on the sidelines of the MoneyShow: “If the beer industry doesn’t take control of the booming marijuana industry, they’re done for.”

Read This Daily Issue