Big Win For FAANG - Without the N
Congressional testimony for the big internet companies was Wednesday. It was supposed to be Monday, but it was postponed due to the death of John Lewis. This didn’t have the typical pomp and circumstance of normal hearings because it wasn’t in person. It’s tougher to grill someone when they aren’t in the same room. Even though it seems like Congress wants to get tough on these companies, the hearing was a complete miss. Problem is the lawmakers either want to make themselves look tough or just don’t know how technology works.
This isn’t about political parties. Both sides want to get tough on big tech, but neither side has any idea how they do business. They likely know less than the average person about tech. CEOs answered their questions very easily. This isn’t to say these companies won’t face antitrust legislation in the next few years.
Keep in mind, the market doesn’t care about fines. The government would need to change the laws on competition to hurt them. Obviously, the worst case scenario is if they are broken up. That’s virtually impossible. It’s not a serious risk.
If you are bearish on the big tech companies because they face anti-competition legislation, think again. There won’t be a threat from the American government in the next few quarters. It might come at some point, but the better reason to be bearish is their growth deceleration and their expensive valuations.
Apple relies on iPhone sales which have been falling. There are reports that China had a huge rebound in Q2 as iPhone SE did really well. Let’s see if that’s accurate when they report Thursday. Apple is being criticized for its 30% App Store fee. I don’t think Apple will be forced to lower that anytime soon. It’s actually normal for a platform to charge that rate.
As you can see from the chart above, Facebook’s spending on lobbying per year has increased. The more the company spends, the lower the risk of something terrible being pursued such as forcing the company to sell Instagram. Lobbyists don’t control the law, but in this case, they are probably effective because they provide the government information which is useful since the government has such a poor understanding of what these companies do.
No Rate Hike
Fed didn’t change rates and didn’t change guidance. Powell said there were tools left in the tool chest. Investors believe the Fed will do whatever it takes, so the Fed doesn’t need to prove anything. Powell mentioned the recent decline in consumer sentiment. But he also said he was waiting for confirmation from retail sales and the BLS monthly labor report before making a prognostication. We already know they will be weak.
Some see an upturn coming in the fall. The July data will be terrible though. Powell probably sees this, but he’s not willing to go on record with a bearish statement until the data comes out. He doesn’t want to predict results since there’s no benefit. By the time the next Fed meeting happens on September 16th, the data will already show a rebound, so it won’t need to comment on this blip.
Labor Market Already Improving
The labor market had a rough July. As you can see from the chart below, the household pulse survey shows there were 6.7 million fewer jobs between survey weeks. If you make a seasonal adjustment based on prior results, job losses might be between 2.2 million and 4.7 million. There will likely be 2 million jobs lost just to be conservative.
Headlines are going to be terrible. Perma bears will claim the stock market is rigged if it doesn’t fall on the day of the announcement which is next Friday. It's obvious that this report is meaningless and the market knows it.
As you can see from the chart below, household pulse survey from the week of July 21st, which isn’t in the BLS report, had a 1.9 million increase in jobs. This is the beginning of an intermediate term trend. Business cycle is about to turn higher. The economy will have a strong 2nd half.
It will be helped by the stimulus and the decline in COVID-19 cases. Number of daily new COVID-19 cases is going to drop dramatically in August. We can expect life to go back to normal by the holidays.
Cases Fall Again
Wednesday showed another weekly decline in cases, but an increase in deaths as expected. Cases will gradually decline in the next few weeks even as testing increases. Positive rate will fall as COVID-19 will be under control in the hotspots. There were 66,921 new cases which was down from 71,967 last Wednesday. There were 1,485 new deaths which is the highest since May 27th. Some predicted the 7 day average of deaths would get to 1,000 a couple weeks ago. It’s now 1,022.
Next prediction is for it to peak this week. Number of new deaths is going to plummet in August as cases fall and treatments improve. We are on the cusp of deaths not being an issue. Once deaths are very minimal, people will go back to normal. 7 day average of deaths per day will fall to 300 by the end of September.
Conclusion
Congressional testimony did nothing to the big tech companies. Their stocks rallied in the face of the questions. Fed meeting didn’t matter as the Fed stayed dovish. Labor market is starting to improve already.
Frankly, most didn’t expect an improvement until either next week or the week after. This is a great sign. Number of COVID-19 cases continued to fall which means the number of deaths should start to decline next week.
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