Tesla & Facebook Fall After Hours

Facebook’s 2018 Spending Growth Disappoints

Facebook - FB reported earnings on Wednesday; it’s the second to last major tech firm to do so. Apple will be the last one on Thursday. Tech is about 24% of the S&P 500 and it’s about 24% of total earnings. Facebook reported a great result, but was hindered by the estimate for 2018 expenses. The stock ended up falling 1.87% in the after hours market. I wouldn’t be surprised if it fell further on Thursday because it’s at its all-time high. The company reported $1.59 in EPS which beat estimates for $1.28. Revenues were up 47% to $10.3 billion, beating estimates for $9.84 billion. Monthly active users were 2.08 billion which beat estimates for 2.07 billion. As you can see in the chart below, daily active users were 1.368 billion. It’s amazing to see daily active users in America and Canada were up about 4% year over year which is impressive given the saturation. Daily active user growth as a whole was up 16% year over year. This is no longer a user growth story as it’s unlikely the company will match that growth next year given that the number of users is closing in on the number of people with internet access.

As I mentioned, the company’s spending guidance hurt the stock. It wasn’t pleasant to hear Zuckerberg say protecting the community is more important than profits. Obviously, user experience is critical, but the way he phrased it means profits will be less than they would have been without these new changes. The company is doubling the number of workers who keep hate speech and fake news off its sites to 20,000 by the end of the year. Capex will also double because of more spending on security and original content. Because Facebook has seen a decline in original posting, the company needs to pay for live shows and other content to get people to stay on the site. The company is in a better situation than Twitter obviously because at least it makes money per user. Either way, this is still a new risk the company faces because it could have sunk costs from failed shows.

Tesla Reports A Big Loss

Tesla - TSLA is one of the momentum names, so its performance is important to my analysis of whether investors feel like taking risks. To be clear, if Tesla were to fail, there wouldn’t be much of an impact as compared to any of the big names like Amazon or Apple. Tesla is just a car company which doesn’t sell many of them. This brings us to the disappointment. The company is trying to increase its Model 3 production, but it keeps missing estimates. The company has only made 260 Model 3 cars since the launch in the summer which is a longshot away from the goal of making 1,500 cars in September. Instead the company is in disarray as it fired 700 people and still relies on hand made parts. The goal of making 10,000 cars per week has been forgotten and it moved the goal of making 5,000 cars per week from late 2017 to early 2018. The company lost $619 million in Q3. In true Tesla fashion, the company is showing off a semi-truck on November 16th even as it can’t properly launch the Model 3.

President Trump Picks Powell Fed Doesn’t Raise Rates

Unsurprisingly, President Trump picked Powell as Fed chair. Powell is a Republican, but that party label doesn’t mean much because he will steer policy in the same direction as Yellen. On the regulatory front, he has a great deal of experience. He is less in favor of regulations than Yellen. He said "the post-crisis reform program has been mostly completed and has mostly been successful. I think it's our obligation now, as we reach completion of it, to look back over it and ask what aspects of it may be redundant or inefficient or utterly essential and should be protected down to every letter. But there are going to be some adjustments and I think that's only appropriate." This means the banks should rally on the news of his appointment. The regional bank index fell 0.49% on Wednesday meaning it already priced Powell’s selection in or it has yet to fully do so.

Because Powell doesn’t have as much experience on the monetary policy side, the most interesting point will be when the economic conditions change. With the economy having low, but solid growth with below 2% inflation, he can continue the exact same policies as Yellen. Rates will go up 50 basis points in 2018 and the balance sheet will be unwound as expected. However, once these conditions change, he will need to show off his own viewpoint on monetary policy which could differ from Yellen. He has a background in the private sector, so his decision making in the long run could be different from hers.

As expected, the Fed didn’t raise rates, but signaled it would do so in December. There wasn’t much new wording in the statement. The changes mostly were about how the hurricanes have made temporary impacts on the economy. The Fed only said the balance sheet unwind is proceeding. There’s nothing more to say because the economy is stable and stocks are rising consistently. This brings us to the final point which is that some Fed members are worried about how the Fed’s hawkishness has surprisingly led to looser financial conditions. This is the opposite of what you’d expect. Frankly, this is good news because the Fed has gotten away from ZIRP without disturbing the market. The goal shouldn’t be to make stocks fall or for the banks to tighten their lending standards. This situation likely won’t continue; it mostly depends on policy. If rates are raised 50 basis points, it would put them slightly above the natural rate. I wouldn’t categorize that as hawkish policy. The economic party will continue until inflation increases, causing the Fed to really step on the gas pedal and raise rates considerably.

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