foxex: Probed

The Market Sum | Insight after the bell

By Caleb Silver, Editor in Chief

Monday's Headlines

1. Markets Slide as Nasdaq Dips into a Correction
2. Google and Facebook Face Regulatory Pressure
3. The Trade War's Misery Effect

4. Crypto-preneur Wins Lunch with Buffett
5. Chart of the Day: Inside the Tech Correction

Markets Closed

Dow
24,819.78 +0.02%

S&P
2,744.45 -0.28%

Nasdaq
7,333.02 -1.61%

VIX
18.86 +0.80%

Bitcoin
$8,575.70 -1.49%

US 10-Yr Yield
2.081 -2.85%

Markets Fall as Google, Facebook and Apple Face Probes

U.S. markets ended mixed today as the DJIA managed to squeeze out a small gain. But the news, and it wasn't good, was squarely in the tech sector.

The tech heavy Nasdaq officially fell 1% today and officially into a correction following news that Google, Facebook and Apple are all reportedly facing regulatory inquiries by the Federal government.

Here's what we know:

Alphabet, the parent company of Google, is reportedly facing an antitrust investigation by the U.S. Justice Dept. around its search practices and other businesses. The WSJ broke the story late Friday night, and Alphabet has yet to respond to it. It's not the first time that the company has faced off with regulators, though. The Federal Trade Commission looked into Google in 2012 (before it was reorganized under Alphabet) for anti-competitive practices, but that investigation went nowhere. The European Union, which takes a much harder line on anti-competitive practices, has fined Alphabet a total of $9.3 billion over the past two years for a variety of violations, all of which the company is appealing.

Read more: Alphabet Shares Fall on DOJ Probe

Facebook is also reportedly in the Justice Department's sights, according to the WSJ.

The Journal reports that the FTC, in coordination with the Justice Dept., gained jurisdiction over Facebook as part of the same investigation as the one it is conducting into Alphabet. The FTC has separately been investigating Facebook for violating user privacy in relation to the sale of user data to Cambridge Analytica in the 2016 U.S. presidential elections.

While these cases are not related, they do speak to the larger movement among government regulators investigating Google and Facebook for anti-competitive practices. Both companies dominate online advertising through their platforms. Combined, they account for more than 67% of digital ad revenue, according to eMarketer.

Apple may also be under the same regulatory probe, per Reuters. Reuters reports that the Dept. of Justice gained jurisdiction over Apple as part of the Department's broader investigation into anti-competitive practices of Alphabet and Facebook. Reuters broke the news today just as Apple kicked off its Worldwide Developers Forum in San Jose.

Why it Matters

There has been a broad backlash against the tech giants over the past two years as they have dominated their respective markets. Several of the 2020 U.S. Democratic presidential candidates have called for them to broken up given what they call monopolistic practices and their misuse of user data. The European Commission has moved aggressively against Alphabet and Facebook, but U.S. regulators have shown more bark than bite when it comes to punishing them. All of these companies have deep pockets to defend themselves and lobby elected officials to keep regulators off their backs. Marketwatch tracked the lobbying spend by the FAANG companies over the past ten years, and apart from Netflix, the increased spend is dramatic.

That strategy seems to be fading - at least lately.

For investors, their dominance has delivered plentiful returns. Many millionaires and billionaires have been minted through their ascent. Given their size and weight in stock indexes, ETFs and mutual funds, many retail investors and passive investors have also done quite well. But, as Jimmy Cliff sings, 'The harder they come, they harder they fall'. They fell hard today.

The Trade War's Misery Effect

A new chapter in the trade war opened last week with President Trump's surprise announcement of a 5% tariff on Mexican goods starting on June 10th unless Mexico does more to stem the flow of migrants into the U.S.

Mexico is still considering how to respond to those threats, but the overall impact of these increased tariffs is starting to ricochet through sectors and corporate balance sheets. One key manifestation of this is through what is called margin compression.

Anything that makes a company's costs rise or revenues fall will compress margins and reduce net income. While margins naturally fluctuate, sustained margin pressure will hurt a company's profitability and its stock price.

Increased tariffs have this effect, and we are starting to see it.

Bank of America Merrill Lynch quantifies the impact of margin compression in what it calls its 'Misery Index'. As the Bank puts it, U.S. companies have not been able to exert enough pricing power to offset the rising cost pressures. Margin pressures may be building as pricing power has moderated and wages have accelerated, and unit sales are slowing. This is a recipe for misery.

Crypto Entrepreneur Pays $4.57 Million to Lunch with Buffett

Only in 2019... Justin Sun, the founder of cryptocurrency TRON and the CEO of file-sharing company BitTorrent, won the right to dine with the Oracle of Omaha, a noted crypto-skeptic. Buffett, the legendary value investor, has called Bitcoin and other cryptocurrencies, "rat poison squared", and other superlatives. The proceeds from the charity lunch go to the Glide Foundation to help the homeless in San Francisco, where the software file-sharing company BitTorrent is located.

More News:

Bitcoin Seen Rising $10,000 As Volatility Recalls 2018 Meltdown

6 Takeaways on President Trump's China-Mexico Trade War

Cracker Barrel Reports Earnings Below a Key Moving Average

chart courtesy www.koyfin.com

Nektar Therapeutics shot up almost 9% today, on the company's announcement of updates to one of its most promising clinical programs.

FAANG stocks all took a tumble today, on account of the anti-trust news we discussed above. Centene fell more than 10% today, on news that the healthcare insurance company Humana is not interested in acquiring them.

Word of the Day

Correction

With the Nasdaq falling into a correction today, we thought it would be good to go back and look at the definition.

"In the world of investments, a correction is generally defined as a decline of 10% or greater in the price of a security from its most recent peak. Corrections can happen anywhere including individual stocks, the indexes that follow stocks or sectors, the commodities and currency markets, or any asset that trades on an exchange."

Today in History

June 3rd, 1775 -

The national debt of the U.S. is born, as the Continental Congress authorizes a loan of 6 million pounds sterling to buy gunpowder. Like politicians today, our founding fathers couldn't wait to spend money they didn't have.

William G. Anderson, The Price of Liberty: The Public Debt of the American Revolution (University Press of Virginia, Charlottesville, 1983), p. 6.

The U.S. National Debt, for those interested, is currently over $22 trillion. If you want to be less confused about the national debt in general, I would recommend reading this. It helped me this afternoon.

Chart of the Day: Tech Sell-Off Pressures Nasdaq Into Correction

Tech stocks were hit severely on Monday, starting the new week and month on a sour note and pressuring the tech-heavy Nasdaq Composite index into a correction ahead of other major indexes. A correction is generally defined as a decline of 10% or greater in the price of a security from its most recent peak.

Driving Nasdaq's slide on Monday were reports that major tech firms, including FAANG stocks: Facebook (FB), Amazon (AMZN), Apple (AAPL), and Alphabet (GOOGL), will be scrutinized more closely by U.S. government regulators. More specifically, the U.S. Department of Justice will be initiating an antitrust probe of Alphabet as well as looking into the competitive practices of Apple. Further, the U.S. Federal Trade Commission will reportedly be reviewing Facebook and Amazon to assess their practices with respect to competition.

This barrage of reports suggesting stepped-up regulatory oversight on key companies made investors skittish on Monday. Of the FAANGs, FB and GOOGL were hit the hardest at -7.51% and -6.12%, respectively, on Monday alone. Meanwhile, AAPL's hit was milder at -1.01% and AMZN was somewhere in the middle at -4.64%.

As noted, these losses combined to bring down the Nasdaq Composite by 1.61% on Monday, pressuring the index well into correction territory. The chart above shows the QQQ ETF, which tracks the smaller NASDAQ-100 index. As shown on the chart, price was already down at its 200-day moving average before Monday's extended plunge. After the fall, QQQ broke cleanly below the moving average and settled around -10.7% below the new all-time highs of late April and early May. In short, the combination of a breakdown below the 200-day moving average and the beginnings of a correction is an ominous sign that does not bode well in the near-term for tech stocks or the market as a whole.