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This week: Facebook Under Fire; Spring Rotation; Virus Fatality Rate; Secession.
Facebook Under Fire
Facebook was sued last week by the Federal Trade Commission and by dozens of US states charging that it engaged in monopolistic conduct with its acquisition and management of Instagram and WhatsApp. A usual defense of Facebook in the past was that it is difficult to call it a monopolist because its service is free to its non-business members. This ignores that Facebook mines members’ content and browsing history to sell ads targeted at these same members. It follows therefore that a member’s content and their browsing history are monetizable assets and that Facebook should pay members for the right to mine them.
The fact that Facebook does not pay members suggests that it is charging them a monopolistic price exactly equal to what it would pay them for those assets. Whether this user fee is low, fair or high (as in monopolistically high) can be ascertained by looking at Facebook’s profit margins. Facebook is by far the winner in this non-negotiated transaction, considering that the company clocks a gross margin of 80%+, well above the margins of other very profitable companies such as Google/Alphabet at 55% and Microsoft at 65%. We made the case in more detail last year in Tech Giants Should Pay Users.
MORE on this topic >>> Andrew Yang is pushing Big Tech to pay users for data.
The rate of growth in coronavirus US confirmed cases and deaths appears to be leveling off (see charts) but the topping off process may take several more days or weeks before we see appreciable declines in the seven-year averages. Nonetheless, a big part of optimism is to look beyond the near term and to cast our sights on the probable situation of March, April and beyond.
By then, vaccines will become widely available to the general population and seasonality will help the virus recede in most regions of the country. The impact on the markets should be swift. Longer duration treasury yields will rise to more ‘normal’ levels with the ten-year moving from today’s 0.9% to its pre-pandemic level of 2% or higher. This would trigger the mother of all sector rotations in the stock market with the major winners of 2020 (growth and tech names) giving back some of their gains and the laggards (energy, retail and travel) recovering rapidly. Recall in this regard the violent upswings in the springs of 2003 and 2009 when sentiment about those crises (Iraq war, financial crisis) hit bottom and reversed sharply.
The proximate causes for market moves would then be as follows. 1) Rising rates would depress the valuation multiples of growth names as earnings prospects improve in other sectors. It is sobering that a stock now trading at 1,000x earnings would still be trading at 100x earnings if it declined by 90%. 2) At the other end of the spectrum, companies that were sold off because of worries that they may not have enough cash to weather the downturn would suddenly look viable again and investors’ opinion would shift from “could soon be bankrupt” to “will survive and is looking cheap”. This sort of shift has led to big surges in cyclicals in the past.
Overall, given the large weighting of growth and tech names, it could mean that 2021 will be an average or below average year for the overall stock market, especially if higher taxes are brought back by the Biden/Harris team. In hindsight, it may well look like Congress and the Federal Reserve overdid the economic stimulus, though clearly not for those most suffering from the economic impact of the pandemic. Perhaps there was a way to better target the fiscal stimulus to those most in need, rather than risk another asset bubble.
Virus Fatality Rate
We do not yet know the actual fatality rate of the coronavirus. Most experts place it between 0.5% and 1% of cases. Until then, we only have imperfect empirical data, in this case the ratio of actual deaths to 21-days-ago confirmed cases. As shown in the chart, this ratio has been trending down to a new low of 1.4% in the US (ignoring the artificial lower low during the under-reported Thanksgiving holiday). Even this number is objectionable to some people who argue that the number of virus deaths may be exaggerated by the way hospitals classify new deaths of people with severe comorbidities. This argument is thrown on its head by reports that overall excess deaths from all causes this year are higher than a multi-year average (say 2015-19) to a degree that is consistent with the disclosed virus figures. Whatever the case, what is of interest here is not just the raw percentage shown in the chart but the fact that it has been declining. This means that therapies are improving and will also contribute to a better spring.
The odds are that no state will secede from the Union this time around, notwithstanding calls from the extremist fringe. But language can have its own deleterious effects. What was unmentionable last year is now part of the discourse. There are two views about the actual damage being caused. One is that the airing of such inflammatory calls trivializes what was previously unthinkable and makes its occurrence more plausible in the future, even if not the near future. Another is that a country with strong institutions such as the United States has enough guardrails and shock absorbers to get past this rhetoric unscathed and emerge on the other side little changed from the experience.
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