Techs sold off at fastest pace since 2007

Outflows from PowerShares QQQ Trust Series 1, which tracks the Nasdaq 100 Index topped $3.7 billion for the five sessions ending July 28, the most since early November 2007. On Thursday [..] QQQ suffered an intraday selloff of more than 2 percent led by Amazon.com Inc., with investors dumping the e-commerce giant ahead of its quarterly earnings report. Also that afternoon, JPMorgan Chase & Co. quant Marko Kolanovic warned that investors had a “limited window” to position for a pickup in volatility.

In my humble view the markets are probably due for significantly more selling. Everything is expensive, hitting all time highs without much of a pullback between rallies. Most investment managers are bullish stocks, and margin debt (to borrow and buy stocks) is at record levels. Earnings expanded more due to buybacks of shares than actual sales improvement. As a result of this, and more, I think we’re due for a breather, if not an outright correction. But I could always be 100% wrong.

Full disclosure: Short NASDAQ 100.

Source: https://www.bloomberg.com/news/articles/2017-07-31/investors-flee-tech-giants-at-fastest-pace-since-november-2007

Proctor and Gamble slashes digital ad spend by over $100M

Procter & Gamble Co. (PG -0.52%) said that its move to cut more than $100 million in digital marketing spend in the June quarter had little impact on its business, proving that those digital ads were largely ineffective.

Almost all of the consumer product giant’s advertising cuts in the period came from digital, finance chief Jon Moeller said on its earnings call Thursday. The company targeted ads that could wind up on sites with fake traffic from software known as “bots,” or those with objectionable content.

The question here is whether or not this is the beginning of a larger reconsideration of digital advertising value — and its translation in to meaningful sales of products. Facebook targeted advertising, advertising directly on content producing websites and objectionable content websites were named specifically as areas where scaling back was occurring en masse.

The Proctor and Gamble cuts will probably send some shock waves that cause others to reconsider spending in similar ways. I think digital ad spending, especially on content producing sites and highly targeted ads, is an area that deserves attention as we keep our eyes on an expensive domestic stock market that was led higher in part by expansion of ad revenue in the tech sector.

Full disclosure: No position long or short in Proctor and Gamble. Short position against NASDAQ 100.

Source: https://www.wsj.com/articles/p-g-cuts-more-than-100-million-in-largely-ineffective-digital-ads-1501191104

Big tobacco gets sold hard on FDA nicotine reduction talk

With U.S. officials pushing to cut the nicotine in cigarettes below addictive levels, there’s new urgency to switch to next-generation smoking products that are higher-tech — and purportedly lower-risk.

Philip Morris International Inc. and other big tobacco companies have been planning for this future for years, spending billions of dollars developing alternatives to combustible cigarettes. But a regulatory crackdown could force them to speed up those efforts — and convince investors that Americans are ready to ditch traditional smokes after more than a century of puffing away.

How unfortunate that companies who make their profits from destroying the health of addicted people are suffering. Perhaps they should have considered investing in e-cigarette technology rather than tobacco years ago. That market share has already been captured by other companies. Traditional tobacco cigarette producers are on life support. And reinvention seems unlikely given that they’re so late to the game.

Full disclosure: No positions in any tobacco companies long or short.

Source: https://www.bloomberg.com/news/articles/2017-07-28/altria-bat-routed-as-fda-seeks-tougher-cigarette-regulations

US fiscal policy disappointment to drive dollar lower?

The U.S. gross domestic product report for the second quarter of 2017 confirmed that economic growth accelerated to a 2.6 percent annualized rate from the first quarter’s sluggish 1.2 percent pace. That should reassure equity investors, but dollar bulls face a number of significant headwinds, including weak inflation, bearish trading technicals and now potential for U.S. fiscal policy disappointment.

It’s been a tough year for the greenback, which has already fallen some 9 percent as measured by the Bloomberg Dollar Spot Index. Add to that the dour outlook issued by the International Monetary Fund, which earlier this week lowered its forecasts for U.S. GDP growth in 2017 to 2.1 percent from 2.3 percent, and cut its outlook for 2018 to 2.1 percent from 2.5 percent.

Source: https://www.bloomberg.com/view/articles/2017-07-28/stronger-growth-can-t-save-dollar-as-policy-risks-rise

USD index testing major support area: 93

US dollar index chart Five year / weekly chart: The US dollar index is testing a major support area of 93. Below that is 84-85. Then 79 comes in to view. Break below 93 could be major. Index is very oversold now, so not surprised to see a pop, and then drop. Momentum could be big on the way down.

Further, in my technical view USD had too much trouble getting much above 100. There’s a solid ceiling in place, while support is breaking down. Lots of potential momentum to the downside given the catalysts: dysfunctional gov’t, enormous debt burden, no signs of Fed effectively tightening or reducing balance sheet in meaningful way, and huge amounts of capital seeking higher returns will likely go to EM and EU.

Are emerging markets a good bet right now?

US equities have a smoothed P/E of approximately 24 whereas emerging markets average P/E is 16. Combine that with the potential of the US dollar uptrend (which started in summer of 2014) unwinding (adding emerging market native currency appreciation potential) and higher yields in emerging markets (an average of about 6.5% based on my math).

It seems like there is an opportunity here, if even only for normalization of valuations. I would suspect that liquidity would continue to be drawn, perhaps at an even faster pace, to EM equities and bonds (as it has been since early 2016) as the US dollar rally unwinds.

Full disclosure: I have been investing in EM equities and bonds since January, 2016 when I felt an enormous opportunity was on the horizon.

The cloud is an enormous security risk

The cloud is so massively insecure (by design) that a massive data breach will happen. From a technological perspective, the host (or cloud provider) can read the memory and disk space of every guest (client). Therefore no form of encryption or data protection is actually secure.

With that in mind, all PII, financial and other data stored in the cloud will be breached eventually, if it has not been already. It’s just a matter of a malicious hacker or devious employee at a big cloud company gaining host-level access.

Be careful both trusting your information to the cloud (where you have a choice) as well as investing in companies that are completely cloud-driven. We may see an unexpected upset when the realization that virtualization isn’t nearly as secure as once thought hits.

Is digital marketing delivering its promise of value to clients?

Google’s earnings revealed that their advertising is worth less (per bid vs Q1), while Facebook also simultaneously said their ad bids are going up. Frankly I’m not so sure that indicates market share / value transfer or more funny accounting.

But I will say this: the world of digital marketing needs an enormous reboot of transparency and quality. Right now if I am advertising on a website and someone clicks my ad, but immediately leaves before seeing any content (less a pixel or two) that counts. That allows automated click farms to partially load content (to save bandwidth) and rapidly click on a multitude of ads around the web to generate revenue for content generators (websites that advertise with Google, Facebook, etc).

That wouldn’t seem like much of a problem, except that 60% of clicks behave that way. That doesn’t even account for what is described as detected click fraud. That’s about 20% of the digital ad spend. So, according to those metrics, about of remaining clicks 20% on ads are viewed by humans and of them perhaps 1%-2% lead to sales.

Now the math gets interesting. Recent studies claim at least $16.4B is lost to click fraud (probably an extremely low ball figure, but let’s roll with it). The smoothed P/E of techs in digital marketing (like Google) is about 33. Google has an average profit margin of about 20%. So $16.4B * 33 = $541.2 billion. 20% of that is $108.24 billion.

That means at least $108.24 billion of market capitalization in this concentrated tech sector is at risk if just click fraud is exposed and eliminated. That doesn’t address the other 60% of ad clicks that are effectively meaningless. That would add another $324 billion of market capitalization at risk. And again, I feel these are low ball figures.

The biggest advertising companies these days are Google, Facebook, Microsoft and Verizon. So I would be most concerned about their long term performance.

Full disclosure: I have a short position against the NASDAQ 100 at the time of writing this article.

Verizon beats earnings on account of unlimited data plans

Yes, when you give people what they want, they will buy your service. This is not really news, as much as observational humor. Verizon removed these unlimited data plans because they were eager to capitalize on metered plans (whereas heavy users pay a lot more money than they would on an unlimited plan).

I applaud Verizon for listening to their customers and bringing the unlimited data plans back. I’m also happy to see them bringing gigabit (or near gigabit) FiOS to many metropolitan customers on the Atlantic coast.

Full disclosure: No position long or short on Verizon shares, preferred shares or corporate bonds.

Karl Denninger at Market Ticker claims Facebook funny business

 

Now tell me what you believe the probability is that 83% of every possible person over the age of 15, which I remind you includes a lot of people who have no high-speed Internet connectivity at all, a fair number of people who are effectively incapacitated due to age and more — in other words everyone over the age of 15 that is not in prison — is on Facebook monthly.

Source: http://market-ticker.org/akcs-www?post=232269