Wow is this edition gonna be a hot one or what? It’s June, the fake meat is sizzling on the grill, and Jerome Powell is an old man. That’s just finance for ya. In this episode, we have some serious content to dive into so let’s get started.
This Week in Economic Uncertainty
Friday’s Jobs Report: Non-farm payrolls added 75,000 jobs in May, coming in far below the 180,000 number everyone expected (wage growth was also stagnant). Compare this to the ridiculous run of job and wage growth over the past decade, and some are calling Friday’s DOL report “the clearest evidence yet” of a slowdown.
Bond Yields: 10-year US Treasury yields are hitting new lows for the year around 2%. Lower bond yields can be a sign of economic uncertainty because it means there’s higher investor demand for low-risk debt.
The market reacted to this news by inking its best week since November. As we’re writing this, the S&P is continuing its push toward the 2,900 range. Markets have reacted positively to the improved chance the FED will cut rates and the seemingly quick resolution to the Mexico situation.
However, President Trump just threatened that he could reimpose tariffs on Mexico if he saw fit, even after Mexico agreed to increase migration control measures. He also threatened to impose another round of tariffs on China unless Xi Jinping agrees to meet with him in Japan later this month. It seems that G20 meeting didn’t go too well after all. Click here to find out more about the causes and effects of the trade war everyone is talking about.
“Tariffs are a beautiful thing when you are the piggy bank”
Economists Everywhere
Zucc on this, Big Tech
“Antitrust law now stands at its most fluid and negotiable moment in a generation,”
Daniel Crane, law professor at The University of Michigan
Antitrust laws are designed to prevent companies from becoming too powerful. As a result, the Department of Justice has the authority to block mergers and acquisitions, or in extreme cases force divestitures to prevent monopolies, which hurt society in a number of ways:
- Higher prices for consumers
- Less innovation in key industries
- Fewer small businesses
- Outsized corporate influence on democracy
For the past 40 years, Washington has remained pretty lax in regard to antitrust enforcement and would defer the fate of large companies to the free market unless “consumer welfare” was at stake. The last so-called monopoly to be broken up was AT&T in 1982.
That paradigm has been flipped on its head, as both conservative and liberal policy makers have become weary of four tech giants: Google, Apple, Amazon, and Facebook. Last Monday, the Federal Trade Commish (FTC) and the Department of Justice (DOJ) launched a series of investigations and suits against Silicon Valley’s biggest firms, causing the four stocks mentioned above to lose a combined $130 Billion in market cap in just one session.
Because tech antitrust is a hotly debated topic (it’s even the topic at the national high school debate tournament this month) with large ramifications over the stock market and our daily lives, we’re going to go a little more in depth on this subject. Before we dive into specifics, here are a few general notes to be aware of.
First, monopolies/oligopolies are ubiquitous. The top four airlines control 75% of the market. The top four US education companies control around 90% of the market. The top four railroad companies control 90% of the market. The airplane manufacturing industry is a duopoly. 90% of US media outlets are owned by six companies. There are plenty of other examples in important industries, but you get the point: massive tech companies are bringing the debate to the table, but their level of dominance isn’t unique – it’s just more controversial.
Second, in this renewed antitrust showdown, there are three factions:
- Team Pocahontas: This squad wants Alphabet, Amazon, Facebook, and Apple to split up into a bunch of smaller companies. It’s widely considered to be more of a catchphrase than a realistic solution, but many Democratic Party leaders take that stance.
- Team Whatever: Free market chillers don’t call for any additional regulation and believe the current system will keep tech companies in check.
- Team It’s Complicated: Centrist policymakers are calling for heightened regulation but oppose complete breakups of the companies in question. Some level of government intervention is garnering bipartisan support, especially when it comes to digital platforms with media influence – as both parties believe the internet is fueling voter misinformation and political polarization while eroding everyone’s personal privacy. These issues could be mitigated with forward thinking legislation.
Third, speaking of forward looking legislation, Europe has been on the antitrust wave for a while. The EU has slapped Google with three antitrust fines in three years, and they’ve also passed forward looking tech governance policies such as GDPR and a set of AI Ethics Guidelines.
With that, we’ll dive into each of the four tech companies’ legal controversies, beginning with Apple.
Apple: We’ll be quick here because Apple doesn’t hold monopoly status in any of their business units with the possible exception of their App Store. Basically, when an app developer wants to put their app on the App Store, they have to give Apple a 30% cut of the revenue, which is debatably too high and debatably squanders innovation. Even if Apple is forced to slash this commission, the App Store only makes up 5% of Apples business so it wouldn’t translate to a major loss for shareholders.
Apple’s counterargument: we should be able to charge 30% because the app store is awesome and we know developers will have to use it to reach a wide audience in a secure manner. Google has the same response when their Play Store is called into question.
Google: While Google has clear dominance in search and mobile OS, Google only accounts for 41% of the digital advertising business, and they seem to be losing ground to Facebook and Amazon (the other companies on this list). The Federal Trade Commission (FTC) investigated Google’s search platform in 2013 without imposing any penalties.
One common criticism of Google’s parent company, Alphabet, is their tendency to acquire both competitors and players in other tech-related businesses. By simply buying innovators, some argue that this practice stifles competition in important future markets. However, the biggest point of contention lies in Google’s search business, which has been accused of biasing results toward Google’s products and subsidiaries.
One issue with calling Google a monopoly that harms consumers is the fact that most of their key services are free and easy to access. In fact, there are very valid arguments that each of the companies in question have provided far more benefits to the general public than harms, and of course none of the major tech CEO’s see their firms as monopolies.
Google just acquired Looker, a data-analytics firm for $2.6 Billion to boost their cloud offerings. They didn’t have any trouble getting that approved, so perhaps antitrust concerns are overblown by the media (at least in the US).
Amazon: Bezos is far from creating a monopoly in the retail sector, but they do account for almost half of online sales. The claim here is that Amazon should not be allowed to advertise its own private label products on its marketplace because it undermines other retailers (Amazon’s private label brands account for 1% of sales).
Most regulators believe making any moves here would open a big can of worms that would harm small to mid-size retailers with private labels in the process.
Facebook: They’ve already set aside $3 Billion to pay the FTC’s fine over failing to protect user data and prevent false information in the Cambridge Analytica debacle. Antitrust is a separate issue, though.
Again, it’s hard to call Facebook a harmful monopoly when their service is free. Officials are more concerned with the ridiculous amount of data Facebook has on us. Have you ever been like “OMG I was just thinking about popcorn and then got an Instagram ad for popcorn!”? It’s horrific, isn’t it?
Well, that’s exactly why some lawmakers want Facebook to sell-off What’s App and Instagram. Zucc’s rebuttal: it’s easier to monitor and control data on all of these sites when they’re under one umbrella, and monitoring social media is necessary to prevent another Cambridge Analytica.
Other News:
Big Acquisitions: Raytheon and United Technologies announced an all-stock deal to become a massive aerospace and defense giant worth over $100 Billion. United Technologies is spinning off its Otis Elevators and Carrier AC business units in the process. Salesforce acquired data-analytics software, Tableau for $15.3 Billion in an all-stock deal, a move that could be “transformative” for the CRM leader.
Beyond Ridiculous: We’ve already discussed how overvalued Beyond Meat, the fool’s meat producer, has become since its May 2nd IPO. After their first earnings report last Thursday, they’ve soared to over $170 at the time we are writing this. That means a fake meat company has increased 580% since their IPO. We’ll update you with reasons for this historic rally as well as buy/sell recommendations in our 2019 IPO report, which we update frequently to give you the scoop on recent stock market debuts.
Other IPO News: Slack filed for a direct listing today. It will be interesting to see how they perform; they already warned investors of slowing revenue growth – indicating they might fall to the same Robinhood fate as Uber and Lyft.
How much money did you make/lose on Beyond Meat? If the answer is $0, you are smart with your money. See you next week when we blast you with more info just in time for father’s day!
Longhorn Investment Team 