Wednesday, March 7, 2018

Regulatory Risks Looms Large Over Wall Street's One-Way FANG Trade

From ZeroHedge, March 3:
The so-called 'FANG' stocks have risen by 63% since the beginning of 2017, compared with a 20% gain in the S&P 500; and, the last two days have seemingly shown the same stocks to be the safe-haven hiding spot for investors (up 7% off Friday's lows amid trade war turmoil)...

But as's Chris Wood asks, what are the risks of continuing to own these stocks after the huge gains of recent years?

One obvious risk is an accelerating monetary tightening scare on rising inflation concerns in America, given that highly rated growth stocks are most vulnerable to higher interest rates. But to Chris Wood, a probably greater fundamental risk is regulatory, most particularly in the cases of Facebook and Google.

This risk is being driven by the increasingly evident backlash against social media as people finally wake up to what should have been obvious years ago. That is the sinister aspects of search engine and social media monopolies. But if such a backlash is building, with a recent cover of The Economist magazine titled ‘The new titans: And how to tame them’, the issue is whether this backlash turns into regulatory action creating meaningful downside risk for the relevant companies’ share prices. This is certainly a risk.

The best critique of social media seen by this writer is a book published last year titled, Move Fast and Break Things, by Jonathan Taplin. This book, written by a former 1960s music producer turned academic, highlights the monopolistic aspects of Google and Facebook, as well as the way they are engaged in a process that is destroying critical cultural infrastructure such as news and art, as well as fanning partisan politics by encouraging extremes only to communicate with each other in the by now well understood “echo chamber effect”. One of the more interesting revelations, among many, was the disclosure that Google staffers had at least 427 meetings at the White House during the Obama presidency, or an average of more than once a week.

Fake News and Fake Clicks
Then, of course, there is the ongoing brouhaha about so-called fake news, given the growing evidence of clever Russian exploitation of social media during the American presidential election. This has led to a series of articles questioning, in particular, the role of Facebook. Thus famous British historian turned polemicist Niall Ferguson, posed a pertinent question in Britain’s Sunday Times last October. “Is Facebook a platform for all ideas? Or the most powerful publisher yet?”
This is certainly a question worth asking in a world where a terrifyingly large number of people, particularly younger people, seem to gather their news from Facebook. This is why it is increasingly hard to deny the longstanding reality that Facebook in recent years has primarily been a media company posing as a technology company rather than the other way round.

Then there is the issue of whether Google’s and Facebook’s estimated 60% share of digital advertising revenue is really merited given the seemingly questionable nature of many of the ‘clicks’. Interestingly, Procter & Gamble (P&G) cut more than US$100 million in “ineffective” digital advertising in the second quarter of last year and found little impact on its domestic sales....

In the case of Facebook in particular there is also the "You're messing with neurotransmitters akin to what cocaine and alcohol do" argument which is gaining some traction.