All of the last year’s fear of anti-trust regulation seem to be coming true. Tech shares dropped yesterday on news that top US regulators had divvied up jurisdiction of tech giants for a forthcoming probe. The Department of Justice and the Federal Trade Commission, the agencies in charge of anti-trust, have decided who will manage what as they prepare to launch an anti-trust probe into Facebook, Amazon, Google, and Apple. It is still unclear exactly what will be investigated, as well as the scope of the probe. After the market closed, the US House of Representatives also announced its own investigation. The tumble in shares sent Google into a bear market.
FINSUM: This has been looming for some time, but now looks like a reality. This could be the start of some very serious volatility and changes for the FANGs.
We ran a piece yesterday highlighting the risk of China using rare earth elements as a bargaining chip in the trade war. The US currently gets 80% of its rare earths from China, and the elements are used in everything from smartphones, glass, electric vehicles, and jet engines. The biggest loser if China blocks access could be Apple. The company is currently planning a ramp up in production for its new fall products, so according to Goldman Sachs “even a short term action affecting production could have longer term consequences for the company.”
FINSUM: It is hard to calculate the financial impact at this point, but we expect it could be significant given that these elements are key to smartphone production.
One of the trade war’s big victims could be Apple. While much of the trade war panic has been focused on other products, Apple could be the biggest victim to suffer. The the reason why may have more to do with sentiment than with tariffs. While there is much talk of Chinese “national champions”, Apple is undoubtedly an American national champion in China, and with sentiment souring against the US in the face of the trade war, it is likely that Chinese consumers will move towards purchasing domestic smart phones. Apple will be forced to raise prices because of tariffs, which would accelerate the trade. China accounts for about 18% of Apple’s revenue and a higher percentage of its profits.
FINSUM: There could be a big hit to Apple’s top and bottom lines here. China could also take measures to specifically wound Apple the way Washington has done to Huawei. Anything seems to be fair game right now.
Want to forecast at where Apple’s stock price is headed? There is a good trick for doing so. The method is to look at the earnings and share price moves of Apple’s suppliers. About a third of suppliers report earnings before Apple does, and many of them derive a high portion of their sales from the company. Therefore, one can fairly well predict Apple’s earnings and likely moves. For instance, Apple has been on a tear since its earnings on Tuesday, and it would have been easy to see from the previously released supplier earnings.
FINSUM: This will not always work and some of the value is probably eaten up by algorithmic traders, but still, it seems a good predictive indicator.
So what are the most popular funds held by mutual fund managers right now? This is always an interesting question, not only because it can give one ideas, but also because it can serve as a counter-indicator. Stocks that are very widely held tend to be over-bought and the most at-risk of falling sharply. The most popular stocks right now are Alphabet, Microsoft, Visa, Apple, Nestle, and Exxon-Mobil. Speaking about the outlook for these stocks, UBS, who made this report, says “Once these trades reach their critical value, or an exogenous shock occurs, we expect a sharp price reversal as investors unwind their exposure in tandem”.
FINSUM: Nothing particularly interesting in those top holdings, so the downside risk of them being there seems the most relevant.