More trade war threats filled financial media headlines this week. Trump’s team this week ordered officials to consider imposing a 25% tax on $200 billion worth of imported Chinese goods, up from an initial 10% rate. The move was intended to bring China back to the negotiating table for talks over U.S. demands for structural changes to the Chinese economy and a cut in the bilateral trade deficit. Recall that the Trump administration slapped duties on $34 billion of Chinese goods last month, which prompted immediate retaliation from China, and another $16 billion will likely follow in the coming days or weeks. Friday we learned that (surprise) China is not interested in negotiating under pressure. Instead, China announced a list of $60 billion worth of U.S. imports it plans to apply tariffs on should the Trump administration follow through with its latest trade threats. Of course all this is good news for U.S. equities, when finished the week higher.
Macroeconomic news was mixed this week. Among regional PMIs, the Dallas Fed Manufacturing index slipped to 32.3 in July, down from 36.5, while the Chicago PMI advanced to 65.5 in July from 64.1. Nationally, the ISM PMI Manufacturing index slipped to 58.1 in July from 60.2 and the ISM PMI Services fell to 55.7 from 59.1. June Non-Farm Payrolls came in at 157,000 job creations, below the 193,000 expected. With the +59,000 upward revisions over the prior two months, traders are not going to let a mediocre jobs number spoil the Bull’s partly. A slight pull-back in the PMIs from strong expansion levels will not upset the markets. As for inflation, the Personal Consumption Expenditures (PCE) index rose +0.1% in June and +2.2% y/y, which again doesn’t bother the Fed who would like to see inflation above their 2% target. Wage pressure also ticked up, with July hourly earnings +0.3% in July from +0.1% the prior month. Year-on-year, wages are rising at a +2.7% pace. In this context, the FOMC left the Fed Funds rate at 2.0% and maintained the same semi-hawkish discourse. Don’t look for bold action from the Fed (in either direction) is setting its target interest rate.
$1 Trillion – That’s A Lot of Wonga
Investors had been speculating on it for a couple years. The day that Apple’s market capitalization passes the bar of $1 trillion. Well, it’s now official. Thursday, two days after announcing a beat on iPhone sales and giving higher guidance, Apple’s share price closed above $207, valuing the company at a cool $1.002 TRILLION. How much money is that?
- Take the market cap of all the Russell 2000 U.S. companies and you have the equivalent of Apple.
- Apple would be the world’s 17th richest country, just behind South Korea (and richer, in terms of GDP, that Switzerland, the Netherlands, Saudi Arabia, or Australia).
- Sell Apple and you relieve the U.S. government of 1/20 of the national debt (which is equally a sad commentary on the mismanagement of public finances over the years).
Interestingly, Apple is not the first company in history to pass the $1 trillion mark. PetroChina hit HKD 7.83 trillion very briefly in November 2007. At the HKD/USD exchange rate of HKD 7.75 / USD, that made a one trillion dollar company. The run-up to $1 trillion for PetroChina was a flash, which turned out to be a straw fire, as the energy giant saw its market cap reduced by 60% in the year following the $1T mark. Apple has also gotten to $1 trillion really fast, but unlike for PetroChina, it has been “controlled euphoria” for Apple. While it is likely the end result will be the same, don’t expect Apple to come down as quick as PetroChina. After all, nearly half the households in the world depend on an Apple product each day!
Will Apple’s incursion above $1 trillion last longer than PetroChina’s one week above? Our bet is “yes”, but don’t expect $2 trillion before a good drop back below $1 trillion!
While Apple is the biggest of the Big 5, the other four tech giants are not that far from $1 trillion themselves. Amazon is at $900 billion. Amazon reminds us of PetroChina. Our bet is that Amazon will come down quickly. Plus, as we mention often, Amazon is a middleman, produces no product themselves, and has limited value-added for the economy (or rather negative value-added from the point of view of traditional retailers).
Microsoft in third in line to the throne. At $825 billion, Bill Gates is in striking distance. Microsoft produces goods that are useful to the economy. If Apple merits $1 trillion, why not MSFT?
Google, combining its GOOG and GOOGL issues, comes in at $854 billion. We have a hard time seeing a pure internet company valued at $1 trillion….although the company is diversifying its activities into things like autonomous driving etc. We are not fans of Google with shares trading at $1220 after a very shallow correction in Q1 2018.
Finally Facebook, a company which saw its market cap cut by $66 billion in one day last week. At $513 billion, we can not see Facebook hit $ 1 trillion before investors get smart and realize Facebook is a very vulnerable company which produces nothing and depends on socials media humanoids, with nothing better to do than coming on their website.
Weekly Trade Recommendation
After disparaging Facebook above, ironically our trade idea of the week is long Facebook. This is not an “investment” and our models show no value in Facebook. This is an in/out trade. Facebook shares plummeted -20% last week. Those who got greedy and could not wait over the past months got slapped down. For readers who have no Facebook exposure, this is a buy the dip opportunity. The Greater Idiot Theory is in effect here (at these levels, it’s safe to assume there will be greater idiots out there drooling to get into FB at these “attractive prices”). As long as the other tech companies keep rising, they will pull Facebook back up, as new money will like the lower price in FB.
Price has stabilized above $170/share. This opportunity won’t last long. We would take a position here, with a stop for one-half your position size below $170. If another surprise leg down occurs, you’ll have dry powder to add at even more attractive levels. Should price start rising, use a trailing stop. FB may still post more record highs later this year, so don’t be too eager to take profits.
