DailySilverTechnology

Slowing growth at Facebook and the EU and the US vs China

By Edward Harrison

1 Big Idea: Maybe the EU and the US will join forces against China

Here’s the BBC’s reporting:

A joint statement said the two leaders agreed to “work together toward zero tariffs, zero non-tariff barriers, and zero subsidies on non-auto industrial goods”.

US import tariffs of 25% on steel and 10% on aluminium, imposed in March, will however remain in place.

The two sides will launch an expert working group to facilitate trade and lower barriers, and they pledged to refrain from new trade restrictions during those negotiations.

A full-blown trade war had been looming, fuelled by the tariffs introduced by Mr Trump…

Mr Trump’s language after meeting Mr Juncker was enthusiastic, in contrast with the angry tone he adopted previously towards the EU, calling it a “foe” on trade

Why it matters: As to where this is headed, we do know that there will be no further escalation. However, the tariffs already imposed will remain in place. And there was absolutely no detail behind the statement. The lack of specifics gives Trump an out, meaning negotiations could fail at some point down the line. For now, the trade war between the US and EU has been stopped at steel and aluminum. There will be no tariffs on autos…yet.

Thought bubble: Maybe Trump has bigger fish to fry with his showdown with China. I think it is very early days here. So it’s hard to say what Trump’s strategy is, except displaying a show of force to try and win concessions. But that’s a tactic, not a strategy. We will see in coming days.

Deeper analysis: China has joined the EU and the US as capable of blocking global mergers because the Chinese market is too big to ignore. If Chinese regulators don’t give merger approval, many deals can die.

Just today, US chipmaker Qualcomm’s proposed takeover of NXP Semiconductors, a Dutch company, failed because China did not give its approval by today’s midday China deadline. Qualcomm has ditched the deal valued at $44 billion, and announced it would instead buy back $30 billion in stock. NXP also announced a separate share buyback of $5 billion. China’s commerce ministry spokesman Gao Feng has made no comment except to say, “This case is about the enforcement of antitrust laws. It has nothing to do with China-US trade.”

Do you believe that? What about the currency devaluation? Does that also have nothing to do with China-US trade? Even if these are just coincidences, they will work to harden stances in the escalating trade war between the US and the EU. And so the question after the EU-US meeting in Washington is whether the US position switches from bellicose toward all comers, NAFTA, the EU, and China, to one of greater conciliation with NAFTA and the EU in order to focus on China.

2. Facebook is slowing

In my last post yesterday on earnings, TMT consolidation and FAANG, I ended writing:

On the FAANG side of things, Google is making some great moves in the TMT space that should begin to add meaningful topline revenue. I think Netflix will need to get into live TV content delivery business like Hulu if it wants to continue to grow. Amazon is always a wildcard. Apple has been slow to react and may miss its window of opportunity. I don’t see Facebook as a player here and wonder where their growth will come from.

So I am not surprised that Facebook’s earnings announcement was weak. Joe Weisenthal at Bloomberg has a few extraordinary tweets about the Facebook situation. Click the twitter pic links if you don’t see the charts:

 

Why it matters: Nothing is happening at Facebook outside of social media. Instagram was supposed to be the new growth engine. That gives Facebook more to work with and makes the company less reliant on the company’s namesake vertical. Nevertheless, the social media giant is still reliant on monetizing free social media apps for all of its revenue. It has almost nothing else to rely on, especially considering the lack of monetization of WhatsApp.

Remember the Oculus Rift acquisition from 2014? The Guardian asked then, “What Next?” Apparently nothing. Again, Facebook has no game outside of social.

Deeper analysis: Facebook warned on future revenue grwoth and is going down bigtime today. We’re talking a cut of more than $100 billion in market capitalization. That’s huge.

And Facebook will likely take FAANG stocks and the broader market down with it. Maybe this is the volatility Goldman was preparing us for. Now, a lot of people are talking about Facebook’s privacy missteps as one reason to see Facebook as a unique case.

I believe Facebook is unique because of its overreliance on a single vertical. Google, in particular, is much better hedged. Amazon is also better hedged as well with its deep penetration into the cloud and into streaming media. Apple and Netflix are arguably the next most vulnerable companies in FAANG.

3. More Goldilocks number

The latest jobless claims report for the week ending 21 July just came out this morning. And it showed seasonally-adjusted claims at 217,000 for the week. That brings the 4-week average to 218,000, which compares very favorably to 244,000 at this time last year.

Why it matters: Jobless claims data is the best real-time data number we have. It comes out every week and is easy to use for year-over-year comparisons whether one uses seasonally-adjusted or unadjusted data (201,257 this year versus 220,455 in the same week last year).

When weekly initial jobless claims are going down as much as they are right now, the economy is going to do well. It means that more people have money to spend since fewer people are losing their jobs. And that boosts economic growth.

Deeper analysis: This is also the last piece of data we get before the GDP numbers hit tomorrow. And it’s good. It reinforces the Goldilocks theme for the US economy.

But I would point out that new home sales have been weak for months now. Yesterday’s figure for June came out and it was the lowest in eight months at a seasonally-adjusted annual 631,000 rate. Existing home sales have also been weak. And they make up the bulk of the market. The number for June was down 2.2% from a year earlier, according to the National Association of Realtors’ report on Monday. That means sales of existing homes have now declined in five of the first six months in 2018. And we’re talking year-over-year figures, not month-over-month. That’s pretty weak.

So as well as the economy is doing, there are signs that the Fed’s interest rate hikes are already feeding through and slowing things down in the housing market. As the Fed continues to raise rates, expect to see some continued acceleration as corporate borrowers lock in. But then we should see signs of credit slowing appear elsewhere as well.

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Edward Harrison 7783 posts 575 comments

Edward Harrison is a senior Editor at Bloomberg. He is also the founder of Credit Writedowns newsletter, a former career diplomat, investment banker and technology executive with over twenty five years of business experience. He speaks six languages and reads another five, skills he uses to provide a more global perspective. Edward holds an MBA in Finance from Columbia University and a BA in Economics from Dartmouth College.

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