FANG, tariffs and trade. That's what matters. Insane as it is, that's what matters.
Most people think that all that matters is the 10-year treasury. If our interest rates go above 3% then investors blindly sell. If rates go below 3% they sell.
To me, the central issue is trade. If President Trump plays hardball with China or Europe and either chooses to retaliate then I think stocks take a hit.
But what happens if there is a truce? What happens if the Chinese or the Europeans fold?
Then I think you get what you see today, a huge rally embracing pretty much ever sector and led by FANG because Facebook (FB) gave you such a good number that it gave all of tech a beautiful halo. When tech gets rolling it remains the leadership group that creates its own rising tide.
Now interest rates were benign today, going down ever so slightly to a few ticks below 3% so I am sure the bond devotees will be crowing that they are in charge here. They are responsible for the rally.
But that's hogwash.
This rally began last night when Facebook put up an incredible number, much better than anyone, including I, was looking for. The sales were excellent, the bottom line hefty. The chatter about the next quarter, the one that would have the fallout from the Cambridge Analytica fracas, was sparse but viewed as positive. In fact the only negative on the whole call involved what could happen when the new European regulations that protect privacy get triggered next month.
There were two conclusions that jumped out at me. First, the media may think that the Cambridge Analytica breach was a big deal but it seems that the users of Facebook sure didn't. Again, we don't know what happened in the month of April, but Facebook's first quarter showed a step up in engagement, something few were looking for. Perhaps more important, advertising was off the charts strong, plus 43%. That's a huge head of steam. Last night I talked about how Alphabet (GOOGL) shocked us with its capital expenditures needed to meet demand. Facebook kept its spending pretty much in line with predictions. Memo to Alphabet: get a better handle on your spend so when you report the same excellent earnings that you did, your stock will go higher not lower, although the pull of Facebook actually took up the bedraggled Alphabet, too.
Remember the best thing about Facebook is that it doesn't pay you for your content. You do it yourself. Same with Instagram. That means they make fortunes just broadcasting your copy and monetizing it. But the worst thing about Facebook? That model has drawn the wrath of Congress and if another incident similar to Cambridge Analytica occurs then Congress might choose to regulate Facebook like it's a media company instead of a dumb pipe and that could crimp the company's treasured growth.
Just so you know, when you look at how much investors are paying for the company's stock, even after today's run, it's a lot cheaper than companies like Procter & Gamble (PG) or Coca Cola (KO) or PepsiCo (PEP) , which also reported today, all of which have much slower growth than the online giant. That's because the big fund managers are convinced that something negative will happen. It's just too juicy for it not to, either here or in Europe where the company's also experienced a less that optimal grimace from the regulators, particularly in Britain where the whole of Parliament seems aggrieved.
We sold some for my charitable trust in part because it had become too big a position -- a victim of its own success -- for us. Also, for as apologetic as the company was, I didn't get the kind of outside verification I am looking for to be sure that these privacy problems aren't behind them.
Still, given the amount of wealth this company is creating, you get a pretty rosy view of all of tech because, as I am wont to explain, FANG spends money like it is going out of style to try to keep up with their customers, so a strong spend from Facebook signifies that the digital revolution is alive and well.
Remember, we don't just monitor FANG here. We like the cloud kings, companies like Salesforce.com (CRM) , Red Hat (RHT) , Work Day (WDAY) , Adobe (ADBE) , Splunk (SPLK) and VMware (VMW) and, most important ServiceNow (NOW) , which reported still one more explosive number and took up every one of these key stocks. Now, as someone who coined the term FANG and anointed the kings, I understand how fatuous the linkage can be. Just because ServiceNow reports a strong number it means absolutely nothing for the other kings. But it doesn't' really matter because there is no accounting for group think.
I don't want to get carried away with the FANG and the Kings though because Facebook and ServiceNow might have been up but they would not have had such pull if it weren't for a particular interview that occurred this very morning with Larry Kudlow, the president's chief economic adviser, on Squawk on the Street.
It was terrific to see my old partner, Larry, from Kudlow & Cramer days, but there are no free passes so we peppered him with questions about how hard the president might be on China. Larry's going to China soon and while he made it clear he thinks that China doesn't play fair, he's an optimist that an agreement can be reached that will satisfy the president.
That's all the market needed to hear and if you look at the intraday charts of the averages you can see that they opened in the green but they positively roared when Larry imbued viewers with a positive attitude about how things could shake out with all of our trading partners. We haven't looked back since.
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