March 22, 2018

Facebook, the Fed and the Playground

Facebook (FB) is cheap by fundamental standards, so is Apple (AAPL), however Tesla (TSLA) and Amazon (AMZN) are the exact opposite, we own them all. A big reason FB stands apart is because the company has casually generated more than enough revenue to justify its stock price, but it has done it with equally casual and explicit disdain for the shareholder.  

Over time FB has gotten away with this dysfunctional relationship because its users (clients) placed their trust in the company as opposed to the product. Perhaps showing my age I’ve always found it curious how companies such as Google (GOOGL) and FB have avoided what has been a decades long  denigration from my generation for every product from Big Macs to Talcum Powder without actually harming McDonalds (MCD) global expansion nor Johnson & Johnson’s (JNJ) lock on beauty and heath production.

But just as potato chips are unhealthy, some also taste good. That said, FB has made some very clever acquisitions over the years which seized on an unexpected gain. Namely that different generations are migrating to different platforms such as Instagram and WhatsApp that are represented within nearly 70 companies owned outright by FB and that’s made for enormous growth in users, their data and the high stakes applications and advertisers that pay heavily to play with them. At last count the company has $37 Billion dollars in cash to plow into new acquisitions including products you can hold in your hand such as Oculus, the Virtual Reality product or marketable software in fields of Self-Generated Application Development, E-Commerce and Artificial Intelligence.  So in addition to favoring some exposure in the stock I’m also curious if the company can actually achieve what is expected of them in the long term, namely, protection of user privacy and what can be done in the near term.

The issue of privacy has wide support among the public 45 and older and defended through powerful political legitimization. The US body could very likely seek regulatory revenge in the shape of a tax, similar to the European Community attacks over tech management of privacy issues which over the past two decades has cost the group billions.

The Fed
The reason I’m discussing the Fed is because yesterday two events took place. First the new Chairman of the Federal Reserve announced that the body would be raising its targeted rates by .25%, totally expected. What wasn’t expected was the Chairman’s announcement for strong growth expectations, tight job market expectations and higher than expected inflation to exceed 2.1% and moving towards 2.9%, the historical average. All this raised the likelihood of four rate increases this year as opposed to the expected three. This combined with continued challenge of current legislation going after Chinese violations of the WTO may not mean a trade war but raises the specter of retaliation.

The Markets
In my opinion, the sharp decline in the FB stock price over the last few days has less to do with widely distributed positions of 2-4%  but more of  a cut in concentrated 5-10% (and even higher) positions held by Hedge Funds and young investors eligible for that kind of risk. All of this has served to impact the broad indexes and for now, impact appears to be more a reflection of redistribution of risk and characteristically for this kind of environment the nervousness that takes place before earning season, which begins at the end of the month. Right now I believe cash is a desirable defense and I’ll be looking for opportunities in growing cyclical sectors such as Healthcare. Likewise, we’ll maintain positions of 1-3% respectful of the volatility that the abovementioned scenarios will create and like with all positions in the tech space, for example, take some profit now and then. Every major tech stock, including beloved Apple (AAPL) has given up price for some compelling buys over the last 5 years.