What Caused Tech Stocks to Plunge?

NEW YORK (TheStreet) -- Twitter (TWTR) is an amazing tool. Not only does news break on Twitter, changing the way people consume and  react to news, but the micro-blogging site lets you have conversations with people you would never ordinarily meet, and discuss a wide array of topics. Perhaps the most esoteric of all these is finance.

This past Friday, Kara Swisher of Re/Code put out an article on the recent sharp drop in some publicly traded tech stocks, including Twitter, Facebook (FB), Netflix (NFLX), Tesla (TSLA), Google (GOOG) and a host of others. The gist of her article was that very few people, if anyone, have any idea what caused the recent sharp drop in publicly traded tech companies.

A passage from her story:

"In other words, its [The Wall Street Journal] very nice reporters have no idea what was going on with investors and neither does anyone else. (Me neither!)"

In this passage, she was talking about Weibo (WB), the Chinese-version of Twitter, which despite pricing its initial public offering at the low end of its range ($17, down from an expected range of $18-$20), managed to surge in its first day of trading, gaining 19% in its debut. Sentiment in the stock, and tech stocks in general, however, actually caused the stock to open below its offering price at $16.27. This isn't particularly normal behavior, a juxtaposition she highlighted in her article.

Naturally, when I saw this, I started a conversation with Kara, about what might be the cause of it. Here's the Twitter conversation below:

I don't believe that no one knows anything. I believe the facts are there, hitting us smack in the face, and it's not something we want to hear: the dreaded "R" word. Recession.

Though I think we're headed towards a recession, let me clarify by saying I am neither bull nor bear. In fact, if anything, I'd tend to put myself more in the bull camp than anything, simply because I want people to prosper. Rising asset prices (be it equities, debt, real estate, art, various other collectibles, and to some extent, gold) allow people to move up on the societal ladder. No one wants to see someone suffer, and after the credit crisis we went through in 2008, and to some extent, are still feeling today, no one wants to see anything like that again.

However, I think we're starting to see the signs of some weakening in the global economy, led by China, and that's putting a damper on equity prices, particularly high-momentum, high-beta (read: a beta of 1.0 or more signifies a particular issue as being riskier than the overall market) names.

Pandora, Twitter, Facebook decline

Amazon, Netflix decline

Normally, I wouldn't put too much stock (Ha! Look at that! I made a pun! I'm so punny #killme) into equity declines over a month or so. In the short-term, markets are a voting machine. That's why Wall Street places an emphasis on having a CEO it likes (read: Steve Jobs, Larry Page, and for right now, new Microsoft CEO Satya Nadella), and sometimes discounting companies with CEOs who are unpopular (read: former Microsoft (MSFT) CEO Steve Ballmer, former Yahoo! (YHOO) exec Carol Bartz, and former Home Depot (HD) CEO Bob Nardelli to name a few).

However, Google's recent earnings report, coupled with the yield on the 10-Year U.S. Treasury in recent weeks, has made me pick up my head.

Allow me to take you on a timeline over the past month, beginning with some incredibly ominous data, commodity prices, and some speeches made that may turn into self-fulfilling prophecies, given markets trade on psychological factors, just as much as they do on earnings and various other fundamentals.

March 7: Price of copper (a key industrial commodity, and largely looked at for the health of China), collapses, falling the most since Dec. 2011.

March 11: DoubleLine Capital's Jeffrey Gundlach gives a speech looking at the markets for 2014, entitled "What Hath QE Wrought?" Essentially, the presentation is that QE has distorted markets so much, that we really don't know what the true price of various asset classes are, given the abundance of liquidity we've seen provided from the Federal Reserve, Bank of Japan, Bank of England, and potentially, the European Central Bank.

March 7-18ish: The majority of these high-flying names peaked all within in this time frame (with the exception of Tesla, which peaked in February), and have been trading down sharply since then. Money moved from these names into more traditional, low-growth, lower-risk tech names, such as IBM (IBM) and Cisco (CSCO).

Cisco chart

IBM chart

If this wasn't bad enough, look at some of the charts of the more defensive equities over the past few months, including Kimberly Clark (KMB), Clorox (CLX), Altria (MO), and General Mills (GIS), just to name a few.

Kimberly Clark chart

Clorox chart

Altria chart

March 19: The Federal Open Market Committee continues to pare its bond buying program, known as quantitative easing, to $55 billion a month. It had been $85 billion a month in purchases, as the Fed buys U.S. Treasuries of varying maturities, as well as mortgage-backed securities. Federal Reserve Chairman Janet Yellen, in her first press conference as head of the Federal Open Markets Committee, suggests that the first rate increase could come six months after the end of the QE.

April 16: China is indeed slowing down, as first-quarter GDP came in at 7.4%, less than the 7.5% growth rate the Chinese government was expecting. The 7.4% growth rate was better than the market expected (7.3% consensus), but given the skepticism surrounding almost every data point coming out of China, this warrants a bit of skepticism as well.

April 17: Google reports first-quarter earnings. Though the company blamed the earnings miss on large one-time expenses, including the Nest acquisition, the company's core business faltered, even if just a bit, from the fourth quarter.

The company noted cost-per-click (CPC), a key advertising metric, remained flat from the previous quarter, as it appears Google's initiative to bundle advertising buying on various platforms, known as enhanced campaigns, is working. However, CPCs still fell 9% year over year. Paid clicks, which include clicks related to ads served on Google sites and the sites of its network members, increased approximately 26% year over year, but fell 1% sequentially.

On the earnings call, Nikesh Arora, Google's senior vice president and chief business officer, noted CPCs will start to move higher as more advertisers begin to understand mobile devices. He noted that in the medium to long term, mobile ad pricing will be better than desktop because more will be known about the user and the context of what they're doing and what they're searching for. Additionally, Google is working on making its payment enabling system easier, which should cause CPCs to rise. But getting advertisers to focus on the mobile side as opposed to desktop is a much harder initiative and will take some time.

April 21: The yield on the 10-Year U.S. Treasury has continued to come down, despite Yellen's comments about a potential rate hike. Normally, when the FOMC Chairman makes a comment about rate hikes, yields would rise. That hasn't happened though.

Going back to March 7, when many of the these issues hit their 52-week, and in some cases, all-time highs, the yield on the 10-year was 2.8%. As of Tuesday April 15 (the last date FRED has data for), the yield was 2.65%. That's a pretty sharp drop in the span of five weeks, especially considering we're in a low growth economy.

Then there's the price of the iShares Barclays 20+ Yr Treas. Bond ETF (TLT). The price of the ETF rises as yields fall. Yields have continued to fall throughout the credit crisis and throughout the recovery, but the price of TLT peaked in late 2012, and had been trending down since then. Yet, towards the latter part of 2013 and into 2014, the price of TLT has continued to climb.

iShares Barclays 20+ Yr Treas.Bond chart

Obviously a few months of certain data points is not a trend.

Initial jobless claims have been better (last week hitting 300,000), companies are adding jobs, albeit it slower than most would like, with the most recent nonfarm payroll report showing the U.S. economy added 192,000 jobs in March, slightly below the consensus estimate of 200,000 jobs.

ISM Manufacturing data continues to climb higher, and is firmly above 50, the level needed for expansion.

On the flip side, ISM Non-manufacturing (the larger part of the U.S. economy) is trending lower, though still remains above 50, the level needed to signify expansion in the economy.

We need to see more data over the next three or so months, to see if we're really headed towards a recession or not. It's possible that due to QE, and the pumping of $85 billion a month into the markets, it caused the high-growth names to overshoot to the upside, as Swisher notes in her article (Yahoo! having gained 47% over the past year, Facebook up 115%, and Google up 36%), and what we're seeing now is a return to a more normal valuation for some of these companies.

However, that doesn't explain money moving into slow-growth names, such as consumer staples, utilities, the decline in the yield on the U.S. 10-year, and a host of other negative economic factors.

Starting with Netflix tonight, and looking out through Tesla on May 7, when it reports, any guidance these companies give will be incredibly important, to see whether the recent downturn is a sign of things to come, or if it was just a crack on the yellow brick road.

--Written by Chris Ciaccia in New York

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