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).
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.
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.
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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