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Technology stocks have reclaimed record highs, making them one of the first groups to put last year’s carnage behind them. But everywhere else you look in the industry, bad news is overwhelming the good.
Profits are shrinking at an alarming pace, valuations are reflating and politicians want to break the companies up. Semiconductor orders have slumped, and spending on infrastructure to support the cloud is off. And yet the addiction won’t break. Shares are up more than 30 percent since Christmas.
It’s a familiar sight to anyone who’s been watching the broader U.S. stock market, which just posted its best quarter in 10 years even as earnings estimates slid. However grim things look, too much money has been lost by sitting out. Mike Wilson, the chief U.S. equity strategist at Morgan Stanley, says groupthink is taking over, a force that while capable of provoking powerful rallies, usually precedes a cycle’s peak.
“I can’t remember a time in my career when institutional investors have been so preoccupied with what everyone else is doing,” said Wilson, who advised investors to avoid tech stocks. “When investors are more focused on what everyone else is doing, rather than what the fundamentals are doing, it’s probably the end of a trend.”
If this is the end, it’s been a tough one to miss. The Nasdaq 100 just rose for the 14th time in 15 weeks and is about one big day away from its August record. Fourteen companies, among them chip standard-bearer Advanced Micro Devices Inc. and Lam Research Corp., are up more than 50 percent from their Christmas lows, and only seven stocks in the gauge are down over the stretch.
Read more on first-quarter earnings preview
All this as software and electronics makers prepare to report an 8.7 percent drop in first-quarter profit, analyst estimates compiled by Bloomberg show. Should that forecast come true, that would mark the worst income decline since 2009.
But investors aren’t fazed, rushing back to an industry that was the market’s favorite as recently as last summer. At 4.4 times sales, tech stocks trade at a multiple that is twice as high as the rest of the market. That’s close to the highest premium since 2000.
Tech stocks hovering near highest premium to market since dot-com era
Bulls can be forgiven for their passion as tech firms have proved a reliable source of superior growth over the past four years, a stretch when recession fears kept haunting the market. For 15 straight quarters through last June, tech profits outpaced the S&P 500, with the growth gap averaging 6.3 percentage points.
"Everybody is trying to find growth at all costs and there’s not a plethora of options," said Mark Lehmann, president of JMP Securities. "People are willing to pay more."
To be sure, the industry has managed to innovate itself out of growth slumps in the past. Who knows what they’ll make off everything from self-driving cars and artificial intelligence in coming years.
But right now, tech has a growth problem. Products such as smartphones have entered a maturing phase and parts makers like semiconductor companies have seen weak demand from a range of end markets including data centers.
Analysts don’t see any quick rebound, projecting essentially flat sales through the third quarter of 2019. Partly reflecting the bleak outlook, their price targets for tech stocks pointed to only a 2 percent gain over the next 12 to 18 months. That rate of expected returns trails all other S&P 500 industries except for utilities.
Limited Upside
Tech stocks seen posting second-smallest gain among S&P 500 industries
Source: Bloomberg
To Edwin Davison, a senior equity analyst with DuPont Capital, the resurgence in tech shares, particularly those sensitive to economic swings like chipmakers, reflects an improved macro backdrop -- the Federal Reserve has turned more dovish, the Sino-U.S. trade talks are progressing and China has introduced another round of economic stimulus.
Once companies start rolling out their financial reports, investors will focus on whether all the positive developments translate into gains for individual businesses, he said.
“People are starting to bake in some of these things: trade, the Fed, China stimulus,” Davison said. “Things have stabilized. I think there are still questions about exactly what the second half looks like.”
The persistent love for tech stocks is reminiscent of the 1990s Internet frenzy to Leuthold Group. Granted, the excitement today pales in comparison and is motivated by nothing other than the fact that the industry is a default choice when growth is scarce. Still, the danger of crowding is no less pronounced, said Doug Ramsey, the firm’s chief investment officer.
“In the late 1990s, it was the carrot. In this cycle, it’s been the stick,” Ramsey said. “Different paths, but each has led to similarly precarious portfolio bets.”
1-2. First-quarter earnings are expected to be lousy, but the stock market may not care, CNBC
Published 23 Hours Ago Updated 41 Mins Ago, April 6, 2019
2. 5G: World's first commercial services promise 'great leap', BBC
By Virginia Harrison BBC News
South Korea and the US have this week launched the world's first commercial 5G services, promising a new wave of capabilities for smartphone users.
Samsung said its Galaxy S10 5G device will offer speeds up to 20 times faster than current phones as it began selling the handsets on Friday.
Countries are racing to build 5G networks that will be crucial for future tech such as driverless cars.
Nations are also working to resolve security concerns tied to the networks.
What is 5G?
5G is the fifth-generation of mobile internet connectivity. Users will get more data faster, with less delay. It also promises wider coverage and more stable connections.
Ed Barton, chief television and entertainment analyst at Ovum, said the shift from today's 4G networks to 5G will be significant.
He said first-generation or 1G networks enabled voice, 2G brought text, 3G static images or photos, and 4G enabled video.
"We're expecting the leap from 4G to 5G to be a much greater leap than ever before."
Part of the "leap" will come from the ability to move much greater volumes of data across networks. 5G will mean more devices can be connected to the network at better speeds.
Nikhil Batra, senior research manager at technology consultancy IDC Asia Pacific, said speeds will be 10 times faster than what is possible with 4G. Samsung said its 5G device will be up to 20 times faster.
What will 5G enable?
Initially, 5G will bring higher-quality streaming and the ability to livestream to bigger audiences - a better experience for people watching live sports or cloud gaming.
Ovum's Mr Barton said down the track it will enable more augmented reality capabilities, such as better mapping apps and shopping experiences. 5G will be crucial for driverless cars.
The scope of possibilities is vast, from remote surgery to holographic video calls. Mr Barton said we don't yet know what the "killer apps and use cases will be".
"It's a bit like no one predicted that ubiquitous smartphone with payments and location awareness would give rise to Uber," he said.
Where is it available?
The technology is being piloted in trials all over the world but commercial applications are just becoming available.
South Korea's top three mobile carriers launched 5G services this week, while US telco Verizon also launched 5G services in parts of two cities this week.
DJ Koh, president of IT & mobile communications at Samsung Electronics said it has begun "a new era where the incredible speed and connectivity of 5G becomes a reality".
Frost & Sullivan telecoms analyst Quah Mei Lee says South Korea and Japan have been leaders in 5G development. She said South Korea has always been strong in consumer applications but there's "more than it can do" in 5G.
"We will see more applications coming to the market over the next three-to-six months."
What about security concerns?
Much discussion about 5G infrastructure has centred around possible security risks, namely the participation of China's Huawei.
Huawei, the world's largest maker of telecoms equipment, has faced resistance from foreign governments over the risk that its technology could be used for espionage.
The US, Australia and New Zealand have all blocked local firms from using Huawei gear in 5G networks.
In principle, controlling the technology that sits at the heart of vital communications networks gives an operator like Huawei the capacity to conduct espionage or disrupt communications.
This becomes a bigger problem as more things - from autonomous vehicles to domestic appliances - become connected to the internet.
The US argues Huawei could use malicious software updates to spy on those using 5G, pointing to a Chinese law that says organisations must "support, co-operate with and collaborate in national intelligence work".
Additionally, IDC's Mr Batra said one of the fundamental differences between 4G and 5G networks is the ability for remote control which raises "potential security concerns".
Mr Batra said with 4G, software and hardware were very tightly coupled. In 5G networks, hardware is separated from the software.
"That allows for remote control... of the network assets. All of these things can be managed virtually, and that makes it challenging in terms of security."
Still, he said authorities around the world are working with operators to address these concerns and "we haven't really seen any hard proof in terms of what is the issue".
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Donald Trump urges US Fed to cut interest rates, BBC
Donald Trump has stepped up his attacks on the US Federal Reserve by calling for the central bank to cut interest rates.
The US President claimed that the Fed has "really slowed us down" in terms of economic growth, adding that "there's no inflation".
Mr Trump made the comments as data showed a sharp rebound in new jobs growth during March.
US firms added 196,000 jobs last month, compared to 33,000 in February.
Mr Trump said: "I think they should drop rates and get rid of quantitative tightening. You would see a rocket ship."
The Fed has raised interest rates four times since Jerome Powell took over as chairman in February last year.
Mr Powell was appointed by Mr Trump but the president has frequently criticised the Fed chairman for increasing rates.
The Wall Street Journal reported earlier this week that Mr Trump told Mr Powell in a recent phone call: "I guess I'm stuck with you."
The Fed had been forecast to raise interest rates a further two times this year. However, it has since said it is now taking a "patient approach" to interest rates.
Last month, it indicated that it did not expect to raise interest rates for the rest of 2019 amid slower economic growth.
Mr Trump said earlier this week that he would nominate the former boss of Godfather's Pizza to the Fed's board of governors.
Herman Cain, 73, ran to be the Republican presidential nominee in 2012 and is a former chairman of the Federal Reserve Bank of Kansas City.
Along with Mr Cain, Mr Trump also intends to nominate Stephen Moore, who advised the president during his election campaign, to join the Fed's board of governors.
The politicisation of the Fed
By New York business correspondent, Michelle Fleury
With his picks of Herman Cain and Stephen Moore to the Federal Reserve's Board of Governors, Donald Trump appears to be politicising America's central bank.
Their candidacy marks a shift from the president's first few nominees to America's central bank. They were more traditional candidates and were more or less greeted with bipartisan approval.
By contrast, Cain and Moore appear to have been picked less for their experience and more for their loyalty to the President and have therefore provoked a great deal of political criticism.
Donald Trump has been openly critical of recent Fed policy, heckling Fed Chairman Jerome Powell on Twitter.
The President favours lower interest rates and switching from quantitative tightening to quantitative easing.
Economist Stephen Moore has been openly critical of the Fed. While Herman Cain, the former boss of Godfather's Pizza and who has worked at the Kansas City Federal Reserve has often stated his anachronistic view that the US should return to the gold standard.
If their nominations go through, they would be in a position to promote his view that the economy can grow much faster without overheating.
For investors, it would raise fears about the independence of America's central bank.
While new jobs figures for March beat forecasts - analysts had been expecting growth of between 170,000 and 180,000 roles - earnings data showed that the annual rate of wage increases slowed to 3.2% in March, down from 3.4% in February.
Ian Shepherdson, chief economist at Pantheon Macroeconomics, said: "Overall, these data won't change anyone's mind about whether the Fed ultimately will have to hike this year.
"The payroll gain is welcome but one month does not prove that the trend remains close to 200,000, and doves will point to the modest average hourly earnings gain as evidence that the Fed's 'patient' stance is justified."
Win Thin, global head of currency strategy at Brown Brothers Harriman, said it was a "mixed report" with highlights including an upwards revision to the 20,000 new jobs initially reported in February.
But he said: "The average hourly earnings was a big disappointment."
The unemployment rate remained at 3.8% for a second month.
The healthcare sector saw jobs rise, but the retail and manufacturing sectors both saw declines.
Some 6,000 jobs were lost in manufacturing, the first decline in the sector since July 2017.
Car companies have been cutting thousands of jobs, including General Motors which is cutting about 14,000 workers.
Hedge-fund billionaire Ray Dalio says capitalism needs urgent reform, MarketWatch
By Ciara Linnane and Jonathan Burton
Published: Apr 6, 2019 9:41 a.m. ET
Bridgewater Associates founder argues that a widening wealth gap harms America and could spark conflict that hurts everyone
Capitalism is no longer working for most Americans, according to one hedge-fund billionaire, who says the expanding wealth gap dividing the haves and have-nots is creating a volatile environment with disturbing parallels to the economic and social upheaval of the 1930s.
Ray Dalio, founder of Bridgewater Associates LP, the world’s biggest hedge fund, says capitalism has developed into a system that is promoting an ever-wider wealth gap that puts the very existence of the United States at risk. In a two-part series published on LinkedIn, the noted investor argues that capitalism is now in need of reform — and offered ways to accomplish it:
‘I have also seen capitalism evolve in a way that it is not working well for the majority of Americans because it’s producing self-reinforcing spirals up for the haves and down for the have-nots. This is creating widening income/wealth/opportunity gaps that pose existential threats to the United States because these gaps are bringing about damaging domestic and international conflicts and weakening America’s condition.’ Ray Dalio, Bridgewater Associates
Dalio says he was fortunate to grow up in a middle-class family, to be educated at a good public school and to be able to enter a job market that offered him equal opportunity — at the time when most people believed equal education and equal opportunity were fair and productive.
The investor says he became a capitalist at 12 when he earned his first wages by delivering newspapers, mowing lawns and caddying, and invested them in the stock market while it was hot in the 1960s.
That experience led Dalio, 69, to become a global macro investor, a career he has pursued for nearly a half-century and one that has shaped his understanding of economics and markets. Dalio believes capitalism is the most effective allocator of resources that raise living standards, arguing that communist systems fail because they do not recognize the need for people to be rewarded properly in order to motivate them to work.
Read: Here’s why hedge-fund billionaire Dalio says the next downturn is what ‘scares me most’
Also: The investor known as the ‘Warren Buffett of Boston’ rattles Davos crowd with this warning
Today, however, the system has produced little or no real income growth for most people for decades, according to the Dalio essay on LinkedIn. Prime-age workers in the bottom 60% have had no real (inflation-adjusted) income growth since 1980, and the percentage of children who grow up to earn more than their parents has fallen to 50% from 90% in 1970.
From the MarketWatch archives: Ray Dalio was mocked for his ‘blowoff rally’ call last year, but nobody’s laughing at Bridgewater’s performance in 2018
The wealth gap is at its widest point since the late 1930s, with the top 1% owning more than the bottom 90% combined, “which,” Dalio notes, “is the same sort of wealth gap that existed during the 1935-40 period (a period that brought in an era of great internal and external conflicts for most countries).”
Most people in the bottom 60% “are poor,” he writes. About 40% of all Americans would struggle to raise $400 in the event of an emergency, he says, citing a recent Federal Reserve study. The childhood poverty rate stands at 17.5% and has not shown meaningful improvement in decades. That, in turn, leads to poor academic achievement, low productivity and low incomes.
Read on: Dow Jones Industrial Average’s 6-month drought nears an end — but key hurdles remain
Also: 5 things JPMorgan CEO Jamie Dimon is worried about for America and his bank
“The income/education/wealth/opportunity gap reinforces the income/education/wealth/opportunity gap,” Dalio writes, citing statistics showing that richer communities have better funded public schools, with better teachers, equipment and materials. Poverty hurts the family unit, too, leading to divorces and separations that exacerbate hardships for children raised in poverty. Bad child care and bad education can lead to badly behaved adults, creating higher crime rates and higher levels of incarceration.
The wealth gap is weakening the U.S. because it is undermining the country’s strength relative to global competitors, according to Dalio. It is also creating dangerous social and political divisions that threaten cohesion — and capitalism itself.
“Disparity in wealth, especially when accompanied by disparity in values, leads to increasing conflict, and, in the government, that manifests itself in the form of populism of the left and populism of the right and often in revolutions of one sort or another,” Dalio writes. “For that reason, I am worried what the next economic downturn will be like, especially as central banks have limited ability to reverse it and we have so much political polarity and populism.”
Capitalists don’t know how to divide the economic pie, while socialists don’t know how to grow it, he writes, “yet we are now at a juncture in which either a) people of different ideological inclinations will work together to skillfully re-engineer the system so that the pie is both divided and grown well or b) we will have great conflict and some form of revolution that will hurt most everyone and will shrink the pie.”
Taking action
Who’s to blame for this predicament? Dalio says it’s not “evil rich people” or “lazy poor people” — it’s capitalism itself.
“Capitalism is now working in a way in which people and companies find it profitable to have policies and make technologies that lessen their people costs, which lessens a large percentage of the population’s share of society’s resources,” Dalio writes. “Those companies and people who are richer have greater buying power, which motivates those who seek profit to shift their resources to produce what the haves want relative to what the have-nots want, which includes fundamentally required things like good care and education for the have-not children.”
Giving people greater shares of national wealth, alleviating financial insecurity, and providing better opportunities for education and advancement, is key to Dalio’s proposed solutions to narrow the wealth gap.
Change must come from the top, he writes. “You will not effect change unless you affect the people who have their hands on the levers of power so that they move them to change things the way you want them to change,” Dalio notes. “So there need to be powerful forces from the top of the country that proclaim the income/wealth/opportunity gap to be a national emergency and take on the responsibility for re-engineering the system so that it works better.”
Dalio implores national leaders to make policies that improve people’s lives. Changes in personal and corporate taxation, borrowing, and philanthropy, are imperative and would be instrumental, he explains. His ideas include:
Create private-public partnerships to invest in socially and economically productive projects that offer a solid, measurable return on investment; tax pollution and other causes of poor health, for which society pays a price; raise more money from top-earners and distribute the proceeds to the middle- and bottom-earners, making sure to still encourage productivity and innovation; establish minimum standards of healthcare and education for all, and put “money and credit into the hands of those who have a higher propensity to spend from those who have a higher propensity to save and from those who need it less to those who need it more.”
The consequences of political inaction and continued infighting could be grave, Dalio warns. ”We are at the sort of critical juncture,” he writes, “in which the biggest issue will be how we deal with each other rather than any other constraints.”
Dalio senses danger in the defining national elections taking place over the next two years in the U.S., the U.K., Italy, Spain, France, Germany, and the European Parliament. He adds: “There are enough resources to go around to deal with the risky issues and produce much more equal opportunity plus improved productivity that will grow the pie. My big worry is that the sides will be intransigent in their positions so that capitalism will either a) be abandoned or b) not be reformed because those on the right will fight for keeping it as it is and those on the left will fight against it.”
If capitalism is caught in a political tug-of-war, its power and influence will decline and so will the pillars of economic and political freedom it supports, Dalio cautions. The way forward, he adds, is for “sensible and skilled” people from both sides to come together in a bipartisan effort to reform capitalism, “so it works well for the majority of the people.”