(Anti)Trust Me – Again

It doesn’t take much to spark “trade optimism” these days.

News that Bob Lighthizer and his entourage will head to Shanghai next Monday for the first in-person, principal-level trade talks between the US and China since negotiations broke down in May was enough to propel US equities to their best day since July 3.

Forget the fact that a broad deal is nowhere in sight. And listen, that’s not an attempt to employ pessimism for the sake of pessimism. There are good reasons to believe that both sides would be fine with letting this drag out for the foreseeable future, especially if the Trump administration lifts restrictions on Huawei and China deploys enough stimulus to stabilize the domestic economy.

As usual, Wilbur Ross struck a downbeat tone. “It is impossible to judge how long it will take when the president’s objective is to get a proper deal or go ahead with tariffs”, he said. At this point, you’d be forgiven for asking whether Wilbur is just hopelessly tone deaf. Previously it was tempting to suggest that Ross’s curmudgeonly assessments were down to him being a realist, but by now, you have to speculate on whether he might be oblivious to how futile he makes everything sound. The reported addition of China’s Commerce Minister Zhong Shan to the negotiating mix arguably doesn’t bode well either.

In any event, markets that want to move higher tend to do so absent an excuse not to, and that’s precisely what’s happening this week.

That said, the rally will get a test with Facebook, Amazon and Alphabet all set to report and the big news after hours was the Justice Department’s “antitrust review” of big tech. Tuesday’s press release was somewhat vague and there’s more than a little confusion about how this jibes with last month’s news of a tag-team-style investigation being conducted by the FTC and the DoJ.

The big names fell in late trading, dragging down QQQ and, eventually, Nasdaq futs.

The news comes after last week’s hearings on Capitol Hill, where lawmakers are conducting their own investigation into anti-competitive practices on the part of America’s tech giants. Democrat David Cicilline penned an irritated letter to Facebook, Amazon and Google this week and has accused the companies of furnishing “evasive, incomplete, or misleading answers”.

The DoJ’s press release says the Department’s Antitrust Division “is reviewing whether and how market-leading online platforms have achieved market power and are engaging in practices that have reduced competition, stifled innovation, or otherwise harmed consumers”. In other words, these are the same questions centered around the same laundry list of concerns.

You’re reminded that when the FTC and DoJ news hit on June 3, big-cap tech underperformed the S&P by the widest margin since Goldman’s infamous “Is FANG Mispriced” note.

We’ve written a ton on this over the past 14 months. In fact, it’s not clear how much else there is to say until further information becomes available.

Regulatory concerns have been swirling around Amazon, Google and Facebook for a long, long time, and the latter’s role in inadvertently facilitating a hostile foreign power’s successful attempt to subvert American democracy doesn’t help. Meanwhile, the person who benefited the most from that same subversion (Donald Trump), is determined to make life hell for Jeff Bezos. Throw a notoriously fearsome Democratic presidential candidate who’s equally determined (if not more so) to break up all three of the companies, and you’ve got a potentially precarious setup, although given how little lawmakers seem to know about how these businesses actually work, it’s safe to say the ultimate day of reckoning, assuming there is one, is a long time off.

Of course, Trump has repeatedly threatened to fine the companies. Indeed, his rhetoric in that regard has been particularly shrill over the past several weeks. None of the companies were invited to the president’s farcical “social media summit” earlier this month and Trump seems to be particularly irked by the prospect of Brussels fining “his” tech companies.

Read more: Trump Tells Big Tech ‘If Anybody Is Gonna Sue You, It Should Be Me!’

Given all of the above, it’s probably not entirely safe to assume that the high-fliers which have, at various intervals, shouldered the burden of the US equity rally, aren’t at risk of something more serious than an EU-style fine.

“Regulatory concerns for Google can be segmented into three primary areas: 1) Anti-trust, 2) Taxes and 3) Privacy [and] we see all three being front-and-center issues in 2019 and beyond”, Barclays wrote last month, when regulatory scrutiny kicked up in earnest, adding that “this comes at a troubling time, as Google’s fundamentals are eroding along with the rest of the internet.” The bank cautioned that Google is almost out of friends inside the Beltway. “[The company] has few allies left in Washington after heavy alignment with the Democratic party candidates who didn’t get elected, so we’d guess this inquiry will be long and painful, but we doubt will result in breaking up the company”, Barclays went on to say. Ironically, the bank said it sees a lot of upside if “Senator Warren gets her way.” Specifically, they cited “hidden gems” buried inside Google which aren’t currently reflected in the company’s market cap. A rough, back-of-the-envelope calculation shows 30% upside to current levels (see figure).

While analysts have generally played down the risk of an actual forced, Warren-style breakup of any of the companies mentioned above, these investigations are likely to bring to the public’s attention a series of rather alarming statistics about just how dominate the firms really are. As with any alarming statistics, the numbers make for astonishing visuals that may help galvanize public opinion.

On June 12, we highlighted some of those visuals. You can peruse them all in “As Antitrust Probes Ramp Up, Facebook, Amazon, Google Investors Should Fear These Charts“, but we’ll re-run a handful of them in light of Tuesday evening’s news.

The following two visuals depict, from left, equity market concentration and the share of sales captured by mega firms in their respective industries.

(Goldman)

The simple pie chart below shows Google’s share of global search. On the right is a bar chart showing Google, Facebook and Amazon are set to account for a combined 68% of US net digital ad revenue.

(Goldman)

As we’ve written previously, everyone knows these numbers, but the visuals always come across as particularly poignant.

The bottom line is the same as it was last month. While most observers will likely scoff at “breakup risk”, we caution that nobody should underestimate the lengths politicians will go to in order to placate voters when public opinion becomes galvanized around a highly-charged issue.

In addition to that, nobody should underestimate the lengths Trump will go to in order to settle a personal score.