You Need Us

The reflationary vibes were discernible Tuesday, as 10-year breakevens pushed up against 2.4% (second figure below), the highest in some eight years. Copper’s monumental rally continued.

More broadly, Treasurys fell, even as the seven-year sale was relatively well received. Volume was a bit low ahead of the Fed.

Jeff Gundlach offered some run-of-the-mill Fed criticism. “I’m not sure why they think they know it’s transitory,” Gundlach told Bloomberg, of the Fed’s benign assessment of the inflation outlook. “How do they know that when there’s plenty of money printing that’s been going on and we’ve seen commodity prices going up really massively?”

They don’t “know that,” Jeff. But neither do you on the other side of the debate (which I assume is the side he’s inclined to take).

We’re in new territory with the pandemic policy conjuncture. Nobody knows anything. Better to embrace the great unknown than to rail against it. Unless it’s Bitcoin. In which just call me old fashioned or, as one reader put it Tuesday, “a horse owner yelling at those new-fangled automobiles.” (I’ve never been on a horse, let alone owned one, by the way.)

“They’re guessing,” Gundlach added, of the Fed. But, again, aren’t we all?

Gundlach also described upcoming Treasury issuance as a “spawn supply,” a somewhat bizarre, if amusing characterization. At least he’s always good for a chuckle (or three).

I’m not inclined to spend much time on Gundlach. When it comes to macro, he’s not wrong. Which is about all you can ever say about his public musings. When it comes to equities, he’s often wrong. Just like the rest of us.

Big-tech earnings after the bell went fine, all things considered. Alphabet beat on the top-line with revenue of $55.31 billion, up 34%. Consensus was looking for $51.61 billion. Operating income looked like a sizable beat. Margins exceeded estimates and EPS was well above the top-end of the range ($26.29 versus $11.32 to $19.44). Ex-TAC revenue of $45.60 billion was ahead of the Street. A fresh $50 billion buyback will likely go over well. YouTube ads revenue of $6.0 billion was up roughly 50% YoY. Cloud revenue of $4 billion was in-line and grew 46%.

The company delivered the customary reminder. Basically: You need us — especially in a pandemic. “Over the last year, people have turned to Google Search and many online services to stay informed, connected and entertained,” Sundar Pichai said. “Our Cloud services are helping businesses, big and small, accelerate their digital transformations.” Of course, Google is also poised to benefit from the reopening as consumers Google where they’re going to go, what they’re going to do and how they’re going to get there.

Microsoft, meanwhile, logged its best revenue growth in years, and yet, at $41.71 billion, the top-line was still within the range. EPS of $2.03 was up 45% and easily beat consensus ($1.78). Operating income, which rose 31%, topped the highest estimate. Satya Nadella offered a similar message to Google’s. “Over a year into the pandemic, digital adoption curves aren’t slowing down. They’re accelerating, and it’s just the beginning,” Nadella remarked. “We are building the cloud for the next decade, expanding our addressable market and innovating across every layer of the tech stack to help our customers be resilient and transform.” Again: You need us.

Google rose after the bell. Microsoft retreated. It barely matters. It’s the same story every quarter. It’s a digital world. The pandemic accelerated the shift. And a handful of companies control the entire ecosystem.

During big-tech earnings, I often take the opportunity to recap some of the more poignant excerpts from last year’s coverage. They’re just as applicable today as they were then.

Yes, we’ve had a mini-correction in the Nasdaq 100. And most analysts see the rotation to cyclicals and value remaining intact for at least a while longer as the recovery accelerates. But I imagine the quotes (below) will remain a semblance of accurate in virtual perpetuity. Especially if the big five are allowed to keep buying up competitors. The following are presented using bullet points, in no particular order.

• In addition to the macro-based investment thesis, widespread fascination with the top five stocks stems at least in part from the world’s childlike obsession with toys, gadgets and the apps that run on them.
• “Scroll hypnosis” is a real thing. If you’re an investor and you want to “own what you know”, everyone “knows” these companies because, increasingly, they’re synonymous with life in a way that something like Starbucks or Nike are not. It’s true that you “are what you eat” and that people still identify with brand names. But you aren’t a white chocolate mocha or a pair of VaporMax in the same way that you are your Instagram or your Twitter handle.
• While the business models of the tech heavyweights weren’t immune to COVID-19, they have a stranglehold on all aspects of digital existence.
• These monopolies permeate nearly every facet of daily life. And for millions upon millions of Americans, digital life is increasingly the only kind of existence there is. Maybe herd immunity can change that. But somehow, I doubt it.
• Mega-cap tech are the new utilities. It’s simple really. You seek safety in the oligopoly whose businesses pervade nearly every aspect of human existence. The pandemic reinforced the trend towards a digitized, virtual world.
• Nothing – not regulatory worries, not ridiculous multiples, not overt threats from politicians, not privacy breaches – seems capable of short circuiting the perpetual motion machine dynamic driving these names inexorably higher.
• Yes, there’s something profoundly absurd about stretched tech names counting as “defensive”, but remember, that’s the zeitgeist. It’s been that way for quite a while. The pandemic just cemented the case by giving people a health-based excuse to avoid human interaction and further immerse themselves in the digital realm.
• I’ve joked previously about an “infinity rally” in the sector. While it’s possible to posit a number of mildly bearish scenarios, one thing I haven’t heard from anyone, anywhere, is a convincing argument for why investors should abandon the big five en masse.
• Put differently, there doesn’t seem to be an aggressive bear case for mega-cap tech in a world where the same handful of companies are, in one way or another, embedded in virtually all aspects of social interaction and commerce. It’s an oligopoly over almost every facet of human existence.