April 7, 2014

Global Macro 360 - Daily Note - Tech Crunched

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Here is an extract from today’s Global Macro 360 Daily Note. To read the full content click here to sign up for a One Week Free Trial.

Tech Crunched_1

Summary

  • Tech Crunch? Are falling tech prices the new normal?
  • United States: Risk off – to stay with us?
  • United States: Yanks creating enough jobs.
  • Eurozone: ECB has modelled up to 1 trillion euros of QE
  • Russia: Inflation continues to accelerate
  • The week ahead: A lull in the data

 Good morning

When the price of tech stocks with no income starts to fall, is it a sign of normal or abnormal times ahead?

This is a question I’d like you to think about because one the of the most interesting developments since we flagged tech weakness to you in our note Candy Crushed  has been the recent fall in tech stocks. This continued last week and last night we saw Asian tech getting hammered.

So what’s happening?

To tell you the truth I don’t know. But just consider the chart below.

Figure 1: Tech crushed?

Chart 1 7 Apr

The S&P is not doing much, yet the tech sector is falling rapidly.

My best guess as to what’s behind this is the market is now beginning to price in normal times ahead. In the US, there will be less and less and then ultimately no QE, unemployment will slowly head towards 5.5%, interest rates will increase gently and all the free money – which was driving the excessive valuations of these tech stocks –  will slowly disappear.

This is a massive change to the liquidity environment and it will alter people’s perception of risk and value. Little things like profits, costs and the overall business model of the more outlandish tech propositions, will be looked at in a harder light. This means trouble for the more fanciful sales pitches to have come out of Silicon Valley in the past few months and years.

If there isn’t always a Facebook to act as the buyer of last resort for startups, where’s the exit strategy for stocks that can’t make profits?

If tech takes a persistent tumble, this will be huge news for a market which had almost got used to ludicrous valuations and got used also to a lack of financial rigour because cheap money meant prices could just go up and up.

Not any more.

(BTW I will be on CNBC’s squawkbox tomorrow morning at 8.45 am, tune in.)

 

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