The current sell-off may end up emboldening the bulls, if the last tech bubble is a guide


The bubble isn’t burst yet.


Justin Edmonds/Getty Images

Traders at the moment seem to have as much patience with tech stocks as Kansas City Chiefs fans do for a moment of unity.

Thursday was the fourth ugly finish in five sessions, with the Nasdaq Composite
COMP,
-1.99%

skidding 2%, and the other major indexes backtracking as well.

Andrea Cicione, head of strategy at independent investment research firm TS Lombard, said excessive leverage in the market really began in earnest in July. Cicione added that was occurring in U.S. stocks wasn’t happening anywhere else in the world.

And while he’s seeing signs of a bubble, he thinks if the selling doesn’t intensify, the bubble may reflate soon.

“The leverage accumulation so far may not be enough to burst the bubble just yet,” he writes. “If the recent selloff does not intensify further, the whole episode may end up simply emboldening the bulls to buy the dip and take even more risk.”

Between 1997 and 1998, the Nasdaq experienced three sell-offs of at least 17%, only to emerge stronger and rise four-fold to the 2000 peak. “Leverage is a key characteristic of all bubbles, and almost invariably it is the mechanism that leads to their collapse. But there may not have been enough leverage for the dot-com 2.0 bubble to burst just yet,” he says.

The reason leverage is important in bursting bubbles is because it uniquely can lead to forced unwinding. “When faced with margin calls they cannot meet, investors may have to liquidate positions against their will. The resulting fall in prices can instil doubts in the mind of others, persuading them to sell,” he said.

The buzz

Consumer price data for August is due at 8:30 a.m. Eastern.

The quarterly services survey and August budget deficit are also due for release. The Congressional Budget Office, which typically gets the budget picture pretty close to the mark, estimated the August deficit was $198 billion, and said the September-ending fiscal year gap will be the highest relative to the economy since 1945.

Database software giant Oracle
ORCL,
+0.66%

topped earnings and revenue expectations, helped by revenue from key client Zoom Video Communications
ZM,
-1.32%
.
Oracle also declined to discuss whether it will buy the U.S. operations of social-media company TikTok, as U.S. President Donald Trump said Thursday there will be no extension of the Sept. 15 deadline for it to be sold to a U.S. company or shut.

Peloton Interactive
PTON,
-3.75%
,
the exercise bicycle company, reported stronger-than-forecast fiscal fourth-quarter earnings and revenue, with its current year outlook also well ahead of estimates.

Jean-Sébastien Jacques, the chief executive of mining giant Rio Tinto
RIO,
-1.67%
,
announced he will resign in March following the controversy over the firm blowing up ancient caves while excavating for iron ore.

Thursday marked the first day since spring when new coronavirus cases in the European Union and the U.K. exceeded the United States.

The market

U.S. stock futures
ES00,
+0.65%

NQ00,
+0.64%

were stronger.

Gold futures
GCZ20,
-0.46%

fell while oil futures
CL.1,
+0.21%

edged higher.

The British pound
GBPUSD,
+0.18%

continues to reel from its more combative stance taken against the European Union in trade negotiations.

The chart

This incredible UBS illustration of Tesla
TSLA,
+1.38%

shows how shares have performed compared to other tech giants since joining the $100 billion market cap club. It took Apple
AAPL,
-3.26%
,
Alphabet
GOOGL,
-1.36%

and Facebook
FB,
-2.05%

between 4 to 11 years to achieve what Tesla did in three quarters. UBS increased its Tesla price target to $325 from $160 ahead of the company’s battery day presentation.

Random reads

Here’s the 2010 memo from a venture capital firm on an investment which valued retail software maker Shopify at $25 million. Shopify
SHOP,
-1.59%

is now worth $114 billion.

China said its U.K. ambassador’s Twitter account was hacked — after a steamy post was liked.

An experimental treatment kept mice strong in space, one that could have uses back on Earth.

Need to Know starts early and is updated until the opening bell, but sign up here to get it delivered once to your email box. The emailed version will be sent out at about 7:30 a.m. Eastern.



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Apple countersues Epic Games for breach of contract


Apple Inc. countersued Epic Games Inc. on Tuesday, claiming the maker of “Fortnite” breached a contract when it introduced a new in-app payment system within the popular videogame.

The iPhone maker
AAPL,
-6.72%

asked U.S. District Judge Yvonne Gonzalez Rogers for punitive damages and to block Epic from continuing what it calls unfair business practices, in the escalating skirmish between the two companies. Late Friday, Epic sought an injunction to force Apple to put “Fortnite” back on the App Store, disclosing that roughly a third of “Fortnite” players access it through the App Store.

“Although Epic portrays itself as a modern corporate Robin Hood, in reality it is a multibillion-dollar enterprise that simply wants to pay nothing for the tremendous value it derives from the App Store,” Apple said in a filing Tuesday.

An Apple spokesman declined further comment, but pointed to a company statement on the Epic case called “Free Fortnite.” Epic was not immediately available for comment.

Apple shares plunged nearly 7% in trading Tuesday in another rough day for tech stocks.

The latest legal jousting comes nearly a month after Epic introduced the payment system within the “Fortnite” to side-step the 30% fee Apple and Alphabet Inc.’s
GOOGL,
-3.64%

GOOG,
-3.68%

Google charge for in-app purchases. Epic’s gambit prompted both companies to boot the game from their app marketplaces. Epic eventually sued Apple and Google in federal court in Northern California, accusing the computing giants of anticompetitive conduct.

Epic’s stand against Apple has prompted voices of support from Microsoft Corp.
MSFT,
-5.41%

, Spotify Technology Inc.
SPOT,
-3.30%

, and others.

The Apple-Epic case has set evolving battle lines on market definition, according to antitrust attorney Paul Swanson.

“Market and product definition may end up being the central battleground in this case. Does Apple have to open up the app-purchasing and in-app purchasing space to competitors, or are those intrinsic parts of Apple’s products that it can rightfully control?” Swanson told MarketWatch.



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New China ban threat puts U.S. chip-equipment makers at forefront of tech stock rout



MARKETWATCH PHOTO ILLUSTRATION/ISTOCKPHOTO

Chip equipment makers led technology stocks lower Tuesday following reports that U.S. sanctions could spread to businesses like Semiconductor Manufacturing International Corp., China’s largest chip fabricator.

Shares of KLA Corp.
KLAC,
-7.74%
,
Lam Research Corp.
LRCX,
-6.86%
,
and Applied Materials Inc. AMAT all fell more than 6% as U.S. stock markets opened on Tuesday following Labor Day holiday weekend, while the PHLX Semiconductor Index SOX was down nearly 3%.

Over the weekend, reports surfaced that SMIC could be added to a U.S. “entity list” like telecom equipment maker Huawei back in May. On Monday, when U.S. markets were closed, SMIC
981,
+3.07%

shares dropped more than 20% in Hong Kong trading.

Meanwhile, the U.S. tech-heavy Nasdaq Composite Index
COMP,
-2.33%

was down 2.6% and the S&P 500 index
SPX,
-1.50%

was off 1.8% Tuesday.

Investors may be worrying that SMIC is just another one of many Chinese companies to get added to the list, given President Donald Trump’s recent bellicosity toward Chinese-owned apps TikTok and WeChat .

“Will the Trump Administration stop with only Huawei and SMIC?” speculated Evercore ISI analyst C.J. Muse in a Tuesday note. “Hard to say,” he said, warning that other chip makers in China could be next. Should the potential ban be limited to SMIC, then chip-related stocks have been oversold, Muse said.

Tech stocks have been getting battered since last week, when the tech sector gave up in two sessions at least half of seven week’s worth of gains from a strong earnings season .

Morgan Stanley analyst Joseph Moore said adding SMIC to the list “certainly would be a negative impact to our semiconductor capital equipment coverage”. Moore noted that SMIC had plans of spending $6.7 billion in capital equipment this year alone.

“The bigger issue is that the China risk factor for semiconductor capital equipment continues to grow, as U.S. Commerce Department actions continue to impact new areas,” Moore said.

Susquehanna Financial analyst Mehdi Hosseini took a much less fearful view of the development, remarking that “policy has also proven a double edged sword as efforts of the past few years in isolating China have not really proven a winning strategy”.

Hosseini said “with secular trends suggesting a bright future for chip consumption and thus [semiconductor capital equipment], especially as more of the demand shifts to cloud/commercial end markets, the pull backs caused by such headline risks can also offer a buying opportunity, in our view.



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Apple’s ‘dark side’ led these brothers to launch the AppRising


Ben and Dan Volach are unlikely candidates to lead a developer insurrection against Apple Inc., a company whose products they deeply admire.

But the chatty Israeli brothers, who have a knack of finishing each others’ sentences, find themselves at the vanguard of an “AppRising” against Apple
AAPL,
+0.06%

and its increasingly controversial App Store.

“We like Apple as a company, but they have a really dark side,” says Ben, explaining the motivation behind a David-vs.-Goliath lawsuit that has given antitrust scrutiny a kick in the behind and set the stage for Epic Games Inc.’s lawsuit against Apple following the eviction of mega-popular game “Fortnite” from the App Store. The brothers claim Apple outright copied a feature from their email app, BlueMail, and then immediately booted it from the App Store with no warning.

Read more: ‘Fortnite’s’ impact could be Epic on antitrust investigations of Big Tech

“Apple is a monopoly. It dictates what it wants, and how it wants to shape it,” adds Dan. “It’s about the way they behave — not their products. The practice is troubling. They should allow for competition.”

Ben, 37, and Dan, 43, decided to take on Apple, and challenge its 30% commission fee for developers on the App Store, when no one else would. Now, they find themselves on the front lines of a digital insurrection against the iPhone maker, shoulder-to-shoulder with Epic, Microsoft Corp.
MSFT,
-1.40%

, Facebook Inc.
FB,
-2.88%

, Spotify Technology Inc.
SPOT,
-5.14%

, and other big names. An Epic spokeswoman said the company has no comment on the Volachs’ suit.

The Volachs’ company, Blix Inc., is the only other private company to file antitrust litigation against the iPhone maker, in October 2019, which led them to work closely with the staff of Rep. David Cicilline, D-R.I., chairman of the House Judiciary Antitrust Subcommittee, in advance of the July 29 hearing on Big Tech. Apple Chief Executive Tim Cook was briefly grilled on the business practices of the App Store, but defended its cut and insisted all of the store’s 1 million-plus developers were treated fairly. A spokesman for Cicilline declined comment on the Volachs’ participation.

At the hearings, Rep. Hank Johnson, D-Ga., pressed Cook: “Has Apple ever retaliated against or disadvantaged a developer who went public with their frustrations with the App Store?”

“Sir, we do not retaliate or bully people,” Cook said flatly. “It’s strongly against our company culture.”

Read more: Antitrust questions bruise but don’t break Big Tech CEOs in historic hearing

What got Cook and the Volachs there was Apple’s decision to introduce an app called Sign in With Apple, at the Worldwide Developers Conference in June 2019 that bore striking similarity to a feature on Blix’s email app BlueMail. Apple’s new feature lets users generate a random email address for apps when signing in, so they never need to hand over personal information to a third party.

In 2018, BlueMail added a patented feature that does precisely the same thing. Fueling the Volachs’ anxiety, Apple removed BlueMail from the Mac App Store a few days after debuting Sign in With Apple, underscoring their claim that Apple has manipulated the App Store to promote its own apps over competitors.

A few months later, Blix sued Apple in a Delaware court, claiming patent infringement and violation of U.S. antitrust laws.

Among their arguments: Developers of iPhone apps over the years have repeatedly discovered that Apple had integrated technology similar to theirs into its devices, often at no charge to users. For example, flashlight apps that once flourished on the App Store were eliminated after Apple integrated them into iPhone screens.

An Apple spokeswoman said BlueMail was removed from the macOS store because of security concerns. Apple attempted to work with Blix to bring the app back to the store and offers developers a “fair and level playing field,” the company said in a statement.

Such are the vagaries of doing business on vast digital platforms, where the operators like Apple and Google often incorporate the best ideas that developers come up with, says James Currier, managing partner at venture-capital firm NFX.

“We are developers. All we want to do is bring applications to consumers,” says Ben Volach, who has 20 patents and applications. “We are really worried about bringing innovation to the market. [Apple] is ruling the world, and making it more difficult than ever to compete. They are acting more like gate keepers, and need to behave more like innovators.”

Their decision didn’t come lightly. Ben and Dan, who grew up in Haifa and split time between London and New Jersey, are not just unavowed Apple fans but they understand the vast influence of Apple’s App Store and Alphabet Inc.’s
GOOGL,
-2.96%

GOOG,
-3.09%

Google Play.

Blix, which claims it has data showing Apple suppressed App Store rankings of products that compete with Apple’s own apps, also believes Apple and Google are working in concert on pricing, which led Google to abruptly kick its BlueMail email app off its Play Store — 36 hours after Blix developers revealed they cooperated with House lawmakers.

“Google retaliated against us for outspokenness on antitrust issues,” Volach said.

A Google spokesperson said in a written statement that the BlueMail app had been reinstated to the store. Volach countered that unfavorable media coverage forced Google’s hand after only 15 hours.

What has emboldened the Volachs beyond outrage is their ability to devote the resources, time, and effort it requires to take on a corporate behemoth like Apple, which has a market value of more than $2 trillion.

While other small developers shrink from the financial obligations, the Volachs have a cushion of sorts: In 2006, they sold their mobile messenger company, Followap, to a company called Neustar for about $140 million.

Still, most app developers live and die with the Apple because most of their revenue comes from being distributed and sold on the store.

“Going public against the App Store is viewed as biting the hand that feeds you and few developers are so bold,” Adam Landis, CEO of mobile-analytics company AdLibertas Inc., told MarketWatch. “No store means no distribution, which means no new users, which means no growth.”

But the Volachs — the standard bearers of an ideological campaign with the hashtag #fairness2020 and a website — are doubling down and calling on other developers hurt by Apple to join them and tell their story. Indeed, they haven’t ruled out a class-action lawsuit.

“We are optimistic, and we are going to keep fighting they are going to change,” Ben says. “A lot of smaller companies just don’t have the resources, time and effort to fight Apple.”



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U.S. Defense Department reaffirms $10 billion cloud deal to Microsoft


The Force appears to be finally with Microsoft Corp. in its epic duel with Amazon.com Inc. for JEDI.

The Department of Defense on Friday said it has completed its re-evaluation of the hotly-contested $10 billion cloud-computing deal and reaffirmed its award to Microsoft. “Microsoft’s proposal continues to represent the best value to the government,” the DoD said in a statement.

“The JEDI Cloud contract is a firm-fixed-price, indefinite-delivery/indefinite-quantity contract that will make a full range of cloud computing services available to the DoD,” the statement continued. “While contract performance will not begin immediately due to the Preliminary Injunction Order issued by the Court of Federal Claims on February 13, 2020, DoD is eager to begin delivering this capability to our men and women in uniform.”

The announcement came shortly before the markets closed. In another brutal day for tech stocks Friday, shares of Microsoft
MSFT,
-1.40%

dropped 1.4% in trading; Amazon
AMZN,
-2.17%

shares declined 2.2%.

“We appreciate that after careful review, the DoD confirmed that we offered the right technology and the best value. We’re ready to get to work and make sure that those who serve our country have access to this much needed technology,” a Microsoft spokesperson told MarketWatch.

Amazon vowed to “protest this politically corrupted contract award” in a strongly worded blog post.

“[Amazon Web Services] remains deeply concerned that the JEDI contract award creates a dangerous precedent that threatens the integrity of the federal procurement system and the ability of our nation’s warfighters and civil servants to access the best possible technologies,” Amazon said. “Others have raised similar concerns around a growing trend where defense officials act based on a desire to please the President, rather than do what’s right.”

“This was illustrated by the refusal to cooperate with the DoD Inspector General, which sought to investigate allegations that the President interfered in the JEDI procurement in order to steer the award away from AWS,” Amazon continued. “Instead of cooperating, the White House exerted a ‘presidential communications privilege’ that resulted in senior DoD officials not answering questions about JEDI communications between the White House and DoD. This begs the question, what do they have to hide?”

The Defense Department’s Joint Enterprise Defense Infrastructure (JEDI) cloud-computing deal over 10 years is considered a plum government contract. The Pentagon initially awarded JEDI to Microsoft in October over the objections of co-finalist Amazon, which filed suit in protest in November. In April, a federal judge gave the Pentagon permission to reevaluate bids from Microsoft and Amazon.

Read more: Amazon files suit, challenging Pentagon’s $10 billion cloud contract to Microsoft

Anticipating a win, Microsoft has been signing similar deals with foreign governments for cloud-infrastructure services, according to a report by CNBC last month.

For years, Microsoft and co-finalist Amazon have engaged in behind-the-scenes lobbying and subterfuge over the deal as they battle for supremacy in the cloud market. And at times, the competition has taken on almost a cartoonish quality, evoking Mad magazine’s Spy vs. Spy comic strip.

Adding to the political intrigue is the future of TikTok, a video-sharing social networking service owned by ByteDance, a Beijing-based Internet company. Microsoft is the leading candidate to acquire TikTok, though Oracle Corp.
ORCL,
-2.39%

and Twitter Inc.
TWTR,
-4.22%

have also been mentioned as suitors. Alphabet Inc.’s
GOOGL,
-2.96%

GOOG,
-3.09%

Google was part of a group that explored a bid before dropping the idea, according to a Bloomberg report.

Microsoft is believed to be the favorite to acquire TikTok, published reports suggest, because it has been in close contact with the Trump administration. The software giant was initially awarded JEDI in October because of the president’s disdain for Amazon Chief Executive Jeff Bezos, who also owns the Trump-baiting Washington Post, say two people closely aligned to Amazon who are not authorized to speak publicly on the matter.

Amazon Web Services commanded 47% of the cloud infrastructure market in 2019, while Microsoft had 13%, according to estimates from market researcher IDC.

“This is a game changer for Microsoft as JEDI will have a ripple effect for the company’s cloud business for years to come, and speaks to a new chapter of Redmond winning in the cloud vs. Amazon in our opinion on the next $1 trillion of cloud spending expected to happen over the next decade,” Wedbush Securities analyst Daniel Ives said in a note late Friday.



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