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
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+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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European stocks rise, diverging from U.S. tech fears


A worker assembles VW ID.3 electric cars at the Volkswagen factory on July 31, 2020 in Zwickau, Germany.


Jens Schlueter/Getty Images

European stocks advanced Monday, diverging from the U.S. after a rough week in markets.

Down 1.9% last week, the Stoxx Europe 600
SXXP,
+1.10%

rose 0.8%, with automakers including Renault
RNO,
+2.80%

and Volkswagen
VOW3,
+3.14%

advancing.

The German DAX
DAX,
+1.29%
,
French CAC 40
PX1,
+1.17%

and U.K. FTSE 100
UKX,
+1.36%

also advanced.

U.S. stock futures, which will still trade despite U.S. markets being shut for the Labor Day holiday, were lower, particularly for the tech-oriented Nasdaq 100
NQ00,
-0.94%
.

Last week the tech-dominated Nasdaq Composite
COMP,
-1.26%

lost 3.2%, its worst decline since the period ending March 20, and first drop after five consecutive gains.

SoftBank Group
9984,
-7.15%

shares dropped over 7% in Tokyo on Monday after The Wall Street Journal reported the Japanese investment group bought $4 billion worth of options tied to around $50 billion worth of individual tech stocks.

“There was no specific trigger to the selloff but after extreme bullishness driven by monetary and fiscal policies, stock prices reached levels that could no longer be justified by fundamentals,” said Hussein Sayed, chief market strategist at FXTM. “Liquidity and low interest rates alone cannot be the solution to everything, so it’s essential to see continued improvement in economic data and an end to the pandemic for sustainable upside in risk assets. ”

Germany reported a 1.2% rise in industrial production for July, which was a slower than forecast rise.

The British pound
GBPUSD,
-0.67%

weakened after the Financial Times reported the U.K. was working on legislation to override parts of the Brexit withdrawal agreement. The Sunday Express separately reported a dossier is being considered by Downing Street that would seek to limit access for European Union companies seeking to raise money in London. Talks on a post-Brexit U.K.-European Union trade deal are due to re-start Tuesday.

Associated British Foods
ABF,
+3.40%

rose 4% after saying trading in the fourth quarter ending Sept. 12 in both its food businesses and Primark exceeded expectations.



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Here’s why the stock market tumbled last week and what’s ahead for Wall Street


A bout of volatility returned to financial markets with a vengeance last week, disrupting a nearly uninterrupted climb to records for U.S. stock indexes and raising questions about the path for Wall Street headed into a hornet’s nest of challenges for investors.

Perhaps, the overarching question is, “What the heck just happened to equity markets in the 48 hours after the S&P 500 index
SPX,
-0.81%

and Nasdaq Composite Index
COMP,
-1.26%

on Wednesday notched their 22nd and 43rd closing records of 2020 respectively, and the Dow
DJIA,
-0.56%

scored its first finish above 29,000 since February, bringing it within 2% of its Feb. 12 all-time closing high?”

The bull perspective

From the bull’s perspective, not a lot has changed.

Bullish investors see the promise of lower interest rates for years to come and further injections of money by the Federal Reserve into various parts of the financial system, along with perhaps another fiscal stimulus from the government, as buttressing the market and offering a floor against future dramatic losses.

Optimists see the slump that the equity market experienced this week as a bump in the road to greater gains.

“Since the current bull market kicked off in March, there have only been two pullbacks of more than 5%. Recent bull markets have tended to have three or four setbacks over the first nine months,” wrote SunTrust Advisory chief market strategist Keith Lerner in a research note on Thursday — see chart:

Lerner also notes that the five-month winning streak for the S&P 500 since August, which has only occurred 27 times since 1950, is a good sign because it tends to imply that further returns are ahead.

So, investors may view this retreat as a natural corrective phase that removes some of the euphoric froth from equity valuations that had far exceeded the metrics that pragmatic investors use to assess an asset’s value compared against its peers.

MarketWatch’s William Watts wrote last Thursday, citing Dan Suzuki, deputy chief investment officer at Richard Bernstein Advisors, that technology stocks — particularly, a cohort that includes Facebook
FB,
-2.88%
,
Amazon.com
AMZN,
-2.17%
,
Netflix
NFLX,
-1.84%
,
Microsoft
MSFT,
-1.40%
,
Apple
AAPL,
+0.06%

and Google parent Alphabet
GOOGL,
-2.96%

GOOG,
-3.09%

(or FANMAG) — had seen their valuations rise by dint of multiple expansion, or rapidly rising prices, while other segments of the market had seen earnings estimates fall out of whack with their prices, distorting the “P” portion of the commonly used priced-to-earnings metric, or P/E, used to gauge a stock’s worth.

“But these two groups of stocks have gotten more expensive for completely different reasons,” he noted. “FANMAG’s P/E has risen because their ‘P’ (prices) has gone up faster than their ‘E’ (earnings), while the P/E for the rest of the S&P 500 has expanded because ‘E’ has gone down much more than ‘P’,” wrote Suzuki.

Indeed during the period between the market’s March lows and early last week, investors have maintained a voracious appetite for technology-related stocks, and a group known as “stay-at-home companies”, including Zoom Video Communications Inc.
ZM,
-2.99%
,
due to the belief that not only are they receiving a boost from the COVID-19 pandemic but also that they are best positioned to benefit when the economy eventually emerges from the recession.

A bounce off Friday’s lows, aided by moves into financials also was viewed as constructive for the broader market, heading into the three-day Labor Day weekend.

“The move higher was mostly led by financials, which came as a result of slightly higher rates rate on the long end of the curve, notably the 10 basis point move in the 10-year Treasury,” wrote Peter Essele, head of portfolio management for Commonwealth Financial Network, via email.

Yields in the 10-year Treasury
TMUBMUSD10Y,
0.721%

benchmark bond rose to 0.72%, marking the biggest single-day rise on Friday since May 18.

It’s unusual for yields to climb as stocks are falling as they did on Friday because investors usually turn to the perceived safety of government debt, driving prices higher and yields lower, in times of uncertainty. That didn’t occur on Friday and may be interpreted by some as signaling that at least fixed-income investors see the move in stocks as indicative of a temporary pullback rather than a more significant and lasting decline.

UBS Global Wealth Management’s chief Investment Officer Mark Haefele said that he viewed this week’s market drop as investors consolidating gains. “We view the latest selloff as a bout of profit-taking after a strong run,” he wrote.

“The S&P 500 enjoyed its strongest August in 34 years, gaining 7%, and added a further 2.3% in the first two days of September, to reach a fresh record high,” he wrote. “Stocks are still well-supported by a combination of Fed liquidity, attractive equity risk premiums, and a continuing recovery as economies reopen from the lockdowns.”

The bear’s perspective

From a bearish vantage point, the outlook for stocks looks more uncertain for investors. This uncertainty may have well laid the groundwork for substantial episodes of turbulence if not gut-wrenching drops in stocks, some experts say.

“The mini-tech selloff on Thursday has left a lot of scarring; it is not overly surprising that in New York equities trading, things were relatively muted into a long weekend,” wrote Stephen Innes, chief global markets strategist at AxiCorp, in a Friday research note.

September is a notoriously weak month for investors, and even if that weakness is somewhat moderated in an election year, October also has the hallmarks of a rough patch for Wall Street, with the Nov. 3 presidential election looming.

Chris Senyek, chief investment strategist at Wolfe Research, said the possibility of a resurgence of COVID-19 headed into the fall and winter also is cause to lighten up on stocks.

“Our sense is that a similar resurgence in infection rates is likely to occur in the United States this fall as children and college students returns to school and flu season begins,” analysts at Wolfe Research wrote on Friday.

Michael Kramer, founder of Mott Capital Markets, in a blog on Friday described the recent swings in the market as “insane” and said that it is difficult to gauge what’s ahead for the market, but he notes that an explosion in volumes related to the selloff could signal a change in the uptrend for stocks.

He noted that for the first time since April 3, the S&P 500 closed below its uptrend. “This is typically not something we want to see; it would indicate that momentum is likely shifting,” he wrote (see attached chart).

Of Friday’s paring of losses into the close, Kramer said: “The rally into the close was impressive, but it could have just as easily been on the heels of short-covering as it was on real buying.”

Part of the downturn occurred as two popular companies saw their shares drop after stock splits: Apple
AAPL,
+0.06%

and Tesla
TSLA,
+2.78%
.

Tesla has been among the highest of highfliers in recent months and viewed by some as a gauge of sentiment in the overall market. Its recent retreat is something bearish investors have pointed to as a signal of weakness in the market.

On top of that, Tesla wasn’t announced as a new entrant into the S&P 500 index late Friday, which may cast a pall over the stock that has lost about 20% from its peak.

The road ahead

Looking ahead, investors turn next to the Federal Reserve’s Sept. 15-16 policy meeting, which could be important in clarifying the length of the time interest rates could be held lower but also what, if any, new quantitative easing the central bank will implement.

Fed Chairman Jerome Powell in an interview with National Public Radio conducted Friday afternoon said that the 1.4 million jobs added to the labor market in August and an unemployment rate falling to 8.4% from 10.2% as a good sign of progress in the economy.

But he did emphasize that progress is going to be slow: “We do think it will get harder from here,” Powell said.

Doubts that the government will soon provide a fresh round of fiscal stimulus for out-of-work Americans has put some pressure on the Fed to do more to dull the impact on the economy from disruptions caused by the pandemic.

The Fed’s role may be the most important feature of whether the stock market is able to continue to make progress higher. As it stands now, there are few alternatives to stocks, with long-dated government bonds yielding around 1% or less.



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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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