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

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

topped earnings and revenue expectations, helped by revenue from key client Zoom Video Communications
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
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
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


were stronger.

Gold futures

fell while oil futures

edged higher.

The British pound

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

The chart

This incredible UBS illustration of Tesla

shows how shares have performed compared to other tech giants since joining the $100 billion market cap club. It took Apple

and Facebook

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

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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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

and Nasdaq Composite Index

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

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

and Google parent Alphabet


(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.
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

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

and Tesla

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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What can Zoom do for a sequel to one of the most astounding earnings blowouts of all time?

Zoom Video Communications Inc. enjoyed one of the biggest blowout earnings reports in history in early June, as the COVID-19 pandemic made the company’s name synonymous with videoconferencing and attracted millions of new users to its service.


profit roared more than ten times higher, revenue exploded with 169% growth, and the company doubled its expectations for full-year sales. An analyst on Zoom’s conference call called the quarter perhaps the greatest in enterprise-software history, and Zoom shares — which many believed had run too far heading into that report — have gained more than 80% in the three months since.

For more: Zoom’s astounding quarter shows it expects to be a force even after workers go back to the office

There is only one problem with that type of performance: How do you follow it up ? On Wall Street, an outstanding performance only increases expectations for it to repeat when Zoom reports second-quarter earnings Monday afternoon.

Morgan Stanley analysts reported last week that the “buy-side” expects Zoom to beat consensus estimates by about 30%, even after the company’s forecast for about a half-billion dollars in revenue for the quarter sent analysts’ estimates soaring. And even Morgan Stanley analysts, who are not as bullish on Zoom as other banks with an equal-weight rating on the stock, believe Zoom will meet those expectations — at least for now.

“In general, we think that buy-side expectations for FQ2 (~30% beat) can be achieved and that the company will have flexibility to guide down slightly or flat sequentially, creating little risk heading into the quarter,” the analysts wrote in an Aug. 20 note in which they increased their price target on Zoom to $240 from $190. “However, with buy-side expectations calling for significant continuation of growth trajectory into FY22 and FY23, we are aware that there could be some valuation contraction as sequential growth slows in the back half.”

Analysts cited strong growth in app downloads and users as reasons for yet another strong performance, as well as users signing up for paid plans after getting their feet wet with a free account earlier in the pandemic.

“App downloads [and monthly active users] remain strong and we show a path to F2Q21 revenue well ahead of consensus expectations (and likely buy side expectations as well) serving as a near-term catalyst for additional share appreciation,” RBC Capital Markets analysts wrote in an Aug. 17 note titled “All I Wanna Do is Zoom-A-Zoom-Zoom,” a reference to the early-90s rap hit “Rump Shaker.”

The analysts, who maintained at outperform rating and raised their price target to $300 from $250, said that data from SensorTower shows metrics are seeing “moderation from April peaks yet remain significantly above pre-COVID levels.”

Zoom has also been pushing new initiatives, expanding its Zoom Phone cloud-telephony service to new countries and introducing a hardware-as-a-service offering as well as a Zoom for Home device. While that may not make a material difference immediately, it is additive for the long term and helps Zoom compete against legacy offerings like Cisco Systems Inc.’s


“We also continue to view Zoom Phone as an interesting component of the company’s market opportunity,” William Blair analysts said in a Wednesday note that maintained an overweight rating. “Our industry conversations suggest that continued development around this product, as well as persistent expansion of native international support, is driving competitive wins against legacy solutions as well as modern UCaaS providers.”

While continuing to try to nab customers from competitors, Zoom may already have the largest share of the videoconferencing market. JP Morgan analysts reported on July 31 that Zoom has now captured roughly half of the videoconferencing market just more than a year after its initial public offering.

“Zoom has captured the biggest portion of market share, increasing
from ~34% of total MAU’s back in March, to over 48% as of July 24th,” the analysts wrote while maintaining an overweight rating. ” Google


also seems to have captured market share, but their offering is free leveraging what we think to be education customers and smaller businesses that are not where we see the biggest long-term opportunity for Zoom.”

What to expect

Earnings: Analysts on average expect adjusted earnings of 45 cents a share, according to FactSet, up from 8 cents a share a year ago, after Zoom guided for adjusted earnings of 44 cents to 46 cents a share. Analysts were predicting 11 cents a share in adjusted earnings ahead of the last earnings report from Zoom.

Estimize, a software platform that crowdsources estimates from hedge-fund executives, brokerages, buy-side analysts and others, reports an average projection of 50 cents a share in adjusted earnings.

Revenue: Analysts on average expect revenue of $500 million, according to FactSet, up from $146 million a year before, after Zoom projected sales of $495 million to $500 million. Analysts were expecting less than $225 million on average before Zoom increased its forecast in early June.

Contributors to Estimize expect revenue of $531.9 million on average.

Stock movement: Zoom stock has increased the day after the company released earnings in three of five instances since the company went public, including both events so far in 2020, when shares increased 7% and 7.6% respectively. The stock overall has more than quadrupled this year, gaining 339.8% as the S&P 500 index

has gained 10%.

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The New York City office may be in limbo, but dead? Fuhgeddaboudit

The middle of New York City remains a ghost town almost six months after the pandemic led throngs of office workers to flee its packed city streets.

But dead forever? Not a chance.

“Absolutely, positively, not,” said Bill Rudin, a New York City real estate scion and chief executive of Rudin Management Co., which owns a sprawling portfolio of office towers, luxury apartments and recently the ground-up Dock 72 workspace at the Brooklyn Navy Yard.

“It’s not dead. It’s very
much alive.”

Rudin pointed to the burst of office-leasing deals in July, roughly 2.3 million square feet in all, a month after real-estate agents were allowed to resume in-person property tours under “Phase 2” of the city’s reopening plan.

Then came Facebook Inc.

in August, inking a splashy 730,000-square-feet office lease with Vornado Realty Trust

at the landmark Farley Building, a former Manhattan post office that’s part of a $2 billion redevelopment near Madison Square Garden. Terms weren’t disclosed, but the move-in date was pegged as 2021.

Even as the pandemic bore down on the city, Amazon

bought the former Lord & Taylor building on Fifth Avenue from struggling co-working startup WeWork, reportedly paying $1.15 billion. Amazon plans to occupy the property in 2023, and hire 2,000 white-collar workers in New York, the New York Times reported earlier this month.

The spate of deals arrived as a breath of fresh air for Manhattan landlords, who saw office-leasing activity plunge to a 25-year low in the second quarter as the city became the epicenter of the COVID-19 pandemic.

Tenants signed up for a mere 2.5 million square feet of office space from April to the end of June, down from an average 8.4 million square feet per quarter over the past three years, according to Cushman & Wakefield
a real-estate brokerage.

That played into a key fear for property owners, that companies forced into a shotgun wedding with remote work might opt to never return to the office, or decamp to lower-cost cities and suburbs.

“Businesses have realized that they don’t need
their employees at the office,” James Altucher, a comedy club owner, former
hedge-fund manager and prior MarketWatch columnist wrote in his viral essay claiming New York City is “dead” forever.

“They say that after every crisis,” said Marty Burger, chief executive at Silverstein Properties, another family-held New York City property giant, whose office skyscrapers include 3, 4 and 7 World Trade Center.

“We’ve proven them wrong each time.”

Burger says working from home serves as a “short-term solution, not a long-term solution” for many industries, pointing to limitations of Zoom

calls and other videoconference platforms for conducting business.

Imagine a consumer-goods team virtually pitching “a new lipstick” to colleagues, he said, or mentoring a young associate on how to rise through the ranks from home.

After Labor Day, a new look

New York City waged a nearly 100-day battle to contain the coronavirus after its first confirmed case in March. But the next big test for the city will come after Labor Day, when many companies expect to recall more staff to Manhattan offices.

That’s also when school buildings are set to reopen, although with a third of students recently electing to attend online and with the city encouraging the use of schoolyards, nearby parks and other open spaces for classes, according to The City.

New York Fashion Week also got a green light to proceed in September through a mix of live and virtual events, although with face masks, temperature checks and no spectators for indoor shows.

Such precautions look to be the new “normal” for a while.

Manhattan Borough President Gail Brewer told MarketWatch that many of the real-estate owners she talks with have a plan for three years from now, in terms of seizing on a recovery, even though many tenants have immediate concerns.

Since last week, Brewer’s been hitting the streets and hearing about small-business woes, while she’s parceled out face masks and hand sanitizer to small-business owners, from bodegas to Chinese takeouts.

To her own surprise, “the hardest-hit stores have been the shops selling tchotchkes to tourists,” Brewer said, referring the trinkets, T-shirts and other memorabilia popular with visitors. One shopkeeper told her about making only $3 in sales over a recent day, while owing some $100,000 in unpaid rent.

Brewer pointed to landlords willing to cut tenants slack on back rent, but also the city’s deep fiscal troubles, the worst since 1970. “Subways and schools bring people to New York City,” she said, noting their role in fostering the next generation of New Yorkers. “I worry about those two.”

JP Morgan Chase’s

Daniel Pinto told CNBC this week that some degree of working-from-home is here to stay, a change he thinks could reduce stress on public transportation and result in a smaller real-estate footprint.

Read: Here’s
a snapshot of what Wall Street’s coronavirus protocols look like for returning
to work

Still, Burger at Silverstein Properties expects the pandemic’s impact on office properties to be neutral, once the dust settles and companies sort out their game plans.

“Some firms will take more space. Some firms will learn to live with less space,” he told MarketWatch, adding that his employees will be recalled to the office after Labor Day.

“We think it’s important to bring them back.”

Morgan Stanley office-property analysts have a less optimistic outlook. They expect New York City office vacancies to peak above 11% over the next six to 12 months, eclipsing the 10.6% high-water mark following the global financial crisis.

Critically, they also foresee office rents declining 15% over the next 12 months, although that’s less dire than their initial 20%-25% forecast in May, as landlords struggled to collect rents.

Here’s how past recessions impacted New York City office space.

Meanwhile, Gov. Andrew Cuomo recently extended an eviction moratorium to protect commercial-property tenants until Sept. 20.

“There are a lot of developers who are very hungry to find distressed real estate,” said Robert Rynarzewski, head of commercial real estate at Piermont Bank in Manhattan, which lends to high-net worth clients owning two to 15 properties, not $1-billion skyscrapers.

“New York City, to me, is ever changing and ever evolving. It’s never dying,” he said, even though the lines for a morning coffee in midtown are gone and his clients want to buy suburban offices.

“It ebbs and flows.”

Until now, there hasn’t been a deluge of distressed real-estate deals, like the ones in 1990s that came after the collapse of the savings-and-loan industry, which led banks to dump real-estate loans in bulk onto the market.

Some hedge funds and private-equity lenders have been wrangling over trophy properties in the city, but mostly it has been a waiting game to see what comes next, after commercial real-estate transaction volumes plunged 69% in the second quarter from a year prior.

now there’s a bit of paralysis,” said Scott Homa, head of Americas office
research at Jones Lang LaSalle, a commercial real-estate company.

will likely continue to be that way until there’s a sense that the market has
hit a floor and tenants can resume making long-term space decisions.”

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Deodorant sales fall due to social distancing but locked down consumers send ice-cream sales soaring, says Unilever

People socializing less and working from home caused a slump in demand for personal care items like deodorant and makeup, consumer goods giant Unilever

said on Thursday.

The firm, which owns Dove soap and Axe deodorant, as well as hundreds of other brands, said lockdowns led to a drop-off in sales for personal care items. 

Read: European stocks open higher, led by Unilever, Daimler

But Unilever, which also owns Ben & Jerry’s and Magnum, said locked down Americans ramped up their ice cream consumption, enjoying at-home eating while staying indoors to control the spread of coronavirus. 

Its sales through restaurants and cafes fell by almost a third, but that was offset by heightened demand for food at home, including Ben & Jerry’s ice cream. 

“Sales of ice cream for consumption in-home increased by 15% in the first half and by 26% in the second quarter, significantly offsetting the declines in out-of-home channels,” it said. 

The FTSE 100 firm updated investors on Thursday with its results for the second quarter ending on June 30, showing surprisingly strong performance. 

It comfortably beat analyst expectations and said it was boosted by a 9.5% boost in sales in North America in the three months to June 30, sending shares surging in London on the good news. 

Shares closed 7.88% higher at 4,671p ($59.58).

The boost helped it overtake drugmaker AstraZeneca

to lead the FTSE 100 index of the U.K.’s largest listed companies.

Read: Unilever profit climbs in first half

“Lockdowns in our markets and reduced personal care occasions amidst restricted living, led to lower demand for skin care, deodorants and hair care, which each saw volume and price decline,” it said on Thursday. 

“Magnum and Ben and Jerry’s continued to grow strongly,” it added. 

Another factor driving sales was heightened focus on good hygiene, which Unilever said drove increased demand for its hand and home hygiene products, each growing double digits in period.

It said that group wide sales for the three months ending June 30 were just 0.3% lower than a year earlier, beating analyst forecasts of a 4.3% drop. 

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