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Good afternoon,

It’s a battle of the economic titans this week, as Fed Chair Powell, ECB President Lagardge, President Biden and BoJ Governor Kuroda all take the mic. 

Domestically, Apple is managing its own set in its annual shareholder meeting this week. Minutes may include why fellow FAANG members are recently failing to hold up their end.

Let’s dive in.

Economy Heat Check

As of 3/3/2023 market close, unless otherwise stated.

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Bad News Briefings

Market movers like to bury bad news on Friday afternoon, so we've decided to excavate them. 

• Canadian cannabis company Adastra gets permission to sell cocaine (MJ)

• Oil investors get $128B handout as doubts grow about fossil fuels (BBG)

• Shortage of metals for EVs is raising red flags in automakers’ C-Suites (Yahoo)

• Amazon pauses construction on second headquarters in Virginia as it cuts jobs (BBG)

• Russia is successfully working around sanctions to secure crucial tech for its war in Ukraine (Reuters) 

• The DOJ and SEC are hunting for a new type of insider-trading case, specifically prearranged trading plans (WSJ)

Performance Review

Firm updates your bank may be less inclined to disclose. 

• Bridgewater Associates to cut 100 jobs to free up resources for AI initiatives (BBG)

• Citadel and Balyasny poach Goldman Sachs MDs post-bonuses (EF)

• Trafigura trader who led deals with alleged fraudster to leave (BBG)

• Deutsche Bank hired one of Credit Suisse's most profitable credit guys (EF)

• Bed Bath & Beyond’s tanking stock puts its rescue from hedge fund Hudson Bay Capital at risk (NYT)

• Russia is relying on a 37-year-old former Morgan Stanley banker to develop new markets for its oil and gas companies cut off by Western sanctions (WSJ)

• Wagamama rebuffed hedge fund Oasis Management’s request for a board seat and rejected its demand for an independent strategic review (BBG)

DEEP DIVE: The Fall of the FAANG Cartel

Meta just got labeled a mob after its newest pay-for-protection subscription.

But they’re not the only FAANG stock who may soon need to pay to stay a mob don. Let's dive in. 

Meta, the parent doing anything to stay relevant through their kid (Facebook), has revealed it will begin selling $12/month subscriptions to test its paid account “verification” service. One particularly disgruntled journalist called it “a move straight out of Don Corleone’s playbook.” 

Certainly, the English language would loosely consider that “an argument.” But it severely underestimates the underlying implications this strategy represents for Meta’s business model, specifically for policymakers.

The thing is, it actually could be a mob move-under-the-radar strategy. But not for the research and rationale a Washington Post journalist being paid minimum wage by Jeff Bezos came up with. 

As governments globally are cracking down on TikTok, here’s why it’s important now more than ever for Meta to brand itself as a tech parent company rather than a social media one. 

The Don Corleone Origin Story

Meta’s latest subscription strategy, according to an article published last week, is to make users pay for security and basic customer service once hacked. Without the sector context, that’s known as a protection racket when mobsters do it.

To summarize the background of the subscribe-for-security strategy, without the tired mob metaphors: 

• Meta’s subscription will come with a blue checkmark after a user's ID has been checked and customer service is provided to assist with account lockouts and hacker takeovers. 

• Twitter recently announced it will start charging for a basic security feature that used to be free. Two-factor text-message authentication will only be available to users who subscribe to its $8 Blue service. 

• Why? Companies are looking for new sources of growth that are worth paying for, as profits are no longer piling up as high in Silicon Valley for companies that built businesses on targeting users with ads.

TL;DR: Social media firms are increasingly seeking new revenue streams amid declining profits from ad targeting. 

The key words there are “social media,” despite the article beginning by describing the companies as Big Tech. Once you boil their key activities, services and revenue streams down, all roads point back to social. 

In spite of all you hear about Tesla’s data strategy, that wasn’t in Musk’s narrative for acquiring Twitter. Instead, it was because of Twitter being a “town hall” – one of the furthest places from Big Tech. And as TikTok is banned from more states and countries, that’s exactly the last place Zuckerberg wants to be seen.  

Can We Take the “Big” Out of Big Tech Yet

Today, you can expect any tech-enabled startup to insist it’s a tech company more than back-office analysts insist they’re genuine analysts. Sure, you theoretically qualify, but you actually fall in completely different sectors performing completely separate activities. 

One of the most prominent current examples involves Uber. Uber has maintained it’s a tech company over a transportation one because, according to representatives, “we don’t transport goods or people — our partners do. We just facilitate that.” As entertaining as the proposition is, the ramifications are legally and financially crucial. 

If Uber is perceived as a transportation company, then it is subject to the regulations under which the transportation industry operates. If it’s a cute tech company, the regulations don’t apply. That would give Uber a massive competitive advantage. 

The most obvious reason social platforms would rather be thought of as tech companies is that the “tech” label introduces the potential for much higher valuations. As investor Chris Dixon makes clear, classification has significant implications in the investment world. 

Understandably, investors will generally see greater income potential in the technology sector than the media sector. Plus, institutional investors don’t tend to fund media services. But Zuck stopped losing sleep over what people thought of his or Meta’s value decades ago. 

The tech label isn’t just about the financial benefit from investors, but, similar to Uber, preventing financial repercussions from regulators. 

Why Mark Needs Meta To Be a Tech Company 

Within hours of its Q2 2019 earnings report, investors learned that Facebook was hit with a historic privacy fine. It was all over “its failure to protect consumers’ privacy.” The DOJ announced it was seeking civil penalties, an injunction, and other equitable relief for the violations. In other words, Facebook may have been facing another sizable penalty after just having settled for $5B with the FTC.

The record-breaking fine took attention away from other components of the punishment, including the “severe restriction on Facebook’s future operations.” In its statement, the FTC wanted to require the world’s largest social media company to “restructure its approach to privacy.” 

There it is again: privacy. That thing now-Meta plans to charge users for. 

The Most Unprofitable Rebrand in History

Meta hasn’t laid off quite enough employees yet for there to be no one on the legal team familiar with the FTC decision. So let’s examine why we’re supposed to believe a Meta rebrand, bundled with more useless tech like the VR headset, sums up to value for shareholders and happiness from regulators. 

When Zuck’s company was named Facebook, it was wining and dining Big Tech titans like Alphabet, while flirting with a place in the exclusive trillion-dollar club. After becoming Meta Platforms (META), the company dropped to become less than Home Depot. 

We’re not going to let Zuck’s PR statements about the rebrand live rent-free in this newsletter, so to summarize: he wanted to get to the next generation of computing. What he didn’t expect was a massive macroeconomic and competitive upheaval that has threatened Meta’s core social-media businesses from multiple directions. 

The company was worth as much as $1.078T last September, after becoming one of just six in the US to ever top the trillion-dollar mark. But Meta’s time in the club was short-lived, as it proceeded to fall over the past year. After its Q3 2022 earnings call, it finished with a $263B valuation. The last time Meta was valued at under $300B was early 2016. 

Zuck seems record-breaking in breaking records. First, he secured a previously unfathomable fine from the FTC ($5B). Then, in an apparent strategy to avoid more fines, he managed to lose his company 16,300% more than the original fine (or roughly $815B). 

What’s Next for FAANG

For years, “success” for many in tech has meant getting a job at a FAANG company. (So Facebook, Amazon, Apple, Netflix and Google). We’ll admit, those five are also often the major companies people think of when they think of "big tech." 

But that tech label is to Silicon Valley what tax loopholes are to Al Capone. And there’s ample evidence that Meta – once a dominant monopoly and everyone’s favorite scapegoat pre-Powell – is close to dropping out of the Big Tech club. 

Pre-Meta, Facebook’s core advertising business was already flashing warning signs thanks to another monopoly: fellow FAANG-gang member Apple. In fact, Apple is unlikely to fall beneath the 10-digit market cap threshold anytime soon. Meanwhile, Amazon and Meta have lost their trillion-dollar market-cap status, Netflix is struggling with increased streaming competition, and some investors are bearish on Alphabet after its declining advertising revenue.  

So users may soon worry about paying Meta for protection. But the bigger worry will come from ⅘ of the mob trying to keep the dominant don associated with them at all.

WEEK AHEAD: Signal to Noise

Next week’s market outlook and whether you should actually care. 

• Monday: US Factory Orders (🐻)

• Tuesday: Fed Chair Powell begins Congressional testimony (🐂); US Wholesale Inventories (🐻)

• Wednesday: ADP National Employment Report (🐻); JOLTS job openings (🐻); U.S. Imports and Exports (🐻); China Inflation Rate (🐂)

• Thursday: US Challenger Job Cuts (🐻); Bank of Japan (BoJ) Interest Rate Decision (🐂); President Biden’s Budget Proposal to Congress (🐂)

• Friday: Nonfarm Payrolls Report (🐂); U.S. Government Budget Balance (🐂)

Signals 🐂

Nonfarm Payrolls Report

Amid the ongoing scrutiny of the US’ road to recession, the key focus this week will be on February's nonfarm payrolls report out Friday. After a jaw-dropping 517,000 jobs were created in January, traders will look to see if that number gets a serious downward revision. Economists currently have January's increase as a one-off statistical quirk.

This month, nonfarm payrolls will be critical for the direction of interest rates. Another surge in the payrolls, or an acceleration in earnings growth, may further dampen market sentiment. Wage pressures are another key consideration. If average hourly earnings come in hotter-than-expected, that could fuel more Fed rate hiking bets.

However, the labor market remains strong – too strong for the Fed to have confidence that inflation will fall fast enough. Analysts currently anticipate that a softer jobs report and slower auto sales should set a broad tone for data in the coming weeks.

Fed Chair Powell Begins Congressional Testimony

If there’s one thing analysts can agree on with the Fed, it’s that Powell will be trending on Tuesday as he appears before the Senate Banking Committee to deliver his semi-annual update. He then answers questions from the House Financial Service Committee the following day. 

Powell’s two days at Capitol Hill will undoubtedly draw scrutiny from economists and lawmakers alike. More tightening will, understandably, raise the risk this economy is recession-bound. Traders will look to see how hawkish Powell will remain given the strong data as of recent. 

Indications currently suggest that the median dot later this month will likely validate market expectations of a 5.50% terminal rate, up from 5.125% in December.

President Biden’s Budget Proposal & US Government Budget Balance

On Thursday, President Biden will outline his budget proposal for the upcoming fiscal year to Congress. The new budget is expected to contain higher taxes on billionaires and upper-income households. Experts don’t anticipate any tax increases for households making less than $400,000 a year. 

Republicans are calling for sharp spending cuts, which aren’t expected to be in this version. The announcement will come amid an impasse on the debt ceiling. The US trade deficit narrowed in the second half of last year (~$69B average vs. almost $89b in H1). But as the new year gets underway, the deficit will likely begin widening again. 

Raising the US debt limit will start to become a focal point, but this is still the early stages. The federal government could run out of money to pay its bills as early as the summer if an agreement isn’t reached.

China Inflation Rate

All eyes will be on the National People’s Congress (NPC) as it kicks off its annual session. This will set the tone in Asia as China will announce major personnel changes, government policy goals and growth targets.

China's CPI, PPI and trade figures will also be due for the first time of 2023, showing January and February conditions. These numbers will offer the first official indications of mainland China's reopening effect following the rebound seen in PMI numbers. The February trade balance is expected to decline, while both CPI and PPI soften. China’s credit last month is expected to have been reined in as aggregate financing and new yuan loans declined.

Some of the data, however, will be impacted by the Lunar New Year holiday. Deflation may not have ended, but is expected to take over the next few months. 

Despite being on the list of signals to watch, it was relegated to the bottom because China’s reports don’t tend to spark much movement in the closely managed exchange rate.

Bank of Japan Interest Rate Decision

The end of BOJ Governor Kuroda’s tenure is here. His last meeting will be a few hours before the US jobs data on March 10. In the meeting, the BOJ is expected to stay the course and make no changes with YCC or with rates. In other words, expect Kuroda to stick to his stance of maintaining monetary easing to aim for sustainable, stable 2% inflation.

The local press has played down the likelihood of a surprise move, and Kuroda's successor, Ueda, seems to be in no hurry to alter policy. Ueda has already hinted he will stay the course, but currency traders are eagerly awaiting any signs on how the BOJ will exit this ultra-easy policy.

As fears of a surprise lessen, Tokyo's February CPI fell to 3.4% from 4.4% in January, likely foreshadowing a similar fall in the national figures (March 23). The BOJ's forecasts (to be updated at the April 27-28 meeting) has the core CPI (excludes food) at 1.6% at the end of the year (from 3.0% in December 2022).

Noise 🐻

ADP National Employment Report, JOLTS Report & US Challenger Job Cuts

It was all about payrolls last month. We wouldn’t hold your breath for labor market movements. Because it won’t be happening until Friday’s long-awaited nonfarm payrolls report. 

In the meantime, you can pre-game the nonfarm payrolls release with the Bureau of Labor Statistics when it drops the Job Openings report on Tuesday and its Labor Turnover Survey (JOLTS) on Wednesday. JOLTS tracks the number of openings, hires, quits and separations for the month (in this case, of January). 

Job openings are projected to have fallen to 10.6M in January, down from 11M in December. As of the latest report, there are nearly two job openings for every job seeker, highlighting the tight national labor market.

Don’t forget to invite ADP to the pre-game, as it releases its National Employment Report on Wednesday. That report tracks growth in private sector payrolls for February. Economists project private businesses added 185,000 positions last month, compared to 108,000 in January. 

The reports will set the stage for the February nonfarm payrolls report due from the BLS on Friday (detailed above). Economists project the US added 200,000 jobs last month, well below a 517,000 gain in January that marked the strongest job growth in six months. The unemployment rate is forecast to remain unchanged, at a 53-year low of 3.4%.

US Factory Orders, Wholesale Inventories & Imports and Exports

Factory orders kick off the week on Monday, but don’t expect much movement until Powell takes center stage the next day. Raw prices are rebounding, but the US manufacturing sector is still shrinking. It’s been four straight months of manufacturing activity contracting, which doesn’t seem set to change. 

Last week, Commerce Department figures signaled that businesses continue to make longer-term capital investments, regardless of high borrowing costs and lingering economic uncertainty. So don’t expect too much in the short-term. The data revealed that orders placed with US factories for business equipment increased in January by the most in five months.

Meme Bank

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