David Garrity, Chief Market Strategist for Laidlaw & Co. Ltd, on Facebook’s corporate governance and the outlook for COO Sheryl Sandberg. Hosted by Pimm Fox and Lisa Abramowicz.
Click here to listen to interview.
Sector Pullback Only Profit-taking Or A Signal With Broader Implications?
Since Fed Chair Powell’s 10/3/18 comments on neutral interest rate policy, the tech sector has taken the broader stock market down from its highs. In part this is to be expected given the tech sector has held a firm market leadership position in leading the market recovery off the March 2009 lows. As the prospects of further Fed monetary policy tightening have firmed coupled with the negative effects of lop-sided tax reform and trade tariffs, we expect economic growth will decelerate over 2019. Against a weakening macro-economic backdrop, investors should take profits in high P/E multiple names that don’t pay dividends so we do not view the pull-back that has occurred with undue alarm. Overall, the tech sector is characterized by companies with strong financial positions that can continue operating quite well in the event of recession. It is against the larger backdrop of rising interest rates and slower growth that their appropriate valuation level needs to be found, something the current market turbulence reflects.
Facebook Business Model In Question As Countries Investigate
It is one thing for a tech stock to experience profit-taking, but another thing entirely when a tech company’s business model is under increasing scrutiny from several governments simultaneously. As has been widely reported, Facebook (FB) has enabled interference by foreign powers in elections in the U.S. and elsewhere and has left unchecked on its platform hate speech that has gone so far as to incite ethnic cleansing in Myanmar. FB Chairman & CEO Mark Zuckerberg has impregnable control over the company such that he cannot be removed by investors. For all intents and purposes, Zuckerberg is Facebook and Facebook is Zuckerberg. Possibly regulators might view this as being an abuse of the corporate veil, but whether Zuckerberg will be held personally accountable remains for regulators and legislators to decide. However, an organization that incites wholesale ethnic cleansing and undermines the operation of liberal democracy may not be a good corporate citizen deserving of equal protection under the law. Meanwhile, Zuckerberg does need the ongoing involvement and management support of Facebook COO Sheryl Sandberg, if for no other reason than to have someone other than himself to be held responsible for the mounting litany of predicaments in which the company finds itself. The fact that FB’s business model is in question remains a material negative in considering a possible purchase of shares. Accordingly, we are at best neutral and would consider other Tech sector companies such as AAPL or AMZN to be better investment candidates.