The "Bombshell" Reason Tech Stocks Just Suffered The Biggest Rout Since Brexit, In Two Charts

"Last week, after making new highs, the NASDAQ “reversed” to the downside. It bounced from there, but yesterday’s action was horrific, for having opened sharply, violently, surprisingly higher, by the day’s end the NASDAQ was sharply, violently, surprisingly weaker and it was so even as the Dow finished higher on the day, albeit materially below its peak. This morning, as we write, the Dow futures are higher but the NASDAQ is weaker… again!" - Dennis Gartman

As we discussed in our overnight wrap, FANG stocks have tumbled 5.6% in last 5 sessions...

... while overnight the MSCI World Tech index just suffered its biggest four-day drop since Brexit, as contagion from the tech-rout spread across the globe.

What started and accelerated this plunge? 

The retreat in tech stocks is being attributed to speculation those firms will benefit least from the tax changes, as existing breaks designed to encourage innovation arguably did just that. Turning that around, it implies that those sectors that will benefit most are some of the U.S.’s least dynamic, which in turn undermines the arguments for stronger growth and set a cap on the "growth narrative" and unlimite P/E expansion for tech stocks.

Bloomberg explained further, writing overnight that "in a shift now under scrutiny by corporate tax officials and lawmakers alike, Senate tax-writers made an unexpected decision to keep the existing 20 percent alternative minimum tax for corporations -- a move that imperils GOP promises of business growth and more hiring, tax lawyers and lobbyists said."

Keeping the provision -- which had been set for repeal in an earlier version of the bill -- was “a very unpleasant surprise,” wrote Caroline L. Harris, chief tax counsel for the U.S. Chamber of Commerce, in an article titled “The Alternative Minimum Tax Bombshell.” The chamber and other groups are calling for repealing the AMT.

As Bloomberg adds, Under current law, the corporate AMT serves as a kind of insurance policy designed to prevent companies from using various breaks to pay too little tax. But because the Senate bill would also cut the regular corporate income tax rate to the same 20 percent level, the AMT would hit virtually every U.S. company, according to experts.

“The fact is, almost everyone who’s a corporate taxpayer is going to be an AMT taxpayer” under the bill, said Bret Wells, a tax law professor at the University of Houston.

 

As a consequence, planned tax breaks in the Senate bill related to intellectual property and to spending on new equipment -- along with the existing research and development tax credit -- would lose their effect.

As a result, Technology firms and utilities might be hardest hit by retaining a 20 percent AMT in the tax legislation, the key factor that appeared to weigh on the stock market Monday.

As Credit Suisse analyst, and tech cheeleader, Jonathan Golub confirms in a report this morning, "TECH+ is our favorite sector given its strong fundamentals. However, as investor attention has shifted to the impact of proposed tax reform, TECH+ has become a source of funds driven by two factors: (1) generally unfavorable tax changes for the group and (2) overweight positioning within the Hedge Fund community."

That said, one doesn't even have to focus on the "bombshell" AMT provision: as Golub explains, companies with primarily domestic end-markets tend to pay more in taxes. "As a result, groups such as Retail, Transports, Business Services, and Telecom should outperform as investors begin to discount tax relief. This should come at the expense of TECH+, Pharma & Biotech, and Autos, which are disadvantaged by proposed changes." This is shown in the first chart below.

Tech's low effective tax rate suggests there is little benefit from tax reform, and in fact upside growth may be capped, even as the sector trades at the second highest forward PE of all market groups, as shown in the next chart.

And while it remains to be seen how much further the coordinated selloff can push tech names, there is some good news: the tech forward PE multiple is far more reasonable than, say, the dot com days, when tech hit 45x fwd.

As such a crash in the Nasdaq is unlikely, although considering record hedge fund leverage, and that tech names have become the biggest hedge fund hotel in history (as shown below), one never knows.

 

Comments

ne-tiger BennyBoy Tue, 12/05/2017 - 11:10 Permalink

This thing is fucking POS. For example, now graduate student's scholarship has to be taxed. With today's outragous tuition, your scholarship can easily be 45k, + 15K stipend as TA/RA, now for fucks sake, you have to pay tax for 60k on your 15k stipend. Trump loves "low educated people".  Guess all the tards here will cheer high school education is the maximum they need.

In reply to by BennyBoy

Laowei Gweilo ne-tiger Tue, 12/05/2017 - 11:44 Permalink

>>> "Tech's low effective tax rate suggests there is little benefit from tax reform, "<<< the FANGs have something like $700 billion in cash hoarded abroad... even if their domestic effective tax stays at 20% via AMT, their foreign cash can now be repatriated at, what 10% with the new bill?that's still a pretty big benefit.... and it skews to tech (and I guess pharma, since Pfizer is in Ireland, etc)

In reply to by ne-tiger

Laowei Gweilo gatorengineer Tue, 12/05/2017 - 11:48 Permalink

nah, those getting nuked just out of pure Chinese stock, bond, everything carnage + general negative sentiment on transparency (e.g. that one blog about Alibaba)  +  a round of disappointing earnings (e.g. Momo). there's probably some general sentiment link (e.g. M&A hopes; expansion into US hopes) but it's mostly just general Chinese financial carnage going on right now.

In reply to by gatorengineer

onthedeschutes Tue, 12/05/2017 - 09:21 Permalink

Tyler,  the real "bombshell" you need to worry about is when the likes of the Swiss National Bank, the BoE, BOJ, ECB, etc decide to unload their FANG holdings.  Until that happens...the PPT will maintain a solid floor under the FANGs.

eclectic syncretist Tue, 12/05/2017 - 09:26 Permalink

Maybe FANG stocks are crashing because investors are finally starting to appreciate that they don't produce anything that couldn't be done better by lots of other more insightful and talented people, they spend an inordinate amount of their time working on unwanted energy sapping spyware integrations and how to screw advertisers out of money for unseen ads, and they haven't got anywhere else to go but down from here.

pigpen eclectic syncretist Tue, 12/05/2017 - 10:58 Permalink

I agree with your thesis that digital advertising model will be exposed for the fraud it is.Brave browser is rapidly being adopted. Brave blocks advertising, malware and tracking by DEFAULT and works on any device and operating system.I live in SF and it is funny everybody I know uses adblocking software and they tend to be the demographic that advertisers want to target.What is value of advertising when I can't be served an ad, don't view an ad and can't be tracked across the web.Brave browser is best Xmas gift to give friends and family.Cheers,Pigpen

In reply to by eclectic syncretist

Identify as Ferengi pigpen Tue, 12/05/2017 - 14:29 Permalink

/* Style Definitions */
table.MsoNormalTable
{mso-style-name:"Table Normal";
mso-tstyle-rowband-size:0;
mso-tstyle-colband-size:0;
mso-style-noshow:yes;
mso-style-priority:99;
mso-style-qformat:yes;
mso-style-parent:"";
mso-padding-alt:0in 5.4pt 0in 5.4pt;
mso-para-margin-top:0in;
mso-para-margin-right:0in;
mso-para-margin-bottom:10.0pt;
mso-para-margin-left:0in;
line-height:115%;
mso-pagination:widow-orphan;
font-size:11.0pt;
font-family:"Calibri","sans-serif";
mso-ascii-font-family:Calibri;
mso-ascii-theme-font:minor-latin;
mso-fareast-font-family:"Times New Roman";
mso-fareast-theme-font:minor-fareast;
mso-hansi-font-family:Calibri;
mso-hansi-theme-font:minor-latin;}
I like Brave. It's a little balky with some online forms, but for general surfing, very smooth.

In reply to by pigpen

eclectic syncretist Rainman Tue, 12/05/2017 - 09:31 Permalink

Yeah! Who needs Arthur Anderson to do your crooked accounting when Congress and the cheaply bribed criminals at the SEC refuse to repeal Mark-to-candyland fantasy accounting, and pretend to have their heads in the sand when they and everyone else who's taken even a cursory look at the situation knows that companies are far and wide making up whatever bullshit accounting results they like?

In reply to by Rainman

hooligan2009 Tue, 12/05/2017 - 10:10 Permalink

those forward PE's are predicated on rosy ANALyst projections that have been consistently revised downwards each year for the last 40 years.a better analysis would take the impact on free cash flow (FCF) multiples (not non-GAAP) and would re-state current FCF on  pre and ppst proposed tax planandre-state to assume a 3% hike in the Fed Funds rate as 6% nominal GDP growth is factored in to the debt financed balance sheets of different sectors.andtry it with different nominal gdp assumptions.gdp = 20 trillion, so where is 6%, or 1.2 trillion of additional output per annum (12 trillion over teny ears) going to come from based on just 150 billion per annum of tax cuts (1.5 trillion over ten years).assuming 4% nominal GDP is the long term central path (2% CPI plus 2% real growth), the tax cuts could be slated to generate an incremental 2% nominal GDP growth = 400 billion extra activity per annumif the tax cuts can leverage economic impact by 150 billion per annum gets 400 billion more activity.now factor in repatriation of capital held overseas to build out third world infrastrucutre and diver that to restoring a first world infrastructure in the US and .. wellfingers crossed everyone gets a slice of that extra 1.2 trillion a year with 400 billion coming from the tax package.then maybe a spend of 500 billion to 1 trillion a year on investment in the US - more crossing fingers.one things for sure, over hyped FANG stocks only ever reduced prodcutivity by creating a world of excited misery and buying shit that is only consumption, not investment.PE's of FANGS could halve and still be overpriced based on tax and interest rate adjusted FCF