Dow Industrials, Transports Post Strong Weekly Gains
Individual company quarterly sales and earnings reports continued to be the focus of stock market speculators and investors this past week. As was bound to happen sooner or later, someone big stubbed their toe in a big way. That someone was NASDAQ-listed Facebook (FB). Reporting their April-June quarterly results after markets had closed for the day on Wednesday Facebook dropped two unexpected bombshells. The first was that their profit figures for the quarter came in under expectations because of unanticipated (unanticipated to Facebook executives at any rate) costs associated with actions Facebook was forced to take to attempt to contain the negative fallout from disclosures mad earlier this year that Facebook in effect sold out the private data of their own users to whomever might be willing to pay for access to that data, most notably a political data-mining and consulting firm working on behalf of the Trump campaign who then targeted specific political advertising to voter profiles they deemed most likely to be swayed by these ads and who also could provide the margin of victory in key battleground states like Ohio, Pennsylvania and Michigan to name three. This revelation turned out to be the tip of the iceberg at Facebook, where it evidently was standard operating practice to sell out anyone and everyone who had been silly enough to believe company propaganda promising safety and security of private and personal data. Cleaning up this heretofore lackadaisical attitude toward customer privacy cost Facebook a bundle and negatively impacted the bottom line much more than Wall Street analysts had been led to believe that it would. The second bombshell was that expectations of Facebook executives of their own in-house forward forecasts of future revenues and profits were scaled back from previously publicly disclosed company forecasts, with the new attention to personal privacy being forced upon them by market forces cited as the main reason for this lowering of expectations.
What Facebook executives may or may not have learned from the subsequent wholesale dumping of their stock that took place immediately after these disclosures were made is that there are prices to be paid, sooner or later, for breaches of trust. The 3-year chart of FB stock below gives a very vivid demonstration of that cost to shareholders of FB stock, most especially the top-tier executives who own very large stock positions. Between Wednesday, July 25 at 3:45 PM when FB stock hit its highest-ever all-time intraday price of $218.62/share and the close of trading the very next day, Thursday, July 26 when FB stock closed the day at $176.26/share the value of FB stock dropped by -19.375%. For many of these Facebook top executives their holdings of FB stock comprise the vast bulk of their personal net worth and quite literally overnight about 20% of that net worth had evaporated into thin air. Stonehenge Analytics will point out that this net worth evaporation was entirely self-inflicted by the Facebook top brass by themselves and on themselves. The chart below tells one and all that these folks were not quite as smart as they thought themselves to be. No one gets anywhere lying to their own customers, promising data security while simultaneously selling out that very same data to whomever might be willing to pay cash in exchange for access to it.
The chart below also illustrates what happens to the stock price of a company whose executives mislead Wall Street analysts. As we have repeatedly pointed out, “earnings season” on Wall Street is a “buy in anticipation, sell on the news” event. The chart below shows that FB stock was following that script to the letter through Wednesday, July 25, hitting an anticipatory all-time price high just 15 minutes before the close of trading and the release of FB quarterly results. Odds are that FB stock would have gone down the next day in a “sell on the news” reaction no matter what results FB reported. But, the results FB actually did report were far below what Wall Street analysts had been led to believe that they would be, and at no time had Facebook executives breathed a word to anyone about the enormous costs they had piled up in the April-June quarter attempting to plug all of the security holes in their social media platform. Stonehenge Analytics will offer an unsolicited word of advice to Mark Zuckerberg & Co. they can probably get away with misleading Wall Street analysts once and still recover. Do it again and FB stock will likely go all the way back down to its IPO price of $45.00/share and not because the business model is no good or that Facebook becomes a pariah among social media websites. It will be because Zuckerberg & Co. will have proven to the Wall Street professional investment community that they are congenital liars who cannot be trusted under any circumstances and FB stock will be shunned as an investment option for that reason and that reason alone.
From a purely technical chart perspective the odds that FB stock will recover are pretty good. No important price up-trend line has yet been broken and the stock prices is still above its most recently-made significant intermediate-term price low from April 4 of this year at $150.51/share. Our opinion is that longer-term investment-oriented accounts would be wise to allow the downward price momentum generated on Thursday and Friday of last week to play out a while longer before coming to any firm conclusions about FB’s ability to avoid a major technical breakdown. We would prefer to see the April 4 low successfully re-tested before concluding that FB stock will weather the storm that broke last Thursday.
The collapse of FB stock on Thursday negatively impacted the NASDAQ Composite Index ($COMP) because FB stock is a major component of that index on a market capitalization weighting basis. As a consequence, the NASDAQ Composite posted a weekly price decline of -82.78 points this past week to close at 7,737.42. But, FB stock is not a component stock of the Dow Industrial Average nor of the Dow Transportation Stocks Average. Those two major stock indices enjoyed solid weekly price gains for the week. The Dow Industrial Average rose by +392 points to close at 25,451 and the Dow Transportation Stocks Average rose by +215 points to close at 10.957. For the Industrial Average this was its highest weekly-close price since the week that ended on June 8. For the Transportation Average it was the highest weekly-close price since the week that ended on June 15. So far at least, the fallout from FB has remained well-contained in the technology stock sectors and specifically social media company stocks. As long as that remains the case only the owners of these specific stocks will need to worry about future fallout from this past week’s Facebook price collapse.
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