Tech giants Facebook, Google, and Amazon face a rising tide of public outrage.

How does this change the outlook for their high-flying stocks?

Terrorism.

Bullying.

Depression.

Psychological manipulation.

Put yourself in the shoes of a CEO of a large American company.

What’s your worst nightmare? The worst thing that could possibly happen to your business?

We would argue that having public opinion turn decidedly against you – and associating your brand with the toxic terms listed above – is near the top of the list.

Much to the horror of executives at Facebook, Amazon, and Google, this nightmare is becoming reality.

Over the last few years, these companies have grown into behemoths. Not only are they 3 of the 4 original high-flying “FANG” stocks, they’re now the 3 of the 6 largest publicly traded businesses in America, period.

Their dominance will raise your eyebrows. Togeth-er, Facebook and Google effectively own the online advertising market. Last year they accounted for 99% of all digital advertising growth in the U.S. And we’ve all heard the stories of Amazon crushing traditional stores. This year alone it has been blamed for forcing more than 30 retailers – like Toys R Us and Payless Shoes – into bankruptcy.

Not long ago, Americans adored these tech compa-nies. Facebook founder Mark Zuckerberg, for in-stance, was thought of as a likeable kid in a hoodie with dreams of improving the world. And while it seems like ancient history now, he was an underdog as recently as 2013, when many believed Facebook was not a viable business. In September 2012, the influential Barron’s took the bearish stance that Facebook was worth just $15/share.

Today, Facebook trades at $179/share. And public perception has totally shifted. The company is no longer known for uniting old high school buddies. Instead, it is perhaps best known for its election scandal, when it allowed Russians to buy Facebook ads that potentially helped put Trump in the White House.

Astonishingly, the Russia scandal isn’t even the most damaging story about Facebook to come out lately. Have you seen the damning article published by the The Atlantic? Crammed with data and statistics, it convincingly argues that Facebook is partially responsible for the alarming increases in teen loneliness, depression, and suicide.

Or how about Facebook co-founder Sean Parker’s recent comments? “God only knows what [Facebook] is doing to our children’s brains,” he said, as he explained that Facebook is purposely designed to be addictive, to keep kids coming back for more.

And then there’s the microphone controversy. Many folks believe that Facebook secretly accesses the microphone on your smartphone to listen in on your conversations to serve you up targeted ads.

This conspiracy is most likely false. But perception is what matters here. And more and more folks perceive Facebook as secretive, manipulative, predatory, and just plain bad for you.

We don’t mean to pick on Facebook. Amazon and Google are staring at similar problems. Amazon is seen as a corporate bully, crushing mom and pop stores and killing jobs. Google recently paid a $2.7 billion fine for abusing its godlike power over internet search.

As investors, let’s discuss what this all means for the widely-owned stocks of these tech giants.

“Priced for perfection” is the key term. For these companies to justify their current sky-high valuations, they’ll not only need flawless execution; they’ll need luck. Spending on advertising, for example, is highly correlated to the economy. So evenif Google and Facebook do everything right, ad sales could still disappoint if the economy turns down.

And we’re already seeing signs of a slowdown in spending on digital advertising. Felder points out that Procter and Gamble, which employs some of the savviest ad men on the planet, has scaled back its spending on ads.

On the topic of digital advertising, P&G’s Chief Brand Officer recently said: “We cut more than $100 million in wasteful spending starting last March because we couldn’t be assured ads would not appear next to bad content like a terrorist video.” Not what you want to hear if you’re an investor in Facebook or Google.

Amazon faces an even bigger chasm between reality and the rosy future implied by its nosebleed valuation. Over the last 7 years, Amazon has achieved monster sales growth averaging 28% per year. Of course, it’s managed to grow its top line so rapidly by completely ignoring its bottom line. Amazon barely earns any profits, as its ridiculous Price/Earnings ratio of 297 shows.

Felder notes that Amazon’s price-to-sales ratio is about 3.5x. In comparison, Walmart’s is just 0.5x. “That’s the future for Amazon,” Felder believes. Indeed, the company can’t grow sales at 25%+ forever. Eventually sales will slow and it will have to start producing profits. When this reality dawns on investors, Amazon’s stock will likely no longer command such wildly optimistic valuations.

Shifting gears, there’s one huge risk for these three companies we haven’t touched on yet.

Facebook, Amazon, and Google wield immense power. Historically, many companies with such power have been prosecuted as monopolies and broken up. Or, at the very least, heavily regulated.

What’s different this time around is the nature of these companies’ power. John Rockefeller’s Standard Oil was ruled to be an illegal monopoly in 1911. By crushing all competition,it was able to rake in obscene profits.

In the last five years, Facebook stock has climbed 579%, Amazon 357%, and Google 195%.

These returns are damn impressive. But importantly, they’re the result of the companies’ stock prices climbing significantly faster than their profits. This has stretched their valuations. In fact, according to good friend of Real Vision Jesse Felder, they now trade at the highest valuations they’ve traded at during the current bull market.

Felder recently sat down with Real Vision co-founder Grant Williams on October 20, 2017, to make sense of what’s happening here. Here’s Felder:

“[These stocks are] priced for perfection – the highest valuations in 10 years. This says things are going to be fantastic going forward. And what’s really going on under the surface is a little different…”

Amazon, on the other hand, barely earns a profit at all. Can you be a Monopoly if you don’t make profits? Amazon shareholders should hope the answer is “no.”

As we mentioned earlier, for most of their existence, Facebook, Amazon, and Google have enjoyed positive reputations in the eyes of the public. Many believe this is a big reason why there hasn’t yet been much talk of these companies being monopolies. Quite simply, if the public likes you, the authorities are more likely to stay off your back.

But these companies are transforming from good guys to bad guys before our eyes. This makes them much more vulnerable to regulators and, interestingly, President Trump has repeatedly commented that Amazon kills jobs and has too much power.

Again, it’s all about perception. Above all else, a strong brand should elicit positive feelings. It’s why Coca Cola’s marketers spend billions on ads to make sure we all see happy polar bears drinking Coke at Christmas. Good feelings!

America’s tech giants no longer elicit good feelings. According to USA Today, 78% of Americans now believe they have too much power.

Will this be their downfall? Not necessarily. Some industries thrive despite public hatred. Just look at tobacco companies. Consumers know, beyond the slightest doubt, that cigarettes are bad for them. Our society treats smokers as pariahs, and the public despises big tobacco.

None of this has prevented tobacco stocks from creating immense wealth for shareholders. Altria Group (MO), for example, has returned about 500% since 2007.

So you see, public perception is important, but it isn’t everything. Especially when your product is addictive, like tobacco, sugary foods, or… Facebook.

But enough of that.

Now is the moment for all of us at Real Vision to wish you a joyful holiday season and new year. We sincerely thank you for your support in helping make 2017 Real Vision’s best year yet. And we can’t wait to show you the exciting things we’ve got up our sleeve for next year. The financial media revolution continues in 2018…

20/20 will be off next week for the holidays. See you on January 4th.

The European Commission Eurozone Economic Sentiment Indicator is at the top of its 25-year range. The ratio of European banks versus US banks is close to the bottom of the 25-year range. Will 2018 be the year that European equities start to outperform the US, led by the banking sector?

Business is booming for America’s banks. The industry posted $45.6 billion in profits in the 3rd quarter – an all-time record. The spike in profits comes mainly from a massive $10 billion surge in net interest income earned.

As we all know, U.S. interest rates have been extraordinarily low for years. This has made it difficult for banks to grow revenue through lending. But after enduring nearly 8 years of effectively zero rates, banks are finally getting some relief. Interest rates in the U.S. are on the rise, with the 2-year, 3-year, and 5-year Treasury yields putting in multi-year highs.

Fueled by record profits, bank stocks are ripping. The five biggest U.S. banks by assets – JP Morgan, Bank of America, Wells Fargo, Citigroup, and Goldman Sachs – have gained 47% on average in the last two years. And that figure would be significantly higher were it not for Wells Fargo and its fraud scandal dragging down the group.

We draw your attention to Goldman Sachs (GS) in particular, which has a compelling chart setup. Its stock currently sits at about $250, which is roughly its all-time high from back in 2007. A significant breakout above this level to new all-time highs would be quite bullish, and could potentially lead to much higher prices.

Despite the surge in overall bank profits, bank trading desks had an awful quarter. Trading revenues fell significantly across the board at the big U.S. banks, with Goldman Sachs, J.P. Morgan, and Citigroup all posting double-digit declines. Goldman in particular is having a tough time. Its once-vaunted trading arm is on pace for its worst year since 2008.

The banks blame their bad trading results on record-breaking tranquility in markets. Volatility continues to scrape along near record lows, and, unlike in some recent quarters, markets offered no big events like Brexit or a major election to trade around.

We note that, unlike Wall Street’s megabanks, smaller regional banks do not typi-cally generate much revenue from trading. Instead, they engage in more traditional banking activities like lending. If you’d like to bet on a resurgence in bank lending while avoiding the ups and downs associated with trading revenues, consider the ETF KRE. It’s the largest and most liquid regional bank ETF. In the last two years, it has outperformed IYR, which holds larger banks, by a small margin (+40% to +36%).

For bank trading desks, business has changed a lot since 2008. Going into the financial crisis, many banks were inadequately capitalized to cover losses. This is a primary reason why things spiraled out of control and the financial system nearly collapsed.

Following the crisis, regulators have worked to reduce the amount of risk banks can take relative to their capital levels. A bank must maintain a certain amount of trading capital to support its open trading positions. If the ratio of open trades to capital surpasses this limit, the bank has two choices. Either close open trades, or post more capital.

The newer rules don’t just lower this ratio; they also impose stricter limitations to stop banks from shuffling around assets to manipulate the ratio, as many were doing pre-crisis.

With markets acting unusually calm, these new stricter rules haven’t been put to the test yet. But regulations frequently have unintended side-effects. So it’s fair to ask: could these regulations inadvertently exacerbate a downturn in the markets?

The answer has to be yes. Importantly, a bank’s trading capital isn’t a fixed number. Instead, the bank must re-calculate its fair value each day as market prices fluctuate. Therefore, if prices fall rapidly, a bank could be forced to liquidate large trading posi-tions to stay in compliance with the capital requirements.

By most accounts, the old rules were easy to game. According to several sources, many trading desks did so by “borrowing” capital from a different arm of the bank. If these and other loopholes are now shut, banks that are leveraged up to the limits could be forced to quickly sell large positions if markets hit an air pocket.

“Forced selling”

These two words have triggered many a financial crisis. Selling anything because you need to – your house, your wedding ring, your business – is a sure way to get the worst possible deal. Multiply this across the financial markets, and you get a rapid plunge in prices that could disrupt the whole system.

We’re not saying this will happen. But it could happen. And if it does, the impact on bank profits would be ugly. As we discussed earlier, depressed trading profits haven’t been enough to drag down banks’ overall profitability. But that could change if plunging prices force bank trading desks into a fire-sale.

For now, if you own bank stocks, enjoy the record profits. But markets can’t remain this calm forever. Always have an exit plan in place for when markets shift.

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For weeklY inVestment insights.

During the tulip mania oF the 18th centurY, the Dutch east inDia companY was worth $7.9 trillion in moDern Dollars, roughlY the same amount as the gDps oF moDern-DaY Japan ($4.8t) anD germanY ($3.4t) aDDeD together anD greater than the market caps oF some oF the worlD’s largest companies, such as apple, microsoFt, amazon, exxonmobil, berkshire hathawaY, tencent, anD wells Fargo combineD.

JeFF DeJarDins oF the Visual capitalist, Dec. 8th 2017

questionanswer

Milton,

Help me out here. I just got my Christmas bonus. My wife wants to use it to pay down our mortgage. I think we should invest it in the stock market. What would you do?

Great question. Most financial planners will tell you to invest it in the stock market. They’ll point out that, based on historical returns, you’re likely to earn more in the market than you save by paying your mortgage early. They’ll also stress the tax benefits of deducting mortgage interest.

This is all true enough, but there’s one big problem. Stocks today - U.S. stocks in particular - are near their most extended valuations in history. Trees don’t grow to the sky. Going forward, logic says that stock market returns should be lower - possibly a lot lower - than the historical data suggests.

So, what should you do? The answer depends on what your personal balance sheet looks like. But I’ll tell you what- I’ve never met anyone who regretted paying off their mortgage early!

As for me, well- there aren’t many benefits to being 2 feet tall. But one of them is I don’t need much living space. I paid off my 600 square foot house many years ago.

Milton

WHO

WHAT

WHERE

WHEN

WHY

HOWFamed short-seller Marc Cohodes joins Real Vision co-founder Grant Williams for a revealing, candid, and emotionally raw discussion. An early reviewer called it the “Best interview I’ve ever seen in my life.”

The debut of Real Vision’s new flagship interview series Grant Williams: In Conversation

Filmed on Cohodes’ farm in Northern California

Marc recalls the thrilling achievements and frustrating disappointments of his illustrious 25+ year career.

Because frankly, Marc has some of the most jaw-dropping stories we’ve ever heard. His experience during the 2008 financial crisis is truly astounding. His fund made the right bets and was massively short the market as it crashed – but lost money anyway. It’s a lesson all serious investors need to hear.

WHAT PEOPLE ARE SAYINGThis interview has stuck with me the last few days. Honest, real, and deeply educational for investors. A masterpiece of financial journalism. Thank you to Marc and Grant.-Subscriber Jason V.

We at Real Vision believe in learning from the best. As one of the most successful short-sellers in history, Marc shares the incredible wisdom he’s accumulated while exposing dozens of fraudulent companies over his career.

CLICK HERE FOR THEBLACK AND WHITE VERSION

KNOW SOmEONE WHO SHOuLD BE INTERVIEWED ON REAL VISION TELEVISION? CLICK HERE TO INTRODuCE uS!

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