The markets remain under pressure Thursday afternoon due to a combination of three different factors.
First, the Trump Administration laying out his tariff and investment restrictions on China today. The Administration's tough, unyielding stance on tariffs and trade have rippled through the markets every step of the way, and the loss of a free trade policy has scuttled investors out of the equity market.
Next, the Federal Reserve announced yesterday that they raised interest rates to the target range of 1.50% to 1.75%. Despite Federal Reserve Chairman Jerome Powell painting a strong picture of the economy that included raised GDP forecasts, some investors are fearing an acceleration in the pace of interest hikes over the next few years.
Lastly, the markets have temporarily lost a leadership group in technology stocks. The scrutiny on Facebook (FB) this week has weighed down technology and FANG, causing many of the beloved stocks in the market to become hated.
But the key point that we reiterate is that we have prepared ourselves for this type of selling. We have maintained a very health cash position during the entirety of this market volatility, and we plan to continue to do so. In the last two weeks alone, net of all our trades, we have taken out approximately $92,000 from the market, and we are scouring the market to find opportunities to put that capital back to work at lower prices. We remind members that we made a big update to the bullpen on Tuesday (read our Alert, here). Furthermore, we identified how dicey single stock risk can be, and this was all part of our thinking in reducing our position in Facebook by 27.5% through multiple trims at the start of the year. You can see our past trims here, here, and here.
As we look at today's market, club members know we are always watching the yield on the 10-Year Treasury. During our February members-only conference call, which you can read here, we provided a real-time minute by minute analysis of the direction of the 10-year yield and how it affected stocks The yield on the 10-year has moved sharply lower in the last 24 hours, and is sitting at roughly 2.83% (at the time this was written). When the 10-year yield moves lower, we typically see the banking stocks under pressure, thus explaining the weakness in Goldman Sachs (GS) , JPMorgan (JPM) , and Citigroup (C) today. We continue to like this group for the long-term rising interest rate environment, optionality in capital returns, the stock's discount to the market on earnings, and industry re-regulation, and we would be buyers of GS and JPM right now had we not become restricted from trading. We view this volatility in the market as an opportunity for the banks (and especially Goldman Sachs) as fluctuations support profits in the trading operations of financials. Mike Mayo, banking analyst at Wells Fargo Securities, raised his price target on Goldman earlier today based on the company's ability to generate trading profits in a volatile backdrop, and we believe that Goldman is the bank that benefits the most in the current environment.
On Facebook, management is beginning to take the steps needed to repair its image as CEO Mark Zuckerberg's released a statement yesterday on the data mishandling, which you can read here, and he appeared on TV and conducted an interview last night. Also, COO Sheryl Sandberg will be making an appearance on CNBC's Closing Bell later today. This all said, we believe more must be done. Shares cannot truly rally until the company acts on what happened and fully owns up to the mistakes that were made. The trust of the public and the confidence of investors is hinged until they do so. We are talking about management fully admitting that they were in the wrong, regardless if they actually believe they were. Furthermore, Facebook needs to bring the best of the best outside counsel to investigate how they handle user data. Until then, its user base and investors will be wary that there are other situations like Cambridge Analytica out there. Also, a full internal investigation will boost confidence that the company has a plan in place to prevent this mistake from happening again. These are the two things that we are patiently waiting for management to commit to, and we laid out the rest of the Facebook game plan in our Wednesday's Alert here.
We still like shares for the long-term as there is simply no social media alternative quite like Facebook, but the headlines risk right now is palpable. To better align our ratings with our commentary from Tuesday when we said we would look for the stock to break 18 times next year's earnings, or roughly $160 as an entry, we are downgrading shares to a TWO. We want members to know that our price level should be viewed as fluid given the developing storyline, and we will upgrade shares back to a One once we believe the top executives at Facebook instill confidence to the public and shareholders.