Issue 27

 Issue 27

November 4, 2020 

This issue is dedicated to our Founding Fathers. You knew it would be a mess, but still better than anything else. The Open There was a time when the internet was the digital version of the wild west. Endless opportunity combined with a lawless version of risk. Explorers forging the path, the survivors at least, have been amply rewarded for their effort and innovation. Jeff Bezos, the founder of Amazon, gave $40 billion to his ex-wife last year and he is still worth almost $200 billion today. According to the mood in Washington, however, the salad days of internet business are over, and the consequences will reveal themselves for years to come. In 1996, Congress passed a law called the communications decency act which contained provision 230. “No provider or user of an interactive computer service shall be treated as the publisher or speaker of any information provided by another information content provider.” This means the internet firms cannot be held liable for content on their site, they merely provide a platform. This is a sweeping protection that technology companies have used to avoid legal problems in cases ranging from hate speech to selling faulty products. You can 

sue Wal-Mart if you buy something there that sets your house on fire, even though Wal-Mart did not make the product. You can’t sue Amazon if you bought the faulty product from one of their re-sellers. Amazon will say they are just providing the platform that connected you with the seller. 

Facebook has built a near trillion-dollar business on the back of the free speech protections of 230. They are not responsible for the insane things that happen on their site, but they do profit from selling ads to all the crazies. Newspapers and other traditional media outlets have never been given this type of latitude. The Wall Street Journal cannot publish just anything on their editorial page. I can Tweet anything I want, and Twitter is not responsible. 

The amount of government regulation is related to growth prospects of an industry. They are inversely correlated, meaning the higher the regulations the lower the growth. Health care is the most regulated industry in America, and it is an absolute mess. Technology is the least regulated, and it is the most profitable. It is easy to see this play out in the stock market. Apple is worth $1.8 trillion and Johnson and Johnson, one the largest health care firms in the world, is only valued at $360 billion. Apple can buy JNJ using lunch money. 

The regulation question matters because legal policy has such a powerful effect on the ability of an industry to grow. And the stock market rewards growth. Increasing regulations means higher compliance costs which leads to lower profits. 

25 years ago, the public was fascinated with all things internet and Washington reflected that with friendly laws. The mood has changed. Recent senate hearings sound like the politicians are out for blood. It is a bi-partisan shift as well. The justice department is now going after Google for anti-trust violations. Facebook is under pressure almost every day for one thing or another. Amazon has union organizers at their door and those organizers have political support. Something is about to change. 

After the historic stock market crash from 1929 to 1932 a series of regulations were enacted called the securities act of 1933. The financial services industry has never experienced the same growth that it went through before the passage of the law. A similar fate awaits the technology group. 2021 is the year it will happen. 

This coming event will be more like changing seasons than an abrupt departure from current practices. The technology industry spends an enormous sum of money on donations and lobbying which will translate to watered down versions of proposed laws. Following normal procedure, the large firms will help write the laws in their favor (although no law is always preferred). New business formation in the technology space will slow down due to the increased compliance costs and the industry will start showing signs of wear and tear. The Age of the Technology Titan is ending. 

This information is helpful for longer-term deployment of investing capital. Angel and venture capital outfits, the kind that stay exclusively in the tech arena, need to tighten their investing criteria and reduce their expectations. The rest of us need to understand that Apple is not going to double in share price every year anymore. I will update on this topic every few months, but let it be known that the initial warning shots have been fired. 

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Shoeshine Corner 

Our leather sole sanitation professional is asking for a time indulgence. He wants to wait until election results are all in before placing more cash into the markets. He is happy with current positions (of course he is, he is making a killing!). 

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Bottom Line 

Election results are not in prior to publish deadline, but you’ve known after weeks of reading TradeHawk that the election was not going to massively disrupt the major uptrend currently underway in the stock market. As has been said here for several weeks, stocks should hit new all-time highs in four months or less. 

There is nothing further I can add until we know the outcome. 

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Investing and trading are hard; TradeHawk can help. Please contact us with any comments or questions. 

hawk@tradehawk1.com 

317-452-2083 

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