HOT AIR BALLOON FLIGHT

By Julia Horowitz • Tuesday, October 5

Good morning. In today's newsletter: Facebook shares could recover from a horrible October. Plus, US oil prices have hit a seven-year high, and another Chinese real estate developer is in trouble.

 

US stock futures are up after the Nasdaq Composite shed more than 2% Monday on debt ceiling and inflation worries. Markets in Europe gained in early trading, while stocks in Asia were mixed.

 

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MARKET FLASH

Facebook's stock is down but not out

Facebook is having a terrible few days. But there are reasons investors may not abandon the company for long.

 

What's happening: Big Tech shares tumbled Monday as concerns about inflation pushed investors to pare back their exposure to the sector. But Facebook — which suffered an hours-long outage across all its products, including Instagram and WhatsApp — fared the worst.

 

The social network's stock dropped almost 5%. Microsoft, for comparison, shed about 2%, while Apple lost 2.5%.

Facebook had already been generating headlines for all the wrong reasons. The Wall Street Journal recently published a damning series revealing that the company's own research indicated it was causing social harm. Leaked internal documents showed the company knew about the damage Instagram was causing to teen girls, and that changes to Facebook's algorithm in 2018 ended up surfacing more divisive content, not less. 

 

On Sunday, former Facebook product manager Frances Haugen — the whistleblower who provided the documents — sat down for an interview with "60 Minutes." 

 

"The thing I saw at Facebook over and over again was there were conflicts of interest between what was good for the public and what was good for Facebook, and Facebook over and over again chose to optimize for its own interests," Haugen said.

 

Clearly, none of this is good news for the company — and yet shares are rebounding 1.5% in premarket trading Tuesday. 

 

What gives? While public sentiment has sharply turned against Facebook in recent years, Wall Street has continued to reward its money-making prowess.

 

Facebook doubled its profit during the second quarter, netting $10.4 billion. Advertising revenue soared 56% compared to the same period a year earlier.

 

Shares have rallied more than 19% so far this year, and 46% since companies like Hershey's and Denny's paused ads on the platform as part of the #StopHateforProfit campaign in July 2020.

 

Big picture: A meaningful, long-term hit to Facebook's stock would require a major shift in advertiser behavior, as well as some big wins from fed-up regulators.

 

That's not off the table. Facebook warned over the summer that sales growth could slow in the second half of the year, and it's battling a serious effort in the United States to dismantle the company. On Monday, its lawyers asked a court to dismiss an amended antitrust complaint filed by the Federal Trade Commission, claiming there is "no plausible factual basis for branding Facebook an unlawful monopolist."

 

Recent developments could intensify the pressure. Democratic Rep. Alexandria Ocasio-Cortez said that Monday's outage across platforms wouldn't have occurred "if Facebook's monopolistic behavior was checked back when it should've been."

 

"Break them up," she tweeted.

 

That's not all: Haugen — who will testify before a Senate subcommittee on Tuesday — filed at least eight complaints with the Securities and Exchange Commission alleging the company is hiding research about its shortcomings from investors and the public.

 

But for now, don't expect Wall Street to start dumping large tranches of Facebook's stock. At least, not before it announces its third quarter earnings.

VOICES

The United States isn't backing off China

"We will use the full range of tools we have and develop new tools as needed to defend American economic interests from harmful policies and practices."

 

US TRADE REPRESENTATIVE KATHERINE TAI

 

Read more from CNN Business.

OIL MONITOR

OPEC decision sends US oil prices to 7-year high

The Organization of the Petroleum Exporting Countries is standing by its plan to gradually boost oil output as demand recovers, defying pressure to open its taps wider and delivering another jolt to crude prices.

 

The latest: OPEC and its allies, including Russia, said after an unusually speedy meeting Monday that they would stick to a previous decision to increase supply by 400,000 barrels per day in November.

 

That sent Brent crude futures, the global oil benchmark, up 2.5%. They continued to rally on Tuesday, hitting their highest level since 2018. West Texas Intermediate futures, the US benchmark, have reached their highest level in seven years.

 

"It's not that [OPEC and allies do] not recognize the coming supply shortage," said Bjornar Tonhaugen, head of oil markets at Rystad Energy. "The group is well aware of the global inventory draws, maintenance work and rising demand, but chose to wait until later this year to adopt a bolder supply approach."

 

What it means: Higher prices are a positive development for crude producers. But for consumers, who were already fretting about inflation, it's a growing concern.

 

Energy prices in developed countries rose 18% in August, the fastest pace since 2008, according to data released Tuesday by the Organization for Economic Cooperation and Development.

 

Watch this space: Oil prices could be pushed even higher thanks to the soaring cost of natural gas and coal, which may trigger a scramble for crude to generate power over the winter, UBS analyst Giovanni Staunovo said in a note to clients.

 

A cold winter in the Northern Hemisphere or fresh supply disruptions could also keep prices from falling, he added.

UP NEXT

The ISM Non-Manufacturing Index, which tracks the US services sector, arrives at 10 a.m. ET.

Also today: The Facebook whistleblower's testimony before the Senate Subcommittee on Consumer Protection, Product Safety and Data Security also kicks off at 10 a.m. ET.

 

Coming tomorrow: Earnings from Constellation Brands and Levi Strauss.

WHAT WE'RE READING AND WATCHING

▸ Empty buildings across China speak to Evergrande debacle (WSJ)
▸ Warren wants SEC to probe the Fed's trading scandal (CNBC)
▸ Power crunch looms in India as coal stocks reach crisis point (FT)
▸ Stock in company behind California oil spill plunges (CNN Business)
▸ Tesla ordered to pay ex-employee for racist treatment (Bloomberg)
▸ Would you try plant-based seafood? (CNN Business)

FINAL WORD

Another Chinese real estate developer is in trouble

Global investors are increasingly concerned that China's real estate market is a bubble about to burst.

 

In recent weeks, there's been plenty of obsessing over the fate of Evergrande, the heavily-indebted Chinese property developer that's scrambling to find the cash it needs to survive.

 

But it's not the only weak link in the system. Fantasia, a Chinese developer of luxury apartments, missed $315 million in payments to lenders on Monday. The company, whose shares were suspended Tuesday, said it's assessing "the potential impact on the financial condition and cash position of the group."

 

Step back: The news revived fears that debt woes are deepening in China's overextended property sector, my CNN Business colleague Laura He reports. The industry is vital to China's economy, accounting for around 30% of its output.

 

"The [Chinese] property sector is worrisome," Macquarie Group economists Larry Hu and Xinyu Ji wrote in a research note Tuesday. Property sales in the top 30 Chinese cities plunged 31% in September from a year ago, according to Macquarie's estimates.

 

Fallout will depend on what Beijing does next. The government is expected to intervene to limit consequences for homebuyers, but could be tougher on the companies themselves as it tries to hammer home a message of financial discipline.