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Morgan Stanley turns more defensive on stocks, downgrades technology

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Morgan Stanley downgraded technology stocks to underweight from equal weight on Monday, citing expectations of a more defensive turn in the market.

Cyclical sectors such as technology and consumer discretionary tend to perform better during periods of growth, when investors are more willing to take on risk.

Now Morgan Stanley Chief U.S. Equity Strategist Michael Wilson and his team said it’s time for those high-flying sectors to take a backseat to defensive sectors such as utilities, where business is less affected by fluctuations in economic growth.

Tech is the best performer in the S&P 500 so far this year, up more than 12.5 percent.

“We suspect it will not be immune from the changing attitudes toward risk assets we are seeing across markets and think the sector may have benefitted from a false sense of security the past few months,” Wilson said in a report. He noted that earnings growth is already priced in, relative valuation is elevated and the industry is sensitive to growing trade tensions since it is one of the most dependent on China by revenues.

Semiconductors, which tend to lead the performance of cyclical sectors, have “meaningfully underperformed” technology in the last few months, Wilson pointed out.

Source: Morgan Stanley Research

Overall, “we think there is a growing probability that the market is now discounting at least 2 of our 3 necessary conditions for sustained defensive leadership — peaking y/y earnings growth and a top in the 10 Year Treasury Yield,” the report said. The final condition, which is an inverted yield curve between the 10-year and the 2-year Treasuries, is just 28 basis points from happening, and the gap between the two is narrowing quickly, it added.

“Waiting for an ‘engraved invitation’ is never a good idea when anticipating leadership changes.”

On Monday, Wilson downgraded small-cap stocks to equal weight based on the view the group has run too far ahead of itself. He also upgraded defensive sectors consumer staples and telecom services to equal weight from underweight.

Morgan Stanley upgraded utilities to overweight on June 18. Since then, the sector has gained 6.3 percent as the top performer in the S&P 500. June marked the first month “showing broad and consistent performance from the defensive sectors,” the report said. “We think this is likely to continue and could portend a more difficult market environment overall as we enter the seasonally worst time of the year.”

Wilson pointed out the S&P 500 typically trades poorly in July and August of midterm election years. “Given the highly uncertain nature of this year’s election, we suspect this year could prove to be worse than average,” he said.

Source: Morgan Stanley Research. As of July 5, 2018.

Stocks rose Monday morning after Friday’s better-than-expected employment report.

Wilson maintained his 12-month S&P 500 target of 2,750, but expects the index could rise to 2,800 to 2,825 in the near term, or up at least 1.5 percent from Friday’s close.

“Our suspicion is that this rally may prove to be a bull trap that provides the perfect opportunity to position more defensively. … We think [the jobs report] will likely encourage the Fed to continue to tighten and may encourage the administration to continue to take a strong stance on trade issues,” he said. “After all, economic data like this suggests the trade policies are successful. Neither of these potential actions is good for equity markets in our view.”

The U.S. and China each implemented tariffs Friday on $34 billion worth of imports from the other country.



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Elon Musk apologizes to British cave diver following ‘pedo guy’ claim

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Elon Musk, co-founder and chief executive officer of Tesla Inc.

Patrick T. Fallon | Bloomberg | Getty Images

Elon Musk, co-founder and chief executive officer of Tesla Inc.

Tesla CEO Elon Musk apologized after making the baseless claim that a British diver involved in the Thai cave rescue mission was a pedophile.

The apology comes after the spelunker, Vern Unsworth, who was involved in the early days of efforts to save the now-rescued boys’ soccer team, threatened legal action against the billionaire executive over the comment.

Musk said on Twitter late Tuesday that he had made the claim out of “anger” because Unsworth had criticized his idea to rescue the boys with a “mini-submarine” made out of a SpaceX rocket part.

“Nonetheless, his actions against me do not justify my actions against him, and for that I apologize to Mr. Unsworth and to the companies I represent as leader,” Musk said.

“The fault is mine and mine alone.”

Musk got involved in efforts to rescue the group of 12 boys and their soccer coach earlier this month — mere days before their rescue. The boys had gotten stuck in the flooded Tham Luang cave in Chiang Rai after venturing through it with their coach.

He and a team of engineers from SpaceX and The Boring Company brought over the vessel — a cylinder made out of the liquid oxygen transfer tube of a Falcon rocket — to Thailand, and met with government officials there about the possibility of using it to help.

But Narongsak Osottanakorn, head of the command center during the rescue, did not welcome the idea, saying the sub was “technologically sophisticated” but “not practical” with the rescue mission.

Musk then hit out at reports referring to Osottanakorn as “rescue chief,” noting that he was the former provincial governor of Chiang Rai and claiming he was not the “subject matter expert.” Osottanakorn stepped down from his role to join the initiative.



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European Union is expected to fine Google $5 billion over Android: Reports

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Sundar Pichai, chief executive officer of Google

Michael Short | Bloomberg | Getty Images

Sundar Pichai, chief executive officer of Google

European Union regulators will slap Alphabet-owned Google with a $5 billion antitrust fine for abusing the dominance of its Android mobile operating system, according to reports.

The case relates to the dominance of Google’s Android operating system, which is one of the world’s most popular mobile software systems, competing fiercely against Apple’s iOS. The Android OS controls more than 80 percent of smartphones globally.

The EU has scrutinized that dominance, arguing that Google should look to make competition fairer and allow smaller players in the market to flourish. It is widely expected to fine the firm a record levy on Wednesday.

According to the Wall Street Journal, that fine will amount to 4.34 billion euros ($5.06 billion). The Journal, citing an official familiar with the matter, said the decision is not expected to be discussed at a meeting between EU Competition Commissioner Margrethe Vestager and other officials.

Shares of Alphabet, Google’s parent company, shed more than 1 percent during U.S. premarket trading.

You can read the full Wall Street Journal report here.



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Hedge fund billionaire Einhorn places sixth in major poker tournament

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Hedge fund billionaire David Einhorn plays poker at the World Series of Poker's "Big One for One Drop."

Joe Giron | World Series of Poker

Hedge fund billionaire David Einhorn plays poker at the World Series of Poker’s “Big One for One Drop.”

Hedge fund billionaire David Einhorn busted out of a $1 million buy-in poker tournament just short of taking home prize money, Tuesday night in Las Vegas.

Einhorn and 26 other businessmen and poker players each ponied up $1 million to enter the World Series of Poker’s “Big One for One Drop” tournament.

Einhorn survived two days of play and came into the third day with the fifth most chips of the 6 remaining players.

But, while other players were doing all they could to avoid getting eliminated, Einhorn didn’t seem to mind playing aggressively.

For his sixth-place finish Einhorn receives no prize money. Fifth place would have paid out $2 million.

Einhorn has been a regular at the World Series of Poker for years, always giving his winnings away to charity.

This year he played sporting a shirt that said “Service Year,” a charity that allows people to serve in the community for a year, and be paid for it.

Simply playing in the tournament was a charitable endeavor as $80,000 from each entry goes to the charity One Drop, an organization dedicated to sustainable access to safe water.



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