MorningWord 9/5/12: Yesterday, Andrew Ross Sorkin of the NYT, in his Dealbook column titled “The Man Behind Facebook’s I.P.O. Debacle”, matter of factly states:
It is David Ebersman’s fault. There is just no way around it.
But when it came to Facebook’s catastrophe of an initial public offering — the stock reached a new low on Friday, closing at $18.06 — it was Mr. Ebersman, not Mr. Zuckerberg or Ms. Sandberg, who was ultimately the one pulling the strings.
But when it came to Facebook’s catastrophe of an initial public offering it was Mr. Ebersman, not Mr. Zuckerberg or Ms. Sandberg, who was ultimately the one pulling the strings.
Henry Blodget of Business Insider came to the defense of the Ebersman in a fairly detailed post yesterday titled, “Sorry, But People Who Lost Money On Facebook Stock Have Only Themselves And Their Advisors To Blame“. It is a good read and too Blodget’s credit, he appeared on CNBC a week before FB’s ill fated IPO suggesting to anyone who would listen that the deal was “muppet bait“.
I fall in Blodget’s camp on this, I believe that there were many failures, by many market participants that led to the botched deal and it seems a bit pedestrian to just blame one guy. Make no mistake about it, there are plenty of greedy soles at FB to blame, but clearly not just one.
If I were a shareholder I would spend less time on the debate of who’s fault it was that the stock is down more than 50% from the offering in mid May, and more time on the mechanics of the overhang of unlocked shares to come. Last night FB filed an 8k notice with the SEC adopting a new “insider trading policy” suggesting that ~440million shares owned by FB CEO Mark Zuckerburg that were originally slated to be unlocked for sale in Nov will not be sold for a year, 2 non employee directors will only sell shares to satisfy tax obligations for the next year, and that the company will use about $2billion of it’s cash and debt to repurchase shares from employees for tax purposes, thus reducing potential overhangs. Pfew, problem solved……well not really, there is still the question of decelerating growth facing an ever-increasingly skeptical investor base who have their fingers on the trigger, and the tiny little fact that there is still about 1 billion shares coming unlocked in the next 3 months. (Read my FB Nov/Jan Calendar trade in FB from Friday here)
One simple take-away from the stocks recent plunge into and out of the Aug 16 lock-up expiration is the that it appears that FB executives have learned a few tough lessons early in their public existence. First of which is don’t treat your investors like morons. Think about the unintended consequences of their blown IPO; 1. morale internally went from coolest, most talented, richest kid on the block, to orphaned in juvenile detention, while it maybe a decent place to go work now with the stock at a 50% discount, they are very likely to lose some of their best talent for more entrepreneurial sort of deals at competitors or start-ups, and 2. the once darling of Wall Street analysts is now massively in the penalty box with price targets and estimates dropping quicker than Zuck’s Unfriendings, and now is very much a “show me” story.
Apparently the powers that be at FB do watch their stock price as it has been reported that they have been making the rounds with large investors for weeks now trying to show them a little love. Additionally last nights filing, while likely in the works for a while appears to be a clear reaction to FB director and early investor Peter Thiel’s unloading of almost his entire FB stake on the May IPO and the Aug Lockup. It appears that the company is finally getting the fact that they are mere mortals and that investor sentiment can be as fickle as a friend request.
Last night’s news doesn’t change much in my opinion and I would expect the stock to see lower lows, but I would expect the stock to find a bottom at some point in the near future, probably at or around the Nov lockup.
When it comes back to the question of who killed the IPO, we all did, all the irrational exuberance displayed by almost every willing participant in the process, from the company, to the early investors, to the press, the very eager bankers and the overly anxious investing public, so when asked who killed the IPO, the fruit of the labor of the geeky little kid in the hoody, we all did.
MorningWord 9/4/12: Every once in while I wake up and see something before I have had my coffee that causes me to rub my eyes and question the fragile balance of the universe. The other day it was my dog and cat casually sitting within one foot of each-other without a hiss or a growl, while that was more cute than anything else, this morning, I am almost fell out of my chair reading the following headline from the FT, “McDonald’s to Open First Vegetarian Outlets”. After reading the article, I realize this is for perfectly logical (and frankly honorable) reasons, to appeal to those who view the Cow as sacred, and offer a fast food dining experience in a couple Indian towns that serve as very Holy sites among Sikhs and Hindus. Pfew, disaster averted for moi, my quarter-pounder w/cheese fix in airports and on interstates will likely go uninterrupted in the U.S. for the time being.
But this does lead me to the conundrum that many U.S. multi-nationals such as MCD face in a global marketplace, which they rely on for much of their future growth, in what appears to be an increasingly recessionary environment the world over. Last month, MCD released Q2 earnings where they reported that same store sales declined month over month in all 3 of their top regions (North America, Europe & Asia), which had not happened since 2004. In 2011, the U.S. only accounted for ~30% of MCD’s sales, and the U.S. is becoming an increasingly saturated and competitive market for such offerings. As far as growth goes, earnings and sales are only expected to grow at low single digits this year, but analysts expect to see a ramp up to ~10% and 5% respectively in 2013. Not sure why, but it would appear to me that there may be some secular trends in place globally, and some more subtle challenges in expected growth areas that may cause future estimates to be severely challenged. Using the most common form of valuation, what sort of PE would you pay for low to mid single growth, for a well managed global brand with a solid balance sheet and above average dividend yield (3.13%)? I guess it would be hard to make the case for too much above the S&P500, which is about where it is on this year’s expected earnings.
So while the SPX sits within a couple % from the 52 week and multi-year highs, MCD’s is down a little more than 12.5% from the all time highs made in January and about 10.8% ytd. Investors in MCD have obviously been doing their homework as the stock has massively under-performed most of its fast food peers, and certainly the broad market.
Last week in this space I highlighted the recent under-performance of KO, which in a lot of ways has similar characteristics to MCD. At this point, MCD certainly sets up as a decent press on the short side on any strength, but it may make sense to take a closer look at the likes of PG, PEP, T & MO (to name a few) that appear to be fairly crowded trades due to their defensive nature and high dividend yields. This trade has been a bit of a “Sacred Cow” for investors in 2012, but with many of these Low Growth stocks trading at or above market multiples largely as a result of their yield, holders of these names who have enjoyed nice ytd gains might consider a slightly “leaner” diet for the balance of the year and at the very least consider stock replacement strategies given the generally low implied volatility in most.
MorningWord 8/31/12: Jackson Hole will always hold a little place in my heart, it was the site of one of the first very truly speculative trades I ever made in a market and in a product I knew nothing about. My esteemed colleague C.C. was also involved in the “due diligence” of this real estate endeavor in 2004/05, (due diligence= boondoggle) and ultimately I settled on buying raw land on the other side of the “Teton Tracks” in Victor, Idaho, same views, just other side of the range.
As many readers know, I pretty much go out of my way to avoid the crowd on investment themes, but the real estate bubble of the middle part of last decade was just too enticing with credit flowing and opportunities abound, I jumped right in. I’ll spare you the boring details, cause really they are boring, I bought 2 adjoining plots of land, with an aspen grove, a trout filled creek and pristine views of the Tetons, but then here is the boring part, I just sat with it for 2 years. Towards the middle part of 2006, when I seemed to get a call weekly from mortgage’s brokers and real estate agents about new exciting opportunities to own land, I decided to take them up on that offer, but to find a buyer for my dormant property. What I quickly found out, was that there wasn’t really any incremental buyers, and the guy who bought the land from me, was the real estate agent who had actually brokered the land 2x prior in the last 10 years (one to me). Wow, Phew, whatever you want to call it, but I got out before the crash and actually sold at a profit.
I guess the point of the little story is that I first made an offer on one of the parcels in late Aug 2004, and this is a magical time of year to be in a town like Jackson Hole, the fresh air, the views, the whole clean living way of life can get the juices flowing and get you to do things against your better judgement.
As Fed Chairman Bernanke is less than an hour away from his highly anticipated speech at the Kansas City Fed Symposium in Jackson Hole, WY. , the weight of the financial world seems to be resting on his shoulders, as weeks of anticipation of what he will or won’t do or say regarding further quantitative easing comes to an end.
My assumption is that Mr. Bernanke has learned much from the real estate bubble of last decade, and how the Fed’s policies affected said bubble, but much like me maybe the clean air and the spectacular views will cause him to do something irrational?
MorningWord 8/30/12: On more than a few occasions in the last 6 weeks we have highlighted the weak internals of the SPX’s 12% rally since early June, often suggesting that few stocks have powered much of the gains. There have been pockets of strength in sectors like large cap tech and defensive domestically focused dividend payers like AT&T & WMT that have practically carried the SPX on it’s back on it’s march to 1400. At this point of the rally many market participants would expect to see the rally broaden out, but in many ways we are starting to see some of the crowded stories that got us here coming undone one by one.
For instance, KO, considered relatively defensive, low growth, low valuation, decent dividend, solid balance sheet, was earlier this month trading at 13 year highs, but has quietly retreated about 8% in the last few weeks on essentially no news.
On a technical basis, the chart looks broken as it blew through near term support at $38, and an uptrend line that has been intact since Nov 2011, on big volume.
What is the price action in KO telling us about the ability of the SPX, of which it is the 13 largest weighted component as the index moves less than a quarter of a point a day at the top end of the 2012 range? When you look at the SPX vs KO (below) it becomes very apparent that some of what got us here is starting to come undone, and if we start to see similar price action as we have recently seen in the XLU and other defensive crowded trades like MO then the SPX could most definitely be on the verge of a re-tracement. AAPL can’t take this market to new highs all by it’s lonesome.
MorningWord 8/29/12: What have Chinese Central Bankers learned since the global financial crisis of 2008/2009 that their counterpart in West have not? I guess both learned a lot about the use of such artillery like Bazookas, both learned how to leave printing presses on auto-pilot, both very aptly learned how to re-inflate investment bubbles, but with the Shanghai Comp at almost 4 year lows, and the SPX at 4 year highs, why are market participants confused by China’s apparent reluctance to ease and U.S. central bankers apparent on doing so?
I ask a question that I certainly don’t have the answer to, but when I find myself confused by Central Banker Speak/Action I often just Google one of my favorite Onion stories written at what was in hindsight just the beginning of the crisis back in July 2008 (and thus brilliant), “Recession-Plagued Nation Demands New Bubble To Invest In”.
Have Chinese Bankers learned from such venerable journalistic endeavors as the Onion, that further aggressive easing could actually only pro-long their existing property/credit bubble, and re-inflate the commodity bubble of a few years ago and thus kick the can down the road and create a whole host of unintended consequences? Again I have no clue, and I suspect we will see lower rates and lower reserve requirements for banks in the very near future, but a measured non-heavy artillery approach may be prudent.
As for the Fed, have a ball, QE3 is just what the doctor ordered, likely to get BAM reelected, keep Bernanke from having to go back to academia and bicker with Krugman full time, and most likely the hint of it sends safe-haven U.S. equities to levels not seen since our last bubble burst back in 2007. But not the prudent thing to do.
Europe is another story all together as they deal with solvency issues of nations and banks, they can do whatever the hell they like to fix their problems, but short term fixes ain’t gonna do the trick.
So maybe the answer is we are damned if we do and damned if we don’t, but make no mistake about it, global economies and capital markets are where they are today as result of the unprecedented global easing of the last 4 years, we have been existing on stimulus fumes, and in my humble opinion this makes for a less than optimal investment environment. The chart above makes this point fairly aptly, but something likely to give in the very near future as because in a fairly rudimentary manner, a declining Shanghai signals declining Chinese GDP, which signals declining global growth, which will make it very hard for U.S. equities to keep rising.
MorningWord 8/28/12: While AAPL and FB have seemingly caught most of the headlines in Tech this summer, PC weakness stole a little bit of thunder with less than stellar results and outlook from DELL and HPQ, which has caused both beleaguered stocks to make new 52 week lows yesterday. I would also note that even as some pc supply chain companies like STX trade near multi year highs, INTC who supplies the largest component to PCs got absolutely drilled last week closing down about 5.5%, vs DELL down 7.85% and HPQ down 10%. What is more interesting is the unusual activity last week in the Aug31st weekly expiration (expire this Friday, and were listed just last Thursday). There was brisk buyers of the Aug 25 and 24 puts with ~16k and ~9500 trading respectively on Friday (upper right on monitor).[caption id="attachment_16076" align="aligncenter" width="589" caption="INTC AUg31 Expiration Option Monitor"][/caption]
Buyers of these Puts have committed about $750k of premium to the stock closing below 24.70 (24s obviously lower) this Friday at 4pm. With the stock down 5.5% in a week and 15% from the May highs, it will likely need a little help from general market weakness to break-even on these short dated puts, possibly an earnings pre-announcement? Some analysts are already factoring weakness into their estimates after last week’s PC data points, but I will note that the last time INTC pre-announced negatively was in a similar market environment back in Aug 2010 as we waiting for Bernanke’s infamous Jackson Hole speech hinting to QE1. Are about to do a late August redo? Options traders are betting on it, but remember this buying could be defensive as opposed to outright bearishness, could be longs hedging on a short term basis, but I doubt it, the premium would be better spent in Sept.
MorningWord 8/27/12: It’s fairly shocking when you consider that the jury verdict in AAPL’s patent infringement case against Samsung resulted in a $1billion fine to AAPL in damages, yet the real damage or awards are being played out this morning in market capitalization in magnitudes of the award. Samsung got drilled last night in Seoul, down~8% on the news, resulting in an almost $12 billion loss in market cap.
AAPL, the obvious beneficiary of the verdict, will likely reap many rewards, not just the $1 billion verdict which is a rounding error on their cash balance of about $118b, but the potential ban of Samsung “copycat” phones and tablets should most definitely help their market share, the moral victory that was repeatedly echoed by Steve Jobs before his death, that “Android was a stolen product” and the potential for licensing fees from exiting competitors who hope to avoid costly litigation. Obviously this case wasn’t all about Android, but they will get to that. With AAPL up about 2.5% in the pre-market, AAPL has gained nearly $15.5billion in market cap.
GOOG which has plenty of skin in the game, (not to mention that emails btwn GOOG and Samsung execs ended up being some of the most damning evidence in the Jury’s findings), will likely face the full force of AAPL’s litigation wrath as they are emboldened by the verdict. GOOG is trading down about 2% in the pre-market or a lose of about $4b in market cap.
MSFT amd NOK are even up as some perceive that their new Windows 8 smartphones may get a market share lift if there ends up being a ban of certain Samsung smartphones, I highly doubt this, their phones are DOA in my opinion so I am not going to do the math on this mornings market share gains as they are likely to evaporate by the end of the trading day.
From a stock market perspective it will be very interesting to watch this play out. AAPL and Samsung hold very similar places in large equity indices in their respective countries ( AAPL makes up about 5% of the SPX and 20% of the Nasdaq 100, while Samsung as of last night’s close makes up about 16.5% of of South Korea’s Kospi Index). The chart below shows how the stocks have traded in lock-step with one another until today’s break.
Anyway you look at it, AAPL is willing to spend hundreds of millions to litigate to strengthen their competitive position, and defend their moral ground. I think it is interesting that there is one thing that is lost on this whole thing, AAPL’s phones are not that innovative in my opinion, AAPL is the only major smartphone OEM that does not have a 4G phone. If I could I would use the Samsung Galaxy S III, but AAPL has me trapped, all of my media is on iTunes and make no mistake about it, the “Halo Effect” is in full effect in my household.
MorningWord 8/24/12: As experienced traders, we are always wary of complacent trades. We’ve seen too many times over the course of our careers a trade that works, and works, and works, only to eventually end in tears. The fact that it will end in tears is usually known well in advance, but you never know when the market will actually turn. One by one, all of the followers of the trade climb onto the bus, until it’s become so crowded that there is no one left to board.
On my mind today is the short VXX trade over the past year. There is almost no gravy train that has paid so cleanly. Check out this chart:
A trade doesn’t get more one way than that. Just stay short VXX and close your eyes. BUT, BUT, one day, this trade is going to turn, and it will be the inverse of the old saying, markets take the escalator up, and the elevator down. This thing will be the flying elevator.
To be clear, we don’t trade VXX because it’s a product prone to negative carry, just like most leveraged ETF’s, so you’re likely to lose money buying it the large majority of the time. We express our long volatility bets with VIX options instead. But I wanted to point the VXX out because I would be very scared to be short this gravy train. This is a crowded, crowded trade. And those always end in tears.
MorningWord 8/23/12: Usually leave the charting to my main man Enis, but the technical set up of the DAX looks a bit curious to me as we digest this morning’s PMI readings across the EuroZone and as investors hope to get some more clarity on future ECB/Troika actions to stem the continuing debt crisis. While PMI’s across the region contracted, Germany’s showed relative out-performance rising to a 3 month high, which speaks to some degree to the massive out performance of the DAX (up 18% ytd) to almost every other major equity index the world over.
Looking at a 2 year chart of the DAX it is fairly apparent, that the techncials are at a massive inflection point, sitting at prior resistance of about 7000. If Euro central bankers don’t deliver in the coming weeks when they are back from their Holidays, a retest of the 6500 level, which also happens to be at about the 200 day moving average could very well be in the cards.[caption id="attachment_15913" align="aligncenter" width="589" caption="2 yr DAX chart from Bloomberg"][/caption]
Some chartists may look at the graph above and see some steam building even as it stopped on a dime at the downtrend line from the 2011 highs, but I would suggest that the inability for it to push through and make a new high for 2012 tells me that investors feel that there is a decent amount of good news discounted in what has been the safe-haven equity market of Europe.
Safe-havens remain that way until just a few big players head for the door at the same time, and with the news flow surrounding Europe almost non-existent for the last month, I think proceeding with caution as it relates to European equities for the next month or so could be prudent, at least that’s what the technicals are telling me in a very slow news cycle.
MorningWord 8/22/12: If you listen very closely, you can almost hear it, it is the sound of the infamous corporate death rattle for the once dominant PC maker DELL. If you have been an investor in companies like NOK, RIMM or MOT this sound is not unfamiliar too you, but truth be told it is not usually heard until it is just too late too turn around your investment.
Last night DELL reported fiscal Q2 earnings that were below street consensus and guided Q3 and fiscal 2013 down. While expectations were not exactly running high as it relates to full year guidance (company had guided to above $2.13 back in Feb, while consensus sat at $1.90) the company guided to at least $1.70. As expected, PC sales led the weakness, as they make up 50% of the company’s revenues. There were a couple bright spots though, sales of Servers, Software and Storage to corporations saw a year over year gain and the company hired an executive from KKR and formerly HPQ to run their Enterprise Solutions Group that houses these products. My first thought, HPQ, really? Well as I said in my preview yesterday, these guys are fairly well screwed and the stock appears to be a classic value trap.
Price action yesterday was slightly reminiscent to what we saw back in March/April before we topped out. As some were calling it, we were in an NBA market, Nothing But Apple. Yesterday AAPL opened to a new all time high, dragging the SPX to a new 52 week high, only to reverse on a dime at about 10:40am. The SPX took this in stride for a bit, but then also turned lower at about 11:19am, while both spent the rest of the day grinding lower (chart below).
AAPL is nearing about 5% of the SPX’s total weighting, and nearly 20% of the Nasdaq Comp, don’t be mistaken about who is driving the train here. Put another way the SPX and the Nas really need AAPL to release a Revolutionary New iPhone, not just an evolutionary iteration as they have apparently gotten used to over the last 2 cycles. AAPL’s 14% rise since reporting in July poses risks to the broad market, this coupled with the new found enthusiasm for bank stocks. If European debt/banking fears re-ignite, coupled with the usual global growth fears we could see very similar price action to the spring where tech and financials 2 of the great outperforming sectors of Q1, lead us lower, and quickly.
With the SPX above 1400 (for now), I expect disappointment in Jackson and at the Fed’s Sept 13th FOMC meeting, while Europe remains a wild card. If I read another blog post about the impending “Bazooka” that the ECB is prepared to wield I may puke, it may be a short term trick, but it ain’t gonna fix the ills on anything more than on a short term basis (remember operation twist).