MorningWord 9/7/12: Mission Accomplished!

by Dan September 7, 2012 9:05 am • Commentary

MorningWord 9/7/12:  Yesterday’s 2% rally in the SPX clearly highlights just how confusing the current market environment has been for those of us who like to over think things.  Since ECB chief Mario Draghi surprised the risk-taking world on July 26 by suggesting the central bank would do “whatever it takes” to keep the Eurozone together, the SPX is up ~7%, the DAX up almost double that and the sovereign yields of many of the Euro-zone’s debt-ridden nations down dramatically, problem solved, mission accomplished, pfew.  Draghi really should have given his press conference from an aircraft carrier off of the coast of Spain, Italy or Greece.

I hate being so snarky about something so serious, and trust me I do take my trading very seriously, but I often times find it nearly impossible to just jump on what seems to be the obvious trade, but make no mistake about it, it periods like this, when I am routinely getting kicked in the stones on the trading front, it is for one reason and one reason alone, I am over-thinking what appears to be obvious to many, big money and retail investor a like.

Which leads me to the part about rolling up your sleeves and doing work on names/stories where you think you can get a bit of an edge, whether it be fundamentally, technically, quantitatively, you name it.  Many of our themes this year have been correct, the timing of entry and exit have often been the biggest challenge in an investment climate that has been dominated by macro themes.  Since early summer we have been talking about the PC supply chain, from the makers, to components and software, and the effects of tablet cannibalization and the fales hope of a Windows8 fueled upgrade cycle.  Well just this morning, INTC cut their Q3 outlook for the second straight quarter citing weak PC demand, fine we get it no surprise.  But I guess my point here is that even when you are wrong on the macro, and continually stubborn, there are opportunities abound on the micro.  SO you won’t hear me whining because I have gotten the markets reaction to  central bank action wrong, I will again, and so will you, I can only do what I do best, identify a story that appears to be miss-priced, rundown my laundry list of inputs, determine conviction and then debate the best way to express that view with an eye towards finding the best risk/reward relationship.

The technical breakout in the SPX is powerful, and it may be just a tad to early to try to fade the move, but if INTC’s price action (down 17% off of the May highs, while the Nasdaq makes new 12 year highs) is any indication of the opportunities on the micro side of the market, than I am going to re-double my efforts to continue to fund them.




MorningWord 9/6/12:  There is a pretty good blog post detailing AAPL’s product announcements and and the stocks reaction into and out of the events from, and then shared by the likes of BusinessInsider and making the rounds on the Twittersphere this morning.


So the data above begs the question whether AAPL’s stock at all time highs is setting up for disappointment into next weeks Sept 12 iPhone5 Launch event.  I know this sounds a bit pedestrian, but with AAPL masking a ton of broader market weakness as the stock makes up 5% of the SPX’s weight and 20% of the NDX, the stocks reaction to the new smartphone could hold the key to whether the SPX can hold it’s gains and make new highs.  I obviously have no clue how this shakes out, but I would suggest that if the new iPhone looks remotely similar to the 4s, and the only real upgrades are 4G, sharper display, improved Siri, then watch out below.   But I also said this about the 4S launch and I was proved very wrong.  I don’t have a short position on in AAPL because this trade frankly just hasn’t worked, I have chosen to express this view through XLK Sept Put Spreads (here).




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.