Monday, May 16, 2011

Quick Bounce than Blah

Well to profit from this morning's long side trade on the S&P 500 you had to be really nimble - the profit was only there for about 4 hours.

By end of day we have come down to test that 50 day moving average, and broke on an intraday basis the low from 2 weeks ago although some buying in the closing minutes looks like it will keep the index over that low on a closing basis.  (the close always more important than the intraday action)  With that said, it really seems quite sickly out there and even those frightened by the non stop V shaped bounces might have a hope of a real move down.  If that 50 day breaks, there is an enticing gap in the 1310s.... then as we said last week, the 100 day moving average at 1300.

Worrisome for bulls - today's action despite the dollar being sold off.  It almost feels like everyone went margin all in on silver, and once that trade reversed two weeks ago margin calls came across the board and like August 2007 you have a lot of dislocations under the surface in momentum names across the board.  This is what happens when every HAL9000 essentially runs the same programs.

The Economist: Another Internet Gold Rush

Much like the first tech/internet bubble (created on the back of Easy Al's "Y2K" easy money policies) version 2.0 (created on the back of Easy Ben's "Everything Must be Inflated" easy money policies) will create a small handful of big winners, and a bevy of overinflated losers in the long run.  I'm not the only one saying this, but as with everything it's all about timing... via Reuters:
  •  The Internet investment scene is in the throes of a gold rush mentality that is driving valuations higher across the board based on a small number of notable startup successes, one of the venture capital industry's pioneering members said.  
  • Sky-high market capitalizations for the likes of Groupon, Twitter and Facebook are creating untenable expectations for the investors who provide the early financial backing for young web companies, Alan Patricof, founder and managing director of New York-based Greycroft Partners. 
  • "We're going through a period of irrational exuberance at the moment for the most part, which is really caused by a certain limited number of very exciting success stories," Patricof told Reuters Insider in an interview.   "It's beginning to set the benchmark of pricing for companies that go all the way down the line and may not be appropriate to benchmark off those 10 or 13 companies that everybody knows and is very familiar with," Patricof said.

I expect some great short opportunities to develop whenever the "anything social media and/or group buying is gold" fervor breaks - be it mid 2012, mid 2013 or whenever.  Until then I suppose we keep making billionaires out of Chinese founders whose companies have less revenue than the typical local Kohl's store.

The Economist weighs in with a lengthy story:
  • The return of big internet IPOs, rarities since a bubble in telecoms and internet stocks burst in 2000, and the resurgence of large mergers and acquisitions among technology firms is dividing opinion in the industry. Some veterans see a new bubble forming in the valuations of start-ups and a handful of more mature firms such as Twitter, which is still hunting for a satisfactory business model five years after the first tweet. More sanguine voices retort that many young companies have exciting prospects and that there are plenty of corporate buyers, such as Microsoft, with the money and confidence to snap up older internet firms still in private hands.
  • Yet both sides agree that the internet world is being transformed by a number of powerful forces, three of which stand out. First, technological progress has made it much simpler and cheaper to try out myriad bright ideas for online businesses. Second, a new breed of rich investors has been keen to back those ideas. And, third, this boom is much more global than the last one; Chinese internet firms are causing as much excitement as American ones.
  • Thanks to the boom’s second driving force, finance, these companies have no shortage of eager backers. Although too small to interest many venture-capital firms, they are being fought over by wealthy individual investors, or “angels” in the venture industry’s jargon. Many of these financiers made their fortunes during the 1990s bubble and are eager to put their know-how and cash behind today’s tiny companies.
  • Their cumulative impact is staggering. According to the Centre for Venture Research at the University of New Hampshire, angel investors in America pumped about $20 billion into young firms last year, up from $17.6 billion in 2009.Much of the angels’ money has gone to consumer-internet firms and makers of software apps.
  • The financing of more mature tech start-ups has also changed. Elite venture-capital firms such as Andreessen Horowitz and Kleiner Perkins Caufield & Byers have raised billions of dollars in new funds in the past year or so. Some of this money has been pumped into “late-stage” investments (eg, in Twitter and Skype), allowing companies to remain private and independent for longer than used to be the norm.

  • Much more striking, however, is that the latest round of euphoria involves emerging markets that were mere spectators during the last one, above all China. The country boasts not only the world’s biggest online population, but also its fastest-growing. The number of internet users there will rise from 457m last year to more than 700m in 2015, according to the Boston Consulting Group (BCG). And the Chinese are no longer mostly playing games, but are diving into lots of other online activities, notably shopping.
  • Albeit with a dip in 2009, the amount raised by Chinese venture funds has grown sharply, rising from nearly $4 billion in 2006 to more than $11 billion in 2010 according to Zero2IPO, a research firm. The sum invested increased from $1.8 billion to nearly $5.4 billion. Much of this went into internet start-ups.  
[click to enlarge]

  • ....some venture capitalists to argue that 2011 may be more like 1995 than 1999: if a bubble is inflating, it is a long way from popping. So investors who shun internet firms now may be missing a great chance to mint money. Jeffrey Bussgang of Flybridge Capital Partners, a venture firm, notes that venture funds raised between 1995 and 1997 enjoyed stellar returns. 
  • Others point to signs of bubbliness. For instance, some start-up firms are dangling multi-million-dollar pay packages in order to tempt star programmers from Google, Microsoft and other big companies.
  • There are also signs of irrational exuberance among some investors. Color, a photo-sharing and social-networking start-up, has been reportedly valued at around $100m by venture firms, even though it has an untested product in a crowded market. Competition among angel investors has helped drive up valuations of social-media start-ups by more than 50% in the past 12 months. Financiers are sometimes skimping on due diligence in the scramble to win deals. 
  • In China, too, the purported worth of young firms has risen breathtakingly fast—to an average of $15m-20m in first-round venture financings, which is expensive even by Silicon Valley’s standards.

[Apr 28, 2011: Social Networking Bubble Continues to Percolate - 12 Week Old Startup Company Sells for $20-$30M!]
[Apr 15, 2011: BW - This Tech Bubble is Different]
[Feb 10, 2011: Social Media Bubble Grows as Twitter Valuation Doubles in 2 Months]

No positions

More Signs of MoMo Shakeout - (REDF)

Remember when (REDF) made an announcement about a "group buying" service in 40 cities, and it was cheered as the "Groupon of India" (rah rah!)?  [Apr 26, 2011: Forbes - Rediff Announces Local Deals Service, Stock Skyrockets]  The stock hit $13s that day, and bubbled up to hit $18 two sessions later.  Since then?  POOF.

Just fill one gap at $12 (one more to go in mid $9s) and is now substantially below the level when it made the announcement. 

Everywhere I look the "social media" and "groupon clones" are taking knives to the backs.  This is the other side of the mountain when you play the nonsense trading lemming action.  You can dance (just do it by the exit), and make sure you never drink (Kool Aid).

On the positive side this 'cleansing' should lead to some nice opportunities for the second half of 2011.

No position

Fascinating Stat of the Day: Employers Hired the Same Number of Workers in March 2011 as in the Depths of the Great Depression February 2009

While reading this opinion piece by former Chairman of the President's Council of Economic Advisors (try saying that three times quickly), Edward Lazear - a quite astounding statistic that I was unaware of was revealed.  Mr. Lazear makes the case the job market feels so rotten (outside of government statistics offices) because the number of actual hires in recent months has been no different than it was at the depths of the Great Recession.  The main difference between the two periods is simply that job cuts have slowed substantially.  Here are his data and comments:

  • Why don't American workers feel that the labor market is on the mend? After all, the May 6 jobs report could suggest that the labor market is improving. Nonfarm employment rose by 244,000 and employment growth over the last three months is averaging over 200,000 per month.
  • The fact is the jobs numbers that create so much anticipation from the business press and so many pundit pronouncements do not give a clear picture of the labor market's health. A better understanding requires an examination of hires and separations, or what the Bureau of Labor Statistics calls Job Openings and Labor Turnover Survey (JOLTS) data. Here are some surprising facts:
  • .... the increase in job growth that occurred over the past two years results from a decline in the number of layoffs, not from increased hiring
  • In February 2009, a month during which the labor market lost more than 700,000 jobs, employers hired four million workers. In March 2011, employers hired four million workers. The number of hires is the same today as it was when we were shedding jobs at record rates. 
  • We added jobs because hires exceeded separations, not because hiring increased. There were 4.7 million separations in February 2009. In March 2011 that number had fallen to 3.8 million. The fall in separations reflects a decline in layoffs, which went from 2.5 million per month in February 2009 to 1.6 million per month in March 2011.
  • The decline in layoffs is not unexpected and does not necessarily reflect labor-market health. Layoffs tend to occur early in a recession. When an economy has reached bottom and has already shed much of its labor, layoffs slow. But that doesn't mean that the labor force is recovering. We could have high unemployment and a stagnant labor force even when layoffs are low.
  • In a healthy labor market like the one that prevailed in 2006 and early 2007, American firms hire about 5.5 million workers per month. Recall that the current number of hires is four million and it has not moved much from where it was two years ago.

S&P 1340 Continues to be a Magnet, and S&P 1330 Continues to be a Floor

This morning there was a nice risk-reward trade on the long side as 2 levels of support existed.  First, the lows of two weeks ago that I highlighted last week (S&P 1329) and right below that the 50 day moving average at S&P 1327.  A move below both of those would definitely be bearish but going long just above creates a nicely defined trade.  If it works against you, you take the small loss and move on.  This is a very short duration trade since we're in a massive chop fest and if support breaks, we're prone to a woosh down here.  Thus far the index has bounced about 0.65% versus the morning's low of just below S&P 1333 as we continue to hover around 1340.

You can also observe this morning's low has been effectively the same level of the intraday low the past three sessions.  So for now we remain range bound in about a 20 point S&P range, with a lot of choppy action dictated by currencies, and not much to do other than take short term trades.  In a normal era for markets I think the bears would feel emboldened as many of the momo names have broken down, the commodity trade has been flushed aside from dead cat bounces, and we've seen a rotation into defensive names of late.  However, anyone who has doubted the market's ability to pull off a V shaped low volume bounce the past few years has been continuously smashed in the face.  So there is reticence is using the pre 2009 playbook, and instead one is wary of yet another V shape to begin at any moment.  Recency bias at its best.

The wildcard remains the dollar which has fallen back sharply today and is again pegged against its own 50 day moving average.  It is disappointing action for dollar bulls, considering the 'breakout' Friday - but the case is not yet closed on the greenback.  It has been a huge move in a week and a half, so some resting is normal. (one day delay on the following chart - current price $75.30)

As an aside, I mentioned Sina (SINA) this morning - with today's bounce that filled an upside gap, I'd have attempted a short with entry in the $112-$113 area to see if we can reach $100 in the coming week or two, with stop out over $115.  You have the 50 day moving average as a resistance to potentially help out the bear case.

No positions

U.S. Plains States Farmland Boom Continues, with 20% Year over Year Gains

Back in the early days of this website, as I thought out the "long term" in terms of economic, demographics, urbanization, etc trends, I mentioned arable farmland as potentially the best long term investment (talking decades) I could think of.  Shortly thereafter I heard similar thoughts from legendary investor Jim Rogers - his infamous quote now is something along the lines of "today the bankers drive Ferraris, in the future farmers will."  (with the state of our captured regulatory bodies and Federal Reserve, I don't ever foresee a day bankers won't be driving Ferraris!)  Of course this is not an easy thesis to play since there are limited investment opportunities short of a few niche hedge funds, and a few land oriented stocks (mostly foreign).  But, there are second derivative trades such as investing in "heartland" centric themes, or companies who benefit most from the new found wealth of the farmer class. 

Remarkably while the country suffered through the worst recession since the 1930s, many U.S. states' farmland values only suffered 1-2 quarters of outright losses.  And of late are back to 15-20%+ year over year gains per Federal Reserve surveys.  Now as with all things in the country the past few decades, a valid underlying story will be taken to extremes - combined with a tsunami of easy money that the real economy cannot absorb, you will see 'irrational exuberance' as that money needs to find a home.  Hard assets of all types (ex housing) at this time have been bid up - and farmland is especially attractive due to many long term trends plus the spectacular rise in commodity prices (excluding the past few weeks of course).  Despite my long term bullishness, it would be unreasonable for the current pace to continue - in some of these states, at current pace the value of farmland would double every 5 years.  But for now we party on....

There are two Fed districts where the majority of the "heartland" is based, one of which is the Kansas City Fed.  Per Big Picture Agriculture blog here are some of the heady statistics from that region (source material here)

"With robust farm income, farmland values posted sharp gains akin to the swift rise in 2008. Across District states, cropland values surged 20 percent above year-ago levels, particularly in Kansas and Nebraska. Bankers also reported a sharp jump in cash rental rates that echoed the rise in cropland values, especially for irrigated acreage."

First, year over year gains in Q1 2011 - you can see Kansas and Nebraska on pace for doubling of nonirrigated farmland in 4 years at current pace.

Here is the long term chart on a quarterly basis - one can see the explosion over the long term trend starting in 2007.

Finally one comment from a banker in the district:
  • “Current agricultural land prices are a concern to me as I am afraid they may be a bubble in the making.” – North Central Missouri

[Mar 11, 2011: [Video] Former FDIC Head Bill Isaac Talks about the Dud that is Dodd-Frank, and the Potential for a Farmland Bubble]
[Mar 7, 2011: NYT - In Prices of Farmland, Echoes of Another Boom]
[Feb 16, 2011: WSJ - Midwest Farmland Surges Double Digits in Q4 2010 Alone]
[Nov 15, 2010: Farm Economy Headed for Record]
[Dec 31, 2009: Bloomberg - Ethopian Farmers Lure Investor Funds as Workers Live in Poverty]
[Jun 2, 2009: The Economist - Outsourcing's 3rd Wave - Buying Farmland Abroad]
[Jun 14, 2008: Bloomberg: Farmland Reaps Bonanza for TIAA]
[Jun 5, 2008: NYTimes: Food is Gold, So Billions Invested in Farming]

Is this the Reason for the Drop off in Copper?

We flagged the weakness in copper a few weeks ago as a yellow flag, even as the equity market remained giddy as could be.  Traditionally, copper has been seen as a global economic indicator due to its use in so much of industry.  However, with the dominance of China as the marginal buyer of just about every commodity on Earth the past 5-7 years [May 13, 2009: Commodities - It's China's World: We Just Live in It] , it seems much of the commodity movements nowadays are either due to China's decisions to be "balls to the walls" (or not) in their buying [Mar 23, 2009: - Chinese Stockpiling Spurs Copper Price Rally] and/or easy money policies + the speculator class + the "financialization" of commodities.  That doesn't infer that nothing can be read from commodity movements (or in this case copper specifically) but I'd say it is a far different animal than even 10 years ago.

About 6 weeks ago, we noted a story in FT Alphaville that copper had taken on a strange new body in China, as a form of collateral for financing. [Mar 30, 2011: "Doctor Copper" Turning into "Banker Copper" in China?]  From March:

  • More worryingly however is that the primary use of copper in bonded warehouse appears to be as a financing mechanism to provide cheap working capital for various types of business often unrelated to the metallic industry.
  • Initially via a letter of credit and then by using deferred payment LC, they create a borrowing vehicle. Estimates for the amount of metal tied up in such a way range from 40-80% of total bonded stocks. Our estimates are towards the upper end of this range.
  • Property developers (or the property developing arms of conglomerates), appear to be behind the lions share of this type of activity, driven by an unwillingness by domestic banks to extend finance

It appears the Chinese government took note of this "innovation" and have taken steps to stop it.  Could it be possible then that the price levels of copper were inflated earlier this year due to the use of it as financing in China, and now it has returned to a more realistic level based less on "banking copper" and more on "doctor copper"?


Via FT Alphaville

  • Goldman Sachs said last month that China’s central bank may have cracked-down on the scheme, which saw Chinese corporates use copper as collateral for new loans. Meanwhile, attention turned to other commodities that could potentially be used by China’s companies in a similar way.
  • Here’s Michael Liang, a colleague of all ’round China expert Michael Pettis, with some quick post-mortem detail on the scheme — as told to him by a trader friend:  This process stopped a month ago because the PBoC intervened to prevent more copper-based financing. This was the start of the bearish sentiment in copper – the massive demand in China is gone. 
  • This doesn’t mean however that we can relax. It probably just means that the financial sector will continue to find ways to “innovate” around attempts to rein in credit growth. It also means, I would guess, that total [Chinese copper] imports in the past few months were artificially high, and we should expect lower than “normal” copper imports over the rest of the year. Of course this will put upward pressure on the trade surplus.

Sina's (SINA) Breaking Down so Tread Cautiously

While still finding Sina (SINA) very attractive in the long run, I would advise those speculating in the shares to be careful at this moment.  Much like silver, Sina turned to a momo play (based on valid fundamentals) and that attracts a whole new breed of "investor".  Once the momentum breaks, they leave en masse and with such sharp run ups (silver or Sina) you don't have much underlying support.  While I was a little early in the first week of April, taking some profits along the way never hurts.  I can tell you from the amount of web hits my Sina stories have been receiving the past 45 days versus 6-8 months ago, this name is no longer under the radar.  Further, the broken IPO of (cough) "The Facebook of China" shows slowing momentum in this group.

While I loved Sina's valuation with the undervalued Weibo story back in late 2010, I could not get behind the valuation over the past month and urged caution.  While those who never owned it or wanted to add to shares, had a reasonable area to "take a shot" on the long side just above the 50 day moving average last week, that trade is broken as of Friday when that level was severed.   Now one hopes for a chance down there in the $80s, which would be a much more attractive entry point from a valuation point of view.  The 100 day moving average is exactly at $100 so that's another area one might want to take a stab as that level provided support in mid March.  And yes, I expect another run up in the coming quarters.  But near term... prognosis not so good from this set of eyes, although the stock is fast approaching oversold levels and some sort of dead cat bounce should occur in the next 3-6 sessions.  What happens after that will be the key.

[click to enlarge]

Ironically, Mr. Cramer pumped the name April 14th within days of its peak .... just as he pushed the retail crowd in, Mr. Goldman Sachs downgraded the stock exactly a week later.   (nailing the top)  Ah, you have to love the herding behavior of Wall Street....

[Feb 18, 2011: BW - A Twitter Knock Off has China Talking
[Jan 11, 2011: Word is Getting Out on Sina's Secret - Weibo]
[Dec 9, 2010: The Twitter of China - Weibo]

No position

Friday, May 13, 2011

Sina (SINA) Misses EPS Targets Slightly as it Invests in Weibo, Guides Down Slightly for Q2 Revenue

Sina (SINA) reported a miss in earnings in after hours by 2 cents, but the stock is largely unaffected.  At this point, despite not so hot revenue growth (+17% year over year), the company is being valued for its "Twitter of China" (Weibo) and hence investors are overlooking the near term, for the potential unlocking of value in an IPO in the coming years.

Technically the stock has come in to the 50 day moving average, after a wild run in which it essentially doubled in value in 6 weeks.  This gives new investors a line in the sand to attempt a long position (of course if the 50 day moving average is broken, there should be far more downside) - but valuation remains "pricey".  Of course the value of 140M (and growing) Chinese "twitter users" generating almost no current revenue is all in the eyes of the beholder.  Even the American Twitter, with a far more rich user base, has had a slow beginning in monetizing its users.

Full report here.

Via Reuters

  • China's Sina Corp reported a 39 percent drop in first-quarter net profit as it spent more on Weibo, its highly popular Twitter-like service, to lure new users. Sina, which also operates China's top Internet portal, said first-quarter adjusted operating expenses ballooned 41 percent to $39.1 million, mainly due to higher personnel-related costs and increased marketing expenses for Weibo.
  • Sina reported first-quarter net profit of $15 million, or 23 cents a share, compared with $24.4 million, or 37 cents a share, last year.   Excluding items, it earned 25 cents a share, missing the average forecast of earnings of 26 cents a share.
  • The company said revenue from mobile value-added services, which can include things like ringtone downloads, fell 13 percent to $21.3 million due mainly to rules implemented by China Mobile in late 2009 and early 2010. 
  • Advertising revenue rose 33 percent to $72.3 million in the first quarter. 
  • Revenue, excluding Sina's carved-out real estate advertising business, rose 19 percent to $95.5 million, beating analysts' expectations of $95.4 million. 
  • Sina said it plans to significantly increase its investment in Weibo, which boasts of more than 140 million registered users. 
  • For the second-quarter, Sina expects adjusted revenue of $112-$115 million, versus analysts' expectations of $115.3 million.
  • Sina said in April it had no immediate plans to list Weibo and that it would diversify its operations into e-commerce and online games next year.   
  No position

NYT: Jim Cramer Hits an All Time High

If you are interested in the wild man from infotainment financial TV, the New York Times has a quite in depth expose here on Jim Cramer.  Quite a bit of interesting info, including Cramer's take on the undressing he took at the hands of Jon Stewart.  (if you missed it see here May 13, 2009 - Jim Cramer v Jon Stewart)


When it was announced that Cramer was going on “The Daily Show” to debate Stewart, the media ballyhooed the clash as if it were the reincarnation of Ali-Frazier, albeit with two quick-witted, wise-guy Jewish flyweights.

“There was a real sense of excitement in the newsroom here when Cramer left for ‘The Daily Show,’ ” Mark Hoffman told me. They all thought that if anybody had a chance to go toe to toe against Stewart, it would be Cramer.

They were wrong. For 15 long minutes, Cramer sat abjectly as Stewart pummeled him. Worse, he accused Cramer of being a snake-oil salesman and suggested that he and his colleagues at CNBC were responsible for cheerleading Wall Street shenanigans that wrecked the investments of millions. Cramer greeted this with an abashed grin and repeated apologies for his role in the economic mess. People expecting to hear from the confident Jim Cramer of “Mad Money” were stunned.

“It’s unbelievable, I know, but I never saw it coming,” he told me as we sat in a booth in the diner gorging on a breakfast of bacon and eggs. “The night before Stewart, a bartender in Brooklyn wished me luck, and I didn’t get what he was talking about. I expected a cordial discussion. They promised they wouldn’t use any clips, and they lied,” Cramer said. (“The Daily Show” declined to comment.) “I should have known this was coming because of how vicious Stewart had been all week, but I really thought it was just going to be a friendly show.”


At the beginning of each episode of “Mad Money,” Cramer states his purpose: “I’m not here to make you friends. I’m here to make you money.” He portrays himself as an insider willing to reveal the moneymaking tricks of the trade to the little guy. During the bull market of the mid-2000s, Cramer’s fans indeed made money in the market (as did most other investors) and had fun doing it.

But when the economy began to collapse three years ago, Cramer became a very visible symbol of what had gone wrong. He famously interviewed Wachovia’s C.E.O. on the air, recommending the stock right before the bank’s shares plummeted. For a brief moment it looked as though the traditional world of Wall Street was destined for drastic reform, and as if Cramer, and other stock-market gurus, would go down with the old regime. That, of course, didn’t happen. Though the rest of the economy is still in a quagmire, the stock market has emerged exultant: Wall Street is its old self, and Cramer has positioned himself again as the people’s stockbroker.


In 2000, Cramer had his best year in the market — an astonishing 38 percent return — and his worst one as a human being. “Everyone was afraid for me,” he says. “My father told me I was going to die before he did — literally die — at a young age, like my mother. He was right too. I was 46, my blood pressure was off the charts, I was so weak and out of shape that I was afraid to go to the doctor.” Cramer began experiencing long bouts of anxiety, increasingly severe panic attacks and imaginary coronaries. In November he suffered a complete breakdown and went on medication to help him stay calm and fight off irrationality. To outsiders it looked as if he was walking away at the top of his game. In fact, it was a no mas moment. “Life was total misery. I had the money. I had won. All I could do now was lose.”

German Economic "Miracle" Continues as 5.2% GDP Growth Blasts Past U.S.

Hmmm... so a country which embraces rather than offshores its manufacturing base can succeed?  One where labor has a substantial seat on the boards of its mega corporations?  A place where business and government work together in national goals - thinking out more than 1 election cycle?  A country where all policy is not based on which lobbying dollar of a multinational can create the most difficulty for small and medium sized business - or hollowing out as much of the middle class as possible?  Where taxes are "high"?  And "uncertainty" is rampant (3 of the 17 EU members are in some sort of bailout program)?  With unemployment rates below that of the States?  [Jun 16, 2009: As Euro Zone Unemployment Spikes; Job Saving Measures Emerge - Completely UnAmerican]  And people still get 5-6 weeks a vacation a year?  Without running 10% annual deficits? (I wonder if 1 in 7 Germans are on food stamps?)  And with a rallying (dare I say "strong") currency to boot?? These damn unflexible "socialists" - that's no way to run a country....

Better not let anyone stateside know about this, or a lot of dogma is going to be crushed...

Via Bloomberg:
  • German gross domestic product jumped 1.5% from the fourth quarter, exceeding economists’ median forecasts of 0.9%.  From a year earlier, German GDP surged 5.2%, the biggest increase recorded since reunification two decades ago.
  • “The recovery has become more broad-based,” said Andreas Scheuerle, an economist at Dekabank in Frankfurt. “While the German economy certainly won’t keep this fantastic pace, the outlook is pretty rosy.” 
  • “These are fantastic figures,” said Alexander Krueger, head of capital-market analysis at Bankhaus Lampe KG in Dusseldorf. “We expect full-year growth of more than 3 percent. The skies are blue right now for the German economy.”  
  • Company investment, construction and household consumption all contributed to German growth, the statistics office said. With exports and imports both expanding, net trade made a smaller contribution than domestic demand, it said.
  • German exports surged 7.3% in March to the highest monthly value since records began in 1950, and industrial production increased for a third month as construction surged. 
  • At 7.1%, unemployment is the lowest on record in reunified Germany.
  • “If anything, the risks for German growth are on the upside,” said James Nixon, chief European economist at Societe Generale SA in London. “Germany has done its homework, has put in place some painful reforms and is benefiting now.”

[Jan 13, 2011: Germany Puts Finishing Touches on Impressive 2010]
[Oct 1, 2010:  German Unemployment Rate Down to 7.2% after Peaking at 8.7%; Can We Learn Anything?]
[Jun 30, 2009: Will Germany Transform Itself?  Does it Want to?]
[May 21, 2008: Who is the World's Largest Merchandise Exporter? Not China. Or the US]

[Chart] Bulls Cutting it Close

There is a lot of tension here - the bulls still have the ball, but we're sitting at some key pivot areas for both the market and the dollar.

The S&P 500 keeps getting drawn to S&P 1340... and last week's lows have not been blown out, which bears need.

The dollar on the other hand seems to have broken out to the upside... ruh roh raggy.  This chart is one day delayed but we have a 0.7% gain to $75.75.  This would be a distinct close over the 50 day moving average.

All in all not a bad day, the S&P 500 is down 0.9% but as Americans our purchasing power just went up 0.7%, so only a 0.2% loss in real terms.

On a more serious note, if that green line in the S&P 500 chart above is broken with any purpose (which would coincide nicely with the 50 day moving average) bears finally could have some spring flowers.

Back Online

The system to enter new entries was offline since late yesterday afternoon.  Friday the 13th indeed.

We seem to have lost all of yesterday's entries at this time.  Good thing I did not have anything worth remembering to say!

Thursday, May 12, 2011

Dollar Reverses, Market Zooms

The dollar went from +0.1% to -0.2% in the past 2 hours, and the market went from -0.4% to +0.5%.

Don't over think it; if you are bringing anything above and beyond first grade logic to this market, it is too much.  It just amazes me that literally armies of PhDs can't come up with an algorithm a bit more sophisticated than "IF dollar zig THEN market zag."

[Videos] More Kyle Bass Videos via CNBC

Today on CNBC, we have some videos from well respcted hedgie Kyle Bass of Hayman Capital.  Before Kyle shows up there is a funny discussion about how everything in the marker has become correlated - ironic, since I've been complaining about that for 3+ years ("student body left, student body right" trading)

Email readers will need to come to site to view

Video #1 - Kyle begins around minute 2 (10 minutes)

Video #2 - 5 minutes

[Feb 16, 2011: (Video) Kyle Bass Heads to CNBC's Strategy Session - Biggest Bombshell, He Talked to Congress and They Asked Sensible Questions]
[Feb 15, 2011: Kyle Bass' Hayman Capital Letter February Letter - The Cognitive Dissonance of It All]
[Oct 7, 2010: Kyle Bass of Hayman Capital at Barefoot Economic Summit - Part 1]
[Aug 18, 2010: Kyle Bass on CNBC August 2010]
[May 13, 2010: Kyle Bass of Haman Capital - The Pattern is Set, Betting the Bank on a Keynesian Free Lunch]
[Jan 13, 2010: Kyle Bass of Haman Capital - Japan Defaults on Debt or Devalues in 3-4 Years; US in 10-12]
[Oct 5, 2009: Kyle Bass Hayman Capital October Letter to Investors]

Economic Data Continue to Point to Slowdown

There was a bevy of data out this morning, and for the most part it points to at best tepid growth.

First weekly unemployment claims.  Last week saw a major spike into the upper 400Ks but some of that was apparently one time adjustments.  Hence this week's "drop" was more or less in line with what weekly claims would have been last week without the adjustments - 434,000.   The less volatile four week moving average is up to 436,750 The key here is we had seen this measure move below 400,000 for a period earlier this year, and now has jumped back over.  Some layoffs in the public sector might be contributing for the recent upswing.  Whatever the case, Janet Yellen's model of quantitative easing creating millions of jobs for Americans seems to be another useless ivory tower fiction.

Second, retail sales.  While the headline figure seems ok at 0.5% gasoline prices and food prices seem to be the main driver, so the data can be misconstrued if only focusing on the headline.

  • Sales at U.S. retailers posted their smallest gain in nine months in April as high food and gasoline prices drew spending away from other areas.  Total retail sales increased 0.5%. 
  • Receipts at gasoline stations, which accounted for about 10.5% of overall retail sales in April, rose 2.7%.  Sales at food and beverage stores rose 1.2%. 
  • Excluding gasoline, retail sales were up 0.2%.
Hence, if you believe inflation in the U.S. is anywhere near 2-3%, retail sales are in essence just moving along with inflation.

Third, producer prices continue their steady upward move.

  • Wholesale costs in the U.S. rose more than forecast in April, led by higher prices for food and fuel.  The 0.8% increase in the producer-price index compares with the 0.6 percent median estimate of economists.  The core measure, which excludes volatile food and energy costs, climbed 0.3%.
  • Compared with a year earlier, companies paid 6.8% more for goods last month, the most since September 2008, after a 5.8% rise in March. 

The best news of the morning is that crude oil prices are falling again.  Yesterday gasoline futures plunged 8%.  In a country where most live paycheck to paycheck these are the 'economic indicators' amongst the most important.

Facebook Poised to Pass Yahoo (YHOO) and Google (GOOG) for Display Ad Lead in 2011

Some interesting data via on the phenomenon that is Facebook.  The company looks to be on the path to be the leader in display ads (by revenue) by the end of this year.

  • Facebook's large user base will make it the world’s largest online display advertising company by revenue this year, overtaking the comparable businesses of Google (GOOG) and Yahoo (YHOO), according to analysis published on Tuesday.
  • Enders Analysis, based in London, in a report on Tuesday, forecasts that Facebook will lift its advertising revenues from $1.8bn to $3.5bn in 2011, a rise of 95 percent. At the same time, Google’s display business – which includes YouTube, the video site, and DoubleClick, its banner network – is expected to rise from $2bn last year to $2.6bn this year, with Facebook extending its lead in 2012.
  • Display advertising includes images and video shown on a standard web page, although it excludes search, from which Google derives significantly larger revenues.
  • In spite of Facebook’s attempts to liken the reach and influence of its site to television, its yield per ad impression remains low, making its advertising relatively cheap. Click-through rates are broadly similar to standard online ad formats, such as banners, which Facebook abandoned on its site in favour of text-heavy ads, often mentioning which of a user’s friends also like the advertised product or service
  • Despite Facebook’s growth, revenue per user remains low compared to other internet businesses, with Google generating eight times the revenue per user,” Mr Maude said.  Although many of Facebook’s clients are “relatively low quality”, such as group-buying websites, rather than big brands, Mr Maude said its advertisers were shifting money from other media properties.
  • Its growth therefore stems from the volume of ads shown and the time spent on its site. In the US, Facebook accounted for three time as many ad impressions as Yahoo, its nearest competitor, according to Comscore, the traffic monitoring group.
  • Facebook is also starting to challenge Google as a referrer of traffic to other websites, although it is still some way behind the search engine. Figures from Comscore show that traffic to the top online retail site from Google is falling in countries such as the US, UK and France, while Facebook is becoming more significant, although it is yet to overtake Google.
  • “Social media … and Facebook in particular, are emerging as a powerful news referring source,” Pew said in its report. “At five of the top sites, Facebook is the second or third most important driver of traffic. Twitter, on the other hand, barely registers as a referring source.”

Wednesday, May 11, 2011

Jeremy Grantham - Time to Fight the Fed

For you Grantham fans, the very widely read strategist has come out with a strongly worded letter today - essentially too much risk exists in the system, and its time to fight the Fed.  Grantham is excellent as a long term strategist but sometimes the weakness of seeing far in advance is you are very early.  (I think that is a weakness for myself as well - hence I try to now dance with the crowd more, while dancing in the door frame of the emergency exit!)   So we'll see how his timing is on this one.

"I do not feel the same degree of confidence that I did, which was considerable, that the Fed could carry all before it until October 1 of this year. A third round of quantitative easing would very probably keep the speculative game going. But without a QE3, there seem to be too many unexpected (indeed unexpectable) special factors weighing against risk-taking in these overpriced times. I had recommended taking a little more risk than was justified by value alone in honor of Year 3, QE2, and the Fed in general. Risk now should be more reflective of an investment world that has stocks selling at 40% over fair value (about 920 on the S&P 500) and fixed income, manipulated by the Fed, also badly overpriced. Although the taking of some “extra” risk by riding the Fed’s coattails has been profitable for six months, I admit to being a bit disappointed: I really felt the market had the Fed’s wind in its sails and would move up deep into the 1400 to 1600 range by October 1, where it would be, once again, over a 2-sigma 1-in-44-year event, or, officially, a bubble. (At least in a world where GMO is the official.) At such a level, I was ready to be a real hero and absolutely batten down the hatches, become extremely conservative, and be prepared to tough out any further market advance (which, with my record, would be highly likely!). The market may still get to, say, 1500 before October, but I doubt it, especially without a QE3, although the chance of going up a little more by October 1 is probably still better than even. And whether it will reach 1500 or not, the environment has simply become too risky to justify prudent investors hanging around, hoping to get lucky. So now is not the time to float along with the Fed, but to fight it. Investors should take a hard-nosed value approach, which at GMO means having substantial cash reserves around a base of high quality blue chips and emerging market equities, both of which have semi-respectable real imputed returns of over 4% real on our 7-year forecast. The GMO position has also taken a few more percentage points of equity risk off the table."

(hat tip ZeroHedge)

Click the first icon below for "full screen" to make it easy to read

GMO Qtrly Letter

Back to S&P 1340

Interesting how the market keeps getting pulled back to this "breakout" level.

[click to enlarge]

Dollar up? Check (+0.8%)

Market must go down then.... as HAL9000 decrees.

There is a one day delay on this chart, but essentially the USD is sitting right at the 50 day moving average.  A break above it would be very interesting.

If you want to bring out your bear claws, what do you want to see from here? I suppose the dollar rallying and more importantly a break of last week's lows... i.e. close below S&P 1330.  For now it remains a chopfest and I imagine many (including me if I was out there) are getting fingers and toes snapped off.

p.s. Copper down 11 cents to $3.90.   We noted the weakness there Monday.


Someone just broke their IPO price of $14.... and now every sucker investor who bought it, is underwater.  And it still remains immensely overvalued...

While I like the idea "some" sense has returned to the market, it still only makes me 1 for 2 because I thought (YOKU) was a horrid investment 50% lower as well.

No positions

Star of the Day - Rovi (ROVI)

Quite a few of our old holdings that I have not talked about much in 2011, are having quite fantastic earning seasons.  Rovi (ROVI) is catching everyone's attention with a 20%+ type of move.  Once more I thought these were solid results (and yes raised guidance), but some of the reactions to the earnings reports are causing me to scratch my head.  Frankly I lost track of this name but I can see it has been doing pretty awful in terms of stock performance in 2011, so it could just be a sigh of relief type of rally. (Full report here)

Via Reuters:

  • Rovi Corp raised its full-year profit outlook as it begins to gain from the Sonic Solution integration.  Rovi bought Sonic Solutions, which owns the popular digital video player software DivX, for $720 million in December. 
  • Santa Clara, California-based Rovi expects full-year adjusted earnings of $2.25-$2.55 per share, raising it from its previous forecast of $2.20-$2.50 a share. Analysts on average were expecting the company to post earnings of $2.38 a share for the full year, according to Thomson Reuters I/B/E/S.
  • "I think the upside to bottom line guidance was because they are seeing higher synergies from their merger with Sonic," analyst Edward Williams with BMO Capital Markets said.   The deal, which is expected to close in the first half of this year, would add 5-10 cents per share to its adjusted earnings and would generate more than $15 million in savings in 2011, Rovi said.
  • However, the impact of the natural disaster in Japan could limit revenue growth in the $10 million range, the company said on a conference call as it sees potential sales declines and supply shortages in that market.
  • The company gets about a third of its Consumer Electronics segment (CE) revenues from Japan. The segment, which contributed about 57 percent to first-quarter revenue, includes guidance products and patents licensed to device manufacturers.
  • January-March net income came in at $17 million, or 15 cents a share, compared with $68.1 million, or 64 cents a share, a year ago. Excluding items, the company earned 61 cents a share, topping analysts' expectations of 51 cents.
  • First quarter 2011 GAAP revenues of $161.5 million, compared to $129.4 million for the first quarter of 2010.

One analyst weighs in, and thinks there is more upside to go:
  • "The convergence of the Internet and traditional media has provided Rovi with a multitude of growth opportunities," Wedbush Morgan analyst Kerry Rice wrote in a note to investors.  "Revenue growth was driven by the continued conversion of analog to digital, new international licensees, and accelerating product revenues," the analyst added, reiterating an "Outperform" rating and a target price of $72.

[July 15, 2010: All About Rovi]

No position

Tencent - a Real Chinese Internet Juggernaut - Delivers Outstanding Earnings

With all these less than stellar Chinese internet ("me too") companies taking advantage of the easy money policies of The Bernank, to make their founders into newly minted billionaires, one company which I wish would list in the U.S. is Tencent.  Now this is an actual superstar along the likes of Baidu (BIDU).  This company has its hands in all areas deemed hot by the speculator class - messaging, group buying, social networking, et al.  Unfortunately, no IPO in the U.S. yet - I am not sure exactly why.   But if the day comes, this is the type of merchandise you want to get your hands on.

Tencent delivered another stellar quarter this morning.  (full report here)

Via Bloomberg:

  • Tencent Holdings, China's biggest Internet company by revenue, reported first-quarter profit jumped 61 percent, beating analysts’ estimates, after offering new online games to boost sales.  Net income climbed to 2.87 billion yuan ($442 million) from 1.78 billion yuan a year earlier. That beat the 2.36 billion- yuan average of seven analyst estimates compiled by Bloomberg. Sales rose 50 percent to 6.34 billion yuan.
  • Revenue from mobile and telecommunications services rose 26% to 777.8 million yuan from 618.2 million yuan, while revenue from online advertising rose 37% to 280.9 million yuan from 204.3 million yuan.
  • Tencent led Chinese games companies including Inc. and Shanda Games in increasing online sales as new titles such as “Seven Heroes” helped attract players. Demand from gamers in the world’s biggest Internet market is helping Chairman Ma Huateng fund expansion in new services such as electronic commerce and social media.
  • Shares of Tencent closed unchanged at HK$209.80 in Hong Kong trading today before the earnings announcement. They have gained 24 percent this year.
  • The company increased its share of China’s online games market to 29.1 percent in 2010, from 21.1 percent a year earlier, according to research company iResearch. 
  • Tencent will increase spending this year on services including social media, Internet search and e-commerce, Ma said in March. 
  • The company, the leading provider of instant messaging service in China, will also step up efforts to expand overseas, according to Ma.  There were 674.3 million active user accounts for Tencent’s QQ instant-messaging service at the end of March, compared with 647.6 million three months earlier, the company said.
  • Sales of Internet value-added services, including online games and QQ-related subscription fees, rose to 5.25 billion yuan from 3.39 billion yuan, Tencent said. Online advertising sales increased to 281 million yuan from 204.3 million yuan. 
Through its various online platforms, including Instant Messaging QQ, web portal, the QQ Game platform under Tencent Games, multi-media social networking service Qzone and wireless portal, TencentChina and fulfills the user's needs for communication, information, entertainment and e-Commerce on the Internet.     Tencent has three main streams of revenues: Internet value-added services, mobile and telecommunications value-added services and online advertising.   


Bank of England's Mervyn King's Seems to Throw in the Towel on "Transitory" Inflation

While much of the U.S. financial media and blogosphere is having a field day with the word "transitory" since Bubble Bernanke used the term to explain away any inflation fears (after denying them entirely the previous year), it's not really Ben's term.  Indeed, he has borrowed it from the Bank of England's top honcho, Mervyn King who has been using "transitory" as a way to explain away England's far more accurate inflation gauge (which does not have housing as the dominant weighting).  [Jan 19, 2011: UK Facing Inflation Near 4%, Central Bank Keeps Rates Ultra Easy, Raising Public Ire]

Keep in mind whenever inflation is over the central bank's target rate of 2%, Mr. King must write a letter to explain why.  Hence, "transitory" has been a useful smokescreen for the past 15-18 months, but one must ask how long must a condition persist before transitory no longer works as an excuse.  It appears based on this report, King is finally getting close to throwing in the towel and acknowledging it's time to fess up.  Despite a dramatically slowing economy, [Jan 25, 2011: UK Appears Headed to a Double Dip] [Apr 12, 2011: UK Retail Sales Plunge by Largest Amount Since 95 as Austerity and Inflation Combine Forces] due in part to "real" cutbacks in government [Oct 21, 2010: UK Unveils Serious Austerity Measures - Potentially Slashing Half a Million Public Workers] King might be forced to raise interest rates to contain the 'transitory' forces.

  • Bank of EnglandGovernor Mervyn King said that inflation remains “uncomfortably high,” and officials signaled they may need to raise interest rates later this year even as the economy struggles.  “The recent pattern of revisions to the projections over the next year -- downward to growth and upward to inflation -- has continued,” King told reporters in London today. Inflation “remains uncomfortably high and well above the 2 percent target. And there is a good chance that, if utility prices rise further later in the year, inflation will reach 5 percent.”
  • The pound rose after the release of the bank’s forecasts, which showed that a quarter-point interest-rate increase by the end of the year may be needed to control inflation, which officials see “markedly higher” in the short-term than they did in February. The central bank kept its benchmark rate at a record low of 0.5 percent last week to aid economic growth.
  • “The most likely outcome for growth in the medium term is somewhat weaker than in the February report, reflecting a more gradual recovery in consumption and a less pronounced boost from net exports,” the bank said in its Inflation Report published today. Inflation “is more likely than not to remain above the 2 percent target throughout 2012.”
  • Inflation across the world is persisting, putting pressure on central banks to withdraw stimulus and raise interest rates. Germany's rate jumped to 2.7 percent, more than initially estimated, separate data released today showed.
  • "Bank rates can’t stay at this level for ever,” King said. “But that doesn’t tell you what month” it will increase even if it’s a “reasonable judgment” that the interest rate will rise in next two years, he said.
  • Money markets expect a full 25 basis-point increase in the central bank’s key rate by December, Tullett Prebon Plc sterling overnight interbank average data show. Before the report, investors were factoring in a quarter-point rise in January.
  • Three of the bank’s nine policy makers voted for an interest-rate increase last month, while one called for an increase in the bank’s asset-purchase program from the current 200 billion pounds ($330 billion). The majority, including King, voted to leave policy unchanged.  “There is a high degree of uncertainty, and an unusually wide range of views among committee members, about the strength of these various forces, and therefore around the overall outlook for inflation,” the bank said today.

Tuesday, May 10, 2011

What Selloff?

Last week's selloff is quickly fading from memory.  Another low volume V shaped move is rocking and rolling.  We're 11 points away from the high on the S&P 500 reached at the turn of the month - buying every dip like Pavlov dogs remains the only game in town.  (look at the bottom of this chart, how volume each day of rallying drops materially v the days we sold off last week - it's magic.) 

If You Pledged, Please Read

If you "pledged" a potential future investment anytime in the past 2-3 years, you should have received an email from me sometime in the past 96 hours.  Please check your spam folder as well, since I am writing the same email for about 400 people, one by one - hence I am probably being deemed a spammer by certain filtering agents.

(I am working in reverse chronological order, so those from summer 2010 forward I am still working on - trying to get this finished by Wednesday evening)

Thanks, Mark

Bad Week for Gafisa (GFA) - CEO Resigns Just Ahead of Paltry Earnings Report

As highlighted last week, it has been a tough year for Brazilian stocks.  That said, it's been an especially tough year for Brazilian homebuilder Gafisa (GFA) - tougher still if you go back to the November high in the $17s.   One thing you never want to see is the CEO resign.  Even worse when it happens within 24 hours of your earnings report.  But that's what happened here.   One wonders if the stock is close to washing out as I cannot imagine the news cycle getting much worse.  And this is a notoriously volatile stock that trades in large ranges - last time it bottomed out was near $10 in May 2010.

On a side note, the Brazilians have not yet learned to obfuscate manage information efficiently like Americans - when a CEO resigns, the reason is the always happy go lucky "to pursue new opportunities" or the lovable "to spend more time with family".  Strangely, he will remain on the board.

First the CEO resignation:

  • The board of Brazilian homebuilder Gafisa  recognized the resignation of Chief Executive Wilson Amaral de Oliveira on Monday and named Alceu Duilio Calciolari as his substitute.
  • The board gave no explanation for Oliveira's resignation in a market filing but said he would remain as a board member. He was expected to retire at the end of 2011 after serving the past five years as head of the company. 
  • Calciolari has been appointed to step into the top company post until Dec. 31, 2011. He will also take on the responsibilities of chief financial and investor relations officer.

That's going to be one busy man - CEO, CFO, and investor relations officer? 

Next earnings:

  • Net income at Brazilian homebuilder Gafisa tumbled 79 percent in the first quarter, hurt by delays in construction and licensing.  Sao Paulo-based Gafisaearned 13.7 million reais ($8.5 million), down from 64.8 million reais a year earlier, the company said in a regulatory filing. 
  • The latest results also suffered in comparison with a strong year-earlier period.  Net income in the 2010 fourth quarter was 137 million reais. 
  • "While we project our second quarter to be impacted by some of the same factors that we experienced in the first, looking ahead we expect to see improvement in our financial performance throughout the second half of the year," Chief Executive Wilson Amaral said in the filing.
  • The company stood by its estimate for the value of new projects at sale, known in the industry as launches, to a range of 5.0 billion to 5.6 billion reais.  First-quarter adjusted earnings before interest, tax, depreciation and amortization, or EBITDA, a measure of cash generation and operational profitability, totaled 106.5 million reais, down 37 percent from a year earlier.
  • The value of sales contracted slid to 822 million reais in the quarter, down 4.1 percent.

No position

Fossil (FOSL) - Quietly Putting in Fantastic Performance in the Retail Space

Since QE2 was strongly hinted at Jackson Hole, Wyoming late August 2010, watch maker Fossil (FOSL) has quietly tacked on a 200% gain.   I am not sure if this is the best performance in the consumer discretionary space, but it has to be near the top during that time frame.  Despite a nearly $7B market cap, this is a name you almost never hear about in the financial media.   The company reported another good quarter this morning, beating estimates by 20 cents, and the stock is off to the races again this AM.

Via AP:

  • Fossil Inc. said Tuesday that its first-quarter earnings surged 55 percent on 37 percent revenue growth led by its performance in Asia.   The results from the apparel and accessories retailer beat Wall Street forecasts, and Fossil shares climbed $11.79, or 12.5 percent, to $105.79 in morning trading.
  • The retailer reported net income of $55.8 million, or 86 cents per share, for the quarter that ended April 2, compared with $35.9 million, or 53 cents per share, in the first quarter of 2010.  Revenue jumped to nearly $537 million from $393.2 million a year earlier.
  • The company attributed its results to strong broad based growth, led by a 57 percent jump in revenue in Asia. Revenue in North America and Europe each grew by 34 percent.  
  • Online sales rose 27 percent.
  • Analysts surveyed by FactSet expected earnings of 66 cents a share on revenue of $513.8 million.
  • For the second quarter of fiscal 2011, the company expects to earn between 70 and 73 cents per share. It's predicting the impact of a higher tax rate to hit earnings by about 26 cents per share. It sees revenue growth from the same quarter last year of between 28 and 30 percent. Analysts expected earnings of 76 cents a share.
  • It's forecasting full year earnings of $4.44 to $4.54 per share on revenue growth of between 21 and 23 percent. That's up from its previous prediction of $4.22 to $4.32 per share, with revenue up 19 percent to 21 percent. 
Fossil is a global design, marketing and distribution company that specializes in consumer fashion accessories. The Company's principal offerings include an extensive line of men's and women's fashion watches and jewelry sold under proprietary and licensed brands, handbags, small leather goods, belts, sunglasses, soft accessories, shoes, and clothing.
No position

Until the Trend Changes, Keep Playing It

By now, every market veteran has been trained to throw out the old playbook and accept all bounces now turn into low volume, V shaped rallies.  It is strange, as this was once a rare event, but now is the main method demonstrated in upward moves.  Someday we might revert back to how the market worked pre 2009 but for 2 years now anyone who doubted V shaped moves was crushed the majority of the time.

While still not out of the woods - the market is now in it's 3rd day of attempting the same old song.  A week ago Monday I said the market would be overbought soon and we obviously worked that off with the 4 days of selling.  What is curious is all the "go to" areas of the market were the ones slaughtered - the momo trades in commodities and leadership stocks (especially small caps) were the names hit the hardest.  It would be atypical for speculators to run right back into the groups that were the most damaged, but the way this market acts, you have to be ready for anything.

For now we continue to sit over the S&P 1340 area which was the top of the three month range the market exited in late April.  Other than a quick revisit intraday last Thursday we remain over that level - the next test is making a run at the highs of 1370 seen two weeks ago.   Eventually expecting a low volume, V shape move to occur will blow up in people's faces but for now Pavlov dogs rule.

In other news, kick the can continues globally as the rumors begin that Greece will get another bailout - because as we all know by now the way to treat debt is to hand out more debt.  It worked like a charm 12 months for Greece (not), so let's try it again.  Can't have those German, French, or British banks take any losses, so more handouts it is.  I'm sure we'll be having this same discussion in a year from now as well.  Winning.

Thus Far RenRen (RENN) a Bust

So far, RenRen (RENN) i.e. "the Chinese Facebook" (but not really) has been a bust for anyone but the insiders (including the newest Chinese billionaire) and the big institutions who were handed shares they could dump to the retail class on IPO day.  It seems some of the bad press and ungodly valuation matters here, unlike with (YOKU).  At this time the stock is threatening to break the IPO price of $14.

No position

Monday, May 9, 2011

Ritholtz: When to Fire Your Mutual Fund Manager

Barry Ritholtz has a quite compelling piece in the Washington Post - the title is self explanatory on the topic.  Frankly it could be applied to any money manager for most of the items (excluding "too big" which would be an issue for hedge or mutual funds but not individual accounts), but I thought it was a useful list.  Link to the longer piece here - but here are the bullet points.  Interestingly with his last two points he mentions why "performance" (at least in the short term) is not one of his reasons.


While there are many reasons to hire a fund manager, there are just as many reasons to fire one. Here are my main criteria:

When they suffer from style drift: This happens quite often; a manager developed an expertise in a given area but is looking beyond that. Maybe they got bored. Maybe the new cow in the pasture caught the bull’s eye. Whatever it is, they are doing less and less of why you bought them in the first place. That’s your signal that it’s time to move on.

When they become too big: Some managers find a niche that they can profitably exploit. But beyond a certain size — which can range from less than $1 billion to about $5 billion — they no longer can create alpha with that strategy. This may be true for eclectic segments such as convertible arbitrage, but I have found it is especially true for small cap and technologies, and emerging markets.

When they fight the dominant market trend: Bill Miller’s market-beating 15-year streak came to an end amid a value trap. He bought more and more of his favorite holdings — banks, GSEs and investment houses — right into the financial collapse. Doubling down again (and again) is not a valid investment strategy. Whatever advantages he had heading into 2008 disappeared.

When they seem to lose their edge: Whether it’s success or money or a loss of interest, managers sometimes lose the “fire in the belly.” Determining this is admittedly challenging. We often find out about some personal demons — divorce, alcohol, whatever — after the fact. Regardless, when whatever it was that made them a top stock picker starts to fade away, you should also.

When they become a closet indexer:  (Mark's note - this is a major pet peeve of mine... so many 401k plans have 8 'large cap' funds whose holdings are all essentially a mimic of the S&P 500.  Also why buy your 174th best idea?)  When a fund owns 100, 150, 200 names, it effectively becomes a high-cost index. Even if they have the top performing stocks, it will be in such small quantities as to not move the needle. This is an easy fix — you replace them with a low-cost, passive index.


Notice that performance is not a factor in any of the points above. There are two reasons for that:

Process, not outcome: Investors ought to be focused on creating a reproducible methodology, regardless of luck or misfortune in any given quarter. Investing is a probabilistic exercise, and performance can slip for a quarter or two — even when the manager is doing everything right.

Mean reversion: The opposite of chasing performance (and buying high) is dumping a weak quarter (selling low) that then snaps back.

Doctor Copper Breaks the 200 Day Moving Average

While I think copper to a large degree has become dominated by the whims of the Chinese buyer, many still view it as an indicator of broader economic activity since its an input to so many items.  If still relevant as such, the drop to (and through) the 200 day moving average Friday should be troubling.  The red metal is up 4 cents today but still below that key level at $3.99.

[click to enlarge]

This move along with the large drop in yields since mid April on the 10 year bond the past few weeks, might be confirming that awful ISM non manufacturing number we saw last week.  At this point equity markets could care less as it dances with every whim of the U.S. dollar, but these are secondary indicators one should be taken note of....

[click to enlarge]


LinkedIn (LNKD) Files IPO for Minimum $3B Valuation

The Kool Aid delicious valuations in social media continue.  The latest is everyone's favorite professional networking site - LinkedIn (LNKD).  As with all the companies (well most of them) in this broad sphere of 'social networking' the contention is not with the growth metrics, but the valuations all this easy money is imparting on the business.  While quarterly revenue is up 110% year over, it was off a tiny base of $43M.  And what incremental profit did that 110% revenue growth generate?  Not much - only 14% year over year.  Obviously expenses are ramping up almost 1:1 with revenue.  Eventually net income is what matters....

At the bottom of the current range, LinkedIn is being valued at $3 billion.  Their latest quarter was a $93M print.  We won't use trailing 4 quarter revenue (as we should) to be nice, but even if we annualize the $93M over a year that's under $400M per year, or nearly a 10x sales value.  For a company growing the bottom line under 15%.  And we can be sure this is one of those stocks that will pop 50%+ on IPO day so that $3B valuation is going to be $4.5B or $5B.   Oh well - compared to RenRen (RENN) or (YOKU) I guess it's a "steal" at these prices.  Party on Garth.

Via Forbes

  • LinkedIn increased its IPO plans Monday, saying it intends to raise a maximum of $315.6 million by offering 7.84 million shares at $32 to $35 per share, according to an amended S-1 filing.
  • The total offering (NYSE: LNKD) would raise a maximum of $315.6 million at the top of the range, not including fees. The company expects net proceeds of $146.6 million at the midpoint of that range. If underwriters increase the offering LinkedIn could raise up to $183.2 million.  
  • The $315.6 million number is way up from LinkedIn’s previous filing in January, when it said it planned to raise $175 million.
  • The company will have 94.5 million shares in total after the IPO, giving the company a valuation above $3 billion even at the low end of the IPO range.
  • For the quarter that ended March 31, LinkedIn reported net revenue up 110% to $93.9 million, from $44.7 million in the year-ago period. The company has three main revenue lines: hiring solutions, marketing solutions and premium subscriptions. Hiring solutions is the largest piece, at $46 million in revenue in the quarter–it also grew the fastest, up 174% from the year-ago period.
  • Net income in that most recent quarter was $2.1 million, up 14% from $1.8 million in the year-ago period.
  • LinkedIn’s largest shareholders are founder and chairman Reid Hoffman with 21.2%, Sequoia Capital with 18.7%, Greylock Partners (where Hoffman is now a venture capitalist) with 15.6%, and Bessemer Venture Partners with 5.1%. They are all selling very small pieces of their stakes.  Morgan Stanley, Merrill Lynch and J.P. Morgan are leading the deal.

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