Monday, May 23, 2011

Gold, Silver to be Legal Tender in Utah

An interesting development in Utah as gold and silver are going to be acceptable forms of legal tender.  Somewhere Ron Paul has to be smiling.  That said, retailers are not required to accept gold or silver so I am not sure how much of an effect this will have.

Via AP:

  • Utah legislators want to see the dollar regain its former glory, back to the days when one could literally bank on it being "as good as gold." To make that point, they've turned it around, and made gold as good as cash. Utah became the first state in the country this month to legalize gold and silver coins as currency. The law also will exempt the sale of the coins from state capital gains taxes.
  • The idea was spawned by Republican state Rep. Brad Galvez, who sponsored the bill largely to serve as a protest against Federal Reserve monetary policy. Galvez says Americans are losing faith in the dollar. If you're mad about government debt, ditch the cash. Spend your gold and silver, he says.
  • His idea isn't to return to the gold standard, when the dollar was backed by gold instead of government goodwill. Instead, he just wanted to create options for consumers.  "We're too far down the road to go back to the gold standard," Galvez said. "This will move us toward an alternative currency."
  • Earlier this month, Minnesota took a step closer to joining Utah in making gold and silver legal tender. A Republican lawmaker there introduced a bill that sets up a special committee to explore the option. North Carolina, Idaho and at least nine other states also have similar bills drafted.
  • ........the legislation doesn't require merchants to accept the coins, either at face value — $50 for a 1-ounce gold coin — or market value, currently almost $1,500 per ounce. And no one expects people will be walking around town with pockets full of gold and silver.
  • Matt Zeman, market strategist for Kingsview Financial in Chicago, expects more people will start investing in gold as America's growing debt and bankruptcies in other countries continue to decrease the value of government-backed money. "You've seen gold replacing these currencies as safety instruments," Zeman said. "If I don't feel good about the dollar or other currencies, I'm putting my money in precious metals."
  • The U.S. and many other countries largely abandoned gold-backed money during World War I because they needed to print more cash to pay for the war. Later, during the Great Depression, President Franklin D. Roosevelt took steps that essentially prohibited gold and silver as legal currency to prevent hoarding. In 1971, President Nixon formally abandoned the gold standard.
  • Fifteen years later, the U.S. Mint began producing the gold and silver American Eagle coins, primarily aimed at investment portfolios and allowing people to trade them at market value but with capital gains taxes on profits. Utah is now allowing the coins to be used as legal tender while levying no taxes.

S&P 1312.88 - Gap "Filled"

I'll give the market the benefit of the doubt here and say the gap filled.  The target was 1312.70 and we just saw 1312.88.   That said, still not interested in the long side at this time as it will be more of the cursory bounce type.  Bulls have some work to do.

Ritholtz: The Many Hats of Great Investors

Barry Ritholtz, from The Big Picture blog, has been posting some great stuff in his gig at the Washington Post.  I highlighted this piece a few weeks ago [May 9, 2011: When to Fire Your Mutual Fund Manager] and over the weekend we have his latest - The Many Hats of Great Investors.   Worth the full read, I'll post the highlights below - but it definitely showcases the part of the market I like.  That is, how it's essentially a multi dimensional 4 dimensional "game" of the highest order, like chess.  And it only seems to get more complicated by the year with outside involvement by central bankers, and internal advancements by players of the silicon kind.  (Although at times like this it is pretty simple - tell me where the dollar goes, and I can tell you more or less how everything else will move!)

As I've stated in this piece [Dec 31, 2010: The Year Ahead and Times Gone By] when I first came to the market in a serious way, I thought I could just analyze it to pieces, and break it down mathematically and it was as simple as that.  If that was true, statisticians and engineers would be the greatest investors - rather than people from all sorts of backgrounds, including liberal arts.  Barry explains below!


  • From the next generation of Warren Buffett wannabes, I occasionally hear questions such as “What should I learn to become a great investor?”  Contrary to popular belief, investing isn’t a traditional academic discipline. Money management is hardly a typical major. There are, of course, plenty of “Business Administration” undergrads, but their focus tends to be on running companies, rather than investing in them.  
  • We churn out MBAs like made-in-China widgets, yet few ever become outstanding investors. And don’t even ask about economists — the profession that missed the housing boom and bust, the Great Recession, the credit crisis and the market collapse.
  • Great investors are savvy generalists. I can think of five fields that are hugely helpful to asset management. If you were to study these disciplines, your understanding of how markets work would greatly improve. And you would be a better investor.
  • How? You will generate better risk-adjusted returns; meaning, you will get the most bang for the bucks you are putting at risk. You will suffer less from volatility — the stomach-churning ups and downs in the markets that are one part risk, one part opportunity. And you will avoid the typical mistakes that most investors make.

The five disciplines that can help:
  • Historian: Knowing what has happened in the past (and how often) is an enormous advantage when it comes to investing. It informs you of the range of possibilities, allows you to conceptualize possible outcomes to various scenarios and provides a framework for thinking about market cycles.
  • Psychiatrist: Fear and greed are the most enduring investor emotions. They lead to destructive behaviors. Not understanding your own psychology is the downfall of many an investor. The best financial plan becomes worthless if you are unprepared for the emotional turmoil that accompanies the ups and downs of markets.  The crowd becomes an unthinking mob at tops and bottoms. Being able to read the emotional state of the market, as well as keeping your own emotions in check, are hallmarks of great investors.
  • Trial lawyer: Good litigators are always skeptical, but not negative. Like a good litigator, you must question data, consider alternative explanations, argue against the obvious. You cannot blindly accept everything you hear as truth, nor can you reject everything out of hand. Being able to discern between information that is valuable and that which is not, is crucial.
  • Mathematician/statistician: Investing is filled with math: compound interest-rates, dividend yields, long-term gains, price-to-earnings ratio, risk-adjusted returns, percentage draw downs, annualized rate of returns.
  • Accountant: An understanding of basic accounting is essential to grasping the fundamental health of a company or business model. It is how you determine whether an existing company is profitable, or when a young firm might become profitable. But it also can help you determine when a formerly profitable company is heading down the wrong path. You don’t have to be a forensic accountant.

Didn't Quite Fill the Gap on S&P 500

On April 19th, the intraday high on the S&P 500 was 1312.70.  The next morning the market gapped up, and the intraday low was the opening print of 1319.12.  This morning we flushed down to the 1314 area but did not quite fill the gap.  I would find it incredibly rare not to so when we came so close...

Of course the index also gapped down below the lows of last week at S&P 1320, and a close below that level would deteriorate the technical picture even further.  Clearly this is not a "V" shape bounce the bulls have relied on repeatedly and that is a change in character to note.

The dollar is up about 0.7% and has broke through last week's ceiling of $76.00 as it trades in the $76.20s.

(one day delay on this chart)

If You are Interested in Hedge Funds

If you are into the hedge fund thing, ZeroHedge posted some interesting composite information via Goldman Sachs.  I've embedded the entire report below - what was fascinating to me was the concentration level in a typical hedge fund.  Most investors focus on the big whales (about 10-15 names) but it seems a lot of smaller names in the hedge fund inverse are extremely concentrated in their top 10 positions  - 64% of their long exposure v 29% in a large cap mutual fund and 19% in a small cap mutual fund. 

As I noted in 2007-2008, despite being a relatively small piece of the equity markets (3% per the latest analysis) , hedge funds have a massive impact as the marginal buyer (or seller).  We can say the same for ETFs as they only represent 4% of assets in equity markets, but are used by so much of the investment community as trading vehicles.

A lot of other tidbits here including the most widely held stocks by the hedgie community (which over the long run outperform as a group)

Our most recent Hedge Fund Trend Monitor report analyzed 700 hedge funds with $1.25 trillion of gross equity positions consisting of $822 billion of long stock-specific and ETF equity assets and an estimated $428 billion of short single-stock and ETF positions. We have published our quarterly Hedge Fund Trend Monitor for the past five years and analyzed constituent-level portfolio holdings of US hedge funds since 2001. The current report focuses on hedge fund positions at the start of 2Q 2011 and is based on 13-F filings as of May 15, 2011.

As always hit 'fullscreen' for an easier read

5.21 Kickstart

Monday Morning Melt Down as Chinese Manufacturing Slows and European Debt Worries "Matter"

On the positive side the world has continued past 6 PM Saturday.  On the negative, there is a lot of red worldwide U.S. investors are waking up to this Monday.  There are a bevy of issues on the plate from a slowdown in Chinese manufacturing (which was seen as a 'positive' the past few months as it indicated a soft landing) to European sovereign debt issues (which the market only seems to care about at certain moments) to the weakening euro / stronger dollar.  It appears at this point, the warning signs from copper [May 9, 2011: Doctor Copper Breaks 200 Day Moving Average], defensive sectors [May 17, 2011: Two Recent Bull Markets - Consumer Non Discretionary and Healthcare], and the 30 year bond (now at year lows in yield) a few weeks back were fairly prescient, even as the S&P 500 stubbornly had held in between S&P 1330-1340.

The intraday low of 1320 will definitely be in play this morning, and that gap in the 1310s from mid April has a chance of finally being filled.


China's market has given back all of this year's gains as it suffered a 2.9% loss to 2774

(chart below is one day delayed)

The main manufacturing gauge used by insiders - the dual Purchasing Managers Indexes (one private, one from government) came in weak-ish in the preliminary HSBC report.  This is kind of a catch 22 situation because many months of late people have been applauding a slowing manufacturing figure as they reasoned China could deal with inflation via the soft landing approach.  Today however, they seem to be taking more of a hand wringing approach.  Always fascinating to see how the same data means nothing one month, and affects the market so severely the next.  In theory today's data should be 'positive' as long as China has not overdone its slowing as it means the country is closer to the end of its tightening policy.

Via Bloomberg:

  • A Chinese manufacturing index fell to its lowest level in 10 months, adding to signs that economic growth is cooling after the government raised interest rates and curbed lending to rein in inflation.  The preliminary purchasing managers’ index compiled by HSBC Holdings Plc and Markit Economics dropped to 51.1 in May from a final reading of 51.8 in April. A number above 50 indicates expansion.
  • Stocks in China extended declines after the report, with the benchmark index dropping to its lowest since February, on concern the government’s measures to tame inflation will damp growth and corporate earnings. Vice Premier Wang Qishan reiterated this month that the government’s top priority is to control price increases.
  • The data “confirms growth is slowing, which will likely dampen price pressures and limit scope for monetary tightening,” said Dariusz Kowalczyk, senior economist at Credit Agricole CIB in Hong Kong.
  • New export orders contracted in May and stocks of purchases and finished goods fell at a faster rate, HSBC said. An output gauge declined to a 10-month low, although it remained above the 50 level that divides expansion from contraction, the bank said. 
  • Industrial output growth weakened last month and the worst power shortage in seven years is hurting production at some factories as provinces start curtailing electricity supplies. 
  • “Cooling growth is not all bad news as it also helps to tame inflation,” Qu said. The preliminary index’s input price gauge was at its lowest level since August 2010 and growth in output prices eased to 54.6 in May from 55.2 in April, he said. 
  • HSBC’s preliminary manufacturing index, called the Flash PMI, is based on 85 percent to 90 percent of the total responses to its monthly purchasing managers’ survey sent to executives in more than 400 manufacturing companies.

Meanwhile over in Europe, a very expected trouncing by the Socialist Party in Spain, a debt downgrade in Italy, a slowdown in German manufacturing and overall weakness in the euro - down over 1% (leading to dollar strength and per HAL9000 weakness in asset prices, priced in dollars) all are weighing.  The major European indexes are generally down in the 1.5%-2.0% range.

Via Reuters:
  • Following Fitch Ratings cut of Greece's debt ratings by three notches on Friday, pushing the country's debt deeper into junk status, rival Standard & Poor's cut its outlook for Italy to "negative" from "stable" on Saturday.
  • Spanish voters added to the angst, becoming the latest electorate to punish sitting European governments for the current economic climate.  The ruling Socialists were hit by stinging losses in local elections and now face a balancing act between voter anger over sky-high unemployment and investor demands for strict austerity measures.
  • The euro fell to a record low against the generally safe-haven Swiss franc. 
  • Worries about some form of debt restructuring by Greece was a key element of the sell off.  If Greece were to restructure its debt that could prompt Ireland and Portugal to follow with debt restructuring of their own.

Also via Reuters:

  • The German private sector’s growth slowed to its lowest rate since October in May, at 56.4.  The key survey showed in a fresh sign Europe's largest economy is cooling from a surge in the first quarter.  A flash composite purchasing managers index (PMI) of the manufacturing and services sector by research firm Markit fell to 56.4 from 59.2 in April.
  • A separate PMI index tracking the manufacturing sector fell to 58.2, its weakest level since November last year, while a measure of the services sector dropped to 54.9, its lowest point since September.
  • Both readings were below economists' expectations given in a Reuters poll, which had put consensus forecasts at 61.0 for the manufacturing sector and 57.0 for services. New orders growth also dropped for both sectors.

These are still very healthy numbers, but with the other issues in the region today - helping to cause pain.

Sunday, May 22, 2011

NY Observor: Hedge Farm - Hedgies Turning into Survivalists?

It appears we dodged another end of days scenario yesterday.  On a more serious note - an interesting story in the NY Observor on a trend I've been pointing out for a few years; the move into farmland by the investor class; in this case hedge funds.

  • But on a recent afternoon, The Observer had a conversation of a different sort about agricultural pursuits with a hedge fund manager he'd met at one of the many dark-paneled private clubs in midtown a few weeks prior. "A friend of mine is actually the largest owner of agricultural land in Uruguay," said the hedge fund manager. "He's a year older than I am. We're somewhere [around] the 15th-largest farmers in America right now."   "We," as in, his hedge fund.
  • It may seem a little odd that in 2011 anyone's thinking of putting money into assets that would have seemed attractive in 1911, but there's something in the air-namely, fear. The hedge fund manager and others like him envision a doomsday scenario catalyzed by a weak dollar, higher-than-you-think inflation and an uncertain political climate here and abroad.
  • The pattern began to emerge sometime in 2008. "The Hedge Fund Manager Who Bought a Farm," read the headline on one February 2008 Times of London piece detailing a British hedge fund manager's attempt to play off the rising prices of grains in order to usurp local farmland. A Financial Times piece two months later began: "Hedge funds and investment banks are swapping their Gucci for gumboots." It detailed BlackRock's then-relatively new $420 million Agriculture Fund, which had already swept up 2,800 acres of land. 
  • Even Michael Burry, the now-defunct Scion Capital founder and star protagonist of Michael Lewis' The Big Short-who bet against the housing bubble in 2008 with credit default swaps to enormous profit-gave a rare interview on Bloomberg TV last year, explaining that he's thrown his hat into "productive agriculture land with water on site" as it's going to be "very valuable in the future." 
  • Three years later, the purchase of farmland both in America and abroad by outside investors has increased-so much so that in February, Thomas Hoenig, the president of the Federal Reserve Bank of Kansas City, warned against the violent possibilities of a farmland bubble, telling the Senate Agriculture Committee that "distortions in financial markets" will catch the U.S. by surprise again. 
  • He would know, because he's seeing it in his backyard: Kansas and Nebraska reported farmland prices 20 percent above the previous year's levels and are on pace to double values in four years. 
  • A study commissioned by the Organization for Economic Cooperation and Development and released in January estimated the amount of private capital currently committed to farmland and agricultural infrastructure at $14 billion. It also estimated that future investments will "dwarf" what's currently being thrown into land, by two to three times. Further down, the study makes a conservative projection that the amount of capital potentially entering the sector over the next decade will fly past $150 billion.
  • This is happening in part because investors see their play as a hedge against hyperinflation. While the rest of the world uses the current calculation of the Consumer Price Index as a proxy for the cost of goods, some farmland investors are using a different equation, one from 1980. These investors assert inflation should be calculated the way it was before the Boskin Commission's 1996 reworking of the CPI formula-in which case, it would be much, much higher.
  • "The CPI supposedly today is something like 1.5 percent," says the hedge fund manager. "We think the actual rate of inflation is something closer to 6 or 7 percent on an annual basis. It's also not about what it's been over the last 10 years; it's about what it's going to be over the next 10 years."  [Dec 16, 2010: - Consumer Inflation as Measured in 1980 Would be 8%+, as Measured in 1990: 4%]
  • So the logic is that not only is the dollar worth far less than we think it is, but everything is more expensive and will only move further in that direction. Especially food, the value of which may have risen due to population increases, especially in places like China, where a consumer-happy middle class has finally started to emerge.
  • But farmland isn't an option for most investors. Farming is still mostly made up of family-run businesses, in the U.S., at least. Much of the farmland being purchased in America is purchased at estate sales. Pure-play farming isn't a readily available product.  Additionally, there isn't much arable land out there, it's not increasing, and the quality of the land varies from parcel to parcel
  • And to make money off a farmland investment, you can't just sit on it. You have to know what to do with it. "If you farm it like we do, you can generate a yield," says the hedge fund manager. "We think the farmland will be worth 5 to 10 percent more every year, and on top of that, you get the commodities yield." In other words, hedge funds are growing, picking and selling corn.
  • Asked if the American public would eventually see a chance to invest in Old McHedgeFund's farm one day, the manager replied in the affirmative:  "Yes. Without a doubt." He estimated it would be only a few years before this happened. If farming IPOs begin to emerge en masse, then farming-already often a dicey proposition simply on the basis of its being difficult to do correctly, the volatility of the weather and the possibility of entire crops going bad-may be vulnerable to a bubble.
  • There is, of course, a slightly more sinister reason to develop a sudden interest in agriculture. Last year, Marc Faber recommended to anyone: "Stock up on a farm in northern Norway and learn to drive a tractor." He sees a "dirty war" on the horizon, playing on fears of a biological attack poisoning food supplies. Those sort of fears drive capital into everything from gold (recently at an all-time high and a long-time safe haven for investors with currency concerns) to survivalist accoutrements.

[May 16, 2011: U.S. Plains States Farmland Boom Continues, with 20% Year over Year Gains]
[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]

Yandex (YNDX) - the "Russian Google" - Next Week's Hot IPO?

In the rush to push out the next generation of internet stocks, out next week will be Yandex (YNDX) aka "the Russian Google".   While dominant in its home country, the company will have its work cut out for it as it attempts to expand internationally.  There is also political risk with any Russian stock - something I narrowly avoided with Mechtel a few years ago.  That said, with the current hysteria around almost anything internet/social media/group buying - it will most likely have a very positive reaction upon IPO.

Via BusinessWeek

  • .... after May 24, when Yandex is expected to raise around $1 billion in an initial public offering on Nasdaq. Most of Russia's successful companies are those that dig—for oil, nickel, aluminum. Others are tainted by accusations of corruption or intellectual-property theft. Yandex seems to be an exception: a homegrown market leader that leveraged Russia's math and engineering talent in pursuit of technological breakthroughs. 
  • According to research group LiveInternet, its search engine now accounts for 64 percent of the Russian market to Google's 23 percent, and Yandex is hinting at ambitions abroad. For foreign investors, the question will be whether the Kremlin leaves the company alone.
  • Volozh and his high school friend, Ilya Segalovich, started working on search in the early 1990s. Their Internet search engine went live in 1997, and Yandex, which stands for "yet another indexer," became an independent company in 2000. Revenue has doubled every year since, and in the first quarter of this year, Yandex brought in $137 million, almost entirely from ads, according to its prospectus.
  • Part of the explanation for Yandex's success is first-mover advantage. Google (GOOG) didn't open a Russian office until 2005. Volozh and Segalovich began work on their indexing technology before Sergey Brin and Larry Page had even met, and they added maps, news search, and Web mail to Yandex's offerings years before Google did.
  • Being native Russian speakers helps. Yandex's algorithm accounts for the intricacies of Russian grammar, where the same word can have dozens of different endings depending on its place in a sentence. It can, for instance, recognize the word "field" ("polye") even when it appears in a phrase like "lilies of the field" ("polevye lilii"). Google couldn't do the same until 2007.
  • In its prospectus, Yandex warns investors that "well-funded, well-connected financial groups" in Russia occasionally use "economic or political influence or government connections" to take over independent companies. "Our ability to thwart such efforts may be limited," the prospectus reads.
  • Yandex would know. In 2008, Alisher Usmanov—an Uzbek mining oligarch and longtime ally of Russian President Dmitry Medvedev—said he tried to buy a 10 percent stake in Yandex but was rebuffed. According to local press reports, the following year the Kremlin forced Yandex to sell a "golden share" to a state-owned bank for one euro. The share gave the bank, and by extension, the Kremlin, power to veto any acquisition by a foreigner of more than 25 percent.
  • A Yandex executive interviewed in December 2009 says the company was slow to grasp the importance of lobbying but has begun to take it seriously; Volozh now meets regularly with Surkov.

Via Reuters:

  • Yandex will raise $1.3 billion from its Nasdaq IPO if it prices new and existing shares at the top of their range and the banks exercise an over-allotment option.   Its order book -- officially due to close on Monday -- is already oversubscribed, sources say. 
  • Full-year 2010 revenue rose 43.2 percent to 12.5 billion roubles ($445.2 million) to U.S. Generally Accepted Accounting Principles (GAAP). First-quarter 2011 revenues stood at $137 million.
  • Net profit rose to 3.8 billion roubles ($135.3 million) in 2010 from 2 billion roubles in 2009. First-quarter 2011 net profit amounted to $28.8 million.
  • The number of advertisers rose by more than 40 percent in 2010 to 180,000.

No position

Friday, May 20, 2011

Another Sign of Too Much Money, Chasing Too Few Ideas - Entire Companies in Silicon Valley Being Bought for the Talent of 1 Person

Quite an interesting story in the NY Times on the trend being called 'acghired'.  Whereas in the past, larger tech companies would go after the small fry to get at a technology, now they are buying an entire company simply to shut it down but get access to the talent.  And instead of cash, we see the transaction being done in stock - even with private companies.  This reminds me of the stories a decade+ ago where talent was being acquired in the tech boom with things like real estate rather than cash.  More signs of a boom bust cycle approaching back to a peak?

  • Sam Lessin sold his Web start-up to Facebook for millions last year, and Facebook promptly shut it down. All Facebook wanted was Mr. Lessin.  That is what it has come to in bubbly Silicon Valley. Companies like Facebook, Google and Zynga are so hungry for the best talent that they are buying start-ups to get their founders and engineers — and then jettisoning their products.
  • Some technology blogs call it being “acqhired.” The companies doing the buying say it is a talent acquisition, and it typically comes with a price per head.  “Engineers are worth half a million to one million,” said Vaughan Smith, Facebook’s director of corporate development, who has helped negotiate many of the 20 or so talent acquisitions made by Facebook in the last four years.
  • The money — in the form of stock — is often distributed among the start-up’s founders, employees and investors. The acquired employees also get a rich salary and often more stock options, which makes this a good time for entrepreneurial engineers.
  • But the deals may not be so good for everyone. Some Silicon Valley veterans fear that companies are overpaying for talent and that some of the acquired employees will defect as soon as they can, perhaps because they will get restless in a corporate environment.
  • The talent acquisitions are a reflection of the most competitive market for computer whiz kids in more than a decade. Big companies like Google and tiny start-ups complain that they cannot find enough good people. They are dangling new perks and incentives, from free iPads to lessons in entrepreneurship, to lure them.
  • Perhaps no one has jumped on the trend more enthusiastically than Facebook, which has bought a string of small start-ups with names like Parakey, Hot Potato, and Octazen. Almost all their products have been killed
  • But the size of some deals is raising eyebrows.   It was widely reported that FriendFeed was bought for about $47 million, or about $4 million for each employee, though some money went to its outside investors. 
  • When Facebook bought for an undisclosed sum, only Mr. Lessin, a friend of Mr. Zuckerberg’s since college, joined Facebook. He is now in charge of the user profile pages.  Facebook paid a few million dollars for, according to people briefed on the deal who would speak only on the condition of anonymity because the terms of the deal were confidential.
  • “Some per capita values seem hard to justify,” said Randy Komisar, a longtime venture investor.
  • Zynga said it bought 12 companies in the last year, and an unspecified number of those were for talent.

NYT: Nearly 50% of 2009 College Graduates are Either Jobless, or Working in Jobs That Don't Require a College Degree

As U.S. student debt has now passed the amount of credit card debt, and the intellectual returns of U.S. college are coming under fire [Jan 18, 2011: Report - First Two Years of College Show Small Academic Gains], grads are also being pressured on the job front.  Some quite startling data in this New York Times story as 22.4% of 2009 college grads are not working, and (more troubling from this set of eyes) 22.0% are in jobs that don't require a college degree.  It's no wonder student debt default rates are at record highs.    The issue of jobs is not just U.S. centric - many (high cost) developed countries are facing the same situation; Spain's youth unemployment is near 40% for example. [Feb 7, 2011: BW - The Youth Unemployment Bomb]  However what makes the U.S. unique is the enormous cost of secondary education - which is now garnering a poor ROI (return on investment) for an increasing amount of graduates.   While Wall Street is focused on the number of jobs, they have missed the forest for the trees - the quality of jobs gained versus what has been lost is putrid. [Feb 3, 2011: CNNMoney - Jobs Coming Back, but the Pay Stinks!]

Anyhow, I've been told not to worry for years by those who live in ivory towers and speak dogma - once we outsource a big chunk of jobs, it will make other countries middle class well off.... whom will one day have more disposable income to buy U.S. goods.  That are built in the foreign countries.  Which somehow will lead to U.S. jobs.  For example....McDonald's burgers (staffed by locals), and Apple iPhones (assembled in China).  [Oct 4, 2010: WSJ - Americans Souring on Free Trade as Losing Their Jobs Overpowers Lower Prices]  Don't ask questions, just believe it will all work out in the end.

I am not sure when the tipping point will be reached but as I said in 2008 we are approaching a point where for many (not all!) going to college, incurring massive debts, and then entering a job market where many of the jobs they once had have been outsourced (and continue to be) or eliminated via automation/productivity improvements, will simply be a losing proposition even accounting for the 'higher pay' in the long run.  I don't know when the college bubble bursts but eventually it will face the same end as all bubbles.

From the story....

  • The individual stories are familiar. The chemistry major tending bar. The classics major answering phones. The Italian studies major sweeping aisles at Wal-Mart.  
  • Employment rates for new college graduates have fallen sharply in the last two years, as have starting salaries for those who can find work. 
  • What’s more, only half of the jobs landed by these new graduates even require a college degree, reviving debates about whether higher education is “worth it” after all.
  • The median starting salary for students graduating from four-year colleges in 2009 and 2010 was $27,000, down from $30,000 for those who entered the work force in 2006 to 2008, according to a study released on Wednesday by the John J. Heldrich Center for Workforce Development at Rutgers University. That is a decline of 10 percent, even before taking inflation into account.
  • Of course, these are the lucky ones — the graduates who found a job. Among the members of the class of 2010, just 56 percent had held at least one job by this spring, when the survey was conducted.
  • Even these figures understate the damage done to these workers’ careers. Many have taken jobs that do not make use of their skills; about only half of recent college graduates said that their first job required a college degree.
  • An analysis by The New York Times of Labor Department data about college graduates aged 25 to 34 found that the number of these workers employed in food service, restaurants and bars had risen 17 percent in 2009 from 2008.. 
  • There were similar or bigger employment increases at gas stations and fuel dealers, food and alcohol stores, and taxi and limousine services
And when college majors are busy waiting tables, being baristas, or selling liquor and gas - it has a cascading effect.
  • This may be a waste of a college degree, but it also displaces the less-educated workers who would normally take these jobs.  “The less schooling you had, the more likely you were to get thrown out of the labor market altogether,” said Mr. Sum, noting that unemployment rates for high school graduates and dropouts are always much higher than those for college graduates. “There is complete displacement all the way down.” 

And about those loans the federal government is just dying to hand out so that the massive Ponzi scheme called the college tuition bubble can escalate?
  • Meanwhile, college graduates are having trouble paying off student loan debt, which is at a median of $20,000 for graduates of classes 2006 to 2010.
  • Many graduates will probably take on more student debt. More than 60 percent of those who graduated in the last five years say they will need more formal education to be successful.

[Dec 21, 2010: Video - CNBC, the Price of Admission - America's College Debt Crisis]
[Dec 14, 2008: WSJ - K-12 Schools Slashing Costs, College Bills Wallup Families]
[Dec 5, 2008: NYT - College May Become Unaffordable for Most in US]

E-Commerce Dang Dang (DANG) - Paying Up for Growth, not Profits

E-Commerce Dang Dang (DANG) is having a nice day today on the back of its earning report, but has been a broken stock once its IPO came out.  At this point the only people who have made money are insiders, and those who dumped it immediately.  It's a long road for "The Amazon of China".

That said for a paltry 1 cent of earnings, investors are giddy today about DANG's earnings.  Analysts were in for $103.4M and $0.00 EPS.  The company did $105.0M and $0.01.  Cost of revenue jumped (translation - gross margins fell) - as did marketing and fulfillment costs as a percent of revenue.  The only 'profit' was due to the Wall Street game of pretending handing boatloads of options to insiders is not a real expense.  Full report here.

  • Total net revenues in the first quarter of 2011 were RMB687.6 million ($105.0 million), a 53.4% increase from the corresponding period in 2010.  
  • Media product revenue for the first quarter of 2011 were RMB514.0 million ($78.5 million), representing a 34.3% increase from the corresponding period in 2010. General merchandise revenue for the first quarter of 2011 was RMB164.0 million ($25.1 million), representing a 161.6% increase from the corresponding period in 2010. Other revenue including revenue from third-party merchants, for the first quarter of 2011 was RMB9.5 million ($1.5 million), representing a 242.9% increase from the corresponding period in 2010. 
  • Dangdang had approximately 4.2 million active customers in the first quarter of 2011, representing a 42.3% increase from the corresponding period in 2010. Total orders for the first quarter 2011 were approximately 8.0 million, a 40.9% increase from the corresponding period in 2010. 
  • Cost of revenues was RMB553.6 million ($84.5 million), representing 80.5% of total net revenues, as compared to 79.8% in the corresponding period in 2010. Cost of revenues as percentage of total net revenue has increased primarily due to the high growth rate of general merchandise, which has resulted in a changed revenues mix. 
  • Operating profit excluding share-based compensation expenses (non-GAAP) was RMB1.2 million ($0.2 million), a 42.5% decrease from the corresponding period in 2010, primarily due to the revenues mix change and increased marketing expenses.
  • Net income excluding share-based compensation expenses (non-GAAP) was RMB5.5 million ($0.8 million)

  • Dangdang expects its total net revenues in the second quarter of 2011 to be in the range of RMB779 million to RMB789 million, representing year-over-year growth in the range of 51% to 53%.

[Dec 8, 2010: Meet China's Newest Billionaire - E-commerce China Dangdang's CEO Peggy Yu Yu]

No position

Ping Pong


I think five of the past seven sessions we've ping ponged between these 2 figures.

My brain says we go lower, my 2009-2011 experience says V shaped bounce. Hmm...

Only problem for V shape (this time around) is we actually have life in the dollar so the former leadership group is no longer there.

[Video] ABC Nightly News - The Plight of America's 6M Long Term Unemployed

From Wednesday's ABC Nightly News; the plight (and stigma) of being long term unemployed.

3 minute video

Aruba Networks (ARUN) With Another Excellent Quarter

Aruba Networks (ARUN) is a name I've been late to the game to, only becoming familiar with the company about 9 months ago, but it continues to impress.  Last evening as all eyes were on (CRM) earnings, Aruba posted a quite stellar earnings report.   Revenue grew 53% year over year to $105.8M (v $98.2M expected) and earnings came in at 16 cents ex items (v 15c).  There does appear to be a headwind of higher taxes coming down the pike, a quarter ahead of expectations.  Full report here.

  • “In the third quarter, we benefited from strong demand across all of our major geographies and increasing acceptance of our solutions in both the general enterprise and across our other verticals. Our continued innovation is a key factor in our rapid customer acquisition, as we added over 1,200 new customers in the third quarter, a record for the Company.”

While the chart looks "meh" of late, it has outperformed many of its cohorts in the 'networking' space.  It bounced sharply off its 100 day moving average 3 days ago and provided a nice entry point for the very nimble.

Via Reuters:

  • The company also said a new tax structure resulting in a tax rate of 20-22 percent will come into effect in the first-quarter of 2012.  Analysts were expecting the changes to take effect in the second quarter. "It might be a bit more difficult (for Aruba) to show an EPS expansion given that tax headwind," analyst Marchetti said. 

Via IBD:

  • Aruba's shares were down 3% after hours, after it issued its results and outlook. In answering a question on a conference call with analysts, Aruba CEO Dominic Orr said the company didn't want to be too aggressive in its guidance because of a still-uncertain global economy.
  • Aruba makes equipment for wireless local area networks. Such WLAN gear lets workers in remote offices securely connect tablets, smartphones and laptops to their computer networks.  Aruba installs its security and management functions on mobile devices. The software then hooks into wired networks through an access switch. Ensuring the security of wireless devices is a growing priority for tech managers. Aruba has benefited from rapid adoption of the Apple (AAPL) iPad tablet.
  • A recent survey of 152 global tech buyers found that 10% of companies use Aruba's WLAN gear vs. 78% that use Cisco's, according to CIOZone Research Network.  But 27% of those polled say they're considering Aruba for future purchases compared with 71% for Cisco.

[Feb 18, 2011: Aruba Networks Scorches Upward, Despite CFO Departure]

No position

Thursday, May 19, 2011

Prepare for a Fed Hike... in 2018. So Says Goldman Sachs?

About this time last year - or perhaps 14 months ago as QE1 ended - the talk was about the Fed tightening that was to come by the end of 2010.   With the tsunami of spending out of the federal government still going full blast, one could assume the economy could handle a few less steroids from the central bank.  Instead economic activity drooped, and the stock market (after flash crashing), had an awful summer.  By late August, QE2 was hinted at strongly and it's been all (mostly) "good times" since.  (I say that with sarcasm)

As I look around we are in Groundhog Day.  I hear the Fed and the financial infotainment industry believing that tightening will happen by the end of this year or early next.  Now "tightening" is all relative - even if the Fed began selling inventory off their balance sheet, the Fed funds rate is at its lowest in history and the Fed still holds trillions of product.  So we're simply talking from going from"ultra ultra ultra ultra easy" to "ultra ultra ultra easy".

Call me an outlier.  I don't think it will happen.  My belief is the structural economy is so dependent on easy money from the federal government spigot, plus super easy monetary policy [Nov 18, 2009: Our Economy is on Steroids] any true reversal of policies will lead to the same type of weakness (economic) we saw last summer, and the Fed will immediately panic.  QE3 will be here.  Indeed I expect it by next winter.  Just about the time everyone believes The Bernank will "tighten".

We're running at a 10% annual federal deficit simply to push out paltry 2-2.5% GDP growth.  It's pathetic.  If the government goes back to 3% type deficits (which I don't foresee but even a drop to 5-6% will be a blow to the economy) the US goes back into recession immediately.  No one wants to take the 'medicine', so QE infinity it is.  Some say it is politically impossible - I say, I disagree.  More dollar weakness and commodity speculation?  Yes.  Is the Fed trapped in a box?  Yes.  But to appear to be useful the Fed has to do 'something'.  They can't sit on their hands.  And the only 'something' they have left is the same thing.

Yes, the Fed policies will blow up the US again down the road - I expect Bernanke to be viewed like Greenspan now is in due time - I wrote that 2+ years ago. If the stock market corrects 12-15% I expect an immediate QE hint in a speech.   We'll see, perhaps I am wrong.  But according to this story on CNNMoney, some of the sharp minds at Goldman Sachs agree with my outlier view on no 'tightening' anytime soon.   Indeed they don't believe the Fed will tighten until near the end of the decade.  With a cyclical recession surely to hit sometime mid decade, I don't necessarily disagree with them on that count either.   Where Goldman disagrees with me, is they believe no more QE....

From the story:

  • A report issued by economists at Goldman Sachs argues that a coming wave of government belt tightening, hailed by hawks everywhere, will actually keep central bank doves in control for a long stretch -- perhaps well into the second half of this decade.
  • The yawning U.S. deficit and the fear that tighter policy could derail a weak recovery could keep the fed funds rate near zero for perhaps six years, the Goldman research suggests.  "The best the Fed can do is keep monetary policy on hold to cushion the growth drag from the fiscal consolidation," writes Goldman economist Sven Jari Stehn. "As a result, the looming fiscal adjustment should reasonably be expected to see policy rates -- and probably longer-term rates too -- at lower than normal levels for an extended period."
  • With all the frothing about inflation, how on earth will Bernanke & Co. be able to justify staying on the sidelines? The answer lies in the unhappy math of a profligate nation out of control for so long that its excesses can't be trimmed all at once, no matter what the Paul Ryans of the world might claim.
  • Even if our political leaders quickly agree on a package of spending cuts and tax increases – an outcome that doesn't look terribly likely right now, on debt ceiling day – it will take years to bring that massive deficit under control. Goldman cites an IMF survey of fiscal consolidations in rich countries that puts the average length of the successful government belt-tightenings at six years.
  • That is a daunting enough statistic. But most of these successes – ranging from Ireland in the mid-1980s toFinland, Italy and Sweden in the mid-1990s – shared one notable characteristic: A cut in short-term interest rates that averaged 5 and a half percentage points.  Pulling that lever isn't an option for the Fed, which cut its fed funds rate to its current level just above zero in December 2008.
  • "With the funds rate close to the zero lower bound," Stehn writes, "a spending based adjustment could not be accompanied by monetary easing unless the Fed decided to adopt another asset purchase program (which we think is highly unlikely)."
  • That means that even a successful U.S. consolidation could feature a Fed on hold for, all things considered, a decade.  (just remember, we are not Japan) If you start back in 2008 and figure it will take our solons in Washington the rest of the year to put together a plan for meaningful reforms, a six-year timeline means we could still be consolidating in 2018. And that assumes something gets done before next year's presidential election.
  • It will also mean more trials for the dollar, which has fallen 10% against major currencies since Bernanke said in August that the Fed would do anything to boost domestic demand.

To V Shape or Not V Shape

The question facing every cautious bull and bear is whether this is the beginning of the upteempth low volume, V shaped rally.  For those of you who are Realmoney subscribers the author 'RevShark' literally stole the words out of my mouth in his last post of the day yesterday.  If you are a market veteran, you had a textbook oversold bounce that invites shorting.  But old rules have been useless since 2009. 

We had a classic low-volume, oversold bounce off of support today, which old-time technicians might think is a potentially good short setup. Prior to June 2009, that wasn't a bad bet. But in this market, the smart move has been to buy short setups rather than sell them. 

Logically, this is not a market that should go straight back up, especially if the U.S. dollar doesn't collapse once again. We've had clear distribution lately and plenty of repair work needs to be done to individual charts. Market players are conditioned, however, to jump in on a bounce and keep on pushing. It has worked so often that it would be foolish to rule out.  

If you began in this market sometime from 2009 forward the only thing you know is to buy these sort of dips, because there is never any pain for doing so.  The only exception was in spring and early summer 2010 - when there was no major QE program* in place.  That was a market that acted 'normally'  (excluding May 6th) for 3-4 months from a technical basis.  I enjoyed it. 

*MBS runnoff was being reinvested i.e. QE1.5

But during QE campaigns it doesn't matter that volume drops off on rallies, and surges on selloffs.  Doesn't matter if the leaders break down - they can now reverse 180 and go straight back up as if technicals no longer apply.  All that matters is that after technical breakdowns, the cursory oversold bounce - which used to be a boon to bears to load up on short positions for the next leg down - have gone against pre 2009 precedent, and simply turned into V shaped moves. 

So really the only question go forward is - has whatever changed since 2009 (grassy knoll types can offer many reasons on 'what' has changed) - permanently changed the market dynamic, or will we one day revert to what used to the work the previous X decades.  I have no idea myself, and I now view everything with 2 sets of books - (i) pre 2009 and (ii) 2009 forward. Until I see the old rules matter again, I have to pretend I just started in the market in 2009 and play by set (ii).  I will be interested to see if rulebook (i) comes back out July 1st, as it did spring 2010 between the two QEs....

Here is a trend line from the last two tops, and the current move - a break above that level would make me more comfortable joining the "this is easy!" bulls.  You can also connect the 3 most recent lows from mid March and you see a big triangle forming.  Whichever way you break out from that sort of triangle usually created a substantial move.

Existing Home Sales Continue to be Lifeless: Sales Down 12.9% Year over Year, and Prices 5%

Speaking of real estate, as we are about to enter the seasonally strongest period of the year (where the housing bulls will chirp about the imminent recovery as they do every year) but the data suggests more of the same.  Existing home sales are far more important than new home sales, as they make up 90%+ of the transactions and the data this morning for April in a word stunk.  As always, one should compare real estate YEAR over YEAR rather than MONTH over MONTH - something that trips up the housing bulls who always get excited the past few years in May, June, July (when housing data ALWAYS turns up).  On those measures sales were down 12.9%, and median prices 5%. 

To be fair, I believe the last gasps of the desperate government's home credits were offered a year ago, so you have a distorted figure from last year to a degree.  On the other hand, home affordability is even better this year, which is a plus.

Bottom line we are years upon years from an organic recovery.  Indeed, 7M+ home "owners" are living 'rent free' not making a mortgage payment and we have YEARS just to clear out that situation.  (we're not even addressing shadow inventory)  I read just last week that the average NY / NJ foreclosure process is now in excess of 900 days as banks are overwhelmed and/or are happy to lie about what is on their balance sheet since the US accounting board said "mark to myth" is an accepted GAAP practice as of March 2009.  Hence someone strategically defaulting today in those states won't be out of the house until Christmas 2014.  (process that for a moment)  Repeat that across the nation - indeed rinse, wash, and repeat it.  Which means we'll be well into the next cyclical recession and still have millions underwater (28% of all homes and rising), strategically defaulting, and the like.   The only question is what QE we will be on by then.  I say QE5.

A nice graph via Calculated Risk blog showing how 5M in monthly sales compares to the past 15 years - keep in mind, the US population has grown substantially over that time.  This with near record low mortgage rates, and record affordability.

Via AP

  • Sales of previously occupied homes fell 0.8 percent in April to a seasonally adjusted annual rate of 5.05 million units, the National Association of Realtors said Thursday. That's far below the 6 million homes a year that economists say represents a healthy market.  Sales were down 12.9 percent year over year.
  • Purchases made by first-time homebuyers increased to make up 36 percent of sales. That's still below the 40 percent that the trade group says is consistent with better markets. Sales to investors dropped slightly to account for about 20 percent of the market.
  • The median sales price.. down 5 percent from the same month one year ago, to $163,700. 
  • Sales of homes at risk of foreclosure fell in April and made up 37 percent of all purchases. Foreclosure sales declined only because a large number of those homes are backlogged in the courts. 
  • A separate survey from the trade group found 11 percent of Realtors said a contract was canceled because an appraisal came in below the negotiated price. And 14 percent said a contract was renegotiated to a lower price because of a low appraisal. 
  • There's a glut of unsold homes on the market but few buyers are biting. In April, the supply of homes rose to nearly 3.9 million. At last month's sales pace, it would take more than 9 months to clear those homes. Analysts say a healthy supply can be cleared in six months.
  • The increase in unsold inventory "should continue to weigh on prices," said Dan Greenhaus, chief economic strategist at Miller Tabak + Co.
  • The situation is much worse when taking into account the "shadow inventory" of homes, economists say. These are homes that are in the early stages of the foreclosure process but, because of backlogged courts or the government probes, have not hit the market for re-sale.   
  • CoreLogic Inc. in March estimated about 1.8 million homes were delinquent or in foreclosure, a so-called “shadow inventory” set to add to the unsold supply of existing houses already on the market.

And here comes the next wave....
  • The Mortgage Bankers Association said Monday that about 8.3 percent of homeowners missed at least one mortgage payment in the January-March quarter when adjusted for seasonal factors. That's up 0.7 percent from the previous quarter.

[Video] CNBC - Richard Lefrak Talks the Real Estate Market

Over the past few years, one of my favorite guests on CNBC has been Richard Lefrak.  He has his hands in nearly every part of the real estate market, across the commercial to residential spectrum.  A very wide ranging 10 minutes interview this morning where he touches on themes we have proposed as well.

  • The easy money policies of the Fed, along with the changes in accounting rules to let banks lie about what is on their balance sheet (circa early spring 2009) (ala "pretend and extend") have allowed the system to heal.  Indeed, in some markets (i.e. NYC) he fears we are back to bubble valuations.  (I believe this is where Bernanke takes a bow and mutters "mission accomplished")
  • Single family residential stinks for the most part, 2M excess homes in the market, still sees 10-15% correction in pricing
  • Multi family home (i.e. apartments) are booming as many more Americans turn into renters, by choice or not.  Rents jumping sharply. (Mark's note - I think this is a huge trend for the coming 5 years) [Apr 5, 2011: Apartment Vacancies Drop to 3 Year Low, as Rents Rise - Apartment REIT's benefit]
  • The attitude towards home buying has changed.  
  • Markets with true job growth (many centered around natural resources) are doing much better than the average market.
  • Believes lowering barriers to immigration would help the housing market immensely - he cites it happening in Miami condo market.

All in all, The Bernank is creating a massive wealth effect for guys like Lefrak and he is very thankful.  (literally says so in the interview).  

Email readers will need to come to site to view

LinkedIn (LNKD) Unbelievable Price - $100

LinkedIn (LNKD) opened at almost double the IPO price, and has tacked on another $20.  1999 is back.


Wednesday, May 18, 2011

S&P 500 Has a Crush on 1340

This 1340 level is like a magnet.  After yesterday's late day reversal saved the market from breaking the 50 day moving average support (remember it is the close that is most important versus intraday), every underinvested bull and bear now asks is this the beginning of the next low volume, V shape bounce that makes no sense but keeps happening.  With all the break of momentum names lately I doubt it this time around - this looks more like an oversold bounce as so many of the momo names had fallen so far in a short amount of time - but I could certainly be wrong.  We remain stuck and in choppy conditions - a place to keep position sizes smaller and time frames shorter.  Or go eat popcorn and watch.

Bankers Association Upset at Elizabeth Warren's Plan to Simplify Mortgage Documents - Claiming it will "Stifle Innovation"

The more things change, the more they stay the same.  We truly have learned nothing from the worst financial crisis in 70 years.  The same folks who brought us all sorts of 'financial innovation' - many of which even the head of Goldman Sachs claimed had no social value [Sep 10, 2009: Goldman Sachs CEO: "Ok, I Admit - Some of Our Innovations were Socially Useless"]  - are resisting any form of simplification to the mortgage process.  Because it will stifle innovation.

I am unclear why a mortgage document needs to be 'innovative'.  I think 98% of the people would prefer a 1-2 page document with simple terms in 12 point font.  In return for such a reward, I think they'd be happy to give up any 'innovation' the banking industry has in store for us in the future.  As Paul Volcker said, the only positive innovation from the banking industry the past few decades has been the ATM machine. 

Here is the story from Bloomberg - the majority of the piece shows why changing anything in this country is so difficult.  Both sides (consumer groups & banking industry) are attacking Elizabeth Warren, citing the potential for lawsuits - or lack thereof - under the proposed changes.  Ah... lawyers.....

  • For Elizabeth, the Obama administration adviser setting up the Consumer Financial Protection Bureau, simpler mortgage paperwork is a “regulatory sweet spot” that will cut lender costs and borrower confusion.  (sounds appealing...tell me more)
  • That view hasn’t stopped battle lines from forming around the prototype “mortgage shopping sheet” the agency is planning to publish today
  • Industry groups say the revisions may lead to limits on innovation and variety in lending, while consumer advocates are resisting changes that might limit borrowers’ right to sue to stop a foreclosure. (doh!)
  • Warren has said the goal is to have a document that succinctly shows the costs of a loan and gets to borrowers early enough to allow for comparison shopping. (what a concept! but please I don't want to have these benefits, if I lose out on 'innovation')
  • “The papers come too late and are too complicated to be helpful to consumers,” she told the House Financial Services Committee at a March 16 hearing in comments about the current system. “By the time they see most of the papers, they are at the closing table being told ‘sign here, sign here.’” (amen)
  • “It’s not clear to me if disclosure is about simplifying the documents or simplifying the product,” Bob Davis, executive vice president at the American Bankers Association, said in an interview. “If you simplify the product, you stifle innovation.”
  • Warren’s plan could affect “everyone throughout the chain” of home finance, from title firms and loan originators to risk-hedging systems, said Stevens. The changes “could involve lawyers and create a class-action nightmare,” he said.
  • Warren explicitly touted regulatory simplification as a way to cut down on litigation during a question-and-answer session after a March 30 address to the U.S. Chamber of Commerce in Washington. The complexity of rules “produces people who allegedly do not comply and therefore the opportunity for a lawsuit,” she said.

LinkedIn (LNKD) Raises IPO Price by 30%, Valuation Will Now Top $4B at Inception

Not too bad for a week's work - just last week LinkedIn (LNKD) was valued at at an eye popping $3 billion.  [May 9, 2011: LinkedIn Files IPO for Minimum $3B Valuation]  This week - it's $4 billion.  The circus begins tomorrow.

Via WSJ:

  • On Tuesday, LinkedIn raised the expected offering price range for its shares to between $42 and $45 a share, up from its previous price range of $32 to $35 apiece. The higher offering price puts the valuation of the Mountain View, Calif., career social-networking company at more than $4 billion, up from about $3.3 billion previously.
  • How LinkedIn's IPO performs on Thursday after it sets its offering price Wednesday night could signal the market's appetite for IPOs from other social-oriented Web companies, such as Facebook Inc., Twitter Inc., Zynga Inc. and Groupon Inc. Each has been in the grip of a recent private-market frenzy, with venture capitalists and other investors driving up their valuations in multiple financing rounds. 
  • Founded in 2002 by entrepreneurs including Reid Hoffman and funded by venture-capital firms including Bessemer Venture Partners, Sequoia Capital and Greylock Partners, the site allows people to post resumes and exchange messages and information with friends, colleagues and business contacts. 
  • LinkedIn makes most of its money from businesses that pay fees to recruit and to advertise their company. It claims more than 100 million subscribers worldwide.
  • By any measure, LinkedIn's projected valuation is lofty. At $4 billion, its market capitalization is 258 times greater than 2010 profit. In regulatory filings, LinkedIn said it earned $15.4 million on sales that doubled to $243 million. Its registration statement forecast slower revenue gains this year and a loss due to higher expenses.


Deere (DE) Beats by 6 Cents, Raises Internal Guidance

It continues to be times of plenty for the agricultural economy.  Deere (DE) reported this morning and beat estimates by 6 cents while raising (their own) guidance across the board.  Full report here.

Via Bloomberg:

  • Deere & Co, the world’s largest farm-equipment maker, raised its fiscal 2011 earnings forecast and posted second-quarter profit that beat analysts’ estimates amid increasing demand for agriculture and construction equipment.
  • Earnings will be $2.65 billion in the year through October, more than the $2.5 billion forecast in February, Moline, Illinois-based Deere said today in a statement. The average analysts’ estimate in a Bloomberg survey was for profit of $2.67 billion, or $6.26 a share.
  • Deere said equipment sales will rise 21 percent to 23 percent in fiscal 2011, up from a previous projection for an 18 to 20 percent increase. Equipment sales in fiscal 2010 were $23.6 billion.
  • Net income gained 65 percent to $904.3 million, or $2.12 a share, in the quarter through April, from $547.5 million, or $1.28, a year earlier, Deere said in the statement. The average analyst estimate in the survey was for earnings of $2.06 a share. Total sales rose 25 percent to $8.91 billion from $7.13 billion a year earlier. 

More comments:
  • The March earthquake and tsunami in Japan will reduce full-year sales by about $300 million and operating profit by $70 million.

Par for the course, sales outside the U.S. far outpaced domestic demand - even with the raging bull market in U.S. agriculture.  The weakness in the dollar also helped.
  • Equipment net sales in the United States and Canada increased 17 percent for the quarter and were up 24 percent year to date. Outside the U.S. and Canada, net sales were up 45 percent for the quarter and 36 percent for six months, with favorable currency-translation effects of 8 percent and 4 percent for these periods.

That said, the stock - like everything 'beta' or commodities related has been beaten over the head the past few weeks.

No position

Tuesday, May 17, 2011

Vancouver Housing Prices Pass New York and London as Chinese 'Move' In

Pardon the pun in the title, simply could not resist.

Quite a fascinating article in Bloomberg, as it seems the recent clampdown on property in China has led many to head east (well the "west") spiking the already red hot Vancouver housing market.  One that already had the warning flags last summer. [Jun 30, 2010: BW - Vancouver, Canada: Housing Bubble North of the Border?]  One (of a myriad) of reasons you could see the U.S. housing market getting out of control was the complete disassociation between median incomes and housing prices.   [Dec 6, 2007: What Should Median Housing Prices be Today?]   To say this has happened as well in Canada - and especially Vancouver - is an understatement.  That said, they have the same very loose monetary policy, and an influx of buyers - many of them cash - from outside the country itself, so it is definitely setting up an interesting scenario.   One wonders what happens when their central bank actually begins to raise rates in earnest.

At this point, using the measure above (median household income to median price), Vancouver is now more expensive than New York or London.  And I am sure a lot less investment bankers work there, than in either of those 2 locales.

Some of the growth measures in this story seem nearly impossible - looks like some mass herding effect out of China and into Canada...


  • Vancouver's Royal Pacific Realty had such a surge of business during the first two weeks of February that agents and assistants worked day and night shifts to find homes for Chinese buyers visiting during the Lunar New Year.  “It was unprecedented,” said Royal Pacific Chief Executive Officer David Choi.
  • Sales of detached homes, townhouses and condominiums in metropolitan Vancouver jumped 70 percent in February from January, to 3,097 units from 1,819, and were up 25 percent from a year earlier. In March, sales climbed 32 percent from February. Sales increased by 80 percent from two years ago.
  • Buyers from mainland China are leading a wave of Asian investment in Vancouver real estate as China tries to damp property speculation at home. Good schools, a marine climate and the large, established Asian community as a result of Canada's liberal immigration policy make Vancouver attractive, said Cathy Gong, who moved from Shanghai to the Shaughnessy neighborhood on Vancouver’s Westside about three years ago.
  • China, where home prices rose 28 percent in Beijing and 26 percent in Shanghai last year, has taken steps to curb property speculation within its borders.  Premier Wen Jiabao placed curbs on mortgage lending, boosted down-payment requirements and limited the number of purchases.
  • In 2010, Vancouver had the third-highest housing costs among English-speaking cities worldwide. Only Hong Kong and Sydney, another magnet of Asian immigration, were more expensive. 
  • Vancouver’s median home price of C$602,000 ($618,000) was 9.5 times the annual median household income of C$63,100. Canada had a 4.6 national multiple, making it “seriously unaffordable,” while the U.S. at 3.3 was “moderately unaffordable,” the study showed. To be affordable, the multiple must be 3 or less.
  • Vancouver was more expensive than San Francisco, London and New York by that measure.
  • Unlike London or New York, “we don’t have enough jobs with high incomes to justify” the home prices, said Ladner. He noted Australia has placed restrictions on foreign home ownership.  
  • Holidays in China have been a popular time to look for houses in Vancouver. Sales picked up in October during China’s weeklong national holiday, said Winnie Chung, a Royal Pacific agent who represented buyers or sellers in C$285 million of home sales in 2009 and 2010 combined.
  • Mainland Chinese are buying houses primarily in Vancouver’s Westside, boosting the median sales price to C$2 million in the district known for its wide boulevards, beaches, expansive parks and stucco Tudor mansions.
  • Our office has done 50 sales this year, which is pretty incredible,” said Vancouver realtor Tom Gradecak at his office in Point Grey, where he has one colleague who speaks Mandarin and Cantonese and is hiring a second. “Half of those sales are from mainland China.”
  • Some buyers acquire multiple homes, one to live in and others for investment, said Chung, the broker. Her clients made their money in a variety of businesses, she said, including mining, stainless steel manufacturing and real estate. About 10 percent of them speak English, she said.
  • Westside home prices rose 77 percent during the past five years through April amid the housing collapse in the U.S. 
  • In 2010, the average home price in greater Vancouver rose 14 percent from 2009.
  • The current group of Chinese homebuyers in Vancouver is the third “wave” from Asia since 1990, following Taiwanese and Hong Kong immigration, said Manyee Lui, a veteran Vancouver realtor. “People from mainland China are the new immigrants,” Lui said.
  • Chinese buyers frequently are absentee owners, wealthy businessmen who buy second or third houses for their wives and children while continuing to live in China for work.   “You see a lot of these satellite families,” said Chow. He said it’s not unusual to see college-age kids of wealthy Chinese parents driving Bentleys, Maseratis and Porsches around the Westside. 
  • Low interest rates inflated home prices and created a bubble, said Lawrence Wong, an immigration lawyer with many Chinese clients. “There is this psychological fear that ‘Ok, if I don’t get into the market, I might not be able to get in later on,” said Wong. 

Fun random fact....
  • Starting about 18 months ago, so many homeowners applied to change the last two digits of their addresses to remove or shift the number 4, which in Chinese sounds like the word for death, or add the numeral 8, which is considered lucky, that Vancouver began turning down some requests, said Bonnie Lee, addressing coordinator for the city. (CTRP) Faced with Potential Real Challenge in Chinese Travel Market as Tencent Takes Stake in eLong (LONG)

For many years (CTRP) has been the dominant player in the Chinese travel industry.  Meanwhile eLong (LONG) has been its wayward competitor.  I'd parallel these two to something along the lines of Intel (INTC) versus Advanced Micro Devices (AMD) - yes they are competitors but the gap between the two is more like a chasm.

Overnight, an event happened that might finally change the balance of power to some degree.  Chinese powerhouse Tencent (which we just spoke about in the past week) took a 16% stake in eLong
  • Tencent has acquired approximately 16% of the outstanding shares for a total purchase price of $84.4 million and become the second largest shareholder of eLong.  Expedia has acquired approximately 8% of the outstanding shares for $41.2 million and now holds 56% of the outstanding shares. 
  • The strategic investment in eLong represents the first significant investment in the travel market by Tencent. eLong and Tencent plan to deepen their cooperation in future, including forming a business partnership to develop online travel products and distribute eLong's hotel supply to Tencent's online community with 674 million(1) QQ user accounts in China.
If they can leverage their 600M+ users towards this travel business, it would be a huge win for eLong.  The market loves the development - the stock is up 50% even after selling off from morning highs.

Another potential winner is Expedia (EXPE) which has a near 60% stake (after buying 8% more) in eLong.  Much like Yahoo (YHOO) is being valued more for its Chinese holdings than its American business, Expedia could be viewed the same if Tencent takes eLong to the next level.

The obvious potential loser here is Ctrip but it's been the dominant horse for such a long time, it should set up quite a battle in the space.  Near term the reaction today in CTRP is probably overdone as it will take time for eLong to benefit from this new relationship.

No positions

Two Recent Bull Markets - Consumer Non Discretionary and Healthcare

While the general indexes have been holding up decently (until this week), there has been a lot of carnage under the surface the past few weeks - especially in leaders of the run from Sep-mid March.  That carnage has been hidden by outperformance by two (defensive) groups in particular - consumer non discretionary and healthcare.  These are not areas of focus for me, due to their lack of growth characteristics, but looking at the charts since mid March you'd think the market is flying.  So if you are wondering how the markets are holding up (relatively speaking) while so many other sectors get hit - this is the reason.

Both appear to be very overbought, so the question is what happens when they slow down?  Do we rotate back into the high growth areas? Or when they falter do the indexes finally give up the ghost?  Stay tuned.

SPDR Health Care (XLV)

[average market cap $74 Billion]

Company name% Net assets
Johnson & Johnson12.82%
Pfizer Inc.11.95%
Merck & Co, Inc.7.91%
Abbott Laboratories4.87%
Unitedhealth Group, Inc.3.87%
Amgen, Inc.3.78%
Bristol-Myers Squibb Company3.43%
Medtronic, Inc.3.20%
Eli Lilly and Company2.69%
Baxter International Inc.2.39%
Percentage of holdings 56.91%


SPDR Consumer Staples (XLP) 

[average market cap $89 Billion]

Company name% Net assets
Procter & Gamble Company14.41%
Philip Morris International, Inc.9.90%
Wal-Mart Stores, Inc.8.54%
Coca-Cola Company7.19%
Kraft Foods, Inc.4.66%
Altria Group Inc.4.45%
CVS Caremark Corp4.40%
PepsiCo, Inc.4.35%
Colgate-Palmolive Company3.61%
Walgreen Company3.31%
Percentage of holdings 64.82%


As an aside, while the other two sectors broke out beginning mid March, another defensive group - Utilities (XLU) - has also taken off in the past few weeks.

No positions

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