MorningWord 3/11/13: Most traders of my age, the ones who sit in front of screens all day, have one eye trained on the scrolling news ticker on their quote system. Prior to the Great Recession, and before the proliferation of the “Social Web” most traders had forsaken the uselessness of the Web 1.0 stock chat-rooms and relied on third party news/quote services and Google searches for their single stock and economic news.
A few years ago this all changed and now it appears the big boys of financial media and brokerage are losing their grasp on being the first destination to obtain financial news. Twitter’s rapid ascent in real time search and theri recent adoption of the $ ticker hyperlink has been a game changer. There have been plenty of attempts to assign values to Twitter’s worth and I have to clue whether it should be $1 billion or $15 billion but I can tell you this, aside from the daily searches on GOOG that yield so-so results, I use Twitter more than any other web property for professional uses. Twitter is very likely in the first inning of penetrating different industries and verticals from what I can tell. And like most of you who follow @RiskReversal & @EnisTaner for trade updates, alot of our followers are new to twitter and my sense is from talking to friends and peeps in the business most of them are not even on Twitter yet.
The first thing that I used to do when I woke up was log onto my Bloomberg and read 10-15 top news stories, now I generally don’t log onto Bloomberg until I get into the office. I scroll my Twitter feed on my iPhone or iPad and quickly get through dozens of stories from dozens of news sources. Finally the Social Web brings some efficiency rather than being a massive productivity drain.
Here are a few things (of dozens) from just this morning that I would have never found if not trolling around on Twitter:
Or this from CNNMoney:
An analyst who downgraded Apple last August now says that Google is due for a fall
FORTUNE — “We’ve seen this movie before (Apple at all time highs) and we know how it ends.”
So began a brief note issued Sunday by Oracle Investment Research’s Lawrence Isaac Balter, chief market strategist at a boutique firm whose main claim to fame is his Aug. 21, 2012 downgrade of Apple (AAPL), five weeks before the stock went into a five-month swoon.
Now he’s warning that Google (GOOG) may be next.
“As we begin to hear the rumblings of $1000 target prices and cheerleaders in pom-poms, we are raising the target price only slightly from $670 to $700 to reflect earnings per share growth, but we still think you are overpaying.”
I don’t pretend to fully understand Balter’s accompanying chart (above), but it looks scary. As do the stats he rattles off:
From a P/E perspective, GOOG is the 10th most expensive in the S&P 100 at 24.6x
At 3.8x P/Book, it’s the 31st most expensive
With a PEG ratio of 1.20, it’s trading at a premium of its growth rate, whereas Apple’s PEG ratio is just 0.55x (the 5th lowest in the entire S&P 500)
Over the past 5 years, GOOG has been compounding retained earnings at only 6.74%, whereas Apple has been nearly double that at 11.88%
GOOG’s return on Assets has been declining at -6.47%/yr compounded rate, whereas Apple has been increasing by 11.7%/yr
For the record, by Dec. 5 last year Balter had changed his “hold” on Apple to a “buy” and then a “strong buy.” The stock, however, continued to fall, from $570 to below $420.
And of course follow dudes like the @ReformedBroker because, aside from his non-stop wit and astute market musings , he will serve you up his own list of tweets and news story culled down from his own process:
SO YOU GET THE POINT, FOLLOW SMART PEOPLE AND RELIABLE NEWS SOURCES, THEY WILL MAKE THE YOUR JOB BEING WELL INFORMED ABOUT THE GOINGS ON IN THE MARKETS THAT MUCH EASIER. AND IT’S FREE. ALL THAT SAID THERE ARE TONS OF THINGS I (WE) HATE ABOUT TWITTER, LITTLE TO DO WITH THE COMPANY OR THE OFFERING, AND MORE TO DO WITH ITS USERS, BUT I’LL SAVE THAT FOR ANOTHER POST!
MorningWord 3/8/13: In case you missed it, The February NonFarm Payrolls number came in this morning adding 71k more jobs than forecasts predicted, with the unemployment rate dropping to 7.7. Despite the revision lower to the January numbers (down 38k from the initial report), the S&P futures are taking the news fairly positively, up 50 bps as I write. The data is clearly good news for the supposed economic recovery, but begs the question how long can “Helicopter Ben” keep his pedal to the metal on the QE front in the face of improving economic data? I am not an economist and generally rely on opinions of many smarter than me on macro issues, but if we continue to get the double whammy of improving housing and jobs data, it seems very unlikely that we will see QE4 and even more likely the Fed starts floating trial balloons as to how and when they put an end to easing in 2013 .
MorningWord 3/7/13: Tuesday night on Fast Money two of the panelists were engaged in a bull/bear debate on the merits of owning INTC at current levels. When asked for my opinion on the matter I weighed in with the bear, well because that’s just what I do. For all intents and purposes, INTC appears to be a classic value trap. Despite a strong balance sheet, ample cash flow to pay a dividend that yields 4.1% and fund a massive share repurchase, the company is facing a massive crisis as they have been caught off sides on the secular trend towards mobile computing. INTC’s guidance and analysts estimates for 2013 reflect the company’s weak positioning in this brave new mobile world, with earnings expected to decline 9% and sales to grow a mere 1%. Despite holding firm on the server side, INTC’s earnings have been under pressure from declining margins from pricing pressure for chips that go in PC’s and laptops which have faced massive cannabilization from tablets where the company’s market share is nearly non-existent.
MorningWord 3/6/13: IN case you missed it the financial world is rejoicing in its own splendor as the the most mathematically dubious index the world over, the Dow Jones Industrial Average, closed at a new all time high yesterday. After you are done sweeping up all the confetti, think for a second where you were the last time the Dow closed above 14,160, on Oct, 9th 2007? With the help of my trusty Palm Pilot, I just looked and it says I was gainfully employed by Merrill Lynch in their equity derivatives group, had drinks at a new Sakatini bar in Soho with 2 guys my trading group was desperate to hire, and then had dinner at Nobu to celebrate the closing of my latest condo investment in a swamp in Florida. Ok I am kidding about some of that but Merrill no longer exists for all intents and purposes and the combined equity with BAC is some 80% lower than Oct 2007, let’s just say those young traders we hired learned very quickly what LIFO means, tables at Nobu are now easily available on OpenTable, and that Florida condo didn’t work out so well!
MorningWord 3/5/13: Its fairly hard to miss as the market continues its march onward and upward, AAPL’s slow leak is causing the stock to make fresh 13 month lows. This has be a fairly interesting phenomenon that has played out over the last few weeks/months, and now that it is becoming the norm it may be close to done. After more than a year and half being a “bizzaro” stock on a relative strength basis both positive and negative. AAPL’s 40% retreat from its all time highs in September at $705 to yesterday’s close of $420 has not been without its beneficiaries. AAPL investors who had become accustomed to earnings and sales growth of 25% plus over the last 5 years have been desperately searching for growth at a reasonable price and have found a new tech mega-cap darling, GOOG, which is up ~20% (at all time highs) since the start of November, vs AAPL which is down 30% in that period.
Is GOOG entering its own parabolic rally not to0 different from AAPL’s in 2012?
MorningWord 3/4/13: Just when you thought some of the market ills from 2011/2012 were behind us, then wham, right in the kisser. First Europe last week, and now fears of a slowdown in China (again). The Shanghai Composite and the Hang Seng nearly hit the lows for 2013 last night (down 3.65% & 1.5% and both basically flat for 2013) on the back of a series of weak economic data coupled with the nation’s attempt at cooling off an overheated housing market. China has clearly been off the radar of many investors in the U.S. for the last couple months, but it was just a few months ago that many western market participants were more focussed on 2,000 on the downside in Shanghai, rather than 14,165 in the Dow Jones. Since the Shanghai’s false breakdown in December, the index had more than a 25% rally of the lows. After failing to get near what looks like significant resistance at 2500, this puppy could be range bound for some time.
On the heels of China’s tightening measures, and soon after Asian markets opened, CBS’s 60 Minutes ran a piece on China’s real estate bubble that got a lot of love in the financial Twittersphere in real time. If you haven’t seen it, you should:
For many market participants, this is not a new story, famed short seller Jim Chanos has been warning of a property bubble ready to burst for at least 3 years; 2010-here, 2011-here & 2012-here, and websites like Business Insider have also been writing about these ghosts towns (here).
Why should U.S. investors worry about the potential for China’s real estate bubble burst and what would most certainly amount to a credit crisis of epic proportion? For the same reason that international investors should have feared back in 2007/08 about the U.S. real estate bubble burst and the subsequent reverberations across almost all businesses, causing a financial crisis that spread from Wall Street to Main Street, and then quickly overseas. Some of the actions by Chinese banking officials to cool down the real estate market in the last year or so and to rein in their massive shadow banking industry, appear reminiscent to the last ditch efforts by U.S. regulators to contain the uncontainable impending subprime credit crisis here.
Ironically, it was demand from China in 2009 that helped the world economy shake off the global recession caused by our crisis, and after years of very strong growth in China, U.S. multinationals in 2012 saw a drop in revenues, earning and operating profits (chart below from IBT.com), as the country struggles with decelerating GDP that is expected to be flat year over year at 7.4% in 2013, a far cry from some of the 12-23% prints just a few years ago.
So the easy answer, and to oversimplify it and state the obvious, is that U.S. investors should keep a close eye on investment bubbles while they inflate and eventually deflate because many of our investments in U.S. companies rely a great deal on China for growth, either for manufacturing to sell outside of China or to penetrate and gain market share in a country that has a massive emerging middle class greater than the entire U.S. population. Maybe 2013 will not be to dis-similar to 2011/2012 with macro risks abound causing volatility in U.S. equities.
Enis: I have no doubt that the Chinese property bubble is of historic proportions, and its bursting would cause massive economic consequences in all asset classes around the world (and major social consequences in China). But this bubble has been known for years now, so developing a trading thesis around it is in large part about timing.
My main takeaway from the 60 Minutes piece was not the actual story (which I had already heard and seen many times), but the simple fact that the Chinese government allowed a prominent American program such access to the developments and to the people involved. The new Chinese administration actually seems resolved to curb property speculation, and using the foreign media to discourage more speculation is just another tool. The risk going forward is that the Chinese government succeeds too well, and their soft landing becomes a very hard landing indeed.
MorningWord 3/1/13: Last night CRM reported eps (.51 vs .40 consensus, but .08 of the beat comes from an r&d tax credit) and revenues ($835m vs $831m consensus) that beat expectations, and guided Fy 2014 to inline with consensus. By all accounts the quarter looked good on most metrics from op margins that came in 1% higher than expectations, and strong bookings that included a very healthy large order closing rate in Q4. Yesterday afternoon, prior to the results I placed a low risk, potentially high reward bearish trade in Apr expiration, that would benefit from a move in line or greater than the implied 8% move, but, it was not solely predicated on the move happening today.
Most readers know I often look to be a tad contrarian in these situations, and CRM is not the sort of stock that would make it on my Buy list given its current growth profile and valuation. So I would tend to look for structures that offer a good risk reward in front of potential inflection points, and that was the plan with yesterday’s trade (from yesterday’s trade post):
Trying to pick tops is difficult business, but trying to spot inflection points is another thing all together. On tonight’s call, if results show fiscal 2014 consensus estimates to be a tad optimistic, the stock will likely be re-rated, similar to the revelation that AAPL investors had in the last 5 months that the company was facing deceleration in earnings and margins. The difference btwn CRM is that the stock is priced as if they will continue to grow sales and earnings at 20% plus a year for the next ten years.
So what did last nights call actually show? As stated above, it showed what I would call their ability to hold on to their first mover advantage for now. The guidance that they gave for the current quarter was actually a tad light to expectations, and the full year guidance bulls will argue will prove to be conservative.
Wall Street analysts are overwhelmingly positive on the stock with 35 Buys, 3 Holds and 4 Sells, things feel about as good as it gets from a sentiment standpoint.
The stock is up ~4.3% in the pre-market and I have a sneaking suspicion that the quarter and guidance wasn’t the sort of masterpiece that will drive incremental buyers a few % from all time highs, and if I were part of the 10% short interest I might not exactly being scrambling to cover. Earlier in the week another high valuation, semi-controversial stock, PCLN had a large implied move that it under-performed on its own strong quarter, and has since spent the next 2 trading days filling in the earnings gap, maybe its wishful thinking, but if I saw this sort of price action in CRM today, the stock could set up as a decent press on the short side.
So here is the MAIN ERROR IN MY CRM TRADE, (as I said I wasn’t trying to pick a top merely an inflection point, but in hindsight), I SHOULD HAVE JUST WAITED TILL AFTER THE RESULTS WERE OUT AND PLACE MY TRADE WHETHER THE STOCK WAS UP OR DOWN 4%.
I was risking less than 1% of the underlying to catch the inflection over the next month and a half, but now I am stuck with a position where the strikes may be to far out of the money, I will need to dig myself out of a hole.