The Reformed Broker
• the Standard & Poor's 500 trading at more than 8% above its 52-week exponential moving average
• the S&P 500 up more than 50% from its four-year low
• the 10-year Treasury yield higher than six months earlier
• the Investors Intelligence's bullish advisory sentiment over 47%, and bearishness under 25%; in the latest data, the numbers were 47.9% bulls and 26.6% bears
WHEN ALL THOSE CONDITIONS OBTAIN, as they very nearly do now, look out below. In 1973, a 48% collapse ensued over 21 months, and in August 1987, there was a 34% plunge over the following three months. Since that ancient history, losses of 10% to 18% ensued in the 1998-2000 period, followed ultimately by a plunge of more than 50% in the dot-com bust of 2000-02. And in 2007, a correction of 10% culminated in the 50%-plus plunge of 2007-09 (see chart).
Forsyth pairs Hussman's words of caution with the even more cautious take from Walter Zimmerman, who's looking for a serious reversal and breakdown to come this week.
I don't know Zimmerman's track record of these types of prognostications but I know that Hussman is typically over-cautious (he hedged against the dotcom blowup 12 years ago but then also sat out the bull market of the last three years).
Regular readers know I've been hating on Groupon ($GRPN) since before the IPO, I made it pretty clear that I was not a fan of the model or the opportunity for a daily deals stock. I had some great intel from merchants who used the service and salespeople from competitors about why this should never have been a multi-billion dollar company.
Morningstar put out a piece of research on the stock this morning that I thought cut right to the heart of the matter - the barriers for competition are effectively zero...
Groupon's Business Can Easily be Replicated
We believe that Groupon is primarily a local e-mail marketing company that is hoping to transform into a local advertising powerhouse. This potential opportunity is not lost on the market, as companies including LivingSocial, Travelzoo (TZOO), Amazon.com (AMZN), OpenTable (OPEN), and Google (GOOG) have launched daily deal services as well. Although Groupon has incredible brand recognition, it's not clear to us why merchants would avoid using the competition, particularly if they receive other services or better terms.
Thoughts on the Economic Moat
In our view, Groupon has not carved out an economic moat. We cannot attribute any of our five defined sources of an economic moat to Groupon's business at this point in time:
Customers and merchants have no switching costs. Consumers typically subscribe to multiple e-mail lists, and we believe that the value of the deal and the quality of the merchant drives the transaction, not the company that e-mails the offer.
The firm also does not have a cost advantage. The company has built an e-mail subscriber list and runs a call center to call local businesses to run "Groupons." Unless the company can develop a low-cost way for "self-service" advertising by local merchants that is superior to the competition, we cannot envision any cost advantage that Groupon could construct. Furthermore, we think that competitors who sell other ad products to the same merchants may put Groupon at a competitive disadvantage.
The firm has no meaningful intangible assets, and it doesn't enjoy network effects. Groupon is essentially a sales agent and intermediary between local merchants and consumers. Consumers are free to use competitors such as LivingSocial, Amazon Local, or Travelzoo's Local Deals and gain little to no benefit from using Groupon repeatedly. Moreover, LivingSocial has shown no signs of slowing growth although it has a smaller base of merchants and customers.
The rest of the report concerns valuation and "weak economies of scale. It's behind a paywall at Morningstar but if you want to sign up for Morningstar StockInvestor, it's $109 for the year (12 issues).
One of the time honored traditions of the financial media and blogosphere is to obsess over each quarterly 13F from Warren Buffett's Berkshire Hathaway. Should we sell what Warren is selling and buy what he's buying? What sectors is he concentrating on, which positions is he adding to and where is he trimming?
The bigger question is whether or not there is any value to doing so...
What makes the Berkshire 13F so valuable for investors is that, unlike many hedge funds, he is a looooooooong-term holder, when he gets involved, it is usually for an extended period. Because this is the case, the filing of his positions is not hopelessly out of date even though it comes out 45 days after the close of a quarter.
But can we make money from it?
Chad Cotty may have an answer to that question:
I tracked his major equity purchases going back to 4Q 2009 and determined their returns on the day they were made public, as well as how they performed one, three and six months down the road. I then tracked the S&P 500 over the same time periods as a comparison.
And so it should come as no surprise that after a 200 point sell-off in the Dow yesterday, they're already feeding their unofficial PR spokesman, Jon Hilsenrath of the WSJ, the latest new weapons specs:
Federal Reserve officials are considering a new type of bond-buying program designed to subdue worries about future inflation if they decide to take new steps to boost the economy in the months ahead.
Under the new approach, the Fed would print new money to buy long-term mortgage or Treasury bonds but effectively tie up that money by borrowing it back for short periods at low rates. The aim of such an approach would be to relieve anxieties that money printing could fuel inflation later, a fear widely expressed by critics of the Fed's previous efforts to aid the recovery.
The dollar was immediately smashed on that news - and here's how the commodity markets reacted...
Crude-oil and gold futures traded higher Wednesday, leaving behind their anemic floor-trading opening as investors cheered a Wall Street Journal report that Federal Reserve officials are considering a new type of bond-buying program. Gold for April delivery rose $15, or 0.9%, to $1,686.90 an ounce on the Comex division of the New York Mercantile Exchange. Crude for the same month's delivery rose $1.10, or 1.1%, to $105.80 a barrel on Nymex.
The Fed is not playing games, guys, they want this market rolling higher. Fight it at your own peril.
Wells Fargo's Chief Economist is out with a look at the skills mismatch between what manufacturers need versus what the labor force in America can actually do. John Silvia notes that this mismatch is nothing new even as it seems more and more pronounced.
Further, his research finds that, like most things, the disconnect is a regional thing - certain parts of the country have fared better than others.
Regions That Successfully Countered The Trend
The decline in manufacturing employment however has not been even across regions of country. In fact, the West and South both have seen very strong manufacturing job growth over the past decade. In the West, producers of technology products have added jobs while the South has benefited primarily from the relocation of facilities from higher-cost producing states in the Midwest to the lower-cost South as well as strong foreign direct investment in industries such as the auto industry. This trend however, is beginning to shift as the cost differentials between the U.S. and other nations such as China are eroding pushing non-durable manufacturing overseas while keeping many specialized, quality focused durable manufacturing in the region. However, the firms staying in the region continue to adopt more technology to stay competitive and thus today’s manufacturing workers need to continue to improve skill levels.
One of the big surprises in this endless balance sheet recession is that we haven't seen a lot more migration a la the Depression where people went to where the work (or the charity) was. Especially given the disparity in regional economic strength this go-round.
DISCLOSURE: I'm not long $LNKD nor am I recommending anyone buy it - you do you, I'mma do me.
I'm not a fan of the LinkedIn site or service and my lack of interest in connecting with people or researching people with it probably kept me soured on the company's investment potential when it went public last spring. But just because I have little use for it, doesn't mean it's not going to be an important company with a bright future - I'm a sample size of one after all!
So far, I haven't missed much with my knee-jerk bearishness, the name has essentially round-tripped to it's post-IPO highs.
So I'm taking a new look at the stock and I'm liking almost everything I see strategically (not so much on current valuation, but that's the way with these things - you're either playing that game or you're not). LinkedIn is being underestimated as it makes one clutch acquisition after another. I'm not bullish on the stock from today's price just yet - but I am getting bullish on the story (an important precursor).
What the company is becoming is the Google of the Professional Experience - not just the Facebook of Resumes as many of us have derisively sneered in the past year. I want you to consider their latest foray into email, via a nugget from Byrne Hobart at Digital Due Diligence:
LinkedIn’s strategic brilliance is under-appreciated. At every stage of the recruiting process, LinkedIn is either commoditizing (“sourcing” a first-round list of candidates has gotten an order of magnitude easier in the last five years), or cashing in on (cheap sourcing means higher demand for contacting prospects, for which LinkedIn is happy to charge). They’ve also extended into company profiles and careers pages. And of course, they’ve become a superset of the résumé.
Their acquisition of Rapportive fits into this strategy nicely. Essentially, Rapportive saves you the Google search or Gmail search you’d use to figure out how you know (or should know) whoever sent you the email you just received.
(This is a clever acquisition for another reason. LinkedIn nearly owns searches for full names; a decent fraction of those searches are likely catalyzed by cold emails or emails from tenuous connections. By skipping the Google search, LinkedIn is cutting off Google+’s opportunity to steal the click. Expect to see LinkedIn push Rapportive heavily to new users.)
The problem here for bottom-up fundamental analysis guys is that the valuation is banoodles - $9 billion in market cap over an expected $1.28 billion in expected revenues next year. But this is not so far-removed from where the group trades (or sells for) at this stage in the game.
Moreover, I think LinkedIn represents a property that could probably find new ways to monetize the massive network and data they have every month. The fact that they've been in business so long (for a Web 2.0 company) gives investors the added confidence that there is a real asset and managment team here, not just a fad. Finally, I'm certain that the 8 times revenue valuation also has something to do with the possibility that Facebook could easily use it's new currency later this year to simply acquire LinkedIn rather than attempt to replicate what the company already does so well. Facebook's going to need non-banner ad revenue at some point, the LinkedIn model affers that.
Anyway, I'm not in the stock now - but I'm no longer sneering at it either. I think there is something big here and it's definitely on my watch list.
Bloomberg's doing an interesting show at 8pm each weeknight when most of financial television is done for the day. Bloomberg Rewind, which began in November 2010, is really starting to hit its stride.
They're repackaging the most important interview clips and soundbites of the day (from Buffett, Stockman, Faber, Biggs, Cooperman, Gross, El-Erian) while host Matt Miller is highlighting and discussing the stuff you may have missed with a different on-set guest each night.
This is helpful for people like me who have no TV in front of them during the day or don't have the time to watch hours of nothing just to get to the kernels of importance that tend to occur when smart people are interviewed about key topics. Matt Miller & Co comb through the best of each day and condense it all into something fun and digestible every night.
I sat on set the other night for a taping of the show, which happens from 6:30 to 7:30 so that it's ready for air at 8 o'clock. Prior to the fast-paced filming itself, Matt and I had a chance to talk about the financial media in general, where it came from and where it's going.
Matt's been a Bloomberg reporter for 12 years, he spent much of that time over in Germany and then in London. This gives him an added depth of understanding when it comes to the ubiquitous topic of the European crisis. His first appearance on TV for Bloomberg was almost accidental - he was overseas and the producers called up, they needed someone to go to for a segment. It was one of those "Sure, I'll give it a shot" moments that can sometimes change lives and send people's careers in all sorts of unexpected directions.
Fast-forward to now and Matt is a daily fixture on TV, taping live from the New York Stock Exchange and Television Soundstage (NYSETS) along with the Rewind show each evening.
Joining Matt each evening to replay these great clips and add commentary are a revolving menagerie of regulars like David Kotok and Brad DeLong. If they ever decide to have someone under 45 years old on, you might even see me and some of my friends pop up one day.
I've just added Matt's show to my DVR so I can catch up with each day's best interviews and moments at night while everyone else watches Bones or whatever it is that non-obsessive Wall Streeters do after work. You should check the show out too.
And just in case he's hoping most people have forgotten about this already, here is Matt at a New York spa last week getting manicures and pedicures and all kinds of treatments for I'm not sure what reason. Don't hold it against him though...
McDonalds ($MCD) is coming off one of the most amazing runs in terms of innovation, profitability, stock price performance and growth in the company's history. They are the envy of the entire restaurant sector and one chain is looking to step to the plate. USAToday has a feature on Taco Bell indicating that the also-ran chain may have been watching $MCD and taking notes.
Taco Bell has been the weak link in the YUM Brands ($YUM) empire for a decade now, competing (not well) with sister brands KFC and Pizza Hut for attention and affection. Sales slumped in 2011, prior to that there was the e.coli outbreak, the accusations about how only 35% of the meat is actual meat and on and on.
But this year the brand is going on offense. They're launching a Chipotle-competing fresh menu called Cantina Bell along with a new product that will probably take the country by storm - a taco in a Doritos-flavored shell produced in conjunction with Frito-Lay. In test test markets, the Doritos Loco Taco is selling like, well, Doritos. They're also ready to re-attack the breakfast daypart, their fourth attempt.
I bring this up because I don't believe that Taco Bell momentum is being priced into the 2012, 2013 base case for YUM Brands. I have no position in YUM just yet because it simply will not pull back for even 30 seconds - the company is crushing it overseas with or without a recovery of the domestic T-Bell business (which could be the icing on the cake for a true homerun).
To get up to speed on what the Taco Bell brand is up to, run, don't walk, to the profile in USAToday.
I think the performance of so-called hedge funds as a group wouldn't be so roundly mocked and scrutinized if:
a) there weren't so many of them and...
b) their compensation wasn't so incredibly disconnected from what they've been able to deliver and...
c) they actually lived up to their nomenclature and actually hedged
But there are like 8000 of them and they charge more than double what traditional asset managers are able to and not only do they not hedge - it turns out that a great many hedge funds are really leveraged, highly concentrated vehicles that put on big positions and lever up to magnify them in the quest for a grand slam. There's nothing wrong with a fund's portfolio being constructed that way if that is the manager's strategy - but let's please stop referring to that as "hedge funds" lest Alfred Winslow Jones continue rolling in his grave until he bores his way to China.
Here's a stat you may not have seen in your post-holiday comings and goings, but it is one that should never be forgotten...
From FT Alphaville:
Many hedge funds are well below their high watermarks, meaning that they can only charge investors management fees, which at around two per cent is only enough cookie money for a year or two unless one is a ginormous fund. According to Credit Suisse data cited by the Economist, 67 per cent of hedge funds were below their watermarks at the end of 2011.
While returning cash in the face of adverse markets may be the noble thing to do, there is also the risk "that high-water marks could skew funds’ investing decisions. Managers who have not earned a performance fee in years could take bolder bets to get back into the black."
Indeed, the FT pointed out in January (using the same Credit Suisse dataset) that leverage has crept up ever so slightly to 2.5 times, off the post-crisis low of 2.4.
To recap, years like 2011 are the exception not the rule - high volatility and a year of massive swings is an almost impossible climate for a traditional asset manager to navigate more than in a middling fashion. Guys like me with clients planning for retirement are tasked with a mission of getting out alive and in one piece. But hedge funds were supposed to have been able to thrive in a year like 2011. That is how they typically present themselves and the exploitation of volatility along with non-correlated returns is the assumption for most hedge fund investors.
When looked at in this context, it is impossible to escape the conclusion that hedge funds as an asset class have just failed their final exam.
Here at TRB we root for everybody to find their way into successful investments and investment vehicles, no hating is the primary rule. But I mean, come on!
The Boss is back with a new album coming March 6th. Bruce and the E Street Band absolutely killed at the Grammy Awards, it might have been the first time I'd seen them without the Big Man but they certainly didn't disappoint.
Here Bruce talks to Rolling Stone about his experimental new record:
Two years ago Bruce Springsteen told Rolling Stone that he had just written his first song about a "guy that wears a tie." The songwriter had spent much of his career writing about characters struggling in tough economic times, but the financial crisis convinced him it was time to write about the people and forces that brought America to this ugly point.
The result was Wrecking Ball, a scathing indictment of Wall Street greed and corruption and a look into the devastation it has wrought. "This is as direct a record as I ever made," Springsteen tellsRolling Stone. "That's with the possible exception of Nebraska, which this record has a lot in common with."
The stark subject matter is paired with an experimental sonic palette that Springsteen created with producer Ron Aniello. "The record basically started out as folk music – just me and a guitar singing these songs," says Springsteen. "Then Ron brought a large library of sound that allowed me to explore – like maybe a hip-hop drum loop or country-blues stomp loop. The actual drums came later. There was no preconceived set of instruments that needed to be used, I could go anywhere, do anything, use anything. It was very wide open."