MORNING BID – The Cleveland Administration in the market

Apr 2, 2014 13:43 UTC

It took the market a little while to get the full measure of the day’s biggest economic news. (And no, it wasn’t the shout-fest on CNBC that seemed to have resulted in the delaying of an IPO and one of the first real reckonings among many people about the ramifications of high-frequency trading.)

But it seems to have truly settled in now: Car sales were up big in March, to a seasonally adjusted annual rate of 16.3 million units. That’s better than expected, and it’s one of the first big data points that lends credence to the idea that there was a real constraint linked to winter weather that was the worst in about 13-14 years.

With all things market related, it’s the future that matters, and that’s what allowed the S&P to push past its most recent level for its first close in the ‘Grover Cleveland administration,’ as blogger Eddy Elfenbein pointed out, pushing past Chester A. Arthur for the first time (that’s 1885 – this is a bit too ridiculous to further, so I’ll stop here).
The gainers were once again, technology, with an odd mix of leadership between a few big momentum favorites turning it back around again (Priceline, TripAdvisor), and some older tech names getting a bit of a boost like Cisco Systems, helped by it being its ex-dividend day, and Hewlett-Packard, which is just sort of old.

And that kind of puts us at a crossroads. Michael O’Rourke of JonesTrading suggests we could see a breakout after a month of churning in this market, though it’s possible the day’s gains came from some beginning-of-month flows into equities as investors allocate funds in that direction. ETF flows per Credit Suisse show lots of money headed in the direction of large-cap stocks – $6.4 billion out of the $7.5 billion on the week – with the biggest outflows out of healthcare ETFs, not exactly a surprise given the selling in biotech last week.

Now then, on the high-frequency trading (HFT) issue. Felix Salmon points out that the fervor over Michael Lewis’s book comes at a time when HFT action has diminished somewhat and the money being made isn’t what it was a few years ago.  But critical mass takes a while on these things, and a Lewis book seems to have turned out to be a catalyst for discussions of both the fairness question and how it relates to the underlying technology: Is this skimming or the way these firms provide liquidity (though one would argue who has asked them to act as an intermediary in some of these cases).

It seems to have thrown a monkey in the wrench of Virtu Financial’s IPO as well, at least for the time being. The times have changed – when smaller shops were doing the bulk of this activity and hitting other banks in their prop trading operations, it seemed like it was in a weird area and the nebulous definitions of what HFT did in the market didn’t move anyone to act, despite books from the likes of WSJ’s Scott Patterson or others. Things seem to be moving another direction now — and the old defense, that the HFT world provides liquidity and is totally benign (or worse, the knee-jerk “free markets gotta be free” assertion), isn’t enough. Institutions may be the ones most affected, and the concerns people have are there even if, as Salmon notes, the idea that Greenlight’s David Einhorn qualifies as the “little guy” doesn’t quite pass muster.

MORNING BID – Crushing It

Mar 26, 2014 12:48 UTC

Is King Digital Entertainment the next Zynga or not? The markets may not find out with today’s first day of trading in the London-based company, but it will provide a bit more context for those eager to build some kind of “time wasting” index or something like that. The King IPO has other gamemaker companies waiting in the wings at a time when there’s been a high volume of IPOs this year coming from unprofitable companies – according to Renaissance Capital, the IPO research firm, 66 percent of this year’s 53 IPOs were unprofitable names, though Kathleen Smith, principal at the firm, points out that if you clear out the biotech names, just 37 percent are those that do not yet have earnings. (Whether this is a good argument or not is another matter — witness the trading lately in the biotechnology shares overall, which have been pummeled in the last few weeks.)

The obvious reference point for King is Zynga, which has lost about half of its value since the company’s IPO in 2011 that valued it at about $8.9 billion. And things did well for them as long as people were interested in Farmville, until they weren’t. Right now, Candy Crush is the current darling, drawing in more revenues on Apple’s App store than any other in 2013, and, well, it just happens to garner three-quarters of its revenue from this game (well, 78 percent, actually). These kinds of fads tend to fade, though, putting pressure on the company to keep filling the void with some kind of new version or new product, not an easy task.

The company’s registration statement helpfully points out that this game, plus Pet Rescue Saga and Farm Heroes Saga together account for 95 percent of total gross bookings — but really, that’s not exactly a three-legged stool here, as we can see well enough. And that leaves you a model of finding a way to make the most profitable activity ever that you can use to while away the hours, for infinity forever (or at least 20 years or something like that). Because time-wasting just really isn’t much of a business model. Yes, film and television qualify as leisure, but production companies don’t bank it all on one program, and besides, this ain’t Game of Thrones we’re talking about here. A better comparable would probably be the bowling stock bubble of 1961 when Brunswick and AMF shares went kinda nuts on the idea that Americans would be bowling for two hours a week, every week. Yes, really. BOWLING.

The summary offering puts it well enough by reiterating its biggest problem – lots of competition. “We face significant competition, there are low barriers to entry in the digital gaming industry, and competition is intense,” they wrote in their F-1 registration. (They’re so worried about competition they said it twice in one sentence.) They also point out that people might, well, find something else to do with their time (like go bowling). So investors have a right to be wary – while Renaissance’s US IPO Index has done well for itself over the last three years, gaining 52 percent, it is down 4.7 percent over the last month, trailing the S&P 500 pretty badly.

MORNING BID – Seeing the Oracle

Mar 18, 2014 13:05 UTC

The markets are still a few weeks away from the earnings season (didn’t the last one just end?) but there’s an early – or late, if you will – precursor to all of that with Oracle’s results due out after the closing bell on Tuesday.

Whether it’s a harbinger of what to expect for technology companies remains to be seen. But as a company with substantial revenue coming from the Asia-Pacific, it’s going to be closely watched to see what kind of toll slowing growth in China has taken on demand for technology goods for companies operating in the region in general.

The trends, of late, haven’t been all that fantastic. Year-over-year, new software licenses and cloud software subscriptions revenue fell to $410 billion in its most recent quarter, down 17 percent from a year earlier, and revenue from the sales of hardware systems products wasn’t much better, dropping 10 percent from a year ago.

From a year-over-year perspective, software licenses/cloud subscriptions revenue has weakened for four straight quarters. Hardware systems revenues had already been struggling, but overall, for the six months ended in November, the software/cloud segment was at least helping Oracle boost overall revenues, if only by two percent compared with the previous June-November period.

That’s good, but the lack of pronounced growth has resulted in lower margins, another sign to watch headed into the release. On the other hand, the management team sounded rather optimistic at the last, most recent conference call. It expects to keep boosting those subscription revenues, even though the overall growth rate in most parts of the world has been lackluster. If it works, though, that will boost margins for Oracle, which saw its after-tax margin slip in its most recent quarter from a year previous.


Oracle’s cloud business will take more than enough time to grow given the competitors have strong offerings. and Workday have specific cloud offerings, which will make it tough for oracle to compete with.

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MORNING BID – Losses continue, and other concerns

Mar 14, 2014 12:27 UTC

The ructions in China have had an interesting effect on commodities prices – good for gold, crappy for copper. And more developments in this area should be expected as the market deals with growing weakness and the threat of a deflating credit bubble coming from the massive lending to various sectors in the world’s second-largest economy. Copper has been rather weak of late, but the broader CRB commodities index is actually much higher on the year. This is the biggest divergence since the eurozone debt crisis in 2011, points out Ashraf Laidi, the chief global strategist at City Index in London.

Again, the recent selling has had to do with the Chinese companies using the metal (and iron ore, too) as collateral for cheap dollar financing. So we’ve hit a weird storm here – weak yuan that makes those loans more expensive, and copper falling too, and again, that also messes with those loans. Put that together and you have a few markets moving in directions that are not beneficial to a major counterparty in several of them, for one, and resulting in the kind of activity that tends to turn into a vicious cycle.

More copper weakness, more yuan weakness, wash, rinse, repeat. Add a slowing macro economy and it’s a recipe for some more problems down the line. It’s also not good for other risk assets, even U.S. stocks, and part of the reason bonds rallied on Thursday. The growing problems there may be a reason why the Fed’s custody holdings data on Thursday afternoon showed foreign central banks dumped more Treasuries this past week than at any time – $104 billion, almost triple the previous record – as banks prepare for liquidity problems.

And it’s why things look like they’re going to be a bit ugly on Friday following more losses in Russia (down 5 percent) and in Asian markets. That’s not all, though. More defaults on trust products in China are expected. These started earlier in the year, where these big trusts that were sold to investors guaranteeing big returns backed by loans to coal producers didn’t repay investors on time. “The number of defaults are likely to accelerate in coming weeks as more Trust funds are expected to mature starting in April,” wrote Robbert van Batenburg, strategist at Newedge. He points out how intertwined these companies are in differing industries, with the common link being that they’ve all promised big returns for investors that now seem like they’re not going to come to fruition. Sound familiar? “If these problems in China escalate, a flight in gold and Treasuries is likely to ensue,” van Batenburg wrote. Well, that’s what we’re seeing again on Friday; the safe havens get the benefit while other markets suffer.

A bit of the reverse is happening in gold, which is predictably benefiting from the safe-haven allure of the yellow metal at a time when tensions are also rising between Russia and Ukraine and as a possible response from the West looms if Russia annexes the Crimean region of Ukraine (even if they want to go).

MORNING BID – Bubble, bubble

Mar 5, 2014 14:35 UTC

Opinions vary right now as to whether we’re seeing the return of bubble-like qualities across a broad swath of the market or just in select names (which really isn’t a bubble, then, bubeleh, just overvalued stocks).

With the Ukraine issue subsiding a bit, investors had a chance to sink their teeth back into the market, including a number of areas that seemed ripe for buying, like small-cap names, which saw a very strong 2.6 percent increase on Tuesday that outdid the larger-cap stocks.

Fund flows have remained strong to smaller stocks, and the overall valuation picture is still somewhat complicated here, as lower interest rates have tempered concerns about reduced liquidity (it’s a strange thing to see the safe-haven play into bonds not quite recede, while stocks shoot to the moon. The best of both worlds, until it ends.)

Naturally there are skeptics. Mike O’Rourke of JonesTrading has been a consistent one for some time, and he went all-out in a late note, pointing out that the double-levered long Russell ETF had 17 times its average daily volume.

That, he said, is “either some short being covered or a major reach for risk,” also noting the ongoing moves overnight seem correlated with dollar/yen and the bond market. Again, this is more a signal of a risk-on/risk-off environment than one operating on expectations of economic and earnings growth.

With the S&P 500 once again at an all-time high, it’s hard to argue that point, but let’s give it a shot anyway. The bull case would be that the weather will recede as a true problem and that growth and overall cash flow is good enough – and that low yields still make it complicated to invest in other asset classes.

It’s not a stellar argument, particularly when many of the more bullish strategists still also don’t see the S&P gaining much more than a few percentage points in the rest of 2014.

One outlying argument came from Morgan Stanley’s Adam Parker, who points out that even though about 40 percent of tech stocks have a price-to-sales ratio that exceeds 5 times, that’s still not close to the tech-bubble peak, when it was about 80 percent. Admittedly, this figure is at a five-year high at a time when people continue to fear markets rolling over somehow.

Still, the big gains in the S&P and Russell suggest a possible “blow off” move, according to Jason Goepfert of SentimenTrader. He says moves like this, in the past, have been at the apex of a rally – especially as the small-caps and biotechs moved up sharply, and they’re the kind of high-beta outperformers that go nuts just before the deluge. So there’s that.

Longer-term strength can follow moves like this, often after some short-term weakness, however.

MORNING BID: Bitcoin, gravity, and “Gravity”

Feb 28, 2014 14:01 UTC

United States markets have hit a relatively calm period. Where problems in Ukraine and Russia are giving a modest safety bid to treasuries, the U.S. stock market continues its climb after a better-than-expected earnings season, though concerns remain over the weather’s impact on some recent weak economic data.

The more interesting action is taking place in the world of bitcoin, where the biggest exchange Mt. Gox, filed for bankruptcy after several months of dwindling as the most influential exchange in this fledgling market.

Reuters has a nice story from Emily Flitter and Brent Wolf that explains how the company and its CEO remained a champion of the business even as it started to lose its edge.

Proponents of the bitcoin phenomena have noted that with this downfall, there are at least no bailouts to be had. But that speaks more to the tiny size of this market then any ideal relating to bitcoin’s disintermediation from the rest of the financial markets. In fact, the growing pains we see in the sector will only intensify as regulators take a closer look at the digital currency.

It was inevitable that someone would eventually find a way to put together some sort of indicator that talked about the Academy Awards and their effect on the movie studios in question.
CMC Markets ended up doing just that and they found a way to really lay out the fact that the studio that has the Best Picture winner would get an extra boost to its stock over a period of time following the award.

“On average, the studio most closely associated with the Oscar winning film has outperformed the sector by 1.7%,” CMC analysts wrote, referring to its March performance. That could bode well for a number of studios, although this column thinks Time Warner will be the ones smiling when Warner Brothers’ “Gravity” walks away with the crown on Sunday.

MORNING BID – Making it up on volume

Feb 4, 2014 14:50 UTC

Monday was the worst day in the stock market since June. And while you can go through all the machinations and point out that the market is still down just 5 to 6 percent from its record high – and you’d be right – that doesn’t really translate to a strong environment at this time.

Not when the selloff continues through to overseas markets, with the Nikkei down 4 percent, Hong Kong losing more than 2 percent and ending at the day’s lows, and Europe down as well. So far the US market is experiencing something of a dead-cat bounce, but we’ll see how long that can last.

Part of the problem comes from the ignominious statistics that arrived with Monday’s selloff, most of which related to volume. Specifically, just a shade under 3 million E-mini futures contracts traded on Monday amid the sharp decline in the S&P, one that saw big selloffs in the transportation stocks (along with everything else – just 10 stocks ended the day higher).

That one-day volume is the biggest for the E-minis since Feb. 25 of last year, so that registers as (to use a genteel term) a puke-fest, or rather, a “distribution day,” a sign that sellers are right now much more motivated than buyers. A chart of the last several days of futures trading shows the volume has been higher on the down days and weak on the up days. (Furthermore, volume in CBOE VIX futures hit an all-time high in January, so investors were at least buying cheap protection against a market decline.)

The market’s predilection has been to react more harshly to the bad news than good – another indicator that right now, equity managers see stocks as fairly valued, given the economic environment and the reduction in Fed monetary stimulus.

Earnings season in general has been better than expected – the growth rate has ticked up to about 9.7 percent for the fourth quarter, and revenue growth is at 0.9 percent – better than expected, anyway. But the market’s not taking any solace from this (downgraded estimates for all of 2014 have something to do with it) – instead reacting harshly to a plunge in new orders in the ISM survey and lackluster car sales figures, even though weather clearly had an effect.

The declines Monday might be the beginning of the end of the selloff – a few more days like this and there might just be enough in the way of distribution days to where investors have truly had enough. But we came into the year at valuation levels higher than the historic norm (pick your valuation stat, be it forward P/E ratio or the cyclically adjusted P/E ratio, if you like), and so several months of churning activity wouldn’t be a surprise, nor would it be seen as unhealthy.

What isn’t clear is how much the market will continue to take cues from the weakened emerging markets, which haven’t finished with their selling, either.

MORNING BID – Microsoft and opportunities

Jan 23, 2014 14:01 UTC

The parade of earnings releases continues Thursday, with bellwethers ranging from McDonald’s to Microsoft on tap. Discount airline Southwest was out before the bell, and Starbucks, Intuitive Surgical and Federated Investors are all due after the closing bell.

The technology industry’s equivalent of a boring utility, Microsoft is more of a candidate for lively activity this time around, as the software giant looks for a new chief executive, a task many investors had expected to be done by now. The company’s sales of its Windows product are expected to have been weak in the fourth quarter and its new Xbox also left some people nonplussed.

How much a new CEO is worth to a company is debatable. Those that look good from an initial glance can turn into a Ron Johnson-at-J.C. Penney-style disaster, while less-heralded types can do a lot without great fanfare. Either way, buying or selling the stock based on such an announcement is the functional equivalent of grading a football team’s draft picks on the day of the draft.

Whomever ends up taking on the job might be looking at an interesting opportunity. The stock, which seems condemned to forever trade between $28 and $36 a share, looks undervalued from Starmine’s perspective, which puts an intrinsic value of about $44 on the shares. The company falls squarely inside a theme Goldman Sachs has been noting for some months – if capital expenditures pick up in 2014, Microsoft is one of those companies that would be expected to spend more money.

It has, on balance, shown pretty high returns on invested capital over the years, but of late, it’s been spending less. Goldman puts the ratio of its capex spend to depreciation at 4.8, compared with a five-year average of 7.5. It’s been too content, instead, to reduce its share float, gobbling up shares through buybacks, paying big dividends to investors, and little else. Additional buyback authorizations would be a surprise for this report after a big one in September, but any commentary on that is probably welcomed.

Even in a world where stocks far and wide are outstripping what many investors see as what they’re worth, Microsoft stands out: A forward price-to-earnings ratio of 13, lower than the overall market’s 15-and-change and below the company 10-year median of 13.6.

That’s a median that encompasses some leaner years for the Redmond, Wash.-company, but the overall profile hasn’t changed too much. It’s managed to hold the line on margins as well, which is saying something, given expectations that margins have definitely topped out by now on an overall basis.

MORNING BID – Netflix, and a bear’s lament

Jan 22, 2014 17:27 UTC

The week opened with the earnings of a number of high-profile corporate names that disappointed investors. Most notable of these was International Business Machines, which really ought to be called International Buyback Machines, given Big Blue’s penchant for driving earnings through financial engineering rather than, y’know, the real kind of engineering.

IBM fell short on revenue estimates, saw shrinking demand in part because of reduced government spending (China’s government, not the US), yet exceeded net income estimates because of – what else – a lower tax rate, now at 11 percent vs 14 pct a year ago.

Margins continue to shrink – the pre-tax margin for the fourth quarter dipped to 25.1 percent from 26.7 percent a year ago. So, in some ways, it’s a microcosm of the recent earnings trend – cost-cutting, relying on government largesse, moving money around, and making per-share earnings look better by just changing the whole “per share” thing.

IBM’s not the only company that mirrors the S&P 500 writ small. Another is Netflix, the streaming media company that was the S&P 500′s best performer in 2013 and reports earnings after Wednesday’s close.

The bear case is pretty much handled by pointing at a chart of the stock rocketing into the stratosphere, looking into the TV cameras, and saying “Seriously?” Which is pretty much how some of the bearish types on Wall Street think of the entire market right now, believing they’re the only sane ones on earth while everyone else is crazy.

But we know how that goes when it goes wrong, and with Netflix, all those bets against it went wrong all year – causing short interest on the name to dip from the mid-20 percent area to a miniscule 0.93 percent of the float, according to Markit, which puts it in ExxonMobil territory.

Analysts expect a gain of about 2 million U.S. subscribers, and Wall Street forecasts net income of $41 million, five times the $8 million it recorded a year earlier.

The expectations at least remain positive, so that’s something. But there’s an irony here – the stock more than tripled in 2013, and from an intrinsic value basis, ranks as one of the worst in Starmine’s greater universe: The $330 price in the market should be closer to $61 a share, according to Starmine, as its forward price-earnings ratio currently stands at about 83, when it warrants somewhere around a 19 P/E.

The idea that the overall market is just as overvalued as Netflix doesn’t quite pass the smell test. You can hear the bear’s lament in the discussion of the broad market just as can be heard in the NFLX discussion – one that waned as the stock kept rising.

MORNING BID – Let’s be careful out there

Jan 17, 2014 13:26 UTC

The first couple of weeks of the year have caused some investors to examine the hyper-bullishness that closed out 2013 – the most successful year for equity-market investing in more than 15 years. Still, a few weeks of softness this year didn’t stop the S&P 500 from hitting a new record Wednesday, however briefly.

Short of the perma-bears, who only see the market as a walking disaster, some notes of caution have rung from those who expect stocks to continue higher, yet struggle through what’s been a mixed start to earnings season.

If anything, the results so far indicate investors are going to have the bull thesis tested, from chipmaker Intel’s middling numbers, outlook for flat 2014 revenue and margins and no sign of that capex everyone had looked for, to the inevitable correction in Best Buy, one of the best performers of 2013 (second in the S&P, with only Netflix exceeding it).

Interactive Brokers strategist Andrew Wilkinson noted in commentary Thursday that the options market never saw the 29-percent drop coming, with some contracts putting a robust 2-percent chance of such an occurrence ahead of time.

On a broader basis, Goldman Sachs strategists noted early in the week that they’re concerned with investor sentiment, hearing many people are looking for further multiple expansion – along the lines of 17 or 18 times forward earnings. And that’s at a time when historical figures suggest price-to-earnings ratios are already relatively high and such expansion would push the S&P into ranges not seen since the tech bubble of 1997-2000.

That doesn’t mean it can’t go higher, but they point out that on a cyclically adjusted price-earnings ratio, the S&P is 30 percent overvalued in terms of operating earnings per share and 45 percent overvalued using as-reported earnings. (Which is all the more surprising, given Goldman sees sales beating the consensus in 2014 – just that it’s not going to translate into gains for equities.)

Even the bulls are a bit on the back foot. Tobias Levkovich, Citigroup’s equity strategist, sees a good year ahead, but without a correction in two years, he cautions that bull markets will still have times where they turn ugly, even for a while.

“Chasing the tape simply on the basis of momentum may not be a good strategy since expecting another 25 percent to 30 percent appreciation in 2014 seems rather excessive,” he wrote this week, “especially with euphoric investor sentiment readings.”

Yes, that means all of you.

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