MORNING BID – On GDP, the Fed, Argentina, and lots of other things

Jul 30, 2014 13:45 UTC

To paraphrase Kevin Costner in Bull Durham, we’re dealing with a lot of stuff here. The U.S. economy did end up rebounding in the second quarter, with a 4 percent rate of growth that’s much better than anyone anticipated – and the first-quarter decline was revised to something less horrible, so investors worried about the economy are a bit less freaked out at this particular moment.

Of course, that still means that the economy only grew 0.9 percent in the first half of the year, and that’s not all that amazing, but the economy in the second quarter grew in areas that matter the most – business spending, consumer spending and to a lesser extent government, which was such a drag on GDP for a good long time that can’t be just ignored. In tandem with the GDP figure, the ADP report said 218,000 jobs were added for private payrolls for July, another strong month that portends a good showing out of the Labor Department figures on Friday. That’s all at a time when the housing indicators continue to weaken, which is still a concern, and some even believe that auto sales have probably hit their apex as well for this cycle, given so much of the buying was based on incentives, but we’ll get better clarity on that on Friday.

The good data overall has given the dollar a jolt, continuing a strong run for the U.S. currency that strategists believe will be maintained for some time now. The euro hit a low of $1.3369 overnight and is at levels not seen since November, and the dollar is at one-month highs against the yen.

The dollar in coming days and months clearly will hinge on data and how the Federal Reserve and bond yields react to it, particularly when you see the differential between U.S. and European rates. Spain’s 10-year note yield dropped through the U.S. rate as of yesterday, and Germany’s annual inflation slowed to a 0.8 percent rate of growth, which should keep the lid on the euro. Net short positions in the euro have been increasing, with nearly 89,000 in short positions among speculators as of last week, according to CFTC data, while dollar/yen short positions are slowly being liquidated, dropping to 53,000 last week from about 82,000 in mid-June.

That’s a notable shift, and similar things are happening in sterling; Marc Chandler of Brown Brothers Harriman said this morning that the dollar is “turning,” with the next technical breach on the euro coming around $1.3325, and he says it could fall to $1.3230. Again, the attractiveness of the U.S. dollar when weighed against super-low European yields should keep some funds coming into Treasuries, so the lower-for-longer argument persists, and money will keep rushing in as yields become more attractive – the two year note is now at 0.57 percent, highest since May 2011, and the CME Group’s Fed Watch puts odds on a rate increase by April at 42.7 percent today versus 38.8 percent yesterday.

Money is also rushing into Argentina’s bonds this morning as the talks continue to head off a default, although that’s a bit of a fuzzy situation. Simply not paying bondholders is the definition of a default, while ISDA’s determinations committee is the one that rings the bell on a default for those holding the $1 billion or so in insurance contracts for those who are holding those things. Talks went through all day on Tuesday, and Wednesday will be the day of more and more and more talks as people keep watching this situation with interest.

Investors who like playing some single-share volatility got their wish with Twitter earnings yesterday. The stock is up more than 20 percent following those results, a relief for those who saw the Netflix, Apple and Google releases all come out and fizzle in terms of big moves in individual shares.

Ryan Vlastelica pointed out in a story yesterday that it looks like investors are still expecting bigger moves in Expedia, Tesla Motors, 3D Systems and others, just because while harvesting, or selling, volatility is ok in a market as steady and dull as this one, when it comes to high-growth shares with much of their value wrapped up in their future growth, one never knows. Twitter ranks in Starmine’s bottom decile when it comes to its enterprise value-to-sales ratio and other ratios, so it’s a big bet on growth.

MORNING BID – To my brother Russell…

Jun 27, 2014 14:35 UTC

The index business is a big business, so it’s not for nothing that the London Stock Exchange agreed on Thursday to buy Frank Russell Co and its Russell Indexes.

Those indexes are benchmarked to more than $5 trillion in index funds and puts the LSE in the third position behind S&P Dow Jones and MSCI in the ETF world as well, a lucrative business that involves using their well-known indexes like the Russell 2000 and its “value” and “growth” versions into a multitude of funds.

The iShares Russell 2000 ETF is generally in the top five in terms of daily trading volume among ETFs, and the Direxion triple-short Russell ETF hovers around the top 10; several other leveraged ETFs linked to the small-cap index are big ones too, and we haven’t even gotten to all of the regular funds that index to the Russell.

With that in mind the market awaits the big rebalancing of Russell Indexes which will cross at the end of the day in a massive trade (Credit Suisse estimates about $42 billion in trading on the “cross,” that is, the moment when everything rebalances all at once in an event that sometimes seems like it should be a Y2K-style debacle, only it isn’t).

Of course, big index desks have been preparing for this for months, with some of the preliminary trading to position for companies they expect to see a bigger weighting even starting as early as January. Credit Suisse notes that some index trading desks likely make most of their profit-and-loss for the year as a result of this trade.

That said, this year’s notable additions to the Russell 1000 index are a bit underwhelming: Tyco has come back to the fold not long after being banished due to domicile concerns, while Ally Financial and CBS Outdoor Americas are also among those coming into the index.

The Tyco addition will produce a trade of about $648.3 million, the largest of the day, and significant buying will also be notable in Twitter and Facebook – $495.6 million and $452.8 million, respectively, ranking them fourth and fifth.

Those two stocks are seeing their share in the Russell 1000 increase as well – explaining the adjustment there.
Some of the trading, meanwhile, will relate specifically to shifts in a stock’s growth/value profile, such as American Airlines, expected to see an index trade worth about $558.7 million, second only to Tyco – the result of it being classified as 100 percent growth, rather than the 58/42 split from last year, according to Credit Suisse.

MORNING BID: Mo-Mo and the Hedge Fund Reckoning

May 15, 2014 13:34 UTC

Who had the mo-mo mojo and who was crushed by the steamroller becomes evident late in the day Thursday when filings from major hedge fund managers – those things known as 13-Fs – are released.

Hedge funds were hit hard by the decline in the likes of Twitter, Tesla, Netflix and a lot of other names that long/short investors had favored throughout 2013 and early 2014, but their substantial decline cut the legs out of a lot of leveraged managers looking to continue to profit on the big run-up in that sector.

Credit Suisse data shows that investors were generally overweight in the momentum strategy (one of a number of style baskets), especially after a stellar 2013, when stocks ran up all at once. They responded in late March by putting on substantial hedging positions to offset some of those losses and as the declines faded, performance normalized a bit more. There are still some believers (there always are when it comes to internet software and biotechnology companies) but still more investing firms are now going the other direction, boosting their short bets in these names and pulling away from the long side.

Many of these managers had maintained long positions in names as they kept falling. In recent weeks, though, investors have instead started to add to short positions – 3D Systems’ short interest is now hovering about 22 percent, up from about 15 percent at the beginning of the year, according to Markit. SolarCity has seen overall short interest utilization rates rise to about 76 percent from about 20 percent at the beginning of the year (oddly with this name, short bets were very high in 2013, but fell off as skeptics gave up in the face of the overwhelming market rally).

Netflix has been a bit less of a heavily shorted name, but it too has seen a modest increase in short bets, from just 1 percent in mid-January to about 10.5 percent as of this week, Markit data shows. It will be interesting to see if there are any that detail sudden reversals in exposure – from long to short – or vice versa.

(One notable exception to this trend is Twitter, which has seen a notable decline from its heavy short interest in recent weeks. According to Markit data, about 90 percent of the shares available for borrow were being used for such purposes on May 6; by May 12 that had dropped to about 50 percent of shares available to borrow. The reason for this is relatively easy to explain: Twitter’s lock-up period preventing certain insiders from selling expired on May 6, so there’s more available to borrow for short bets.)

That the big selloff in these names didn’t spread to the broader market in any meaningful way is the result of a few things. For one, the stocks were overvalued by most conventional and a few unconventional measures. Also, they didn’t encompass large swathes of the market the way the tech bubble did in 2000, and most other sectors of the market have remained steady on expectations for better economic growth, so the rotation to the likes of utilities and consumer staples stocks has helped offset the losses in the big momentum stocks.

And now, it’s gotten to a point where these hyper-growth names are even undervalued when compared with their historic relationship to the market. Hyper-growth names that derive more than 40 percent of their enterprise value from their future growth prospects trade at about a 51 percent premium to the broader market, per Credit Suisse figures. That’s usually 66 percent, meaning this is where buyers could step in…if they wanted.

MORNING BID – Big Mo, Oh No

Apr 11, 2014 12:51 UTC

The question of whether the market is going into a longer, broader correction is one with a lot of wrinkles.

Whether these high-flying stocks are going to come back is the easier question to answer. Why? Because unlike stocks where most of the embedded value is in existing earnings and existing growth – things a person can cling to, like the utilities or telecom – these stocks ride based on their expected growth for years down the line.

And when the unknown is combined with optimism you get price-to-sales ratios of something like 20. So when they cheapen – that is, sell off – those price-to-sales ratios (just another way of valuing a company) they drop to 15 times sales, which when compared with the S&P 500 is still ridiculous (the whole index tends to run around the 1.7 area of late). Which tells you of course that valuation was never the name of this game to begin with.

So with the valuation not there, and investors no longer getting the gratification from seeing stocks rise as soon as they buy them, there’s a couple strikes against them. A third one is supply. Motivated sellers, knowing they bought the stock at higher prices, are therefore champing at the bit to get out of positions if the market surges to a level they’re satisfied is enough to either lock in profits (if they’ve been in a while), get out at even (if they bought recently) or get out with losses because they know they’re screwed. Because, make no mistake about it, people who bought these high-flyers this year are underwater, sometimes seriously so, and unless sentiment does a complete about-face, these “investments” suddenly don’t look like so much fun to own. Broken momentum stocks are an ugly thing – just ask those who rode shares of Crocs into oblivion.

How are we so sure of this? Using volume-weighted-average price data (and a big tip to Mike O’Rourke of JonesTrading for cluing us in on this). Using Datastream, we found that some of your momentum favorites have been on average purchased at much, much higher prices this year than they stand now.
A group of 24 big-gaining names with most of their value wrapped in future expectations, as identified by Credit Suisse, have disappointed those who jumped in this year hoping for lots of gains.

We won’t go through all 24 here, but here are five favorites, listing the VWAP, or average price investors have paid this year, along with Thursday’s closing price, and the difference between the two:

  • 3D Systems $71.90 $48.78 -32.2%
  • Twitter $56.81 $41.34 -27.2%
  • SolarCity $71.17 $55.13 -22.5%
  • Workday $94.28 $75.62 -19.7%
  • Netflix $385.91 $334.73 -13.2%

Not much to like there at all. On average, investors in Twitter in 2014 are down 27 percent from where they bought the stock, and it’s not even as if a 27 percent gain will get them to break-even - at $41.34, that stock now needs to rise by 37 percent to get back to this break-even VWAP level.
That’s a tall order, especially when sentiment is moving against the shares and hedge funds are correcting themselves from being more overweight in momentum than they were any of the other style factors that strategists measure (which include things like beta, volatility, earnings yield, dividend yield, and a few other metrics).

If there was one area that wasn’t constrained by the hedge fund managers, it was momentum – thanks to a rosy 2013 that many figured would just roll on in 2014. It’s been anything but that. Now, some strategists are warning that earnings are the next point of measurement and sure, that’s true – but that’s more for companies within a small range of where most think they’re valued. These stocks are different – the forecasts for growth over coming years vary wildly, because with names like this, things are just inexact (and even more so with biotechnology names, which are frequently all-or-nothing stocks).

Momentum works two ways – and now it’s working in the wrong direction for the bulls.

from Ben Walsh:

No, it’s not secret – a guide to Twitter’s confidential IPO filing

Ben Walsh
Sep 13, 2013 17:54 UTC

Twitter filed for an initial public offering: we know this because the company tweeted so, not because the registration documents, or the company’s financial disclosures, are publicly available. Twitter didn’t even have to tweet what it did: its not legally required to say that it has filed registration documents with the SEC (it did that voluntarily).

When did the process of filling IPO documents become confidential?

Here’s how the JOBS Act alters the IPO process:

  • Its changes only apply to companies with less than $1 billion in annual revenue. Anything more, and the standard IPO process applies: registration documents, including a prospectus and financial details like revenue and profit, are public as soon they are filed with the SEC; and amended with increasing detail as the company gets closer to selling its shares.

  • These companies (referred by the law as emerging growth companies) are allowed to file their IPO registration documents confidentially with the SEC.

  • The registration documents are required to be made publicly available 3 weeks before the company starts meeting with potential investors to explain and sell its offering.

There are other provisions in the JOBS Act – changes in crowdfunding regulations, allowing hedge fund advertising – but in terms of IPOs, those three changes are it.

The key point is that the filings are confidential, until they are not. After they are submitted, the SEC reviews them (yes, confidentially), and can request changes to make the company’s filings, as Matt Levine points out, not misleading. Then, the documents must be must be released three weeks before the company starts its talking to investors. That gives investors, journalists, and other assorted, curious onlookers a month to read a set of legal and financial documents.

Is it a secret IPO?

Groupon’s founder and former CEO Andrew Mason offered his thoughts on the benefits of this new, different, and now, perfectly legal process:

 

 

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