Archive Page 2

Merkel Wagers EU pact on Semifinals; RIMM and HBS; Steel

I have three theories as to why the EU provided the market moving agreement overnight:

1)      Wagers between the Mayors of competing teams in the World Series or Super Bowl usually involve food – lobsters, steaks, etc.  The EU has taken this to an entirely new level.  As such I wonder whether Merkel wagered Germany’s approval of the pact announced this morning on the outcome of yesterday’s Euro 2012 Championship Semifinal match.

2)      Merkel is the anonymous GP of a very large hedge fund with lagging performance. Her lock-ups expire July 1st so she needed a big end of the quarter mark-up on her portfolio today.

3)      Merkel has been diagnosed with a very rare, life threatening disease and is not expected to live out the European ratification process, thus allowing her to stay true to her pledge “not in my lifetime.”

 

I have been neutral in terms of market exposure, cautious of the greater risk than reward, unwilling to bet that the 19th time is the charm.  While this agreement has some of the characteristics of the others – execution and final details to be worked out – it exceeded both my expectations and the markets’.  Nonetheless I do believe the rally can continue despite continuing trouble on the earnings front – NKE and F being the latest – until we reset over the next few weeks from earnings reports.  Within a relatively neutral exposure to equities I have been initiating small positions in some fairly beaten up names such as JOY, TOT and ANF and covered shorts in steel over the last few days, closing them out yesterday as a couple of steel companies reported EPS and the stocks rallied.  While the actual metrics on these companies are different than my shorts in X and MT, I didn’t believe the market would distinguish.    Should they rally much from here, I will return because the issues remain and the steel business has very high barriers of EXIT.  Unlike coal, capacity has increased as prices have declined due to softening end demand. I don’t see this changing with China continuing to  slow.

 

The rally in materials and energy, with extremely high short interest, is going to make next Weds.’ fireworks look like a Sputnik launch.

 

With European bank balance sheets still in disrepair and lending non-existent, unchanged in any meaningful way by today’s announcement, JPM should pick up significant share helping to offset the governor on earnings provided by tighter regulations and low interest rates in the US.  WFC has also started to expand beyond these shores, albeit in a not particularly meaningful way.

 

Thus the only questions are  “have stocks sufficiently discounted the slowing global economy?” and “is this just another false start by the EU fueling a quarter end short covering rally?”   To the first, the easy and correct answer is that some have and some haven’t.  To the latter question: Yes, for now but doesn’t mean we can’t rally for the next week or so.  I’m not going all in, that’s for sure.

 

RIMM – the Dean of Harvard Business School has likely sent a Thank You note to the BOD at RIMM, thanking them for providing the material for the best case study they have seen in years.  The death blow here is not the quarter but the continued delay in the release of the BB10.  Developers will not invest much in new apps for this device thus making it DOA.

 

iPad At The Ready; Is Icahn Greek & Germany’s 4 Day Work Week

Night after night, morning-to-morning, it’s the same routine.  The iPad sits at the ready, less than an arm’s length away on the nightstand, sharing space with an old school Blackberry, an alarm clock separating two generations of technology.  It’s the last thing I look at before I go to sleep and the first item I reach for when I wake.  I’m seeking out news, waiting for the solution.  That’s what I need to get off the sidelines, to put my cash to work. Sure equity valuations are cheap, that is if you believe the global economy is not worsening. Sure Treasuries are overvalued and in a bubble and asset allocation begs for a swap into equities but these factors have been in place for a year.  In the interim, China has markedly slowed and Europe is in an economic near death spiral. Ergo, I need something new: a plan that will work. I am fairly confident that I know what the answers are, I’m just hoping that some variations of it appear in a Reuters or Bloomberg headline:

ECB Lends $2 Trillion to Spain and Italy – Funds Targeted for Banks;

Greece Accepts Receivership: Icahn Reveals That He is Part Greek and Agrees to Head Creditors Committee

I would settle for one out of two, the ECB lending program being my first choice.  The last two days brought scant hope, with Spain’s Budget (a clear oxymoron) Minister asking for other “European Institutions” to “open up and help facilitate” a recapitalization of their banks.   (http://www.bloomberg.com/news/2012-06-05/spanish-minister-urges-eu-aid-for-banks-in-first-plea-for-funds.html).  I guess, a recognition by Spain that they have a problem is the first step toward a solution.  Record outflows of capital and the seizing up of the banking system has a way of offsetting the effects of too many carafes of sangria at three hour lunches more so than afternoon siestas.  However, there is little chance of Germany injecting capital directly into Spanish banks.  And then today, we had the ECB’s Mario Draghi tell us not to worry, capital is not fleeing, hoping to dispel us of the facts.  Nice try, Mario, but this will not help me sleep any better.

Here is how I believe the issue should be resolved in order to restore some semblance of sureness to the market. Actually, this is not really my original thought but rather that of an extremely successful hedge fund manager as we discussed the issues during a game of golf.  However, as a part-time talking head and part-time author, I am in conflict: the former imbues me with little respect for identifying ownership of ideas, claiming all as my own, while the latter avocation imbues me with abhorrence for plagiarism.  Since no one is paying for this advice, I will default to the former and provide what believe would put the market back on firmer footing in response to Europe.  While the ECB is not allowed to buy new issue debt from sovereigns, it can loan money to them.  Spain will ultimately agree to a program and, in return, the ECB will provide a 30 year loan with a nominal coupon to the government, specifically targeted for the banks.  This will not crowd out any other creditors, thus limiting resistance.  As part of this rescue package, and in lieu of using Spiderman towels and English lessons (wouldn’t German be more appropriate?) to lure potential depositors, the banks will offer greater levels of deposit insurance, backstopped by the ECB.   There will be greater, collective EU oversight to large EU banks as a condition to German participation without obligation of further German funding.

Perhaps the above won’t happen so here’s another thought.  It was also reported by Bloomberg that the EU and ECB is at work on a Master Plan (http://www.bloomberg.com/news/2012-06-03/ecb-eu-drawing-up-crisis-master-plan-welt-am-sonntag-says.html) and may have something ready by the end of June.  Well, that would be nice but this would have to be authored and led by someone other than Merkel’s countrymen since Germany’s last Master Plan didn’t work out well for anyone and time has done little to  erase the memory.  The problem is that no other European economy has the economic wherewithal to plug the dyke.  I imagine that Germany does a daily calculation comparing the breakup of the currency and the potential impact on trade with the cost of being the sugar daddy for the rest of the EU, albeit without the typical prurient perks of being so benevolent.  The Germans undoubtedly realize that they would have the world’s strongest currency were the EU to fail, thus crippling their own economy by making the price of their goods uncompetitive.  Here’s a solution: cut off the EU like you would a drug addicted stepchild and allocate those funds to internal spending, thus inflating the D-Mark and maintaining competitiveness in global trade.  Instead of the annual Oktoberfest, have a  Freitagfest and a 4 day workweek, placing them on more even footing with the rest of socialist Europe. That won’t drive the DM to levels on par with the drachma but will get you moving in the right direction.

So as my search for the evidence of a solution forges on, I remain on the sidelines although even the hint of a legit solution (or of an improving US economy) will rally an oversold market.  Oversold rallies, however, such as today’s (June 6), are to be sold, not embraced. Commodities will remain under pressure and steel is still a great place to be short as analysts now begin to look for losses in the upcoming quarter.  Recall that last year, X reported a loss despite a combined 13% volume and price increases.   Their end markets, with a slowing global economy, won’t be so kind this time around.   They didn’t even bother to offer a mid-quarter update at their analyst day today.

One more thing – look for downward revisions to multinationals pick up speed as the dollar retains its strength.

Playing Poker with the EU: Why There Won’t Be A QE 3

Wistful visions of a Bernanke Put have kept many invested. It is everything they want it to be: the lifeline, the safety net, the impetus for economic growth.  However, I believe it is unlikely to happen.  The logic is simple: Europe is much more fiscally troubled than the US and is arguably the source of not only market turmoil but also for economic angst in the US.  Without a shock and awe resolution from the EU, any further easing from the US will be ineffective in reversing our declining economic fortunes so why waste the powder.  And with Europe in much more desperate shape, in recession , broadly, and possibly headed toward a depression in Spain (Greece there already) it is much more incumbent upon the EU to provide a shock and awe solution to their economic woes sooner rather than later.  Additionally, Bernanke has come under significant criticism for his prior QE’s so why not let Europe do the heavy lifting this time around?  The European solution, if credible, will obviate the need for further stimulus from the US.  China keeps threatening to stimulate their economy and should this happen,  this could also lessen the burden on the American economy.   If I were Bernanke, I would play this hand to conclusion.  Not even another deficient jobs number will change my view.  In fact, I believe that the payroll report will come in above consensus based upon what I hear from my source who has been almost clairvoyant in their forecasts based upon real-time information.  They see strength across all sectors.  It won’t be a blow out number but should be comfortably above consensus.  This will lead to a short covering rally and a good opportunity to lower exposure

Separately, a great review for The Big Win http://seekingalpha.com/article/625331-book-review-the-big-win :

Book Review: The Big Win
Just as whale watching is a popular adventure tour for nature lovers, reading about the whales of finance is a popular pastime for investors. InThe Big Win: Learning from the Legends to Become a More Successful Investor (Wiley, 2012) Stephen L. Weiss profiles one woman and seven men who have truly excelled.

First, a caveat about what Weiss describes as “the ugly reality of whale watching,” by which he means “blindly following large, smart buyers into a stock or other investment.” (p. 25)

 

Unless an investor has insight into the whale’s rationale for making a particular investment, his time frame, and his risk appetite, the investor is at a considerable disadvantage. It is critically important, as Weiss writes, to “understand the process. … The true value of these case studies … is in understanding each investor’s methods, not standing in awe of their results.” (pp. 32-33)

 

Weiss’s eight legends—Renée Haugerud, James S. Chanos, Lee Ainslie, Chuck Royce, A. Alfred Taubman, James Beeland Rogers Jr., R. Donahue Peebles, and Martin J. Whitman— each carved out a niche and developed an investing style.

Haugerud, for instance, is a top-down investor. Her hedge fund, Galtere Ltd., has a five-stage investment process: taking the temperature of the global markets, developing a few themes, microanalyzing and selecting strategic investments, timing trades technically, and applying risk management. Her “big win” came in 1993. With gold trading as much as 40% above the world’s highest cost of production and the one-year bonds of Canada’s western provinces yielding 9 to 12%, she shorted gold for a rate of less than 1%, bought the bonds, and hedged her short gold position with undervalued small-cap stocks of mining producers in Australia that had high margins and low production costs. “‘All three legs worked,’ as Haugerud puts it, and all kept working for a good long while. It was a simple trade, and the returns were good enough to carry that year’s performance to her stated goal and beyond.” (p. 50)

Chanos is a short seller, Ainslie a stock picker, Royce a small cap investor. Taubman and Peebles are both real estate developers, Rogers is a commodities investor, and Whitman is best known as a distressed debt investor.

What do all these legends have in common? Weiss catalogs seven traits: no emotion, no ego, long-term investors, discipline, thorough research process, passion and work ethic, and drive. Or, reduced to six words:

 

“Drive. Passion. Process. Equanimity. Discipline. Humility. These are the commonalities between all those profiled in this book and the qualities that make for a great—and legendary—investor.” (p. 17)

 

The Big Win is an easy, thoroughly enjoyable read for those who want to learn from the whales.

Facebook Pt 2: A Wall Street Insider’s Perspective

Prior to the pricing of Facebook’s IPO, not one institutional investor I spoke with expected a successful offering. In fact, I had said on Fast Money that I would sell any shares I received as soon as I could.  I had a bet with a noted hedge fund manager on the size and pricing of the deal.  He had believed that it would price at the mid-point of the original range.  My bet was an increase in size and price; I won lunch.

Having been involved in the pricing of hundreds of deals during my time on the sell-side of Wall Street, I can tell you that kowtowing to FB management, hubris and greed led to a failed transaction.  Facebook may also be to blame for the  poor performance since it appears that they took a much more active role than most other issuers usually do during an IPO process.  I can tell you that it is unlikely that the other “lead” managers had anything to do with the mechanics of the offering since they rarely do; they are there in name only.

Morgan Stanley had a lot at stake; they likely won the lead mandate based upon their view on pricing and size as well as their distribution capabilities through retail, a sales force that GS doesn’t have.  MS was not going to be the lead manager of the first “hot” tech transaction, the largest ever tech IPO, not to upsize on price and size, nor were they going to lose the lead role to a competitor.  They focused on the front end, hoping the back end would take care of itself.  My guess is that they pitched FB a valuation higher than the other firms seeking the business whereas the right thing to do would have been to start the price lower and then walk it up into the original range.  This was their first fatal mistake since they left themselves no margin for error.  Not increasing the filing range would have been a mistake since it would have sent a negative message about demand, but increasing the size significantly was a much bigger misstep. But, hey, more shares and a higher price equate to more fees for the underwriter.  And , of course, a more hallowed place in the record books.

Institutional investors were uncomfortable with such a large retail component – it is usually the sign of a poorly accepted transaction although, in this situation, their participation was strategized into the process from the outset.  And with all the hype, institutions believed that if the deal went south, retail would panic and sell.  The news flow was also terrible: GM dropping, the ad model being questioned and constant commentary on valuation.  When I was involved in a transaction I almost always received calls from Portfolio Managers cautioning me on price and size; MS undoubtedly received these calls too but ignored them, as I often did.  Institutions nonetheless piled into the deal figuring that MS had to support the transaction with a long lasting syndicate bid.  A free put is nothing to turn down.  As such it didn’t take long for MS to eat away at the capital allocated to support the share price and my guess is that they first took a stand above the issuance price, realizing that if FB traded to issue, it would trade through it in a heartbeat.  But FB, being THE trophy deal of the millennium, used their weight to get MS to take a large discount in their fees.  As with a lot of items bought on sale, there is a reason why the price is low.  In this case, the attendant discount manifested itself in less capital in the syndicate bid.

So lots of blame to go around, hindsight being 20/20 except of course for the smarter, professional investor who had it pegged from the start.  Overhyped and overvalued.  The NASDAQ technology glitches – those were icing on the proverbial cake.

At the end of the day, a troubled start to life as a public company should not have a long lasting impact on its stock price.  That will be the result of its ability to execute on its business model and the valuation investors assign to the company.  On this, I have no opinion.

Facebook – My Take

From the Fidelity website (3 days and counting):


Warning:
  • Facebook
    Fidelity continues to deal with the aftermath of Friday’s market issues in delayed processing of orders for Facebook (FB) stock. As they did then, Fidelity’s systems continue to operate normally. Although some executions were reported back from market makers over the weekend, we are still waiting for final responses on other orders. This is an industry-wide issue and we are working aggressively to address it. We appreciate your continued patience.

What some had inexplicably hoped would be a catalyst to bring the retail investor back to the equity markets has added yet another reason to stay away.  Apparently the largest allocations to Fidelity investors were 100 – 150 shares, the average I have heard being 50 shares.  Participation was limited to accounts with a balance of at least $500,000 and had a certain level of activity.  These requirements further narrowed the number of eligible buyers.  Yet despite such limited participation, Fidelity’s retail investors still don’t know if they sold their stock, where they sold it or if they sold it.  Now, with a balance of at least half a million, the hit should be small but the psychological impact wil be much larger.  As these stories spread, investor confidence wil be further eroded.  Of course, none of this is Fidelity’s fault but rather NASDAQ.  However, all will suffer in the aftermath and we see volumes continue to dry up even despite yesterday’s rally.

So why was it ludicrous to believe that a successful FB IPO would bring back the retail investor?  First of all, the deal was too hyped, too richly valued and too big to succeed in spectacular fashion.  But even if it did, the news on other fronts, in particular Europe, provides too much uncertainty.  At most it would have been a respite from the realities.  The best hope we have for the markets is shock and awe from Europe.  I’m not counting on it.

The European Spring: Why Caution is the Best Market Position

In typical Hollywood fashion, the producers of the successful Arab Spring

have announced the sequel,  The European Spring, starring the people of

France.  In fact, pre-filming has already begun for the 3rd installment in

the series, The US Spring which will be airing the first Tuesday in

November.

The French

The French hosting elections on a Sunday is itself an interesting issue; I

have to assume they value their days off during the work week too much to go

to the polls than they value their leisure time on Sundays.  Logistics

aside, the polls point to a victory by François Hollande and socialism again

taking front and center stage in the City of Lights.  (Why shouldn’t

Parisians leave the lights on – the government is footing the bill.)   Of

course, Sarkozy can pull it out in the final days if he is able to draw in

the fence sitters and Le Pen acolytes; this should not be completely

discounted.  But assuming Hollande wins, I have heard the argument that this

event is already priced into the market. So will the rhetoric about

endangering the EU fade as political campaign promises often do?  Not on

your life.  With legislative elections upcoming on June 10th and June 17th,

the rhetoric is just beginning.  Those arguing against France’s

participation in the bailout fund and austerity as the path to growth will

be emboldened to speak even louder.  That, after all, will be the proven

path to winning a seat in the National Assembly of the Fifth Republic.

The Greeks

The Greeks have their own election on Sunday.  With massive unemployment,

there is hardly a reason to hold their elections on the weekend. Don’t these

people need something to do during the week or is that when the beaches are

less crowded?  From all reports, it looks like the coalition will survive by

the slimmest of margins. The rhetoric here too will build as their exit from

the EU remains the likely end game.  But if the coalition falls apart,

either on Sunday or near term, then the collapse of the EU is an immediate

fait accompli.

The Rhetoric

So the chatter will increase as the citizens of France, the Netherlands,

Italy, etc., continue to question with increasing authority and anger, why

they should labor under austerity programs in order to support the

irresponsible governments of Spain and Greece.  This will continue to

pressure the indices particularly as Spain and Italy continue coming to the

market to roll over their debt. At present, there is no avenue to growth and

Draghi seems unwilling to inject anymore stimulus into the markets until

governments put forth growth initiatives (and maybe, actually do cut

spending).

The Sequel

So this is the sequel to the Arab Spring as the Europeans rise up and say no

mas.  It is a more civilized uprising, as they perhaps torch candles instead

of themselves, but an uprising nonetheless. And then, in November, it will

be our turn.

Add to this the slowing US economy – yes, slowing, not a pause, and the EU

and China continuing to slow, and you have a rather poor outlook for US

equities.  But Brazil is the bright spot, isn’t it?  Nope. China is the

economic delta for Brazil.  We had an earnings season that few had expected

in terms of growth and outlook but the skepticism about the future is what

preys most acutely on the market, and, the economy.  Sure there are bargains

to be had but like most retailers, there is never one clearance price.  And

yes, Treasuries are fully valued and arguably in a bubble, but that’s been

the story for a while too.  I don’t know who is good picking bottoms and

tops so I’m staying low beta and fairly neutral.  There is very little

chance that under this scenario, allocators have a call to arms for

equities.  That will happen but not now. Not perhaps unless there is a

Romney victory and Europe puts forth some plans for growth.  I would

actually support a position that puts Greece in default, cuts back on

austerity in favor of responsible spending for growth  but I’ll leave my

daydreaming for when I’m at the chick flicks my wife occasionally drags me

to.

I continue to be short global cyclical stocks such as materials.  I hate

beta, except perhaps on the short side and bunting instead of the long ball.

As my favorite metals and mining analyst, Pete Ward, said to me yesterday,

“steel has very high barriers of exit.”

During your market respite, you may want to read an excellent new book: The Big Win.

The Only Difference Between China and Spain is the Color of the Rice

Before moving on to today’s comments, a commercial announcement:
My new book, THE BIG WIN, is NOW available on AMAZON
In stores May 1st

CLICK to BUY NOW!

If you want to create wealth, understand how the smartest investors in the world do it. And to learn from the best, then get the best to speak candidly about their investment strategies. That’s what Stephen Weiss did in The Big Win, a truly fascinating read that details these legendary investors’ winning strategies in stocks, bonds, and real estate.”

—Larry Kudlow, Host of CNBC’s The Kudlow Report

China:  Yesterday’s WSJ article on Bo Xilal (page A11) highlights the issue that should provide pause to anyone blindly bullish on China and materials stocks.   It reveals a story of monstrous leverage using property as collateral.  When Bo Xilal rose to the top political seat in Chongqing, the city’s debt was estimated to be 162 billion yuan. At the end of 2011, at least one informed estimate approached 1 trillion yuan.  I like the sound of “trillion” but it only translates into roughly $150 billion, perhaps not bad for one of China’s fastest growing cities.   And maybe that’s not a lot by Western standards for a permanent population of 28 million but the rate of change is significant and places Chongqing’s debt at 100% of GDP versus China’s broader estimate for the country at 22%.  The proceeds of borrowings and  land sales went into highways, state owned businesses and social welfare programs.  But unfortunately, these expenditures don’t throw off enough “income” to offset the cost of the leverage.  (Let me know if you’ve heard this story before – perhaps while travelling through the warmer climes of the EU.)  Taking on debt against land at all time high prices is exactly what got the rest of the world in trouble.  Add in the debt on developers’ balance sheets and leverage at the business level through off-balance mechanisms such as LOC’s and household real estate purchases at prices that exceed current levels  and the only difference between China and Spain will be the color of the rice.  Of course that’s an exaggeration but suffice it to say that perhaps China does not have the iron grip on its politicians, people and economics that so many pundits, economists and portfolio managers give them credit for.  With the central government’s decreasing appetite for individual excess – 感謝什麼,博 (Translation: Thanks for nothing, Bo)  I doubt that there will be as much sympathy for fat cat capitalists who have traded their Mao suits for Prada as was shown to the indebted by the rest of the world.  And I doubt Chongqing is the only city modernized by taking on significant debt as Bo is not the only politician seeking to climb the political ladder by leveraging the future.  In fact it is estimated that local property sales accounted for approximately 40% of revenues and lending for cities throughout China.  Wu and every other politician has been very clear in stating that property prices remain too high.  Three cities, including Shanghai, have tried to ease property controls but the government forced their immediate cancellation.  Yup, the rulers on high are resolute n sending a message that excess, driven by inflating property values at the risk of the people, is over.  The only question is if they caught it in time.  Fortunately, I don’t have to answer that question since the near term impact will be the same.

The great unwind in China is on its way.  Let’s see how that works out as their export economy fades.  And how it works out for us.


Latest Tweets

Enter your email address to follow this blog and receive notifications of new posts by email.


Follow

Get every new post delivered to your Inbox.

Join 6,116 other followers