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the teddy bear market

1/29/2014

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Needless to say, it has been a very ugly market this week and looking at the technical charts alone (never mind those pesky fundamentals...!) suggests that we're headed lower still. Now the talk on Wall Street is that this is just a very healthy correction in an overall equities environment that has risen more than 20% in 2013. We can't go on like this forever, they reason, so buy these opportunities while you can. Well, the Street is right on one thing...

You always have to be careful whenever an "incentivized person" offers you advice, whether that be financial in nature or something far more mundane. The investment sector is rife with what I would call "legal conflicts of interest." Whenever someone has something to gain by directing you towards a specific opportunity (ie. a commission on sales of company stock), that person's advice has to be taken with a huge grain of salt. You're not going to get an honest appraisal of a BMW at a Mercedes Benz dealership, so why would anybody trust the Street's assessment that now is a buying opportunity? Of course they would say that : their livelihoods depend on you constantly churning the equity machinery!

I understand the perception that the elite scoops up discounts when "there's blood on the streets." Especially with the rise of the internet and the proliferation of ideas (many of them conspiratorial or downright insane), being an investing contrarian is considered to be the "in" thing to do. Unfortunately, what people don't realize is that the elitist blood buyers wait for the perfect opportunity, since scooping up a discount now will be rather moot if prices continue to erode substantially later.

What I would stress as a "long-termist" is to wait. Though there may be a pop up in the domestic equities, this would only be a day trade, not a position trade. Caution is king during these upheavals, and until those aforementioned fundamentals improve on a irrefutably substantive basis, there's no need to engage in wild gun-slinging here.

Better to avoid being a hero for a day and save for a more permanent legacy.  


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Apple : the follow-up

1/27/2014

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After another rocky day on Wall Street, recent investment wisdom is being challenged. One of those is the notion that Apple is an undervalued company relative to earnings. This theme has been harped upon by the mainstream financial press so it seems rather ironic that the tech-centered NASDAQ composite index was the laggard today amongst the major indices.

Our first blog focused on our bearish sentiment for Apple, specifically regarding the leadership, which translated into blasé product lineups and uncharacteristic marketing missteps. There were other fundamental hiccups including gross margins and business efficiency metrics. And while share prices did seem very cheap when measured against trailing earnings, the company was inline with their competitors in terms of equity-capitalization rates ; in other words, Apple was "okay" but certainly not remarkable.

With shares currently tanking in after-hours trading, have valuations now reached crazy cheap levels? Don't be too sure. The stock was overvalued at $600 and it's still overvalued at $500. They lost Steve Jobs. We lost one of the brightest of business geniuses. That gap can never be filled. We all know what happened to Apple without Jobs.

What investors need to understand is that consumer electronics is a vicious industry : even the tiniest of miscalculations can reverberate for years on end. Competitors that compete both on price and innovation are propping up everywhere. Potential tech bulls should take this moment to avoid being a "knee-jerk contrarian."

Sometimes, there's a reason why the herd is leaving...

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Red Friday : The Trajectory of 21st Century America?

1/26/2014

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A day after one of the worst sessions of the year, the stock market took a decidedly more aggressive tumble, with all three major indices absorbing 2% losses. On paper, this doesn't sound like much, and it really isn't. Technical analysts (known by the term "technicians") will cite the psychological impact of losing the 1,800 point threshold for the S&P 500, and the 16,000 mark for the Dow Jones. While trading behavior does indeed have a psychological (some might say psychotic) element, the above concern is merely semantics. We could easily recover those metrics, just like we know that eventually, the bathroom door will open : the more pertinent question is, how long can I hold it?

For the American economy, this is a very complicated and bifurcated answer. The common criticism that is cited within the duality of our entire political spectrum (we only have two parties that have a realistic chance of winning meaningful elections...really!?) is the national debt, which stands somewhere north of $17 trillion...I lost count. Though it is a serious burden, it's not the worst nightmare scenario for our policymakers and their think tanks ; our debt is mostly comprised of public debt, which in accounting terms, is an asset owed to the people of the United States. Contrary to internet conspiracy theories, doom and gloom hucksters, and The Second Coming of Christ (Revised Edition) movement, China is the largest holder of U.S. Treasuries amongst foreign entities. As a total amount, this is a minority allocation of America's debt. Besides, given the superiority of our military, I doubt that anybody is going to collect on us.

No, the real problem is the American consumer and their illiquidity. People are so cash-strapped that only those with cash (comprising a smaller and smaller percentage) are spending. And when consumer spending goes down, corporate revenue goes down. And when corporate revenue goes down, earnings goes...up?

Ah! This is where things start getting interesting. The Wall Street jargon is that we are still in the midst of a great bull market and that the current correction is a perfect buying opportunity. Implicit, and in the case of famed analysts such as Jeremy Siegel, explicit in the aforementioned marketing message is that markets are undervalued. We are told that markets are steadily holding at around a 17 P/E ratio, hardly a measure of irrationality.

But since we have incontrovertible proof that Americans are not spending, where is the engine that is used to justify such an "undervalued" P/E? Company executives undoubtedly recognize the deflationary nature of the current economy and have taken appropriate action, whether that be cost-cutting or corporate mergers. Applying these tactics can certainly boost earnings even when industry share as a concern of totality shrinks, but it also raises the question of how long the cannibalization can last?

As we have seen on Red Friday, the answer is "not long." Other companies will do better, sometimes extraordinarily so, against the mainstream competition. But by and large, the economy faces a reconciliation of all the accounting tricks that have gone uncontested. At some point, Peter will get pissed and will take his money from Paul.

It's an inevitability that will have consequences for the unprepared.


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The harbinger, oh the harbinger...!

1/23/2014

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So if the Old Man on CNBC has his facts straight, today is the first time this year that the Dow Jones, the S&P 500, and the NASDAQ composite index all moved in synchronicity. Of course, it happened to move in the "wrong" direction, unless you were a bear, in which case today was a sort of redemption against the ridicule that must have come their way.

This is just a blip, we're told...markets will bounce back, the economy is improving and we're the biggest kid on the block. Our toughest competitor and simultaneously contentious bedfellow China has caught the flu. This our time to shine! USA! USA! USA!

Wall Street pundits and their esteemed guest hosts all have a message to sell. If this weren't so, you'd get a whole lot of truth and some of you may not like what is revealed. The market reality and the multi-trillion dollar behemoth that it represents all confirm one thing : the product doesn't have to work in order for it be valuable.

The irrationality of the investment community is nothing new : asset bubbles and unwarranted exuberance is an integral part of trading lore and so long as there will be humans, there will be soaring hits and devastating misses. Obviously, I would not characterize today's market action in such extreme sentiments. What I would say is that it's a warning.  

While writing the script for a financial news network segment, I mentioned Advanced Micro Devices (NYSE : AMD) as a top speculative pick for 2013. Since the call, share prices exceeded my own bullish expectations. At the time, my research indicated that despite some horrible financial metrics (hence the speculation), the bears took the price down to unreasonable levels ; after all, their products were still very much in demand, despite having a "second-class citizen" status to rival Intel (NASD : INTC). 

The good times came and I sold. Having gone crazy in the other direction, I felt it prudent to take profits off the table. Still, the good times stayed and I began to wonder...are the pundits right? Do fundamentals not matter anymore?  

This week's broad market underperformance highlights the fact that fundamentals do matter. Numbers don't lie. You can fool all the people some of the time, but you can't fool all the people all the time. The laws of math simply don't allow such violations. There's been significant damage done to certain sectors within the economy that don't bode well for many companies. The wild ride taken by the Federal Reserve over the years also assures us that we're going to have unexpected kinks in the road.

Now, more than ever, is a time to re-evaluate commonly accepted belief systems. Apathy is easy, especially when things move along in a predictable manner. The sudden divergence from this artificial fantasy should give us that extra motivation to see what's really going on...

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Pre-emptive asymmetric monetary policy

1/22/2014

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Just what is in a title? Apparently, a mouthful when you are dabbling with the sometimes relevant, always painful world of economic theory. Luckily, I've engaged the help of Dr. George Cooper, a former fund manager at Goldman Sachs who coined the brilliantly militaristic phrase above.

So what is pre-emptive asymmetric monetary policy? It's a strategy employed by a central bank to artificially combat an anticipated wrinkle in the monetary equilibrium, mostly due to the potential pressures of political downfall should the economy collapse prematurely (ie. right before voters hit the polls). On the surface, if one trusted the "wisdom" of their national central bank, this theoretically would be a good thing : after all, no one wants to suffer through a recession or depression if it could be avoided with a little fiscal massaging.

In reality, things are never that easy. We really don't need to play "fact-checking" with each other as if this were a presidential debate : recent and not so recent history and the collective consciousness of the American people all point to evidence of dramatic economic crises, and the management of such events have arguably led to an even more tenuous situation.

But the real irony to pre-emptive asy...eh...can we just call it P.A.M.P.?  is that it should by default never be necessary. That's because most economists, and more importantly, central bankers throughout the world, ascribe to Efficient Market Hypothesis, that is, today's market prices, no matter what they are, correctly reflect assets' true values, based on both current economic conditions and the best estimate of how those conditions will evolve in the future (Dr. George Cooper, The Origin of Financial Crises).

Given that all assets are priced correctly at all times, there should be no need for any kind of intervention, inflationary or deflationary. After all, if markets are truly efficient as the name of the theory suggests, then whatever is occurring at any particular moment is the most ideal condition. Any intervention by human hands is sure to be less efficient and therefore, under the inverse principle of arbitrage (I'll explain this in a future blog), wholly undesirable.   

Of course, this would not be a popular slogan for the bankers and thus they give us our medicine, even if it's just a placebo.


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now firing : the new American way

1/21/2014

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There's something distinctly un-American about layoffs : we are a brash, unapologetic nation that has a heritage of not just mere growth, but an excess of it. While perceived by others as arrogance, America simply laughs off her critics, a behavior that is seemingly modeled from a bottom up approach.

While flaws are inherent in this and any other country, we've made one thing clear : we don't give up on each other. That "come what may" attitude has changed in a quite pronounced manner over the last two decades as America has become a disposable society. Corporate leaders prance around with talks of the necessity of making "hard decisions" when they damn well know that any decision is an acceptable one, so long as it doesn't affect their wallets.

I wish more people understood the numbers and the truth that is inherent in the outwardly tedious details. Without going too granular, these "cost-cutting initiatives" simply don't work because they merely address the nominal aesthetics of The Problem, but do not address The Problem itself.

Two big companies that are in the media spotlight today, J.C. Penney (NYSE : JCP) and Best Buy (NYSE : BBY), are prime examples of executives not understanding how to run a business in an evolving ecosystem. It may have been great to be the big, bad, Tyrannosaurus Rex, but the race has now shifted to the leverage of the more nimble raptors. The dilemma is not the size of the T-Rex because let's face it : no matter how much that puppy goes on a diet, it ain't getting much smaller!

Yet management across a plethora of industries buy into the cost-cutting madness : by being smaller and weaker, they reason, they would be able to compete with the speed of the raptors. But by artificially reducing the infrastructure, the T-Rex has given up one of its advantages for a questionable and partial benefit. In the meantime, the raptor has given up nothing, thereby increasing its pound-for-pound capabilities against a weakened T-Rex.

Sometimes, a company absolutely has no choice but to cut for the sake of its survival : everyone understands that. But to make that decision, the entire business strategy must incorporate the cut into its plan. An amputation of a badly rotting organ has to be both precise and complete ; a lapse in either category will inevitably create more serious, likely fatal problems later.

Layoffs are serious business. They have long running consequences that may not be appreciated during the stark emotions of the moment, but consequences care not about the intentions of the jettison. Because of this, they should be absolutely avoided if at all possible, but if nothing can be done about the inevitable, an overhaul of the business model must align with the hard decision to give the company's future a chance.

It is the American thing to do...  


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The valuation risk

1/21/2014

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Apple...for all the attention that it gets, the average passer-by would assume that their shares are traded at the Big Board on 11 Wall Street, home of the New York Stock Exchange. Instead, they are traded on the renegade NASDAQ, but I suppose that the great Steve Jobs would have it no other way.

He was the leader that everyone emulated and when his competitors thought the well-spring of genius ideas had dried up, he did what any misfit would do : he changed the world.

Steve Jobs is an Icon.

The same cannot be said for what's his face...I mean no disrespect for Apple's current commander-in-chief, but to put it simply, he lacks the "lack of polish" and willingness to go beyond the convention that his predecessor embodied. Moxy alone could be enough to drive a company forward : I think there's much to be said about Yahoo!'s reemergence due to Marissa Mayer's leadership, despite some significant missteps or questionable calls along the way.  

Ultimately, investors have to feel that there's something special with the next product line up ; the consumer electronics industry can be extraordinarily fickle, and if you're behind a month, you've really lost several years of potential revenue. The capital gains incentive seems mediocre, while the dividend yield is definitely so : more passive gains could be had by holding Treasuries and at least we know that the U.S. government can never fail...at least not without a fight.



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