Archive for September, 2014

Baa Baa Black Sheep

Tuesday, September 23rd, 2014

baba

I wrote last week about how the stock market reacted to the Facebook IPO and we were musing about whether something similar would happen with the Alibaba (Ticker = BABA) IPO.

In the chart above, you can see the performance of the BABA stock (in red) and the S&P 500 (in blue). BABA is now well below where the IPO opened (around $92 per share) and significantly below the high (at $98+ per share BABA is now 11% below its high). The S&P 500 has fallen along with BABA, down a couple of percentage points – not a huge issue right now, but it also belies what is really happening in the market.

These statistics are from Peter Bokvar via Doug Kass’ blog: “On the record high close in the S&P 500 on September 18th, only 57% of NYSE stocks closed above its 200 day moving average vs 74% that did on December 31st 2013 and vs 82% at the peak in May 2013. The Russell 2000 is down on the year. The average mid cap stock is down more than 11% from its 52 week high.”

The S&P 500 is really not telling you the whole story of the stock market at the present time: a lot of stocks (some really good growth stocks that I am eager to buy when they bottom) are down significantly. Take a look at Tesla, arguably the car/tech company of the next decade:

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Tesla is down from $291 per share to $250, or a 14% loss in just under three weeks. And it is not alone – many of the high growth companies that trade at rich P/E multiples which can be rationalized based upon their earnings growth rates have been pummeled.

You will recall that I wrote about our raising upwards of 5% cash in most client accounts (unless we were directed not to do so). We will be putting that cash to work purchasing great companies that have been pummeled by the BABA top.

When will this selloff end? No way to know for sure, but it looks like we have a few more percentage points down on the S&P 500 before we get oversold on a short-term basis. It won’t be straight down as I’d expect some buy-the-dippers to step in to pick up some bargains, but we have to shake out the weak hands before we can move higher again.

Mark

Open Sesame

Thursday, September 18th, 2014

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twtr

The big news that should drive the stock market tomorrow is the initial public offering (IPO) of Alibaba (ticker = BABA), the Chinese internet company that looks to be 1/2 Google and 1/2 Ebay with some other stuff thrown in for good measure.

On its face, its growth numbers are impressive – much like the growth numbers for Facebook and Twitter (see charts above).

I’ve had CNBC on my computer today (with the volume off) and 80% of the times I looked at it, some talking head was on discussing the virtues of BABA and how it will shoot to the moon – much like we heard from the talking heads that talked about Facebook and Twitter.

I am a believer in both Facebook and Twitter as communication platforms, especially now that each has found some success in monetizing their product to bring in actual revenues. I also believe that the stock price of each will continue to grow nicely over time.

However, if you look at the charts above, you will see that after an initial push higher post-IPO, both stock prices fell to much better buy-in points.

We pulled the trigger and bought Twitter around $32 (now trading at $50 and have a gain of 55%) once our technical indicators showed that it’s correction had bottomed and once we were confident that they would be able to monetize their operations and book revenues.

We have not yet bought Facebook since it bottomed before we were confident in their ability to monetize their operations, but it is on our buy list for the next pullback. We would like to purchase Facebook at a more reasonable valuation (the P/E currently stands at 87 – we’d like it around 60 to 75 which can be explained – but maybe not justified – by its growth rate; its PEG Ratio stands at 2.22 – we’d like it between 1.5 and 2.0 to get us to a justifiable 60 to 75 P/E ratio; all of this translates into a purchase target of roughly $5 on either side of $62).

All of that being said, we are not in the market for BABA on the IPO. There is every chance that it will pull back to a better price than where it opens so that we can purchase it at a better valuation AFTER we perform our fundamental analysis on the company.

There are many people talking about this huge IPO marking a top in the market much like 2007. There is no way to know that – the Facebook IPO marked the beginning of a 6% correction in the S&P 500 Index – it is certainly possible that we could see a similar thing happen here when you combine it with the potential beginning of a Federal Reserve Interest Rate increase cycle and the unknown (as of this writing) results of the potential break up of Great Britain due to Scotland’s independence vote.

As I wrote yesterday, based upon a prudent investment management strategy we have raised a 3% to 5% cash position in most client accounts and will await a pullback to companies on our buy list at better valuations for an overall better total return and for risk management purposes.

As we move past the uncertainty of these news driven potentialities, we will have a bit more safety in the market.

Mark

Hard Times to Come?

Wednesday, September 17th, 2014

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We had a wild ride in the stock market today. You can see where the market tanked, rallied, and fell back barely up for the day (+0.24% on the day).

The culprit? The announcement from the Federal Reserve today that they anticipate an interest rate increase on overnight funds up to 1.375% (an increase of 1.25%) by the end of 2015.

Historically, rising rates are bad for the stock market. You can see the knee jerk reaction by investors that sent the market down immediately. Then, a rally ensued – and honestly I do not know what the catalyst was – but it faltered after several minutes and the market ended barely above where it started the day.

For a few years now, we have been talking about what happens when the Fed starts to raise rates.

Generally, the stock market sells off, then as the initial impact of higher rates is seen as not impacting corporate profits immediately, a continuation of the primary trend higher resumes.

Later, as rates have increased and companies have begun to feel the sting of higher borrowing costs hitting their income statement, the stock market pulls back. How far back depends upon whether the country moves into a recession or not, which is usually dependent upon how high the Fed raises rates to stem inflation.

Today’s announcement and the knee jerk reaction, in my opinion, is what we will see A LOT of in coming months as the Fed undertakes its raising of rates. Be prepared for sell-offs that will shake the faith of many investors and cause the market to either trade sideways before resuming the current primary trend up OR change the primary trend to down.

This is a news heavy week for investors, so anything can happen. Just remember that ultimately higher rates lead to hard times for investors – both bond and stock investors. It just depends upon how high rates go and how it ultimately impacts corporate earnings. Those things will be clearer with the passage of time.

However, we do know that given that the market is at an all-time high, prudence dictates that we raise a little cash, book some profits on winners and clear out some losers. This will give us cash to be opportunistic buyers when the first sell-off occurs.

So we are raising 3% to 5% cash in client accounts (unless it is a client that told us to never have cash and they will remain fully invested) so that we have dry powder available for what likely comes our way.

Mark