Riots & Private Prisons

I first pitched this idea on Twitter about a week ago in response to celebrities lining up to bail out violent protestors. I figured this would be the almost ideal hedge on #WOKE culture that escalates and excuses violence.

The relative percent of the US population which is incarcerated is absurd by international standards. 2.3 million people are currently incarcerated in U.S. jails and prisons. The U.S. is 4% of the world’s population while housing 21% of its prisoners.

While county jails have let many people out amid the COVID-19 crisis far fewer have been released from prisons.

The prison companies Corecivic Inc (CXW) and The GEO Group (GEO) have rather low valuations, high yields, and have not recovered anywhere near as well as the broader stock market. Of course value plays tend to respond more slowly than capital compounding machines, but the downside risk on these is not too big unless we blow through the March lows.

Div Yield12.76%13.84%
52 week high$24.38$24.03
52 week low$8.33$9.95
current price$13.79$13.87
annual revenues$1.99 billion$2.47 billion
market cap$1.65 billion$1.68 billion
enterprise value$3.65 billion$4.42 billion

Since the riots started & other REITs have taken off these stocks have also had a good week, but their movements have been smaller than those at mall companies like Simon Property Group (SPG) or Tanger Factory Outlet Centers (SKT). Of course their move to the downside was less extreme than some other names. Falling from $24 to $8 is losing about 66% of market cap whereas Tanger fell from $18 to $4 before bouncing back to about $9.

The election likely determines longer term outcomes for the prison companies, but either candidate could promote making marijuana legal & letting many nonviolent drug offenders out of prison.

This is likely a winning trade if the stock market holds up and sort of stagnates along or if there is a big rotation away from growth toward value plays. It also likely does well if the riots last right up until election and so many people are turned off by the #woke movement that Trump gets re-elected. And if people learn to ignore and tune out the daily COVID-19 death totals then that would remove some of that risk.

If Biden wins the presidential election and there is a Democrat sweep of congress there is a good chance a lot of prisoners would be released, particularly if the SJW movement remains in force after inauguration. If a blue wave sweep seems likely these could sell off in advance.

This is also likely a losing trade if municipal and state budgets get slashed so much that many prisoners are let out soon, or if on the continuing COVID-19 flare up there is a mass push to let prisoners out.

The narrative on prison labor already has a rather ugly past associated with it. The widely contagious disease spreading through prisons combined with some prison labor being used in poultry plants in Louisiana certainly has the seeds of another social justice movement. Some poorer countries have already done mass releases as COVID-19 spread. And a lot of people who end up in prison are from poorer backgrounds, so when visitors come to visit them many of them are also poor living in congested areas where COVID-19 is likely to spread.

Long XOM

Today may be the bottom for ExxonMobil. A triple (or quadruple? quintuple? octuple?) lindy of factors confluence in a culmination of pure culmination.

  • The stock has went nowhere in a decade & is off about 13% so far this year after under-performing the market last year. We are not trading far off the 2010 lows.
  • Jim Cramer compared oil stocks to smoking stocks.
  • The stock’s performance is weighed down by cash concerns from counter-cyclical investments – which is when it is best to make said investments:
    In 2019, Exxon produced $6.6 billion in free cash flow and spent $14.7 billion on dividend payments. Analysts at the Institute for Energy Economics and Financial Analysis (IEEFA) wrote after the earnings report that the deficit between the company’s free cash flow and its dividend payments is expanding rapidly.
  • The Guyana development appears to have some solid economics:
    Exxon Mobil Corp.’s oil-production contract with Guyana is so heavily weighted in the supermajor’s favor that it will deprive the tiny South American country of some $55 billion over the life of the agreement, according to human-rights group Global Witness.
  • Goldman Sachs finally downgraded the stock yesterday:
    The decline came after Goldman Sachs analyst Neil Mehta downgraded shares to Sell from Neutral on concerns that the company’s return on common equity were lagging behind its targets. He dropped his price target to $59 from $72. At the root of these concerns are Exxon’s failures to improve its cash production.
  • The PBoC cut reverse repo rates & then injected money into the Chinese market for the second day in a row, causing their stocks to close up on the second day of trading, after a single huge down day tied to the coronavirus outbreak.
    • On Monday 3,257 stocks fell by their 10% daily limit: “All but 162 of the almost 4,000 stocks in Shanghai and Shenzhen recorded losses, with about 90% dropping the maximum allowed by the country’s exchanges.”
    • Macau is shutting down their casinos for weeks. China is going to keep on printing.
    • China complained that the US was both not doing enough about the coronavirus outbreak AND that the US was fanning fears. There is also rumors that the trade deal could be breaking down as China does their world famous after the contract is signed negotiations can begin trick.
    • The Federal Reserve is still pumping FOMO into the markets to paper over the coronavirus. If they and China are both pouring money into the markets eventually that is going to spill over into commodity prices.
  • Oil prices have fallen the most of any January in the past 30 years, recently entering a bear market. OPEC is conducting a meeting, looking to cut production by a half-million barrels per day. While ExxonMobil may need to sell assets or raise debt to pay dividends, some Middle East countries would outright collapse if oil prices stay low for an extended period of time.
  • The stock goes ex-div on Monday & some will buy the recent dip ahead of that (though there will be a downdraft of selling after it).

Buying oil stocks today is the inverse trade of being long Tesla, without the carrying cost of potentially toxic shorts which can trigger margin calls as other shorts are forced to exit their positions, or the theta time decay factor tied to options.

Tesla is up another 16% this morning after jumping nearly 20% yesterday, giving them a market cap of about $158 billion. For comparison sake, …

  • Fiat Chrystler is valued at about $26 billion
  • Ford is valued at about $36 billion
  • Honda is valued at about $47 billion
  • GM is valued at $48 billion
  • Toyota is valued at about $232 billion

It would take serious balls to short Tesla with any scale. An easier way to take that trade with a bit less leverage is to by a solid oil major. They are beaten down and left for dead.

Commodities have had a brutal run of late

Central bankers & politicians fighting coronavirus with massive stimulus will eventually put a bid under commodities.

If oil stocks have been dead money for a decade is it a sound bet it will be dead money for another decade? Perhaps if you have a $7,000 to $15,000 price target on Tesla, the bitcoin of cars.

Here’s to Tesla’s trillion dollars in annual revenues in the next decade!

It’s Probably Nothing

QE4 is well underway…

… orderly markets are contained globally.

While the market as a whole is treading water, some software names continue to get beaten down. And some of the “pilot to copilot, we goin down in flames” names have seen their sharpest reversals in decades.

PETS recently had its biggest one-day gain in 17 years, up about a third the day after beating expectations. That’s a proper short squeeze.

The company reported earnings of 33 cents per share, while analysts were expecting earnings per share of 26 cents, according to Refinitiv. PetMed has missed estimates the last three quarters.

Markets being what they are, one might expect some other names in the same category to go up on the positive news. Maybe Chewy (CHWY) goes down due to this showing an existing competitor still has a bit of strength, but what happens to a fellow poorly performing company in the category like Covetrus (CVET)?

They continued to bomb out, as the day after PETS beat expectations the CEO of CVET stepped down, causing shares to fall as much as 18% on the day.

Many names which were weak earlier this year have recovered.

  • CVS is trading the like February sell off never happened
  • SKT is up over $4 a share off its lows, which is a huge move for a stock which was trading in the $13s
  • ABBV is up nearly a quarter from its Allergan-acquisition announcement lows
  • WY recently closed at new 52-week highs even after interest rates have recently rose
  • T is up nearly 50% off their last December lows

There seems to be little to no political volatility priced into health companies.

Almost nobody is expecting inflation.

Meanwhile negative rates have caused real estate bubbles, leading cities like Berlin to freeze rent growth:

Berlin’s governing parties struck a deal to freeze rents for five years, marking one of the most radical plans to tackle spiraling housing costs in a major city and hitting the shares of major apartment owners. … The initiative put forward by the Left party’s Katrin Lompscher, head of urban development and housing, is intended to ease the burden on tenants after a property boom caused rents to double over the past decade. The political intervention has spooked investors as a separate campaign attempts to force Berlin’s government to expropriate properties from large landlords.”

One price control to offset another.

Should be sustainable so long as Commerzbank is heavily invested in Slack & Beyond Meat.

If they hurry they might still be able to get in on the WeWork restructure! SoftBank only owns 80% of the firm.

Free Trade & Investment

The stock markets are up big over the past couple days on optimism around trade talks between China and President Trump.

Trump is really trying to goose the stock market, talking past the sale

Monday is Columbus day, so when trade discussions conclude with tariffs delayed but no actual deal that will likely be ugly for investors over the extended holiday weekend. I expected the hopium to burn out by 3 to 3:30 PM absent a large announcement, though the Federal Reserve follow on today virtually guarantees a Trump-friendly close. Shorts are getting absolutely murdered today.

About the only thing down big today is the Russian search engine Yandex. YNDX is off nearly 20% today – trading around $29 a share, not too far off the end-of-world styled lows from last . The Kremlin is promoting a draft law which would limit foreign ownership of local tech companies to 20% of the float.

Yandex, which has expanded from Russia’s largest search engine to embrace services including taxis and food-delivery, has a free-float of 85% of its shares in the U.S. The draft law would hurt investments and restrict international development for Russian companies if passed in its current form, Yandex General Director Elena Bunina said at the hearings.

There was similar scuttlebutt from the US about potentially delisting Chinese securities from US exchanges if they do not follow securities laws and/or limiting government pension investments into Chinese companies.

Further goosing the markets today in the spirit of FOMO (& directly against the concept of free markets), the Federal Reserve announced they were extending their “temporary” overnight funding operations through January & they will be expanding the size of their balance sheet. They are doing QE4 (buying $60 billion in Treasury bills per month starting next week at least into Q2 next year) but are calling it something else

My view on Bitcoin is it is a binary bet on financial chaos. When the regular capital markets increase in prices & investors have confidence in the stock market going up Bitcoin often slides on big moves up in the stock market. I sold out of my remaining Bitcoin yesterday for a small gain & it is off a couple percent today. There was also a new guideline published a couple days ago that would make regular use of Bitcoin for smaller transactions an accounting nightmare, rendering it largely good exclusively for speculation. Even hard forks can be treated as income the moment new chains are created, which would further discourage those.

I also traded in and out of a bit of Kroger & Zillow yesterday while also selling off an ExxonMobil position I had. Coming into today the only stock I was holding (other than a bit of Apple & Disney that I have had for a long time) was some Zillow in my IRA that I bought on yesterday’s dip & sold it today for a couple percent gain.

The Federal Reserve guaranteeing they’ll expand their balance sheet into Q2 of next year virtually guarantees a Trump reelection. Some sectors may still sell off on a Warren headline risk, but if Trump does a trade deal with China ahead of the election & the Fed’s goosing of the economy runs through the first half of next year it is hard to see how he loses re-election.

I’ve made solid gains going in and out of ABBV over the past couple years & have ate some solid losses on what was perhaps too large of a WBA position, though if the healthcare sector starts selling off at all on Warren headline risk with the Federal Reserve expanding their balance sheet I might back up the truck buying a bit of each.

Indexes Hide Carnage

One year ago tomorrow Jay Powell said we’re “a long way” from neutral interest rates. That was the cue for the stock market to crater. Which it did right until Christmas of last year.

This year’s strong performance is nothing but the market offsetting last year’s Q4 carnage.

Zoom out to the beginning of 2018 and we’re flat since the January 2018 high.

This goes a long way to explain why the tax cuts absolutely did not pay for themselves. The central bank raising interest rates increased debt service costs while causing financial asset prices to collapse.

That turned out to be a losing move in terms of overall market stability.

Growth was priced to perfection until WeWork tried going to market … and that didn’t work!

We’ve had one of the biggest rotations from growth to value in the history of the market, a massive spike in oil prices on the Saudi Arabia oil refinery attack, and recent IPOs have been crapping the bed one after another.

While the index is sort of flat some rocket ship growth names have been cut in half.

  • Lyft is 56% off their peak. Uber has fallen about 40%.
  • Direct listings Spotify & Slack are far from their highs.
  • Baidu is trading where it was in December of 2010, and there is rumors the U.S. may try to block listings of Chinese stocks on United States exchanges.
  • With Beyond Meat having a market cap about 40% the size of Kroger, what’s the thesis of being long there? Maybe one needs a full load of Tilray to use while driving in their Tesla to make sense of it all.
  • I like Roku & think they will benefit from marketing spend by various streaming platforms, but their 52-week range is quite extreme with a current price of $104, a recent high of $176 & a low last December of $26. Netflix is over 1/3 below their 2018 high.

The recent large rotation into value may not have been a rotation into value but rather a lifting of shorts against the sector:

Over the past few years, I have been increasingly concerned about the massive structural imbalances in the world, along with excess debt and asinine monetary policy leading to an epic equity market bubble. Remember, your investment returns are directly correlated to the price you pay, not your analytical ability and I refuse to play in the greater-fool theory of finance. … There’s been a massive VAR unwind where “momentum” gets sold and “value” gets bought—yet there aren’t actual flows into value. Rather, funds are pulling in exposure and reducing “value” shorts. While it looks like a sector rotation—I see it as a massive “risk-off” event. Vision Fund, a prominent Ponzi Scheme literally detonated overnight and destroyed confidence in all similar VC ventures. Global Crossing, Worldcom and Adelphia destroyed confidence in “new age” telecom, Tyco did it to industrials while Madoff destroyed the last vestiges of structured finance. Capital gets scarce when you cannot trust the data. Is a massive risk-parity fraud about to be exposed and complete the cycle? … the best defense against the coming crash is to not be exposed to it. … My shorts are mostly clustered in indices, though I have my fair share of exposure to Ponzi Sector stalwarts, along with a hillbilly bank exposed to Miami real estate (guess which??) and another West Coast bank exposed to Ponzi Sector fraud. I laid into Hong Kong as the country has forever been changed. I already have a lot of put exposure, but I feel like now is the time to get more aggressive and I don’t want to keep burning theta on my options. This is the first time since 2007 that I have shorted anything.

Recently there was a research note which highlighted how market stability and low trading volumes have crimped Virtu’s prospects. If Virtu specialized almost exclusively in the indexes that thesis would be correct, but many enterprise software and other hot sectors have taken a brutal beating over the past couple months. A flatish market with tons of sector rotation (due to trade headline risk, fear of recession, chaos in the Middle East, the deflationary nature of web-based software, value plays being overleveraged with debt, etc.) is likely a market where Virtu is making decent money as a market maker.

VIRT doesn’t really care what the narrative of the day is so long as the narrative regularly changes.

A couple days ago the WSJ reported about how VIRT is off 36% year to date. They’ve fallen further since.

The average number of shares traded each day in the U.S. stock market fell to 6.9 billion in the current quarter from 8.5 billion in the fourth quarter of 2018, according to a Sept. 24 research note from Sandler O’Neill + Partners. The Cboe Volatility Index—a widely watched gauge of expected U.S. stock-market volatility—fell about 25% over that period, while volumes and volatility also dropped in overseas markets

I haven’t been trading much over the past month or so, but I recently traded in and out of Virt a couple times. I am still holding a chunk of it that is down a bit, but the bits I went in-n-out were up at least a couple more grand than the chunk I am holding is off now.

Falling $5 a share for a $20 stock is a rather substantial move in a couple weeks!

I am skeptical the broader markets now, but this chop-n-grind range bound stuff with a bit of a downside bias should be a pretty fertile market environment for VIRT.

Interactive Brokers announced free stock trading which led to Charles Schwab adopting the same approach & the stock broker shares cratered, causing TD Ameritrade to announce they too would offer commission free trading. E*TRADE will also stop charging trade commissions by the end of this week.

New exchanges coming online will create more opportunities to arbitrage across markets.

New exchanges can add value to the market, but also add complexity and may make illiquid stocks harder to trade, said Tal Cohen, head of Nasdaq’s North American market services.

That is true even if the cost of accessing order flow goes up as core exchanges try to retrench.

The stock market is off nearly 2% today with volatility being up big & VIRT is roughly flat on the day. That is the market expressing a lack of faith in Virtu. They might be right, but the risk vs reward should be decent for a small position here.

Taking a Break

The market is up higher on optimism around trade, or increased central bank intervention to prevent market risk from being realized, or something else.

And so many of the momentum stocks have been crushed of late. Meanwhile some beaten down value play stocks have been moving like penny stocks, with 5% daily moves. And so many of the momentum stocks have been crushed of late.

Value is seeing the light of day finally. A huge rotation out of momentum stocks is underway as investors pile on bets on economically sensitive, cheap stocks on renewed hopes for a U.S.-China trade deal. The ramped-up wagers on underpriced, cyclical stocks are supported by the view that interest rates have bottomed for now as sentiment around trade uncertainty improved. At the same time, investors are dumping those expensive growth stocks which they had used as a defensive play early this year.


Is that the great rotation trade that marks value is finally in? Or is it something else entirely?

A couple weeks ago I started helping a friend when they launched a new company. My initial impression was that it was going to be mostly light touch & I would assist a bit here or there, but it quickly became a bit more certain I was a life raft working double shifts. And I guess I will continue to do so until they are up and running with things smoothly.

That said, there is no way a person can have 2 or 3 full time jobs while being a successful day trader on the side in the age of Trump tweets. So the Friday before last I liquidated all my active positions to take a break for a bit.

Of course, after having done so SKT was up about 5% a day a couple days in a row & CARS was up 9.4% on Friday on a deal with GM to provide web services to their 4,000+ dealership clients.

I certainly still am up a good bit on the year, but I think doing a couple things really well is more sustainable than doing many things poorly, particularly with how competitive the capital markets are.

I still might trade time to time on the IRA account or if I see something I think is an utterly fantastic set up, but I am probably going to do minimal trading for the next couple months at least. That IRA has done well so far this year with really only a few losers out of about 20 trades.

I find humor in it being just under a clean double.

It reminds me of the time my mom told me I had an IQ test result I left in the car when I didn’t even remember taking such an exam. All I remembered was the comedy of her telling me about that while I was so aloof about it & the bonus joke of being 1 point short of genius.

He who finishes second is first to lose. 😀

Sadly, this hiatus likely means I will be missing out on the WeWork IPO.

Softbank remains bullshit, I mean bullish, on WeWork
A trade of the century for he who is willing to hold his position for a century

I am a big fan of the company

At least I can still watch the theatrics from the sidelines

100-year Treasury bonds might be on offer soon. They might be a better investment than the WeWork IPO, but I’ll stick in cash for now, at least until I have at least 20 free hours a week to devote to the capital markets.

Trillion Dollar Tweets, Again

It makes sense for the stock market to be on fire today.

The US president recently taunted Russia over an accident with a failed nuclear weapon

China is amassing troops near the Hong Kong border & there was violence at the Hong Kong airport.

Argentina’s stock market lost 48% of its value in USD terms in a single day in response to a primary vote

That marked the second-biggest one-day rout on any of the 94 stock exchanges tracked by Bloomberg going back to 1950. Sri Lanka’s bourse tumbled more than 60% in June 1989 as the nation was engulfed in a civil war.

The mainstream media is starting to eat some home cooking. They’ve got their paying subscribers so used to a particular slant that honest reporting drives subscription cancelations.

Today’s stock market liftoff was based in part on waiting to apply additional tariffs against Chinese imports until December 15th instead of September 1st.

The Trump administration abruptly offered China—and U.S. consumers—a reprieve from sweeping tariffs that were poised to hit on Sept. 1, sending stocks sharply higher and raising hopes for reviving talks on a trade deal.

That will prevent the tariffs on toys, computers & cell phones from providing any consumer sting until the holiday shopping season is over & just about everything sold through Christmas will be pre-stocked.

Trump uses Twitter to announce imposing new prospective tariffs, but this announcement of delay came through the press versus being a Tweet.

On yesterday’s sell off (which also had the bonus of being an ex-div day for XOM, providing an additional organic down draft in pricing) I picked up some XOM which I sold off today on the rebound. I also bought a bit of OZK which I sold today.

I also exited a big chunk of Yesterday CARS hit a low of $8.71 & I think I bought a big slug of the bottom to the penny. I sold that as it rebounded yesterday & also sold a bit more today at a hair under $9.50 a share.

Workiva has pulled back from their recent all time high on announcing a secondary offering where existing shareholders will be selling 1,287,038 shares while the company is not issuing any new shares.

Roku once again crushed earnings:

Roku “is an arms dealer,” Martin wrote. “It is indifferent about which over-the-top services or business models win. Roku negotiates a 20-30% revenue share from every over-the-top service that wants access to its 30 million homes. At 3.5 hours a day per household of viewing in the second quarter of 2019, it would be impossible…to launch a new over-the-top service without access to Roku’s 36% of connected TV homes.”

As subscriptions fail to appear in adequate quantity (as competition saturates the streaming marketplace), old media players who dumped billions into acquisitions will ramp up marketing spend & account trials to try to prolong recognition of malinvestment (hey, we are investing in growth). Roku will be one of the primary beneficiaries of that capital misallocation bubble.

A Dealership Full of

I think the sell off is more than a bit overdone and have been an avid dip buyer over the past couple days. It hasn’t felt particularly comfortable watching the stock careen lower and lower, but in reality the company is valued at about 1/3 of what it was valued at when a deep value investor took a strategic position in it. It doesn’t have a huge network of dying retail stores & ultimately is still a leading vertical search play in one of the biggest search categories. CEO & president Thomas Alex Vetter bought 20,000 shares on August 7th at $10.19 a share. And as of close today shares were trading at $9.20 after reaching an all-time low of $9.16 earlier in the day.

Lots of stocks have been up huge or down huge this week. One of my favorite names ROKU was up over 20% today. VIRT fell over 18%. I went in and out of VIRT for a small gain today, but will probably wait at least until Monday before buying more than a small position.

The New York Times warned they would have weak earnings in the second half of the year. They fell from above $35 to under $29. I bought just about the bottom tick on that and sold out after a quick gain of about a percent.

New Media also bombed on their Gannett merger. They are up almost 24% today, but that is still off about 16% from where they were before the acquisition was announced. Zillow fell 15% today. Kraft Heinz fell almost 9%.

5%, 10% & 20% swings in a day are not the mark of a stable market.

Bond yields appear to have bottomed out on a realization China wasn’t going to massively devalue the Yuan. Bitcoin is trading around $11,823. It’s rise has paused while the financial market has jumped back into traditional asset classes today. Alt-coins appear to be dead, with Ethereum back at $216.55 & Bitcoin dominance closing in on 70% at 69.1%.

I sold out of my remaining Kroger yesterday after they were up over 7%. Good thing, as they slid over 2% today.

Funko was up 7% during regular hours today & another 7% after close on a revenue & earnings beat.

CVS has recovered from most of the plunge it took over the past half year while Walgreens is still down quite a bit more.

All 30 Dow Jones Industrial Average components were up on the day & so were about 95% of the S&P 500 components.

Other than individual names that missed on earnings (& the seemingly perpetual downward vortex on CARS) it seems volatility was about the only thing off hard today.

You Were YuanDerful Tonight

The RMB fell through 7 to a Dollar. That caused a sell off in most risk assets (outside of bonds, gold & Bitcoin).

Shortly after noon this is what the market looked like.

Outside of bonds, relative outperformance largely meant falling only a percent instead of falling 2% or 3%.

South Korea is heavily export driven with an emphasis on electronics & computing equipment, so them falling about 5% today is ugly.

I sold the last Bitcoin I had left after the ~ 10% ramp in the past day. Virtu, my counter-cyclical pick that tends to rise with volatility was also up today, so I sold into strength on it. AbbVie was also up today, in part on news of insider buying, so I sold it at a small gain.

Jul 31, 2019Roxanne S. AustinDirector Buy25,000$65.66$1,641,500
Jul 30, 2019Roxanne S. AustinDirector Buy30,000$66.02$1,980,600
Jul 29, 2019Roxanne S. AustinDirector Buy10,000$66.35$663,500
Jul 28, 2019Henry O. GosebruchOfficer Buy30,000$67.28$2,018,400

If the market tanks another day or two I might re-establish an ABBV position.

The other stuff I was holding bled out today.

When the stock market is off 2.5% to 3.5%, almost everything is going to be in the dumpster. Only 20 stocks in the S&P 500 were up today.

China + Russia = US + Mexico?

One trade idea I am kind of starting to think about is a long Mexico play.

It seems some progress is being made on the immigration crisis front with Guatemala signing a safe third country agreement.

If the US relationship with China gets worse & worse & worse then at some point something is going to pick up in Mexico. Mexico still might be an utterly corrupt country heavily influenced by drug cartels, but it could pick up in the same way Russia has improved over the past year due to the US-China trade war drawing Russia & China closer together. Into the Median announced a weak quarter AND that they failed to find a buyer during their strategic review. Their stock is off about 35% to fresh all time lows. They’re currently at about $11.80 a share, but fell to as low as $10.30 a share earlier in the day.

If nobody was interested in their stock a premium to their old trading price then sliding by over a third means the new take out price would be less than their enterprise value yesterday.

I am not sure if their dead cat bounce is over & if they slide back under $11 a share, but they have one of the few memorable, short, descriptive category-killer domain names which could be advertised on TV. Automotive is an absolutely massive advertising & consumer purchase category, so if distinct vertical marketplaces are to mean anything that business should have great value to someone.

After the fall their market cap is $783 million & their enterprise value is $1.44 billion.

Starboard Value established a 9.9% position back in 2017 & that doesn’t appear to be working too well. I traded in and out of CARS a couple times today & am holding a small position. I am hoping the bottom is in, but if one of the tires is loose someone can get hurt!

Factoring exiting a bit of Bitcoin & those in-n-outs on Cars I am actually up a bit today, but the market looks super ugly.

Imma Getmy EduMaCation

A Rather Uneducated Opinion on Education Software

Before the market started falling apart late last year on the Fed’s narrative of rate & balance sheet normalization online education company 2U (ticker TWOU) was trading above $90 a share. As the market broke, so did the stock.

It lost nearly 2/3 of its market cap leading up to its most recent earnings announcement & then it lost nearly 2/3 of its remaining market cap after the ugly announcement with weak guidance which included announcing a business model shift to allow pay for service fees versus sticking to a percent of revenues business model & slower course roll out.

The core business for 2U — helping selective institutions such as the University of Southern California launch large online graduate programs — isn’t growing as hoped. With the “mainstreaming of online education,” attracting large numbers of students to a particular online program is more challenging and more expensive than it was just a few years ago, said Paucek.

To adapt, the company is planning to significantly slow down the number of new graduate programs it launches, said Paucek. It also plans to make its online programs smaller than they were in the past. “By lowering enrollment expectations, we expect a more efficient marketing spend over the long term,” he said.

The above sort of 1/3 of 1/3 – a move from above $90 to $11 and change a share – is the sort of price trend you might expect with like an Enron stock or perhaps a JC Penney trying to draw inspiration from the Sears playbook.

That move marks an extreme in sentiment as at the core 2U is an enterprise software company tied to education. There has certainly been slowing growth & negative press tied to USC, but is the company worthy of the decline they just saw? I am skeptical & have been trading in and out of the stock a few times over the past couple days. If it goes down much more I would be fine holding it figuring it is fairly derisked at current prices, but the regular 3% to 5% swings make it easy to make a bit of profit going in and out of it.

Another online education company Pluralsight did a sweet -40% swan dive after reporting their quarterly results.

Fed Funds Rates, Trade & Tariffs

After the Federal Reserve lowered rates a quarter point & halted quantitative tightening Trump was quick to lay on the next round of tariffs on China (10% on the $300 billion in remaining Chinese imports), giving the stock market a big & beautiful kick to the nuts. Supply chains are being reoriented away from China through Vietnam (though some of that might be Chinese misdirection via repackaging) & Mexico.

U.S. imports from China fell 12% in the first six months of 2019 from a year earlier, while exports fell 19%, the Commerce Department said Friday in a monthly trade report. The total value of bilateral goods trade with China, at $271.04 billion in the first half of the year, fell short of that with Canada and with Mexico for the first time since 2005. Mexico is now the U.S.’s top trading partner. … China’s share of the U.S. market is on pace to fall to its lowest level since 2008. The East Asian nation accounted for 13.2% of total trade in goods—imports plus exports—in the first half of 2019, Friday’s data show, behind Mexico with 15% and Canada at 14.9%.

A glut of bonds will soon hit the market as the new and improved (deproved?) budget will help blow out annual deficits by an additional ~ 1/3 trillion.

Eating Well…

Somehow in spite of the ugly tape I’ve done well over the past couple days largely by being fairly light on exposure, opportunistically trading in and out of positions, and even one of my bigger holdings that has been weak for a while just got a nice upgrade from Pivotal Research analyst Ajay Jain, causing Kroger (KR) to jump over 3%.

Kroger stock has fallen nearly 26% in the past year and is down more than 19% in 2019 alone, a period that’s seen the S&P 500 rise by nearly as much. The company delivered decent earnings at the end of June, raised its dividend, and insiders are buying the shares. Yet those factors have done little to overcome the general fear about intense competition in the supermarket space.

Kroger’s market cap is about $18 billion while their enterprise value is about $38 billion. They sell north of $100 billion in groceries per year. Outside of Walmart & Target most of their competitors are heavily debt-levered by private equity in a way that prohibits investment in growth or running a sustainable business while serving the debt payments on debt mountains.

Now Serving Only The Finest of Fake Meats…

Grocery Outlet (GO) recently went public & has an enterprise value to sales ratio of 1.9 compared to Kroger’s 0.3. Beyond Meat (BYND) is valued at over $10 billion after their recent fall which was driven in part by the record speed of their secondary offering after their large pop from their IPO.

If the segment of the consumer population that shops at Grocery Outlet (T.J. Maxx of grocery stores) continues to grow then one is basically betting on full on feudalism which would likely lead to anarchy and a sell off of financial assets. And fake meat is basically dog food. Other than as a short-term trade I don’t know why anyone would prefer either of those to Kroger.

For anyone who likes Beyond Meat here & has a bit of FOMO to feed, feel free to watch this hot take …

… and then check out how Beyond Content (formerly Demand Media, now Leaf Group) has done since their much hyped IPO.

I think CNN had the best hype on that pump-n-dump scam:

Demand Media shares soar 33% in IPO

Shares ended at $22.65 Wednesday, after touching a high of $25.

That gives Demand a valuation of $1.5 billion — more than the New York Times Co., though less than other media stalwarts like Gannett Co. and Washington Post Co.

That’s also the highest market capitalization for an Internet company since Google‘s IPO in 2004, according to research firm Renaissance Capital.

Nice framing there. Demand Media as the next Google.

Was CNN Money on the money?


General Thoughts

As long as there is more volatility throughout the day & everything is flying around I try to end the days with few sizable positions and am willing to take a hundred here & a few hundred there. Making a grand or two isn’t particularly bad in a tape where most are losing that much. But one has to have some liquidity on hand going into the shitty tape in order to capitalize on overshoots.

Funko (FNKO) is off around 8%. I established a position figuring they’ll eventually come back. I also bought a bit of AbbVie (ABBV).

I also have a start up idea based on buying dog food as a source product to create a meat alternative. More on that later tho!