Themes for 2019

Pets Are Great

Late last week I traded PETS twice in a single day. Caught just about the bottom penny and then sold it for about a 1% gain. Both rather small positions, but gained about a percent on each transaction. Yesterday I bought PETS once again, but got a crappy fill on the position as the price went up about a dime a share on the market order, so when I took a nap I figured I would look again when markets open today & see the stock went from a fresh 52-week low (slightly before I bought) to actually being up a fraction of a percent on the day. I’ll likely sell it on open, as the markets are up decently in pre-market & I was up 1.47% at close & it looks like it was up another half-percent in after hours trading last night. UPDATE: sold at open today.

Pets will remain a growth market as long as birth rates across the United States remain at generational lows (& near all-time lows) as some people who would like to have children but can not afford to (economically, stress, or both) have pets instead.

I don’t see *ANY* mainstream politician with a chance at winning the next presidential election who is prioritizing the concept of family. Something like 55% of children have parents who are on means tested welfare programs now during a non-recession, and as more children are born out of wedlock to people struggling to get by economically, each broken parent acts as a walking advertisement against having kids.

Trading The Dead Cat Bounce On Analyst Downgrade

I also established a small position in Western Digital (WDC) yesterday. It quickly turned up, as a -10% day on an analyst note for a stock tied to a real business that is already quite beaten down is a bit much. I sold too early (probably in part out of frustration on the crappy fill on PETS), but still profited a bit.

If the whole market turns south WDC could fall once more, as it was at a low of $33.83 on Christmas eve & now trades at $38.06 after falling 4.92% yesterday.

Broader Market & Bagholders:  Don’t  Forget  Trade

Cramer believes Christmas eve was the bottom, which means, of course, it was not.

We’ll likely retest those lows in the coming month.

As long as the US Federal government remains shut down Trump can blame any market turbulence on the obstructionist Democrats. In private tech executives support a hard stance on trade with China. If your profits come from IP of course it makes sense to dislike flagrant IP theft.

“I think it’s because the Chinese economy has never been more vulnerable than it is right now, and our economy has rarely been this strong,” he explained. “If we’re ever going to do anything about China, this is the perfect time. If we’re ever going to stop them from forcing our companies into dubious joint ventures that represent ridiculous technology transfers and often outright theft, this is the moment.”

China is willing to commit literal murder for leverage in trade deals – rushing already closed cases back through kangaroo courts a retrial to assign murder. In doing so, they give Trump more incentive to be belligerent in response. He gets to be the person carrying the torch fighting for human rights by crapping on them. That’s a really bad card to give him. And he could slow leak a lack of progress on the trade front on the Democrats to try to pass the buck, while further cratering confidence in Chinese markets & their economy.

It is literally what I would expect him to do. When he does that, Wall Street will be soooo pissed. They’ll tank the markets as a result too. 

Other Trades

About a week ago I sold out the last of my Funko (FNKO) at a small profit. Longterm I like them, but I think they’ll have a bit of a pullback as they ran from $11 and change to over $16 a share in a couple weeks. Of course they were up to $30 not long ago too, but I wanted to exit that position for macro reasons as much as anything else.

I also bought an sold a bit of New York Times (NYT) for a small profit early in the year. I think the New York Times keeps gaining subscriber share as their weaker competitors keep getting rolled up into private equity hatchet job plays. Buying NYT is basically being long formal disinformation, political partisan hackery, and the concept of hypernormalisation.

“It isn’t real, but it conforms to my political bias” is a point that sells & many will proudly pay for, provided the first part is not advertised!

I made a small gain on AT&T as well. If yield spreads start blowing out their stock could fall on the thesis their debt carrying costs will increase.

Trade Days in a Year

I haven’t been carrying much stock or doing much trading because I did a bit of quick math and have had multiple health issues early this year (actually 4 health issues in 2 weeks is a bit of a record for terrible health for me). The math I did was thinking about there being maybe 200 or so trade days in a year. So for there to be a 6-figure income out of trading you’d have to make about $500 a day on trade days (above & beyond the cost of trading). If you could pull out a half-percent a day in trading that would mean you would need to have about $100,000 invested constantly & consistently make great trades. But there are times when the market craps the bed like it did late last year & the only winning move in such markets is often sitting on your hands. So that means maybe there are only 100 or 150 decent trading days some years.

So for that to earn 6 figures you would really need to earn closer to a grand a day on any average trade day. That would mean either needing to wring a greater return out of the market or put more capital at risk. Given QT it is hard to get excited at going long the markets right now. My risk tolerance is rather low & will remain so at least until a certain criminal fraud is caged & my faith in humanity is restored. 

I am sure I could do $500 or so a day on trading if it were all I did, but being a parent who keeps getting sick & does a bunch of other things makes it a bit more challenging to have the time, focus & intensity to stay focused on it without seeing entropy eat more elsewhere.

Focused Efforts  in  Trading  vs  a  Practice  Account

How people will behave with fake money versus real money on the line is not necessarily the same. Sometimes people are willing to take limitless risk with fake money or money they have stolen from others. But it is not uncommon for people to have an emotional response to trades that go against them when it is savings from their own labor that is on the line.

The way to overcome those sort of negative emotional responses is to have conservative trade sizes to where you are not particularly emotional about the trades.

If you half-heartedly pay attention to the market but do not actively trade it there will be some obvious trades you should have made that you didn’t. But recognizing them at the time & seeing a few of them in a row will give you the confidence to return back to active traded – provided you are honest in what trade ideas you really liked & would actually execute on if in the mode.

One I liked – but was perhaps too lazy to act on at the time – was when Target’s stock got smashed down on a day Macy’s had the worst trade day in a decade on weak performance. I was in the line at the San Francisco Macy’s on Thanksgiving & my wife loved buying great baby clothes for 60% off there. It turns out a part of the reason their quarter stunk was they were too aggressive with early doorbuster deals and sort of had a leftoverish feel as Christmas came. Target also sold off as money was pulled out of the retail category on the narrative department stores are close to dying even though Target shared favorable numbers.

“Anybody who makes a living by selling somebody else’s widely available product, they are not going to be able to make their margin. They’re not going to be able to make a buck in this internet-driven economy,” Storch said.

I still see plenty of upside in Target providing there isn’t an imminent recession & the stock market doesn’t crater. As Walmart moves into online advertising as a marketplace player ultimately Google will be forced to acquire eBay and/or Target to remain competitive with Amazon in ecommerce. Google will ultimately need to buy a destination website with a separate brand beyond Google to win (or even remain competitive) in ecommerce. They’ll need a separate brand which is akin to what YouTube is to video.

General Work Philosophy

My philosophy has largely been one of bursts of effort based on results. Long ago I had a lot of success with SEO stuff & anything that moved in the right direction would get a lot more effort & investment. I don’t do as much web stuff as I used to, but the idea of focusing on whatever is moving in the right direction with intense focus & strong burst of effort seems a far better way to do anything than feeling you have to do it everyday.

If you work on something that isn’t producing results that ultimately impacts your mood & the quality of your work. If you internalize it enough it can impact every aspect of your life.

It is far easier to push on whatever is working until it stops responding & jump from project to project with intense, direct focus on it. That way you see results, stay positive & stay motivated.

I am mostly in cash, but am still holding a bit of Google (tech/web growth & AI advancement narrative), ExxonMobil (inflation hedge), & Apple (value play at current price). In a few months if everything goes well on the health front I might get more active with trading again.

Some of the higher volatility stocks I was trading last year like Yandex or Zillow could easily slide 10% if there is another big market pullback. If there isn’t a pullback and the trade war ends they could also quickly end up 30%, but I still expect more fireworks on the tradewar if China is literally murdering people for leverage.

Lower Entrepreneurship Risk

I suspect this year we will see a jump in entrepreneurship as the penalty for not carrying a crappy Obamacare policy is no longer enforced. This will remove $500 to $1,000 per month in junk fees from many young people who are not particularly risk adverse.

I quit my job when I was making $100 a month on the web & only had $900 in revenue in the whole first quarter of working on the web exclusively, but by the end of that year my rev run rate was above average. And I have had many good years in spite of a number of major setbacks including dealing with many major algorithm updates, major health issues, and a few other treats I’ll mention in due time.

The web is certainly far more saturated with competition today than it was when I started, but it is also far easier to find great information in just about any format you’d like: blogs, podcasts, forums, newsletters, Twitter, etc.

Overstocked

OSTK has fallen off a cliff since the delayed GSR investment.

On Monday, Overstock announced that GSR Capital had sought out an extension on an investment they were slated to close over the weekend that would have printed a billion dollar valuation on tZERO and likely would have sent Overstock’s equity price significantly higher.

Once again markets have opened up today before pulling back a bit. Though things look to be heading higher into the Fed announcement at 2PM. I exited a small AT&T position for a small gain, went long Overstock when it passed through flat on the day and sold it shortly later for a couple percent gain, and sold off a bit of Funko. 

At least for the next 3 or 4 years I like Funko as a company in terms of seeing tons of growth ahead, but I also thought it was good at $20, at $18, at $15, at $14, & at $13, so I have been willing to take a few percent here or there on counter trend rallies. Funko has an awesome Pop! Ad Icons: Buzz Bee available today. As long as the prices keep going up on eBay buying those exclusives is printing money. Which will encourage more trade. The big things that separate such a fad collectible from the likes of Beanie Babies is they license third party IP to tie the format to cherished childhood memories & currently hot media, and they got the design so well done.

I bought a bit of Apple today thinking the risk vs reward is decent here with their stock priced for negative growth while their buyback puts a bid under the stock.

  

Rising Rate Environment Meets Market Reflexivity

Almost nothing looked good yesterday & the market was off a couple percent across the board, giving a third straight down day. Longer duration bonds have pulled back from recent highs, with the market suggesting the Fed won’t hike many more times this cycle.

something happened October 3rd when Powell said the US was “still quite a ways from neutral.”

The self-reinforcing reflexive capital-attracting-cycle of Powell’s hard money stance hit the point of saturation. At that point the yield curve started to invert (or at least kink) and risk assets sold off hard. Powell finally tightened too much.

Now, this is where it got really interesting. Those who had taken Powell’s comments at face value were convinced that he wouldn’t shift policy simply because the stock market dipped a little. After all, in the grand scheme of things, financial markets were still elevated. What’s 350 S&P points when the stocks market is up 2300 over the past decade? Surely Powell will not cave at the first dip.

Wrong. He folded like a lawn chair.

Some of the biggest critics of easy money policy like Kevin Warsh & Stanley Druckenmiller are writing joint op-eds asking the Fed to stop raising rates. Even the editorial board of the WSJ is chiming in with the same:

The case for pausing in its interest-rate march back to “normal” starts with the Fed’s mandate to control prices with low unemployment. There’s simply no sign of an inflation breakout.The Fed’s favorite inflation measure, the PCE deflator, has been falling for months. The dollar is strong, both against gold and the world’s other major currencies. Gold sold for about $1,250 an ounce on Monday but six months ago it was about $1,300. Other commodity prices that are often inflation canaries, such as oil and farm products, are also down. … The larger argument for a pause is that the Fed is unwinding the largest monetary experiment in modern history. Central banks around the world are moving away from multi-trillion-dollar bond purchases and zero-interest rates, and they’re doing it without a road map. What is the “normal” interest rate in this post-crisis world? We don’t know, and we doubt the Fed does either.

Paul Tudor Jones mentioned how ugly the recent dynamics have been: 

“Using the Goldman Sachs commodity index as a baseline, Jones said prices are down 15 percent over the past 40 days. That gives the Fed no impulse to rate rates” … “He said he would “buy the hell out of” a downturn that could come with the drop, and expects the upswing will come after the Fed indicates that it will pause.”

Kevin Muir also thinks we are close to done with seeing rate hikes.

I don’t have the answers to what should be done, but I have an educated guess on what will be done. And it’s obvious the days of relatively hawkish US monetary policy are behind us. The surprises will not be how high Powell takes rates, but rather, how quickly he gives up on that idea and reverses course.

That, in turn, means we might be seeing the early days of a cyclical bull market in bonds.

Last week I sold out of almost everything I was holding other than some Google, a small Funko stake, and a small bit of Disney & Apple I’ve been holding for about a year.

I imagine when the market gets the likely memo on the Fed’s change of heart more speculative plays will go up the most. Maybe the memo was already heard premarket, as US markets are up even as Xi pledged to “stay the course”

“The past 40 years eloquently prove that the path, theory, system and the culture of Socialism with Chinese Characteristics … are completely correct, and that CPC theory line and policy that have since taken shape are completely correct.” -Xi Jinping, president, China

I don’t believe Overstock is a great company, but if I were betting on domestic stocks turning up some of the stuff like that which is really beaten down could easily jump dozens of percent. If it appears a recession is not on the horizon from a Fed rate ramp something like Enova International might also outperform.

Chinese stocks have been beaten down enough to start looking appealing. Even as Google disbanded censored Chinese search engine project Baidu hit new 52-week lows. The big risk with Chinese shares is that they’re being artificially kneecapped (ad policies with Baidu, money market regulations for Ant Financial’s Alipay & WeChat, video game approval regulations for WeChat, even the very ugly rape headline risk the CEO of JD faced a few months back) in order to bring them home.

Consider the July 2016 take-private of Qihoo 360, an internet security firm. The founders squeezed out U.S. shareholders at $77 a share, reflecting a value of $9.3 billion. In February 2018, they relisted Qihoo on the Shanghai Stock Exchange at a valuation north of $60 billion. That’s a 550% return. Qihoo’s chairman personally made $12 billion upon relisting, more than he claimed the entire company was worth 18 months earlier.

If one doesn’t want exposure to the Chinese expropriation risk & wants to play some larger names then some of the more debt saturated names with recurring revenue streams like AT&T might make decent short-term positional trades.

Zillow isn’t far from where it was when there was major insider buying & eBay is still quite beaten down. Anyone looking to buy a slug of ecommerce to better compete with Amazon (Walmart? Google?) would have a great destination in eBay.

Target has also pulled back significantly. They’re off 28.8% from their 52-week highs & are trading at a P/E of under 11 at a price per share they hit back in 2007. If the yield curve steepens while rate hikes stop some of the regional banks might also be good plays.

Some emerging markets might also offer great returns if the Dollar weakens significantly.

The simple fact is that apart from the most disciplined systematic manager (who is about to get fired), no one is underweight US assets. … If I am correct, then we don’t need these other countries to be terrific investments. All we need is asset allocators to return closer to their benchmark weighting and the US dollar will decline. And in fact, if all this move ends up being is a return from overweight to benchmark, then the currencies that were hated the most – the ones that investors were most eager to sell in exchange for dollars – will be the ones that rise the most.

Risk On / Big Up Day

Funko was up over 4% today. I sold off 40% of the shares of Funko I was holding.

I also sold Exxon Mobil at open for a nice gain. I bought some more XOM again around $77 & just sold it off again at about $77.40. If it goes under $77 I wouldn’t mind buying a bit more. (While writing this blog post XOM fell below $77, so I just added a position again.)

Verizon, some REITs & some of the municipal bond funds sold off today, while many high beta plays were up big. AT&T was up about 1.5% (I guess they are so relative debt-levered they trade more as a risk on play rather than a risk off play).

The Nasdaq & Russell 2000 are each up about 2%. Google is up about 2.5%, Mastercard is up about 4%, Neflix is up 5% … and then as you go into some seriously speculative stuff there’s a sea of green. Yandex up 5%, Snapchat up 6%, Overstock up 5%, JD.com up 6%, Twitter up 7%, Groupon up 7%, DB up 7%, Pinduoduo up 8%, StitchFix up 9%etc.

Just about everything other than bond equivalents, Under Armor & PLAY were in play to the upside, with nearly 70% of the stocks in the S&P 500 up a percent or more & nearly 90% of stocks in the S&P 500 up on the day.

Cryptocurrencies are up along with gold miners. 

Amazing breadth.

All the above is another way of saying almost everything is up, which is another way of saying the Dollar is selling off. The Dollar index is off about a half-percent today, though it is still up over 5% YTD & up nearly 10% off the February lows.

If the market runs for another day or two like this it will suck money out of fixed income. At that point I might buy some bond-like stocks, REITs or closed-end bond ETFs, but I wouldn’t want to do anything at serious scale throughout the remainder of the year.

Fade the Tweet

Another trade war negotiations working utterly fantastic well hugely big Tweet from the president provides a ramp for the stock market to open up.

I used that & the Libya oil issue to exit the ExxonMobil position I put on yesterday & half of the Funko I had left at open.

On Stocktwits someone published a picture of that San Francisco eBay billboard I walked past recently which promoted Funko Pop. There’s also a Funko lawsuit against Loot Crate for using Funko branding to sell Loot Crate boxes when they haven’t worked together in about a couple years.

Loot Crate hasn’t included a Funko Product of any kind for about 2 years now. The box shown above is an assortment of items from past boxes bundled together to sell at Walmart. The Pop shown (and mentioned above) is the last Funko to be included in any Loot Crate and it was to promote the Assassin’s Creed Movie in 2016.

I spoke with a friend today who has way more Pop than I do. He mentioned there are now a bunch of fake Funko products being created to cash in on the craze. He also collected sports cards when he was younger and said he thought the Pop craze has at least another 5 to 7 years left on it.

Google Trends shows nothing but love for FUNKO.

From open Funko has slid about $1 a share, so I re-established the position I sold at open. I also saw XOM had retreated almost $2 a share from where it opened, so I bought back in on it.

The WSJ published an article stating China was lowering U.S. auto tariffs from 40% to 15%, which is better than the 25% it was before the trade spat, but the financial markets have been see sawed for very little progress. …

Trump aides say that Mr. Trump sometimes tweets positive news about China talks to try to boost the stock market. Futures trading suggested a strong opening on the New York Stock Exchange.

At some point the half-life market performance of Tweets will match their actual half life.

The Dow has already dropped into negative territory for the day, with a big, beautiful 400-point slide from the open.

In other good news, Yellen warns of another potential financial crisis: ‘Gigantic holes in the system’North Korea is expanding missle base with eye toward U.S., experts warn. At least Twitter is up bigly on the day so far.

Another Mid-day Slide & Recovery

On the 6th I sold off a bit of Funko for a few hundred dollar gain. I picked up a bit of AT&T on the 6th which I sold on the 7th for a few hundred dollar gain.

On the 15th of November I put a bit into various muni bonds like MYD, IIM, NAD & NVG. I sold those on the 6th for about a grand of profit. On the 6th I also made a couple hundred on quick flips of PETS & OZK.

I am still holding a bit of Funko & Google, but exited some other positions I entered today or recently. The Funko I am still holding is off about $800 while the Google is stinking badly as they seem to keep coming into regulatory blowback. They are making the right moves in emerging markets like India even if developed markets like the EU & Australia are pushing back on them.

Part of my ongoing belief in Google is I think YouTube is vastly undervalued. As many different companies try to do paid streaming offerings they’ll end up saturating the field to where a greater share of content will end up being ad supported. They’ll perhaps push Netflix to adopt ads, which will eventually make Netflix less differentiated. When people have to choose between Neflix, Disney, Hulu, WarnerMedia, Amazon Prime, Roku, whatever Comcast offers & others, many will choose whatever is free. And almost nobody doing ad-supported deals will be able to sign meaningful exclusives that are ad-supported.

With Funko (FNKO) I perhaps over-bought into the hype of the Wal-Mart & Target shelving space increases. Luckily I was happy repeatedly taking small gains as it lost about half of its value, so I went in and out many times and did decent while the stock stunk up the joint. One of the things I saw while walking the streets of San Francisco with my wife recently was a giant eBay billboard which had limited content on it – only a couple pictures of Funko Pop! vinyl and the eBay logo. I sold out a bit of my remaining Funko position today on today’s gains, though am still holding 75% of the position I recently established.

Funko is hard to put any serious size on though because the bid ask spreads can sometimes be a half-percent to 2/3 a percent with the bids only being for 100 shares at a time. I imagine if you tried to sell 5,000 shares at market in a single go you would likely move the stock at least a percent against you.

Near the bottom today I bought a bit of Apple (AAPL) & then sold it about 2 hours later for a decent gain. I did the same with AT&T (T) along with exiting a small position I had in 1-800 Petmeds (PETS).

I have a small position in ExxonMobil (XOM) which I haven’t exited yet. It’s only up about $100 so far. Oil may still have much further to slide, but commodities are fairly beaten down. If the Fed does a dovish hike next Wednesday that might exhaust some of the recent Dollar strength and put a bit of a bid under commodities. Some of the gold miners (ABX, AEM, GG, NEM) have been rallying over the past month or so.

On a recent interview I heard Luke Gromen mention a more aggressive way to play commodities would be something like Gazprom (OGZPY) or Rosneft (OJSCY), though I think you have to be really attentive to the market or place your position & ignore the short-term market moves if you go heavy into that stuff. I have gotten a few bruises when someone pushed Yandex low out of its trading range by front running a sanctions announcement that afternoon & another one when Yandex was feared to be a takeover target by Russia’s Sberbank.

I am still mostly in cash for now & will opportunistically dip into the markets when it seems there is a decent set up.

Exited Zillow Early

On Monday I sold out of the remaining portion of the Zillow position I had after it popped about 10% on news of insider buying. I thought it might slide into close as shorts re-established positions at a higher base, but not so much. That thing has kept going up & closed up 12% on the day.

I was traveling on a long international flight which meant I wouldn’t be near a computer for about a day. The stock ripped higher throughout the week with Friday being the only down day, sliding 0.68%. Had I held the stock the gains would have been a couple grand higher.

The insider buying reports continued throughout the week. Before the recent jump the stock was priced low enough to be a takeout target for someone like Silver Lake.

That relentless rise throughout the week has been in spite of accelerating weakness in the housing market with canary markets like Dallas clearly turning over.

Going up on bad news is super bullish, but if there is no meat on the Xi-Trump trade meeting the whole stock market could sell off once again. To save face I don’t see China being very accommodating to trade demands until a serious crisis is well underway in their domestic market. They likely haven’t suffered enough pain yet.

The S&P 500  had its best week since 2011 on the back of Federal Reserve chair Jerome Powell suggesting rates are close to neutral, revising his position from October 3rd, when he said rates were probably a long way from neutral. This shifts market narrative from Trump’s the fed is killing us toward giving Trump ownership of the stock market’s performance.

The long view on Zillow is still quite compelling, as their brand is synonymous with their category. They are to real estate search as Google is to web search  & Amazon is to product search. That relationship is unlikely to change anytime soon.

That said, with the Congress split, social media amplifying hyper partisan news, the economic expansion nearing a decade, still increasing suicide rates (in spite of the economic expansion), China trade war narrative & politicians gearing up for the 2020 election next year, there’s a good chance there will be buying opportunities at a lower price.

If it slides back into the $20s I would certainly be a buyer again, but I am content being mostly out of the market for the time being. I should have bought a larger position so I could have done a partial exit & let a portion of the trade ride, but I was traveling & not trading. I also hate the idea of trading from a cell phone as I think that makes it too easy to get into over-trading & seek dopamine impulses vs sticking with fewer & better trades. Also, sometimes like having nothing on so I have a totally clear mind and can focus on other things. That in turn will make it easier to spot other opportunities, but riding a few winners longer is probably easier than spotting dozens or hundreds of different trade opportunities.

I have a tiny bit of Apple, Disney, AT&T, Google & some muni bond funds, but am mostly in cash right now.

Zillow Premier Agent Business Model Shift

Apparently, we are once again deep into FOMO:

“We’ve had clients across the board call in and ask where to put their money,” said Tom Stringfellow, president and chief investment officer of San Antonio-based Frost Investment Advisors. “Investors aren’t making any mass movement trying to get out of the markets, but they’re really looking for something to buy in this environment.”

While the market was up big, Zillow cratered.

They were off about 30% in the previous 3 months & then slid an additional 26.9% yesterday to close at $29.99 a share.  Trade volume was massive at almost 10x average daily volume.

Zillow now has a market cap of $6.062 billion. Given their $1.6 billion in cash on the books & about $600 million in debt, the rest of the business is valued at $5 billion.

We ended the quarter with $1.6 billion in cash and investments on our balance sheet and added cash from operating activities of approximately $102.5 million on a year-to-date basis, which positions us well to fund our next stage of growth.

When Zillow acquired Trulia in an all-stock deal Trulia was valued at about $3.5 billion & when the deal closed Trulia was valued at $2.5 billion.

Here is the competitive landscape for Zillow, based on SEMrush charts for Google search results in the United States.

They literally dominate their market. Realtor.com has passed up Trulia as Zillow stopped investing as much in Trulia & is milking its brand equity. But Trulia is still #3 & Hotpads is #5.

Here is a GIF showing how the market has changed over the past half-decade, with 1 data point for each October.

For comparison sake, UK property site Zoopla was bought by Silver Lake for $3 billion.  And here is what Zoopla’s profile looks like.

 

Having read the transcript of the quarterly conference call, I think the market is overreacting & doesn’t understand the friction in running an auction-based marketplace & is misunderstanding what the shift from version 3 to 4 to 4.1 of Zillow’s Premier Agent product does.

Zillow is expecting total revenues of $340-$357 million, which at the midpoint of that range is still up 23% y/y over 4Q17 revenues of $282.3 million. Premier Agent midpoint revenues of $223 million are also up 12% y/y over 4Q17’s $199 million. Wall Street was expecting slightly higher total revenues of $367.8 million (+30% y/y). All told, while the guidance certainly disappointed, it wasn’t disappointing enough to merit a 20% crash – especially when management already warned that Q4 suffers from seasonality.

Zillow went from sending agents a bunch of emails, to a fewer number of warm calls, to what will soon be a blend of both.

In the past when a Realtor would get an email maybe they would answer right away, maybe they would answer in a few hours, or maybe they would answer in a few days. Now the call leads try a number and if nobody answers it automatically dials the next agent in the tree.

When they shifted their primary lead channel from email to phone calls that lowered the total number of leads sent to Realtors at the same time the back half of the year housing slowdown coupled with rising rates finally starting to impact the economy.

Anyone in sales knows that a warm lead on the phone is worth much more than an email. You can hear a buyer’s voice inflections, understand how urgent their demands are, what their big hang ups are & what their must haves are, etc.

From the conference call:

The consumer experience from all of this is very important to understand. I gave you some data about the improved response rate from about 49% to around 100% from consumers being able to get agents on the phone. I’ll give you one other data point to try to dimentionalize why this PA 4.0 and PA 4.1 changes are so important. Consumers that were contacting an agent through PA 3.0 gave us a 2.5 out of 5-star rating on their experience. Consumers that go through PA 4.0 or PA 4.1 give us a 4.1 star rating out of 5. So that’s a 60% improvement in consumer satisfaction with this new lead connection model. That’s huge. That’s why I know that the changes that we’re making with PA 4.0 and PA 4.1 are good for the business, good for the company and good for the user.

TripAdvisor suffered the same sort of cratering when they shifted from PPC to offering hotel booking services, but ultimately for the businesses to stay sustainable they need to move beyond selling clicks & have deeper integration. TripAdvisor was only generating about 30% as much from mobile visits as they were from tablet or desktop users. Ultimately to have a sustainable business model in a competitive category with high traffic acquisition costs you need to have repeat visitors.

To this day TripAdivsor is still having some bumpy quarters due to the model shift, …

Tripadvisor has struggled in recent quarters as revenue growth has slowed and profits have fallen due to weaker monetization rates on mobile ads than desktop ads, and due to the company’s launch of its Instant Booking platform hitting unexpected headwinds.

… but ultimately it is something they had to do.

Selling clicks is higher margin & faster growth in the short run, but over time it becomes a less efficient model because you don’t build the organic audience comprising of repeat visitors who actively seek out your business.

If you sell every click you must buy almost every click.

And then you eventually run out of people to advertise to & the prices you must pay for traffic increase as people become less receptive to your site and brand.

The alternative is you take the short-term hit to go deeper into the funnel & then see it through to the other side.

Fundamentally, TripAdvisor had mixed success. Average monthly unique visitors were up 8% to 490 million, although hotel shopper counts were down 5% to 160 million in the same period. Revenue per hotel shopper inched higher by 5% to $0.41, ending a long streak of zero or negative moves for the metric. TripAdvisor now offers more than 700 million reviews and opinions, with 2.1 million accommodations, 1 million travel activities, and 4.9 million restaurant listings sending total listings above the 8 million mark.

The cost of doing so is frequently about a 50% haircut in the stock price at the nadir, but then the business has greater longterm stability.

Unless you are Google it is quite hard to become a habit by sending people elsewhere for the transaction. And even Google is bundling hotel booking features in their search results.

If you don’t own the operating system it is hard to build a habit out of a site that sends users elsewhere. There’s a reason the EU fined Google €4.34 billion for Android bundling & there is a reason Google is expected to pay Apple an estimated $9 billion this year & $12 billion next year for default search placement n Safari.

Amazon.com did away with much of their ad options that sent users offsite for conversions & instead is primarily selling ads which lead to on-site conversions. That allowed them to get far more aggressive with on-site ad placement & skyrocket their ad revenues (the extra visual friction of more ads is offset by the lower friction created by conversion happening on-site). And then Amazon is sort of free riding on the DoubleClick for publishers install base to push a header bidding solution where they bring more traffic back into Amazon.com.

I was even more convinced in Zillow’s prospects when I saw a warning about it being a landmine.

I think the big reason they went into the home flipping business (panned by Cramer here) was in part to try to limit the ability of upstart competitors like Opendoor to raise money & issue debt at favorable terms. Opendoor has already raised over a billion.

Most likely in the coming few months Zillow will go slow with some of the new business lines (like home flipping & loan origination) to focus on their core product catering to Realtors & get a strong beat on their Premier Agent product, however it is worth noting we are already almost halfway through the current quarter. Version 4.1 of Premier Agent is supposed to launch in the next couple weeks. The 4th quarter tends to be pretty weak in terms of real estate transaction volume. Q4 numbers might also suck (they have the data to know they would lay an egg when they lowered guidance for the quarter) but I’d expect Q1 & particularly Q2 numbers to look good unless we go into a full-on recession.

A recession might actually make Zillow stronger when compared against fast growth home flippers like Opendoor, as Opendoor is carrying far more inventory & Zillow is still able to sell leads to others if they don’t want to purchase a particular home.

Opendoor acquired about 4,000 homes and sold about that many, a company spokesperson told MarketWatch.  … On the 20,000 people who requested an Instant Offer [from Zillow] in the quarter, DelPrete said, “that’s a $20 million opportunity right there. That goes right to the bottom line, compared to the money they make flipping houses,” which he estimates is a 1% to 2% net profit. “To me that crystallizes the opportunity. That’s a billion dollar opportunity if they roll out nationally.”

Zillow’s entry into the mortgage market wasn’t a particularly large bet either, as the company they acquired cost them $65 million & they can use their own service to add liquidity to the market in whatever regions where demand is soft from other lenders.

I bought a rather small stake in Zillow today. Maybe I am a bit early, but I think the risk to reward is decent after this big of a haircut on the stock unless there is a recession soon. If Zillow falls much more they’d be a buyout target as their addressable market is far larger than Zoopla’s is & after discounting cash on the books Zillow is worth a bit more than 150% of what Zoopla was acquired for.

Analysts & the broader market have a way of *really* believing some narratives of change while having little to no faith in others. LendingTree is still down big from their $404.40 52-week high, but they jumped from as low as $184.19 on October 29th to $264 at the close of market yesterday.

In Q3 LendingTree’s core legacy market – for which their brand is most well known – was off 17% QoQ & 25% YoY, yet they were still up big after earnings in part because they used a portion of their buyback at a blended price of $230 a share, still had a good bit of their buyback left, and have bought growth with other brands like DepositAccounts.com, Student Loan Hero, Ovation, Snapcash, MagnifyMoney.net & QuoteWizard. If the market values your stock at a 30x, 40x or 50x multiple it is pretty easy to keep growing at 15% to  20%+ YoY by buying up smaller complimentary pieces for a 5x to 8x multiple.

LendingTree has largely been lauded for their acquisitions, whereas the street views Zillow as distracted & incompetent whenever they attempt line extension. Cramer stated he felt Zillow’s desperation is unbecoming. I still think they have a strong market position, loads of traffic, great brand equity & lots of opportunity ahead of them.

The Midterm Election

As mentioned in the prior post, I thought the recent Trump tweets about progress with Xi were an attempt to goose the market ahead of the midterms next Tuesday.

Most likely the House of Representatives flips to being Democrat controlled. If it does, pharma stocks are likely to get beaten up as hard-left outsiders call out Trump’s lack of progress on healthcare pricing reforms – nevermind that the New York Times about a year ago published a garbage article promoting healthcare McJobs as a vital jobs engine. That awful logic was debunked by Frederick Bastiat in 1850, but partisan hackery has no need for facts!

Here is a quick blurb from Reuters

Policy efforts to lower prescription drug prices that have started under Trump could get more attention should Democrats gain control in Congress.

Democratic gains in particular could lead investors to anticipate expanded coverage or other changes related to the Affordable Care Act, possibly benefiting some insurer company and hospital shares.

AbbVie beat expectations and boosted their dividend from $0.96 to $1.07, but they also recently lowered Humira pricing by 80% in Europe over biosimilars.

AbbVie is trading at a forward P/E of around 10 & their current dividend yield is 5.38%. If Democrats lose the House of Representatives I wouldn’t be surprised to see ABBV share prices go from $79.56 to $110+ given their strong pipeline.

I sold off a small ABBV position at open & might buy again after the election if either there is a significant price dislocation or the House of Representatives somehow remains under Republican control.

Reuters also mentioned the pulling forward of demand by fears of gun regulations as a potential catalyst for stocks like American Outdoor Brands (AOBC) & Strum Ruger & Co (RGR).

Democratic gains in Congress could pave the way for calls for more stringent legislation to control gun sales. But the prospect of stricter regulations on the firearms industry, paradoxically, could drive up shares of gun-makers.Investors in the past have bid up shares of gun companies in anticipation of tougher rules, because investors predict gun owners will hurry to buy more firearms if they worry about impending restrictions

 

Trillion Dollar Tweets

On the most recent stock market sell off longer duration bonds did not strengthen anywhere near as much as they had historically. Bond yields fell slightly, but only slightly. Whereas in stock market sell offs prior to this year bonds usually strengthened.

About a week ago it seems the Federal Reserve had a different person lined up each day to do an interview where they suggested raising rates is the right thing to do, hinting to the market that the recent stock market revulsions would have no impact on their resolve and up, up, up rates will go – hawkish.

There are few corners of the bond market where Jim Grant sees actual value. About the only area he named was some tax-free close-end municipal bond funds. Even Federal Reserve insiders are mentioning the economy is growing more interest-rate sensitive:

 we have to keep in mind in the medium term, that tailwind could turn into a headwind if the U.S. decides it needs to do things to moderate its debt growth in the future. And the other part of that potential headwind is we have to keep in mind that with this much debt, our economy is much more interest-rate-sensitive even than it was even 10 years ago. And meaning, a rise in rates affects debt service costs more. Corporate debt is higher, although I think it’s probably manageable. And we know government debt is dramatically higher.

Yesterday the stock market was up & so today opened with a Trump tweet touting progress with China.

The broader US stock market jumped. Utility-type value stocks like Verizon or AT&T slid  while most the market went up.

The US-listed Chinese stocks ripped higher. Pinduoduo up 15%,  IQIYI up 13%, Tencent up 8%, JD.com up 7%, Alibaba up 5%, Bilibili up 5%, Baidu up 4.5%, etc.

So is the bottom in?

Risk on?

More likely that great, long conversation full of progress on  a deal is a confidence boosting fake news item.

Stronger stock market = stronger Trump midterm elections on November 6th.

“I don’t buy the story for a second,” said Michael Every, head of Asia financial markets research at Rabobank in Hong Kong. “This seems a perfect way to ensure equities rally into election day, put Xi into a box in terms of what is expected of him and then have someone to blame when the deal then falls through.”

Looking past the Tweets, the broader anti-China sentiment is spreading. The United States is still driving the narrative, highlighting the relentless intellectual property theft.

 “Taken together, these cases, and many others like them, paint a grim picture of a country bent on stealing its way up the ladder of economic development, and doing so at American expense,” said John Demers, who heads the Justice Department’s national security division.

Suddenly the United States isn’t standing alone against China. Here’s an article from French Ambassador Jean-Maurice Ripert & German Ambassador Dr. Clemens von Goetze where they do not dance around the core issues:

A fourth example would be to replace provisions in technology import-export and joint venture regulations that restrict foreign ownership and freedom to exert IP rights, to lift burdens on IP rights holders suffering infringement and to show real commitment to preventing and fighting massive counterfeiting.

I sold out my tiny positions in Tencent & Yandex. Now I am mostly in cash.

Apple gave soft guidance for next quarter after hours & they also announced they are going to stop reporting unit sales. That shift in reporting clouds the message they have shared over the past few years about making money off device sales rather than spying on users for ad targeting.