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.

Hide Out From Volatility in Bitcoin

One big issue with mean reversion trades is when the range breaks it can break HARD & FAST.  If you use tons of leverage on mean reversion you can get hit hard when the range breaks.

A couple of my favorite mean reverting / rangebound stocks over the past few months were Funko & AT&T. Prior to that I did a bit of Yandex & eBay. Of course eventually the ranges broke. AT&T has been on fire the past couple days, but it was on ice for a few days prior. The dividend yield got up to almost 7% after it cratered. And then the value investors came in and started gobbling up shares, pushing prices back up about 5%.

More recently I haven’t been trading much , but a week or so ago my wife got a (bogus) Yahoo! Finance notification that Bitcoin was around $3,400 or something like that.

I don’t check out CoinMarketCap.com every day or own a bunch of Bitcoin, but that notification sounded & felt wrong to me.  In the back of my head I kept thinking that whenever I looked at Bitcoin it was around $6,300 to $6,400 & so I pulled up a chart over the past 3 months.

Ever since September 6th, 2018 Bitcoin has been ahistorically stable, even as broader financial markets have seen a significant uptick in volatility.

The recent range for Bitcoin has been between $6,200 and $6,800, which would be a broad range for a dividend stock, but is much less volatile than most tech growth stocks have been recently.

This relative stability comes as broader financial markets are more volatile (emerging markets melting down & volatility increasing in the US financial markets) & as stablecoin Tether broke the buck.

I have no idea if cryptocurrencies will ever have a real use beyond speculation, but two thoughts I have on it in terms of upside vs downside right now are:

  • the longer it bases, the greater the likelihood it will move up rather than down when it breaks out of the range
  • Venture capitalists have poured too much money into the market to let it go to zero. Other coins may outperform Bitcoin if things improve dramatically (as they are higher beta / more speculative plays), but there is little lasting narrative for any other coin or token if Bitcoin craters to zero. Bitcoin is the Coca-Cola of the industry. The smart money from folks like Tiger Global Mangement keeps pouring into crypto.

Tim Berners-Lee’s second version of the web could create the best parts of what cryptocurrencies claim to offer without needing tokenization & the hype filled speculation boom. The hard part will be figuring out media licensing, while enabling user control & ownership over digital media AND making usability easy.

I think most people value the ability to be lazy & not think about technology (particularly for fun and entertainment) more than they value privacy. Why do so many people still use Facebook? Why is Google so huge relative to Startpage.com or DuckDuckGo or other players? Why are piracy sites (e.g. music, movies, porn, etc.) some of the most popular websites?

Tech is changing. But will users eventually get alienated as the big platforms change their business models? Now Google’s homepage on mobile devices has an algorithmically generated news feed on it, but Google pissed off a lot of bloggers when they arbitrarily shut down Google Reader years ago.

The whole “multi homing” concept is IMHO largely garbage. Most users go to Google for search. Most readers who read ebooks buy from Amazon.com. Movies will get blurrier as DVD sales crater just like CD sales did. With media companies bulking up might DVDs go away entirely so the only source for a particular show is a subscription streaming account (or an illegal torrent)?

It is a pain to have to login to Amazon.com for season 2 of a show, Vudu.com for season 3, and have the DVDs from season 1. This is part of why the early leaders may remain defaults – laziness. But as the movie & TV market splinters it will encourage people to have multiple parallel subscriptions.

Will the bulk of the profits from those moves go to the end publishers? Or will they flow to a couple central app stores that also control most paid access to other collections?

Most new laptops do not even contain DVD drives. I have a bunch of DVDs which are a pain to watch, but are easy(ish) to watch on something like Plex, but I have no idea how something like Plex competes in perpetuity against Netflix. Maybe someone like Roku will need to buy out Plex.

CEO Kicked Out – An Obvious Trade Set Up

I’ve been (slowly) reading Ken Auletta’s book Frenemies: The Epic Disruption of the Ad Business (and Everything Else).

In the book WPP’s former head & roll up founder Martin Sorrell is regularly featured. He was consistently highlighted in the media as one of the highest paid executives in the world & even when his pay “plunged” to £13.9m that was also covered & another chance to remind how he was paid £70m in 2015.

Google & Facebook have rendered the large ad agencies largely unneeded.

Large advertisers are moving their ad agnecies in house. Advertisers can use their own first party data coupled with the targeting features offered by Google & Facebook (upload email addresses, on-site user cookies, look alike audiences, etc.) to target ads more precisely than their ad agencies can.

Companies like Deloitte & Accenture have also jumped into offering marketing services.

The large ad agencies offset the rot in their core business by relying more on kickbacks on media buys, which in turn killed client trust. They also expanded margins by downsizing the various acquisitions & relying more on younger workers who are paid less than the older workers who were pushed out.

In 2009 WPP reduced their headcount by 14,000 employees. Even so, in 2017 they still have 130,000+ employees. To put that number in context, they have almost 50% more employees than Google does without all the massive “other bets” Google makes in AI, self-driving, etc. & without owning the great online real estate Google owns.

At some point when you have over 100,000 employees, the category you are in looks like it is in a death spiral, and you are largely a glorified reseller of a third party’s products & services it is hard to have a differentiated offering. Many of your brightest employees will likely jump ship and move on to Google, Facebook, Amazon, Twitter or one of the “next big thing” styled plays like Snap or Pinterest.

Many sovereign debt crises happen after a new regime comes into power. Nobody wants to be the bag holder when things fall apart. If there are many dead bodies hidden among the accounts, allowing sunlight in to highlight what has happened resets what one is viewed against by resetting the bar lower.

If a new leader says nothing then they eat it & eventually they own it. But if they reveal the corruption in the prior administration they grant themselves the authority to try to fix things along with the ability to try to change the narrative.

The same is also true with CEOs.

Looking at how frequently Martin Sorrell’s pay was highlighted, if he was doing a really crappy job he would have been fired. That his pay was covered as an outrage for so long without him being fired must have meant he was somewhat effective. However he “resigned” in April. After he resigned, it was alleged he used company money to pay for a prostitute. Of course, he denied that claim, but he was already pushed out & he was quick to launch a new venture.

Asked whether he had visited a prostitute, Sorrell said: “We’ve dealt with that by strenuously denying it.”

“So it’s not true?” Auletta asked.

“It’s not true,” Sorrell replied.

WPP shares recently fell the most in decades (worse trading day than they had in the 2008-2009 financial crisis). Revenue fell 0.8%, they missed earnings, margins declined & their share price dropped as much as 22.5% as the new CEO Mark Read has stated they’ve had trouble for the past couple years.

And here’s his money quote (re)setting the baseline

“I think any chief executive has to take responsibility for the company’s numbers. I knew the scale of the task when I took on the job and I think you have to look back in two to three years time and see how we are doing.”

At the bottom their shares fell to a six-year low.

In WPP’s biggest market, North America, like-for-like organic sales declined 5.3 percent, and there was also an unexpected slowdown in the U.K. and Western Continental Europe.

The ugliness doesn’t stop there. Now that the CEO is changing narrative & restructuring the company, the longtime CFO is also leaving.

Another Thursday announcement by the company: Chief Financial Officer Paul Richardson, who’s been in the role for 22 years, will retire in 2019.

Unfortunately 🙁 I didn’t buy put options on WPP ahead of earnings like I should have.

It was such an obvious change given the Sorrell story, the new CEO & the disruption in their core market

Some things are so obvious we look right past them. Doah!

 

Picking Up Nickels In Front of a Steamroller

Trading yesterday certainly felt like picking up nickels in front of a steamroller.

Of the Nasdaq 100, a few minutes before close the only 3 stocks that were up were overrun / off sized clothing discounter Ross Stores & then food product companies Pepsi & Mondelez International which help give bodies an irregular size so they will fit the clothing for sale in Ross Stores.

By end of day Ross Stores went negative, so my joke (acknowledging I am more than a little bit chubby) was for the most part ruined.

I once again sold a bit of Yandex at open.

As ugly as their chart has been the past week, buying the close and selling the open keeps being a winning move.

By the end of day yesterday, I didn’t want to put any more positions on, so I won’t be testing ye ole Yandex fliperoo this morning.

When the markets turned up yesterday I went in & out of eBay, sold off a bit of the AT&T I bought during the morning plunge (though am still holding a bit) & bought a little more AbbVie & Google.

The quick flips were good, but the broader market upturn was fake as in news. When I came back from my workout…look out below!

Bing ad revenues were up 17% YoY. I am sure Google grew faster. Merkle’s 2018 Q3 DMR report stated advertisers increased YouTube spending 77% YoY.

The big issue for Google is the giant TAC payments to Apple for default search placement on iOS devices & desktop Safari web browser.

Google could pay Apple $9 billion in 2018, and $12 billion in 2019, according to the Goldman estimate. … In 2017, Bernstein analyst Toni Sacconaghi estimated that Google was paying Apple $3 billion per year. The only hard number we know for sure is that Google paid Apple $1 billion in 2014, thanks to court filings.

According to Merkle’s Q3 DMR report Amazon’s product ads are dusting Google on the conversion rate.

This is likely due to some combination of

  • far higher conversion rates for Amazon on mobile with 1-click ordering
  • trust in Amazon’s logistics network
  • Google’s disdain for customer service
  • the perception that Amazon is a destination store & a brand aligned with ecommerce, whereas Google Shopping is to ecommerce as Google Video was to video.

That gap will only expand over time as more & more web usage is mobile or even voice.

As a person who works at home it is easy to underestimate how massive mobile web usage is, but people who are having their desktop computers die are in many cases not even replacing them (and that is during a non-recession).

The headline on this graph is fairly muted, but look at the 5% slide on desktop & laptop usage in 2 years.

With the rise of Roku, Chromecast, Amazon Fire Stick, Apple TV, Netflix, Hulu, etc. … for many people the web is simply becoming on-demand TV. Most other simple tasks like email & social media can be done over mobile.

A big portion of the delta is a lot of the Amazon clicks are brand arbitrage where brands feel the need to bid to displace competitors on own brand terms. Google, of course, also enjoys immense profits from brand arbitrage, but they are seen as a search engine rather than a product search ecommerce platform, which makes it harder for them to offer a single stand out massive ad unit for the top bidder the way Amazon can.

Brands feel the need to bid aggressively on Amazon to block counterfeits, cheap goods manufactured from China & the Amazon private label brands showing up everywhere.

One could almost view Amazon’s private label brands as their version of the knowledge graph & people also ask features in Google results. Visual noise to distract users and force the ad buy. Most users are unaware of how extreme it has become, but those who get the web get pissed at the practice.

Ultimately Google will need a real, distinct & separate brand for ecommerce. Their ecommerce equivalent to YouTube.

While eBay keeps sliding (just like Yandex) I think eBay will eventually be a good take out target. They’d be a great way for Walmart to juice their ecommerce business. And if Google or Facebook decide to move away from / compliment their ad revenues from CPC click ads & video watch ads then eBay is a great way to buy a big chunk of the market & own a destination site.

I could also see a company like Wayfair acquiring Overstock to expand their perceived addressable market. But the move down market is really that big. Amazon is a giant, eBay is large but somewhat stagnant, Walmart & Target are aggressively investing in e-commerce, but then if you go below that layer in the US you are really talking niche brands like Blue Nile or Wayfair or companies that are sort of running in reverse (in terms of growth) like Overstock.

Pre-market the S&P 500, Dow Jones Industrial Average & Nasdaq are all up big.

I spent much of the last month doing mostly trades I was going in & out of on the same day, or lightening positions particularly on winners. I am mostly in cash as I expect heightened volatility at least until the midterm elections are over. Daily pipe bomb stories (real or fake) tend to help the news media sell the fear.

And there are many knock on effects beyond interest rates & investor preference for growth vs value equities vs various qualities fixed income. As Netflix levers up on debt & slides, lowered faith in their model not only hits their stock price, but it also causes Disney to slide since the soon to be added on complimentary revenue stream for Disney

Arguably if Netflix weakens & can’t spend as much on differentiating content it would make Disney a stronger competitor that grows share even faster, particularly with all their fantastic IP they own.

Of course short-term & long-term narratives can run in opposing directions & the market is largely viewing Disneyflix as a wait and see.

There’s still the war of the roses between Trump & Xi, and the war of the roses 2 between Trump & Powell.

Some savvy voices in macro think the Federal reserve has already overtightened too quickly to where yield on longer duration bonds are going to start dropping significantly.

 

In the January/February sell off bonds were down with equities, whereas during yesterday’s broad-based market plunge longer duration bonds strengthened.

In and Out of Funko

I went in and out of Funko a couple times today. I saw it was down the magic 7.77% and it felt like it had to go  up. 🙂

I also added & sold off at a slight gain on Yandex & AbbVie positions, though the older established positions I have in both are still stinking.

I went in and out of eBay for a small gain.

I was also quite happy to have sold off some Tencent yesterday even at a slight loss as it stunk today. I am still holding some which is down, though a tiny position.

I had a small position in Gold Corp (GG) which I sold at open.

The whole market was off solidly today, but some players turned up. Google closed green.

President Trump  leveraged the Jamal Khashoggi murder to push Saudi Arabia to pump more oil, which hit oil prices. He then kicked the ball to Congress:

Speaking in the Oval Office, Trump skewered the Saudis, saying, “They had a very bad original concept, it was carried out poorly and the coverup was the worst in the history of coverups. He added, “In terms of what we ultimately do, I’m going to leave it very much — in conjunction with me — I’m going to leave it up to Congress.”

If he can cause oil prices to fall then gas prices will fall, leading to lower inflation expectations by consumers. Which, he hopes, will give the economy more slack to grow & prevent the Fed from raising rates as quickly.

He is regularly casting hate toward Federal Reserve Chairm Jerome Powell:

“Every time we do something great, he raises the interest rates,” Mr. Trump said, adding that Mr. Powell “almost looks like he’s happy raising interest rates.” … “To me the Fed is the biggest risk, because I think interest rates are being raised too quickly,” the president said just before he pushed a red button on his desk, summoning an iced cola delivered to him on a silver platter.

Either he thinks the stock market & economy are headed south & he wants the Fed to be the bagholder, or he is trying to provide enough pressure in the hopes he can slow down rate increases until after he is re-elected.

In a land of make believe eventually people believe in nothing. Former Federal Reserve Chair Paul Volcker recently wrote a book on this:

 “Respect for government, respect for the Supreme Court, respect for the president, it’s all gone,” he said. “Even respect for the Federal Reserve.” … “The central issue is we’re developing into a plutocracy,” he told me.

The trend in the market has been ugly of late.

 The markets fell on Monday in part on worries about a deluge of corporate earnings reports coming this week. The S&P 500 has fallen for four sessions in a row, and 11 of the past 13 sessions. The Dow Jones Industrial Average and Nasdaq are on pace for their worst month since January 2016.

If I had to guess my hunch is we’ll open up slightly tomorrow, though I am mostly in cash at the moment. The only position I added to significantly on a relative basis today was a bit of Funko bought just before close.

If oil falls another day or two & XOM goes with it I might buy a bit.

In order to maintain the troll level at 11, President Trump revoked a nuclear agreement with Russia & then announced he would soon meet Putin.

Exxon Mobil might soon work with Russia on some projects, but palladium is trading at an all-time high even as car sales slow across China , emerging markets, the UK & even the US.

AT&T reports before open tomorrow. Verizon was up huge on an earnings beat today, pulling AT&T up with it. Texas Instruments was off in after hours on weak guidance while Kimberly-Clark was up big like Procter & Gamble was on earnings last week.

 

 

 

YNDX Again

You Have to be Awake to be in the Game

Once again Yandex was up big on open, cratered, and then recovered a bit.

A big part of day trading is being awake during the trading day. 🙂

I screwed up my back and my sleep so I didn’t catch open, though thankfully am feeling a bit better now. I woke up right as the stock was bottoming and didn’t have my mind set to be able to trade then.

Yandex News

Yandex’s founder Arkady Volozh has a significant voting share in the company & put out a statement he had no interest in selling his stake.

Two other notes about Yandex.

First, as of their February report their US-based shares are largely held by a single entity:

Yandex said that as of Feb. 15, 2018, there was one holder of its shares based in the United States which held almost all Class A shares, or around 42.10 percent of shares by voting rights. It did not disclose the name.

Second, Russia has a draft law which will limit foreign ownership in news aggregators.

Russian-language news aggregators Google and Yandex will fall under the draft law limiting participation of foreigners in news aggregators ownership structure, submitted to the State Duma on Monday, co-author of the initiative and State Duma representative Anton Gorelkin told TASS on Monday.

In theory, if such a law were passed it would hit Google harder than Yandex in the Russian market, as Google would either be forced to create a separate operating entity for their Russian news search, or they would have to shut down their news search vertical.

If that law were passed Yandex could rebuy some of their shares and/or sell an equity stake to a local business (like Sberbank) to get the foreign ownership level below 20%.

If Google creates a separate operating entity in Russia that will play absolutely horribly with the polarized political conversation in the United States. Which would mean they would likely be forced to abandon the news vertical, which would then likely cause Yandex’s service to be more differentiated & help Yandex further gain search marketshare across Russia.

Russia was the first market to fine Google for their Android bundling. Since then Yandex has dramatically closed the gap with Google on mobile search usage, lowering the usage gap from 36% to 5%.

And Yandex still leads on desktop + overall.

If Google lacks local news coverage then Yandex could in short order end up with perhaps 70% to even 75% of the Russian search marketshare. That would grow Yandex search revenues at least 25% on top of the general growth of search usage & search ad click prices.

Longterm the above should make Yandex a buy, however there still are 3 big issues:

  • If the news aggregation regulation passes will Yandex spin out a separate news subsidiary? Or will foreign ownership need to be reduced?
  • It is in Russia. Is the company going to come under state control & get plundered?
  • If a single US shareholder owned a large stake in the company is the current massive selling over the past 3 trading days that entity being forced to lower its stake?

Yahoo! Finance lists the following holders information.

Major Holders

Currency in USD

Breakdown
3.57% % of Shares Held by All Insider
83.95% % of Shares Held by Institutions
87.06% % of Float Held by Institutions
423 Number of Institutions Holding Shares

Top Institutional Holders

Holder Shares Date Reported % Out Value
Wellington Management Company, LLP 14,742,445 Jun 29, 2018 5.08% 509,351,463
FMR, LLC 11,880,500 Jun 29, 2018 4.09% 410,471,265
Capital Research Global Investors 9,238,886 Jun 29, 2018 3.18% 319,203,504
Oppenheimer Funds, Inc. 8,924,602 Jun 29, 2018 3.07% 308,344,992
Carmignac Gestion 8,543,751 Jun 29, 2018 2.94% 295,186,590
Morgan Stanley 6,197,172 Jun 29, 2018 2.13% 214,112,287
Blackrock Inc. 6,161,700 Jun 29, 2018 2.12% 212,886,730
Melvin Capital Management LP 5,754,408 Jun 29, 2018 1.98% 198,814,792
Wells Fargo & Company 5,426,630 Jun 29, 2018 1.87% 187,490,062
Harding Loevner LLC 4,722,149 Jun 29, 2018 1.63% 163,150,244

Top Mutual Fund Holders

Holder Shares Date Reported % Out Value
Fidelity Series Emerging Markets Opportunities Fund 4,644,580 Jun 29, 2018 1.60% 160,470,235
Invesco Developing Markets Fund 2,592,126 Jun 29, 2018 0.89% 89,557,951
VanEck Vectors ETF Tr-Russia ETF 2,068,048 Jun 29, 2018 0.71% 71,451,056
Baron Emerging Markets Fund 2,019,815 Dec 30, 2017 0.70% 65,765,179
Price (T.Rowe) Emerging Markets Stock Fund 1,668,630 Jun 29, 2018 0.57% 57,651,165
Smallcap World Fund 1,530,000 Mar 30, 2018 0.53% 60,052,500
Vanguard International Value Fund 1,381,815 Jan 30, 2018 0.48% 53,199,877
Artisan Developing World Fund 1,329,473 Dec 30, 2017 0.46% 43,287,642
Ivy Emerging Markets Equity Fund 1,283,000 Dec 30, 2017 0.44% 41,774,481
Wells Fargo Emerging Markets Equity Fd 1,240,106 Jun 29, 2018 0.43% 42,845,661

Nationalism / Re-localizing The Internet Supply Chains

President Trump is given a lot of crap for being “nationalistic” but so many other leaders around the world are approaching the web using the nationalistic playbook…

  • It is hard to find a more nationalistic country in terms of tech ecosystem than China is. Outside of the US there are only a couple mega cap tech companies that are not from China. And China is trying to force sharing of source code as a condition for market access.
  • Eric Schmidt has suggested the web will fracture with there being the Chinese Internet & the other Internet.
  •  Look at the hoops Google is trying to jump through to get back into the Chinese market. And once they state they are willing to do X (censorship, tracking users, passing information onto a local partner who will then pass it on to the CCP) to be in China they’ve established they are willing to do X, so other countries will ask the same.
  • the EU passed GDPR along with regulations requiring streaming services to have a set percent of local content. And they have the laws surrounding things like compulsory copyright / link tax.
  • Vietnam is following China in requiring localized data storage.
  • India requires ecommerce platforms that sell third party brands to sell for local merchants rather than carrying inventory directly
  • Inda passed a law requiring payment data to be stored locally (which was likely a big part of why Berkshire Hathaway invested in Paytm’s parent company).

Other Trades

Funko was up big today (10.21%, closing the day at $20.08), so I sold out my remaining share in it. If it slides tomorrow I will re-establish a position.

I sold out a bit of TCEHY I was holding for a while at a small loss. Last Thursday I bought a small amount that I sold at a gain Friday, so these two trades just about offset.

This afternoon I also went in and out of ABBV, AEM & EBAY for small gains. I picked up a bit more ABBV just before close.

 

Yandex (YNDX) Beaten & Left for Dead

Yandex followed yesterday’s doom cycle with a dead cat bounce open at $30.48 followed by a rapid decline to $26.42 a share. They’re now worth around $8.7 billion.

The price then touched $28 a share & has since resumed declining, now at $26.63 a share.

I sold the biggest chunk I was holding at open & bought a bit more at $27.50 & $26.79. Both of which I sold at $27.99 as I saw the Russel 2000 turning lower.

I am still holding a small position I bought early into the slide which basically offset the just before close purchase & flip on open.

Yandex is in talks to sell up to 30% of their company to Sberbank, the largest bank in Russia, which is half-owned by their central bank.

So why the decline? Perhaps some investors are concerned over the possibility that Sberbank’s stake could mean potential dilution for existing shareholders — though a share issuance and subsequent buyback would be presumably a zero-sum game. Alternatively, you can’t help but wonder whether Yandex’s autonomy could suffer with a government-owned bank as its controlling stakeholder.

It is rare that a company would have a bidder interested in buying a 30% stake & then see their shares slide 30% in response to news leaking. Ahead of the Yandex IPO they gave Sberbank a golden ticket:

Since 2009, Sberbank has held a priority share in Yandex which was purchased for a symbolic €1. From the company’s publicly available documents, it appears that this priority share gives Sberbank the right to block the purchase of more than 25% of Yandex’s shareholders’ equity and/or votes by any of the company’s shareholders or a third party. A similar right exists regarding the sale of a stake larger than 25% to a third party. However, the golden share does not give Sberbank the right to influence operational decisions, nor does it give it additional dividends.

In May of 2011 Yandex priced their IPO at $25, raising $1.3 billion. On the day of the IPO their stock closed up 55% at $38.84.

Think of how much QE has been done globally since 2011 & what impact it has had on asset prices. Think of how much web usage has grown since 2011 with the rise of mobile.

Russian regulators were the first to fine Google for their mobile OS bundling, which has lifted Yandex’s share of search across the country.

And yet in over 7 years Yandex has went literally nowhere. That is how terrible the Russian economy has been.

Now that QE is running in reverse, Uber & Lyft are racing to IPO before this cycle turns.

When Uber did a deal to merge their Russian operations into Yandex.Taxi Uber put in $225 million and folded their local operations into the company to get a 36.9% stake at a valuation of $3.8 billion.

The current sky high whisper numbers for Lyft & Uber significantly increase the value of Yandex.Taxi (at least until the ride sharing meme fully goes public with no bid & craters).

The Uber Technologies IPO and record-high valuation is a “positive signal for Yandex.Taxi”, BCS Global Markets commented on October 17, noting that the price of Uber’s IPO could serve as a future benchmark for Yandex.Taxi valuation. Even the current $70bn valuation of Uber would imply a 30% premium for the Yandex-Uber deal in Russia.

If $70 billion is a 30% premium then $120 billion would be closer to something like a 100% premium. This would value the 59.3% Yandex stake in the future taxi spin off at something between $2.9 and $4.5 billion.

With Yandex trading at under a $9 billion market cap that would mean their stake in the taxi business would be imputed as being worth somewhere from 1/3 to 1/2 of their market cap. Given they have nearly $1 billion on their balance sheet & they announced a $100 million buyback authorization in June when the stock was around $34 or $35 there shouldn’t be a whole lot of downside at $26.70 a share.

They announce earnings in 10 days, where they’ll likely announce faster than typical growth due to the impacts of rising oil prices coupled with a weak currency juicing the domestic economy. They might launch another round of buybacks after earnings, there’s the potential minority investment, and the taxi service spin out all as potential catalysts.

Overall market sentiment is quite ugly today with both the Nasdaq & Russell 2000 dropping. On Wednesday Yandex was trading at $35.88 & now they are under $27 on massive trade volume that’s about 7x what it has been recently.

I just bought a few more shares at $26.55. I view it more as a trade than a long-term investment though, as we are late cycle with lots of unprofitable garbage bid up & all the sort of late cycle cringeworthy headlines.

Added: I think the bottom is in on Yandex & there was a sell the rumor, buy the news incident. In addition to the Sberbank narrative where there were fears of Putin controlling the company (as Putin visited the company last month), there was another story.

This is the second time it traded down extremely bad this year. The first time it traded like it has the past couple days was when US sanctions against Russia were announced late in afternoon trade (though the sell off started long before the sanctions were announced). The August 8 sanctions were related to the poisoning of Sergei V. Skripal.

The Trump administration agreed with the determination by the British government that set in motion the sanctions. The legislation requires that sanctions be put in place within 60 days, and Representative Ed Royce, Republican of California and the chairman of the House Foreign Relations Committee, sent a letter to President Trump two weeks ago chiding the administration for missing it.

The U.S. is suffering from a lack of faith in institutions. It is suffering nowhere near as bad as Russia is, of course, but it is suffering nonetheless.

The tech companies which avoided meaningful regulation while accumulating power were cheered as savvy for helping president Obama get elected twice, but when president Trump was elected people came out of the woodwork over the damage the tech companies are doing to society. When it was later discovered how many entities were pushing polarized fake storylines that were aligned with the “relevancy” algorithms that didn’t help people who felt they “lost” the election & have been left behind in the financial asset inflation led recovery.

 Saying there’s no comparison to the current period would be a gross understatement. Historically, the Fed has initiated easy money policy only as an emergency stimulus, either during or shortly after a recession. When clear signs of expansion took hold – and an emergency measure was no longer necessary – the Fed would begin to normalize rates. In the current cycle, this simply did not happen. The recession ended in June 2009 but the Fed held off from hiking rates until December 2015. Until last month, they were acting as if emergency measures were still necessary.

Just ahead of U.S. midterm elections this afternoon the U.S charged a Russian with trying to influence the midterm elections. After that headline came out Yandex shares were up about a dollar. I sold the recently purchased shares on the upward momentum as the last time there were sanctions announced it was frustrating as I was stuck as the bagholder on that for a while. I eventually sold out that prior position at a loss and stopped trading for a few days to regather my thoughts & focus more on web stuff. I didn’t want to hold a giant Yandex position over the weekend while my daughter is sick. I need a clear head to do well in the markets. My current Yandex position size is rather tiny & it is certainly down less than what I gained from the opening bell flip & the couple Yandex momentum trades throughout the day today.

Russia has been hoarding gold & dumped their US treasuries.

There still are a handful of narratives which can drive Yandex higher, but the only way to not get frustrated by such volatility as there was over the past couple days is to have reasonable position sizing.

Search, Search, Search

Not a novel or undiscovered market at this point, but search stocks are cheap relative to where they have been recently. And web usage only grows each day as people literally embed themselves in their cell phones.

While the value of social media ads is starting to be questioned more broadly (see the recent Facebook advertiser lawsuit) search ads are late funnel & drive high-intent user traffic. Further, many of the leading search engines also have dominant video destinations, whereas Facebook’s video push was based in large part on “fake news” styled metrics. Worse yet, Facebook got many other publishers to follow them into their video-first doom machine.

Facebook is so addicted to free content AND not sharing adequate revenue with publishers that even Instant Articles bombed. Facebook has already took a beating on the margin front by stating they were going to shift toward more friend posts & hire many moderators.

Will the market accept ANOTHER huge market hit by them investing huge into premium video before they have a strong end-user use case? And, if they pushed hard into video, how would they compete against the head start Netflix & Amazon have, the great IP Disney has, or the device ownership Apple has?

The other day Yandex was up 7% and today it is off 17%. Their market cap is around $9.5 billion and they own the Uber equivalent in the Russian market in addition to their strong domestic search share. They also have a Prime-like subscription service with music & other features & are shifting away from an eBay type ecommerce business to more of an Amazon styled ecommerce business.

Baidu was around $240 a share when the trade war narrative started to bite & their 52-week high was $275. It’s now at $192, so it is off about 30%. Their market cap is around $80 billion & they own a big chunk of an online video portal named iQiyi (IQ) which is like a mash up of YouTube & Neflix. Baidu owns almost 70% of it. Backing out that equity stake the rest of Baidu is valued at under $70 billion offset by what’s on their balance sheet.

Google dominates the web. The #2 search engine is…YouTube. I think most people are unaware of how under-monetized Google & YouTube are in emerging markets. If you use a VPN which allows you to shift your location to an emerging market and clear your cookies or use a new different web browser you will see that YouTube has maybe 1/3 to 1/4 the ad load in emerging markets as it has in the United States. The same deal exists with the general web search results. The interface is ad-heavy in the United States because both Bing & Yahoo! are extreme on this front. About the only general web search player in the United States that is fairly lite on their ad load & used by anybody is DuckDuckGo. Yandex also has a global version of their search engine, though it has a lot more spam on it than their localized version does because it has less end user data to refine the results & they don’t spend as much capital policing search results that are rarely used.

The counter view of search being toast is offered by George Gilder in his Life After Google.

I’ll read the book, but I suspect until there is a recession search ad revenues will keep growing ~ 20% a year.

Tim Berners-Lee is also working on a project hoping to upend the business models of Google & Facebook by giving web users more control over their data.

The centralization & decentralization of power has been a recurring fight throughout recorded history.

The first central currency was introduced by the British monarchy as a way to control the decentralizing tide of the merchant economy. The Teddy Roosevelt-led antitrust movement was aimed at reversing the centralizing tide of industrialization. Today, rising antitrust ambition in the E.U. and the U.S. is set on forcing much the same. Even Donald Trump’s trade war is a move to push global trade towards a decentralized system — away from distributed-supply-chain interdependence and towards nation-by-nation manufacturing independence.