Free Trade & Investment

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

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

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

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

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

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

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

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

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

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

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

Indexes Hide Carnage

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Taking a Break

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

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

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

CNBC

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

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

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

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

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

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

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

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

He who finishes second is first to lose. 😀

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

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

I am a big fan of the company

At least I can still watch the theatrics from the sidelines

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

Trillion Dollar Tweets, Again

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

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

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

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

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

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

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

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

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

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

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

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

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

Roku once again crushed earnings:

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

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

A Dealership Full of Cars.com

I think the Cars.com sell off is more than a bit overdone and have been an avid dip buyer over the past couple days. It hasn’t felt particularly comfortable watching the stock careen lower and lower, but in reality the company is valued at about 1/3 of what it was valued at when a deep value investor took a strategic position in it. It doesn’t have a huge network of dying retail stores & ultimately is still a leading vertical search play in one of the biggest search categories.

Cars.com CEO & president Thomas Alex Vetter bought 20,000 shares on August 7th at $10.19 a share. And as of close today shares were trading at $9.20 after reaching an all-time low of $9.16 earlier in the day.

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

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

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

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

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

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

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

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

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

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

You Were YuanDerful Tonight

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

Shortly after noon this is what the market looked like.

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

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

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

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

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

The other stuff I was holding bled out today.

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

China + Russia = US + Mexico?

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

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

If the US relationship with China gets worse & worse & worse then at some point something is going to pick up in Mexico. Mexico still might be an utterly corrupt country heavily influenced by drug cartels, but it could pick up in the same way Russia has improved over the past year due to the US-China trade war drawing Russia & China closer together.

Cars.com Into the Median

Cars.com announced a weak quarter AND that they failed to find a buyer during their strategic review. Their stock is off about 35% to fresh all time lows. They’re currently at about $11.80 a share, but fell to as low as $10.30 a share earlier in the day.

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

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

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

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

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

Imma Getmy EduMaCation

A Rather Uneducated Opinion on Education Software

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

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

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

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

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

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

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

Fed Funds Rates, Trade & Tariffs

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

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

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

Eating Well…

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

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

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

Now Serving Only The Finest of Fake Meats…

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

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

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

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

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

Demand Media shares soar 33% in IPO

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

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

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

Nice framing there. Demand Media as the next Google.

Was CNN Money on the money?

Hrm…

General Thoughts

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

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

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

MOAR PETS

Yesterday stocks like FNKO & PETS were both up huge (around 7%). I sold off the PETS I had in my IRA & a bit of the PETS I had in my regular trading account yesterday. Today PETS ramped again & I sold down another 2/3 of what I had left in my regular trading account today. I still have a small position, but am sort of hoping the stock falls so I can reload.

The PETS stock was incredibly ugly over the past month or so. It has pulled back with CVET and CHWY, except much more aggressively. I bought the bottom almost to the penny in my IRA.

The growth chart on that thing this year almost looks like an alt coin ponzi deal, except the performance is real. Only crappy bit is I don’t have too much money in the IRA, though a few more years like this one & it would no longer be the case. 😀

Some investors thought the launch of CHWY meant there was no narrative to justify pouring capital into PETS.

Perhaps that would be true if both were profit making, had capital savings & paid a hefty dividend, but only one of the two names is doing that. And then the other has massive profitless growth.

The last 2 days have seen PETS up over 10% with yesterday’s trading volume over double the typical day.

The recent PETS performance has been far uglier than shown in that chart, as they’ve fallen from a high of $54 on January 16, 2018 & are now “up” to $16.97 a share. I believe their cash on hand & inventory is around $6 per share as well, so that fall was really like a company careening toward bankruptcy unable to meet their debt service obligations when in fact they have no debt & about a third of their market cap is cash or inventory.

Covetrus (CVET) has had a similarly ugly performance, sliding from an IPO price of around $46 down to $25.47 today. That’s quite an achievement considering they IPOed back in early February & how strong the stock market has been this year.

They lack growth & they might eventually be priced out of maintaining online exposure in their category if their competitor selling a broader line has a higher visitor value, better brand recognition that makes ad bid prices cheaper based on brand recognition, and the capital markets do not demand profits from Chewy.

But the price action over the last couple days is almost like someone is establishing a position in PETS before acquiring it, or with intent to drive management to make strategic decisions that reward the big financial arbitragers (e.g. sell itself, offer a one-time dividend, etc.).

PETS reports earnings in a week – on the 22nd. I don’t want to have a huge position going into earnings, but if they bomb another one & the stock fades again I think a financier pushing strategic options could emerge. Their small market cap of about 1/3 billion probably makes the below the radar of a Carl Icahn, but smaller investors could build up a sizable position in the company without having to spend too much.

There have recently been headlines like Pet care is a recession-proof industry, with part of the Chewy IPO roadshow material being recycled into new insights.

The media loves rewriting that story.

The speed of the recent rise has me wanting to have at least a bit of exposure to the stock, but a limited sized one with most the gains locked in already.

My IRA is now all in cash and my main trading account is about 2/3 cash. I exited the CVS position on the short squeeze on the drug rebate news, as I expected the broader doom & gloom of politics would outweigh that temporary reprieve.

That said, CVS has held up better than some others like Cardinal Health that now find themselves trading below where they were when the White House rebates health announcement was made.

I still have small positions in Apple & Disney that I don’t really count because they are in Robinhood & I rarely look at it (for me the idea of trading on a mobile device puts one too close to doing like impulse gambling rather than informed investing or even semi-informed speculation).

I am holding a bit of Walgreens that is still down, though it looks like they may soon refresh some of their product line, at least at the Philadelphia store. Items were literally flying off the shelves in a recent flash rob where dozens of teens looted the joint.

I also have a bit of SKT, which is off bigly, though has a decent dividend.

And I still have a bit of PETS. And then I have a bit of Kroger. I think eventually the narrative will change on KR like it did for Walmart & Target, causing a re-rating of KR’s performance & growth prospects.

Kroger, the country’s largest pure-play supermarket chain with 2,760 stores, saw its online grocery sales surge 66% last year to an impressive $1.5 billion increase. … CEO Rodney McMullen told analysts on the first-quarter earnings conference call last week that the chain went from having no online sales at all in 2014 to an annual run rate of $5 billion in 2018, which he expects to trend toward an annual run rate of $9 billion going forward.

Rich Duprey, The Motley Fool

Kroger has exclusive rights to use Ocado technology & they are jointly developing a fulfillment center in Forest Park, Georgia. If Walmart’s stock is getting credit for online ecommerce growth & innovation (even after internal culture conflict stories leak, killing the narrative & Jet growth runs in reverse) then Kroger should at some point also enjoy the narrative shift as well.

I have been pulled in so many directions recently. It feels like right on the edge of chaos, yet somehow still drowning in opportunity.

Risk Events

Investing is managing risk as a cost of entry:

“If you’re not willing to react with equanimity to a market price decline of 50% two or three times a century, you’re not fit to be a common shareholder and you deserve the mediocre result you’re going to get.”

Charlie Munger

When a narrative of major risk arrives active managers sell off the associated stocks, as he who acts last loses. This is true in almost every case unless

  • the risk turns out to be a nothingburger which is vastly over-exaggerated, and
  • the holder does not exit their position after the initial reaction

Even if you know the risk narrative is junk, it will still ultimately impact short term stock price as other investors reposition. If you are smarter than the market you still lose if you have a mismatched timeline on a position. Early is no different than wrong unless you have the ability to endure.

Take healthcare recently. One could have saw how a top Nancy Pelosi aid was promising good things for health insurance lobbyists while also being aware of how President Trump has done virtually nothing to reign in healthcare spending costs & dropped some of his campaign promises on the issue the day he was elected. Other than dropping the individual mandate driven Obamacare policy there hasn’t been any major upgrades in terms of improving healthcare cost & efficiency.

In spite of the above, political rhetoric from the fringe end of the left promising socialized medicine scared the shit out of investors who owned a significant stake in health insurance companies. Then there were other pile on issues as Trump half-heartedly pushed through “reform” agenda talking points on drug care pricing and rebates.

When the White House announced they were killing the rebate idea CVS opened up about 7.5% while Cigna was up 14%. That is the sort of move a stock might get when a risk event disappears on the most favorable terms possible.

If you have some dogs in your portfolio & get hit by a black swan that nobody saw coming that can be seen as a bad break, but sitting on a big loser when the risk narrative has been in the press regularly for months on end puts an investment manager in the awkward position of explaining why they are down so much on a position when the media made it clear the risk was both large & known.

You can be right about the eventual outcome & still lose capital under management as a dog pulls down the aggregate performance.

Each additional media story has the potential to create another wave of selling. Each story drives demand for additional follow ups, causing more reporters to probe for angles.

When the risk event is solved, the sort of catastrophic downside disappears, so the uncertainty being removed causes the stock to jump because the issue is now solve & there is no longer the toxic narrative associated with it.

Shortly before close the FTC announced they were finalizing their Facebook settlement and – as expected – the stock rose on the story of the risk event going away. Tech bloggers who do not understand the capital markets are complaining about the stock going up as proof the fine was an embarrassing joke.

Facebook telegraphed the potential fine long ago & their initial whisper number on the expected fine turned out to be what the finalized number was. If the information they conveyed along the way was vastly off then the story would not be over, as the stock likely would have slid if the penalty was far larger than expected & that would have been followed up by shareholder lawsuits from shareholders who suffered losses.

There’s a limit to how heavily U.S. regulators can fine domestic tech companies for egregious behavior while simultaneously threatening France & the U.K. about potential blowback for clipping U.S. tech companies (while thumbing the eye of Germany for good measure).

“The United States is very concerned that the digital services tax which is expected to pass the French Senate tomorrow unfairly targets American companies,” Mr. Lighthizer said in a statement. “The President has directed that we investigate the effects of this legislation and determine whether it is discriminatory or unreasonable and burdens or restricts United States commerce.”

The domestic tech companies created the fabric of the web & are perhaps even a big part of the draw for investor capital flows into the currency:

“globalization is ending and the world is breaking into three separate economic zones with their own (i) trade and reserve currency, (ii) bond market of reference and, perhaps most importantly, (iii) dedicated supply chains. … China’s vulnerability stems from semiconductors being its biggest import item (about US$260bn a year against energy’s US$170bn) and that US semiproducers hold most of the world’s important patents. … Looking past current tensions, US tech stocks are threatened by the US-China standoff becoming a full-scale cold war. First, this would devastate supply chains, with major consequences for productivity and profitability. The second, and more alarming prospect, is that the breakdown in relations worsens to an extent that China’s policymakers conclude they have no interest in respecting intellectual property rights. After all, if we move into a world where Chinese exports into the US, and other developed world countries, become constrained, China may decide to forgo those markets. It could instead focus on reverse-engineering Western products like jet engines and medical devices with a view to selling them into emerging markets. … Perhaps the utter domination of US tech has not only triggered the massive outperformance of US equity markets, but has also helped keep the dollar high in spite of the US’s sustained twin deficits.”

This might have been a big piece of why the U.S. was so slow to regulate the likes of Google & Facebook.

Facebook also could have been slowed down in 2012, particularly in regard to its purchase of rival social media site Instagram. The FTC had the ability to file a lawsuit to block that merger, and considered doing so. During the investigation, the agency uncovered a document written by a high-level Facebook executive (no name is given). According to the New York Post, the executive said bluntly that Facebook was buying Instagram to eliminate a competitor. One source called it a “spectacular” document.

Externalities were seen largely as bullshit, sour grapes, or complaints from irrelevant dinosaurs who were technology passed by. It took the election of Donald Trump to give the dominant platforms the appropriate level of scrutiny they deserved:

“The Palo Alto Consensus held that American-made internet communication technologies (both hardware and software) should be distributed globally and that governments should be discouraged from restricting speech online. Its proponents believed that states in which public discourse was governed by “everyone” — via social media and the internet — would become more democratic. This would mean both regime change in authoritarian countries (the Arab Spring) and more responsive politics in electoral democracies (something like the White House Petitions). … We can now evaluate how this technology affects politics and the public sphere. More information has been flowing, circumventing traditional media, political and cultural establishments. But the result hasn’t been more democracy, stronger communities or a world that’s closer together. Countries with weaker social institutions felt the effects of social media most violently and immediately. … If the West had supplied basic internet technology and allowed local, domestic competition, social media would be more diverse and more culturally sensitive than it is today. That diversity would give scholars and policymakers a variety of concurrent experiments. The Palo Alto Consensus entailed running the same yearslong experiment in dozens of countries.”

Stocks are a leveraged long on a market, thesis & company. So long as the central banks keep pushing liquidity into the markets, then financial asset prices are likely to remain elevated versus historical prices. But if you are a contrarian & have patient capital that can stand a bit of pain, investing in risk event overreactions is a great way to have capital in the market with some of the downside price already taken out of it. It is important to keep position sizes small enough that you can keep capital in the position even after reading near daily stories about how the stock is a dog, anyone who owns it is an idiot, etc.

Many trends in the capital market tend to remain in place well past their logical conclusion, until they are so far past rational that they violently break in the other direction.

As Tom Sosnoff states, volatility is mean reverting but price is not.

It matters how big the risk event turns out to be versus what is perceived / priced in. When risk is perceived to be extremely high, much of the potential downside has already been removed.

Some risks are temporary and/or cyclical. Others are structural.

Going private doesn’t eliminate shareholders, but rather leaves CEOs facing a handful of more powerful ones, Mr. Questrom said. He noted that it is possible to invest for the long term as a public company and be rewarded for those actions by shareholders, as is the case with Walmart Inc. and Target Corp. “The companies whose stocks are down are doing a lousy job of running their business,” he said.

The delineation there (along with the debt servicing costs of the entity in the market) are often the difference between stocks that eventually mean revert back up to historical valuation metrics (e.g. P/S P/E etc.) & those which become absolute zeros or get acquired by someone else on their way to zero.

If a stock gets acquired before the company goes under that acquisition locks in an exit price for existing shareholders, though it might create a compelling buying opportunity in either the acquirer’s stock or the stock of the company being acquired.

Bloomberg recently conducted an interesting interview of Research Affiliates founder Rob Arnott. He mentions many contrarian value ideas like investing in emerging market value stocks, embracing maverick risk, preferring European stocks to US stocks at current prices, stocks which are removed from indexes like the S&P 500 outperforming stocks that are added to the index, reducing rates to near zero or below zero ends up being counterproductive as it signals panic, and a host of other similarly interesting tidbits.

Fun With Funko

Late last year when the market imploded Funko slid hard. They went from an all time high of $31.12 a share down to $11.22 a share. Over the past couple months they started to recover again with the broader stock market, and have touched $25.

When the market was up big on the narrative that trade talks would resume (did they ever actually stop?) Funko was off about 12% on a day when just about everything was up.

Seeing that divergence, I put a chunk of change from my IRA into Funko only to see the stock quickly bottom & fly up about 6%.

I intended to hold it longer, but if you get 6% in an afternoon, there’s no shame in exiting & waiting another entry.

And, as it turns out, looks like that was a good call, as FNKO has slid for a couple days now.

Of course it could jump at open, but I suspect there will be many more opportunities to go in and out of Funko.

If you were going to try to put a lot of money to work Funko would be a horrible investment vehicle, because even small trades can move the stock price a dime a share sometimes. That’s a big move on a stock trading at around $20 a share.

This year I’ve done well in my IRA because I have mostly done rather high conviction trades & made them rather concentrated.

I have been in cash most days, but you really only need to catch a few of those 3% or 5% moves to have a solid month.

But my IRA is so small as to be meaningless, so it isn’t really going to move the markets & it is easy to aggressively invest it without being too emotionally impacted because the sums are so tiny. (I was stupidly poor for a long time & then went to where I made too much to invest in a traditional IRA, I should set up another retirement account that I can deposit some savings into though).

My main trading account has only done a fraction of what the market has returned, in part because I have mostly stayed in lower beta value trap garbage & even a big chunk of it is in cash, just in case the market totally melts down…I wouldn’t want to see a 2008 repeat having $20ish FNKO hitting about $4 a share & then a management-led buyout that locks me in at the bottom.

I sold out the last of my Bitcoin on the 26th of June, with it nearly doubling from what I paid for it last year. I then bought back in at just above 10k & sold the following day for a quick 6ish percent gain. I think Bitcoin ran too far, too fast & we are likely to see $6k before we see $16k. If it goes back around $7k or $8k I might buy a bit more of it, though it could fall even lower than that as lawmakers & regulators dig into Facebook’s Libra project & what was once a catalyst becomes a headwind.

One other interesting thing to note is in spite of all the various alt coin hype, this recovery has largely left the alternatives behind. In July of 2017 it looked as though Ethereum could eclipse Bitcoin, but it hasn’t seen the same upward momentum recently.

This is a good video about cryptocurrencies.

I still think the trade war stuff is absolutely over-hyped at each extreme. Now that we are near record highs on fake progress it might make sense to lighten up exposure waiting for a narrative shift. Overall I am over 90% cash, though I could quickly invest if I saw a great opportunity.

One opportunity which was snatching defeat from the jaws of victory was quickly exiting Seagate & Western Digital. I bought both of them near recently lows and they’ve went up relentlessly since I sold. My narrative/idea on those is pretty basic though…they sell for 1x to 2x sales, do not have a ton of competition, and the amount of data being created every year is still increasing geometrically. Even data that is stored in the cloud is usually stored on hard drives because the data is often backed up/replicated at multiple locations and hard drives are so much cheaper per gig than solid state drives, RAM, or any other form of storage.

Hard drive stocks sold off with semiconductor stocks, but we’ll still need far more hard drives every year even if RAM demand & margins go through a soft patch.