EA – it’s in the Game

So much for the game market being destroyed. Two days later and it is as if the poor quarter from EA never even happened.

Eh? What Bad quarterly earnings report do you speak of?

Activision (ATVI) hasn’t recovered anywhere near the degree EA did, Nintendo (NTDOY) is not far from 52-week lows, Take Two Interactive (TTWO) hasn’t regained much of what they lost & NetEase (NTES) is still off big.

Gaming company stocks after EA quarterly results announcement.

Yesterday after the adverse market reaction to the Kudlow US – China trade war news coverage I saw XOM was down almost 2%, so I bought a chunk of it as today it went ex-div. I sold that shortly after open today for about a half a percent loss BUT about a percent gain in the quarterly dividend payment that will be paid in a month, so it was net up a half percent on a decent sized position. It was a good thing I sold when I did as it has been down, down, down since open & looks like it could slide below $73 today if the market doesn’t turn up soon (edit: yup, it did, $72 & change). 

I was also holding a bit of FNKO that I sold for a small gain this morning.

I still have a small position in Nintedo that is off a bit over 3%, but made a similar amount from going in and out of EA & ATVI a couple times. I suspect whenever Google launches the next version of their Switch they’ll get a bit of a bump. I still have a position in Google along with a bit of Disney & Apple that were purchased about a year back. 

I’m quite glad to be mostly in cash while the market is choppy, another U.S. federal government shutdown could start next Friday, and the March 1st trade war deadline is only 3 weeks away.

A couple other interesting bits…

  • Today Henry Schein finally spun off their veterinary supplies division into a new publicly listed company merged with Vets First Choice. The ticker symbol for Covetrus is CVET.
  • Quinstreet is off about 20% today after meeting expectations . They saw weakness in their core legacy markets of online education (secular declines as the for-profit colleges are ultimately displaced by the nonprofit universities who have partnered with entities like 2U & they lost a large client in Dream Center Education Holdings which is going through restructuring) and home loans (cyclical market softness in response to rising rates hitting refi demand), but saw stronger growth in their other verticals including insurance, credit cards, personal loans, banking, home services & B2B. On the quarter they grew revenues YoY by 19% to $104.1 million. Financial services is 71% of revenues. Education is down to 16% of their revenues. Their recently acquired AmOne personal loan business (which they paid $20.3 million for plus earn out of up to an additional $8 million) is within striking distance of being their #2 revenue driver behind auto insurance. Almost a year ago Kerrisdale Capital Management published an article on SeekingAlpha highlighting how there is a lot of ingredients in the insurance leads sausage.

EA Weak Quarter

EA turned in a weak quarter, which caused their stock to slide 15% & also hit Activision / Blizzard for a 10% decline while the Nintendo ADR was off 6%.

I traded in and out of both EA & ATVI for quick small gains & am holding a bit of Nintendo + Activision / Blizzard. ATVI is now below the December 24 lows.

There was a recent Business Insider article which talked about how big of a struggle Nintendo has with their reliance on first-party titles. 

“Microsoft and Sony rely on major third-party games like “Grand Theft Auto” and “Call of Duty” to bolster sales of the Xbox One and PlayStation 4 consoles, and only produce a handful of major first-party games themselves. … Just about 85% of Nintendo Switch software sales are first-party games — games made and/or published by Nintendo.”

I believe their analysis is exactly backward. Nintendo’s revenue stream being highly differentiated is a point of strength.

On the most recent earnings call Google’s Sundar Pichai answered a question about the Google Play store 30% rake as though the question was specifically about distributing games.

On Google Play, obviously, we do this at scale, thousands of developers rely on it to safely and seamlessly distribute their games to billions of Android users worldwide. And we invest a lot in our infrastructure to continuously make sure their overall experience is safe and results in high engagement and for the developer’s back. So I think there’s a value exchange there and it’s been the industry standard. And so, I think we will continue down that path but obviously always adapt to where the market is.

If tech companies are displacing the roll of publishers by eating into the longtail of games & taking a fat rake off the top, then whoever has the most differentiated revenue stream has the strongest revenue stream.

If a single strong game can be leveraged into an online  game distribution platform, there’s no reason the company with the best gaming IP wouldn’t be able to  the same, or to be able to demand a higher revenue share from any third party platforms their content is distributed on.

There are a limited number of broad-based verticals the big tech companies can charge recurring subscription fees for: TV & movie, music, productivity software, hosting & file backups, games…and not a lot else. There are subscription services for books or audiobooks, but they are tiny.

Tech, telecom & other media companies have invested heavily in video streaming services, ultimately creating a bubble where they have doubled content costs for scripted animation & some highly demanded animators are turning down hundreds of millions of dollars worth of demand.

Spotify acquired podcasting company Gimlet Media for $230 million & they also acquired Anchor.

Consumers spend roughly the same amount of time on video as they do on audio. Video is about a trillion dollar market. And the music and radio industry is worth around a hundred billion dollars. I always come back to the same question: Are our eyes really worth 10 times more than our ears?

Spotify Founder Daniel Ek

What will drive Spotify’s growth? Unique, differentiated content.

Our podcast users spend almost twice the time on the platform, and spend even more time listening to music. We have also seen that by having unique programming, people who previously thought Spotify was not right for them will give it a try.

The New York Times hit fresh 52-week highs (13-year highs) after beating revenue & earnings expectations, growing their digital subscriptions quicker than anticipated & raising their dividend 25%.

They have differentiated content & drive the news agenda.  

So long as Trump is dominating Twitter & private equity firms are eating newspaper chains to do round after round of layoffs the New York Times has a highly differentiated offering & paying a subscription fee is a way of supporting the party. The decline of NUmedia also makes the New York Times relatively more differentiated

The media industry has already shed more than 1,000 jobs this year, but the Times said Wednesday that it added 120 employees to its newsroom last year to bring the total number of journalists to 1,600, the largest staff in the paper’s history.

NYT might be a great short if Democrats win the presidency in 2020 & their base has less to be outraged by (as their own party is in power). If Democrats are in control there is almost no chance the New York Times will reach their 2025 subscriber goal of 10 million active subscribers.

Lightening Up Market Exposure

January was the best opening month for the stock market since 1987. I doubt we will see a repeat of Black Monday with the DJIA off 22.6% in a day, but there are still many potential negative catalysts in the market: debt build up, slowing growth globally, growing political populism & nationalism, trade imbalances across Europe creating ongoing issues, and the trade war between the US and China.

The market may have over-read the Fed’s willingness to hike into a deteriorating market as they lifted rates on December 19th & Jerome Powell stated rates were a long way from neutral on October 3rd of last year. The market might now also be over-reading into Federal Reserve dovishness.

The end of last year was so choppy because there were both tax loss harvesting driving down the price of losing positions & some winners were sold to lock in profits while offsetting tax loss harvesting. Combine those with fear of a hawkish Fed & there were many people with an incentive to sell & algorithmic players riding along to cause heavy moves in a time of year that traditionally has light volume.

We’re at the point where many people who traded on the (incorrect) thinking the Fed would be dovish on the 19th of December now see many of those positions back in the black. I sold out the bigger stake I had in Apple (still have a smaller stake from long ago), the ExxonMobil position I had, the remaining AbbVie I had, etc.

I also dead cat bounce traded Verizon & AT&T on their sour earnings reports, along with Paypal’s fall after reporting earnings. A few days back Funko was off over 8%, so I traded a bit of that & sold it when they were back to off 4%.

Verizon wrote down $4.6 billion – about half the purchase price of Yahoo! & AOL (formerly known as Oath, known as Verizon Media Group after Tim Armstrong left the company). Yahoo! Finance finally launched their subscription offering with a free trial & a $49 monthly recurring fee. Many traditional newspaper chains & upstart online publishers like Buzzfeed & Vice have done rounds of layoffs, so it remains to be seen if Yahoo! Finance has enough pull to be worthy of a monthly subscription years after they shifted from offering lots of original content to mostly referring traffic to third party sites with original news coverage. One thing Yahoo! has going for them is Google gutted Google Finance over a year ago.

One problem with a market that keeps going up is it can allow a speculator to presume they are brilliant because they keep winning on every trade. In a market with bullish sentiment even bad news only temporarily clips stock prices.  

After a healthy run in the markets I prefer to have lower exposure so I don’t have big positions caught offsides if any of the big issues crop up & cause dislocations: hard Brexit, Italian politics in Europe, the yellow jackets in France, the tsunami of bad debts in China, trade war stuff, etc. … I’d rather wait for company specific, sector specific or marketwide slides before deploying much capital.

Housing has many headwinds: the TCJA capping SALT deductions, affordability (particularly in a rising rate environment), lower investment from Chinese investors, slowing economic growth, still rapidly rising healthcare costs ramping local property tax payments, uncertainty with potential policy changes toward Fannie Mae & Freddie Mac, etc.

Weyerhaeuser (WY), a timber REIT, was down to $25 a share in pre-market after missing their numbers top & bottom line, during the day they reversed & closed at $26.75, up 1.94% on the day – about a 6% swing from the bottom. They were one of the biggest dogs in last year’s decline, but they’re up over 30% off their lows. They are one of a few large REITs which is not near or at 52-week highs. From the following table you can see in the column one from the right how most of the REITs are within the top 10% of the range they have traded over the past 52-weeks & the column left of it shows most are within 2% to 3% of their 52-week highs.

A Sample of Large US REITs

I bought tiny positions in VLO & TGT today. Both were down significantly on the day. VLO has recovered quite a bit since the Christmas eve bottom in the stock market, but they’ve also seen insider buying & they’ve beat expectations by a wide margin

As long as diesel margins remain high — and there’s little reason to see them falling, given low inventories — then refiners can live with weakness in gasoline. Valero, in particular, has demonstrated its ability to capture opportunities on margins where it can find them, and pay out any windfalls to shareholders. Conversely, such financial strength means gasoline supply could stay strong as the year progresses.

Tons of retail stocks slid in tandem with Amazon.com after Amazon.com gave soft forward guidance, but some of the issues Amazon is facing like mounting regulatory pressures in India are not being felt by purely domestic US retailers. Amazon facing headwinds in an emerging market likely increases the value of retailers with a heavy United States emphasis, because the US-based retailer does not need to jump through hoops to undo those malinvestments & they can focus on improving their core business, while the multinational has to give more thought to how they are fueling international growth & if it makes as much sense to cross-subsidize into emerging markets where any success will likely be met with a row of nails thrown under their tires.

“The secretary of India’s Telecommunications Department, Aruna Sundararajan, last week told a gathering of Indian startups in a closed-door meeting in the tech hub of Bangalore that the government will introduce a “national champion” policy “very soon” to encourage the rise of Indian companies, according to a person familiar with the matter. She said Indian policy makers had noted the success of China’s internet giants, Alibaba Group Holding Ltd. and Tencent Holdings Ltd.”

WSJ article

Walmart’s 16 billion Dollar purchase of Flipkart last year is looking ill timed, particularly as it was done to buy growth instead of profits: “The Flipkart purchase would hurt profit by 25 cents a share, Walmart said.”

And that growth just went oops.

Google also looks to be cleaning up in India as they own Android & the iPhone is not a big seller in India. Mobile usage indexes way higher in India than in many other countries. In addition, Google hasn’t got hosed on massive investments the way Amazon & Walmart just did, while smartly acquiring tuck in companies like Where is My Train relatively cheaply, and avoiding the type of scorn Facebook’s WhatsApp has earned.

Target is only worth a little more than double what Walmart paid for Flipkart. Relative to the market caps of the big tech monopolies both Target & Kroger would be cheap buys if the other big tech players wanted to compete head on with Amazon.com. As Amazon.com becomes an ad farm Google spending less than half of their cash on hand to buy out the largest grocery chain & the biggest broad-based US retailer not named Walmart would be a smart strategy to ensure their conversion process is as smooth as possible & they take the fight to Amazon rather than watching Amazon keep encroaching on their turf.

AbbVie Dead Cat Bounce

AbbVie missed earnings estimates on the top & bottom line, causing their stock to slide over 6% Friday. I traded in and out of it 3 times for small gains & still have a position in them going forward.

President Trump signed a bill re-opening the federal government for 3 weeks, which should help relieve some of the short term concerns in the market. China is engaging in stealth QE & the Federal Reserve floated a trial balloon for ending their balance sheet run off far sooner than most anticipated. The Dow Jones Industrial Average, Nasdaq, S&P 500 & the Russell 2000 Index were all up 3/4% or more on the day, which makes the recent decline in AbbVie stand out even more. ABBV is down over 10% so far this year while the broader market is up 6% to 7%, offsetting some of the steep declines seen in December.

Longer term I am iffy on the healthcare industry, as at some point it becomes such a drag on the domestic economy it could literally blow up the global economy.

 “In 2018, Americans spent nearly $1.2 trillion on hospital care, representing approximately $9,200 for the median household, or 14.7 percent of median household income. That exceeds what the average family paid in federal income and payroll taxes. By 2026, projected hospital spending will exceed $13,000 per household: nearly one-fifth of household income.”


But the tighter labor market is causing lower strain on some parts of government budgets as people who were disabled are now opting to work. On an earnings basis AbbVie is priced quite cheaply, particularly given their history of increasing dividend payments combined with a current yield above 5%. The biosimilars competition in Europe was a known issue before the quarter & they missed revenue guidance by a fraction of a percent. Their forward P/E is around 10, meaning it is a quality name in the US trading at the sort of discount emerging markets trade at. And it is in a market where even generics are seeing huge price spikes.

I traded out of ABBV three times Friday & closed the day with a position up slightly, expecting it to go up Monday. If it gains a few percent right away I might sell it, but if it is a slow grind I am fine holding it for at least a few months. And once I get clarity on some other things I am working on it probably wouldn’t be a name I would mind holding longterm.

The Case for Google Buying Target

TGT stock trades around where it was in July of 2007. In the decade plus since many specialty retailers have went under, been bought out by private equity, or have been bought out by private equity then went under. Every time a company like Toys R Us disappears it ultimately increases the value of Walmart, Target & Amazon.com.

Certain segments of the consumer dollar are relatively slow  move online. This is a big part of why Amazon.com bought Whole Foods. Get great urban retail locations & own a slice of the market that seems not to be coming online very quickly. Walmart & Target also have large grocery businesses.

As time passes & Amazon has grown more dominant in ecommerce they have been able to turn their product search result pages into sort of a spam empire. First there’s a big banner ad, then there is another layer of ads, then there is a layer of private label products which eats up the rest of the above the fold screen space and forces brands to buy paid ads in addition to all the other fees Amazon charges (warehousing, logistics expenses, payment processing, etc.) 

Amazon is the fastest growing scaled online ad network. And they are taking their profits & investing them into selling Fire sticks at or below cost, video game streaming via Twitch, IMdB Freedive, etc.

As they grow, they are also unveiling new ad features.

“New-to-brand metrics determine whether an ad-attributed purchase was made by an existing customer or one buying a brand’s product on Amazon for the first time over the prior year. With new-to-brand, advertisers receive campaign performance metrics such as total new-to-brand purchases and sales, new-to-brand purchase rate, and cost per new-to-brand customer.”  

Amazon Advertising

That feature allows Amazon to over-state its own contribution to the conversion process. They will claim a customer is new to a brand if that customer had never bought that brand ON AMAZON.COM in the past year. This is a similar sort of self-over-attribution as what Google Analytics did with last click attribution over-crediting Google.com for conversions. Or like Facebook did with all their fake metrics on video views & how they give themselves a 28-day window for app install attribution after an ad click.

Part of making a lot of money with an ad network is the ability to not only drive attention, but the ability to over-claim conversion contribution to justify ever-increasing ad spend. Some data is shown, some is withheld. The selective display of data allows the aggregator platforms to give themselves an A+ in terms of ad spend ROI while also keeping partners reliant on them for further exposure.

The more ad networks you spend on in parallel the harder it is to untangle what drove what as everybody wants to overclaim their contribution to the conversion.

If large retailers run low margin businesses pushing 10s or 100s of billions of dollars in product each year & see piles of high margin ad revenues available, at some point it makes sense for them to aggressively compete against Google rather than relying on Google. And they won’t catch up to Amazon on the ad revenue front if they are reliant on a third party like Google for managing their ad inventory.

Walmart recently disappeared from Google Express.

If Google Express lost Target they’d have major product gaps. And Apple Pay is rolling out widely. So long as all the major platforms are balkanized (be it video streaming, video game stores, cloud computing services, ads, ecommerce marketplaces, operating systems, payment platforms, etc.) then at some point to be more efficient Google will need an internal customer which provides the baseline level of service quality to handle retail logistics profitably. Google Express has went nowhere and only seems to be falling further behind Amazon.com in the US, let alone the sort of amazing stuff Amazon.com is doing in India.

“The Seattle giant has modified its app to work with inexpensive smartphones and patchy cellular networks. It has added hundreds of thousands of Indian language descriptions of products and videos for those who can’t read, and it has opened physical Amazon stores to walk people through the process of ordering online. It brought on tens of thousands of local distributors to deliver packages, often by bicycle down dirt roads, where it will accept cash or digital payment on delivery.” … “Seated at linked computer screens, the customers, most of whom aren’t comfortable with English or typing, can follow along as he pulls up options. He helps them pick the right size using a chart on the wall and a foot measuring device. Later, customers come back to pick up their orders and pay cash at the store. There is even a changing room so they can try on clothes before paying. “It helps me introduce people to the strange new world of the internet, where they can buy everything, try it and even return it,” said Mr. Arjun. He gets an 8%-10% commission on sales. … Humans translated descriptions for 35,000 of Amazon’s most popular products into Hindi. That allowed a machine-learning system to master the language, and eventually every product description will be translated. Amazon said it plans to add voice searches and descriptions in other major Indian languages.”

WSJ article on Amazon’s success in rural India

Google is going to keep getting clipped by the EU, so they probably wouldn’t want to acquire an eBay anytime soon, as they still wouldn’t solve their logistics problems AND they would open themselves up to another wave of fines from Margrethe Vestager.

Target is one of the few US retailers with a broad range of products & a broad base of stores. Other than them and Walmart, who else could Google acquire to finally be competitive against Amazon in ecommerce & local delivery in a game where Walmart is opting out of partnering with Google?

I haven’t bought any Target yet, but if the market heads south for a bit I wouldn’t mind establishing a position that was a bit set-and-forget for a couple years.

PETS Bombs

PetMed Express reported earnings which missed on both the top line & bottom line, causing their shares to fall about 12% in pre-market trade.

Almost immediately after the market opened up shares ramped up hard in a bull trap, which had shares up above $23 each within 45 minutes of open. They were only down a little over a percent at the peak, while the broader stock market was also down a similar amount. And then the share price slid like a rock until 12:30 PM, bottoming at $20.25 a share.

I wanted to trade the initial ramp, but knew it would eventually turn back, so I sat on my hands until after the stock bottomed & started turning up. I put on a dead cat bounce trade when it was about $20.6 a share, though I got a crappy fill at about $20.83 a share. I looked away from the market for about an hour, came back & saw shares at $21.28, so I sold at market, which was executed at $21.2346, for a gain of about $580 on 1,500 shares.

The company has no debt, $93.2 million in cash,  $32.2 million in inventory, a 5.16% dividend yield and a market cap of about $432 million. They’d be a great buy for someone like Mars who perhaps wanted to own a slice of online distribution to limit the negotiation leverage of Chewy.

Back out their inventory & cash on hand and that shaves over a quarter off their absurdly low P/E ratio.

They are no longer a growth story as about 90% of their orders are repeat customers.

Reorder sales increased by 4.6% to $53.3 million for the quarter compared to reorder sales of $50.9 million for the same quarter the prior year. For the 9 months, the reorder sales increased by 9% to $185.9 million compared to $170.5 million for the same period a year ago. New order sales decreased by 26% to $6.8 million for the quarter compared to $9.2 million for the same period the prior year.

conference call transcript

Newer customers have been harder to find online as the size of ads in the search results has increased dramatically over the past couple years, lowering the relative value of organic rankings in the vertical. Ad prices have went up as well, and they’ve sort of sat on their hands with a relatively flat ad budget, instead of passing all their margins onto Google. They’ve also lowered product prices to stay competitive on the price front.

On the conference call they mentioned they planned on increasing their ad spend offline to compliment their online advertising, as online ad rates were up over 10% in the quarter, driving new customer acquisition cost up to $45 from $39 last year.

I am hoping the market is down again tomorrow and they fall further, presenting another opportunity to buy a few shares. 🙂

Their shares are off over 60% from the 52-week high of $51.60. Considering that they have no debt, are cashflow positive & over a quarter of their market cap is cash + inventory, that is quite a steep fall. I wouldn’t be surprised if a value investor pushed for a sale of the company or a PE firm bought them out, stripped the cash, loaded them up on debt, expanded them beyond medications to have a growth story which masks the cash stripping & justifies temporary losses, then listed them public again in a couple years.

During the December stock market rout eBay did not fall as much as most other tech plays, in part because a couple activist value investors were accumulating a significant stake in the company. eBay closed today up 6.13% on the suggestions by Elliot Management Corp. and Starboard Value LP to split the classifieds-ad business & StubHub from core eBay.

Themes for 2019

Pets Are Great

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

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

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

Trading The Dead Cat Bounce On Analyst Downgrade

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

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

Broader Market & Bagholders:  Don’t  Forget  Trade

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

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

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

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

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

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

Other Trades

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

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

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

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

Trade Days in a Year

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

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

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

Focused Efforts  in  Trading  vs  a  Practice  Account

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

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

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

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

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

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

General Work Philosophy

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

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

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

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

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

Lower Entrepreneurship Risk

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

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

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


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

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

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

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

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


Rising Rate Environment Meets Market Reflexivity

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

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

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

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

Wrong. He folded like a lawn chair.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Risk On / Big Up Day

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

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

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

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

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

Cryptocurrencies are up along with gold miners. 

Amazing breadth.

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

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