Picking Up Nickels In Front of a Steamroller

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

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

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

I once again sold a bit of Yandex at open.

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

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

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

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

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

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

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

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

This is likely due to some combination of

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

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

In and Out of Funko

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The trend in the market has been ugly of late.

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

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

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

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

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

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

 

 

 

YNDX Again

You Have to be Awake to be in the Game

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

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

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

Yandex News

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

Two other notes about Yandex.

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

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

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

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

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

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

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

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

And Yandex still leads on desktop + overall.

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

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

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

Yahoo! Finance lists the following holders information.

Major Holders

Currency in USD

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

Top Institutional Holders

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

Top Mutual Fund Holders

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

Nationalism / Re-localizing The Internet Supply Chains

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

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

Other Trades

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

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

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

 

Yandex (YNDX) Beaten & Left for Dead

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Russia has been hoarding gold & dumped their US treasuries.

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

Search, Search, Search

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

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

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

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

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

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

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

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

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

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

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

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

Carl Icahn Shorts the US-China Trade War

Tech Stocks on Fire

Today tech stocks are once again on fire with Google & Facebook up a couple percent and other online players like Etsy, Twitter, Zillow are up big as well. Even some of the international beaten down tech stocks like MakeMyTrip, Yandex & JD are doing well today.

A couple things stand out on the massive 7%+ jump in Yandex today.

  • The weakness of the Ruble coupled with the strength of oil prices has the Russian economy humming.
  • Sberbank (which is half owned by the Russian central bank) is up over 3% today and bottomed out a few months back, with its US-listed ADR (SBRCY) up ~ 26.7% since bottoming out at $9.69 about a month ago. The Russian central bank raised rates a quarter point last month.
  • Lyft picked their 2019 IPO underwriters & Uber’s CEO suggested the company might go public at a $120 billion valuation. Buying Yandex (which merged their taxi service with the local version of Uber & plans to IPO it early next year) is a way to front run the car-sharing IPO hype cycle similarly to how people bought Zynga ahead of the Facebook IPO. If Lyft is valued at $15 billion & Uber $120 billion (not saying those valuations are solid but are being sold) then the idea of getting a sort of Lyft with a free mini-Google baked inside for $11.55 billion isn’t a particularly bad deal.
  • Yes it is in Russia, but it has the local regulators working for it rather than against it & isn’t likely to see the sort of major EU fines Google has been earning. Google today announced they would start charging European Android device makers a licensing fee for access to the Play Store & other Google Apps.

Say Cheese

Snap is the exception to the tech stock rally, their stock is trading like a beaten down value stock nobody wants on a FOMO day, down almost 4% in a market where competing plays are up 2, 3, 4, 5%.

Icahn Has Dollar Store Stock (Once Again)

The dollar stores have less robust & redundant supply chains than entities like Wal-Mart do & Carl Icahn recently acquired a sizable stake in Dollar Tree.

Icahn in 2014 built a stake in Family Dollar pressuring it to seek a buyer. His firm made a profit of about $200 million on its investment when Family Dollar was acquired by Dollar Tree for $8.5 billion in cash and stock.

Ironically, Dollar Tree has struggled largely because it took on too much debt to make the deal happen, analysts said. That debt has made it harder for Dollar Tree to invest in its 15,000 stores that only sell items for $1 or less.

If the company s already seeing slowing growth due to high debt leverage he might struggle to force them to eat more debt to fuel buybacks. That might be his ultimate play though because each of the last 2 years the company has paid off over a billion dollars in liabilities, which is a sizable shift for a company valued at $20 billion. If he could get them to divert that $1 billion into stock buybacks they could easily pop their market cap 30% before the rising rates couple with the rising debt load to start dragging the stock price downward.

Either he thinks the 30%+ fall in Dollar Tree’s stock price from $116 to around $80 on trade war concerns created an entry point where he can profit from further debt levering before the trade war bites, or he thinks the trade war gets resolved quickly and the company blows well past old all time highs.

DLTR stock is already up over 5% to $85.10 & it looks like today’s share volume might end up about double typical.

If the trade war is a nothingburger in short order then stocks like Newell Brands (NWL) have huge upside. If the trade war is a real thing & will keep escalating then some of the companies like Newell Brands are so beaten up they’ll ultimately end up eating moving production out of China as their stock’s slide since last June has been every bit as extreme as the fall in price after the 1990s tech bubble imploded or the fall from the 2008 / 2009 global recession.

Dollar Tree has a similar market cap to Kroger, but has about 1/3 the debt. Kroger’s stock had been on fire the first half of the year (in part due to them announcing so many ecommerce initiatives & other various partnerships), but recently slid. Walmart also recently announced they would miss their 2019 GAAP EPS guidance. In spite of that their stock was still up over a percent today.

 

Funko Short Squeeze & Slide (FNKO)

The stock market looked quite ugly at close yesterday.

The Funko position I had was in the hurt locker, off about 10%. Then today a massive short squeeze caused a price ramp of about 15%, so I sold close to the top on that in a couple different lots.

Small-caps have since started heading down & Funko has been no exception, giving up about 40% of today’s gains. It is back under $19 again, so I’ve jumped back in.

In the intermediate term I still think Funko is going to have a great next half-year or more (due in large part to the additional space Walmart & Target are creating for selling their products), but if you can go in and out for quick wins then you are lowering the cost basis of the stock you hold.

If you adjust your basis by about $1 a share on a stock trading around $20 a couple times then you are still up to flat if the stock slides 10% while you are holding it.

The big things with Funko are the trading volumes & market cap.

  • Due to light volume sometimes the bid/ask spread can be about a dime, which is about a half-percent on a sub $20 stock, so you really need to catch at least a couple percent swing in order to make going in-n-out worth it. But that isn’t so hard to do when a stock is up over 15% on the day.
  • The other issue is if you did have serious size on you would move the market. so it would probably be hard to trade much more than say 1,000 to 2,000 shares at a time without really pushing the price against you on an entry or exit.

Then again, putting 3% to 5% in on a security isn’t taking a huge risk & unless you have tons of money a few thousand shares would be a sizable position.

No need to be RAMBO and stay fully exposed.

It’s been over 7 years and his Groupon still hasn’t come back yet!

Meanwhile the social gamified Chinese version of Groupon which was founded 3 years ago is valued at almost $24 billion, compared to under $2 billion for GRPN.

Part of what makes that Groupon performance so impressive is how much the stock market has been up during their 80%+ slide since the 2011 IPO & that Groupon raised more than their current market cap in VC funding plus IPO proceeds.

Pinduoduo (PDD) has so many counterfeit goods on it they were investigated by Chinese regulators (though only after the Nasdaq listing, of course).

There’s no Rambo Pop yet, but the Rocky Balboa is going for about $300 on eBay.

 

Long The Gray Lady (NYT)

I  don’t regularly read the New York Times, but I like the current set up for their stock.

Big trends would be: death of competitors, rejection of tech monopolies that ate the playing field, rise of subscriptions & increased political polarization.

Going at them one at a time…

Death of Competitors

  • Many of their competitors (outside of the Washington Post) have been bought out by private equity chop shops to where they are a masthead logo above eHow styled news content.
  • And then there are the repeat bankruptcy styled players like Tronc that do arbitrary name changes to show just how little they value their name, brand & legacy.
  • As regional news services get shallower & crappier & less differentiated while their best employees who were laid off become their fiercest critics, more people will flock to the national news outlets like the New York Times. Businesses in structural decline with many layoffs of media savvy people end up getting their ugly stories told. A few will land techno-oligarch bailouts, but most will end up getting some of the seedy behavior leaked. Their competitors will, of course, cover that story.
  • Savvy web publishers like IAC which have tried to create evergreen content via About.com have repeatedly been whacked algorithmically by Google as they split a big site into vertical sites & vertical sites into niche sub-brand sites.

Competing publishers will have the obvious brand erosion from PE chop shop rightsizing combined with an internet that forgets nothing and trusts nothing.

“Briefly stated, the Gell-Mann Amnesia effect is as follows. You open the newspaper to an article on some subject you know well. In Murray’s case, physics. In mine, show business. You read the article and see the journalist has absolutely no understanding of either the facts or the issues. Often, the article is so wrong it actually presents the story backward—reversing cause and effect. I call these the “wet streets cause rain” stories. Paper’s full of them. In any case, you read with exasperation or amusement the multiple errors in a story, and then turn the page to national or international affairs, and read as if the rest of the newspaper was somehow more accurate about Palestine than the baloney you just read. You turn the page, and forget what you know.”  – Michael Crichton (1942-2008)

Rejection of Tech Monopolies

  • Now that the big tech companies are starting to be viewed broadly with disdain, more people will seek trusted filters / curators rather than relying on the central algorithmically-driven surveillance networks.
  • European publishers who are trying to push regulators to ensure payments of compulsory copyright payments will ultimately lead to over-representation of US media across European countries. When EU pubs first pushed for these types of regulations Google started including bloggers in the “in the news” section inside their regular search results, they’ll also have no problem over-representing whatever they get for free.

Rise of Subscriptions

  • Much of their revenue base has shifted away from advertising to direct subscriptions from end users.
  • Spotify, Netflix & other online vertical media services are re-normalizing content-based subscription fees that the ad-driven Internet temporarily did away with.
  • People are starting to view paying for subscriptions as a virtue signaling move. If you never visited rural towns in the south that have been utterly decimated by “free trade” then you can smugly view yourself on the right side of history paying to inform the public with your monthly New York Times subscription payments.

Increasing Political Polarization

“The world of media, trust, and tribalism is going to get a lot more complicated in the coming years.” – John Borthwick

  • The bailouts & financial asset price reflation have fueled increasing political polarization and resentment.
  • Now that liquidity is disappearing from markets & money is once again having a price the debt binge that masked the true economic damage will start causing further hate / polarization / resentment.

https://twitter.com/antoniogm/status/1049746428464050176

 “After generations of doing the opposite, when unity and conformity were more profitable, the primary product the news media now sells is division. …  we encourage full-fledged division on that strip. We’ve discovered we can sell hate, and the more vituperative the rhetoric, the better. This also serves larger political purposes. So long as the public is busy hating each other and not aiming its ire at the more complex financial and political processes going on off-camera, there’s very little danger of anything like a popular uprising.” – Matt Taibbi

Until the U.S. economy is re-oriented toward the rust belt & away from metropolitan coastal elites the level of division will only increase.

At the bottom of the New York Times pages there is an ad with the headline “Subscribe to debate, not division.”

And yet they publish this sort of polarizing hate, which their base loves.

Millions of people with left leaning political views are likely to subscribe to the New York Times in record numbers in lieu of allowing low-income subsidized housing for teachers which risk lowering their property values by slightly re-balancing supply and demand.

As the saying goes: “I believe the children are our future, let their teachers be poor & burned out & commute at least 3 hours every day…”

Central Aggregators? Indy Publishers? Blockchain? Blah?

Automation will decimate us before we are rebuilt by (eventual) lower barriers to entry which enable our tribal affinities to be focused around more productive & niche interests rather than the primal issues which dominate the current political landscape.

“automation will likely disrupt your current job (and your next one, and the one after that), and you’ll be the target of attention-grabbing, behavior-modifying algorithms so exponentially effective you won’t even realize you’re being targeted. The best defense against that? An emotional flexibility that allows for constant reinvention, and knowing yourself well enough that you don’t get drawn into the deep Internet traps set for you. … I don’t have a smartphone. My attention is one of the most important resources I have, and the smartphone is constantly trying to grab my attention. There’s always something coming in. … The way to grab people’s attention is by exciting their emotions, either through things like fear and hatred and anger, or through things like greed and craving” – Yuval Noah Harari

Longterm I think the web will have many Stratechery-styled businesses where beat reporters who know a particular field exquisitely well build niche communities consisting of many direct subscribers, but that future could be 10 or 15 years off.

Between now and then the Gray Lady will sing.

Normally I write posts shortly after establishing a position. I have an itchy trigger finger for buying some NYT, but I want to give it a couple more days to a week to slide back from the recent strong run it has had. Maybe it keeps going up, but I think somewhere around $23 might be a good entry point.

Long Funko (FNKO)

Funko‘s stock closed Friday trading at $19,47, down from a recent high of $31.12 but up large from a 52-week low of $5.81.

Their November 2, 2017 IPO was widely panned and even qualified for being in the all time disasters category in terms of IPO performance.

Renaissance Capital, which tracks IPOs, reported late Thursday that Funko’s 41 percent fall was “the worst first-day return for an IPO in 17 years.”

Funko shares closed at $7.07, down 41.1 percent from its IPO price of $12, according to Nasdaq. The offering price itself was dialed down from the anticipated range of $14 to $16.

A lot of the best performing companies had institutional hate leading into the IPO or right after the IPO. Facebook cratered on the fear of the move to mobile. Google was viewed as smug and out of touch with the Playboy interview & the Dutch auction listing model that didn’t give banks a big greenshoe.  GoDaddy was seen as carrying too much debt.

It took Funko almost 8 months to reach their IPO price, but after they hit it they blew right through it. Now that Funko shares are up almost 300% off the bottom they may not be cheap, but if you consider the initial IPO goal price was originally ~ $15 they are up less than 1/3 from that price and they have done an amazing job executing by signing a wide range of licensing deals & even launching a cereal line.

CEO Brian Mariotti collects Pez & understands the mindset of collectors. In this interview he highlights the importance of balancing supply with scarcity to reward collectors. He hints they are certainly willing to forego short term profits to keep growing the brand.

Funko fans can even make 1:1 figures at company headquarters.

Ultimately Funko may end up to by like Ty Beanie Babies or even the baseball card bubble of the late 1980s into the early 1990s, but it still has a way to go before reaching saturation.

To a large degree fantasy sports and online stats sort of displaced the roll of the baseball card. And Ty was creating their full on hype cycle versus creating licensed goods.

Here are a few reasons I think Funko still has at least another doubling in it…

  • At around $9 to $12  per piece retail the price of units is quite low, making the barrier to entry / risk / cost quite low & making impulse purchases rather easy.
  • They have a cult following.
  • Once units are retired/vaulted/no longer produced they often quickly double in price or more, then increase further over time on secondary markets like eBay.
  • Some of the ones I paid maybe $20 for a few years ago we limited to a print run of 480 pieces and now sell for $600 or $700 on eBay. Collectors don’t actually gain monetarily on the way up during a bubble until & unless they sell, but they feel as though they have, which encourages further investment / buying new supply. Online price guides & a regular stream of eBay auctions reinforce the growing perceived value. Earlier this year those same units were going for maybe $200 or $300. Even some of the ones that were bought retail for about $10 a few years back are now selling for $400 or $500. eBay shows regular sales at these prices and over time as the prices rise collectors feel the gains.
  • The diversity of product range allows them to appeal to other collectors in other categories. For example they gave out 20,000 Ken Griffey, Jr. Pops at a recent Seattle Mariners game & they are typically selling for $50 and up on eBay. But they cross every sort of entertainment & pop culture category: sports, WWF, Disney collectors, comics, cartoons, movies, music, rap, etc.
  • Rather than creating IP from scratch & investing into building brands from scratch they tap into existing brand equity of other brands in a synergistic way. They can make a set of units for whatever the latest hit movie or video game is, units for cult classic sitcoms or cartoons, and they can make a unit for a local fast food chain in a foreign country. Some of their most popular and most expensive units were mascots for cereals and other ad icons.
  • They can create units quickly at low cost & can use different limited runs to offer collectors options at different price points & create a more diverse range of options to choose from. There is a series called flocked with a different feel to them, some have chrome paint, some have glow in the dark designs, some have other aspects which differentiate them like a stain on an outfit, a different pose, or such.
  • While a trade war may slow down the economy and drive up inflation, I’ve noticed some of the Funko boxes on eBay are showing stickers for “Made in Vietnam” so Funko has already added some redundancy to their supply chains ahead of the widespread tariffs on Chinese manufactured goods.
  • Stores like GameStop that are seen as relics in terminal decline are doing a strong business in pop culture goods turning around their fortunes. They made $208 million in gross profits on $636 million of collectibles revenues in the prior year ending in January. Funko can appeal to many different stores by offering different stores a wide variety of exclusives.
  • The store exclusives both increases the appeal of carrying their product by helping each retailer differentiate their offering against other retailers & it lubricates the secondary market by requiring some people to buy on eBay, Amazon.com or other collectible sites to get ones not available in nearby chains.
  • Walmart recently announced  they are aggressively expanding their pop culture merchandise by partnering with Loot Crate and Funko to try to grab a big slice of the $12 billion collectibles market, which will also likely grow the market.

Funko has a variety of other product lines including Wacky Wobblers bobbleheads, Dorbz chibi styled figures, Blox, Vinyl, Hikari Sofubi hand painted figures, cereals, Pez dispensers, plush toys, T-shirts, mystery minis, etc. … but so far nothing has really caught on the way Funko Pop has. The aesthetic behind Pop product design & packaging is fantastic.

Most likely if other companies tried to clone the Pop product efforts to clone it would bomb. Each additional Pop that sells makes the figurine stronger as the category default. There are other players like Kidrobot, but none have struck lighting in a bottle the way Funko Pop has.

Further, the fact that Funko has relationships with so many IP holders makes it easy for them to go back to those same sources for additional IP licenses while also increasing the licensing fees for any new player who enters the field with a competing product.

As the web fragments culture, Funko Pop is almost a physical manifestation of a horizontal layer to re-homogenize culture by striking deals with many different IP creators from gaming to movies to comedies to cartoons to even in-store or product mascots.

I bought Funko stock at around 13 right as it first broke out but went in and out of it a few times on the way up and only got a small portion of the total move. With the current retracement I figure it might be a decent entry point. If it goes much lower it will be right around the IPO price when revenues have been growing over 30% a year.

Health Industry Stocks

Real Vision was recently profiled in the New York Times. One of their most recent interviews was Kiril Sokoloff interviewing Stanley F. Druckenmiller. In the interview Mr. Druckenmiller mentioned how health stocks drastically underperformed earlier this year perhaps in part due to political rhetoric about lowering drug prices.

He stated how it didn’t make sense they really went down then because if the economy was soft those should be some of the more stable stocks as people take their prescriptions in any economic environment. And now that it seems the economy is going better, the pharmaceutical stocks are on fire.

Pfizer, Abbvie, Merck, Johnson & Johnson, etc. .. you could pick just about anything and make money.

He noted how them being a hot sector right now does not perhaps make a lot of sense because the same political rhetoric is still in place.

One thing to consider is the passage of time is itself a signal. So the pharma stocks recovering from the early year swoon is the market stating they think the anti-pharma company statements from President Trump are hollow bullcrap.

One way to know of the perceived lack of importance of a particular political issue is to see how much action there is relative to jawboning. If a lot of time passes and there is still nothing but jawboning then it is a nothingburger.

Another signal that there is no drive for action is how when Trump won the election his campaign website quickly disappeared health-related promises, as noted by Karl Denninger. Mr. Denninger also wrote another blog post where he mentioned how some doctors he knew who were involved with the political process were quickly deprioritized:

If you recall I expressed grave concern during the election season that he really didn’t mean it on health reform — despite not one but three planks in his platform on the campaign web page related to same.  A large part of my skepticism came from the fact that repeated inside attempts to obtain some sort of solid indication in public on the details or some sort of interaction or meeting were rebuffed.

Then, on election night, those planks disappeared.  Literally gone while the votes were still being counted, as soon as the results were evident.  They’ve never been seen again, although there was, during the transition, a brief flirtation through not one but two people I know (and who have impeccable credentials in terms of actual inside knowledge as a physician) with an alleged meeting on the issue.  One such overture was postponed twice and then canceled with no reschedule, the second was just flat-out canceled.

So that’s at least 3 separate signals that restraining the pharmaceutical companies is political rhetoric versus political action. That would mean the market view earlier this year was wrong & the current market view is correct.

However, it is possible the market is just as incorrect today as it was during the pharmaceutical stock sell off earlier this year.

Next year the Obamacare penalty disappears. That will REALLY make the cost of healthcare hit people hard as the risk pools deteriorate. And the House of Representatives is likely to flip to being Democrat controlled after next month’s midterm elections.

When a party is sort of unopposed they can jawbone eventual changes that never come and appease their base, but when the direct consumer harm felt increases dramatically and populist party outsiders drive political discourse outside of the overture window they’ll likely end up calling each other’s bluffs & end up pushing through some sort of reform.

I recently sold out of my AbbVie & Johnson & Johnson shares on the thesis that actual change will be (almost accidentally?) forced when two different brands of fake populism are forced to square off over an issue where an increasing share of the pain is being felt directly by the populous.

With trillion dollar deficits during a non-recession, there isn’t an easy way to keep sinking an increasing share of GDP into the health industry.

As the Federal Reserve lifted short term rates over the past couple years it didn’t carry through into longer duration bonds & there was a fear of yield curve inversion. Financials have been beaten down recently as spreads dropped.

Today longer dated bonds started selling off with the yield on the 10-year Treasury bond touching the highest level in 7 years, settling at 3.159%. The 30-year Treasury bond jumped to a 4 year high of 3.315%.

As yields rise, debt service costs rise for both the government & heavily debt-levered companies. That in turn lowers the relative value of value stocks while also increasing their interest expenses.

Once I saw bond yields jumping like that yesterday I sold off a bunch of value stocks on the thesis there will be a rotation away from them in the coming week.

Renewed confidence in the economy has helped drive bond yields to fresh highs in the second half of the year after months of relatively driftless trading.

Commerce Department data showed the economy rose at a 4.2% seasonally and inflation-adjusted annual rate in the second quarter, thanks to gains in consumer spending and business investment. Measures of consumer confidence are at 18-year highs, and corporate profits are expected to grow at a rapid clip again in the third quarter.

Accelerating growth & rising rates is typically not the sort of environment where value stocks will outperform growth. The extreme underperformance of value is likely to continue for some time unless the whole market tanks.