Monthly Archives: June 2016

Brexit looming

June 16, 2016 By in Brexit, Uncategorized Tags: , , , , Leave a comment

Voting takes place a week from today in the UK on the question of whether the country should remain in the EU or leave.

If the vote is in favor of Brexit, the government will presumably inform Brussels of its intention to depart, which will start the clock on a two-year waiting period before Britain can officially withdraw.

Recent polls have begun to show for the first time that a majority of citizens favor severing ties with the EU.  This is the reason for recent weakness in London stocks.

My thoughts:

–polls on issues like this are notoriously unreliable.  Some are either tacitly or overtly political, with question design (on the order of “You do favor leaving the EU, don’t you?”) slanted to one side or the other.  As far as internet surveys go, it’s impossible to know whether the respondents are a representative sample of likely voters.  During in-person, and especially during phone, interviews, respondents often tend to be less than truthful, giving instead what they perceive to be expected responses

–Pro voters, who seem to think that exiting the EU will return Britain to its eighteenth-century glory, are delusional

–the two-year waiting period gives both sides time to renegotiate trade agreements (almost half of Britain’s exports are to the rest of the EU).  It’s reasonable, I think, to assume that new agreements will be less favorable than the current ones.  But it’s hard to know whether they’ll make a significant practical difference

–non-EU multinationals who have located operating divisions and general headquarters in the UK because of its being inside the EU will presumably begin to shift operations elsewhere (Ireland?)

–as far as portfolio investors like us are concerned, the main direct economic effect of Britain leaving the union will likely be the weakening of the currency that’s happening now.  So far there has been no counterbalancing positive movement by stocks where the costs incurred by the underlying companies are primarily in sterling but where revenues are in euros or dollars.  Such firms, however, should be star performers if the vote is for Brexit and as the currency stabilizes.

 

My conclusion:  prepare to buy multinationals traded in London on a further selloff that will likely occur if the vote next week is for Brexit.

UPS survey of online shopping

June 15, 2016 By in internet, Retail, Uncategorized Tags: , , , Leave a comment

A week ago, UPS released its fifth annual survey of online shopping.  The main results:

–for the first time ever, more than half of the purchases made by survey respondents are made online

–over three quarters use smartphones for their buys

–a third use social media sites to gather information; a quarter have bought things through social media sites

–a third start their shopping either at Amazon or eBay

—half of online shoppers take delivery at a physical store.  Almost half make additional purchases when they go to pick their items up

–60% of returns go through physical stores.  Again, consumers frequently buy additional items once they’re inside

–almost a third of purchases in a store are smartphone-guided, meaning buyers use their phones for product information, price comparison or download discount coupons

–35% of packages not sent to a store go to non-home locations, a trend that has been steadily rising recently

—pure physical-store shopping, meaning no online involvement in either search or purchasing, is down to 20% of all buys in the US.

 

No wonder traditional retailers, especially mall-based ones, are taking such a beating.  No wonder Amazon is aggressively beefing up its own shipping operations, while starting to tiptoe into opening physical stores (as a better way of processing returns?).

Microsoft (MSFT) and LinkedIn (LNKD)

June 14, 2016 By in mergers and acquisitions, Uncategorized Tags: , , , , , , Leave a comment

Before the open in New York yesterday, MSFT and LNKD announced that the latter has agreed to be acquired by the former in a friendly all-cash deal for $26.2 billion, or $196 per LNKD share.  Satya Nadella, the MSFT chairman, describes the merger as the coming together of the professional cloud with professional networking.  The acquisition price, a 50% premium to where LNKD was trading beofe the announcement, represents a bit less than 7% of MSFT’s market capitalization.

The most interesting aspect of the deal is that MSFT shares only fell by 2.6% in trading yesterday, in a market that declined by 0.8%.  To me this is indicative of the tremendous positive mindset change that has happened by investors about MSFT since the end of the disastrous Steve Ballmer era.

 

 

value investing and mergers/acquisitions

June 13, 2016 By in capital spending and the business cycle, Capital-intensive firms, capitalizing vs. expensing, mergers and acquisitions, return on equity vs. return on capital, Uncategorized Tags: , , , , Leave a comment

buy vs. build

When any company is figuring out how it should grow its existing businesses and potentially expand into other areas, it faces the classic “buy or build” problem.  That is to say, it has to decide whether it’s more profitable to use its money to create the new enterprise from the ground up, or whether it’s better to acquire a complementary firm that already has the intellectual property and market presence that our company covets.

There are pluses and minuses to either approach. Build-your-own takes more time.  The  buy-it route is faster, but invariably involves purchasing a firm that’s only available because it has been consigned to the stock market bargain basement because of perceived operational flaws.  Sometimes, acquirers learn to their sorrow that the target they have just bought is like a movie set, something that looks ok from the outside but is only a veneer.

when the urge is greatest

Companies feel the buy/build expansion urge the most keenly at times like today, when they are flush with cash after years of rising profits.

so why isn’t value doing better?

Many economists are explaining the apparent current lack of capital spending by companies by arguing that firms are opting in very large numbers to buy rather than to build.

The beneficiaries of such a universal impulse should be value investors, who specialize in holding slightly broken companies that are trading at large discounts to (what value investors hope is) their intrinsic value.  Growth investors, on the other hand, typically hold the strong-growing companies with high PE stocks who do the acquiring.

On the announcement of a bid, the target company typically goes up.  The bidder’s stock, on the other hand, usually goes down.  That’s partly because the bid is a surprise, partly because the target is perceived to be priced too high, partly simply because of arbitrage activity.

All this leads up to my point.

Over the past couple of years, growth investing has done very well.  Value has lagged badly.  How can this be if merger/acquisition activity continues to be large enough that it is making a significant dent in global capital spending?

 

 

today’s S&P 500 trading will be interesting

June 10, 2016 By in Strategy, Technical Analysis, Uncategorized Tags: , , , , , Leave a comment

The S&P 500 closed on Wednesday at 2119, after touching 2120 for a moment mid-day.  That’s within an eyelash of the 2124 and 2128 daily closing highs of last July and the intraday high for the index of 2132 made at the same time. (Note:  I’ve always thought intraday figures are more important than closing, even if they’re a tiny bit more effort to look up. That’s not the consensus view, though.  Arguably, that makes them even more important.)

This is the best attempt the S&P has made since then to test the old highs–which have so far proved firmly resistant to being bettered.

Yesterday, the market rallied from intra-day lows to close down, but not badly down, from Wednesday levels.

In the pre-market today, the S&P is showing the most significant weakness it has in a while, although we’re still talking about just over a half-percent.  We also know that dabblers in the pre-market are often derivatives traders who exert little influence on how trading in the stocks themselves plays out.  So pre-market action may have little predictive value.

In any event, I think that today’s trading might give us some insight into what the general mood of the market may be in coming weeks.

Possibilities:

–a breakout above the current historical index highs would be a very bullish sign.  But that might be like expecting a pony for your birthday, just too much to ask.

–a reflex decline, where short-term traders, having determined that the market can’t go higher, try to push prices down to see how far they can decline

—“backing and filling,” which is what technicians often call a sideways market, where stocks bob around in the space between–in this case–the May levels of 2050 or so and the new ground of 2100+ while they gather strength for a further advance.

If I had to pick one of the three right now, I’d select the third.  One twist, though.  It seems to me that as the market struggles higher, it is also reorienting itself further toward secular growth themes, specifically Millennials vs. Boomers and internet vs. physical presence.  I expect that process to continue, no matter what the overall market direction.