Category Archives: stock market

NASDAQ at an all-time high …significance?

April 24, 2015 By in stock market, Technical Analysis Tags: , , , , Leave a comment

The NASDAQ Composite index closed yesterday at a level of 5056.06.  That’s an all-time high, surpassing the previous peak of 5048.62 achieved on March 10, 2000.  NASDAQ is the last of the three major US indices to close above the highs made during the last gasps of the internet bubble of 1999-2000.   A purist might say that the all-time intraday high of 5132 and change–also made on March 10, 2000–has not yet been broken through.  Although I’m somewhat of a stickler about these things, I think the closing figure is much more important in this case.  So I buy the idea that we’re at a new high, even though on an intraday basis we’re fifty-some points short.

Does this achievement have any significance?

In terms of fundamentals, no.

In terms of market psychology, yes, in three ways:

–it finally closes the book on the Internet Bubble, allowing technically minded investors to concentrate their attention on the future, rather than retaining this one tiny cautionary reminder of an ugly period in the past

–an old high acts as a psychological ceiling, particularly for chart-oriented investors.  The more time an individual stock or an index spends just below that level, trying to break through but having no success, the stronger and more impenetrable the ceiling becomes (in the NASDAQ case, we’ve been hovering below the old high for about two months).  Once a breakthrough occurs, and provided the stock/index can stay above the old high, the ceiling reverses its role to become a floor that lends support.  In addition, once the old high is crossed, there are no further barriers to advance for chartists to worry about–no more it-can’t-go-higher-than-this levels, just blue sky

–with 2000 out of the way, I think the relevant chart period to consider is from the highs in late 2007 until now.  Over this time frame, NASDAQ isn’t a laggard.  Quite the opposite.   It’s up by 80% from the old highs vs. +35% for the S&P 500.  NASDAQ is the healthy one, not the S&P.

No, the fundamentals haven’t changed.  And no, I’m not going to skew my portfolio further toward NASDAQ names.  Still, it wouldn’t be surprising to see the OTC index show relative strength over the next few months–provided we can stay above 5048–purely because technically driven buyers will become more favorably disposed toward it.

 

 

Intel (INTC), Microsoft (MSFT) …or an ETF?

April 23, 2015 By in Constructing a Portfolio, ETFs Vs. Mutual Funds, Industry Analysis, internet, securities markets, stock market, Technology Tags: , , , , , Leave a comment

When I was reading the Seeking Alpha transcript of INTC’s 1Q15 earnings the other day, I notice that an ad popped up to the right of the text.  It was mostly a list of passive tech-oriented ETFs, with a performance comparison against INTC.  The list showed that INTC had handily outperformed any of the other entries over the pat twelve months   …but that the year-to-date results were a markedly different story.

That started me thinking.  Would I be better off with an ETF than with INTC?

On the one hand,  INTC is a relatively cheap, high dividend yield stock, whose glory days of the PC era are far behind it.  the company finally recognizes this and is in the midst of an attempt to morph into a 21st century-relevant firm. If it’s successful, I can imagine the stock could have, say, a 35% gain in price as Wall Street discounts better future earnings propects (I’d say much the same of the post-Ballmer MSFT).

This isn’t a bad story.  I’m arguably paid to wait.  The stock’s valuation is reasonable.  And at the moment I don’t believe the overall US stock market has very much near-term upside.  So I’ve been content to hold.

The ETF ad, though, got me thinking.   Can I do better, without taking a significantly larger amount of risk?

This question has two parts:

–is there a better tech stock than INTC?, and

–can I locate it?

I’m convinced that the answer to the first is Yes and that the area to look is online services for Millennials and the companies that supply support and infrastructure for them.

For me, the issue is whether to search for, and concentrate, on a single stock–something that requires a lot of time and effort.  I think it’s better to look for an ETF or mutual fund.  The best I’ve found so far is the Web X.O ETF from Ark Investment Management.  The ETF is tiny, so liquidity is a risk–in fact, Merrill Edge wouldn’t accept an online order from me for this reason.  I had no problem with either Fidelity or Vanguard, however.  The other thing is that ARK is a startup.  The principals may have had long Wall Street careers but I see very little evidence of hands-on portfolio management experience.  So ARK is in a sense establishing its bona fides with (a small amount of) my money.  Not exactly the same risk profile as INTC.

Personally, I’m not so concerned about the portfolio manager.  The organization publishes its holdings every day.  For me, liquidity is the bigger worry–and something that would make me reluctant to recommend ARK to anyone else.  Still, I own some.  And I’m looking for other vehicles that can potentially serve the same purpose in my portfolio.

Berkshire Hathaway and Kraft

April 20, 2015 By in Current Market Thoughts, economics, from growth to value: the life cycle, growth vs value, mergers and acquisitions, stock market Tags: , , , , , , , , , , Leave a comment

A little less than a month ago, Warren Buffett’s Berkshire Hathaway and Heinz (controlled by Brazilian investment firm 3G) jointly announced a takeover offer for Kraft.  The Associated Press quoted Mr. Buffett as asserting “This is my kind of transaction.”  I looked for the press release containing the quote on the Berkshire website before starting to write this, but found nothing.   The News Releases link on the home page was last updated two weeks before the Kraft announcement.  Given the kindergarten look of the website, I’m not so surprised   …and I’m willing to believe the quote is genuine.  If not, there goes the intro to my post.

 

As to the “my kind” idea, it is and it isn’t.

On the one hand, Buffett has routinely been willing to be a lender to what he considers high-quality franchises, notably financial companies, in need of large amounts of money quickly–often during times of financial and economic turmoil.  The price of a Berkshire Hathaway loan typically includes at least a contingent equity component.  The Kraft case, a large-size private equity deal, is a simple extension of this past activity.

On the other, this is not the kind of equity transaction that made Mr. Buffett’s reputation–that is, buying a large position in a temporarily underperforming firm with a strong brand name and distribution network, perhaps making a few tweaks to corporate management, but basically leaving the company alone and waiting for the ship to right itself.  In the case of 3G’s latest packaged goods success, Heinz, profitability did skyrocket–but only after a liberal dose of financial leverage and the slash-and-burn laying off of a quarter of the workforce!  This is certainly not vintage Buffett.

Why should the tiger be changing its stripes?

Two reasons:

—the opportunity.

I think many mature companies are wildly overstaffed, even today.

Their architects patterned their creation on the hierarchical structure they learned in the armed forces during the World War II era.  A basic principle was that a manager could effectively control at most seven subordinates, necessitating cascading levels of middle managers between the CEO and ordinary workers.  A corollary was that you could gauge a person’s importance by the number of people who, directly or indirectly, reported to him.

Sounds crazy, but at the time this design was being implemented, there was no internet, no cellphones, no personal computers, no fax machines, no copiers.  The ballpoint pen had still not been perfected.  Yes, there were electric lights and paper clips.  So personal contact was the key transmission mechanism for corporate communication.

Old habits die hard.  It’s difficult to conceive of making radical changes if you’ve been brought up in a certain system–especially if the company in question is steadily profitable.  And, of course, the manager who decided to cut headcount risked a loss of status.

Hence, 3G’s success.

—plan A isn’t working  

One of the first, and most important, marketing lessons I have learned is that you don’t introduce strawberry as a flavor until sales of vanilla have stopped growing.  Why complicate your life?

Buffett’s direct equity participation in Kraft is a substantial departure from the type of investing that made him famous.  I’ve been arguing for some time that traditional value investing no longer works in the internet era.  That’s because the internet has quickly broken down traditional barriers to entry in very many industries.  It seems to me that Buffet’s move shows he thinks so too.

 

 

 

 

cooling the Chinese stock market fever

April 17, 2015 By in "naked" short selling, Banks, China, commodies speculation--stabilizing or destabilizing?, Investment firms, Margin, securities markets, short selling, stock market Tags: , , , , , , , , 1 Comment

In the 1990s, Alan Greenspan, the head of the Fed back then, famously warned against “irrational exuberance” in the US stock market, but did nothing to stop it   …this even though he had the ability to cool the market down by tightening the rules on margin lending.  This is the stock market  analogue to raising or lowering the Fed Funds rate to influence the price of credit, but has never been used seriously in the US during my working life.

The  Bank of Japan has no such compunctions.  It has been very willing to chasten/encourage speculatively minded retail investors by tightening/loosening the criteria for borrowing money to buy stocks.

 

We have no real history to generalize from in the case of China.  But moves in recent weeks by the Chinese securities markets regulator seem to indicate that Beijing will fall into the stomp-on-the-brakes camp.

Specifically,

–at the end of last month, the regulator allowed (ordered?) domestic mutual funds to invest in shares in Hong Kong, where mainland-listed firms’ shares are trading at hefty discounts to their prices in Shanghai

–highly leveraged “umbrella trusts” cooked up by Chinese banks to circumvent margin eligibility requirements have been banned,

–a new futures product, based on small and mid-cap stocks, has been created, offering speculators the opportunity to short this highly heated sector for the first time, and

–effective today, institutional investors in China are being allowed to lend out their holdings–providing short-sellers with the wherewithal to ply their trade (although legal, short-selling hasn’t been a big feature of domestic Chinese markets until now, because there wasn’t any easy way to obtain share to sell short).

What does all this mean?

The simplest conclusion is that Beijing wants to pop what it sees as a speculative stock market bubble on the mainland.  It is possible, however, that more monetary stimulus–to prop up rickety state-owned enterprises or loony regional government-sponsored real estate projects–is in the pipeline and Beijing simply wants to dampen the potential future effects on stocks.

I have no idea which view is correct.

It’s clear, however, that Hong Kong is going to be a port in any storm, and that it is going to be increasingly used as a safety valve to absorb upward market pressure from the mainland.  So relative gains vs. Shanghai seem assured.  Whether that means absolute gains remains to be seen, although I personally have no inclination to trim my HK holdings.

 

 

surging Hong Kong stocks

April 10, 2015 By in Asian economic development, China, Current Market Thoughts, economics, Hong Kong, Stock Connect, stock market Tags: , , , , , , , 1 Comment

a rising Hang Seng

The Hang Seng index is up by close to 10% over the past five trading days.  The Hang Seng China Enterprises index, which measures the performance of stocks dually listed in Hong Kong and on the mainland, has risen by 13%+.

Both figures understate the performance of many individual issues in the Hong Kong market over that span.  Hong Kong Exchanges and Clearing (HK: 0388), for example, is up by 40% over the past week.  BYD (HK: 0285), the battery/electric car company, has risen by 30%; Air China (HK:  0753) is 40% higher.

The bulk of the money fueling these purchases is coming from the mainland, through the Stock Connect mechanism (see my post on SC) that Beijing established about half a year ago.  The purpose of Stock Connect is to gradually allow larger flows of portfolio capital between Hong Kong and the mainland stock exchanges.  The idea is that at some point the two areas will act effectively as one.

Up until the past few days, SC flows between Hong Kong and Shanghai have been disappointing.  That changed drastically when Beijing gave the okay on March 27th for mainland mutual funds to use the SC mechanism.  I don’t know whether it happened again overnight, but Chinese mutual funds have been forced to stop buying because the daily limit to Stock Connect transfers has been reached early in afternoon trading over each of the past several days.

What is causing the surge?

Two factors:

–sharp upward movement in mainland stock markets had left the Hong Kong shares of dually-listed Chinese companies trading at extremely deep discounts to their equivalent shares in China (shares in Hong Kong still average around 20% cheaper), and

–strict market regulation, properly audited financials and the existence of companies traded in Hong Kong but not available on the mainland all make Hong Kong an interesting destination for Chinese portfolio money.

my take

As long as Hong Kong’s China-related shares trade at a steep discount to their Shanghai counterparts, arbitrage should be a support both for these individual issues and for the Hong Kong market as a whole.

For the first time ever, Hong Kong investors have got to keep a close eye on mainland exchange activity, since arbitrage can work both ways.

To the extent that any Hong Kong stocks are still about the physical place, Hong Kong, and not about the mainland, they’ll likely be significant laggards.

A tiny voice in the back of my head says that there’s something artificial about this week’s sharp rise.  If this were 1980s Japan, I’d be convinced that mutual funds had been strongly urged by some government ministry to use Stock Connect vigorously this week.  Could something like that have happened in China?  Maybe.  I think next week’s stock action will give us a hint as to whether the week’s exuberance is voluntary.

I have a lot of Hong Kong exposure already.  I have no inclination to chase stocks solely on the idea I’ll surf a mega-wave of incoming money.  Still, if this is genuine Chinese investor interest, I think we’re unlikely to see prices back at their week-ago levels any time soon.  And we’re probably going to see pretty regular mainland support for Hong Kong shares.  So I might be tempted to add on weakness.