is Tesla (TSLA) cheap at $360? Blue Apron (APRN) at $25?

TSLA

The recent high for TSLA, pre-coronavirus, was $968.  Basically, then, TSLA has lost 2/3 of its value in a market that’s down by 30%.  That’s a serious dive.  I have no idea whether people still compile down-market betas (an idea spawned by someone with serious time on their hands), but if so I’d bet the TSLA number is going way up.

Interestingly, only a month ago investors were willing to pay around $900 a share in a $2 billion offering.

Personally, I don’t feel any urgent need to buy

Note:  in the 10-15 minutes since I started writing this, the stock is up to $430 or so.

APRN

This is like the anti-TSLA.  Two weeks ago the stock was under $3 a share–and that’s after a 15-1 reverse split last year.  So the $3 is $0.20 on the old shares.  The price in my headline is $1.67.  That’s has started to sag and is now about $20 ($1.33 on the old shares).

My impression is that APRN meals were too expensive and that the firm turned interesting meals into blah by trying to save $.50 on ingredients.  Talk about shoot yourself in the foot.

Unless the company has made radical changes recently, this just looks crazy–almost like a pump-and-dump penny stock scheme.  Again, I have no interest.

DIS at $90?

Maybe.  I’ll write about this today or tomorrow.  I want to post this fact, though, because of the rapid changes in the other two prices.

BTW, ignore APRN and wild moves like TSLA’s are typical of a market trying to stabilize.

 

selectively bearish vs. crazy

Today’s US stock market has, at least as I’m writing this at 11AM, a much different tone than yesterday’s.  Yes, it may be disappointing that there hasn’t been a bigger bounce so far back from yesterday’s mauling.  But at least there seems to me to be a lot more selectivity to what’s being bought and sold.  The losers appear to be companies directly affected by the consumer quarantine, the winners the least consumer-facing.

A second pattern continues, though, that trading is being driven, among the losers at least, by reaction to media headlines rather than investor forethought.

 

For me, one of the more puzzling aspects of the US market throughout my professional career has been the fact that virtually no institutional money managers ever beat their benchmark index.  If, ex broker fees and commissions, investing is a zero sum game, there must be winners (who don’t disclose their results) to offset the highly visible losers.  It could be that the fees and commissions are the reason, but the extent of the professional losses seems to me to be too high.  This leaves private individuals.

I mention this because the reports I’ve read indicate individuals are buying as institutions are forced to sell to meet investor withdrawals.

random stuff

I hope everyone is at least coping with the current emergency situation.

closing financial markets?

What little history there is–and as far as I can see, n one in the media knows this–says this is a very bad idea.

In the worldwide stock market collapse of 1987, there were several minor markets–Spain, Thailand, Mexico–that worked under a commodity trading model, with daily maximum up and down movements for individual issues of, say, 5%.  In the early going, such markets were typically limit down, no trade all day.  This meant that every day your stock was worth 5% less but you had no chance to sell.  These markets felt the deepest panic, fell the most and stayed down the longest–beginning to recover only after the daily trading limits were removed.

There have been two larger Asian markets, Singapore and Hong Kong, which each have had to close down for several days due to widespread fraud–the 1985 Pan Electric stock futures scandal in Singapore and the insolvency of the then-inbred Hong Kong brokerage community caught with huge long derivative positions during 1987.

Then there’s the US after 9/11.  But the issue here was that the financial industry’s record keeping apparatus was all housed in and around the World Trade Center.  Yes, there were backup systems   …but if the main system was on the 10th floor of one of the twin towers, the backup was on, say, the 15th floor, or in the other tower.  The major brokers were prepared for computer malfunction but not for disaster.

The dilemma for a mutual fund:  when the official record keeping system was destroyed, the dispute resolving and insurance scheme that protected a transaction against a rogue counterparty reneging was lost as well.  Therefore, when a fund set its net asset value at the end of the trading day and bought/sold its own shares at that price, it no longer had an ironclad guarantee that the price was correct.  Fund executives weren’t willing to take the financial risk of compensating buyers and sellers who might be transacting at the wrong price.  Wall Street closed up until it could get its systems back in order.

Anyway, history argues that however ugly it gets, shutting down trading just makes things worse.

world’s worst coronavirus response?

I think it has to be Italy.  According to the Financial Times today, however, Xi Jinping has rallied past Donald Trump by, among other things, rushing medical aid to Italy.  This leaves the US in the odd position of functioning less well than anyplace else in the major leagues.

 

is America great again?

stocks and economic forecasting

Historically the stock market has been the most reliable of the leading indicators of future US economy performance, turning up and down roughly six months ahead of domestic economic data.

The three main factors I see in making this so are:

–stock buyers have traditionally tried to look forward to anticipate future earnings performance, while the bond market has been more focused on the here and now;

–as financial instruments, stocks are sensitive to changes in Fed policy aimed at either accelerating or reining in the economy

–until the financial crisis, legions of veteran securities analysts collected and processed economic information that began to be factored into stock prices long before the data became public knowledge.

It’s not clear to me that this continues to be true, given that veteran researchers have all but disappeared on Wall Street, and that the characteristics of their AI replacements aren’t well know.

With that caveat, now that I’m trapped in the house and am trying to avoid compiling a bibliography for my thesis paper, however, I’m finding time to fool around with numbers and to blog.

stocks under Trump

Since the 2016 election (the numbers since inauguration are lower), the NASDAQ index is up by about 40%.

The S&P 500 has gained 35%+.

The Russell 2000, which is much more representative of domestic US businesses, is down by about 10%.

As a citizen, I think that the Russell 2000 wants better schools, better infrastructure and retraining for workers displaced by technological shifts.  Stock prices seem to indicate not enough of that is happening.

 

 

coronavirus: fooling around with numbers

Let’s assume that the negative effect of COVID-19 is that publicly-traded companies have not profits for full-year 2020.  I don’t mean no profit growth, I mean no profits at all.  Maybe the situation is worse than that but let’s look at this case first.

Assume company A is growing profits at 8% per year, and will continue to do so for the next decade.  Not a great performance.  Average-y  …but not nothing, either.   The present value of those future earnings is 12.5x what the market assumed this year’s earnings would be.  Excel out this year’s earnings and the PV becomes 11.5x.  That’s a drop of 8%.

Assume company B grows at 20%, a rate that only the elite can sustain over a ten year span.  The PV in this case is 22x.  The loss of this year’s earnings reduces the PV by 4.5%.

 

A second factor to consider–a crucial one for small business but not so much for firms large enough to be publicly owned–is getting to next year.  The main obstacle is leverage, either financial (generating enough cash to service debt) or operating (needing to run at close to full capacity to pay for expensive infrastructure (think: airlines, cruise ships, frackers, semiconductor fabs)).  The riskiest cases have both.

Let’s pluck numbers out of the air and say the “survival risk” group makes up 5% of the S&P 500 (too high!) and that their value goes to zero (too pessimistic; losing 50% is probably closer to worst case).  That’s a loss of 5% to the index value.

 

Adding the two together, we get -9.5% – -13%.

In other words, the coronavirus alone doesn’t justify anything near the extent of the stock market plunge.

 

Two other factors:

–maybe the S&P was toppy before the decline began;  after all, the index gained 30%+ last year, mostly on PE expansion, not earnings growth

–the chilling specter of the administration thwarting medical efforts to contain COVID-19 while spouting insane conspiracy theories.   To some degree the Trump effect (the market dropped by 10% after his bizarre speech the other night) is being countered by state and local authorities and private business taking matters into their own hands.

My conclusion?  Trump + trading bots gone wild will likely continue to cause ups and downs–probably more of the latter–for a while.  For us as individual investors, our main advantage in the stock market is taking a longer view than most.  This is especially true today, I think.  The thing I’m hanging my hat on is that the coronavirus will most likely play itself out as an investment issue with time.

 

bonds vs. bank loans: drawing down your revolver

 

A number of transport companies announced this morning that they are drawing down their revolving likes of credit with banks.  What does this mean?

bonds vs. bank loans

Bonds are fixed income instruments sold to investors.  Although, like everything else in financial markets there are myriad variations, a plain-vanilla bond is a fixed term and a fixed interest rate borrowing.  Absent the issuer violating loan covenants, holders can only get their money back before redemption date by selling the bond to someone else.  And in recent years of low yields, strong covenants have been few and far between.

Bank loans are a different animal.  For one thing, the counterparty is a bank or group of banks.  Some bank loans are fixed-term, typically with covenants that have more teeth.  Revolving lines of credit, or revolvers, in contrast, are the corporate equivalent of credit cards.  Lines can be borrowed or repaid at will and are very often used for seasonal working capital needs.

The key difference in today’s world:  a bank credit committee periodically reviews the revolver lines to make sure they’re appropriate.  I’ve seen instances, though, where the bank calls an ad hoc credit committee meeting and yanks the line because of changing economic circumstances.

why this matters

This is what I’m reading in today’s news–transport companies are afraid their credit lines will be withdrawn and are grabbing the money before banks can act.

 

2009 vs today

back then

As a result of what I can only describe as massive industry-wide bank fraud, the world woke up one day to realize that major American and European banks were, in effect, bankrupt.  They were stuffed to the gills with virtually worthless securities that the American financial firms had manufactured and sold among themselves and to the rest of the globe.

The really bad news came not exactly from that but from the essential role banks play in world commerce.  Buyers’ banks routinely issue letters of credit to sellers’ banks, guaranteeing prompt payment for stuff when it’s delivered–including a provision that the issuing bank will cover any amount the buyer is unable to pay.  What good does that do the seller, though, if one or both of the banks go belly up while goods are in transit?  So suppliers stopped shipping.

Large companies, armed with supply chain management systems flashing red signals about inventory buildup–and regretting they’d ignored these signs in 2000–determined not to make the same mistake again.  They shut operations down and laid off tons of workers.

The world economy came to a screeching halt.

Many of the I-say-fraudulent-but-no-bankers-went-to-jail securities were based on highly dubious home mortgage loans the issuing banks had made to collect up-front fees and immediately fobbed off to others (the ultimate “dumb money” was, as usual, EU banks).  Those mortgages promptly blew up when economies shifted into neutral, causing a deep housing/construction crisis.

All in all, this was the worst economic calamity since the Great Depression of the 1930s–worse than 1973-74, when the World Bank had to be called in to rescue the UK; worse than the oil shock of 1978; worse than 24% short-term interest rates of 1982; worse than the internet meltdown of 2000.

COVID-19

COVID-19 is certainly a less calamitous situation economically (meaning, writing as a PM, not as a human being) than any of those listed in the previous paragraph.   In many ways, it’s much more clear-cut, too.  But it has its own complications.

–compared with a cyclical business downturn, it’s probably harder to say how much stocks will fall due to COVID-19 but easier to figure how long a time, my guess: about six months, before economic activity will be on the upswing again

–many veteran equity portfolio managers and securities analysts (particularly on the sell side) have been fired over the past decade.  What we’re left with is bots trading on newsfeeds generated by: writers who have lost their industry sources and presenters on financial shows playing acting roles as financial professionals.  Because of this, other than when trading generated by company financial announcements, it looks to me like daily price moves are not as fact-informed as they used to be.  Resulting large moves and swift reversals driven by machines operating on faulty information make short-term trading more perilous (even) than in the past.  They also make it more difficult to “read” the traditional signs of a market bottom.

–the final complicating factor is the potentially dangerous head-in-the-sand approach of the executive branch to COVID-19.  It’s a scary vibe of incompetence.  Although I have no idea how to quantify this, it must be a factor in the intensity of the current selloff.