feeling for a bottom

feeling for the bottom

panic in the air

During bad markets like the present, company fundamentals tend to go out the window as predictors of short-term stock market performance.  What takes their place is varying shades of fear and reading charts.

As for fear, I’ve found in watching my own usually-optimistic behavior, that no matter how far down the market has fallen it isn’t approaching a bottom until I start to get scared–that maybe my innate cheeriness has finally ruined my career and the family finances.  For what it’s worth, I started getting these (irrational) feelings for the first time on Wednesday.  It could be that my last-minute rush to get my thesis project finished and submitted to SVA contributed a feeling of panic.  If not, my Wednesday experience is good news.

charts

My version of William Pitt is to say that charts (not patriotism) are the last refuge of scoundrels.  Nevertheless, when rationality flies out the door, charts are what’s left.

In the US, despite the chatter of TV actors, the important index is not the Dow but the S&P 500.  The important things to look for, in my view, are past bottoms and places where the index has been flattish for an extended period of time.  That’s not a lot to go on but that’s most of what there is.

In this case, the relevant figures I see are 2400, which was the bottom for the mysterious market drop at the end of 2018 and 2100, where the S&P spent much of 2015-16.

Two idiosyncracies of the US market:

–the index often breaks below a big support level–scaring the wits out of traders who see themselves sliding into a yawning abyss, in my view–before reversing itself.  The break below signals the bottom

–almost always the index recovers for several weeks before returning to, and bouncing up from, the initial bottom.  This didn’t happen in 2018, though.

the economy

My guess is that the worst of the coronavirus will be behind the US by June.  If that’s correct, then at some time in May (?) the stock market will begin to discount better times.

The biggest economic negative has come from the White House, where the incompetence of Mr. Trump was on full display, raising echoes of the disaster he created in Puerto Rico earlier in his term.  Not far behind is the recent revelation that Republican senators dumped their stock portfolios after coronavirus briefings, while still toeing the party line that there was nothing to worry about.  (My view is that Trump has done an enormous amount of long-term economic damage to the US in his presidency so far–hurting most deeply those who have trusted and supported him–but that we have yet to see the negative consequences.)  Somehow, Washington appears to have started to function again, however.

On the other hand, state and local officials have negated some of Trump’s “hoax” campaign by acting quickly and decisively.

From a purely stock market view, it seems to me that investors have switched out of panic mode and are beginning to sift through the rubble to sort winners from losers.  If I’m correct, it’s important for us as investors to pay attention to what the market is saying now–and ask ourselves how well this matches with our sense of what is happening.

 

 

 

 

my take on Disney (DIS)

Post the Fox Studios acquisition, DIS remains in three businesses:  broadcasting, theme parks and movies.  December 2019 quarterly operating income from the three (ex direct to consumer) was roughly $5 billion.  Of that, just under half came from theme parks, a third came from broadcasting and the rest from movies.

All three business lines have their warts:

–ESPN, the largest part of broadcasting, has long since lost its allure as a growth vehicle; ABC is breakeven-ish; I think there’s some scope for boosting results from Fox.  Pencil in slow/no growth

–theme parks are (were?) booming, but they’re a highly business cycle sensitive business.  We’ll see that, I think, in March- and June-quarter results.  so even though it’s Disney we should apply a discount multiple to these earnings

–movies are traditionally a low multiple business because of the irregularity of new releases and their typical hit-and-miss nature.  DIS has been exceptionally good for a long time under Bob Iger (it was pretty awful before him), but this is still inherently a low multiple enterprise.

 

This is the main reason the stock spent years bouncing around the $110 level with flattish $10 billion, $6 a share, in earnings.  In the era of human analysts, it wasn’t just the earnings that held the company back.  It was also knowledge of the slow demise of ESPN, the (in hindsight too conservative) sense that theme parks were nearing a cyclical peak, and the idea that the company’s incredible movie hot streak might come to an end.

Then there’s the streaming business, where–to pluck a number out of the air, DIS is spending 10% of its operating income to develop.

 

A couple of months ago no price seemed too high for Wall Street to pay for Disney+, with the stock peaking at $153.    If we say $25 of the rise was due to streaming, at the top the market was valuing Disney+ at $40 billion+, or roughly a quarter of the value of Netflix.

The stock has fallen by about 40% since.

Now, hang onto your hat:

If we assume that the implied value of Disney+ has fallen in tandem with NFLX, it’s now valued at $32 billion.  This gives a residual value for the rest of DIS of about $140 billion.

That would imply a multiple of 13x current earnings–or, alternatively, an assumed 20% decline in profits.  The decline would likely be mostly (I’m assuming entirely) in the parks and movie divisions, implying that area’s income would fall by somewhere around 30%.

So–in this way of looking at things, we are assuming substantial success for Disney+ and a decline in the most cyclical businesses of roughly half what the market is assuming for companies like Marriott.  It would be cheaper to create a “synthetic” DIS out of NFLX + MAR shares, although what would be missing would be the Disney brand.

My conclusion:  Mickey and Minnie aren’t screaming “Buy me.”

 

 

 

 

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.