I’ve just updated Current Market Tactics.
Tag Archives: market tactics
Candy Crush–ed: an odd but encouraging result (except for shareholders)
King Digital Entertainment (KING), maker of the popular mobile game Candy Crush, went public yesterday, It sold 22.2 million shares at an offering price of $22.50 each, a price that was in the middle of the announced $21 – $24 range. The offering was led by JP Morgan, Credit Suisse and Merrill Lynch–KING wanted no participation by Morgan Stanley or Goldman, powerful underwriters the company apparently felt were tainted by the Facebook IPO fiasco.
the odd part
The stock opened relatively quickly, before 10 am, but at $20.99 on 842,000 shares. After some initial gyrations, it fell fairly steadily from there, closing the day down by 15% at $19, on volume of 41 million shares.
What’s peculiar is that I can see no effort by the underwriters to stabilize the price at the offering level.
Typically underwriters place about 15% more stock with clients than they purchase from the IPO firm. This allows them to absorb any potential selling during the initial hours of the stock’s debut. Yes, this is legal. The underwriters declare when they are stabilizing the stock and when they have halted this activity. Normally you don’t need to see an announcement, though. The stock runs into a brick wall (for a while, anyway) that prevents it from falling below the offering price.
In this case, there was no trading at all at the offering price. The underwriters trading books must have been hit by a wall of selling (presumably limit orders as well as market) that convinced them that resistance was futile.The odd part is that this all occurred less than a day after the offering price was set and the deal fully subscribed.
the good
It seems to me that KING must be regarded as a speculative stock. Yes, the company earned $1.75 a share in 2013. But the vast majority of that comes from a single game that competes in a notoriously fickle casual gaming arena. One has to ask how long Candy Crush will remain popular and what other hits are in the pipeline.
There may well be good answers. And the company may prove very successful. However, predicting earnings for 2014, 2015…requires a substantial leap of faith. This places it in the same camp as, say, WDAY, TWTR, TSLA and maybe AMZN and NFLX.
Anyway, everyone in the latter group has been selling off pretty heavily recently. I don’t think the companies have changed much, if at all. What’s occurring, I think, is that the stock market is taking a more sober attitude toward risk as the Fed lays out more concrete plans to end the emergency monetary stimulus that has characterized the past half-decade for it.
The more self-correction we see in the stock market now, the less likely it becomes that upcoming Fed action will cause the entire market to decline when it happens.
hedge fund manager Seth Klarman’s market warning
Seth Klarman’s shareholder letter
Seth Klarman is a value-oriented hedge fund manager who has remained in business for over thirty years and currently had $27 billion under management at the end of 2013. I don’t know Mr. Klarman, nor am I familiar with his track record. Nevertheless, it seems to me that thirty+ years of staying alive in a brutally competitive business and $27 billion under management earn you at least a hearing.
Mr. Klarman has made the news recently, as a result of his yearend 2013 letter to investors (I’ve only seen excerpts from the financial press and on other blogs). In it he cites a long list of warning signals for stock and bond markets. They include:
–least year’s 30%+ gain in the S&P without a commensurate increase in earnings
–a near-tripling in stock prices from the market low in 2009
–record amounts of margin debt, high IPO activity
–nosebleed valuations for stocks like AMZN, NFLX, TSLA, TWTR…
–all sorts of speculative activity in the bond market, particularly in lower quality securities like junk bonds.
All these worrisome developments are the unfortunate consequences of a “Truman Show” environment orchestrated by the Fed in the aftermath of the financial collapse in 2008.
Mr. Klarman underlines his concern about the current state of Wall Street by informing clients that he will be returning (this has apparently already happened) a total of $4 billion of their money to them–forgoing a large chunk of annual management fees. If press reports are correct, Klarman has been running with 50% of his assets in cash and feels he can find nothing at today’s prices to buy. (In addition, if he is charging a management fee of 2% of assets (+ some percentage of profits), the big cash holding is clipping 1% yearly off his net return.)
a little arithmetic
As of December 31st, Mr. Klarman’s hedge fund held 4.9% of the outstanding shares of Micron Technology (MU). That’s after selling 20% of his holding during the December quarter. MU made up 32% of his publicly traded equity exposure at yearend …meaning his entire equity holding was about $3.8 billion on January 1st. This implies his non-equity exposure must have been just under $10 billion. So the stock market is the least of his professional worries. The bond market is his biggest potential risk.
his big concern
It’s the same as everyone else’s–can the Fed withdraw the excessive monetary stimulus that he believes to be (me, too) the root cause of the high degree of speculative activity without causing a great deal of direct damage to global fixed income markets and a lot of further collateral damage to stocks?
It’s not surprising that a traditional value investor would be having difficulty finding stocks to buy in today’s market. After all, stocks in general have almost tripled from the lows, with left-for-dead deep value names having done far better. MU, for example, is up by 10x from its late-2008 low.
In addition, in every market cycle, value works best in the early years. Than growth takes over. On top of that, I think that in the post-Internet world traditional value investing will work progressively less well as time goes on.
mine
It’s not what Mr. Klarman is saying. It’s that I’m not ignoring it in the way I would have a year ago.
More tomorrow.
Janet Yellen’s press conference yesterday
Janet Yellen, new Chair of the Federal Reserve, held a press conference yesterday, following release of the agency’s policy-setting Open Market Committee.
The committee’s decision was the expected one–to continue its program of winding down over the next six months its program of buying boatloads of federal government bonds.
During the Q&A session, a reporter asked Ms. Yellen how soon after the bond purchases end in September it might be before the Fed begins to raise short-term interest rates in the US from their current ultra-emergency low of 0%. Her answer: assuming the economy continues to strengthen, six months or so. In other words, about a year from now.
This reply sent the stock market, which had been within a stone’s throw of its all-time high, into a tailspin.
From the perspective of investors like you and me, the Yellen comment is not new news. It’s pretty tame. In the fast-twitch world of short-term traders, however, the stock market response is understandable. The market was likely bouncing against the top of its near-term trading range, so down was the likely short-term direction no matter what the news. Also, this is also the first occasion when the Fed has said when short-term rates might begin to rise. It’s a few months earlier than the consensus had expected; more important, the timing has been made (more or less) concrete. And the actual shoe dropping–no matter how widely anticipated–almost always provokes a market reaction.
The more interesting issue, to my mind, is why Ms. Yellen said what she did. I can think of three possibilities:
–Maybe she didn’t intend to specify timing and made a rookie mistake.
–More likely, in my view, the Fed may have made a far more decisive turn toward restoring money policy to normal than the Wall Street consensus has thought. Yesterday would have presented a good occasion for starting to get this new information disseminated. The fact that the stock market is at/near record territory suggests it is in a good position to absorb the news; one might even ask if the Fed is worried that too much money is chasing speculative stocks. Maybe it wouldn’t mind if stocks went down a bit.
–It’s also possible, though I think much less likely, that the Fed has come to believe that its current easy money policy is having a negative effect on the economy. Maybe it is coming to view itself as an enabler of Washington dysfunction, that the White House and Congress have the luxury of doing nothing because money policy is so loose.
After all, what do we really know about Janet Yellen. Well, she has a grandmotherly appearance and a vaguely unpleasant speaking voice. That may lead one to forget that she is a woman who has risen to the top of a profession dominated by men. This means that behind her mild-mannered exterior, she has to be super-competent and very tough.
From an investor perspective, I think the takeaway from the press conference is that monetary policy normalization is no longer an amorphous thing somewhere out in the future, but is rather an important fact of life that must be factored into any investment decision. We also have to begin to figure out whether or not a latter-day Margaret Thatcher is emerging as head of the Fed, and what this would mean for stocks.
Current Market Tactics, March 12, 2014
I’ve just updated Current Market Tactics.
Maybe a correction isn’t in the offing. Too bad. On the other hand, upside momentum seem to me to be waning.