Tuesday, August 14, 2012

GRPN, FB, Economic Indicators, & Europe

We will first comment quickly on Groupon (GRPN) and FB, and then we will touch on some upcoming economic indicators.  We remain convinced that the equity market is overbought and a QE3 is more than priced in.

Groupon (GRPN)

It appears that another social media stock plummeted in AH.  Groupon (GRPN), basically a company that offers group discounts for various goods and services online and sends 'targeted' spam emails providing the same discounts, was down nearly 20% after reporting mixed Q2 results.  We are not yet very familiar with this company and do not have any money in the stock.  What got our attention was the beating it was taking after Q2 results.  We looked into the numbers and did a quick back-of-the-envelope valuation (using a DCF model with conservative assumptions) and came up with a $9/sh valuation.  Although this represents an attractive upside, we will likely first learn more about the Company and wait for the stock to create a base or support level (maybe around $5 - $6) before even considering getting in.  We note that at $6.06/sh in AH, the stock clearly represents another IPO failure in the social media space as GRPN's IPO price in early Nov. '11 was $20/sh.

Facebook (FB)

At $21.60, FB is only slightly below the $23 valuation we gave it before the much-hyped IPO.  By the way, the IPO price was $38, as we are sure everyone knows by now.  As if the 19%+ decline after the Q2 earnings wasn't bad enough, 270MM+ more FB shares will hit the market this week as FB's lock-up expiration is this Wednesday.  These shares could push FB even lower.

Economic Indicators

From a macro standpoint, some July retail sales numbers, along with PPI are due out on Tuesday, 8/14.  We do not have specific projections for retail sales and PPI, but expect to see monthly increase in both of them.  Given that front-month oil futures have increased over 20% since end of June, we expect more of an increase in headline PPI than the core figure.

However, as we have stated before, the higher cost of oil is passed on to consumers via increase in gasoline prices very quickly.  For this reason, Wednesday's headline CPI, one of the inflation measuring sticks, may disappoint.  We think it will come in above the 0.2% increase that the market is expecting.  And it is not just gasoline that will be pushing CPI higher, higher food prices are at fault also.  Expect many to downplay the headline CPI figures and focus on core CPI, which exclude food and energy costs, in order to maintain their faith in a QE3.  Bernanke is expected to provide more color regarding a QE3 at the end of this month.  Unfortunately, the market's recent upsurge is making a QE3 less likely.

On Wednesday, in addition to CPI, the Empire State manufacturing survey results for August will be released.  We have seen before that this survey creates some outliers when compared with the Philly, KC, Dallas or Richmond Feds'.  We do expect decline in sub-indexes such as employment.

July's industrial production and capacity utilization are also due out on Wednesday.  We are looking for a 0.5% increase in industrial production which is equivalent to an index value of 97.9; slightly below the Street's 0.6% or 98.0 estimates.  Our capacity utilization estimate of 79.3 is pretty much the same as the overall consensus.

Weekly initial jobless claims will be released on Thursday.  We look for a slight increase from the prior week (seasonally adjusted).  However, as long as the number of claims remain below 370K (the Street's new 'good news' breaking point), we will likely not see much of a reaction.

The housing market has become the hot topic lately, on the positive side.  Thursday's housing starts and building permits will be market movers.  We continue to believe that the home builders space is overbought.  Any slight miss in these two housing indicators could put a dent into the home builders ETF, XHB.  We note that, unfortunately, XHB has moved up nicely, 3.5% to be exact, since we last discussed it on 8/3.

The Philly Fed's manufacturing survey results will be released on Thursday.  We believe this one provides a better idea about August's manufacturing ISM.  In addition, it can be used to see if the Empire manufacturing survey results should be taken seriously or not.

Lastly, University of Michigan's consumer sentiment will come out on Friday.  We do not have a specific projection, but think it will be pretty much in-line with the Street's 72.2 estimate, which is lower than the previous 72.3.  Higher food and energy costs may have more than offset the increase in the equity markets.

By the way, we just learned that Germany's and France's Q2 GDP both came in 0.1% better than expected.  Germany's economy grew at a 0.3% rate versus the 0.2% expectation.  France remained unchanged while many thought it would decline by 0.1%.  In our opinion, this news certainly does not indicate a recovery or a lesser likelihood of seeing contraction in Europe.  However, along with some other not-too-bad data, this puts a QE3 announcement at the end of August at risk.

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