Friday, November 15, 2013

Disappointing Oct. '13 Industrial Production Numbers

Sept. '13 industrial index was revised up, turning the change in Oct. to negative from no change.  The index was at 100.00, versus our 100.25 estimate and the Street's 100.14.  Capacity utilization was also a miss, coming in at 78.1%, lower than the 78.3% consensus and our 79.6% estimate.

Additional detail regarding the indexes is provided here:

The market (S&P 500) closed only a couple of points away from the amazing 1,800 level.  It is getting bubblier and bubblier, in our opinion.  FB was pretty much flat; TWTR closed down 1.6%; IACI lost nearly 1.0%; BCOR hit its 52-week high of $30.12 and closed at $29.82, up 1.88%; and AVID also hit another 52-week high, $8.54, closing at $8.52, up 1.91%.

Are There Cockroaches Under Tesla’s Hood? (Bloomberg View)

We do not follow that special company which makes those special cars that sometimes, in those special moments, may catch fire.  Yes, we are talking about Tesla (TSLA). We do not know much about the auto sector, nor do we know much about TSLA's financials. But the article below, published yesterday on Bloomberg View, got our attention.  And the title reminded us of the senior analyst for whom we used to work as an associate more than a decade ago, who told us all about the 'cockroach theory'.  Enjoy ...

Thursday, November 14, 2013

Our latest valuation of S&P 500, while market is yelling: Yellen!

Given the equity market's two-day celebration of the near 'sure-thing' confirmation hearing of the even more dovish Janet Yellen, along with the same markets hitting new all-time highs, we thought to look ahead and try to value the equity market once more to see just how irrational the market has become.

Last time we did this was in mid-May '13 when S&P 500 was at 1633.70.  We took the median of our valuation range which included projected earnings of 2013 and of 2014.  This time we will only take 2014 into account as we are nearly done with Q3 '13 and are basically approaching the end of 2013.  But before we do that, let's take a look at where the S&P 500 EPS estimates (bottom-up operating estimates) were at before:

It is clear that two things have happened during the last six months: 1) so-called 'analysts' have reduced their EPS projections for this year and next by an average of 1.6%; and 2) 2014 EPS 1-year growth projection has been reduced by a mere 20bps.  Continuing reduction in EPS estimates has been going on for at least a couple of years!  To give you an idea, in Mar '12, 'analysts' expected 2013 EPS of $117.91, nearly 9% more than what they currently expect!  We must note one more thing that displays irrationality: the uber-optimism continues as while EPS projections keep getting 'adjusted' downwardly, estimate of EPS 5-yr CAGR goes up!  That figure has increased from 10.7% in May '13 to the current 11.4%.  But let's move on.

With these things in mind, let's look at the fair value we are giving to the market.  While we admit that we are not taking QE premium into account, we think this actually gives us an idea about what tapering can do, what a bind the Fed is finding itself in right now, and the bubble that is forming.  

This equity index covers a pretty broad market, so we look for our P/E to represent a PEG of 1.0.  Given that we can only work with the data we have, we are applying the 5-year EPS CAGR estimate plus current dividend yield to come up with our P/E ratio, which again represents a PEG (or PEGY) of 1.0.  We thought to at least partially address the ongoing irrationality, so we are taking two scenarios into account.  One is with the assumption of the original 10.7% CAGR (from 6 months ago), and the other is with the current 11.4%.

The first one gives us an earnings multiple of 12.8, resulting in a 1,544 valuation.  The second one gives us 13.5 and 1,628.  The median of the 1,544 and 1,628 range is 1,586, approx. 11% below where the market is currently.  And our range indicates a market overvalued between 9% and 14%.  We must again note that this guesswork is based on the historically uber-optimistic Wall Street 'analysts' EPS and EPS growth estimates.  

Lastly, BCOR which we are no longer bullish on is down about 70bps, IACI is up 1.25% and nearing our $59.50 valuation, FB is up 62bps, TWTR got a nice dead-cat bounce yesterday and is up 4.2% today, and AVID hit its 52-week high of $8.23 today, currently up 2%. 

Wednesday, November 13, 2013

FB: $3bil offer for Snapchat?!?

This is like a little kid wanting every new toy he sees no matter how much it costs; yes, this is the great Facebook (FB) management team led by Zuckerberg. According to the Wall Street Journal, FB offered $3bil for Snapchat, and it was rejected, for now. 

Yes, this shows that FB is desperately trying to minimize defection of teenagers which may be impacting the Company's ability to further monetize its huge audience via ads.  This is something we touched on in our last FB post. Of course the stock reacted positively to this news. Whether such reaction was due to investors saying "thank Goodness Zuckerberg didn't throw away $3bil on a company with NO REVENUES" or was due to investors saying "thank Goodness FB is at least trying to address loss of teenage users", remains to be seen. Lastly, we must remind everyone that FB is still in its early stages in monetizing Instagram for which it paid approx. $1bil.  Maybe Zuckerberg and his crew should wait to see the ROI on Instagram first, before tripling down on a risky bet.  But seeing everything flying so high, Zuckerberg and his team may be thinking the same as many investors: gotta pay whatever to get into this; the market and everything else keep going higher; can't miss the opportunities. 

Tuesday, November 12, 2013

Oct. '13 Industrial Production Guesstimate ...

The industrial production numbers for Oct. '13 are due out this Friday (11/15) at 9:15am (ET).  Given the slight sequential improvement we saw in ISM-manufacturing, we think we will see something similar with industrial production.  We estimate that index to have increased to 100.25 (from 100.04 in Sep. '13), versus the latest consensus of 100.14.  Regarding capacity utilization, while most of the indicators give a mixed picture, we think decline in ISM-manufacturing's employment sub-index and increase in backlogs offset the lower production sub-index and the mixed work week figures from the regional surveys.  We estimate capacity utilization of 79.6%, a 130bps sequential increase, and above the 78.3% consensus. 

Former Fed Quantitative Easer Confesses, Apologizes: "I Can Only Say: I'm Sorry, America" (ZeroHedge)

We thought it would be best to hear it straight from the horse's mouth.  The article below, posted initially on ZeroHedge's website, is straight from the horse's mouth; written by a former 'quantitative-easer' who managed the Fed's MBS purchasing program.  Enjoy ...

Sunday, November 10, 2013

Be Prepared For Stocks To Crash 40%-55% (BusinessInsider)

Once in a while we find some Business Insider articles interesting and useful, and here's one of those articles:  Be Prepared For Stocks To Crash 40%-55%  (

We have mentioned some of the things said in the article before.  Although we agree that the market is overvalued and that it's difficult to time a 'correction', we think that so-called 'mean reversion', in terms of equity valuation, may not be as drastic as a 55% correction, but it will be a significant one. 

A look beyond the Twitter IPO finds rot beneath the gloss of recovery (theguardian)

"With a $30bn valuation for an unprofitable company, the economy seems to be improving. This is not the case for all ... ".  The article can be found here:

Saturday, November 9, 2013

Oct. NFP easily beat all expectations ...

As many already know, the change in NFP for Oct. was much better than we expected, which makes it even better than the market had expected as our estimate was slightly above the consensus.  According to the always reliable government survey conducted by BLS, 204K non-farm jobs were added in Oct.  Excluding change in government jobs, there were 212K jobs added.  

In terms of industries, leisure and hospitality led the way by adding 53K jobs, followed by retail trade, and professional and business services, with each having added 44K jobs during Oct.  

However, the overall retail trade data may be somewhat misleading to most that first think of discretionary goods such as clothing items when they think of retail.  In fact, within clothing and clothing accessories stores, approx. 12.5K jobs were lost.  Retail trade's overall jump in jobs was led by 11.5K in food and beverage stores; and 9.6K in electronics and appliance stores, which we think makes sense as more homeowners (mostly the new ones) are now focusing on upgrading their appliances.  We think this is supported by the slight slowdown we've seen in the housing market lately.  

More jobs in leisure and hospitality was driven by a 37.2K jump in accommodations and food services, which may indicate that restaurants are expecting slightly higher increase in demand during the upcoming Christmas season.   

There was some weakness in computer and electronics products industry (part of durable goods), as approx. 3,200 jobs were lost.  About 2,000 of those were in the semiconductor space.  

Lastly, average hourly earnings went up 2c from Sep '13, but 52c, or 2.2%, from last year.  This is good news, as it is ahead of the latest annual inflation rate of 1.2% (based on Sep '13 numbers).  

Some notable things from the household survey:

  • Number of people saying they are employed part-time due to economic reasons jumped by 124K.  Based on the special note regarding the government shutdown provided by BLS in its report, it does not appear that the shutdown impacted part-time numbers much.  
  • In terms of duration of unemployment, only the ones unemployed for less than 5 weeks increased.
  • And the U-6 unemployment rate moved pretty much in tandem with the U-3 rate (the 'official' one).  U-3 increased 10bps to 7.3%, while U-16 went up 20bps to 13.8%.

While the Oct. numbers were very impressive, in addition to upward revisions of the August and September figures, we believe the uncertainty brought forth by the government shutdown and its temporary resolution will have an impact on businesses hiring going forward.  In addition, similar to what we have seen in the equity market the last couple of weeks (except for Friday) - what we think has been a rotation from riskier industries into more defensive ones - decline in jobs related to clothing stores and increase in jobs related to general merchandise may be showing the businesses are slowly getting defensive too. 

Friday, November 8, 2013

Our Oct. NFP guesstimate; successful TWTR IPO ...

We have updated our NFP model.  As a reminder, the last time we posted anything regarding macro-economic data was back in July.  So, as usual we decided to get back to doing what we do pretty well: GUESStimate some economic data. :)  

October non-farm payroll (NFP) figures will be released by the BLS on Friday morning.  While the current consensus is 100K, we think it may come in slightly above that, or 113K.  We estimate impact of the government shutdown to be slightly less than what others have.  However, we believe it will carry over to the rest of Q4 and into Q1 of next year.  And in honor of Twitter (TWTR), below is our tweet regarding our Oct. NFP guess.

By the way, we are sure most of you know that the TWTR IPO was a successful one.  Although the IPO price was $26.00, the stock actually opened at $45.10, briefly went above $50.00, and finally closed at $44.90.  Of course, this is certainly above where we think the Company should be valued at, as expected.

Twitter tweeted the tweet, #Ring!, at the opening bell.  

And below are a couple of our own tweets about BCOR and our valuation of TWTR, followed by another one with link to our thoughts on TWTR's IPO price ... 

... yes, we are a Twitter addict.  :)