Beware the Summer Swoon

April 24, 2014

  • Stocks stand still: Prepare for the “meat grinder,” Guenthner warns
  • Bear slaughter: Why Apple and Facebook are delivering — and embarrassing the naysayers
  • A new tech bubble? Not by this measure
  • A $3 billion industry arrives: Why now’s the moment to act
  • Spain’s modern-day answer to Robin Hood… grousing about gas prices… second thoughts about an “activist investor”… and more!

  Uhhh… What happened?

Judging by the headlines in mainstream financial media when we woke up, we were supposed to get an ENORMOUS RALLY after fabulous numbers last night from Apple and Facebook.

The tech-heavy Nasdaq popped more than 1% on the open. But as we write, it’s barely in the green. The Dow and the S&P are likewise flat.

  “Today’s action is a huge tell,” reads an email from Greg Guenthner of our trading desk.

“Nasdaq futures were up 50 points before the bell. Gold was down big.

“Thirty minutes later, momentum stocks were selling off hard (again). Facebook was red. Gold soared close to $1,300. There’s a hint of panic under the surface.

“Get out the meat grinder. The psychological damage inflicted by falling momentum and tech names has clearly spooked investors. I think we head lower into the summer.”

 The more interesting story everyone’s ignoring is this: The bear cases for Apple and Facebook collapsed with last night’s releases.

Apple’s best days are supposed to be behind it: Steve Jobs is no longer around. Shorter term, Apple’s iPhone push into China is supposed to fall flat on its face: There aren’t enough Chinese with enough disposable income to buy iPhones when they can buy cheaper domestic or Korean models.

Whoops: Apple has now reversed a two-year slowdown in iPhone sales. “Here’s why China is moving the needle now for Apple,” explains Agora Financial investment director Paul Mampilly: “This is the first quarter where they were selling the iPhone in cahoots with China’s biggest mobile phone service — China Mobile (CHL). You see, the Chinese market works a bit like the U.S. market, where people buy their phones and wireless service at the same time.”

No, there’s no breakthrough product on the horizon that’ll get people to line up around the block. “But in the meantime,” says Paul, “the company is doing stuff that makes its investors happy.”

The stock split announced yesterday means “if you own one share of Apple today, you’ll have seven sitting in your account when the split is complete. But remember that a stock split does not change the value of the Apple shares you own. You can think about it like splitting a single pizza. You can split a pizza into five, seven or 10 slices, but it’s still one pizza.”

Doesn’t hurt that Apple is raising its dividend 8% and buying back another $30 billion in stock — which it can afford with $151 billion cash in the bank.

“Apple is still a very cheap stock paying a 2.5% dividend,” says Paul. “It’s still growing about 20% a year based on Wall Street analysts’ estimates, and you buy all that for a price-earnings ratio of 11. Not too shabby.”

  And Facebook? “Facebook does what television used to do,” Paul explained in yesterday’s Daily Reckoning — it delivers eyeballs to advertisers.

“The big difference is that the content is created by the users, and it’s created by the users for FREE.”

The knock on Facebook went like this: As Internet use transitions from computers to mobile devices, people will have less tolerance for ads hogging the smaller amount of real estate on a smartphone screen. And they definitely won’t put up with video ads that count against their monthly data limits.

Whoops again: “Facebook,” says Paul, “reported that 59% of its revenue comes from a mobile-based 1.23 billion users. This is up from nearly zero at the time of its IPO in May 2012.

“Overall, Facebook grew its sales by 72% in the first quarter. And if you annualize its sales from this quarter, it’s going to have $10 billion in sales for 2014. Facebook made $642 million for the quarter, or 193% more than last year.

“Facebook is a very fast-growing, highly profitable company. I wouldn’t call it a cheap stock. But my experience is that when stocks are growing as fast as Facebook is growing right now, you’ll never get a chance to buy it really cheap. That was true for Microsoft and Cisco and Oracle in the 1990s. And I believe the same thing is happening with Facebook.”

  One more reality check about the “new tech bubble.”

If you’ve seen buzz about it lately, that’s because hedge fund guru David Einhorn — the guy who made a fortune shorting Lehman Bros. in 2008 — recently declared, “We are witnessing our second tech bubble in 15 years.”

One of the factors he cited was that investors and analysts are tossing aside traditional valuation methods — the same way they did when they said earnings didn’t matter in 1999.

Money manager and uber-blogger Barry Ritholtz begs to differ, and he passes along this chart of the Nasdaq 100’s price-earnings ratio. “It speaks for itself,” he says…

“David Einhorn is a very astute trader and an insightful fund manager,” Mr. Ritholtz avers. “He is a smart guy, and I only rarely find myself in disagreement with him. But when it comes to the declaration of an echo tech bubble, I am on the other side of the argument.”

  Is it a sure sign an industry has arrived when government tries to regulate it?

On Tuesday, we documented the tug of war between the cyberlodging firm Airbnb and the state of New York. This morning comes a declaration from Washington that the FDA has the authority to regulate so-called e-cigarettes.

[Ed. note: We missed it when Congress passed a law granting the FDA that authority. Oh, wait: It appears the executive branch is asserting this authority with no say-so from the people’s representatives. Imagine that…]

“The rules, if finalized,” Bloomberg reports, “will limit sales to minors, ban free samples and require nicotine addiction warnings.”

Electronic cigarettes — tube-like devices that produce a vapor you can inhale — have become a $3 billion industry. Two of our editors have recommendations in the e-cigarette space; neither name is reacting much to the news this morning.

  “E-cigs are the way of the future,” says Rick Pearson, editor of Agora Financial’s Catalyst Trader.

“Remember when it was permissible to smoke cigarettes on airplanes? In hindsight, the concept of lighting up inside a big metal tube that recycles much of its air seems absurd. I believe that within 10 years, the concept of rolling up dried tobacco and lighting it on fire will also be headed toward antiquity.”

Rick believes one player in the e-cig sector is a juicy buyout target, good for a 30% gain whenever the time comes.

He should know: Rick’s spent the last decade spotting buyout bait, earnings surprises and favorable decisions by regulators — anything that can send a stock shooting skyward in a short amount of time. Now he’s sharing these lucrative insights with his readers.

For only a few more hours, you can get Rick’s recommendations at the charter-subscriber rate. At midnight tonight, the price of this premium advisory goes up. Follow this link to claim your discount.

  “They call him the Robin Hood of the banks,” reads a Guardian story about Enric Duran.

Between 2006-08, he took out 68 loans from 39 banks in Spain worth nearly a half-million euros… with no plans to pay them back. “Instead,” the paper reports, “Duran farmed the money out to projects that created and promoted alternatives to capitalism.”

Hmmm…

“I’m proud of this action,” he told the paper via Skype from the proverbial undisclosed location — he’s been on the lam for 14 months. The money, he says “generated a movement that allowed us to push forward with the construction of alternatives.” The Guardian piece didn’t specify what those “alternatives” were.

“I saw that on one side, these social movements were building alternatives but that they lacked resources and communication capacities,” Duran added. “Meanwhile, our reliance on perpetual growth was creating a system that created money out of nothing.”

Double hmmm… for a guy who’s so hostile to “capitalism,” he seems to have an intuitive grasp of how the not-so-capitalist banking system saps your purchasing power.

  “Things must be getting bad in the auto sector,” a reader writes with an on-the-ground report on the economy.

“My vehicle is 10 months old, and I’m receiving notice of incentives to trade for a new model. Not to mention ads from other dealers who have no idea of the age of my vehicle.”

  “Our local gas prices,” writes another reader, “are $4.27 today, compared with the average of $3.69 you mentioned Tuesday.

“We are about an hour north of San Francisco. Maybe we could build a pipeline from the Bakken or the Eagle Ford to California and get us some of those lower prices?”

  “It looks as if the Keystone XL pipeline is on hold again,” writes a reader from the Canadian Maritimes, “until after the U.S. elections in November.

“The crude oil from Alberta is sold at a huge discount, but since we can’t ship it to the
U.S., it looks like we will have to sell it to China, which is actively investing in the infrastructure
to get the crude to the West Coast of British Columbia.

“In the meantime, most of the gasoline consumed in eastern Canada is refined in the U.S., instead of our crude being refined here, so consumers wouldn’t have to pay $1.45 per liter for gas. That would be US$5.22 per gallon.”

  “I wouldn’t hold up Bill Ackman as a hero activist investor,” a reader cautions.

“Through some very generous bribes — er, ‘campaign contributions’ — he managed to get a couple of congress members to push the federal regulators to go after Herbalife. Ackman had a $1 billion short position on HLF at the time and probably made a few hundred million off HLF’s 25% decline in market value. At best, Ackman is a pirate. At worst, he’s a crook.

“Speaking of pirates,” our reader pivots to another recent topic, “the disappearance of the U.S. shipbuilding industry is due in large part to the federal government regulating the U.S. flagged carriers out of existence.”

The 5: We never labeled Ackman a hero. Heck, we called him out for his Herbalife shenanigans a few weeks ago — which so far haven’t paid off.

Our mission is to follow the money. All we’re saying is the activist types, whether they act from moxie or clout or both, are stomping the performance of nonactivist hedge funds. We’d be fools not to sit up and take notice.

  “I would have no problem with going back onto a gold standard,” writes a reader carrying on a discussion that began last week. “The only problem is that all of the ‘decision makers’ in the country (world?) do not want that, since if we were on a gold standard, it would not be possible to inflate away all the debt floating around in the economy.

“The plan, since the crash in 2008/2009, seems clear to me — try to print enough money and inflate the debt away. Unfortunately, demand is weak and not recovering. This is not working. All of this extra money is doing nothing except making another financial bubble with biotech and Internet stocks.

“I have had multiple discussions with the people I know in business and deal with in business about what has been going on. The lucky ones are just holding in place. The unlucky ones are losing money. None of us sees any demand that would warrant us wanting to risk any capital in a new business. We all expect that if we tried to start up a new business, it would probably be no better than what we were doing prior and just be a ‘sinkhole’ for capital.”

The 5: You’re aptly describing the tug of war between inflation and deflation that The Death of Money author Jim Rickards often speaks of.

We look forward to drawing him out on that matter when he pays a visit to Agora Financial headquarters next month. Stay tuned…

Cheers,

Dave Gonigam
The 5 Min. Forecast

P.S. Final reminder: The charter-subscriber rate for Agora Financial’s Catalyst Trader is available only through midnight tonight. For discounted access to “Newton’s Secret Profit Triggers,” act now.

rspertzel

Recent Alerts

First Is Not Always Best (Vaccines)

First isn’t always best? Our science-and-wealth maven Ray Blanco thinks so: “Other vaccines, earlier in development, could eventually win the race.” Read More

Central Bank Audit!

The U.S. government is demanding a forensic audit of Lebanon’s central bank or risk sanctions similar to those leveled at North Korea. And the irony isn’t lost on us… Read More

Low Blow for Work From Home

First, we had the geniuses at Deutsche Bank… Now the cranks at Comcast? Here comes the next front in the war on remote workers… Read More

Biden’s A-Team Spells Trouble

What to Expect From the Next Presidential Cabinet… Read More

Speech Regulation (Happening Now)

We return to our theme of social-media censorship… and a rather dystopian pre-election headline we missed. Read More

Cold Reality

With new mRNA vaccines in the pipeline, we can go on the offense. But “the issue,” Ray Blanco points out, “is… transporting the vaccine.” Read More

Mainlining Hopium

It turns out the post-election fundraising grift is common to both major parties: the “Biden-Harris Transition” panhandles from broker Americans. Read More

Rigged!

Here’s an indisputable proposition: If Donald Trump mounts a credible effort to serve a second term, markets won’t see it coming… Read More

Fed in the Crosshairs

A California congresswoman puts the screws to a Federal Reserve stuffed shirt, and a former Lehman Bros.’ insider makes a cynical case for gold. Read More

Media Blackout: Lockdown Demos

“A hell of a lot of Germans are fed up,” says a reader from Bavaria, reaffirming our Election Day forecast on the breakout of social disorder. Read More