Scratch Notes 2

DISCLAIMER: The views and information I provide are for informational purposes only; are not meant as investment advice; are subject to change without notice of any kind; do not constitute an offer of products or services with regard to any fund, investment scheme, or pooled investment; nor do they in any way, shape or form represent the views of my employer.


November 7, 2016

***The strains on my time have grown to the point where my traditional *global* reading and note taking process must take a backseat to my effort to aggressively build out my research process/universe/knowledge base. As such, this page may or may not remain dormant for the foreseeable future.***


October 25, 2016

AT&T Tries to Shake Up Pay TV (WSJ 10.20.16)

  • DirecTV Now likely to be priced at $50 per month with no annual contract
  • Existing DTV biz has 25.3 million subs paying an average of $117/month
  • Sling TV cost $20/month for almost 30 channels
  • Sony Vue costs $75 for a bundle of more than 100 channels
  • T going after 20 million US HHs that don’t pay for home TV
  • UBS projects 2.5 million subs for the DTVN service by 2020

dtv

17M: I am heavily biased because I have a large aggregate stake in the Media sector, but I find it rather comical how these various ‘skinny’ bundle offerings are merely proving out the highly attractive economics of the traditional bundle. Yes there is going to be disruption to traditional viewing habits, advertising, DVR’ing, etc – but the Cable cos are in very, very good position to innovate on the technological side of the Video product equation in order to compete with OTT skinny bundles over time. And as the “Millennial” cohort matures from an earnings standpoint, it is likely the traditional bundle will continue to represent the vast majority of PayTV consumption.

So the key issue really comes down to advertising revenue – not necessarily affiliate fee revenue. I personally watch almost everything – including sports – on tape delay; and it’s tough to envision NFLX or HBO Go successfully embedding advertising into their content…so while I may not be representative, how does advertising revenue not at minimum continue downward?

Google TV Service Signs On CBS (WSJ 10.20.16)

  • GOOG launching a web TV service in early 2017 that will be housed on its YouTube platform
  • CBS, FOXA, CMCSA and DIS will likely all be signed on
  • “Unplugged” will be priced between $25 and $40 per month
  • CBS has said it would seek ARPU of between the $2/sub/month it receives from traditional bundle packages and the $5.99 it charges for “All Access”

October 24, 2016

Caterpillar Buried By Big Commodities Bet (WSJ 10.17.16)

  • CEO Doug Oberhelman took charge in 2010
  • CAT spent almost $10 billion on capacity expansion from 2010 thru 2013, in addition to $8 billion for Bucyrus
  • From 2011 to 2014 CAT doubled the number of plants and facilities in China to 26
  • Oberhelman to be succeeded by Jim Umpleby, a 35-year CAT vet
  • CAT has reduced its workforce by 20% in the past four years, about 30k jobs; and is expected to close or consolidate as many as 20 plants
  • CAT’s Decatur, Ill plant produced fewer than 600 mining and other off-highway dump trucks in 2015, down 78% from the 2011 peak

cat-overview

Big Cable and Mobile Are Ready to Rumble (WSJ 10.8.16)

  • 2017 should see the collision of the fixed and wireless broadband industries
  • In 2011, Comcast and other Cable cos sold unused spectrum to VZ in return for an MVNO agreement
  • Comcast likely the first to launch a bundle containing a wireless offering
  • Cable cos already have what wireless operators need: a greater number of small wireless access points (Wi-Fi)

“Big mobile’s only realistic competitive response might be quickly to roll out 5G wireless that can compete with, and even exceed, cable in delivering high-speed access to the home. Busted open would be cabledom’s biggest strength in the coming showdown, its oligopolistic safe haven in the domestic retail market.

“Oddly, this burgeoning competition between fixed and mobile has always been predictable and yet has figured not at all in the Federal Communications Commission’s regulatory efforts, which paint the country as descending into an uncompetitive broadband hell.

“A new study by economists Gerald Faulhaber and Hal Singer details how an agency that once prized economic analysis increasingly ignores or disregards economics in its regulatory findings. Why? Because if it acknowledged the increasing competitiveness of the market, there would be nothing to regulate, no favor-factory opportunities for its political sponsors to milk.”

Pay TV Could Lose $1 Billion (WSJ 9.29.16)

  • 800K customers could cut the cord in the NTM
  • At $1,248 per sub, that’s $1B to the industry in lost revenue
  • “Cord-havers” spend approximately $187/month (all-in, including Internet); “cord-nevers” $71
  • ~83% of cord-cutters say they can access most or all of the content they want without a PTV sub
  • 6% of cord-nevers say they are very or extremely likely to subscribe to cable in the NTM
  • There are about 16.9 million cord-never HHs

Amazon Takes Aim At UPS and Fedex (WSJ 9.28.16)

  • Nearly two dozen current and former AMZN managers and biz partners say that AMZN’s LT goal is to one day haul and deliver packages for itself as well as other retailers and consumers (17M: ADS – “Amazon Distribution Services”?)
  • Internally, the LT goal is referred to as “Consume the City”
  • Deutsche Post attempted to challenge UPS and FDX in the 2000s (DHL)
  • FDX spends more than $5 billion p.a.; UPS $2.5B
  • AMZN spent $11.5 billion on shipping in 2015
  • AMZN could save $1.1B ex. UPS/FDX
  • 44% of the US pop is within 20 miles of an AMZN facility v. 5% in 2010
  • Global delivery market generates $400 billion of revenue annually
  • AMZN comprises $1B of UPS revenue

construction-zone workforce network shipping-costs


October 17, 2016

US gas: Global market, local problems (FT 9.27.16)

  • The Marcellus is out-producing takeaway capacity, and is now making an all-out push to market the gas in what the industry calls “Marcellus 2.0”
  • Problem is, New York and Connecticut are far less friendly to infrastructure projects than Texas, driven by more dense populations and greater environmental consciousness
  • Gas emits roughly half the carbon dioxide of coal
  • US carbon emissions down 12% from 2005 to 2015
  • Methane receiving greater scrutiny from environmental groups, as it is 84 times more potent as a greenhouse gas than carbon dioxide
  • 22 rigs drilling in PA, down from 109 five years ago
  • Marcellus and Utica production reached 22 BCFPD in February
  • Constitution pipeline led by WMB – 25% owned by Cabot – $1 billion project
  • WMB awaiting federal approval for Atlantic Sunrise, a $3 billion pipeline

Northeast takeaway capacity

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Select Northeast pipeline projects

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Northeast gas production

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September 19, 2016

Machinery Glut Hits Equipment Makers (WSJ 9.19.16)

  • Rather than buy a $500,000 bulldozer or $300,000 excavator construction firms are renting or entering into longer-term leases
  • Dealers keeping smaller inventories of new machinery
  • Bill Yurkovic (Cleveland Brothers Equipment Co): “There’s a lot of machinery around. It’s as bad as it’s been in my 30 years. A lot of renting. Not a lot of buying.”
  • Used machinery prices down 10% YOY according to CAT
  • Rental businesses account for half of new equipment sales in the US, and typically replace their equipment within three years
  • According to Barclays, almost 40% of construction equipment sales financed by Deere’s credit unit are for leases, up from about 30% two years ago and double a decade ago
  • Deere has recently lengthened lease terms and raised payments to drive down residual values at the end of the leases to reflect lower prices for used equipment

Deal Faces Intense Regulatory Scrutiny (WSJ 9.15.16)

  • US corn market share
    • Bayer/Monsanto: 36%
    • DowPont: 41%
    • Chem/Syng: 6%
    • BASF: 0%
  • Global herbicides market share
    • Bayer/Monsanto: 34%
    • DowPont: 19%
    • Chem/Syng: 25%
    • BASF: 10%
  • Global insecticides
    • Bayer/Monsanto: 23%
    • DowPont: 19%
    • Chem/Syng: 23%
    • BASF: 8%

Bayer-Monsanto combination offers farmers a one-stop commodity shop (FT 9.15.16)

  • Monsanto produces seeds and Bayer crop protection – synergies stem not from cost-cutting, but growth derived form complementary product sets
  • World population expected to grow by 3 billion by 2050
  • Two other key mergers in the sector: Dow Chemical/DuPont and ChemChina/Syngenta
  • 2015 global ag market (in EUR)
    • Bayer/Monsanto: 23.1
    • ChemChina/Syngenta: 14.6
    • DowPont: 14.6
    • BASF: 5.8
  • Bayer says global market worth EUR120 by 2025

It does not pay for advertisers to narrow their targets too much (FT 9.12.16)

  • PG cutting its spend on highly targeted ads; opting instead for broader ads that address larger swaths of potential audiences
  • “In truth, this is just the latest evidence that the ad industry has been bamboozled by the rise of digital media, because it had such a tenuous grasp of how advertising worked in the first place.”
  • FB’s pitch to companies is save generally by paying a premium (on a per ad basis) for a highly targeted demographic
  • “The more fundamental problem with micro-targeting is that for big brands, advertising has never really been about messages…It is about the creation of shared memories, triggered at the point of purchase.”
  • Television ads in effect turned brands into cultural icons

September 12, 2016

From zero to seventy (billion) (Economist 9.3.16)

  • Since 2010 Uber has attracted $18 billion of total capital; and currently garners a $70 billion valuation
    • Valued at 17.5 times 2016 ‘loss-making’ sales
  • Uber operates in more than 425 cities in 72 countries; and will have roughly $4 billion in 2016 revenue (more than double 2015)
  • Typically Uber takes 25% of the fare, with the balance going to the driver
  • Co-founder is Travis Kalanick
  • Global internet ad market is $175 billion; taxi market is $100 billion (17M: however that is defined…)
  • Adam Jonas of Morgan Stanley estimates the global ‘personal mobility’ market is worth as much as $10 trillion
  • Rivals:
    • Lyft in America (20% share v. 80% for Uber)
    • Ola in India
    • Grab in South-East Asia
  • Bill Gurley of Benchmark Capital, a venture capital firm
  • MSFT invested in FB in 2007 at a $15 billion valuation (17M: did not know this)
  • Uber positioned at the intersection of three disruptive trends:
    • Asset-light biz models
    • Sharing economy
    • Young consumers increasingly willing to pay for access versus ownership
  • Average cost per mile of UberX is $1.50
    • NYC car ownership works out to $3.50 per mile
    • Rod Lache of Deutsche Bank believes autonomous cars could bring cost down to $.89 per mile
  • Uber merged its Chinese biz with a local firm in exchange for a 20% stake in the NewCo – that stake is currently worth approximately $7 billion
  • Uber is investing heavily in developing its own mapping capabilities

17M: Technology is as difficult to follow and predict as it is fascinating to follow. Could it be that the relatively little-discussed push to develop its own mapping technology be akin to Google’s highly complex search engine technology that allowed it to carve out what Charlie Munger refers to as potentially the widest moat he has ever seen? The combination of its name turning into a verb – silly, but true – and its mapping capabilities could form a moat at least temporarily wide enough to allow Uber to develop a truly sustainable long-term economic moat.

And while long-term pricing economics remain a mystery – as well as employee comp – Uber could become so convenient that consumers would not mind paying as much if not more than a cab. Sort of like Amazon’s low-cost push, where it is difficult to envision them ever trying to raise price – Amazon’s Prime service is so convenient, that I personally would gladly pay a premium to in-store products simply to avoid the act of stepping foot inside of a store.

At minimum, a fascinating long-term thought experiment.

Cloud chronicles (Economist 8.27.16)

  • Linus Torvalds founded Linux on August 25, 1991
  • Andy Jassy helped form Amazon Web Services with the announcement of a beta version of Elastic Compute Cloud (EC2) on August 25, 2006
  • Linux has since become the world’s most-used piece of software of this type (i.e. open source)
  • “Without open-source programs like Linux…cloud computing would have been stillborn.”
  • Roughly 1500 developers contribute to each new version of Linux
  • AWS was formed out of the need to consolidate “jumbled IT systems” after years of rapid growth
  • “Being the first to succeed on a large scale allowed both Linux and AWS to take advantage of network effects, which make popular products even more entrenched.”
  • “Both open-source software and cloud computing have been disastrous for the old giants of IT. New firms almost always opt for an open-source database in the cloud rather than a pricey proprietary version from Oracle, the biggest vendor of such software.”
  • AWS…
    • 10x the capacity of the next 14 cloud providers combined
    • MSFT Azure the next closest competitor
    • AMZN share ~32.5% versus 12.5% for Azure
  • Gartner estimates that about $205 billion will be spent on cloud computing in 2016, or ~6% of the $3.4 trillion IT market

Navistar Deal Fuels German Rivalry (WSJ 9.7.16)

  • NA heavy-duty truck market $30 billion
  • VW China JV with Sinotruk (Hong Kong) Ltd.
  • Daimler has 40% of the US market
  • Andreas Renschler, CEO of VW’s Trucks and Buses business, was the architect of Daimler’s US strategy
    • Left Daimler in 2014 after passed over as CEO
  • Daimler Trucks CEO Wolfgang Bernhard ran VW’s ‘namesake’ car brand a decade ago
  • Both CEOs are focused on utilizing common platforms in order to generate scale economics
  • Daimler owns truck maker Freightliner and egine supplier Detroit Diesel

September 6, 2016

VW buys 17% Navistar stake; full merger is possible (Automotive News 9.6.16)

17M: Per the notes taken this morning, the above commentary is not a surprise. A full merger should take awhile, so likely plenty of time for the market to ‘forget’ about this potential deal and for some air to come out of the stock between now and merger day. Definitely something to keep on the radar…

VW to Take Navistar Stake (WSJ 9.6.16)

  • $200 million at $16 for a ‘nearly’ 17% stake
  • Emissions Gate has cost VW nearly $20 billion so far
  • Since 2010 NAV has lost roughly half of its US market share
  • VW and NAV have been in talks since early 2015
  • VW gets two BOD seats
  • Have agreed to cooperate on purchasing and developing new products
  • Carl Icahn and Mark Rachesky each control about 20% of NAV
    • 17M: Wow – did not know their stakes were that large .
  • Icahn originally bought in hoping to combine it with Oshkosh
  • Truck market
    • VW big player in Europe and Brazil under MAN and Scania brands
    • Volvo produces trucks in the US under the Mack brand
    • Daimler owns Freightliner
    • US heavy duty truck production projected to fall by 33% in 2016, from 200,000 vehicles in 2015
    • NAV has 11% of the NA HD truck market
    • Freightliner is the leader at 40%
    • Paccar makes Peterbilt and Kenworth trucks
    • US market by rank: Freightliner, Peterbilt, Kenworth, Mack and Navistar brands
  • VW created commercial vehicle holding company in 2015
    • EUR34.5 billion revenue
    • EUR1.7 billion EBIT

17M: This is huge news (obviously). A very good credit research firm has been pounding the table on NAV debt; and with VW now in the equity, this becomes an extremely interesting potential idea. Would not be surprised to see VW make a bid for the entire company sometime in the near- to medium-term; but at minimum, likely VW is a game-changer from an operational standpoint.


September 4, 2016

How Obama’s FDA Keeps Generic Drugs Off the Market (WSJ 8.21.16)

  • Modern generic-drug industry emerged after 1984 Drug Price Competition and Patent Term Restoration Act (Hatch-Waxman)
  • Recently however, FDA has imposed similar requirements on generic firms that are applied to branded-drug makers
    • 17M: Apparently I’m not smart enough to know why this is bad…
  • “For example, in a push to reduce the risk of contamination, the agency in 2009 forced generic-drug makers to retool their sterile manufacturing plants and make production lines less intricate. The abruptness of the change caused many facilities to be shut down creating drug shortages and driving up prices.”
  • In 2003 it cost less than $1 million to file a generic-drug application; and a drug would be subject to generic competition at $10 million in revenue
  • Today, it costs $5 million on average to file, and sometimes upwards of $15 million; which means a drug isn’t subject to generic competition until at least $25 million
  • FDA recently committed to review new applications in a 15-month cycle versus the 2+ years for 2013 applications; 2009 applications took three years, while 2015 apps took four years
  • FDA study:
    • Consumers pay 94% of branded price when only one generic manufacturer is in the market
    • Falls to 40% if four
    • 20% when eight
  • More than 1300 branded drugs on the market, and about 10% have seen patents expire with no competition (according to DHHS)
  • Generic manufacturers typically manufacture dozens of different drugs in a single plant (30-50, versus one or two for branded); but the FDA is trying to require one or two drugs per production line, citing potential safety hazards

September 2, 2016

Unlimited Data…Within Limits (WSJ 8.31.16)

17M: Very telling article about how jacked up the wireless business model is right now. “Unlimited data plans” that come with severe restrictions on quality of video and Internet, etc. Sprint and T-Mobile unlimited plans start at $60 or $70 per month, and apparently the companies could eventually eliminate cheaper options with limited data. Beautiful.

It’s really tough to figure out what dream world they are living in, when you get unlimited wifi for less than $70 a month from the cable companies, and ‘wifi everywhere’ is only expanding. This pricing is unsustainable in a world of more and more monthly subscriptions.

Spectrum purists myopically focused on historical market dynamics continue to deride Charlie Ergen and DISH, calling their extremely long-term vision for the wireless connectivity market a ploy for simply cornering the US spectrum market in order to garner a higher market-to-market valuation for their spectrum holdings. Ergen operates with a decades-long time horizon, and correctly sees that the incumbents are operating in an extremely short-term manner by refusing to invest in enough capacity to offer truly unlimited data plans that can compete with broadband providers. Consumers will force incumbents’ hand by refusing to pay increasingly higher prices for crappy quality data, especially as the broadband ‘moat’ only continues to grow over time. As such, incumbents will be forced to compete, thus driving up the value of spectrum over time.

I have no clue when, but my bet (literally and figuratively) is that DISH will find itself squarely at the center of this ‘connectivity’ universe within the next 2-4 years (I said within 5 years 12-18 months ago…). Sort of like Level 3 Communications (LVLT), where the market refused to appropriately value its assets on a long-term basis…until it did; DISH will be appropriately re-valued in rapid fashion when the time comes…

The Robots Are Coming. Welcome Them (WSJ 8.23.16)

  • “Abundant Robotics, a company spun from the same Stanford Research Institute that brought us the mouse and networked computing, has begun testing a robot that picks apples. Red Delicious, not iPhones. Napa Valley vineyards are using vision systems to sort grapes.”
  • “According to a 2013 Stanford University study, some manufacturing robots now cost the equivalent of about $4 an hour—and they keep getting cheaper . . . and better.”
  • MIT testing a silicon chip-based LIDAR (light detection and ranging)
  • LIDAR is like radar, but much higher resolution at shorter distances
  • Current LIDAR costs $70,000, but the new MIT chip $10…likely to be a standard part of all new cars
  • “Technology always creates more jobs than it destroys. JFK worried how to ‘maintain full employment at a time when automation . . . is replacing men.’ Employment was 55 million in 1962. It’s 144 million today. We’ve come a long way, baby.”
  • “This time will be no different. Steam engines destroyed jobs—OK, mostly for horse handlers—but enabled an explosion of manufactories, never imagined jobs and the Industrial Revolution. Cars killed trolleys but enabled hundreds of millions of new jobs.”
  • “Even Chinese workers shouldn’t fear robots. The coming global demand for manufactured goods will swamp a robot-deprived manufacturing economy. Robots will solve China’s looming logistic problems.”
  • A McKinsey study suggests 45% of the activities individuals are paid to perform can be automated using existing technology; but less than 5% of occupations can be entirely automated

17M: Kessler is one of my favorite WSJ regulars, and a must-read IMO. This highly optimistic vision for the future of the global economy is a fantastic counterweight to the bearish prognosticators who believe the developed world has seen its peak in productivity growth. I’m not saying Kessler is 100% correct – or even 75% – but his thoughts very much fall in line with Buffett and Munger’s highly optimistic view of future economic prosperity.

Texas Oil Patch Heats Up (WSJ 8.26.16)

permain oil patch

  • Blackstone agreed to $1.5 billion Permian investment, funded via an $8B Energy-specific fund
  • Properties in some cases are fetching prices that exceed those paid when oil was over $100
  • $25.5 billion paid to date for US drilling properties; roughly 50% in the Permian
  • $6.25 billion of new shares sold by producers targeting the Permian…all of which are trading above their offering price

17M: I have not run thru DVN’s valuation recently, but I would not be surprised if the Company at least receives a take-out offer due to its Permian exposure.

Chocolate CEO Moves Fast To Fight Industry Slowdown (WSJ 8.9.16)

  • Current CEO, Giovanni Ferrero, took sole charge of the Company in 2011 after brother Pietro passed away
  • Ferrero currently 4th in global chocolate market share
  • In last 18 months has halved the time to launch new products
  • Purchased UK chocolate maker Thorntons PLC
  • Ferrero founded in 1946 in Alba, Italy by Pietro Ferrero
  • Michele Ferrero took it over in 1957
    • Invented: Nutella spread, Kinder chocolates, Rocher pralines and Tic Tacs
  • $10.52B revenue; 13% growth (in year ending August 2015)
  • 100% owned by Ferrero family
  • Michelle stepped down as CEO in 1997, and Giovanni and Pietro took over
  • Been approached by Nestle and Mars
  • Company on the hunt for brand acquisitions for the first time
  • Thorntons was a century-old, and known for its expensive toffee and fudge
  • Goal is to double revenue in the coming decade
  • 2/3 of revenue from Europe
  • 2.3% of the US market, and looking to boost this via increased Nutella sales

Long way from home (FT Big Read 8.27.16)

  • Summary Data
    • New home sales rose 31% in July (I believe YOY, but article didn’t specify)
    • Despite robust demand, the median price of a new property fell
  • Increased construction of apartments and town houses – affordable homes in line with first-time home buyers
  • “…The industry has lost all its skilled labour, it has not been accumulating permitted land in as great a quantity…”
  • Millennials wait longer than parents to buy homes, but the desire is no less strong
  • Almost 2/3 of adults under 30 do not have a credit card (according to Bankrate.com)
    • 17M: Extremely surprising to me given virtually everyone I know has one…
  • Student debt has doubled in ten years to $1.3 trillion
  • Lots of psychological pain from watching others lose money in the 2005-2009 housing bust
    • 17M: Surprising to me, as housing busts are rare, and typically that psychology is reserved for traditionally volatile assets such as equities
  • According to Case/Schiller, Portland and Seattle have seen DD housing price growth v. 2% for NYC
  • Banks have sharply pulled back from the mortgage market, with Fannie & Freddie stepping in to fill the void
  • Little appetite from investors to invest in bundles of securitised mortgages, outside of jumbo loans on top-end properties
  • F&F have cut required down payments to 3%; and the FHA has cut its mortgage insurance fee

Twitter notes

Pressure on the pump (FT Big Read 8.31.16)


August 12, 2016

Alphabet revolution is not as simple as ABC (FT 8.8.16)

  • Management still in the process of working out what the biz models and financial targets will be for some of the ‘bets’
  • “new focus” in the core search biz under new head Sundar Pichai
  • “…Ms Porat’s more rigorous approach to making investment decisions has had an effect. A mid-ranking employee at one of the divisions credits her with bringing greater certainty to the internal investment process, even if part of her job is to limit some of the spending.”
  • Facebook “has grouped its bets into ones it hopes will pay off on three, five and 10-year horizons.”

July 25, 2016

ObamaCare and Big Insurance (WSJ 7.25.16)

  • Federal and 11 state antitrust regulators filed to block the $54 billion deal between Anthem and Cigna, and the $37 billion deal between Humana and Aetna
  • The deals would reduce national commercial insurers to three (UNH being the third)
  • “The logic of ObamaCare is that larger and more integrated conglomerates are superior to a market with many insurers, doctors and hospitals vying for consumer business.”
  • “The antitrust case against Aetna-Humana rests almost exclusively on Medicare Advantage, the program that lets seniors choose from a menu of private plans instead of using government fee-for-service. The combined company would serve about 8% of all seniors in 2016 if the merger went through this year.”
  • Under ObamaCare, price caps on operating margins are imposed, turning commercial insurers into public utilities

17M: Just beginning to wade into this arena. What a mess. A basket of the commercial insurers in the wake of deal blocks makes sense on the surface; but difficult to handicap the ObamaCare effect of the last several years (on growth/returns/fair value multiples).

Verizon to Pay $4.8 Billion for Yahoo (WSJ 7.25.16)

  • Google and Facebook will account for more than half of the $69 billion U.S. digital ad market this year
  • Yahoo’s share 3.4%; AOL’s 1.8%

Commentary via Twitter:

The industrial internet of things: The great convergence (The Economist 7.23.16)

SoftBank and ARM: Everything under the Son (The Economist 7.23.16)


June 21, 2016

JPM Flows & Liquidity (6.17.16)

“The trend has been for US corporates raising their net equity buying since the first quarter of 2015 acting as a backstop to a declining equity market. And this backstop was particularly important in the first quarter of this year, against the backdrop of heavy equity selling by SWFs and retail investors.”

“…an argument can be made that this backstop arising from corporates buying their own equity, operated in previous market corrections also. The last time equity markets went through a correction phase, similar to the one we experienced over the past two years, was during the euro debt crisis. At the time the equity withdrawal activity by corporates had spiked when equities had suffered the most, i.e. during the third quarter of 2011. In subsequent years, following the end of the euro debt crisis, corporate equity withdrawal activity slowed as retail investors stepped up their equity fund buying. In other words, the corporate backstop was not needed anymore, as investors turned significant buyers of equities. In a similar fashion, we suspect that net equity withdrawal activity slowed in Q2 vs. Q1 as selling by SWFs/retail investors dissipated reducing the need for a corporate backstop.”

Energy Transfer CEO Feared Deal Would Cause ‘Implosion’ (Bloomberg 6.20.16)

You quite literally cannot make this stuff up. While unfortunately an incredibly painful lesson – the experience trading thru the ETE/WMB debacle was an investment ‘life’ altering experience…only reinforced by tracking it since removing myself on the long side. THE OVERARCHING LESSON from the last 12 months is…trust nobody but yourself. Nobody.


June 20, 2016

Commentary via Twitter:

Facebook: Data plan (FT 6.16.16)

Microsoft seeks to build smarter business software (FT 6.15.16)

Perverse incentives lie behind Microsoft’s LinkedIn purchase (FT 6.19.16)

Auto-Parts Supplier Delphi Hits the Fast Lane (Barron’s 6.18.16)

17M brief anecdotes from weekend in Dallas (6.19.16)

LinkedUp (The Economist 6.18.16)

  • No notes taken, just a good article on the MSFT/LNKD deal

Microsoft Will Serve You Now (Fortune 6.15.16)

  • Same thing – no notes taken, but an excellent, excellent article on the culture change that has taken place inside MSFT since the ‘Ballmer moment’ (my term)

June 12, 2016

Fed silence (FT 6.11.16)

Duh. It’s so easy. Fed remains on hold and investors lagging their bench will push indices to record highs.

Forget the fact that sneaky indicators such as stubbornly high credit spreads ex. Energy and the yield curve are saying something is amiss at record high valuations…

CkuN4-eWYAAOGZ2.jpg_large

 



June 5, 2016

JP Morgan recession probability (Twitter, 6.5.16)


As noted in Twitter comments on Rosenberg article (below), I suspect this YOY ROC chart of US Jobless Claims to start creeping (racing?) higher in the coming months and quarters…

* * * * * * * * * * * *

Notes/pics taken via Twitter on the following articles:

Where Have All the IPOs Gone? (Barron’s 6.3.16)

David Rosenberg Employment Column (BI 6.5.16)

Productivity outpacing output

‘Goods’ employment leads the economy…historically

Temp-agency employment tends to lead

Private sector job diffusion

I noted on Twitter that Rosie’s commentary is interesting when looked at within the context of Jobless Claims at the lowest % of the labor force on record. My hunch is that the YOY rate of change in Claims will creep higher in the coming months and quarters. And my further hunch is that the deterioration in the underlying health of the equity market is ‘leading’ greater economic weakness…and that the YOY ROC in Claims could breach the critical +20% level in the coming months and quarters.


June 4, 2016

DISH Article B (Fierce Wireless 6.3.16)

More of the same…

DISH Article A (Fierce Wireless 6.2.16)


No surprise on the Downlink designation; but the 3GPP plan is huge, especially getting unpaired Uplink included. There is enormous LT optionality in the DISH spectrum portfolio, and I continue to believe 2-4 years from now there is high probability of DISH becoming the epicenter of the US telco connectivity universe.



June 1, 2016

Sequoia and VRX (6.1.16)

A friend sent me the following today re Sequoia and VRX:

img_2236


May 30, 2016

Tepper and Beal (Forbes 5.11.16)

  • Tepper believes that stimulative Chinese policy and a Fed very much on hold is a recipe for the US equity market – which he deems in fair value territory – to “grind higher”
  • Andy Beal is beginning to reign in lending at his Beal Bank

Equity fund outflows (FT 5.30.16)

Outflows continue


I would love to see these outflow figures as a percentage of global AUM in order to compare across time periods. Emphatically, this is not the sign of a raging secular bull market.

These are a not healthy, and precisely what Lowry’s continues to point to – contracting demand. Rather than a contra sentiment indicator seen at major market bottoms, if looked at as a % of AUM, my guess is they are a very good leading indicator…

Symptomatic of a pervasive issue

Again, most will say this is contrarian. Were we at very attractive valuations, with signs of extreme pessimism, and improving underlying market health…then yes. Let’s ask Druck…

Bond inflows

More defensive behavior…particularly what paired with the amount of ‘bond money’ currently finding its way into the equity markets.

May 28, 2016

5 Reasons Market Won’t Crash (Barron’s 5.28.16)

Barron’s out with a beauty this weekend on why the market is not headed for their definition of a ‘crash’ – a decline of at least 20% that lasts for more than 12 months. It really doesn’t get much better than this from a front page mag contra standpoint. Had they come out with five reasons why the market was likely to crash – record high median valuations + narrow leadership + 38% of stocks in a bear market + Fed tightening in face of declining long rates + growing evidence of a credit cycle that’s turning – that would have been very good proof that the ‘bull case’ of extremely pessimistic sentiment was in fact correct.

But because Barron’s is in fact a reflection of prevailing sentiment, it makes sense that they came out with this piece – the market is near ATHs, and outside of perhaps some short-term dumb-dumbs, this market is balls deep in equities. Were the market at 1700, with extremely negative sentiment readings + high levels of ‘smart money’ confidence + far more conservative investor positioning + BAML survey readings indicating investors believe equities are undervalued…Barron’s coming out with the five reasons I mentioned would be a hugely bullish contra sentiment indicator.

Crashes inside recessions

Bears growing concerned


20% decline not a crash, if…


Glad we’ve got that cleared up. No need then to try to avoid a 20% ‘slip up’ if it merely recovers in 12 months. No lost opportunity cost there from not having deployable capital available for assets down 30-40%. Nope.

No need to worry about disturbingly weak underlying market internals because there are few signs of recession. Nope. 

Ahh, valuation

Phew – no need to worry. Divy looks good. Carry on.

Barron’s has ur back, Jack


May 27, 2016

Drinks with Key Bank friend (5.26.16)

Key Bank’s lead credit guy made a big strategic move this week, calling the end of the credit cycle and for Key Bank lenders to begin “reigning things in”.

In their weekly investment strategy call, the equity and fixed income sides of Key Bank took note of this change, and are (from what I could gather) looking to reign in exposure.

I’m sure something like this has zero bearing on the economy and/or the markets…

May 25, 2016

Drinks with JPM trader (5.24.16)

IPO Market

  • IPO space – dominated by tech and biotech in recent years – is nearly dead right now due to so many folks getting burned in 2H15
  • In biotech specifically – generalists piled into the biotech IPO market in 1H15, while the specialists exited almost precisely at the top later in the year
  • Naturally, the generalists were the bagholders on the way down…
  • But the specialists are beginning to leg back into the market

Valeant

  • Stock was ripe for pounding due to the lack of float lock up
  • As the stock declined, the cost to borrow/short did not concurrently rise as it typically does, allowing hedge funds to dog pile into the short side
  • Lots of shorts have since “swept up” those positions for fear of a couple of good quarters could easily lead to the stock getting back to $50 in short order
  • A VC guy – who specializes in cleaning up messy corporate sits – recently joined the VRX board

Broad Market

  • Over last two days JPM trading desk befuddled at long only guys suddenly coming into the market on no news
  • Typically a good sign, as LO guys are the dominant driver of the market when involved
  • LO has not participated at all in the rally since February, so notable getting involved now
  • Believes rate hike is getting priced into the market, so could easily see this move continuing

17M: I like tracking flow data as a supplement to my primary market work; but I’ve seen these types of ‘smart money’ coming into the market analyses toward the end of moves. Traders so heavily in the daily wood chopping can miss the forest; so while I certainly perk up at LO guys coming in, I have yet to see it confirmed by data such as upside volume as a % of total NYSE volume and supply/demand spreads.

May 23, 2016

Amazon BAML Note 5.22.16

In 2012 AMZN launched a B2B business called “Amazon Supply” – since renamed “Amazon Business” (AB) – the focus of today’s BAML note.

Summary Highlights

  • AB is a marketplace that leverages the core principles of Amazon’s consumer marketplace: selection, convenience and value.
  • End markets in focus: businesses, government organizations and education sectors
  • Product categories: industrial/scientific, packaging and shipping, food service, nursing, education, building and other
  • AB reached $1B in sales in its first year, serving 300K customers
  • Global B2B projected to reach $6.7 trillion in 2020; US B2B $1T by 2018, which is more than 2x US eCommerce

EBITDA Margins

EBITDA Margins

B2B Comps

B2B Comps

Key AB Features

  • Delivery flexibility – Free 2-day delivery on orders over $49
  • Multi-user accounts
  • Flexible payment options
  • Approval workflows – Customized order approval workflows and set spending limits
  • Spend analytics
  • Customer service
  • Integration wtih procurement applications – AB offers integration with 20+ procurement applications including SAP, Oracle, Peoplesoft, Workday, Ariba, Coupa
  • Business pricing – Bulk discounts, etc
  • Tax exemption program
  • Compare offers

The Cable Bundle Will Be Reborn (WSJ 5.11.16)

“Yet there is reason to think Disney and its Wall Street antagonists are both wrong. An over-the-top ESPN would not be the money spinner Disney hopes, but the cable bundle isn’t going away. On the contrary, the cable bundle will be remade in the world that’s coming. The reason is a little-noticed technological-cum-strategic fork in the road known as IP Multicast.

“Let’s rehearse: The Internet is still a “network of networks” delivering an infinite variety of services, but by volume it’s increasingly delivering TV.

“Secondly, operators know a coming commercial imperative will be to give customers all their content on all their devices, everywhere, which means wirelessly. ***AHEM DISH***

“Third, on-demand (think Netflix) may be the future of a great deal of TV, but live TV like sports, which millions watch simultaneously, will still constitute the lion’s share of TV’s value proposition.”

  • The solution to the inability of the Internet to handle live television is IP Multicast, which…
  • …Allows an infinite number of devices to “tune into what amounts to a single stream across much of the network”
  • But can IP Multicast be implemented at scale outside of the major cable and wireless providers?
  • Wireless industry working on LTE-B (B for broadcast)

Freeport-McMoRan mired in Indonesian uncertainty (FT 5.10.16)

fcx image

  • Grasberg mine located in Indonesia
  • FCX CEO calls it “the most complex mine in the world”
  • Reserves worth approximately $100 billion at today’s prices
  • Issue at hand is whether Indonesian government renews FCX’s contract to mine at Grasberg, which expires in 2021
  • FCX “insists” it has the right to renew for two more decades to 2041
  • 2015 revenue from the mine was $3B, or 20% of consolidated revenue…
  • …2016 should be more than double due to higher output
  • FCX recently announced an agreement to sell its Tenke copper mine in Africa for $2.7 billion
  • FCX currently owns 90% of the local Grasberg operation – 10% owned by the state
  • Deutsche Bank estimates a 10.64% stake in the mine would be worth $1.2-$1.7 billion

fcx 2

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