Feb 1, 2012

Wherfore Art Thou Amazon?

February 1, 2012

“To forgive is to set a prisoner free and realize the prisoner was you.” –Lewis Smedes

We finished the best January in equity markets since 1997, and the markets are continuing their surge today with a nice jump on the open while both treasuries and the dollar fade. Commodities are also rising, led by wheat, silver and gasoline. The ISM Manufacturing index for January was released this morning, and slightly missed estimates of 54.5, coming in at 54.1. The prices paid index really jumped to 55.5 vs. the consensus of 50.0 and last month’s 47.5.

The chart below comes courtesy of my friend Bob Bronson. Bob is the king of long term market cycle investing, and is one of the forecasters who had the bear market called accurately. His view is that this market is a cyclical bull in a secular bear market (i.e. the uptrend will be relatively short-lived). In the chart below he is anticipating a double-dip recession, even though we are past the official window to qualify as a double dip.

Earnings continue to pour in with mixed results. Exxon Mobile (XOM) missed on both revenues and EPS, but have no plans to slow gas production in spite of falling prices. Amazon (AMZN) is the news of today, missing sales estimates by $800m for the second quarter in a row and driving the stock down 15%. The company did beat EPS on a better than expected gross margin, which is surprising given the bump in sales of the low margin Kindle products. The company’s guidance was below forward estimates for Q1 2012. Broadcom (BRCM), a major silicon provider across a bevy of end products including the iPhone, beat revenue and earnings estimates last night. While there have been a lot of misses in chip land this quarter, a number of companies have cited low channel inventories as a forward looking positive.

The Department of Energy has been having its issues the past couple of years with its investments in the alternative energy space. Lithium-ion battery maker Enerl, the beneficiary of a $55 million DOE subsidy, became the third high profile company receiving federal aid under to file for bankruptcy in the past few months. First there was Solyndra, which received a $535 million government loan guarantee, then Beacon Power, with a $43 million guarantee, and now Enerl. In addition to the DOE money, the company also received a $118 billion grant from the Energy Department in 2009.

It’s official, Facebook has filed for an IPO and chosen Morgan Stanley (MS) as its lead underwriter. Reportedly the competition came down to Morgan and Goldman Sachs (GS) , with the nod going to Morgan due to the private sale last year that was botched by GS. Facebook’s market cap is reportedly somewhere between $75 and $100 billion, and the company is expected to raise $5 billion, although there have been rumors of a raise up to $10 billion. Mark Zuckerberg, Facebook’s founder, owns 20% of the company. Banking fees are reportedly in the $500 million range.

The word coming from the State of California is that in the first six months of the fiscal year tax receipts fell short of plan by $2.6 billion. Amazingly, expenditures were $2.6 billion above plan, resulting in another trip to the capital markets for the state. A brewing crisis which has been barely discussed is the state’s plan to confiscate funds from Redevelopment Agencies (RDA). RDA were set up to siphon off a portion of a community’s property taxes to reinvest into the community. The State’s plan terminates roughly 400 RDAs, but unfortunately leaves the agencies on the hook for bonds issued with the backing of these property taxes, RDA employee salaries, and of course, pension obligations. The combined RDA liability could exceed $100 billion.

Barnes & Noble (BNK) has announced plans to stop selling any titles being sold by Amazon.com. To me this sounds like another step towards extinction for the chain. Customers don’t want to be put in the position of choosing which channel carries the product they are looking for, especially when BNK has long competed based upon their broad selection of titles. I can hear the conversation now: “Mr. BNK, I can’t find the Cat in the Hat” says seven-year old Susie. The evil clerk replies “Sorry, that deceitful Dr. Seuss decided to make an electronic version of that book, how about a classic from that famous capitalist Tolstoy such as ‘War and Peace’?”

After getting quite a bit of grief from around the globe, US regulators are considering exempting sovereign debt from the Volcker Rule. I find it fascinating that in a time when some of the riskiest debt on the planet is sovereign debt, these securities may be excluded from the trading rule.

I am including another Bronson chart, this one showing the tight correlation to unemployment claims (blue line, inverted) vs. the S&P 500.

The China Federation of Logistics and Purchasing said its PMI rose to 50.5% in January compared to 50.3% in December and 49% in November. Remember that in these diffusion indices anything over 50% indicates expansion.

It feels like the housing market is stabilizing based upon incremental data, but apparently the stabilization isn’t occurring on a national basis. Case-Shiller reported that home prices are the lowest since 2003 and that the market value of homes has fallen “almost continuously” for 18 months.

Speaking of housing, it appears that Freddie Mac (FRE) entered into a derivative trade that will pay off only if a large number of homeowners remain trapped in overpriced mortgages. Could that be why they are fighting Congress and the President to unwind underwater mortgages? I wonder if Newt Gingrich had anything to do with this?

Federal prosecutors have broadened their case against Rajat Gupta, the former director of Goldman Sachs (GS) who has been charged with providing illegal tips on various stocks. Prosecutors are adding trading violations in undisclosed companies to the charges.

Holy cow, I’m ready for some football. Patriots or Giants, what’s your call?

Have a great day


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