Don’t Take The Bait On The Uber IPO

May 10, 5:00 pm EST

We end the week with continued stalemate on a trade deal.  Given that trade talks will continue (despite the tariff escalation), it’s not considered a “no deal.”  That’s a relative positive for markets.

As we discussed, as long as Trump will keep the door open, the Chinese will keep talking, and will (in the meantime) protect their exports by weakening the currency.  The yuan is now trading at its weakest level since early January, when trade talks were re-opened after a month long stalemate.

Now, let’s talk about the Uber IPO today …

It didn’t go well for Silicon Valley.  Uber started trading publicly below the range they expected, and instead of getting a huge opening day “lyft”, it traded down on the day.

We’ve talked quite a bit about the IPOs coming from the Silicon Valley hype machine.  Lyft got it all started, and here’s what that chart looks like now…

 

With this above chart in mind and the performance of Uber today, let’s revisit an excerpt from my note from last month …

Pro Perspectives – April 16, 2019

“Lyft and Uber, dumping shares on the public at a combined $140 billion plus valuation, may mark the end to the Silicon Valley boom cycle.

As we know, Lyft was valued as high as $25 billion when it started trading publicly.  Some paid a $25 billion valuation for the privilege of owning a company that did a little over $2 billion in revenue, while losing almost a billion dollars — with slowing revenue growth and widening losses. It has now shed about $9 billion in market cap in thirteen days.

Uber is on deck.  Uber filed its S-1 this week.  In this public disclosure document, we find a company that has privately raised $24 billion, valued at $68 billion in the private market, that has been thought to float shares at as much as $120 billion valuation.  This is a company that (like Lyft) also with slowing revenue growth and widening losses.  Losses?  The S-1 shows a swing from $ 4 billion loss in 2017, to a near $1 billion profit in 2018.  But if we back out the a couple of unusual items (like the gain of a divestiture of some foreign businesses and an unrealized gain in an “investment”) the company lost $4.2 billion on $11 billion in revenue.

As we discussed last month, the hyper-growth valuations on these perceived hyper-growth companies, are unlikely to get hyper-growth at this stage.  That will be a problem for those taking the bait on the IPO.”

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Stand-Down By The Fed Has Put The Bottom In For Emerging Markets

April 4, 5:00 pm EST

The slowdown in China spooked global markets late last year, and have since spooked global central banks. 

Given the current recession-like growth in China (6%ish), and the prospects that it could keep sliding, especially if a U.S./China trade deal doesn’t materialize, the major central banks in the world have positioned for the worst case scenario.

In the process, we may have discovered the real drag on the Chinese economy.

Here’s the latest look at the Shanghai Composite, up 33% since January 4th (which not so coincidentally is the day the Fed walked back on its rate hiking path).

Maybe the easiest message to glean from this chart, and that turning point, is that the biggest culprit in the China slowdown has been the Fed, not tariffs.

Here’s how the Dallas Fed put it in a report from October 3rd (which happens to be the high in stocks, the day stocks turned):

“Emerging economies have suffered a general decline in forecast GDP growth, and inflation rose in a handful of countries. The tightening of monetary policy in advanced economies, both through rate hikes and other policy actions such as forward guidance, results in capital outflows from emerging economies with low reserves relative to their foreign debt.”  

Higher U.S. rates has meant a stronger dollar.  With the economy moving north, the dollar moving north and rates moving north, global capital flows to the U.S. — and away from riskier emerging markets.  It’s not that the U.S. economy can’t handle a 3.25% ten-year yield or a 5% mortgage rate in the domestic economic environment.  It’s the EM world that can’t handle it (at the moment).

China has responded to the growth slowdown with an assault of monetary and fiscal stimulus.  But the most powerful stimulus appears to have been the move by the Fed to stand-down.

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Playing Field Might Be Leveling For Silicon Valley Giants

December 15, 9:00 pm EST

Last week we had the merger of Fox and Disney, and the repeal of the Net Neutrality rule.  And the tax bill continues to inch toward the finish line.

That said, this would typically be the time of year when markets go quiet as money managers close the books on the year, decision makers at companies go on holiday and politicians do the same.

But that wasn’t the case last year, as President-elect Trump was holding meetings in Trump towers and telegraphing policy changes.  And it may not be the case this year, as the tax plan may be approved before year end.  The final votes are said to come next week, and the bill is tracking to be on the President’s desk by Christmas.

With that, and with the lack of market liquidity into the year end, we may get a further melt-up in last trading days of the year.

Yesterday we talked about the other side of the Net Neutrality story that doesn’t get much acknowledgement in the press.  In short, the tech giants that have emerged over the past decade, to dominate, have done so because of regulatory favor. This favor has decimated industries and has dangerously consolidated power into the hands of few.  The repeal of this rule is turning that regulatory tide.

It looks like the playing field might be leveling.  That means a higher cost of doing business may be coming for Silicon Valley, with fewer advantages and more competition from the old-economy brands that have been investing to compete online. That means potentially slower earnings growth for the big internet giants, for those that are making money, and an even more uncertain future for those that aren’t (e.g. Tesla).

With this in mind, at the moment Amazon is valued at twice the size of Walmart.  Uber is valued at almost 40 times the size of Hertz.  And Tesla, which has lost $2.5 billion over the past five years is valued the same as General Motors, which has made $43 billion over the same period.

Next year could be the year these valuation anomalies correct.

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Billionaires Clustering In These Stocks

Today we want to talk about the quarterly SEC filings that came in over the past several days week.

All big investors that are managing over $100 million are required to publicly disclose their holdings every quarter. They have 45 days from the end of the quarter to file that disclosure with the SEC. It’s called a form13F.

While these filings have become very popular fodder for the media, what we care more about is 13D filings.  And of course we have our formula for narrowing down the universe to what we deem to be the best ideas.

For a refresher:  The 13D forms are disclosures these big investors have to make within 10 days of taking a controlling stake in a company. When you own 5% or more of a company’s stock, it’s considered a controlling stake. In a publicly traded company, with that sized position, you typically become the largest shareholder and, as we know, with that comes influence. Another key attribute of this 13D filing, for us, is that these investors also have to file amendments to the 13D within 10 days of making any change to their position.

By comparison, the 13F filings only offer value to the extent that there is some skilled analysis applied. Thousands of managers file 13Fs every quarter. And the difference in manager talent, strategies and portfolio sizes run the gamut.

With that caveat, there are nuggets to be found in 13Fs. Let’s talk about how to find them, and the take aways from the recent filings.

First, it’s important to understand that some of the positions in 13F filings can be as old as 135 days. Filings must be made 45 days after the previous quarter ends, which is 90 days. We only look at a tiny percentage of filings—just the investors that we know have long and proven track records, distinct approaches, and who have concentrated portfolios.

Through our research and nearly 40 years of combined experience, here’s what we’ve found to be most predictive:

  • Clustering in stocks and sectors by good hedge funds is bullish. Situations where good funds are doubling down on stocks are bullish. This all can provide good insight into the mindset of the biggest and best investors in the world, and can be a predictor of trends that have yet to materialize in the market’s eye.
  • For specialist investors (such as a technology focused hedge fund) we take note when they buy a new technology stock or double down on a technology stock. This is much more predictive than when a generalist investor, as an example, buys a technology stock.
  • The bigger the position relative to the size of their portfolio, the better. Concentrated positions show conviction. Conviction tends to result in a higher probability of success. Again, in most cases, we will see these first in the 13D filings.
  • New positions that are of large, but under 5%, are worthy of putting on the watch list. These positions can be an indicator that the investor is building a position that will soon be a “controlling stake.”
  • Trimming of positions is generally not predictive unless a hedge fund or billionaire cuts a position by 75% or more, or cuts below 5% (which we will see first in 13D filings). Funds also tend to trim losers into the fourth quarter for tax loss benefits, and then they buy them back early the following year.

With that in mind, we want to talk about a few things we did glean from these recent filings.

Apple (AAPL)

This biggest news out of the filings this week was that Warren Buffett initiated a new $1 billion plus stake in Apple.  Buffett loves to invest in out-of-favor companies that are depressed in price, with strong brand names, low P/Es and high return on capital.  Apple checks the boxes on all of the above.

We think Buffett’s stamp of approval will change the sentiment on Apple, which has had a short-term ebb.  Apple shares were up 4% on the news Buffett has entered, the biggest one day move in over two months.

Additionally, billionaire David Einhorn added to his Apple position last quarter. He now has more than 15% of his $5.9 billion hedge fund in Apple.

ENERGY

We’ve talked a lot about oil over the past several months. The oil price bust created a binary trade — either it destroyed the global economic recovery (and likely the global economy) or it bounced back aggressively.  Thankfully, it’s done the latter.  Billionaire oil trader, Boone Pickens said this week that he thinks oil could trade as high as $60 over the next two months.

In the filings from Q1, top billionaires just like in Q4 were initiating and adding new stakes in energy stocks – building some large, high conviction positions.

As we’ve said, we think oil-energy stocks are the macro trade of the year.

Internet

One of most popular growth stocks purchased by top billionaire investors last quarter was Facebook. Another notable tech stock in the cross hairs of influential investors:  Yahoo.  A couple of top activist investors, a hot macro investor are involved in Yahoo. And news this week that Warren Buffet and billionaire Dan Gilbert could be teaming up to buy parts of Yahoo.

Billionaires Bottom Fishing in Healthcare

Noted contrarian and billionaire John Paulson has doubled down on two beaten down healthcare stocks last quarter, Endo International and Akorn Inc. We think this is an interesting move because Paulson like many of the best billionaire investors have literally made billions from buying when everyone else is selling.

Many other top hedge funds remain heavily invested in healthcare stocks as well, even after their most recent selloff.

Now, a couple of bigger picture views from the filings…

Some of the biggest and best are bullish on stocks.  Billionaire David Tepper has 12% of his fund invested in call options on the S&P 500 and Nasdaq 100.  Billionaire global macro trading legend, Louis Bacon, now has more than 7% of his fund in Nasdaq call options.  And two other macro investing studs, Paul Tudor Jones and John Burbank have both built big call options on emerging market stocks.

This activity gels nicely with what we’ve been discussing here in our daily notes.  We have a global economic environment that is fueled by central bank support. The risk of the oil price bust has now been removed.  And a lot of the economic data is setting up nicely for big positive surprises over the coming months.  We think we are in the early stages of seeing a global sentiment shift, away from gloom, and toward optimism.  And positive data surprises and changes in sentiment are two very powerful factors in driving markets.

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