Author Archives: alexfigu

Increased Retail Investing

According to reports released from E*TRADE and TDAmeritrade the retail investment sector experienced a big jump in daily trade volume in the first quarter of this year. Both companies reported that daily trades have increased about 30% a day since the first quarter of last year.(WSJ – Mom and Pop Set Up There Trading) Much of the trade growth can be attributed to last year’s strong returns in the market, more mobile trading technology, lack of alternatives to stocks in a period of historically low interest rates, and increased volatility. As retail trades have increased significantly, the broader market has showed decreased volume. This shows that retail investors are becoming a larger fraction of the overall trading in the market.

This year’s growth has diverged from previous trends of decreased retail investment, as retail investors had been diverting their investments to institutional money managers, as they switched from personal stock selection to mutual funds and ETFs. So even though many investors are still switching to ETF and mutual funds, why is the trade volume increasing? I personally believe that this trend is a reflection of the reemergence of day trading. Many retail day traders got smoked in 2008 and after the past 5 years of a bull market, I think day traders are beginning to reemerge.

Besides the positive market environment, I think another factor that has contributed to the reemergence of retail day traders is the exorbitant amount of free information that has become available through social media, such as Twitter and YouTube. With all this readily available information it has become easier for novice traders to learn how to trade. The Wall Street Journal talked to a Gabe Mercer a 22 year old student in North Carolina who said “he stumbled onto the stock market in March while reading Twitter and watching YouTube videos.”

I personally have witnessed similar stories to this as a couple of my roommates began to trade stocks because of information they picked up off from Reddit and Twitter. Now my friends will be on their phones and tablets all day checking stocks and executing trades.

I personally believe that this trend of increased retail investing will continue as commission free trading platforms, such as Robinhood, emerges. Once the high trade execution barrier is removed, I can foresee many young kids sitting on their phones in class day trading with $500 accounts. This will inevitably increase the volume of retail investing even more.

Billionaire Investors Attracting too Many Followers in the Market?

It is often said that money can be made in the market from simply following the bets of big time hedge fund managers. This is not a bad strategy, as you put your trust into someone with proven success and far better resources and information than you. Success from this strategy is often associated with billionaire investor Warren Buffet. Often after publicly announcing a new position, shares of Buffet’s newly acquired position have a tendency to go up significantly.

This strategy is also effective in the short term strategy and can even mitigate the long term risk from holding the stock, but it is only effective for those that can use market signals to get into short term positions of a stock prior to the big announcements from these Billionaire investors.

Traders use many techniques in order to try to “hide” big orders entering the market, but large activist positions can’t be entered in the market without warnings. This was reflected this month as Bill Ackman built up a 10% stake in Allegan Inc (AGN). Despite, breaking up his trade over a month period and using multiple traders to execute many over the counter (OTC) options trades in order to acquire positions, signals that a large order was coming through the market was quite apparent. Traders took notice to this by monitoring the implied volatility of AGN. From April 4 to April 21 the implied volatility rose from 20.5 to 34.8 and the volume in the options market for AGN tripled. Despite Ackman placing many of his orders through OTC markets, many traders are forced to hedge their OTC trades through the options market. According to Steve Sosnick, senior trader at Timber Hill, “OTC options eventually leak back into the listed market. The trail may be subtle, but the counterparties have to hedge somewhere.”

Over the month of April shares of AGN rose from $123 to $166 representing a gain of approximately 35%. The Allegan example, shows that traders who have a strong grasp of the market can capitalize off short term trades on big positions entering the market. This strategy is also likely magnifying as computer models have made it easier for traders to identify opportunities like this in the market. This all brings me to my point, are 30+% share increases a rational response to big time investors entering a stock position? I believe that the prior success of investors like Warren Buffet and Bill Ackman should warrant confidence increasing in positions that these investors enter into, but that being said I am not sure if these investors can provide over 30% worth of value consistently to a stock. Reactions like the one seen this week with AGN, in my opinion may be an irrational market reaction perpetuated by the increased number of computer algorithms that can detect market entry signals.

New Market Trend – Demand for Internet

As our society is constantly becoming more and more connected by technology, the infrastructure needed to facilitate these connections has become highly demanded. As I check news outlets such as Wall Street Journal and Yahoo daily, I have noticed a growing trend in the news – the competition between firms for wireless spectrum. This competition has gotten heated as many companies compete to provide wireless connection to the more than 2 billion people around the world that live in uncovered regions.

Along with the two largest wireless carriers in the US AT&T and Verizon, other tech firms are investing into infrastructure that they hope can one day provide wireless services to people around the world. Facebook, has recently made investments in order to increase worldwide internet connection. Along with their partnerships with Samsung and Qualcomm, Facebook announced that it is looking to acquire Titan Aerospace, a solar powered drone company based out of New Mexico. Facebook plans to use the Titan drones for the purpose of beaming laser broadband connection to areas without coverage. According to the Titan Aerospace website, the drones can deliver internet at approximately 1 GB per second, which is significantly faster than broadband. Facebook CEO Mark Zuckerberg has often expressed his desire to make wireless internet available to all parts of the world.

Amazon is another company that is looking to invest in wireless coverage in order to increase the range of their product use. Amazon recently announced their intention to stream ad-supported television. In order to seamlessly stream this service Amazon has looked into ways in which they can use unclogged wireless spectrum to stream video without bugs and backlog.

Overall the increased demand for internet content and services has created a situation where companies are demanding more ways to deliver content to their customers. All these combined factors have created a new market trend where companies are actively looking to invest in ways to provide internet coverage to the 2 billion people living in uncovered areas across the world. For this reason, as an investor I hope to take advantage of this trend by investing in companies that are positioned to succeed from this trend. One company that I think could benefit from this new trend is Globalstar Inc., who has invested in new satellite constellations that will be able to provide wifi to rural areas in the country using low frequency spectrum. The current FCC Chairman, Tom Wheeler, has already expressed his favor for new technology that can transmit wireless service, so it will be very interesting to see what type of technology develops over the years and how this technology will change the way we use internet.

 

Banks Begin Easing Mortgage Lending Standards

This year many large banks that have historically relied on mortgage banking have reported that there revenue from mortgage refinancing and origination has fallen significantly. Many banks are learning that the market for refinancing has dried up and originations are slowing too. The Mortgage Banker Association forecasted mortgage originations to fall 36% from $1.8 trillion to $1.1 trillion. According to Michael Fratantoni, Chief Economist of the Mortgage Banker Association, “with volume dropping as much as it has, many lenders are looking to expand their credit box,” in order to compete for the smaller fraction of originations (Mortgage Lenders Ease Rules).

For borrowers this means the lightening of credit restrictions and the reemergence of low percentage down payments. For the economy this will likely be good news. It is widely believed that the biggest deterrent for a speedy housing recovery was the restrictive lending standards imposed by banks. These standards prohibited many from participating in the housing recovery, thus slowing the recovery process. According to research done by the Urban Institute in Washington, if credit standards in 2012 had returned to pre-bubble levels, over 200,000 mortgages would have been originated that year. Furthermore, Goldman Sachs estimates that new home sales will rise 800,000 units in 2017 from 430,000 last year, but if lending standards are not eased they are forecasting that the increase will only be 600,000 units. (5 Questions on State of Mortgage Lending) According to this data, the lending restrictions are slowing the housing recovery by 33%.

As we learned in 2008, too lenient of standards will inevitably cause a credit bubble to develop. The changes that we are currently seeing in lending standards are not the same standards that caused the bubble to develop in the early 2000s. For example, many of the mortgage defaults prior to 2008 were a result of adjustable-rate mortgages that bated customers with short term teaser rates that rose shortly after and the origination of mortgages without income verification. Despite low cash payment mortgages reemerging, the mortgage products offered are more straight forward for the consumers as a result of new consumer protection legislation enacted in January. Also lenders have become stricter on verifying income and sources of down payments.

Overall, I believe that the easing of credit standards will be a good thing for the domestic housing recovery. It is unfortunate for the banks that it took large revenue declines for them to finally take more risk in their lending practices, but for the sake of the housing recovery this is a necessary step in order for housing to recovery to pre-recession levels.

 

 

New Regulations on Municipal Bonds

Today it was announced that the Treasury will form a new unit to monitor the municipal bond market. The group will be led by former JP Morgan municipal banker, Kent Hiteshew, and will have similar authorities as the SEC, such as the right to create and enforce rules and regulations. The $3.7 trillion municipal bond market experienced problems this past year as Detroit filed for bankruptcy and Puerto Rico continues to have debt issues. The new group will supposedly monitor public pension funds as well as municipal projects, such as bridges and roads. (WSJ – Treasury Turns its Gaze to Municipal Bond Market)

The development of the new unit likely has been created in order to prevent a market blow up in the chance that Puerto Rican bonds default. Despite Puerto Rico making verbal commitments to honor their debt obligations and their treasury department working with the United States Treasury Department to sort out their books, a Puerto Rico default could have tremendous ramifications for the entire market. Currently three out of four municipal bond mutual funds have exposure to Puerto Rican bonds. Due to the tax exemption benefits that municipal portfolios offer many individuals, institutions, insurers, endowments, and corporations hold high exposure to municipal bonds. With this high exposure comes high risk because in the off chance that Puerto Rico is forced to default on its debt obligations, the effects will be felt throughout the entire market.

To complicate things further, last week big name hedge funds including Paulson & Co., Brigade Capital Management, Fir Tree Partners, Och-Ziff Capital Management, and Perry Capital each invested over $100 million into the new $3.5 billion Puerto Rican debt offering. (WSJ – Hedge Funds Roll Dice on PR) This new offering even came after news hit that Puerto Rico hired debt restructuring lawyers and advisers this past month. Unless these funds have better information than the general public, it seems they are taking a risky gamble on the future of Puerto Rico’s debt and are placing their faith in the help from the US Treasury Department.

Today’s news about the forming of the new municipal group could be a sign that the Treasury acknowledges its need to keep Puerto Rico afloat due to high exposure that Puerto Rico has in the entire market. As details arise this spring about the new regulatory group, we will be able to fully understand what capabilities Hiteshaw and his crew will have. For now it sounds like the US government is committed to ensuring that there will not be another instance like Detroit, for investors in Puerto Rican bonds this could be good news.

Revised: New IPOs Could Signal Future of Tech Stocks

If all goes well, this week has the potential to mark the biggest week in IPO’s since November of 2007. With the current market conditions of a strong S&P 500 and a continued demand for US stock mutual funds, many companies have pushed to expedite their listings to occur before the holiday breaks. The significant take away from this week will not only be the $4.8 billion raised, but rather the reaction that Wall Street has to high growth tech company IPOs. (WSJ – US IPO Market Expects Busiest Week Since 2007)

I have been writing a lot recently about the absurd valuations and acquisitions occurring in Silicon Valley and it appears that this view has caught on in Wall Street. This past month multiple high growth tech companies that have business models based off the “cloud,” “social media,” or “big data” dropped significantly in share price.

According to Wall Street Journal writer Dan Gallagher, “The Nasdaq Composite is down about 5% over the last month, but has seen short-term drops of about 10% on at least four occasions over the last five years. In those instances, the losses were erased in a matter of weeks.” (WSJ – Opening the Box on Tech Stocks Next Move) Despite this recent correction, many of these companies that fell in share value are still trading at valuations much higher than their peers. For example, cloud based software provider Workday (WDAY) fell over 20% this month yet today was still trading at 17.6 times forward sales, whereas its biggest competitors Oracle and SAP are only trading at four times forward sales.

It appears that Wall Street is finally reaching an inflection point where they are forced to question whether or not the premiums attached to these high growth tech companies are warranted. Many of these companies have shown the ability to increase revenue rapidly. But with this being said, many still operate net losses as their sales and marketing expenses increase in order to fuel revenue growth.

An example of such a company that has been successful at increasing revenue but not fending off losses is cloud-based data storage company Box. Box has seen year over year revenue growth of more than 100%, but has also increased its net losses just as quickly. Box plans to initiate its public offering later this month. The degree of success of Box’s IPO will be a good signal to the street of how the market is currently perceiving high growth tech companies. A failure in Box’s IPO will inevitably slump the market for all high growth tech companies.

In my opinion, as these new Silicon Valley tech companies are undergoing a consensus check a safe market play would be to move out of these companies and place money in proven tech giants such as Cisco and IBM. The drop in share prices of high growth tech companies this past month may prove to be a great entry point for speculative investors, but as long as these companies have valuations exceeding their proven competitors by four to five times I believe that they are far too risky for investment.

Why is Wall Street Confused?

In my previous post I argued that the valuations on some of the growth tech stocks that have recently tumbled were overpriced and that a correction in the market was necessary. As this correction has occurred over the past week its affects have trickled down to the entire equity market. Today the Nasdaq dropped 1.3% and the total loss for the week was 3.1%. The S&P 500 and the Dow each dropped 0.9% as well today. (WSJ – Stock Bloodbath Hasn’t Hurt Other Assets)

Despite the recent selloff impacting all equities, riskier asset classes that are often negatively affected by the US stock market selloff reacted adversely in the market today. Whenever the stock market takes a negative hit historically oil prices have fallen as well. This trend did not occur this week as oil prices rose.

 

 

As you can see in the graphs depicted above the price of oil has not moved in correlation with the falling stock market. This trend was also witnessed in emerging markets. As the market fell today the South Korean Won hit a new five year high and the Brazilian Real hit another monthly high.

This unique market movement shows that the dominant market force is currently the Fed’s commitment to maintain low interest rates. This new Fed view comes as opposition to January’s consensus that rates would be immediately hiked due to the strength of the domestic economy. New thoughts about the Fed have caused investors to reinvest into emerging markets and thus create a capital inflow into emerging markets, thus strengthening emerging market currencies such as the Won and Real. The new belief regarding domestic interest rates is also the factor that has pushed up oil future prices.

The current trend in the market is a signal that many investors don’t see this broad equity selloff as a long-term correction. After a high yielding year for tech stocks, many investors are using this correction as an opportunity to cash in profits and diversify their portfolios. Furthermore, the changing treasury rates has created an overall market confusion that has left many investors trying to find ways to make their portfolios more risk-neutral until further guidance.

According to Palisade Capital Management CIO, Dan Veru, “Money isn’t leaving the market, it’s just being reallocated.” (WSJ – Nasdaq Closes Below 4000) With no specific news affecting the market it would appear that this is the current sentiment on the street. With this all being said it would appear as if Wall Street is stuck in a bit of confusion. As the Fed continues to give contradictory forecasts and China continues to waiver, it is difficult for anyone to really know what exactly is going on in the market. For this reason, we may start to see a lag period where investors move their portfolios in order to mitigate as much risk as possible.

New IPOs Could Signal Future of Tech Stocks

If all goes well, this week has the potential to mark the biggest week in IPO’s since November of 2007. With the current market conditions of a strong S&P 500 and a continued demand for US stock mutual funds, many companies have pushed to expedite their listings to occur before the holiday breaks. The significant take away from this week will not only be the $4.8 billion raised, but rather the reaction that Wall Street has to high growth tech company IPOs. (WSJ – US IPO Market Expects Busiest Week Since 2007)

I have been writing a lot recently about the absurd valuations and acquisitions occurring in Silicon Valley and it appears that this view has caught on in Wall Street. This past month multiple high growth tech companies that have business models based off the “cloud,” “social media,” or “big data” dropped significantly in share price.

According to Wall Street Journal writer Dan Gallagher, “The Nasdaq Composite is down about 5% over the last month, but has seen short-term drops of about 10% on at least four occasions over the last five years. In those instances, the losses were erased in a matter of weeks.” (WSJ – Opening the Box on Tech Stocks Next Move) Despite this recent correction, many of these companies that fell in share value are still trading at valuations much higher than their peers. For example, cloud based software provider Workday (WDAY) fell over 20% this month yet today was still trading at 17.6 times forward sales, whereas its biggest competitors Oracle and SAP are only trading at four times forward sales.

It appears that Wall Street is finally reaching an inflection point where they are forced to question whether or not the premiums attached to these high growth tech companies are warranted. Many of these companies have shown the ability to increase revenue rapidly. But with this being said, many still operate net losses as their sales and marketing expenses increase in order to fuel revenue growth.

An example of such a company that has been successful at increasing revenue but not fending off losses is cloud-based data storage company Box. Box has seen year over year revenue growth of more than 100%, but has also increased its net losses just as quickly. Box plans to initiate its public offering later this month. The degree of success of Box’s IPO will be a good signal to the street of how the market is currently perceiving high growth tech companies. A failure in Box’s IPO will inevitably slump the market for all high growth tech companies.

In my opinion, as these new Silicon Valley tech companies are undergoing a consensus check a safe market play would be to move out of these companies and place money in proven tech giants such as Cisco and IBM. The drop in share prices of high growth tech companies this past month may prove to be a great entry point for speculative investors, but as long as these companies have valuations exceeding their proven competitors by four to five times I believe that they are far too risky for investment.

Unionizing of College Athletics

Tonight number 7 seed Kentucky will face off with number 8 seed UConn. This year’s NCAA basketball championship will be remembered as two unexpected teams fought their way from what many considered to be disappointing regular seasons to national championship berths. Off the field, this year’s championship could be remembered for NCAA President Mark Emmert’s comments on the unionizing of the NCAA.

As Emmert publically stated that he would not condone the unionizing of student athletes, he sat overlooking the brand new AT&T Stadium that has recently become a symbol of commercialization and opulence in sports. Ironically, while Emmert claimed that the tuition received by student athletes was a fair trade for the athletes dedication to the game, the camera panned over the stadium and viewers could see the 90,000 seats in AT&T Stadium selling for hundreds of dollars each for tonight’s game.

With ticket sales, television contracts, and sponsorships all combining to give the NCAA and friends a multimillion dollar payoff tonight, it’s a fair question to ask has all this gone too far? The NCAA can claim that a union of student athletes “would blow up everything about the collegiate model of athletics,” but I would say this model has already been blown up as basketball games have moved out of 20,000 capacity coliseums to 90,000 seat NFL stadiums and as athletes have been forced to sacrifice 40 to 50 hours a week on their athletics. (WSJ – The NCAA’s Imperfect Union)

With the continued commercialization in college sports, it is extremely evident that the focus has moved from student to athlete, especially in high revenue sports, such as basketball and football. For example, many student athletes must sacrifice studying the major of their choice in order to take an easier course load that will allow them to combine the NCAA mandated course load with their full-time athletic commitment. Furthermore, for teams that are fortunate enough to make it to the Final Four players must miss weeks of school in order to participate in the tournament.  These missed days in the classroom not only put students behind in their academics but take away from their overall college experience.

As student athletes in high revenue sports, such as football and basketball, continue to sacrifice their education in order to keep up with the growing demands that the game is constantly requiring it is only fair for these players to be able to collectively bargain for additional benefits. For the student athletes that depart for professional sports following their minimal collegiate service these benefits will likely be minimal in regards to their earning potential, but for the majority of the student athletes with no professional aspirations additional healthcare benefits, tuition assistance, and other benefits could be valid compensation for the hours sacrificed towards education. If the NCAA truly has the student-athletes best interests in mind then they would properly compensate athletes, because right now the compensation of free tuition is marginal in relation to the revenue that many programs are bringing in.

According to Ramogi Huma, the President of College Athlete Players Association, “There is $1.2 billion in new annual TV revenue available to provide the protections that college athletes need. While the NCAA and college administrators prefer to spend such revenues on lavish salaries and luxury facilities, some of this revenue should be used to protect college athletes. The new money alone would take care of all of the goals we are pushing for.” (WSJ – NCAA President Mark Emmert Blasts Union Idea)

It will be interesting to see if the unionizing of college athletes takes place anytime soon, but I am certain that when it does take place it will have huge effects on the framework of college sports. We will likely see college sports turn into more of a minor league system as college athletes receive greater compensation and benefits for their play.

Why Ukraine’s Gas Shutoff Could Actually Lead to Long Term Growth

Today Ukraine received another blow from Moscow as Russian natural gas provider, Gazprom announced that it will be raising the price of gas for Ukraine by 81%. The CEO of Gazprom, stated that he will raise the cost from $268.50 to $485.50 for 1000 cubic meters starting this month. Russia justified this economic attack by stating that it is due to Ukraine being late on $2.2 billion worth of payments on natural gas. (WSJ – Ukraine Leader Warns of Gas Shutoff)

Ukrainian Prime Minister Yatsenyuk responded to the economic attack by stating that Kiev will not accept the new prices and will take the case to the international arbitrage court. Currently natural gas is Ukraine’s largest imported product and more than half of all their natural gas imports come from Russia. Yatsenyuk announced that Ukraine will look for solutions to lower their exposure to Russian imported gas. One short term solution that has been in the works is to import 20 billion cubic meters with the help of the European Union from Hungary, Slovakia, and Poland. Russia claims that the importation from the EU will break Ukraine’s contract for natural gas importation, so it is unknown how viable this option will be.

In the short term, it is very likely that Ukraine will experience an economic recession as they continue to absorb economic pressures from Russia and have to deal with a limited gas supply. These pressures will undoubtedly hinder their manufacturing sector, as well as the rest of their economy. Despite the likelihood of the gas shortage crippling Ukraine in the short term, in the long term it will likely help Ukraine build stronger ties with the EU, which will help Ukraine develop in the long term after the Crimea conflict dwindles.

Prime Minister Yatsenyuk already vowed to leave the Gazprom pipelines to Europe alone, so by not tampering with the gas flow to Europe, Yatsenyuk signaled that he is more willing to work in accordance with the European Union in the future over Russia. If this trend continues it is likely that we will see further agreements signed between the EU and Ukraine that will open up more trade between the two markets. According to Martina Bozadzhieva, Head of Research for Frontier Strategy Group, as Ukraine integrates more strongly with the European Union there economy will grow. According to data from Frontier Strategy Group, “integration with the European Union tends to improve the operating environment of a nation.” (WSJ – Ukraine Turmoil Has Huge Impact on Multinational Businesses) In the short term Gazprom’s economic assault on Ukraine will likely be effective of forcing the Ukrainian economy into a recession, but it will also force Ukraine to seek the support of the EU and integrate itself further with the European economy. This fundamental change will help Ukraine in the long term and help it make a quicker recovery.