DAILY DIARY
Well, This Is a First
- Negative
The euro overnight index average, or Eonia -- a measure of borrowing costs in the eurozone calculated by the European Central Bank -- turned negative for the first time ever on Thursday, fixing at -0.004%.
Little Meaning on Close
- $230 million to buy market on close.
Not meaningful.
A Little More TBF
- I paid $27.21 for more the ProShares Short 20+ Treasury (TBF) just now.
Still not big in this yet. But averaging in on weakness.
Pressing the Bond Short
- European sovereign debt yields matter.
With the 10-year yielding a low 2.34%, I am pressing my bond short further.
The only thing (at least to me) holding U.S. yields down are European sovereign debt yields.
As I wrote, European yields are artificially low owing to ECB jawboning. The EU banks are loaded up and, at some point, the jig will be up.
If this buying reverses -- and at some time this is inevitable -- soverign debt yields will soar (back to reality) and take our yields with them.
I just don't know the timing, but at current bond yields i have some margin of safety.
Goldman
- Goldman Sachs on this mornings economic data.
Talking Heads and Auction
- Cash positions?
Another CNBC talking head is wrong (just now) on his statement that corporate cash positions are "higher than ever."
Cash must be adjusted for debt and net debt is much higher today than in 2008 as a record amount of corporate bond insurances have taken place in last few years.
Aldo: The seven-year Treasury auction was just so so.
Recommended Reading
- Bagehot on China.
"Who was it said that beyond a certain point all dangers are equal?"
"I think it was Walter Bagehot. He was talking about a steeplejack." Then he grinned. "Sorry, but I am a publisher.
Here is a great column from The Economist on where China sits globally and where it wants to be.
Art Cashin's Midday Musings
- Midday musings from Sir Arthur Cashin.
Not much bounce off the lows into the close in Europe. U.S. markets pare risk reaction in half.
Poroshenko and team developing a mild credibility problem. Recall the convoy they "decimated" and then no photos of wreckage showed up.
In the longer run, Putin would like to play for time. When the weather's cold, he'll have four times the current leverage. For balance of today, rumormongers have an open field.
Run rate at noon slows to a projected NYSE volume of 515/595 million shares.
More SPY Short
- Adding to SPY short at $200.01 now.
Econ Data
- Still long TBF.
The US economic data have consistently been above consensus expectations over the last two months.
U.S. interest rates continue ever lower, not because of slowing domestic economic growth, but due to lower overseas sovereign debt yields, a flight to safety and a global savings glut (which has led to a worldwide grab for yield).
With U.S. monetary policy normalizing in 2014-15 the current 10-year note is getting very stretched in price and depressed in yield.
I have a small ProShares Short 20+ Treasury (TBF) position, which I just added to modestly.
Ukraine
- Break in!
From Bloomberg:
The West should consider offeringmilitary assistance to Ukraine because it will be very difficult for that nation "to withstand external aggression" without aid, Lithuanian Foreign Minister Linas Linkevicius says • "I think military assistance should also be considered" along with humanitarian aid, Linkevicius says in Baltic News Service interview
• "Judging from the information we are receiving, aggression and an undeclared war is going on. Despite all of this being denied, there's increasing evidence from different sources, including NATO intelligence," Linkevicius says
Adding to Insurance Shorts
- Rates going lower.
I am adding to my life insurance shorts Lincoln National (LNC) and MetLife (MET) in light of the continued move lower in rates.
Not Adding to Citi
- Rate concerns.
I had planned to add to Citigroup (C) at $51-$51.50, but I am backing off in light of the continued reduction in interest rates, which will pressure margins.
More Moni!
- I am taking some more Monitise (MONIF) off at $0.85.
As I mentioned in my previous column, a lot of the buying is probably short covering, which tends to be short lived, so to speak.
Otherwise doing little today.
Best Ideas
- My reasoning.
Over the next few days, I intend to describe my specific price expectations (for the balance of the year) of each of my long positions on my Best Ideas list.
The forecasts that I make are within the context of a cautious/negative market view nd are based on the expectation that stocks will move lower over the remainder of the year.
I would warn that these price expectations are guesstimates and are not meant to be precise. That is the reason I will not give a price target, but rather upside/downside for each equity.
First up is Monitise (MONIF).
Monitise's shares have been a roller coaster in 2014. There is no need to explain the reasons, as I have done enough in chronicling the company's two recent guides down.
The share price free-fall ended yesterday, with the announcement of an extention of an important alliance between the company and IBM (IBM), which could give Monitise the global scale (and opportunties) it has been looking for, as well as depth of technology application, sales and service available from IBM.
From BTIG:
IBM and Monitise have announced a resourcing alliance involving the transfer of
over 20% of Monitise's employees to IBM and IBM delivering services back to
Monitise.
This announcement follows Monitise and IBM's expanded, multi-year global alliance
announced in July to enable clients to deploy new mobile banking, payments and
commerce solutions via the cloud. The July alliance brought together the IBM
MobileFirst portfolio and its financial services and retail industry expertise with
Monitise's mobile banking and payments capabilities. Monitise also moved its
production hosting and cloud requirements to IBM.
Monitise's shares rose by 15% on Wednesday, and so far look to have some more follow- (+8%) through today. With a cumulative gain of more than 25% this week (from $0.67 to $0.86) on this heavily-shorted stock could continue to prosper over the next few days, but a lot of the positive news that I had expected in the company's Sept.15 report has now likely been released and is in the process of being discounted.
In my view, the near-term price behavior could be importantly impacted by how short sellers interpret yesterday's news as a potential growth driver for Monitise . This could lead to some short lived covering, something that I would not characterize as organic (new longs) or good buying.
That said, after the September interim report and over the balance of the year -- and even despite the deepening ollaboration with IBM -- Monitise has to execute and ramp up its sub base for the shares to respond meaningfully from current levels. In all likelihood, the company's success in adding to subs will take some time to develop and won't be apparent for another 3-6 months and won't likely move the needle much for fiscal 2015. (In my earnings model the big ramp up in Monitise's revenues occurs in fiscal 2016).
Valuing a potential disruptor like Monitise is highly subjective, as few comparable companies exist. Monitise's equity capitalization stands at approximately $1.6 billion.
With revenues under 100 million pounds (for the fiscal year ending June 30, 2014) and cash flow negative, the company is not expected to be EBITDA positive until fiscal 2016 and not EPS profitable until fiscal 2017. Sales growth will be relatively subdued in fiscal 2015 (June), with about +25% sales growth projected. However, +70% annual growth in revenues are expected in both 2016 and 2017. If achieved, sales will climb impressively from 95 million pounds (2014) to 375 million pounds (2017). EBITDA is forecast to swing from -35 million pounds (in the recently completed fiscal year) to almost +100 million poounds in the out year.
Monitise is a speculative long-term investment, but if these projections in 2017 are realized Monitise's shares have the potential for rising over 5x in the interim interval (as on today's share price the company is less than 10x 2017 (June fiscal year) enterprise value/EBITDA).
With the IBM news out and little in the way of catalysts over the next few months, Monitise is a show-me stock now (even though the IBM collaboration has the chance to be a game changer).
I would conservatively expect the shares to range between about $0.70-$0.75 (U.S.) on the downside and $0.95-$1.00 on the upside over the balance of the year. The near-term reward vs. risk over the rest of 2014 is relatively even.
As mentioned earlier, the behavior of the shorts will likely dictate near-term price action.
I have aggressively raised my Monitise position over the last two weeks. But after the ramp of yesterday and today and as evidence of conviction of near-term view ,I have sold down my position (from outsized and back to a more reasonable core position). With fewer short-term catalysts apparent, traders in the stock might consider paring into strength as well, with the thought of buying back later in the year at or around the current share price (and of course subject to subscriber progress, which I am hopeful the company will update more frequently).
I am keeping Monitise on my Best Ideas list because of the superior upside business intermediate term opportunity over the 2015-17 timeframe. This view has been supported by my research (with current and prospective customers) over the last f15 months, but particularly in the last 30 days. The further cementing of Monitise's relationship with IBM could encourage investors that the company's 200 million subscriber objective and its fiscal 2018 EBITDA margin target (greater than 30%) are attainable.
Still Very Net Short
- It don't matta?
In the early going, Mr. Market will be influenced by an apparent Russian invasion of the Ukraine, weakening German August employment data and a lower confidence reading for Europe.
Global yields have responded to the deepening EU crisis and Russia news by a further flight to safety, with U.S. and sovereign debt yields at new lows.
Market bulls say ignore the data, it dont matta, and focus on how well corporations are doing. They argue that the geoopolitical issues will have a limited impact on domestic growth and that the U.S. will continue to benefit (in flows) from a flight to quality/safety.
On Tuesday I will have more on the latter subject, which is less than meets the eye.
As I posted yesterday morning, I am at my largest net short positions in a while.
Mark Grant on Common Sense
- Sir Mark J. Grant talks about the use of "common sense" this morning.
I was born and grew up in Kansas City. This gives me a distinct advantage over many people. Common sense emanates from the plains and loses both force and power as it spreads to the coasts. I do not know why this happens but it is evident if you consider what goes on in Los Angeles and San Francisco on the west wide and then in New York and Washington D.C. on the east side. There must be some kind of fountain of common sense that is hidden in the middle of the country. I take no credit you understand but I appreciate the gift.
I am also a great believer in simplicity. I listen to some of the economists and quickly realize that they are making a subject, any subject, more complex so as to demonstrate their intelligence. They must assume that if you can't understand them then you will think they are wise. Words are used that are only found in dictionary appendixes. Formulas are touted that could probably be applied to interstellar physics. I have little faith in these panderers of the perplexing phrase.
I begin my musings today with one very clear and simple assumption: The European Central Bank is not going to allow rates to rise in Europe. At present, in my opinion, it is the major cause of whatever stability Europe has now. Low yields are the glue that is holding the Continent together and, while not enough, it is what is working.
Next I look at the German five year. This morning, according to Bloomberg, it yields 0.17%. America's five year this morning yields 1.64%. The German five year yields 965% less than the American one. There are some simple and basic lessons to be learned from this.
First is that it makes no economic sense and since it doesn't then another answer must be found for the spreads between the two securities. The answer is the ECB and what they have engineered which benefits Europe and so it is kept in place. The second lesson is that this spread will not last because economic forces, Relative Value and the flows of capital will force the change. Consequently if the German yield is not going to rise then the American yield is going to fall. That is my dose of Kansas City common sense to prescribe to you this morning.
I recently read an article, in one of the leading business publications, claiming that lower interest rates would cause a major correction in the stock market. I don't know where the author grew up but it was definitely not in Kansas City. He may have been born in Key West or upper Maine or the northernmost part of Washington State but it was definitely not Kansas City. This poor fellow, by birth, was denied his rightful share of common sense and this was evident by the conclusion he had reached. One cannot blame him, I suppose, for his lack of common sense but then following his advice would make you poorer which is not the goal that we are trying to attain.
I dislike poorer. I do not wear it well and the cloth aggravates my skin.
A money manager is talking to God.
"God, how long is a million years?"
God answers, "To me, it's about a minute."
"God, how much is a million dollars?"
"To me, it's a penny."
"God, may I have a penny?"
"Wait a minute."
It is amazing, in a way, how much bad advice is handed out or shouted out in the media and proclaimed as God's honest truth. I am sure that God has been invoked by many people, many times, who own securities or want you to own them so they can make some money on their purchase but I have found the invocation of the Deity a poor way to invest. It may well be, as our money states, "In God We Trust" but I have seen nothing in any chapter of the Bible that mentions the price of Google.
An oversight, perhaps.
There was a money manager who fell in the ocean and he couldn't swim. When a boat came by, the captain yelled, "Do you need help, sir?"
The money manager calmly said "No, God will save me."
A little later, another boat came by and a fisherman asked, "Hey, do you need help?"
The money manager replied again, "No God will save me."
Eventually the money manager drowned & went to heaven. The money manager asked God, "Why didn't you save me?"
God replied, "Fool, I sent you two boats!"
I make no other point today except to put in front of your noses the yield on the German five year as compared to the American five year. In past commentaries I have discussed the Fed and world events and offered any number of reasons why American yields are going to go down. They are all what I think and honestly believe but today I am only making one point and sticking to it.
There is the German yield and here is the American yield and, "What are you going to do?"
I can't make it any simpler than that.
The Penney Drops
- From The Street of Dreams.
BTIG lowers J.C. Penney (JCP) to Neutral this morning.
This Morning's Market Setup
- Where it began.
The rundown:
- U.S. futures have fallen this morning (S&P futures are down by 5 handles, and Nasdaq futures are 9 handles lower).
- European stocks are broadly lower, with the DAX taking the hardest hit -1.1%).
- Nikkei is 75 points lower or -0.50%.
- China is -0.70% below yesterday's close.
- Little foreign-exchange volatility this morning.
- Gold is $11 higher and crude is unchanged. Copper prices are lower.
- The yield on the 10-year U.S. note is unchanged to 2.33%, three basis points lower.
- With many on vacation I continue to expect a low volume week with little price movement over the remainder of the week.
As posted, I ended yesterday at my highest net short exposure in several months. I expanded that short further in premarket hours with an expansion of my SPY short. I re-initiated my short at about $200.20 this week.
Today's expected economic data: Q2 GDP 3.9%, Consumption 2.4%, GDP Price Index 2%, Core PCE 2%; Initial Jobless Claims 300k, Continuing Claims 2.51m; Pending Home Sales 0.5%
Still Short SPY
- In the last two days I re-established a short SPY position.
I am adding to my SPY short in pre-market trading at $199.84.