Equities – A Rarefied ‘APP’mosphere

It’s getting hot up here! Equities are toast. We are ringing the bell on the global equity markets on the first day of TWTR: NYSE listing.    

 

We love the Internet, Social Media, Gaming, and software applications designed to run ‘ideas’ on smartphones and tablets.  We love their creativity and productivity but we don’t love the public valuations of their stocks. They have entered into the ‘APP’mosphere.  

 

What has driven these stocks higher – the power law of internet adoption rates, corporate debt growth, and credit availability are the first factors that spring to mind.  

 

Markets are where buyers and sellers simultaneously agree on price but disagree on value. There is subjective value and then there is objective value. Subjectively we object to these values.   This is an excerpt for the coming HindeSight Investor Letter November 2013 Equities – A Rarefied ‘APP’mosphere.

 

Debt, it’s an engine for the mobile APPs growth

When too much credit is freely available in a low rate environment, good ideas become bad ideas as too much ‘capital’ migrates through the producer to consumer chain. It is called a misallocation of capital, whereby income can neither sustain the return on capital invested nor service the debt that underpins the idea.

In our HindeSight Investor Letter February 2013 – The Central Bank Revolution II Chasing the Dragon we wrote:

 

“Nowadays investing has little to do with fundamentals and is all about liquidity. Our liquidity indicators have been supportive for a potential re-rating of equities and with little participation it takes little imagination to see how aggressively they could move in the first half of 2013.”

 

The real Austrian Monetary Supply (AMS) was growing 7% annualised rate faster than nominal GDP, which we suggested would produce on average a 15% re-rating in global equities in the first half of the year. What was remarkable was equities in the developed world tacked on another 5% plus.

The question we are asking ourselves has the effect of the perpetual money machine run its course for now. We believe equities globally will experience a 10% correction over the next 6 months as a minimum guide.

 

BID ‘Less’

Did the auction of fine arts tell us so much more than the price of a piece of art – did it portend the end of the equity swoon which began with the up-swing from the 2009 lows?

 

The NYSE stock ticker for Sotheby’s the auctioneer of fine arts, antiques and collectible and offerings is appropriately named BID. But perhaps it should be named BID ‘Less’ after this week’s price action.

BID’s stock price has been exhibiting an exorable rise along with the ‘real assets’ it brokers. It is considered the market vane of the uber-wealthy’s spending temperament.  Those very same 1% who drive 80pc of stock price action. A falter in BID’s stock price could portend so much more?

 

Sotheby’s and Christies who have enjoyed a near-duopoly in the fine art auction-house market just began the Autumn auction season in earnest. The season has turned cold already with sales far below expectations.  Some 25% lower to be precise and with 12 out of 46 pieces unsold at the latest auction alone.

 

On 4th November 2013 Steve Cohen’s legendary equity hedge fund SAC pleaded guilty to five counts of fraud. Federal prosecutors impose a record fine of $1.8 billion and banned SAC from managing client money. Although not found guilty himself, Cohen is being pursued by the SEC in a civil case for “failure to supervise” which if confirmed would see him reaching into his backpocket again.

 

On 6th November 2013 Steve Cohen popped down to Christie’s New York art auction to flog some art. Coincidence? Some would say he is a ‘forced’ seller. For sure he’s been creating a bad ‘impression’ it would seem of late. A piece came under the auctioner’s gavel, “Mann und Frau (Umarmung)” by Schiele – it received no BIDs. It was BID ‘less’ as we say in market parlance. It is rumoured to be owned by Cohen. The wolf-pack has turned on its own. No ‘tainted’ pictures for me.

 

Sotheby’s stock has taken the hit. Christies is privately owned by french luxury entrepreneur Francois Pinault and is thus is not listed on the bourses.  In 2012 Christie’s sales totalled $6.27bn whilst Sotheby’s totalled $5.4bn. However in Q1 2013 Sotheby’s had a net loss of $22.3m despite a 25% increase in sales. Guaranteed reserve prices and tigher margins from new comers have squeezed these market players. So one can say that with sales down 25% in Q4 Sotheby’s losses will almost certainly deepen.

 

On 7th November 2013: TWTR NYSE: A ‘Cheeky’ Bird flies but ‘Dogs’ bark?

 

Twitter IPO’s and a blue bird flies into bluesky territory. TWTR IPO-ed at $45.10 and touched a high of $50.09, so far at the time of typing. As a market comrade quipped ‘forty-five dollars and ten cents a share — AND I@VE STILL GOT 100 characters to GO!!! (Jeeeez)’.

Guess he doesn’t own it!  Courtesy of IG Index (spread betting firm) one could speculate on the market capitalisation or value of Twitter pre-IPO, in what is known as the ‘grey’ market or (‘blue’ market in this case). 1 pt represents $100mm change in the market cap. The market on the 13th September valued the stock at $33bn. Twitter said it would have 544.7mm shares outstanding on the IPO day so the price was equivalent to $60 per share. By the 14th September the price fell to $25 – $27 range or $14bn in value.

TWTR IPO opened at $45.10. So the IPO buyers got a near double and TWTR got a market cap. to outstrip Facebook’s IPO mkt cap, who have $10bn in revenue and $2bn in net income.

So an opening price of $45.10 for TWTR that cheeky little microblogger and would-be mobile advertiser values the company at 22x est. sales revenue, whilst Facebook trades at 12.2x. Cheeky – or Tweety – indeed.

In our HindeSight letter out next week we will offer some market only analysis on why we believe equities will correct and likewise provide some information to our downside targets. As Austrian followers we have a ‘moral’ belief that central bankers are exploiting and abusing the monetary system. However, although we promote feverishly the tenets of sound money, when it comes to markets our aim is to just make some at a rate faster than the central bankers debase it.

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