Buzz on the Street: Twitter Leaves the Nest
A look back at the happenings on Wall Street this week, as seen by Minyanville's Buzz & Banter.
Here is a small sampling of this week's activity in the Buzz.
Monday, November 4, 2013
Mo Better Blues!
It's a brand new week on Wall Street and the holiday cheer is self-evident. Last week, we touched on the scope and breadth of this year's stock market rally--92% of the S&P is positive, up 29% on average--and this morning, an article from Bloomberg suggests the rally will "pick up steam through year-end," if history is any guide.
Looking back since 1928, shares climbed in the final two months 82% of the time when the S&P gained double-digits through October. The mean increase for November and December is 6% which, if accomplished anew, would target S&P 1892 into year-end.
The momentum is there, of course, but past results never guarantee of future returns. A prominent director of investment strategy was quoted in the article saying, "Clients ask me, 'Why don't I take profit now?' My theory is you can sell a lot higher later." That may prove true; we just have to wonder how many others are waiting to sell alongside him.
While bears will point to sluggish growth, uninspiring labor markets and artificial stimuli that will presumably end one day, the bulls seem to increase alongside the year-to-date returns. Abby Joseph Cohen of Goldman Sachs (NYSE:GS) is pointing to how inexpensive the market was on a P/E basis to start the year--and still thinks it is "under-priced on a 12-18 month period."
The bulls have some gravitas after a 160% rally the last four years, just as the bears growled loud in 2008 and 2009 after a massive decline. It's the way of the world, particularly on Wall Street where you're only as good as your last trade and perception is reality. Hands over ears and eyes glued to our screens, we might actually arrive at the conclusion that all is well in the world.
The Federal Reserve may induce a state of financial nirvana if they can pull off Operation Rug Sweep, but that requires a matter of trust and leap of faith. That doesn't come easy for increasing majority that has suffered as a result of the policies but everything is funny when you're making money so nobody wants to hear about the other side of that trade right now.
With the market in 'no-man's land' through a technical lens, one would be wise to define risk, maintain perspective and remain lucid. History has rarely been kind to bandwagon investors who bought (or sold) because everyone else was doing it; this time could be different, for two months or longer, but we would be wise to see both sides.
Good luck today.
BlackBerry (NASDAQ:BBRY) was halted for news pending following a report from the Toronto Globe saying that the company would abandon its sale plan, raise $1 billion in convertibles, and replace its CEO. The stock was down 19% to $6.32 before being halted.
And now the company has confirmed the news. It is receiving a $1 billion investment from Fairfax Financial and other investors, and has named John Chen as Chairman and interim CEO. Fairfax' Prem Watsa will be lead director, current CEO Thorstein Heins and director David Kerr will resign, and the review of strategic alternatives has been concluded.
Fairfax and the other institutions are buying $1 billion in 6% unsecured subordinated convertible debentures, which are convertible into BlackBerry shares at $10.
We'll have to see what happens when the stock opens back up for trading, but it looks like my $9 December butterflies will be heading straight to zero. I may, however, just close out the short $9 calls in the position and leave the long $8 and $10 calls on as lottery tickets -- as in very low probability of success, but they're going to be worth next to nothing anyway.
Clear & Present Markets
1. I have to laugh at Google (NASDAQ:GOOG) Chairman Eric Schmidt’s outrage over NSA Spying. This is a company who profits by tracking every move internet users make. If he thinks the government looking at this information is illegal, what does that say about the business model for Google, Facebook (NASDAQ:FB), Twitter (NYSE:TWTR), Yahoo (NASDAQ:YHOO), and the rest? Of course, foreign nations will be skeptical of companies gathering so much information on their citizens, especially after Google hired Regina Dugan, the former head of DARPA (Defense Advanced Research Projects Agency), last year. Technology has progressed and profited in the absence of regulation, but it is only a matter of time before regulators come down hard on this information gathering sector. Regulation can also create barriers to entry, which reduces competition and slows the innovation cycle.
2. I have been looking at the airlines recently, wondering if the business model is really “new”, and whether profits can continue to grow in the sector. The major airlines are winning by eliminating flights, which reduces capacity and drives travelers to other flights resulting in full planes and higher ticket prices. It hardly seems like a novel idea to track bookings data and use it to find the optimal balance between service levels and profitability, but given the financial problems in the industry, perhaps it really is the first time the industry is tracking such data and using it to enhance profitability. Consolidation has reduced competition on certain routes, and allowed the majors to execute this strategy. In addition, the increased profitability allows the majors to cut prices where needed to compete with regional carriers trying to undercut them.
Airlines like Frontier (Republic Airways Holdins (NASDAQ:RJET)), Allegiant (NASDAQ:ALGT), and Spirit (NASDAQ:SAVE) are executing a similar strategy by targeting the personal traveler and flying only occasionally. The majors have to fly multiple flights every day to multiple destinations to satisfy the business traveler. These smaller carriers are only flying a couple of times a week during the most profitable times and giving personal travelers a cheap flight with disaggregated costs (baggage fees, purchased food, pay for preferred seating, etc…) provided they change their schedule to accommodate the cheaper flight times. This strategy has proven highly profitable, but it is not yet having a material impact on the profitability of the majors.
I am narrowing my focus on 2 airlines with catalysts in the near future that should increase profitability. Delta (NYSE:DAL) is in the process of winding down its Tokyo hub and moving that traffic to Seattle’s Sea-Tac Airport, which will give Delta a west coast hub with flights to every major Asian destination. This move should have a broader impact on Seattle’s economy, but it should specifically benefit Alaska Air (NYSE:ALK), which brings as much traffic into Sea-Tac as United (NYSE:UAL) does into San Francisco (its Asian departure point). The industry is using data to make better business decisions, and it is both profitable and growing, even with oil at $100/bl. There are still risks and vulnerabilities to investments in the sector, but I am warming to the ability of the airlines to deliver profit growth for another couple years, as long as oil process don’t spike.
3. Merck (NYSE:MRK) released positive data this weekend on its Phase 2 Hepatitis C drug, and analysts expect the Merck drug to reach the market about 18 months after the treatments by Gilead (NASDAQ:GILD) and Abbvie (NYSE:ABBV). It will be interesting to see how this market shakes out as these treatments are not chronic therapies, they actually cure HCV. There is an estimated 200 million people worldwide infected with HCV, so investors should expect a rapid ramp in sales for these drugs, but the big question is how long will sales grow before enough people are cured and sales begin to decline. These drugs have to be modeled differently than the chronic therapies pharmaceutical companies typically churn out, but competition and pricing strategy will play a bigger role in the market share and profitability of these vaccines. None of these treatments are approved yet, but the Phase 2 trials are showing efficacy rates in the range of 90%-100%, with minimal side effects compared to current treatments.
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