Incoming layoffs, Danger of the ad business, SBC harming shareholders , Dead cat bounces, Insider buying, Merrill redefines FANG ...
Stock/Bond Correlation, Documentaries about Druckenmiller and Paul Tudor Jones and SQ vs MA/V
Good morning Coffee drinkers and tea lovers alike!
After yesterday's newsletter, I am here to bring you another one. I have whiplash on my neck, so what else to do.Â
Today we talking about:
Incoming layoffs
Dangers of the Ad business and SBC (Share-based compensation) harming shareholders
Insiders are buying, should you?
Documentaries of Druckenmiller and Paul Tudor Jones
Dead cat bounces
Merrill redefines FANGÂ
Stock Bond Correlation
Square vs Mastercard/Visa
Incoming layoffs
Governments all over the world said last year, that recession was not possible due to the high employment rate. Inflation soared higher, yet the risk was ignored. Now we see layoffs rising (thanks @HighyieldHarry). Not just in the deeply unprofitable and horrible companies like Carvana, but also at the winners of the last decade. As seen in the Tweet above, Facebook (I refuse to call them Meta until they create something worthy of that name), Salesforce, Netflix, Amazon and Walmart are all overstaffed, froze or slowed hiring. Klarna laying 10% off its workforce spells trouble for sub-prime lenders such as Affirm and it can't be reassuring that Nvidia also confirmed a hiring slowdown.Â
Inflation is starting to take its toll. As input costs are rising, companies try to protect their profits. As sad as it is, they are more than willing to sacrifice employees rather than profits. I think that we will see much more layoff news coming in the next quarter.Â
Dangers of the Ad business and SBC (Share-based compensation) harming shareholders
Snap Inc, the company behind Snapchat issued a profit warning. Despite giving what many thought of conservative guidance in the earning call last months, the macro environment seems to hurt them more than anticipated.Â
This is the danger of the ad business. As costs rise, companies will try to tame them as much as possible. Facebook and Google might look cheap, but we don't know to what extent they might be harmed by the changing business world. Additionally neither Facebook nor Google told us how much of their revenue comes from unprofitable startups. As credit gets more expensive, those startups won't be able to spend as much on ads. Given that Youtube bombarded me with Wix ads, until I discovered uBlock Origin (an Adblocker, be sure to install uBlock Origin as just uBlock contains malicious code), I find it likely that their profits will materially be harmed.Â
For Snap holders this is a double whammy. As outlined in the tweet below by Wasteland Capital (thanks!), Snap is now ~40% below its IPO price and has issued more than 475m new shares.Â
The only people who got richer are the Venture Capital companies and the insiders of the company. SBC is a huge costs and in the recent years, it has gotten out of control in the US. The Free-Cash-Flow of companies like Square (or now Block) and Atlassian is more than half SBC. Insanity. SBC might not be a huge cost to the business, as they don't have to pay out cash, but it is a cost to all other shareholders.Â
Insiders are buying should you?
Bloomberg recently posted an article stating that Insiders bought the most amount of stock since March 2020. While generally insider buying is a good thing, those insiders often ignore the systemic risk.Â
The same was happening in 2008 after Bear Stearns went bankrupt (thanks @PauloMacro for the article). Insiders bought heavily into their own company -Â anchoring the price to previous highs.Â
Additionally many of those insiders sold millions or even billions in stock. For example Ehrsam Frederick Ernest III, a Coinbase director recently bought 75m worth of shares. It looks impressive, until you realise that he sold 481m a few months before. The difference between having 100k and 5m in terms of living standard is huge, but between 481m and 410m - not so much (although you might have to settle for the smaller private jet). The same can be said for companies such as Carvana or other high flyers. Those might be used to just prop up the share price.Â
That is not to say that all insider buys are ill-timed or with the stock pump intention in mind. There are exceptional companies where insiders are buying, but it is better to stay on the cautious side.
Great documentaries about Druckenmiller and Paul Tudor Jones
Finaius made two great documentaries about Druckenmiller and Paul Tudor Jones. They are about 20 minutes each and worth a watch. Here are my takeaways.
You can't shove the economy into a math formula.
Use any technique, like technical analysis or fundamental analysis, as long as it makes you money.Â
Quickly change your mind if the facts change.
Most investors lack discipline. They get excited when everything is great, but ignore the risks.Â
Put all your eggs in one basket and watch that very carefully.Â
The most important thing is to learn how to communicate, talk and think. Take Journalism 101 and Newspaper writing.
It is important to look at the behaviour of other traders.Â
Price patterns are the same old story in different times.Â
Avoid loses. It is better to focus on the downside -Â then the upside takes care of itself.
Don't disregard black sawn events and try to prepare for them.Â
Dead cat bounce
In this great research paper, the author looks at dead cat bounces. Here are my takeaways:
During bear markets there is often a temporary reversal of the downtrend, followed by a further decline. This is called bear market rally or a dead cat bounce. Often governments intervene. If the reversal happens at the same time as the intervention, they can often look more promising and give investors a false sense of security.Â
The paper explains it using the CPT (cumulative prospect theory). It leads to investors to take high risks in unprofitable investments in the hope to recover losses and the anchoring of price points. If the expectations of several investors is the same, they will buy back at a similar time - thus there will be a dead cat bounce. The larger the optimism during the bubble, the higher the probability of a dead cat bounce and the larger its expected size becomes. This dead cat bounce is prolonging the bubble and its burst. Â
Given the extraordinary bubble and decline that we had the last few weeks, we might be due for such a rally. As I myself have several short positions, not getting caught out by such events is important.
Merrill redefines FANGÂ
In a market outlook published in March by Merril they redefine the meaning of Fang (Thanks @quakes99 for the article).Â
I think the picture above speaks for itself. I just find it remarkable that a shift of perception is starting. We might be far from a bull market in these areas, but I believe they will come over the next decade.Â
Stock-Bond Correlation
In a research paper from August 2021, Graham Capital looks at the correlation between stocks and bonds. In it, they find that during high inflation, bonds and stocks are not negatively correlated as many proponents of the 60/40 portfolio (60% stocks, 40% bonds) would like you to believe.Â
These findings lead me to two conclusion:
First, that bonds are not the safe haven, in our current environment that everyone thinks they are.Â
Secondly - Druckenmiller often profited from a flight to safety into liquid assets such as treasury bonds or the Deutsche Mark. When oil, the dollar and interest rates were up in the past, it spelled disaster for the earnings of companies. As a result many fled into treasury bonds. We saw that fight to safety, but it did not move the price of treasuries up significantly. I believe that the big flight into treasury bonds will not happen to the same extent as in past crisis.Â
Square vs Mastercard and Visa
As a parting gift, I leave you with a tweet from the great short-seller Jim Chanos, where he says, that even if you believe the margin goals for Square, why not buy Mastercard/Visa who are profitable, cheaper and have higher margins. To be honest, I have no argument, that could disagree with him.
