Category: zerohedge

Did Goldman Just Kill The Music? – "The S&P500 Is Now Overvalued By Almost Any Measure"

“As long as the music is playing, you’ve got to get up and dance…. We’re still dancing.”

      – Chuck Prince, July 2007

Late last night the music may have just skipped a major beat after Goldman released a Friday evening note that is perhaps the most bearish thing to come out of Goldman’s chief strategist David Kostin in over a year, (and who incidentally just repeated what we said most recently a week ago in “Stocks Are More Expensive Now Than At Their 2007 Peak“). To wit:

S&P 500 valuation is lofty by almost any measure, both for the aggregate market (15.9x) as well as the median stock (16.8x). We believe S&P 500 trades close to fair value and the forward path will depend on profit growth rather than P/E expansion. However, many clients argue that the P/E multiple will continue to rise in 2014 with 17x or 18x often cited, with some investors arguing for 20x. We explore valuation using various approaches. We conclude that further P/E expansion will be difficult to achieve. Of course, it is possible. It is just not probable based on history. 

 

The current valuation of the S&P 500 is lofty by almost any measure, both for the aggregate market as well as the median stock: (1) The P/E ratio; (2) the current P/E expansion cycle; (3) EV/Sales; (4) EV/EBITDA; (5) Free Cash Flow yield; (6) Price/Book as well as the ROE and P/B relationship; and compared with the levels of (6) inflation; (7)
nominal 10-year Treasury yields; and (8) real interest rates. Furthermore, the cyclically-adjusted P/E ratio suggests the S&P 500 is currently 30% overvalued in terms of (9) Operating EPS and (10) about 45% overvalued using As Reported earnings.

Cue David Tepper to bring out even bigger greater fools who do believe in his 20x PE multiple “thesis.” Cause if 20x works, why not 40x, or 60x, or moar?

* * *

Kostin’s full “market is now overvalued” note:

We believe S&P 500 currently trades close to fair value and the forward path of the market will depend on the trajectory of profits rather than further expansion of the forward P/E multiple from the current 15.9x. We forecast a modest price gain of roughly 3% to our year-end 2014 target of 1900. We expect S&P 500 will climb to 2100 by the end of 2015 and reach 2200 by the end of 2016 representing a gain of 20% over the next three years.

However, many clients argue that the multiple will continue to expand in 2014 leading to another year of strong US equity returns. A forward multiple of 17x or 18x is often cited, with others suggesting 20x is reasonable given the strengthening US economy and low interest rates. Many on the buy-side have year-end 2014 targets between 2000 and 2200 reflecting a price gain of 9% to 20%, well above our more modest projection.

The current valuation of the S&P 500 is lofty by almost any measure, both for the aggregate market as well as the median stock: (1) The P/E ratio; (2) the current P/E expansion cycle; (3) EV/Sales; (4) EV/EBITDA; (5) Free Cash Flow yield; (6) Price/Book as well as the ROE and P/B relationship; and compared with the levels of (6) inflation; (7) nominal 10-year Treasury yields; and (8) real interest rates. Furthermore, the cyclically-adjusted P/E ratio suggests the S&P 500 is currently 30% overvalued in terms of (9) Operating EPS and (10) about 45% overvalued using As Reported earnings.

Reflecting on our recent client visits and conversations, the biggest surprise is how many investors expect the forward P/E multiple to expand to 17x or 18x. For some reason, many market participants believe the P/E multiple has a long-term average of 15x and therefore expansion to 17-18x seems reasonable. But the common perception is wrong. The forward P/E ratio for the S&P 500 during the past 5-year, 10-year, and 35- year periods has averaged 13.2x, 14.1x, and 13.0x, respectively. At 15.9x, the current aggregate forward P/E multiple is high by historical standards.

Most investors are surprised to learn that since 1976 the S&P 500 P/E multiple has only exceeded 17x during the 1997-2000 Tech Bubble and a brief four-month period in 2003-04 (see Exhibit 1). Other than those two episodes, the US stock market has never traded at a P/E of 17x or above.

A graph of the historical distribution of P/E ratios clearly highlights that outside of the Tech Bubble, the market has only rarely (5% of the time) traded at the current forward multiple of 16x (see Exhibit 2).

The elevated market multiple is even more apparent when viewed on a median basis. At 16.8x, the current multiple is at the high end of its historical distribution (see Exhibit 3).

The multiple expansion cycle provides another lens through which we view equity valuation. There have been nine multiple expansion cycles during the past 30 years. The P/E troughed at a median value of 10.5x and peaked at a median value of 15.0x, an increase of roughly 50%. The current expansion cycle began in September 2011 when the market traded at 10.6x forward EPS and it currently trades at 15.9x, an expansion of 50%. However, during most (7 of the 9) of the cycles the backdrop included falling bond yields and declining inflation. In contrast, bond yields are now increasing and inflation is low but expected to rise.

We addressed equity valuation using the Fed model and interest rate sensitivity in our December 6th US Weekly Kickstart. Simply put, the earnings yield gap between the S&P 500 and ten-year Treasury yields currently equals about 325 bp. Goldman Sachs Economics forecasts bond yields will creep higher to 3.25% by year-end 2014, a rise of just 25 bp. If the earnings yield gap remains unchanged, then the ‘fair value’ multiple according to the Fed model would be 15.2x at year-end 2014. The implied index level would be 1900 assuming our 2015 EPS forecast of $125. However, bond yields could rise by more than we expect and hit 3.75% while the yield gap could narrow to perhaps 275 bp. The resulting EPS yield of 6.5% represents a forward P/E of 15.4x implying a S&P 500 level of 1923. Exhibit 4 of the Dec 6th Kickstart shows valuation using various yields and yield gaps.

Incorporating inflation into our valuation analysis suggests S&P 500 is slightly overvalued. When real interest rates have been in the 1%-2% band, the P/E has averaged 15.0x. Nominal rates of 3%-4% have been associated with P/E multiples averaging 14.2x, nearly two points below today. As noted earlier, S&P 500 is overvalued on both an aggregate and median basis on many classic metrics, including EV/EBITDA, FCF, and P/B (see Exhibits 5-8).

 

* * *

Then again, this is Goldman, where dodecatuple reverse psychology in recos is the norm. If Goldman has just gone bearish, it would logically suggest it is very short and is hoping for a crash. But it could also mean it is hoping its clients panic and dump so collapsing trade volumes finally soar and Goldman makes at least some money on commissions, or is waiting for a plunge in stocks so it can put its massive cash hoard to use, or simply planting the seeds of the next Lehman-like event (now over 5 years later), which would serve as the periodic reset of what once used to be a business cycle? We are sure to find out soon because whatever happens, there will be volatility.


    



via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/Im6w4YMlQ2Y/story01.htm Tyler Durden

Euro and Sterling to New Highs?

Our analysis of the foreign exchange market has emphasized that what many see as the US dollar’s decline has largely limited to the euro and sterling.  On a broader basis, the dollar has been appreciating.  The Bank of England trade weighted measure of the US dollar, which is updated daily, had appreciated almost 4% since testing the year’s low almost three months ago.  In fact, on this metric, it was trading at 6-month highs on the eve of the US jobs report.  

 

The shockingly weak employment report has dealt an important blow to market psychology, even if the immediate price action was a bit exaggerated.   The disappointment over the jobs data was acute because many investors had been moving in the opposite direction.  The 4-handle on Q3 GDP, the upward revisions to Q4 GDP estimates, had convinced many investors that the US growth was accelerating.  With less of fiscal drag, 2014 was going to be a breakout year.  

 

We have argued that the Fed’s forward guidance delivered by Bernanke who will not be there to implement it, and seemingly refusal to provide the new chairman with the opportunity to display her leadership skills, undermines the Fed’s credibility. Yellen appears to have been Obama’s first choice, which appears to have been Summers.  Now Obama is nominating Stanley Fischer, the rock star of central bankers who was the dissertation adviser for both Bernanke and Draghi’s doctorate degrees in economics, as Vice Chairman of the Federal Reserve.  Under such circumstances how can the former #2 get the respect (earn the gravitas) of a #1 ?  

 

On top of that it was the Bernanke Fed that laid out the road map for the exit from QE3+.   The weaker Fed credibility translates into the lack of conviction by investors.  The first significant piece of disappointing data and many questioned whether the Fed’s tapering will continue.  In response to the poor jobs report, the US 10-year yields dropped about 10 bp, the most since the mid-September reaction to the Fed’s decision not to taper.  The 2-year yield had been edging toward the September high near 50 bp, dropped back below 40 bp–levels not seen in a month–and approaching trend line support near 33 bp.  

 

Given this context, we suspect that the dollar will be particularly sensitive to the next string of economic data.  Not all data, but real sector, output and consumption data.  The US reports PPI and CPI figures are the end of next week, but as we have seen the Fed did not let the lower core inflation readings deter the December tapering decision, much to our chagrin. 

 

Next week sees two important real sector reports:  retail sales and industrial output.   The unexpected weakness in US December auto sales will likely translate into a soft retail sales report and the poor weather in December that depressed the employment report may have dampened shopping.  Industrial output may have also been depressed by weather factors, though the frigid temperatures may have boosted utility output.  

 

The bottom line is that investors should be prepared for some less inspiring US data and this may weigh on the dollar.  The euro and sterling appear poised to re-challenge the recent highs around $1.3800 and $1.6600 respectively, even if there is some consolidation at the start of the new week. This is a key area for the euro as the market has tried on three separate occasions to sustain a break of it (the second half of October and mid-and late-December)  On the downside, it probably requires a convincing break of the $1.3550 area to spur ideas that a top is in place.  This area corresponds to the 100-day moving average, a level that the euro has closed below once in the past six months.  The Relative Strength Index has turned up and the MACDs are about to cross higher.  

 

The technical indicators are not as clear for sterling and the UK reported its own disappointing data (industrial and construction output and BRC retail sales), but the weaker US dollar was the dominant theme.  It is also in the middle of what appears to a largely $1.64-$1.66 near-term trading range.   This implies that the euro should out perform sterling in the period ahead.  After hitting a one year low against sterling on the eve of the US jobs report (~GBP0.8230), the euro looks poised to recover toward GBP0.8320-50.  

 

The sharp decline in US yields in response to the jobs report sent the greenback sharply lower against the yen.  It was the biggest dollar decline in about ten weeks.  It finished below the 20-day moving average for the first time in two months.  The risk is that the yen’s strength weighs on the Nikkei, which lost 2.3% last week to be the weakest of the major bourses.  Still, investor psychology is such that a short yen position is among the most favorite trades for 2014.  This means that yen bears are not going to rush for cover and are inclined to sell into yen bounces.  Initial support is seen in front of JPY103.50.  A break of it could spur a move toward JPY102.50.  However, given sentiment, the risk is that yen bounces are less than what technical indicators would suggest.  

 

The dollar-bloc currencies have generally under-performed, but the Canadian dollar has taken the leadership from the Australian dollar.   Given the large short speculative Canadian dollar position, second only to the Japanese yen in the futures market, we suspect the first sign of flagging momentum could spur a bout of short covering. The first indication may be if the US dollar falls below its previous day’s low, which has not taken place for the last six consecutive sessions.

 

Short covering seems to be already taking place in the Australian dollar, where the technical indicators, like RSI, MACD and the crossing of the 5-day average above the 20-day average.  The Ausssie gained a little more than 0.5% against the US dollar last week, for the second consecutive weekly advance, which has not been done in three months.    A move now above the $0.9000-$0.9030 area could spur a further short squeeze toward $0.9100 before the bears make another stand.

 

The US dollar ran out of steam near MXN13.20, the upper end of the trading range.  One might have thought that the weakness in the US and Canadian jobs data may have had a negative knock-on effect on the Mexican peso.  Instead, the peso rallied alongside most of emerging market currencies, helped by the drop in US Treasury yields.  The lower end of the dollar’s range comes in near MXN12.80.  Look for this area to be approach in the days ahead, but at this juncture, a break of it does not seem particularly likely.

 

Observations from the speculative positioning in the CME currency futures:

 

1.  The main feature of the Commitment of Traders report in the week through January 7 was a reduction of exposures.  We track the gross positions (long and short) of seven currency futures, making for 14 in all.  In the latest reporting period, 10 of the 14 fell.  The Canadian dollar account for half of the remainder as both longs and shorts grew fractionally (2.3k and 4.9k contracts respectively).  The other two were short euros (+2.3k contracts) and long pesos (+0.6k contracts).

 

2.  Position adjustment were general minor.  Ten of the 15 gross positions changed by less than 5k contracts.  There was only one change, long euros, that was more than 10k contracts (-13.8k).

 

3.  The net long euro position was halved in the last reporting period, falling from 30.6k contracts to 14.5k.  There has been a slow, but significant, adjustment to the speculative euro positioning.  In late October, the gross long euro position was near 140k contracts.  Now it stands at 88.1k contacts.  Shorts have grown, but more slowly.  In late October, there were around 60k short euro contracts.  Now there are almost 74k.  This translates into a drop in the net long position from over 70k contracts to 14.5k now.    Still the gross euro longs are the largest among the currency futures.  The gross euro shorts are the third largest, behind the Japanese yen and Canadian dollar and just ahead of the Australian dollar.

 

4.  The net short yen position of 129k contracts is the smallest since late November.  Given the yen’s rally following the poor US jobs data, the bout of profit-taking was inspired.   The price action probably saw more the 140k gross short contracts cover.

 

5.  Speculators have been aggressively building a short Canadian dollar position.  At 91k contracts, it is more than 2.5 times larger that it was in late November.  The slide in recent days, encouraged by poor data and new speculation of a rate cut, has carried the Canadian dollar to new multi-year lows.


    



via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/M8wKRhqf9gc/story01.htm Marc To Market

US Issues Terrorism Warning For Winter Olympics

Following the suicide bombings and the discovery of numerous explosive devices near Sochi – the site of the Winter Olympics – the US state department warned Americans of the potential for terrorism. As Reuters reports, in a ‘travel warning’ that the Olympics presented “an attractive target for terrorists,” the department urged Americans to be vigilant about personal security at the Games, and flagged the possibility of petty crime, inadequate medical care and hotel shortages. Somewhat oddly, the state department also used the warning to highlight the fact that a Russian law, much criticized by rights groups,
that would make it a crime to publicly promote the equality of gay,
lesbian, bisexual and transgender people.

 

Via Reuters,

…

 

In a “travel warning,” the department urged Americans to be vigilant about personal security at the February 7 to March 14 Olympic Games, and flagged the possibility of petty crime, inadequate medical care and hotel shortages.

 

…

 

“Large-scale public events such as the Olympics present an attractive target for terrorists,” the State Department wrote in the travel warning, saying that Russian authorities have said they are taking appropriate security measures.

 

However, the department noted what it described as “acts of terrorism” in Russia during the final three months of last year, including three suicide bombings that targeted public transportation in city of Volgograd, 600 miles from Sochi.

 

“There is no indication of a specific threat to U.S. institutions or citizens, but U.S. citizens should be aware of their personal surroundings and follow good security practices,” it said.

 

The warning also highlighted the danger of petty crime and the possibility that political demonstrations – which the Olympic charter bars at the site of the Games, but which Russian authorities say may take place seven miles from Sochi in the village of Khost – could unexpectedly turn violent.

In addition to the threat of terrorism, the US state department saw fit to remind travelers of Russia’s anti-gay actions…

It also highlighted a Russian law, much criticized by rights groups, that would make it a crime to publicly promote the equality of gay, lesbian, bisexual and transgender people.

 

It also noted that Russia’s State Duma lower house of parliament passed a law in June banning the “propaganda of nontraditional sexual relations” to minors which, in the U.S. government’s view, applies to Russian citizens and foreigners.

 

“Russian citizens found guilty of violating the law could face a fine of up to 100,000 rubles ($3,100). Foreign citizens face similar fines, up to 14 days in jail, and deportation,” it said.

We are sure Putin will be cock-a-hoop at this release after spending more than China did on the Summer Olympics to highlight his nation’s appeal…


    



via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/jrOWN0imiF8/story01.htm Tyler Durden

Humana Warns Of “Adverse Obamacare Enrollment Mix”

Submitted by Michael Krieger of Liberty Blitzkrieg blog,

Thought the incredibly unpopular Obamacare health plan (the most epic disaster story was the woman who was touted as a success and then later kicked off her plan) had put most of its problems behind it? Think again. Yesterday, after the stock market close, health insurer Humana warned that the “risk mix” of those who have signed up for the program will be “more adverse than previously expected.”

In plain english what this means is that only old and sick people are signing up, while younger generations with piles of student debt, a couch in their parents’ basements and no jobs decide to ride things out uninsured.

Honestly, I can’t blame them, as I just received my own 12% rate hike the other day. Happy New Year to you too Barry.

From Investor’s Business Daily:

Humana said the “risk mix” of its ObamaCare exchange members will be “more adverse than previously expected,” the latest evidence that the health reform is attracting older, sicker Americans than originally projected.

 

The health insurer, in an SEC filing late Thursday, cited the Obama administration’s 11th hour decision to let people stay on plans that had been cancelled due to ObamaCare regulations. The White House was reacting to political anger of President Obama’s “if you like your plan, you can keep it” vow.

 

Humana made no mention of the administration’s late December decision to let people with cancelled plans avoid the individual mandate tax penalty in 2014. Those who choose to forgo insurance presumably will be younger and healthier.

 

The White House has refused to give any information regarding the age or health status of people signing up on the federal healthcare.gov site. Data from some state-run exchanges have suggested fewer “young invincibles” are signing up.

 

The ObamaCare exchanges need young, healthy people to make up a significant share of enrollees. If not, the plans may be more costly for insurers, potentially creating a premium rate death spiral. But the Obama administration plans to use “risk-corridor” and “risk-adjustment” payments to offset much of insurance companies’ unexpectedly high costs. Such taxpayer bailouts may keep insurers from hiking premiums in 2015 or simply bowing out of the exchanges.

“Premium rate death death spiral.” Call me crazy, but I’m not itching to find out what that means…

Full article here.


    



via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/EiIAu4q134A/story01.htm Tyler Durden

Humana Warns Of "Adverse Obamacare Enrollment Mix"

Submitted by Michael Krieger of Liberty Blitzkrieg blog,

Thought the incredibly unpopular Obamacare health plan (the most epic disaster story was the woman who was touted as a success and then later kicked off her plan) had put most of its problems behind it? Think again. Yesterday, after the stock market close, health insurer Humana warned that the “risk mix” of those who have signed up for the program will be “more adverse than previously expected.”

In plain english what this means is that only old and sick people are signing up, while younger generations with piles of student debt, a couch in their parents’ basements and no jobs decide to ride things out uninsured.

Honestly, I can’t blame them, as I just received my own 12% rate hike the other day. Happy New Year to you too Barry.

From Investor’s Business Daily:

Humana said the “risk mix” of its ObamaCare exchange members will be “more adverse than previously expected,” the latest evidence that the health reform is attracting older, sicker Americans than originally projected.

 

The health insurer, in an SEC filing late Thursday, cited the Obama administration’s 11th hour decision to let people stay on plans that had been cancelled due to ObamaCare regulations. The White House was reacting to political anger of President Obama’s “if you like your plan, you can keep it” vow.

 

Humana made no mention of the administration’s late December decision to let people with cancelled plans avoid the individual mandate tax penalty in 2014. Those who choose to forgo insurance presumably will be younger and healthier.

 

The White House has refused to give any information regarding the age or health status of people signing up on the federal healthcare.gov site. Data from some state-run exchanges have suggested fewer “young invincibles” are signing up.

 

The ObamaCare exchanges need young, healthy people to make up a significant share of enrollees. If not, the plans may be more costly for insurers, potentially creating a premium rate death spiral. But the Obama administration plans to use “risk-corridor” and “risk-adjustment” payments to offset much of insurance companies’ unexpectedly high costs. Such taxpayer bailouts may keep insurers from hiking premiums in 2015 or simply bowing out of the exchanges.

“Premium rate death death spiral.” Call me crazy, but I’m not itching to find out what that means…

Full article here.


    



via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/EiIAu4q134A/story01.htm Tyler Durden

5 Stocks Due For A Pullback In 2014

By EconMatters


Beware of Bubbles & Market Valuations in QE Sloshfest


There have been several reports of money managers returning funds to investors because of a lack of attractively valued investment opportunities in the markets. This is actually very responsible and quite prudent from a fiduciary standpoint where most fund managers are so concerned about raising assets under management that they sacrifice the fund`s long term viability by investing at inopportune times, i.e., investing in assets at historically rich prices relative to the underlying fundamentals of the business. 

QE has definitely distorted many asset prices to the upside, and with it finally ending this summer, fund managers are weary of buying at these levels without a guaranteed catalyst to replace the Fed`s monthly liquidity injections, and the global economy will really need to be humming along to replace $85 Billion of Fed injections via asset purchases.

 

Thus, the takeaway is that many assets are overvalued when it comes to stock prices but we will focus on 5 candidates that we think are going to have a tougher time justifying their lofty stock prices due to a myriad of factors other than the taking away of the QE punchbowl.

 


We will start with Twitter, Inc. (TWTR) which opened its IPO around $45 a share, traded between $40 and $45 a share for several weeks and then took off with the Santa Claus December Annual Rally to $73 a share. It is currently trading around $69 a share.

 

All the valuation metrics are going to look bad with this stock from EPS to Operating Margin and EBITDA, as the story for Twitter will be one of a growth stock so none of these valuations matter in the short term. This is the bullish case for the stock, and it makes for a great investment theme if you can sell the story that normal valuation metrics don`t matter, it creates the environment that many a momentum stock feeds off of from a frenzy standpoint.

 

However, the first and second earning`s reports for Twitter in 2014 are going to bring home the reality to investors that there is a difference between a great product used by the media and various celebrities for marketing purposes, and a revenue generating model that justifies a $38 Billion Market Cap.

 

 

The next bearish catalyst is the ending of the Lock-up Period, and as these probation periods from selling shares on the market expire, expect a lot more shares being added to the trading float trying to capitalize on the current lofty stock price in an overall bull market to secure their Payday for these initial investors in the company a la Facebook.

 

Once key technical support levels break and automated selling programs kick in this just adds more downside fuel to the fire as investors get nervous and reevaluate their “Greed Factor” and some large initial investors who were originally thinking in terms of holding out for becoming Billionaires, start to reevaluate and settle for becoming Multi-Millionaires, thus dumping additional shares onto an already saturated market.

 

Just like in Facebook, Inc. (FB) once the earning`s reality and the share unlocking takes place the Twitter stock will enter a defined downtrend, let the stock find a bottom before venturing to enter from the long side for what may provide a value proposition at some price.

 

But time will tell exactly what price constitutes value in this name, so investors will have to continually monitor earning`s results, the overall space that Twitter operates in, along with both the overall market and global economy.

 

But one thing is sure Twitter with a current Market Cap of $38 Billion, with it not actually being a profitable company by many financial metrics, is quite an expensive stock and due for a price realignment with a healthy dose of market reality reinforced by actual earning`s results in 2014.

 

Amazon


Amazon.com Inc. (AMZN) is the next candidate ripe for a pullback in 2014, it has had a nice run the last five years and the actual trading float is really small as much of the available float is in the hands of long term investors in the company.

 

However, with QE Infinity finally looking to come to an end which has definitely benefited this stock as much as any over the last five years, these long term investors may finally start locking in these gains and secure this wealth by diversifying into more capital preservation type investments.

Especially since Amazon has gotten a relative pass on earnings over the last five years due to growing the company and gaining market share, at some point the company has to start producing larger profits than 0.28 earnings per share to justify a 1400 P/E ratio.

 

 

Our thesis on the stock is that Amazon finally starts to get punished for poor earnings in 2014 and in combination with the lofty stock appreciation over the last five years buttressed by a multitude of QE initiatives that capital gains finally get locked in at these levels in the stock.

 

Similarly to how the major Apple run to $700 a share ended very abruptly with a six month and $300 haircut in the stock, once the downturn in investor sentiment occurs, and the downtrend gains speed, losses become self-fulfilling for investors, leading to additional selling, and given how far this stock has come in recent years there is no real support until the $240 a share level.

 

Consequently if the downtrend takes hold in 2014 the pullback could be quite severe for investors trying to hold through the weakness in the stock. Sort of like David Einhorn and Greenlight Capital`s approach to their Apple position, they would have been much better off by selling at $700 a share, and buying back in after the collapse at around $400 a share.

 

Amazon is a good company with a bright future, but from a valuation standpoint it is due for a major pullback in 2014. Any investors already in the name need to take profits ASAP, and new investors should avoid trying to pick a bottom too soon, Amazon has a lot of hot air in its stock price, and once the key technical levels of support fail, look out below!

 

Tesla


Tesla Motors, Inc. (TSLA) is our third stock candidate setting up investors for a sour 2014 campaign. The stock is the ebullient highs of around $195 a share, trading currently around the $150 a share level and we expect the stock to fall below the $100 a share level some time in 2014; whether that area represents a good buying opportunity for investors is an entirely different matter.

 

But some of the headwinds for 2014 are going to be stiff earning`s comps for 2013 where environmental credits made earnings look a whole lot better than they actually were given the lofty stock price. With the dismal automobile numbers for December being recently released it appears that many people who needed to upgrade their vehicles have already done so in 2013, and this was one of our concerns with GM as a possible headwind. Furthermore, given Ford`s downbeat profit forecast in 2014, December`s automobile numbers, and the rise in interest rates 2014 seems to be setting up for disappointment in the automakers, and yes that includes the electric car manufacturers as well.

 

 

We also think 2014 is finally the year that oil prices retreat with more supply coming on line than a slightly improving economy can utilize from a demand perspective that gasoline prices stay low relative to the peaks of the last four years, thus further dis-incentivizing the electric over fossil fuel economic switch by consumers. With the US Domestic oil resurgence, North American increased output and Iraq, Libya, and Iran all producing more oil globally in 2014 we expect oil to be under considerable price pressure which ultimately reflects itself in downward pressure on alternative energy plays like TSLA.

 

Finally there is just the valuation of the stock, it can even be a great company with a long term bright future eventually, but the actual quarterly and annual automobiles that Tesla produces just doesn’t equate with a $19 Billion Market Cap with negative Earnings per Share, negative Operating Margin, negative Net Income and negative EBITDA. Plain and simple the stock is vastly over valued at current levels of automobile production based on company costs versus profits from an investment standpoint. Investors should not even begin to look at Tesla Motors, Inc. from a long standpoint until it drops below $100 a share.

 

Priceline


The fourth candidate due for a pullback in 2014 is priceline.com Incorporated (PCLN) which has had quite a run, more than doubling in 2013 alone, you think there isn`t a lot of liquidity out there in markets!

 

Priceline started 2013 at around $650 a share and reached a high of close to 1,200 a share in the fourth quarter before retreating to trading currently at the 1,130 level. You think some investors might want to take some profits in this name? You better believe it, the stock already looks to be rolling over and this stock is going to ramp up speed on the downtrend. It is a no brainer that Priceline falls below $950 a share in 2014; it is just a matter of how fast!

 

The price to the upside was fueled by the small float, low daily active trading volume, and lofty price so momentum to the long side just sort of snowballed, self-reinforcing the stock to excessive margin expansion in 2013.

 

 

With a $60 Billion Market Cap, and Gross Margin of 0.83 with Operating Margin of 0.36 and a P/E of 32.68 Priceline is one of the ‘uber-pricey’ names in the investing world and vastly over-valued when compared to solid companies like Apple Inc. (AAPL) with a P/E of 13.61 and Exxon Mobil Corporation (XOM) with a P/E of 13.00.

 

And arguments can be made for both of these solid companies to pullback in 2014 once stocks readjust to life without the Federal Reserve pumping $85 Billion worth of liquidity in the financial markets each month, i.e., Exxon Mobil Corporation is right at all-time highs for a company that has been around long enough for my grandfather to have invested in it!

 

This does not bode well for Priceline investors; get out while you still can because the drop is going to be brutal in this name for 2014. Moreover, investors in this stock, who have any historical reference, will remember the magnitude of the crash that this stock has undertaken in the past once the selling begins in earnest. For investors unfamiliar with the potential declines in this stock check the 1999 – 2000 time period charts.

 

I point this out to any bottom pickers, just stay away from this stock in 2014 the downside risk is too great for any potential upside gains, there is so much liquidity air in Priceline that there are going to be absolutely gut wrenching down days in 2014.

 

Netflix


The final stock due for a pullback in 2014 is Netflix, Inc. (NFLX) which is a great company, and has done wonders for the space, but valuations are just too rich considering the actual fundamentals of the business.

 

We have been Netflix, Inc. subscribers for years, and although we keep the product we recognize the limitations of limited selection choices compared to other online outlets, outdated series to binge upon, and more interesting live opportunities with competitive media viewing choices. My online media viewing world would be much more negatively affected if I suddenly lost YouTube access as opposed to our Netflix, Inc. subscription.

 

 

However, the real issue with Netflix is the valuation of the stock, and how much good news is already priced in the stock. Netflix received a great lift in 2013 when the original programming of House of Cards really boosted the stock, but the problem is that with binge viewing and no commercials, it only takes a weekend to knock out an entire season, and then the rest of the year is spent searching for decent content to watch. It still takes forever for the latest releases to actually hit Netflix streaming!

 

The stock more than tripled in 2013, going from around $100 a share to a high of $389 a share. The stock is currently trading at $363 a share with a Market Cap of $21 Billion, Earnings per Share of1.20, and a P/E of 303.85. Netflix is not a cheap investment, and frankly with the ever-changing landscape of online media who knows if the company will even exist in five years!

 

The problem is that with momentum stocks like Netflix, once a downside catalyst emerges, the bloom comes off the rose real quick as investors bail at record pace and all seemingly at the same time. Just look what happened to the stock when Reed Hastings raised subscriptions fees and made customers angry in the process, it went from $300 a share to $55 a share rather quickly.

 

It is no secret from an operational standpoint that Netflix is going to have to raise subscription revenue from existing customers, and at what price do customers just drop the service? We have it and frankly we can take it or leave it: the service offerings versus other viewing alternatives are probably below average even among free viewing options, and we are in the higher income bracket.

The point is that Netflix is spending a lot of money to offer what little quality content they have right now, and they will need to spend more to keep up with consumer`s demands, and from an operational standpoint does the financial math even add up – is this a “destined broke” business model long-term? Can they ever bring in enough subscription revenue to balance out the soaring content costs and escalating requirements for additional new content and not alienate their customer base in the process?

 

This is my real concern for the stock long-term aside from the 2014 valuation concerns. We don`t think the risk versus reward justifies any long position in the stock at these current price levels, and we expect a rather precipitous drop for the stock sometime during 2014.

 

If I had to bet on a catalyst it probably comes down to a series of relatively disappointing earnings reports in the wake of an increased volatility period inspired by lack of QE Liquidity in the market. Moreover, expect the drop to be significant, we expect at least a $100 a share price drop from current levels in the stock for 2014.

 

Final Thoughts


So now you have our five stock candidates ripe for a pullback in 2014. Be careful with these investment vehicles when trying to pick a bottom, just as they rose to tremendous heights with seemingly little effort, remember that margin debt has been at record levels for 2013, QE Infinity is finally being wound down, and interest rates are rising on cheap money both from a stock buybacks perspective, and an overall borrowing standpoint for the investing universe.

 

In short, these names can fall farther than investors ever think once the downside momentum kicks in, with existing buyers selling, newly added shorts coming to the table, and losses begetting additional losses. In the modern era of investing, market timing is just as important as picking the right companies to invest in, and 2014 will not be a good year for investors in these five companies.

 

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5 Stocks Due For A Pullback In 2014

By EconMatters


Beware of Bubbles & Market Valuations in QE Sloshfest


There have been several reports of money managers returning funds to investors because of a lack of attractively valued investment opportunities in the markets. This is actually very responsible and quite prudent from a fiduciary standpoint where most fund managers are so concerned about raising assets under management that they sacrifice the fund`s long term viability by investing at inopportune times, i.e., investing in assets at historically rich prices relative to the underlying fundamentals of the business. 

QE has definitely distorted many asset prices to the upside, and with it finally ending this summer, fund managers are weary of buying at these levels without a guaranteed catalyst to replace the Fed`s monthly liquidity injections, and the global economy will really need to be humming along to replace $85 Billion of Fed injections via asset purchases.

 

Thus, the takeaway is that many assets are overvalued when it comes to stock prices but we will focus on 5 candidates that we think are going to have a tougher time justifying their lofty stock prices due to a myriad of factors other than the taking away of the QE punchbowl.

 


We will start with Twitter, Inc. (TWTR) which opened its IPO around $45 a share, traded between $40 and $45 a share for several weeks and then took off with the Santa Claus December Annual Rally to $73 a share. It is currently trading around $69 a share.

 

All the valuation metrics are going to look bad with this stock from EPS to Operating Margin and EBITDA, as the story for Twitter will be one of a growth stock so none of these valuations matter in the short term. This is the bullish case for the stock, and it makes for a great investment theme if you can sell the story that normal valuation metrics don`t matter, it creates the environment that many a momentum stock feeds off of from a frenzy standpoint.

 

However, the first and second earning`s reports for Twitter in 2014 are going to bring home the reality to investors that there is a difference between a great product used by the media and various celebrities for marketing purposes, and a revenue generating model that justifies a $38 Billion Market Cap.

 

 

The next bearish catalyst is the ending of the Lock-up Period, and as these probation periods from selling shares on the market expire, expect a lot more shares being added to the trading float trying to capitalize on the current lofty stock price in an overall bull market to secure their Payday for these initial investors in the company a la Facebook.

 

Once key technical support levels break and automated selling programs kick in this just adds more downside fuel to the fire as investors get nervous and reevaluate their “Greed Factor” and some large initial investors who were originally thinking in terms of holding out for becoming Billionaires, start to reevaluate and settle for becoming Multi-Millionaires, thus dumping additional shares onto an already saturated market.

 

Just like in Facebook, Inc. (FB) once the earning`s reality and the share unlocking takes place the Twitter stock will enter a defined downtrend, let the stock find a bottom before venturing to enter from the long side for what may provide a value proposition at some price.

 

But time will tell exactly what price constitutes value in this name, so investors will have to continually monitor earning`s results, the overall space that Twitter operates in, along with both the overall market and global economy.

 

But one thing is sure Twitter with a current Market Cap of $38 Billion, with it not actually being a profitable company by many financial metrics, is quite an expensive stock and due for a price realignment with a healthy dose of market reality reinforced by actual earning`s results in 2014.

 

Amazon


Amazon.com Inc. (AMZN) is the next candidate ripe for a pullback in 2014, it has had a nice run the last five years and the actual trading float is really small as much of the available float is in the hands of long term investors in the company.

 

However, with QE Infinity finally looking to come to an end which has definitely benefited this stock as much as any over the last five years, these long term investors may finally start locking in these gains and secure this wealth by diversifying into more capital preservation type investments.

Especially since Amazon has gotten a relative pass on earnings over the last five years due to growing the company and gaining market share, at some point the company has to start producing larger profits than 0.28 earnings per share to justify a 1400 P/E ratio.

 

 

Our thesis on the stock is that Amazon finally starts to get punished for poor earnings in 2014 and in combination with the lofty stock appreciation over the last five years buttressed by a multitude of QE initiatives that capital gains finally get locked in at these levels in the stock.

 

Similarly to how the major Apple run to $700 a share ended very abruptly with a six month and $300 haircut in the stock, once the downturn in investor sentiment occurs, and the downtrend gains speed, losses become self-fulfilling for investors, leading to additional selling, and given how far this stock has come in recent years there is no real support until the $240 a share level.

 

Consequently if the downtrend takes hold in 2014 the pullback could be quite severe for investors trying to hold through the weakness in the stock. Sort of like David Einhorn and Greenlight Capital`s approach to their Apple position, they would have been much better off by selling at $700 a share, and buying back in after the collapse at around $400 a share.

 

Amazon is a good company with a bright future, but from a valuation standpoint it is due for a major pullback in 2014. Any investors already in the name need to take profits ASAP, and new investors should avoid trying to pick a bottom too soon, Amazon has a lot of hot air in its stock price, and once the key technical levels of support fail, look out below!

 

Tesla


Tesla Motors, Inc. (TSLA) is our third stock candidate setting up investors for a sour 2014 campaign. The stock is the ebullient highs of around $195 a share, trading currently around the $150 a share level and we expect the stock to fall below the $100 a share level some time in 2014; whether that area represents a good buying opportunity for investors is an entirely different matter.

 

But some of the headwinds for 2014 are going to be stiff earning`s comps for 2013 where environmental credits made earnings look a whole lot better than they actually were given the lofty stock price. With the dismal automobile numbers for December being recently released it appears that many people who needed to upgrade their vehicles have already done so in 2013, and this was one of our concerns with GM as a possible headwind. Furthermore, given Ford`s downbeat profit forecast in 2014, December`s automobile numbers, and the rise in interest rates 2014 seems to be setting up for disappointment in the automakers, and yes that includes the electric car manufacturers as well.

 

 

We also think 2014 is finally the year that oil prices retreat with more supply coming on line than a slightly improving economy can utilize from a demand perspective that gasoline prices stay low relative to the peaks of the last four years, thus further dis-incentivizing the electric over fossil fuel economic switch by consumers. With the US Domestic oil resurgence, North American increased output and Iraq, Libya, and Iran all producing more oil globally in 2014 we expect oil to be under considerable price pressure which ultimately reflects itself in downward pressure on alternative energy plays like TSLA.

 

Finally there is just the valuation of the stock, it can even be a great company with a long term bright future eventually, but the actual quarterly and annual automobiles that Tesla produces just doesn’t equate with a $19 Billion Market Cap with negative Earnings per Share, negative Operating Margin, negative Net Income and negative EBITDA. Plain and simple the stock is vastly over valued at current levels of automobile production based on company costs versus profits from an investment standpoint. Investors should not even begin to look at Tesla Motors, Inc. from a long standpoint until it drops below $100 a share.

 

Priceline


The fourth candidate due for a pullback in 2014 is priceline.com Incorporated (PCLN) which has had quite a run, more than doubling in 2013 alone, you think there isn`t a lot of liquidity out there in markets!

 

Priceline started 2013 at around $650 a share and reached a high of close to 1,200 a share in the fourth quarter before retreating to trading currently at the 1,130 level. You think some investors might want to take some profits in this name? You better believe it, the stock already looks to be rolling over and this stock is going to ramp up speed on the downtrend. It is a no brainer that Priceline falls below $950 a share in 2014; it is just a matter of how fast!

 

The price to the upside was fueled by the small float, low daily active trading volume, and lofty price so momentum to the long side just sort of snowballed, self-reinforcing the stock to excessive margin expansion in 2013.

 

 

With a $60 Billion Market Cap, and Gross Margin of 0.83 with Operating Margin of 0.36 and a P/E of 32.68 Priceline is one of the ‘uber-pricey’ names in the investing world and vastly over-valued when compared to solid companies like Apple Inc. (AAPL) with a P/E of 13.61 and Exxon Mobil Corporation (XOM) with a P/E of 13.00.

 

And arguments can be made for both of these solid companies to pullback in 2014 once stocks readjust to life without the Federal Reserve pumping $85 Billion worth of liquidity in the financial markets each month, i.e., Exxon Mobil Corporation is right at all-time highs for a company that has been around long enough for my grandfather to have invested in it!

 

This does not bode well for Priceline investors; get out while you still can because the drop is going to be brutal in this name for 2014. Moreover, investors in this stock, who have any historical reference, will remember the magnitude of the crash that this stock has undertaken in the past once the selling begins in earnest. For investors unfamiliar with the potential declines in this stock check the 1999 – 2000 time period charts.

 

I point this out to any bottom pickers, just stay away from this stock in 2014 the downside risk is too great for any potential upside gains, there is so much liquidity air in Priceline that there are going to be absolutely gut wrenching down days in 2014.

 

Netflix


The final stock due for a pullback in 2014 is Netflix, Inc. (NFLX) which is a great company, and has done wonders for the space, but valuations are just too rich considering the actual fundamentals of the business.

 

We have been Netflix, Inc. subscribers for years, and although we keep the product we recognize the limitations of limited selection choices compared to other online outlets, outdated series to binge upon, and more interesting live opportunities with competitive media viewing choices. My online media viewing world would be much more negatively affected if I suddenly lost YouTube access as opposed to our Netflix, Inc. subscription.

 

 

However, the real issue with Netflix is the valuation of the stock, and how much good news is already priced in the stock. Netflix received a great lift in 2013 when the original programming of House of Cards really boosted the stock, but the problem is that with binge viewing and no commercials, it only takes a weekend to knock out an entire season, and then the rest of the year is spent searching for decent content to watch. It still takes forever for the latest releases to actually hit Netflix streaming!

 

The stock more than tripled in 2013, going from around $100 a share to a high of $389 a share. The stock is currently trading at $363 a share with a Market Cap of $21 Billion, Earnings per Share of1.20, and a P/E of 303.85. Netflix is not a cheap investment, and frankly with the ever-changing landscape of online media who knows if the company will even exist in five years!

 

The problem is that with momentum stocks like Netflix, once a downside catalyst emerges, the bloom comes off the rose real quick as investors bail at record pace and all seemingly at the same time. Just look what happened to the stock when Reed Hastings raised subscriptions fees and made customers angry in the process, it went from $300 a share to $55 a share rather quickly.

 

It is no secret from an operational standpoint that Netflix is going to have to raise subscription revenue from existing customers, and at what price do customers just drop the service? We have it and frankly we can take it or leave it: the service offerings versus other viewing alternatives are probably below average even among free viewing options, and we are in the higher income bracket.

The point is that Netflix is spending a lot of money to offer what little quality content they have right now, and they will need to spend more to keep up with consumer`s demands, and from an operational standpoint does the financial math even add up – is this a “destined broke” business model long-term? Can they ever bring in enough subscription revenue to balance out the soaring content costs and escalating requirements for additional new content and not alienate their customer base in the process?

 

This is my real concern for the stock long-term aside from the 2014 valuation concerns. We don`t think the risk versus reward justifies any long position in the stock at these current price levels, and we expect a rather precipitous drop for the stock sometime during 2014.

 

If I had to bet on a catalyst it probably comes down to a series of relatively disappointing earnings reports in the wake of an increased volatility period inspired by lack of QE Liquidity in the market. Moreover, expect the drop to be significant, we expect at least a $100 a share price drop from current levels in the stock for 2014.

 

Final Thoughts


So now you have our five stock candidates ripe for a pullback in 2014. Be careful with these investment vehicles when trying to pick a bottom, just as they rose to tremendous heights with seemingly little effort, remember that margin debt has been at record levels for 2013, QE Infinity is finally being wound down, and interest rates are rising on cheap money both from a stock buybacks perspective, and an overall borrowing standpoint for the investing universe.

 

In short, these names can fall farther than investors ever think once the downside momentum kicks in, with existing buyers selling, newly added shorts coming to the table, and losses begetting additional losses. In the modern era of investing, market timing is just as important as picking the right companies to invest in, and 2014 will not be a good year for investors in these five companies.

 

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5 Stocks Due For A Pullback In 2014

By EconMatters


Beware of Bubbles & Market Valuations in QE Sloshfest


There have been several reports of money managers returning funds to investors because of a lack of attractively valued investment opportunities in the markets. This is actually very responsible and quite prudent from a fiduciary standpoint where most fund managers are so concerned about raising assets under management that they sacrifice the fund`s long term viability by investing at inopportune times, i.e., investing in assets at historically rich prices relative to the underlying fundamentals of the business. 

QE has definitely distorted many asset prices to the upside, and with it finally ending this summer, fund managers are weary of buying at these levels without a guaranteed catalyst to replace the Fed`s monthly liquidity injections, and the global economy will really need to be humming along to replace $85 Billion of Fed injections via asset purchases.

 

Thus, the takeaway is that many assets are overvalued when it comes to stock prices but we will focus on 5 candidates that we think are going to have a tougher time justifying their lofty stock prices due to a myriad of factors other than the taking away of the QE punchbowl.

 


We will start with Twitter, Inc. (TWTR) which opened its IPO around $45 a share, traded between $40 and $45 a share for several weeks and then took off with the Santa Claus December Annual Rally to $73 a share. It is currently trading around $69 a share.

 

All the valuation metrics are going to look bad with this stock from EPS to Operating Margin and EBITDA, as the story for Twitter will be one of a growth stock so none of these valuations matter in the short term. This is the bullish case for the stock, and it makes for a great investment theme if you can sell the story that normal valuation metrics don`t matter, it creates the environment that many a momentum stock feeds off of from a frenzy standpoint.

 

However, the first and second earning`s reports for Twitter in 2014 are going to bring home the reality to investors that there is a difference between a great product used by the media and various celebrities for marketing purposes, and a revenue generating model that justifies a $38 Billion Market Cap.

 

 

The next bearish catalyst is the ending of the Lock-up Period, and as these probation periods from selling shares on the market expire, expect a lot more shares being added to the trading float trying to capitalize on the current lofty stock price in an overall bull market to secure their Payday for these initial investors in the company a la Facebook.

 

Once key technical support levels break and automated selling programs kick in this just adds more downside fuel to the fire as investors get nervous and reevaluate their “Greed Factor” and some large initial investors who were originally thinking in terms of holding out for becoming Billionaires, start to reevaluate and settle for becoming Multi-Millionaires, thus dumping additional shares onto an already saturated market.

 

Just like in Facebook, Inc. (FB) once the earning`s reality and the share unlocking takes place the Twitter stock will enter a defined downtrend, let the stock find a bottom before venturing to enter from the long side for what may provide a value proposition at some price.

 

But time will tell exactly what price constitutes value in this name, so investors will have to continually monitor earning`s results, the overall space that Twitter operates in, along with both the overall market and global economy.

 

But one thing is sure Twitter with a current Market Cap of $38 Billion, with it not actually being a profitable company by many financial metrics, is quite an expensive stock and due for a price realignment with a healthy dose of market reality reinforced by actual earning`s results in 2014.

 

Amazon


Amazon.com Inc. (AMZN) is the next candidate ripe for a pullback in 2014, it has had a nice run the last five years and the actual trading float is really small as much of the available float is in the hands of long term investors in the company.

 

However, with QE Infinity finally looking to come to an end which has definitely benefited this stock as much as any over the last five years, these long term investors may finally start locking in these gains and secure this wealth by diversifying into more capital preservation type investments.

Especially since Amazon has gotten a relative pass on earnings over the last five years due to growing the company and gaining market share, at some point the company has to start producing larger profits than 0.28 earnings per share to justify a 1400 P/E ratio.

 

 

Our thesis on the stock is that Amazon finally starts to get punished for poor earnings in 2014 and in combination with the lofty stock appreciation over the last five years buttressed by a multitude of QE initiatives that capital gains finally get locked in at these levels in the stock.

 

Similarly to how the major Apple run to $700 a share ended very abruptly with a six month and $300 haircut in the stock, once the downturn in investor sentiment occurs, and the downtrend gains speed, losses become self-fulfilling for investors, leading to additional selling, and given how far this stock has come in recent years there is no real support until the $240 a share level.

 

Consequently if the downtrend takes hold in 2014 the pullback could be quite severe for investors trying to hold through the weakness in the stock. Sort of like David Einhorn and Greenlight Capital`s approach to their Apple position, they would have been much better off by selling at $700 a share, and buying back in after the collapse at around $400 a share.

 

Amazon is a good company with a bright future, but from a valuation standpoint it is due for a major pullback in 2014. Any investors already in the name need to take profits ASAP, and new investors should avoid trying to pick a bottom too soon, Amazon has a lot of hot air in its stock price, and once the key technical levels of support fail, look out below!

 

Tesla


Tesla Motors, Inc. (TSLA) is our third stock candidate setting up investors for a sour 2014 campaign. The stock is the ebullient highs of around $195 a share, trading currently around the $150 a share level and we expect the stock to fall below the $100 a share level some time in 2014; whether that area represents a good buying opportunity for investors is an entirely different matter.

 

But some of the headwinds for 2014 are going to be stiff earning`s comps for 2013 where environmental credits made earnings look a whole lot better than they actually were given the lofty stock price. With the dismal automobile numbers for December being recently released it appears that many people who needed to upgrade their vehicles have already done so in 2013, and this was one of our concerns with GM as a possible headwind. Furthermore, given Ford`s downbeat profit forecast in 2014, December`s automobile numbers, and the rise in interest rates 2014 seems to be setting up for disappointment in the automakers, and yes that includes the electric car manufacturers as well.

 

 

We also think 2014 is finally the year that oil prices retreat with more supply coming on line than a slightly improving economy can utilize from a demand perspective that gasoline prices stay low relative to the peaks of the last four years, thus further dis-incentivizing the electric over fossil fuel economic switch by consumers. With the US Domestic oil resurgence, North American increased output and Iraq, Libya, and Iran all producing more oil globally in 2014 we expect oil to be under considerable price pressure which ultimately reflects itself in downward pressure on alternative energy plays like TSLA.

 

Finally there is just the valuation of the stock, it can even be a great company with a long term bright future eventually, but the actual quarterly and annual automobiles that Tesla produces just doesn’t equate with a $19 Billion Market Cap with negative Earnings per Share, negative Operating Margin, negative Net Income and negative EBITDA. Plain and simple the stock is vastly over valued at current levels of automobile production based on company costs versus profits from an investment standpoint. Investors should not even begin to look at Tesla Motors, Inc. from a long standpoint until it drops below $100 a share.

 

Priceline


The fourth candidate due for a pullback in 2014 is priceline.com Incorporated (PCLN) which has had quite a run, more than doubling in 2013 alone, you think there isn`t a lot of liquidity out there in markets!

 

Priceline started 2013 at around $650 a share and reached a high of close to 1,200 a share in the fourth quarter before retreating to trading currently at the 1,130 level. You think some investors might want to take some profits in this name? You better believe it, the stock already looks to be rolling over and this stock is going to ramp up speed on the downtrend. It is a no brainer that Priceline falls below $950 a share in 2014; it is just a matter of how fast!

 

The price to the upside was fueled by the small float, low daily active trading volume, and lofty price so momentum to the long side just sort of snowballed, self-reinforcing the stock to excessive margin expansion in 2013.

 

 

With a $60 Billion Market Cap, and Gross Margin of 0.83 with Operating Margin of 0.36 and a P/E of 32.68 Priceline is one of the ‘uber-pricey’ names in the investing world and vastly over-valued when compared to solid companies like Apple Inc. (AAPL) with a P/E of 13.61 and Exxon Mobil Corporation (XOM) with a P/E of 13.00.

 

And arguments can be made for both of these solid companies to pullback in 2014 once stocks readjust to life without the Federal Reserve pumping $85 Billion worth of liquidity in the financial markets each month, i.e., Exxon Mobil Corporation is right at all-time highs for a company that has been around long enough for my grandfather to have invested in it!

 

This does not bode well for Priceline investors; get out while you still can because the drop is going to be brutal in this name for 2014. Moreover, investors in this stock, who have any historical reference, will remember the magnitude of the crash that this stock has undertaken in the past once the selling begins in earnest. For investors unfamiliar with the potential declines in this stock check the 1999 – 2000 time period charts.

 

I point this out to any bottom pickers, just stay away from this stock in 2014 the downside risk is too great for any potential upside gains, there is so much liquidity air in Priceline that there are going to be absolutely gut wrenching down days in 2014.

 

Netflix


The final stock due for a pullback in 2014 is Netflix, Inc. (NFLX) which is a great company, and has done wonders for the space, but valuations are just too rich considering the actual fundamentals of the business.

 

We have been Netflix, Inc. subscribers for years, and although we keep the product we recognize the limitations of limited selection choices compared to other online outlets, outdated series to binge upon, and more interesting live opportunities with competitive media viewing choices. My online media viewing world would be much more negatively affected if I suddenly lost YouTube access as opposed to our Netflix, Inc. subscription.

 

 

However, the real issue with Netflix is the valuation of the stock, and how much good news is already priced in the stock. Netflix received a great lift in 2013 when the original programming of House of Cards really boosted the stock, but the problem is that with binge viewing and no commercials, it only takes a weekend to knock out an entire season, and then the rest of the year is spent searching for decent content to watch. It still takes forever for the latest releases to actually hit Netflix streaming!

 

The stock more than tripled in 2013, going from around $100 a share to a high of $389 a share. The stock is currently trading at $363 a share with a Market Cap of $21 Billion, Earnings per Share of1.20, and a P/E of 303.85. Netflix is not a cheap investment, and frankly with the ever-changing landscape of online media who knows if the company will even exist in five years!

 

The problem is that with momentum stocks like Netflix, once a downside catalyst emerges, the bloom comes off the rose real quick as investors bail at record pace and all seemingly at the same time. Just look what happened to the stock when Reed Hastings raised subscriptions fees and made customers angry in the process, it went from $300 a share to $55 a share rather quickly.

 

It is no secret from an operational standpoint that Netflix is going to have to raise subscription revenue from existing customers, and at what price do customers just drop the service? We have it and frankly we can take it or leave it: the service offerings versus other viewing alternatives are probably below average even among free viewing options, and we are in the higher income bracket.

The point is that Netflix is spending a lot of money to offer what little quality content they have right now, and they will need to spend more to keep up with consumer`s demands, and from an operational standpoint does the financial math even add up – is this a “destined broke” business model long-term? Can they ever bring in enough subscription revenue to balance out the soaring content costs and escalating requirements for additional new content and not alienate their customer base in the process?

 

This is my real concern for the stock long-term aside from the 2014 valuation concerns. We don`t think the risk versus reward justifies any long position in the stock at these current price levels, and we expect a rather precipitous drop for the stock sometime during 2014.

 

If I had to bet on a catalyst it probably comes down to a series of relatively disappointing earnings reports in the wake of an increased volatility period inspired by lack of QE Liquidity in the market. Moreover, expect the drop to be significant, we expect at least a $100 a share price drop from current levels in the stock for 2014.

 

Final Thoughts


So now you have our five stock candidates ripe for a pullback in 2014. Be careful with these investment vehicles when trying to pick a bottom, just as they rose to tremendous heights with seemingly little effort, remember that margin debt has been at record levels for 2013, QE Infinity is finally being wound down, and interest rates are rising on cheap money both from a stock buybacks perspective, and an overall borrowing standpoint for the investing universe.

 

In short, these names can fall farther than investors ever think once the downside momentum kicks in, with existing buyers selling, newly added shorts coming to the table, and losses begetting additional losses. In the modern era of investing, market timing is just as important as picking the right companies to invest in, and 2014 will not be a good year for investors in these five companies.

 

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Rolling Stone Resurrects Karl Marx (And No – It Was Not Satire)

Submitted by Pater Tenebrarum of Acting-Man blog,

The Problem of Economic Ignorance

The fact that economic ignorance is widespread is really a big problem in our view. Unfortunately even what is broadly considered the economic mainstream thought is riddled with stuff that we think just doesn't represent good economics. This is not meant to say that there is absolutely nothing worthwhile offered by the so-called mainstream. Often one comes across valuable insights and stimulating ideas. Still, there are a number of very fundamental issues on which various schools of economic thought don't agree  – beginning with basic questions of methodology.

Regarding the place economics should have in our lives, Ludwig von Mises once wrote:

“Economics must not be relegated to classrooms and statistical offices and must not be left to esoteric circles. It is the philosophy of human life and action and concerns everybody and everything. It is the pith of civilization and of man's human existence.”

We agree wholeheartedly with this sentiment. There is little harm in leaving astronomy to astronomers and quantum physics to experts in theoretical physics. With economics it is different, because even though it is supposed to be wertfrei (value-free) as a science, economics necessarily has a political dimension, since politics is all about the acquisition and distribution of property by political (as opposed to economic) means. In other words, economic policy is the main topic around which politics revolves.

When Mises wrote the above words, he thought of economics as a more or less unified science, in broad agreement on basic concepts. In a way that is still true, but it is less true than it once was. For instance, to briefly come back to the point about methodology, Mises spent a lot of effort on systematizing the economic method and discussing the epistemological problems of economics. However, while doing so, he never doubted for a moment that it was quite clear to all economists that the science had to proceed by means of deductive reasoning and logic. He probably didn't expect that positivism would eventually conquer economics. As an aside, if one looks closely, one soon realizes that even the most committed positivists and econometricians secretly agree that there actually is such a thing as the laws of economics, and that these laws are not necessarily all derived from empirical observation.

Be that as it may, there is definitely a great deal of economic ignorance out there. Partly it is actually furthered by statist propaganda and obfuscation. For instance, the average citizen is not supposed to question the centrally planned monetary system, and neither is he supposed to actually understand how it works (hence what is actually a pretty straightforward operation has become a fairly complex variation of the Three Card Monte, designed to obfuscate the system's inherently fraudulent nature).

How much ignorance there is regularly becomes evident by things such as e.g. the enduring popularity of protectionism (it is almost as though consumers enjoy harming themselves).

Another glaring example is the still widespread idea that socialism – or rather, communism (i.e., full-scale socialism as opposed to its milder 'democratic' version) – would be 'the best possible system of social and economic organization if only it were implemented correctly', or the variant ' … if only human nature were different and we were morally more advanced than we actually are'.

The main problem with this train of thought is that it is actually completely wrong. When confronting supporters of socialism with the total failure and murderous nature of the communist system in the real world, a common retort is that 'this wasn't real socialism'. In other words, if Lenin, Stalin, Mao and their followers had only implemented everything according to the precepts of Karl Marx, then things would have been perfectly fine, and the communists would have erected a king of land of Cockaigne.

However, not only did they in fact follow the precepts laid down by Marx and Engels, but even if e.g. Stalin had been a veritable angel, the system would still have failed. Socialism is literally impossible as Mises has already proved in 1920. In brief: it is a system in which rational economic calculation becomes impossible, because there are no longer prices for capital goods once private property in the means of production is abolished. A system bereft of economic calculation can no longer allocate scarce resources efficiently. It cannot really be called an economy anymore. It a system that is doomed to break down in short order, and the only reason why it survived as long as it did in the former Eastern Bloc was that the COMECON planners were able to observe the price system in the capitalist countries and so could engage in a rudimentary form of economic calculation. Had the whole world become socialistic, the economy and division of labor would have completely collapsed within a few years and people would have been forced to return to a hand-to-mouth existence, barely able to subsist. Life would once again have become 'nasty, brutish and short'.

 

No, It Was Not Meant to Be a Satire …

In other words, it seems quite important that people really understand why socialism cannot work. After all, bad ideas have a habit of coming back after a while and an example for this has just been delivered via an editorial in the 'Rolling Stone', penned by one Jesse A. Myerson, a former 'Occupy' movement organizer.

At first many people mistakenly thought it was meant to be a satire, but it soon turned out it actually wasn't. On Twitter, Myerson runs the hashtag #FULLCOMMUNISM (anything less than the 'full' version apparently won't do), so there can be no doubt as to his ideological proclivities.

Anyway, in his article, couched in 'hip' language (the word 'blow' or 'blows' is used frequently, as in e.g. 'work blows'), he argues that millennials should make five economic demands, namely:

1. Guaranteed work for everybody, 2. a basic income for everybody (he calls that 'social security', but he actually means that everybody should get a government salary in exchange for – nothing. Being able to fog a mirror is sufficient reason), 3. the expropriation of landowners (it is not 100% clear if he merely argues for a Georgist land tax or full-scale expropriation), 4. the abolition of private property and nationalization of the means of production, and 5. a 'public bank in every state'.

The last demand sounds like he has picked up the ideas of the Greenbackers and associated monetary cranks, who hold that the monetary system could be improved if money printing were left to politicians directly rather than a central bank (for a trenchant critique of Greenbackism, read Gary North, who correctly notes that the ideology is at the root indistinguishable from Hitler's economic program).

So essentially, this leader/hero of the 'Occupy' movement proposes an economic program that is a jumbled mixture of Marxism/Stalinism, Georgism and National Socialism. Whoa!

Luckily not even the readers of Rolling Stone are falling for this stuff, judging from the comments section below the editorial. However, we have once again come across many comments that show that the problem discussed further above continues to persist – i.e., many people still seem convinced that communism would actually work if only it were 'done right'. That this is a fundamental error needs to be pointed out at every opportunity.

Not surprisingly, Myerson has become a target of ridicule all over the media landscape by now. Especially conservative columnists had a field day. However, Myerson of course stands by his nonsense, and attempted to defend it on Twitter and elsewhere. One of the more interesting conversations revolved around the accusation that what he proposed amounted to a defense of the system practiced by the Soviet Union. Since it has clearly failed there, there was really nothing left to discuss. As one might expect, Myerson retorted that of course, the Soviets never implemented his demands. In other words, the leftist trope that the 'communists never really tried communism' was predictably dug up by him. If only they had done so, they would of course have succeeded, so the story goes.

Unfortunately for him, there are a great many fact checkers out and about these days.  One of them proved that not only had every single one of his demands been implemented by the Soviets, but they were actually without exception part of the Soviet constitution. On the Drew Musings blog an article entitled “Advocate For #FULLCOMMUNISM Says Soviet Union Did Not Try #FULLCOMMUNISM” has all the details and quotes from the Soviet Union's constitution. As Drew concludes, the only thing that still needs to be mentioned regarding the communists is that

 

“They did succeed at one thing…killing million upon millions of people in their efforts to remake society and maintain their control. #FULLCOMMUNISM = #MILLIONSDEAD. Always has, always will.”

 

That is not exactly an unimportant detail. Since the expropriation of private property necessarily involves force, it cannot be implemented without killing and imprisoning people. Once the system is established, it must continue to use force to ensure that the new ruling class won't be challenged and that the system remains in place.

 

Conclusion:

It is heartening that so many people, including the readership of the generally leftist Rolling Stone magazine, have vehemently disagreed with Myerson and heaped ridicule on his vile editorial. However, keep in mind that as time passes, the ignominious collapse of the communist system will become an ever more distant memory. In fact, that such an article is published at all is already a sign that this is happening. It is also concerning that the idea that communism would be just fine if only implemented correctly continues to be held by so many people. This is a result of widespread economic ignorance. It is more important to challenge the ideas propagated by Myerson on theoretical grounds than by merely citing historical events. Only if it is widely understood by people that socialism is indeed impossible will the danger posed by the Marxist ideology truly be banned.

 

 

communists

The fathers of the Marxist ideology, Marx and Engels and two important leaders of the Marxist reality, Lenin and Stalin – briefly resurrected by the 'Rolling Stone'. Let us make sure they are interred again.


    



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Are Stocks Cheap?

We have asked (and answered) this question a number of times in recent weeks. Ignoring for a moment the bubble-trajectory, hope-expectations, and investor sentiment, as ex-Morgan Stanley-ite Gerard Minack notes, equity markets in 2013 appeared to completely ignore macro fundamentals. For 2014, as we warned here, the dream of moar multiple expansion may be over. With the Fed desperate to convince the world that strong language is just as effective as 100s of billions of dollars in liquidity provision, we suspect the ‘wedge’ between hope and reality will compress (significantly)…

 

 

 

Even Goldman Sachs is starting to question the sanity of its clients hopes and dreams…

S&P 500 valuation is lofty by almost any measure, both for the aggregate market (15.9x) as well as the median stock (16.8x).

 

We believe S&P 500 trades close to fair value and the forward path will depend on profit growth rather than P/E expansion.

 

However, many clients argue that the P/E multiple will continue to rise in 2014 with 17x or 18x often cited, with some investors arguing for 20x.

 

We conclude that further P/E expansion will be difficult to achieve. Of course, it is possible. It is just not probable based on history.

 

This won’t end well…

 

Chart: Bloomberg


    



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