Sunday, November 24, 2013

As the Price of Bitcoin moves up and Gold moves down

Last week, the digital currency Bitcoin continued its strong, but volatile, move upward as the U.S. Department of Justice said it was a “legal means of exchange”. The recent strong price move up began on October 2, when the operator of the Silk Road web siteRoss Ulbricht, was arrested by the Federal Bureau of Investigation for allowing illegal purchases of drugs, guns and other illegal items using Bitcoins – this event limited the supply of Bitcoins.  Other drivers include increasing global interest, particularly in China; and funding for Bitcoin and virtual currency related startups such as BitpayCoinbaseCircle and OpenCoin. 
  • On Friday, the price of Bitcoin was $775, up from $144 on October 1 and $13 at the beginning of the year. 
  • For those interested in space travel, Richard Branson announced that Virgin Galactic will accept payments with Bitcoin.  
  • Note: because Bitcoin is technology driven and not created by any government, it has been referred to as “gold for geeks”.  

Separately, as gold prices remain under pressure, consider the following insights: 
  • Janet Yellen from recent U.S. Senate hearing - “Well, I don’t think anybody has a very good model of what makes gold prices go up or down... it is an asset that people want to hold when they’re very fearful about potential financial market catastrophe or economic troubles and tail risks. And when there is financial market turbulence, often we see gold prices rise as people flee into them.” 
  • Paul Singer’s Elliott Management, as reported by Reuters - “the U.S. Federal Reserve's quantitative easing policy has caused stocks to rise, fueling a form of inflation. In the portfolio, Elliott is adding to its bullish gold option holdings that aim for limited downside risk with a large upside potential, saying it still feels that fundamentals are uniquely positive for gold, 
  • the World Gold Council - “Gold demand to the end of the third quarter was 12% lower than the corresponding period of 2012. This is almost entirely due to substantial outflows from ETFs, Conversely, at the consumer level, demand for gold jewelry, bars and coins for the first nine months of the year was at a historical record of 2,896.5t, well ahead of the levels seen in the first nine months of 2012.”

  • Regarding Bitcoin –   the recent broad price swings are likely increasing its attraction to speculators, but discouraging its use as a way to purchase products and services. If price volatility declines and market demand expands, the roles of regulators, central bankers, FX traders and service providers could undergo significant changes.
  • Regarding gold – with negative investor sentiment at a high level, it could be attractive to contrarian investors.  If gold stabilizes and begins to move higher, investor memories could be short.

Sunday, November 17, 2013

Views from Walmart, Cisco Systems and Janet Yellen's Confirmation Hearing

Last week, as weakness was reported in the Eurozone (economic growth), Japan (exports) and the New York region (manufacturing), firms continued to report corporate earnings.
  • Management comments included Wal-Mart’s U.S. Chief Executive Bill Simon saying the holiday shopping season "is going to be about as competitive of a market as we've ever seen…at the same time, some customers feel uncertainty about the economy, government, jobs stability and their need to take care of their families through the holidays."
  • In addition, after network equipment firm Cisco Systems reported poor results, CEO John Chambers said, “I do think we are seeing a slowdown in these emerging markets both in the decision making and their economies.” He also suggested that concerns about NSA surveillance activities might be affecting sales.
Separately, from a U.S. Congressional hearing to confirm Janet Yellen as Federal Reserve chief:
  • Senator Mike Johanns (Republican, Nebraska) said he was concerned about stock market and real estate bubbles - "Here's what I'm saying... I think the economy has gotten used to the sugar you've put out there. And I just worry you're on a sugar high." Yellen’s response - “We have to watch this very carefully, but I don't see this as an asset bubble" and believes positive price moves are a "logical response" to the Fed’s actions.
  • When Senator Charles Schumer (Democrat, New York) said he was concerned about income inequality and the struggling middle class, Yellen said income inequality "is a very serious problem" that goes back to the 1980s. She noted that contributing factors may include the nature of technological change, globalization and the decline of unions in the U.S., and said, "We can't change all of those trends. The solutions involve a multitude of things".
  • Regarding Walmart – Given the firm’s broad exposure to the U.S. economy, the CEO is another voice highlighting the challenges facing many Americans.
  • Regarding Cisco Systems - In addition to weak product demand and the impact of NSA issues, the firm is likely facing competitive challenges from Asian hardware manufacturers as well as software based network routers and switching solutions.
  • Regarding Janet Yellen – As stimulus efforts continue, improving employment and income inequality issues may remain significant challenges. Hopefully, her management of a potential bubble is better than Alan Greenspan.

Sunday, November 10, 2013

Thoughts on Twitter and Tesla Motors

On Wednesday, social media firm Twitter sold shares of its stock for $26 in an initial public offering.
On the same day, Securities and Exchange Commission Chairman May Jo White said, while not specifically mentioning Twitter, “Consider a company that correctly claims it has a hundred million users, and that the rate of user growth is expected to continue to grow at double digit rates. That certainly sounds good and it would seem to bode well for the prospects of the company – information that certainly could influence an investment decision. But what if only a fraction of those users are paying customers? What does that mean for future financial results? What if the bulk of the growth in the number of users is in an area where the company has not yet figured out how to turn those users into paying customers? What does that then say about the meaning of user growth rates?”

On Thursday, Twitter’s stock began trading at $46 (up 76% from Wednesday’s IPO price) and finished the week at $41. Because Twitter is not profitable, some investors use a price to sales ratio to compare its value to other internet firms.

On Friday, Twitter was valued at 44 times its revenue, while LinkedIn was 17, Facebook 17, Yelp 20, Pandora 8 and Google 6.
Highlighting the opportunities and challenges of momentum stock investing, Tesla Motors announced its quarterly earnings results last week. Since the beginning of 2013, the stock rose about 475% until September 30, and has since declined by about 30%. On Friday, Tesla Motors’ price to sales ratio was 9.5; Ford Motors was 0.4, General Motors 0.3 and Harley-Davidson 2.4.

  • Regarding Twitter - its IPO provided a significant transfer of wealth to the firm and its investors and provides funding to build out its business franchise – likely through acquisitions. Significant work is needed to move the firm toward profitability and sustained growth.
  • Regarding Tesla Motors – CEO Elon Musk is a leading industrial innovator and the firm’s electric cars are state-of-the-art. However, there are limits to maintaining the upward trajectory of momentum stocks. Factors influencing Tesla’s recent decline include: 1) its CEO’s said he thought the stock had become overvalued, 2) three Tesla Model S cars caught fire, although the customers may have be at fault and 3) constraints the firm is encountering as it expands its production capabilities.
  • Bottom line – technology investing can be exciting, but momentum can move in both positive and negative directions.

Sunday, November 3, 2013

Is the Market Overvalued?

Last week, Larry Fink, CEO of BlackRock, the world’s largest money manager with $4.1 trillion in assets, said, “we’ve seen real bubble-like markets again. We’ve had a huge increase in the equity market. We’ve seen corporate-debt spreads narrow dramatically”, “We have issues of an overzealous market again” and referencing the U.S. Federal Reserve stimulus efforts, he said, “It’s imperative that the Fed begins to taper.” 

In addition, Bill Gross, co-CIO at PIMCO, the world’s largest bond fund with $1.9 trillion in assets, said during a CNBC interview "All asset prices are bubbly, bond prices, stock prices" and addressing the Federal Reserve’s efforts, "to the extent that any of them can be sustained is the ultimate test in terms of tapering.” 

Investor Warren Buffett, during a September 10, 2013 CNBC interview, said stocks have "moved a long way" in the past five years, they seem "more of less fairly priced now" and "we don't find bargains around but we don't think things are way overvalued either. We're having a hard time finding things to buy." 

Note: in a December 10, 2001 Fortune Magazine interview, Warren Buffet highlighted a favorite market measure saying” the market value of all publicly traded securities as a percentage of the country’s business–that is, as a percentage of GNP… has certain limitations in telling you what you need to know. Still, it is probably the best single measure of where valuations stand at any given moment.” As of Friday, the value of U.S equities was slightly higher than recent GDP, suggesting that the U.S. equity market is slightly overvalued. 


With the investment landscape made up of many markets, asset classes and geographic regions; “is the market overvalued?” seems like too simplistic of a question. Today, investors are wondering 

  1. how will reduced stimulus efforts affect global markets
  2. are record high profit margins sustainable
  3. will technology continue to help drive profit growth and 
  4. will globalization trends remain stable
U.S. equities may be fairly valued, but seeking selected ideas at a company and stock level may provide opportunities. In addition, not all global markets are overvalued.  Patience, research, managing risk and hard work are critical for investment success.