Copper and FCX Showed Us The Path
Copper and the benchmark stock for copper, Freeport McMoran ($FCX, FCX) have led the way much lower. FCX alone has dropped 40% since August. The other precious metals have followed suit, with gold and silver grabbing more headlines. We can attribute some of that weakness due to over all strength in the US Dollar, as the dollar index has risen 10% (give or take) during this same period. However, that isn't the entire story.
Government Fiat Is On Trial, and Losing. Big Time.
Gold has been used as a type of anti-governmental stimulus mechanism. Simple really. Don't believe in the credit of a nation, or believe that additional stimulus will lead to a path of hyperinflation/deflation, gold was perceived to be the safe haven. Within limits, that perception has been widely held, and as a result gold has appreciated a great deal. However, that run has been dominated by a more powerful force. In short, we are well beyond the limits when precious metals serve their purpose as a hedge against governmental fiat.
Correlation Isn't Your Friend, and There is No Hedge (almost)
When the panic button is hit, then you will be able to tell because the correlation of ALL RISKY ASSETS approaches 1. That is what you have now. This is a major tell: managers of risky assets are liquidating, even the assets with handsome gains, in order to get into the safest assets (the US Dollar, and US Treasuries). In short, gold and other precious metals isn't safe either.
What then could be seen as a hedge for risky assets? Financials ($XLF/$FAS/$FAZ)
Financials are the only potential hedge. Even beyond the weak fundamentals, the lingering balance sheet problems, and flattening yield curve, a short financials could be seen as a hedge to the correlation of other assets. Only a short financials position addresses all of the ills that exist, plus offer a correlation hedge of sorts. Experienced persons in financial markets know that there is no hedge, per se, to correlation. That is the challenge of risk managers everywhere. The scenarios cannot be measured when correlations converge to 1. That is what we see right now. That said, a short financials position isn't risk free, and short $FAS / long $FAZ are full of structural problems due to the daily rebalancing of the instruments. However, a short $XLF position may be the best position until the correlations recede.
Friday, September 23, 2011
Tuesday, September 20, 2011
Let's Remove the Names and You Decide ($NFLX)
What If This Was an HBS Case Study? Let's see. UPDATED
Acme Inc:
Doesn't control access to supply of inputs necessary to distribute.
Doesn't control pricing to supply of inputs neceesary to distribute.
Potential competitors have greater power to influence access and pricing of inputs than Acme Inc.
Potential competitors have MUCH greater access to capital, and a far wider range of related products.
One last thing, Acme Inc's real name? Netflix (NFLX)
Insert whatever industry you want, the facts above are true, and the conclusion would be that Acme Inc is doomed. When, not if, unless there is a game-changing event (like M&A).
That doesn't mean that you can't make lots of money trading NFLX. The Acme Inc summary above tells you that extreme caution is necessary in doing so. You cannot predict the movements because (presumably) there are more people with more money pushing around the prices for their own reasons. However, if you are long, then you must remember that the facts regarding Acme Inc are incontrovertible until proven otherwise.
We can talk all about momentum and technicals, which are fine when there is a conflict of information regarding the Acme Inc's of the world. In the short run, those factors may certainly dominate the price action for a day, or a week, or even longer. My only point: when the fundamentals are THIS negative, then be quicker than usual and close your position (long or short) if you are proven wrong, given your timeframe.
That all said, feel free to click on the left, where an advertisement is almost certain to appear, compliments of Google AdSense, for your free trial. How Yahoo! (YHOO) missed click advertising is beyond imagination. That it has survived that colossal mistake is no small achievement, I guess. Perhaps that is the subject of another post. Nah. Nothing much more to say than that.
UPDATE: Splitting up the company into two individual parts, one which is dvd/video game delivery and one which is streaming is the best solution among a number of bad alternatives. The dvd/video game can be seen as a commodity, whose competition will include Blockbuster kiosks, GameStop, et al. The streaming business, however, is built to be sold. Its subscriber base can be sold to any number of parties, from the media creators to Amazon to cable companies to TV manufacturers. That is the shareholder-maximizing move. That doesn't necessarily mean that it will be easily sold, but it is clearly an exit path. Management should be applauded for this move, since it does present an alternative. Assigning a multiple, however, is another matter. The issue now will be what multiplier gets assigned to the streaming business. So unless the streaming business gets sold to Apple, which along with an actual TV, could be the entire back-to-front delivery package, the other potential bidders may have large misgivings because of the pricing of access to media. That leaves Google, Apple, or a partnership with Hulu and studios. The issue is that the pricing of the streaming business is highly contingent on the quality of the potential buyer. Absent a buyer, all of the original post remains true, and Netflix ($NFLX) could see much lower prices, even from here.
Acme Inc:
Doesn't control access to supply of inputs necessary to distribute.
Doesn't control pricing to supply of inputs neceesary to distribute.
Potential competitors have greater power to influence access and pricing of inputs than Acme Inc.
Potential competitors have MUCH greater access to capital, and a far wider range of related products.
One last thing, Acme Inc's real name? Netflix (NFLX)
Insert whatever industry you want, the facts above are true, and the conclusion would be that Acme Inc is doomed. When, not if, unless there is a game-changing event (like M&A).
That doesn't mean that you can't make lots of money trading NFLX. The Acme Inc summary above tells you that extreme caution is necessary in doing so. You cannot predict the movements because (presumably) there are more people with more money pushing around the prices for their own reasons. However, if you are long, then you must remember that the facts regarding Acme Inc are incontrovertible until proven otherwise.
We can talk all about momentum and technicals, which are fine when there is a conflict of information regarding the Acme Inc's of the world. In the short run, those factors may certainly dominate the price action for a day, or a week, or even longer. My only point: when the fundamentals are THIS negative, then be quicker than usual and close your position (long or short) if you are proven wrong, given your timeframe.
That all said, feel free to click on the left, where an advertisement is almost certain to appear, compliments of Google AdSense, for your free trial. How Yahoo! (YHOO) missed click advertising is beyond imagination. That it has survived that colossal mistake is no small achievement, I guess. Perhaps that is the subject of another post. Nah. Nothing much more to say than that.
UPDATE: Splitting up the company into two individual parts, one which is dvd/video game delivery and one which is streaming is the best solution among a number of bad alternatives. The dvd/video game can be seen as a commodity, whose competition will include Blockbuster kiosks, GameStop, et al. The streaming business, however, is built to be sold. Its subscriber base can be sold to any number of parties, from the media creators to Amazon to cable companies to TV manufacturers. That is the shareholder-maximizing move. That doesn't necessarily mean that it will be easily sold, but it is clearly an exit path. Management should be applauded for this move, since it does present an alternative. Assigning a multiple, however, is another matter. The issue now will be what multiplier gets assigned to the streaming business. So unless the streaming business gets sold to Apple, which along with an actual TV, could be the entire back-to-front delivery package, the other potential bidders may have large misgivings because of the pricing of access to media. That leaves Google, Apple, or a partnership with Hulu and studios. The issue is that the pricing of the streaming business is highly contingent on the quality of the potential buyer. Absent a buyer, all of the original post remains true, and Netflix ($NFLX) could see much lower prices, even from here.
Friday, September 16, 2011
75% Agree to Greece Bailout: Welcome to Multi-Party Prisoners' Dilemma
Only 75%? Are You Kidding Me?
According to CNBC (take that with a grain of salt), 75% of private sector banks have agreed to the Greek bailout. Many people have heard of the simulation called the Prisoners' Dilemma. For those who haven't, an explanation is here. If you Google "prisoners dilemma," you will find many academic papers describing it, as well as simulations that predict the most favorable outcomes.
The problem with that analysis is that it presumes multiple interactions, where you have the experiment over and over. However, in the case of Greece bailout, this is not necessarily the case.
What Does This Mean?
To agree means taking a haircut, maturity extension, etc of existing Greek debt. If anything, what you probably have is that 25%, who dissented, have not properly marked their Greek debt holdings to market. Acceptance of the Greek bailout will crystallize these losses. The French banks (Soc Gen, BNP) have seen their equity prices decline, and their credit ratings cut as a result of the instability caused due to suspicions that they have too much Greek debt. Who knows if this is true, but it is clear that the banking system has restricted funding to French banks due this suspicion. It is now also clear that the ECB and the Federal Reserve, along with other central banks, have basically turned the faucet to "full on" in order to provide the financial system with dollar liquidity. Also clear: these central banks knew full well that the acceptance rate was much lower than the 90% required for the bailout.
Dissent also implies that these banks believe that their survival is at stake, or that they believe that the ECB et al will cave, and provide the bailout in any case. If the bailout is not granted, then the dissenting banks must believe that they will not survive. Otherwise, they would have agreed to the terms as they were originally set. In short, this is mutually agreed destruction from the Cold War days, because if a bank fails (or 25% of them do), then the systematic risk would be catastrophic. However, each dissenting bank must believe that either a) they will perish anyway, or b) the Troika will bailout Greece in any case.
Variations
The reason that this case is so interesting is that it is difficult to ascertain just who is playing. Let's presume that the 25% represent one side. The question is, just who is on the other? The Troika? The other 75% of the banks? Both at the same time? That is why this situation doesn't exactly fit the Prisoners' Dilemma scenario, but it is instructive because the 25% of banks that dissented may, themselves, not agree on who is the other side of this.
Dear Timmy, Ever Hear of the Glass Houses and Stones Thingy?
One thing that Europeans seems to unilaterally agree upon: Mr Geithner's opinion was not, is not, and won't be welcomed. Now that has implications for the entire system, especially since the US has more than shouldered its share of the burden (failure?) of keeping the system afloat. Untold billions have been lent to the US branches of foreign banks, so in a way, it is peculiar indeed that Mr Geithner is receiving the cold shoulder from the Europeans. Perhaps, there is yet another dimension to this particular instance of the Prisoners' Dilemma, with very nationalistic overtones. Yikes indeed.
According to CNBC (take that with a grain of salt), 75% of private sector banks have agreed to the Greek bailout. Many people have heard of the simulation called the Prisoners' Dilemma. For those who haven't, an explanation is here. If you Google "prisoners dilemma," you will find many academic papers describing it, as well as simulations that predict the most favorable outcomes.
The problem with that analysis is that it presumes multiple interactions, where you have the experiment over and over. However, in the case of Greece bailout, this is not necessarily the case.
What Does This Mean?
To agree means taking a haircut, maturity extension, etc of existing Greek debt. If anything, what you probably have is that 25%, who dissented, have not properly marked their Greek debt holdings to market. Acceptance of the Greek bailout will crystallize these losses. The French banks (Soc Gen, BNP) have seen their equity prices decline, and their credit ratings cut as a result of the instability caused due to suspicions that they have too much Greek debt. Who knows if this is true, but it is clear that the banking system has restricted funding to French banks due this suspicion. It is now also clear that the ECB and the Federal Reserve, along with other central banks, have basically turned the faucet to "full on" in order to provide the financial system with dollar liquidity. Also clear: these central banks knew full well that the acceptance rate was much lower than the 90% required for the bailout.
Dissent also implies that these banks believe that their survival is at stake, or that they believe that the ECB et al will cave, and provide the bailout in any case. If the bailout is not granted, then the dissenting banks must believe that they will not survive. Otherwise, they would have agreed to the terms as they were originally set. In short, this is mutually agreed destruction from the Cold War days, because if a bank fails (or 25% of them do), then the systematic risk would be catastrophic. However, each dissenting bank must believe that either a) they will perish anyway, or b) the Troika will bailout Greece in any case.
Variations
The reason that this case is so interesting is that it is difficult to ascertain just who is playing. Let's presume that the 25% represent one side. The question is, just who is on the other? The Troika? The other 75% of the banks? Both at the same time? That is why this situation doesn't exactly fit the Prisoners' Dilemma scenario, but it is instructive because the 25% of banks that dissented may, themselves, not agree on who is the other side of this.
Dear Timmy, Ever Hear of the Glass Houses and Stones Thingy?
One thing that Europeans seems to unilaterally agree upon: Mr Geithner's opinion was not, is not, and won't be welcomed. Now that has implications for the entire system, especially since the US has more than shouldered its share of the burden (failure?) of keeping the system afloat. Untold billions have been lent to the US branches of foreign banks, so in a way, it is peculiar indeed that Mr Geithner is receiving the cold shoulder from the Europeans. Perhaps, there is yet another dimension to this particular instance of the Prisoners' Dilemma, with very nationalistic overtones. Yikes indeed.
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