This chart from the US Energy Information Administration also shows an interesting chart – total US energy usage, while up in 2018, has been relatively flat since the mid 2000’s:
Given the rising market share, and the aging of the US population, it seems that petroleum share will have to start shrinking. The primary reason its share has been rising is the dramatic fall in oil prices since 2010. The price of crude oil is now roughly just over half of what it was in between 2010 and 2014. One would think that with the advances in Solar and Wind power lowering the costs of electricity, petroleum prices will have to continue to fall in order to maintain market share.
A lot of good reporting has been done regarding the General Electric (GE) ‘fraud’ accusations, one of the better is which is this Bloomberg article. In summary, the accusations are that GE has under reported its reserves for its long term care business, and will be in need of more cash than would be expected.
My take on all this reminds me of my take on the Boeing problems. In that post I refer to anecdotal evidence that something was amiss with management.
While its been many years since I have worked for a GE company, my take on this is agree with the whistle-blower Harry Markopolos. In many ways it does remind me of the Bernie Madoff story. I don’t think Bernie Madoff started out to be a crook. I think many people bend the rules once they start to get into trouble, then keep bending, then bending until they are so deep they realize it would be financial ruin to come clean, so they just keep putting it off. I recall a client I worked for who had a startup with lots of investor money in the early 2000’s. He had a small company and staffed up to build a big company, and when the market turned the company imploded and exposed some financial misdoings he had committed to try to keep the dream alive.
So this is the parallel I draw with General Electric. I agree with the theory they have been bending the rules with financial reserves, back when they needed money to make their quarterly numbers. GE is full of financial engineers, and their previous CEO Jeff Immelt was very short term (read that bonus) focused. I am sure they thought that business would pick up and they would deal with the issue before it got out of hand, but when Immelt left the years of dirty laundry left behind by him has been exposed. I am in the camp that GE will end up in Chapter 11, especially if the economy continues to soften as GE tries to sell assets. The most accurate analyst on GE has been Stephen Tusa, and he has a price target of $5 on the stock.
General Electric, like Boeing, is a no-touch stock for me. While the new CEO of GE is much more capable than the prior leader, I think the damage has been done and the cupboard is empty. Now its time to just watch this disaster unfold from the sidelines.
The battle for the living room has been interesting to watch from an investing perspective. I have been down on Comcast for years, thinking their business model would be severely hampered by the cord cutters eliminating cable. This has been somewhat true as the stock price has been flattish over the last 5 years:
Comcast 5 year chart
The one stock I have been kicking myself for not owning is Netflix – which has had an incredible run over the last 5 years:
Netflix 5 year chart
Earlier this month, Netflix reported slowing growth, and the stock got hammered – down from 360’ish to 310’ish. Recent earnings showing a slowing of subscriber growth, and fears of the Disney streaming service and Apple streaming service spooked investors.
The way I see it – the market is wrong on this one. Granted Netflix’s valuation is awfully high, but even with their subscriber growth not meeting projections, it was still decent domestically and great internationally. Interestingly their growth in the previous year’s quarter also missed expectations, and it bounced back nicely the following quarter. The word on the street was that areas that had price increases fared the worst. I am willing to bet that subscribers to Netflix are not that price sensitive. Amazon raised the price on Amazon Prime and nobody blinked – I think Netflix has more levers they can pull to raise revenue if they feel the need.
Regarding the increase in competition – I think the market is overreacting on this one too. I agree Disney is going to be a formidable competitor (and luckily I have been long Disney for awhile), but I hardly think Netflix will be the one hurt the most by this. Netflix is an establishment in most households – and I think it has the strongest network effect of all streaming companies. I think the big losers will be the 2nd tier streaming/content services – things like CBS Interactive, maybe Showtime, HBO etc. If people want to cut down their expenses on monthly TV subscriptions, I think Netflix will be low on the list. Regarding Apple’s offering – I am willing to bet that it will be underwhelming and not meet expectations. I still am in the camp that Apple is struggling to execute on its new initiatives, so I think the market is overly concerned about this one.
I initiated a small position in Netflix a few months ago when I saw the stock price weaken on these competition concerns. I prefer to invest in companies with CEO’s that consistently make the right moves, and Reed Hastings meets that criteria. So even though I am underwater on my holdings of Netflix, I am definitely not selling, and considering doubling down on this one – I am just waiting for the stock market and price to stabilize then will take a closer look.
Every once in a while I get a notice of a bond offering from my broker for Ford Motor Credit. As I am always on the lookout for higher yields, I always pause and give this some thought.
With a 7 year CD yielding around 2.0%, my first thought is sure – Ford Motor seems pretty safe, maybe I should go after a higher yield. But after thinking about it a bit more, I always back off.
A couple problems keep creeping back in. First, I think the next market downturn will be initiated by some sort of credit breakdown, whether it be corporate borrowing, consumer borrowing, or sovereign borrowings – all at historically high levels. There is too much debt out there and so I am leery of low rated credit getting rated even lower. If this happens, I either want to be in high quality corporates, or government bonds. I am not sure I can consider Ford Motor a high quality corporation. The stock is lower now that it was 20 years ago, and has a terrible Debt/Free Cash Flow ratio of 6.77.
The second thought I have is the future of car manufacturers. The automobile industry is in the midst of a huge transformation and will likely look quite different in the next few years. From the switch to primarily gas fueled vehicles to electrics, to the concept of ride share replacing car ownership, I think the automobile business model will change drastically.
This disruption will lead to winners and losers. Will the ride share companies running autonomous vehicles be the winners? Will Tesla be the next big car manufacturer? All these questions nag at me as I look over the yield of these Ford Motor Credit bonds.
Investing in high yield bonds is always difficult. Every high yield bond/corporation has its fault, thus the risk premium. In many ways its similar to investing in stocks. It requires an investment thesis and opinion about the future. And for me, a low rated bond focused on consumer credit and the car industry looks like a risk that is too big to bear.
For years I have been automatically retrieving financial data from a variety of sources to help manage my stock portfolio, and power the VFS Daily Investment Contest. For years I just scraped prices from various websites and parsed the results into a database. Its not elegant, but it has worked. I have been looking for cleaner ways to do it, but many of the online data services for financial data charged high monthly prices that didn’t make sense for the minimal quotes I retrieve on a nightly basis.
Recently, I stumbled across a great new service to pull all sorts of financial data. In addition, for my needs I can likely stay at the free level, and its the cleanest API I have seen for financial data.
All I had to do was sign up for a free account, which provides a token that I can use to access the data. The API calls are all simple GET requests, with the token in the querystring:
The result is nicely formatted JSON, which can be easily parsed using library (I use Newtonsoft). No more parsing and stripping html to get to the data. The full list of data options provided by the API can be seen here. Below is a C# example of the code I use to pull quotes on a nightly basis:
(click to expand)
Amazingly simple, and I have been re-purposing this code to handle requests against other data points, so its real easy to get at all the API end points.
The pricing structure for this is smart also. The free level that I am currently at provides you with 500,000 request points a month. A delayed quote is 1 point, a dividend list is 10 points, and fancier things like full financials are 5000 points. So if you just want to get daily prices you can get virtually unlimited. If you want more advanced data that has been difficult to get to in the past, the free level limits will likely be exceeded. The pricing for the next level up is $9 a month, and that gets you 5,000,000 request points a month which would more then meet even my wildest data dreams.
This is a relatively new operation (the API came out of Beta in April), and they are constantly updating/improving it. It is missing some features I want (Can’t currently get prices for mutual funds, or dividends for ETFs. But those fixes are on their road map to be done soon. The IEX cloud GitHub repository does a great job of keeping users updated on changes, bugs, and upcoming fixes.
As I said above this is a new service, and in this world of online services, many do not survive. I really hope this one does. If you are looking for easy access to a wide variety of data, give this new API a shot. This is a pretty exciting development for financial data geeks such as myself.
Every month the financial press makes a big deal about the total payroll report. I have never really paid attention to it, as it seems like its just headline material rather than anything one can act on financially. Recently, I was poking thru the FRED data sets looking for an employment indicator that I could plug into my valuation model, and the one that caught my eye was a subset of the big monthly number – the Temporary Help Services number.
I put together this chart below comparing the numbers of the Wilshire 5000 stock market index, the Temporary services number, and the headline Nonfarm Payrolls number.
(click on image to enlarge)
As far as an early indicator of economic downturn (and hence a stock market downturn), it seems like the temporary help number is a much better indicator. The temporary help number started trending downward months before the non-farm payroll number, and even started rising sooner after the 2001 and 2008 recessions. There are some ‘headfakes’ in the temporary help number, but with a little smoothing I think my stock market model can be taught to ignore those.
One thing I have learned over the last several years while looking for correlations is there are a lot of coincidental correlations. So when I add data factors to my model, I give the data a good old fashioned smell test – does this data seem reasonable? In this case, I have rationalized that yes, it seems reasonable that in an economic downturn, companies would start jettisoning temporary employees early as they start to slow down, since those are typically the easiest and cheapest employees to part ways with.
So now when the monthly noise comes out about the jobs number, I will continue to ignore that number – but that will trigger me to look deeper at the temporary help number that gets released at the same time.
Townsquare Media is a company I have followed for a few years. I decided to post an article on Seeking Alpha about the company because I think it has an interesting story. The company primarily runs a number of rural radio stations, but is now working on tools to upsell its advertisers.
This stock has long been a value trap (and may still be), but if this new strategy pans out, it might be worth a look. For more details check out the article on Seeking Alpha.
The other day I was looking over my portfolio to make changes based on what my valuation model suggested. One of the stocks in my top 10 holdings, Universal Forest Products, Inc (UFPI), came up as a stock to underweight based on relative valuation. UFPI is a pretty inexpensive, low growth stock, and it had a small run in the last few months.
As I often do with stocks in which I have a short term gain, I give some pause to selling. My model predicted a .44% increase in May, so its not like I was bearish on the stock, just thought there might be better alternatives in other securities. So I took a quick look to see if it might make sense to sell a covered call against my position, collect some extra income since I don’t think the stock is going to move much in May. So I pulled up the options chain, and saw an interesting tidbit:
It is interesting to see that the volume on most UFPI options is zero. This is a small 1.89 billion market cap stock, not followed by many people. But curiously, in this list of zero options, someone tossed down a 40 contract trade betting that the stock would go from its current price ($31) to over $35 by May 17th. Granted that is only a $400 investment (40 contracts @ $.10 * 100 shrs a contract), so this isn’t likely the so called ‘smart money’, but it is curious. UFPI releases earnings tomorrow (April 24th) after the bell – perhaps some small roller is ‘playing a hunch’ and trying to earn some extra cash.
At any rate, this raised my curiosity enough for me to hold onto my position until after the earnings release. I am not in any big hurry to sell, and maybe this is telegraphing some good news around the corner.
4/27/19 Update
Earnings came out more positive than expected, pushing the share price from around $30 to a $36.65 close on Friday. those options purchased for $0.10 are now worth approximately $1.90. That $400 option investment translates to a current value of $7,600. So it appears that if you are going to sell a stock, it may be worth always check the options trades to see if anybody might be making a big bet.
I have owned Boeing stock, but sold out of it last year due to a couple reasons. First, its a very large cap stock that grew a lot, and I didn’t understand why it jumped so much. My current opinion is on large cap stocks, you are competing more against institutional money that really models the company and the profits, so I don’t know if I want to try to outperform those companies with those resources.
The second reason I unloaded Boeing was more anecdotal. A group of guys I socialize with have and had worked for Boeing for the last 30 years. They were always very positive on Boeing and its management – until a few years ago. All of these employees were disgusted with management, and felt things were going downhill. I try to make a point in investing in superior management, and so this change in sentiment was enough to convince me to stay away.
With the recent drop in the price of Boeing stock due to the whole 737 Max events, I gave some thought to re-entering Boeing stock. The consensus had been that the problem is a software problem, easy enough to fix with software update. But more info is starting to come out, and now, I am beginning to think weak management is showing its hand.
This article on Quartz provides a great overview as to the issue surrounding the 737 Max. To summarize, when Airbus came out with a fuel efficient A320, Boeing had to quickly adapt the 737 to stay competitive. And to adapt the 737 to the new engines, they had to move the engines on the wing. This led to some handling problems, so they created software ‘as a kludge’ to offset the handling problem. So this is much more than just a software fix – the need for the software is due to a design flaw, which is additional complexity in the airplane. It seems this need to rush out a new plane for competitive needs may have led to deadly consequences. Also hitting the news is headlines about the approval process and the training provided to the airlines, none of it positive for Boeing.
So now, given this complexity and the headline risk, why would an airline pick the 737 Max over the A320? It seems this puts Boeing at a real competitive disadvantage. Indonesian airline Garunda already cancelled their orders for the Max – I would guess more will follow. Perhaps unsurprisingly, Boeing received no new orders for the 737 Max in March, and only 10 orders in the first quarter of 2019. Add on congressional investigations into the FAA certification process, the extended groundings, passenger perceptions of the airplane, and pilots concern related to the training, and I think the story gets worse before it gets better.
So if your bull thesis on Boeing is based on this 737 Max problem just being a software fix – think again. I think this could be the sign of cracks in the company culture and missteps by management. I think this plane that management forced out for competitive purposes could end up being a long term disaster for Boeing.
With the Lyft IPO yesterday, this kicks off the creation of a new wave of an estimated 10,000 silicon valley millionaires. In addition to Lyft, Uber, Airbnb and Pinterest are expected to IPO in 2019, and given the compensation structures of San Francisco startups, this will result in a huge wealth realization for all those employees who hold stock options.
Should this number of newly minted millionairres materialize, it raises some interesting social issues. What happens to a city when a large amount of money floods a city (San Francisco is approximately 7 square miles)? The supply and demand of housing and premium services is going to be off the charts, likely worsening the homeless crisis currently in San Francisco.
It will also be interesting to see this wealth reverberate up and down the west coast. Historically housing prices in the Pacific Northwest correlate to California, so I would assume we will see ripples of this wealth bomb.
I fear this will also make the growing divide in the US between the technology disrupters in Silicon valley, and the declining income of those unskilled workers who lose their jobs to the disruption of the technological revolution. With all that money from the stock IPO’s going into those companies, it will only speed up the progress of the disruption.
So it will be interesting to see what happens in 2019. The impact on San Francisco will be interesting to watch, and hopefully it will drive some discussion about how to deal with this continued disruption across the country.
