In this midweek’s blog edition, we want to highlight some of the most important events for the week of September 22 and September 26, 2014.
- Greed and Fear
- Must see internet links
- Technical market outlook
Greed and Fear
This week we will discuss a controversial subject. The subject is Greed and Fear and this is more about market psychology then fundamental or technical market indications.
Technical analysis acknowledge the concept of Greed and Fear as market driving force by stating:
Buyers and sellers move markets based on expectations and emotions (fear and greed).
Greed and Fear is difficult to measure by itself, there are a tools like the Greed and Fear index or the VIX index, but these are just calculated numbers by algorithms which mostly give you a glimpse into the past, but will hardly give you any trustworthy indication of where we are or where we are heading.
To get a more accurate read of where we are on the Greed and Fear scale, we have to look more into the market psychology, emotions and behavioral economics.
The Cycle of Market Emotions is a simple representation of how emotions do move the markets and that emotions in the market are acting like a cycle and market emotions will let markets react to extremes and that's why we see bubbles and crashes happening.
Benjamin Graham described market emotions in his book "The Intelligent Investor" very well by comparing the market to a real person by calling it Mr. Market:
Mr. Market is often identified as having human behavioral manic-depressive characteristics, it:
- Is emotional, euphoric, moody
- Is often irrational
- Offers that transactions are strictly at your option
- Is there to serve you, not to guide you.
- Is in the short run a voting machine, in the long run a weighing machine.
- Will offer you a chance to buy low, and sell high.
- Is ‘frequently efficient…but not always.
This behavior of Mr. Market allows the investor to wait until Mr.Market is in a 'pessimistic mood' and offers low sale price. The investor has the option to buy at that low price. Therefore patience is such an important virtue when dealing with Mr. Market.
When the book of Benjamin Graham was released in 1949, times were different, we didn't had 24 hours TV broadcasting, social-media and highly efficient and super-fast communication networks. Basically these new media and communication technologies will just amplify the emotions in the markets to even bigger extremes. But the media can also give us a great indicator to where we might be in the Cycle of Market Emotions.
This comedy clip by The Daily Show portraying the Alibaba IPO last week, gives glimpse into the mentality that is right now happening in the stock markets. There is a lot of euphoria and very little critical questions asked if this stock market rally is sustainable in the long term. Here another video to give an idea what is going on in the market these days:
On the other side, when we see a red day between all these green days, it sounds like a small panic in the media, while some healthy pullbacks in the market are nothing unusual, especially after such a strong run in the equities. Here is two videos to show you the unrealistic views that are in the markets (please remind yourself that the markets are at near all time highs):
There are much more examples of this and the general sentiment on the equity market is very bullish with no end in sight. While we of PGM Capital have been looking at the fundamental data for a long time and advising to be cautious and warning of potential bubbles that are created from all the cheap money printed by the central banks, we can observe this "bull market with no end in sight" mentality on Wall Street.
While this analysis is mostly subjective and based from personal market observation, there are a lot of opinions on this subject. What we can conclude is that:
- On bullish days we see a lot of euphoria and high amount of greed "bull-market with no end in sight"
- On bearish days we see a lot of nervous voices, mixed with comments "this is an opportunity to buy cheap"
We don't know when we might see a bigger stock market correction, but it is clear that emotions are running very high and this is always been an explosive combination in the past when it comes to bursting bubbles.
Lets not forget one fundamental fact, around the world central banks are still in "crisis" mode for more then 5 years and are very slowly trying to turn around, while equity markets are at all time high.
Must see internet links
Please take your time to read/watch the following links that we have posted below.
- Peter Schiff: Bubble Economy Can't Survive Without Fed's Cheap Money
- Silver, Gold & Currencies Revalued Overnight - Mike Maloney
- G20 finance ministers add to fears of a stock-market bubble
- U.K. Seeks to Criminalize Manipulation of 7 Benchmarks
Technical market outlook
This week we will look at the equity markets and give short-, mid- and long term sentiment indicators. To represent the equity markets we will use the S&P 500, the FTSE, DAX and the Hang Seng.
Short Term - Multi-day trends (7 up to 60 days)
- S&P 500: Bearish
- FTSE 100: Bearish
- DAX: Neutral / Bearish (Near a bearish crossover point)
- Hang Seng: Bearish
Mid Term - Multi-week trends (4 weeks up to 6 months)
- S&P 500: Bullish / Neutral (Near a neutral crossover point)
- FTSE 100: Neutral / Bearish (Near a bearish crossover point)
- DAX: Neutral / Bearish (Near a bearish crossover point)
- Hang Seng: Neutral / Bearish (Near a bearish crossover point)
Long Term - Multi-month trends (3 months up to 5-6 years)
- S&P 500: Bullish
- FTSE 100: Bullish / Neutral (Near a neutral crossover point)
- DAX: Bullish
- Hang Seng: Bullish
While a short term bear market is nothing to worry about, but if a short-term bear market continues without any major recovery, it might trigger mid- and long-term bearish sentiment which can lead to broader sell offs in the market.
As a comparison the long term bull-market sentiment for the S&P 500 has been in place since December 2009 without any interruption. A bearish crossover in the long-term sentiment will trigger some major sell orders which can lead to a prolonged equity bear-market.
We will keep you updated on the technical market aspects.
Last but not least, before following any investing advice, be aware that above outlook is of pure technical nature and does not respect any global macro events that will disturb this outlook. Please always consider your investment horizon and risk tolerance and financial situation.
Dear PGM Capital Blog readers,
In this weekend's blog edition, we want to discuss with you, the "Alibaba Group Holding" that went IPO on Friday September 19, 2014.
ABOUT ALIBABA HOLDING GROUP:
Alibaba Group Holding Limited (NYSE: BABA) is China’s largest retailer.
Originally founded 1999 by an English schoolteacher by the name of Jack Ma, Alibaba has carved its place via alibaba.com, which connects Chinese suppliers of pretty much anything with buyers, within the Chinese Internet consumer market and expanded its reaches into every single possible thing, from online auctions to messaging and payments.
Alibaba.com has since expanded to launch other websites - including Taobao and Tmail - which now dominate the e-commerce market.
It also has major investments in the Chinese equivalent to Twitter (Sina Weibo), a YouTube-esque site called Youku Tudou and owns 50 percent of China’s most successful football club, Guangzhou Evergrande.
In 2012, two of Alibaba’s portals together handled 1.1 trillion yuan (US$170 billion) in sales, more than competitors eBay Inc (NYSE: EBAY) and Amazon.com Inc (NASDAQ: AMZN) combined.
The company's turnover in 2013 was US$6.73 billion and is expected to be much more this year. As a comparison, Facebook made US$3.7 billion in 2011, just before it had its own IPO which ended up giving the social networking company a value of more than $100 billion. More exciting is the company’s increase in profits, which have tripled in a year.
As can be seen from below pie-chart, it is responsible for 80 percent of all online sales in China - the world’s second biggest economy after the United States - and handles more transactions than eBay and Amazon combined.
The company primarily operates in the People’s Republic of China, and in March 2013 was estimated by The Economist magazine to have a valuation between US$55 billion to more than US$120 billion.
Furthermore, Alibaba’s strategy of creating a worldwide e-commerce empire with its own financial services has attracted close scrutiny from China’s regulators and resistance from the country’s banks.
THE ALIBABA GROUP IPO:
An IPO could further fuel the company as it continues to gain control over the mobile shopping and social media venues.
On 5 September 2014, the group—in a regulatory filing with the U.S. Securities and Exchange Commission—set a US$60- to US$66- per-share price range for its scheduled initial public offering (IPO), the final price of which would be determined after an international roadshow.
Let us flex the numbers in below table to see what the Chinese e-commerce giant might fetch in an IPO.
With is IPO date of September 19, it is going to release 368 million shares (with a starting price between $66 and $68 per share) onto the New York Stock Exchange in order to raise around US$25 billion in funds that it can then use to expand the company to the US and Europe.
- On 18 September 2014, Alibaba's IPO priced at US$68, raising US$21.8 billion for the company and investors. Alibaba is the biggest U.S. IPO in history.
- On September 19, 2014, Alibaba's shares (NYSE:BABA) began trading on the NYSE.
- The stock opened at US$92.70 shortly before noon ET and quickly rose to a high of US$99.70, before paring gains to close at $93.89 an increase of 38 percent on its market debut.
- Some 271 million shares changed hands on the IPO date.
Below chart shows the performance of the Alibaba Group shares on their market debut date of Friday September 19, 2014.
Alibaba flags and banners decorated the NYSE façade in orange and white. Inside, executives mixed with a press pack including 130 Chinese journalists, reflecting the excitement in Alibaba’s home market around its offering
PGM CAPITAL COMMENTS:
At the close of the market on Friday, September 19 2014, the Chinese e-commerce company had officially logged the biggest Initial Public Offering (IPO) in US history, raising US$21.8 billion in its first day on the New York Stock Exchange.
Less than half of the funds raised will actually go into Alibaba's accounts, however, with the rest a moneymaking bonanza for insiders. The biggest windfall in terms of pure cash goes to Yahoo, which received 40 percent of Alibaba in exchange for US$1 billion and control of Yahoo China in 2005.
Yahoo already made US$7.6 billion when it sold some stock back to Alibaba in 2012. Now it has earned about US$8.3 billion from a quarter of its remaining stake, while still retaining 16.3 percent of the internet giant.
The company's earnings give it a market capitalization of over US$231 billion, "putting it at the close of the market on Friday September 19, among the 20 biggest companies by market cap as can be seen from below table.
|No.||Ticker||Company||Country||Market Cap||P/E||Price [USD]|
|2||XOM||Exxon Mobil Co.||USA||414.18B||12.37||97.12|
|5||BRK-A||Berkshire Hathaway Inc.||USA||347.68B||18.07||212000.00|
|6||JNJ||Johnson & Johnson||USA||304.56B||19.96||107.99|
|7||WFC||Wells Fargo & Company||USA||278.56B||13.18||53.36|
|8||GE||General Electric Co.||USA||263.79B||18.01||26.29|
|9||ROG.VX||Roche Holding AG||Switzerland||258.42B||19.70||292.71|
|10||RDSA.AS||Royal Dutch Shell plc||Netherlands||255.53B||15.23||78.75|
|12||0491.HK||China Mobile Limited||Hong Kong||250.86B||13.18||61.43|
|13||WMT||Wal-Mart Stores Inc.||USA||247.62B||16.08||76.84|
|15||0857.HK||PetroChina Co. Ltd.||China||238.952B||11.38||134.51|
|17||BABA||Alibaba Group Ltd||China||231.90B||300||93.89|
|18||JPM||JPMorgan Chase & Co.||USA||229.85B||15.79||61.11|
|19||PG||Procter & Gamble Co.||USA||228.65B||21.60||84.47|
|21||HSBC||HSBC Holdings plc||UK||206.84B||13.45||53.95|
|22||TM||Toyota Motor Co.||Japan||203.57B||10.94||118.76|
Above table shows that Alibaba, which became the largest USA IPO, based on its closing price of Friday, September 19, ranked as the world's 17th biggest company by market capitalization.
Above table proves also that most of the companies in the top 23 table have very high valuation, which due to this can therefore be considered overvalued.
Alibaba IPO goes to the extreme of what we have saw last year with social media stocks IPO, flying high with (almost) no fundamentals to back up their stock price and subsequent market cap.
To those who believe they have to go with the flow and that Alibaba is worth whatever the market says its worth, please indulge us in a little rundown of reasons why Alibaba at current price is overvalued:
- 300x times current earnings – it takes a lot of real earnings growth to justify such a lofty multiple.
- Little room for expansion (at least in China) – Anyone who wants to be listed on Alibaba is listed on it. The only real new businesses who sign up for it are new businesses.
- Little room for increasing share of current customers – Alibaba, for now, serves one purpose: Linking manufacturers and those looking to source in China. Once the two parties hook up, there is no need for Alibaba to continue their business relationship.
- A Small Moat – The only real thing that Alibaba has going for it is the network effect – there’s nothing special about their brand or the software that runs the site.
As a long term investor we've seen similar hypes and crazy behavior of the markets in 1998 and 1999, when Internet and dot.com stock with no earnings or intrinsic value, went IPO and rose like a rocket. Back then they called it innovation and New Economy.
Ladies and Gentlemen, the rule of money is timeless, it has never changed, it is and will always be about, cashflow, earnings intrinsic value and sustainable business model.
And when the hype is over and reality calls, the prices of these so-called high flyers of today will implode bringing them to their real and realistic valuation.
Until next week.