In spite of the recent 'social media' excitement North American equity markets have struggled somewhat in the notorious month of 'Sell in May.' Not a day has gone by without a key negative headline reporting potential sovereign debt insolvency, rising inflation in emerging growth economies, domestic budgetary failures, threat of substantial higher interest rates, a slow down in world wide growth prospects, and most significantly - no NFL next year! (Can you imagine the beer and chicken wing surplus?)
The only real 'investor' exuberance has been generated in the high flying Internet social media space.
LindedIn has held it's initial IPO first day 'double return' and currently trades over $90/sh & almost $10b in market cap. LinkedIn, along with it's negligible earnings, has a total valuation greater than a third of the S&P 500 in it's first week of trading! The initial 110% LNKD 'pop' on the first day actually pales in comparison to other 'dotcom era' first day explosions. T Petruno financial columnist of the LA Times in a recent article recalled what real 'foam and froth' looks like in his list of the top ten biggest 'single day' jumps in that wild and painful era. They are:
#1 VA Linex (698%), #2 Exodus Communication (637%), #3 Theglobe.com (606%), #4 Foundry Networks (525%), #5 webMethods (508%), #6 MarketWatch.com (505%), #7 FreeMarkets (483%), #8 Cobalt Networks (482%), #9 Akamai Tech (458%), #10 CacheFlow (427%).
Not every issuer was happy during this extraordinary period. 'Formerly listed' Internet darling EToys.com actually sued their sponsoring broker Goldman Saks for having under priced their 'quality' issue. I wonder if they settled out of court before they went out of business?
I am not trying to downplay the current 'Internet Bubble 2.0' - but Russian Internet search engine Yandex was 'only' 17 times oversubscribed and posted a paltry 45% first day stock price increase with a very 'sociable' US$12 billion market cap. Heck, that was only 100 times trailing earnings and 28 times trailing gross ad sales! Yandex dominates the Russian search business with almost almost a 70% domestic market share along with a few other Baltic countries. 'Non earnings' enterprise Zynga (my favorite name) Game Network founded in 2007 is soon to be sold to the the public at a very healthy $10b market cap. Founder M Pincus named Zynga after his late dog (definitely a red flag IMO). I hope this one doesn't have fleas! Zynga has over 250 million users per month playing addictive time consuming/wasting games (CityVille & FarmVille) on Facebook. Zinga has tapped into the 30+ year old female market who flock to the site much to the consternation of their employers. I have yet to waste some time 'playing' either of them but I'm sure they must be fun.
The over worked and over paid corporate finance types are anticipating another 400+ various significant IPO deals to be done in North America before the year ends covering all major industries.
Headline media continues to focus on the negative 'non tech' aspects of the economy. It doesn't help that US GDP came in a tad lower today and the associated unemployment rolls unexpectedly ticked higher. The fear, loathing, and dread in the domestic US housing market makes me more bullish than ever. Recent rumblings of a potential Italian credit issue implosion that would certainly 'Rock the Casbah!' All eyes are on the debt ceiling(s) and the grand finale of a 'dry docked' QE II and related bond market turbulence. The President has called for the debt ceiling mess to be 'cleaned up' by next week. Translation: 'More no strings borrowed cash please and thank you.' I read that no currency has a long term future other than 'whipping boys' gold and silver. I've stopped keeping track of the reasons to be 'short' the market and 'long' the dry goods and ammunition.
Fortunately the stock market is healthy and appears to have a future. Most major markets are within an eye lash of recent high territory. Utilities and Transports continue to shine and out perform. Interest Rates couldn't be friendlier even if they tried. The recent commodity 'crash' has been more of a mild & orderly sell off & consolidation. The recent positive corporate earnings season and reasonable equity valuations sure do impress me. I'm not certain that this 'market pause' will translate into a 'June to the Moon' breakout - but I'd be surprised to see it turn into the seasonal 'June Swoon' that we have grown to expect.
In the US the DJIA and S&P look to complete a normal one month 2-3% orderly sell off. Corporate stock buy backs and dividend increases have been positive. Early Tarp repayments have been even more impressive. GM has surprisingly and suddenly reasserted itself as the #1 car company in the world. Basic material, energy, and cyclical companies are firing on all cylinders. The agricultural sector has probably never been healthier. All of a sudden being a farmer has become a 'cool and sexy' thing!
On the minus side of the ledger - former President W. Clinton calls for a 'small' short term default on US debt payments with the hopes of injecting some reality into the Congressional 'leadership' proceedings. They sure won't like those bothersome calls from the credit card companies looking for repayment!
Business Insider ranks the top 21 countries most 'likely to default' (according to the intraday CDS cost to insure each countries debt) with the good old 'US of A' failing to make the grade.
For those who like top 10 lists as much as I do these are the 'top' 10 countries likely to welch:
#1 Greece (57%)- in spite of Dr. N Roubini (formerly Dr. Death) reporting today that the Greece's half trillion in debt problem is 'overblown' (bad word); #2 Venezuela (52%) - number two but trying harder; #3 Ireland (43%) -who have recently 'manned up' to face the music (must be the Guinness); #4 Portugal (40%); #5Argentina (34%)- two time losers; #6 Ukraine (27%) - my homies; #7 Dubai (24%) - surprised to see these dudes here; #8 Lebanon; #9 Iraq (21%) - surprised to see that they pay for anything; and last but not least #10 Egypt (20%).
In commodities - other than Silver - most sectors have experienced a moderate and orderly correction this month. Gold holds US$1,500/oz, Oil US$100/bbl, and Copper US$4/lb. Natural Gas continues to consolidation in it's mid range of $4.50/mcf in spite of reports of massive surpluses.
China is now the #1 holder of Gold in the world snapping up more gold in the first quarter of 2011 than ever & over taking India the perennially champ! China's investment demand more than doubled to 90 metric tons in the first 3 months as compare to India's 85 metric tons consumption. China now accounts for 25% of gold investment demand and India is a close second at 23% in the world. A short ten years ago China consumed almost zero gold! As the middle class growth in China and India continues to explode these consumption numbers look to expand significantly. I figure these two behemoths will be slugging it out for top spot for a long time to come! Silver held the low $30 level as expected and looks to challenge recent all time high levels before long. My view was that on the move to US$50/oz for Silver shorts got well squeezed and well 'wrung out!' More than likely we have returned to a 'normalized' but growing Silver consumption market.
In the AGRA sector I continue to be very interested in the grains (corn, soy beans, and wheat) with break out potential into new recovery high territory for the trio. Changing detrimental weather patterns could easily contribute to the upside potential along with consistently higher real World consumption growth. The seed and fertilizer stocks are reasonably and attractively priced with very positive earnings profiles. The recent Glencore Euro listing had none of the 'internet social media' frenzy and trades slightly below cost price. That was a bit of a surprise considering that Glencore is primarily a leveraged trading facility with very volatile earnings and levered growth potential.
In Canada the TSX held the critical 13,250 level and it's 200 day ma. The volatile TSX Venture exchange held the important 2,000 level following a significant 3 month 15% very over sold correction.
From the 'Why can't we be friends department?' the Maple Group (Banks) have officially gone 'hostile' after been stood up by the TMX group. It will be difficult for the shareholders not to accept the over 20% higher Cd$3.6 billion Maple offer. Somehow the Toronto Stock Exchange and the London Stock Exchange will have to 'sweet talk' and come up with an improved offer their 'shareholders can't refuse!' I must confess I'm not cheering for the Banks but I guess it would only be right if the owned everything? A sharp tongued wag in the weekend paper called a bank owned stock exchange in Canada a 'monopolistic silo!'
Speaking of that largess -the Banks earnings are beginning to roll in higher but slightly below 'elevated' expectations. Bank of Montreal disappointed based on lower 'influential' trading earnings and a softer quarter for TSX securities. National Bank increased their dividend 8% and the Royal Bank is expected to follow on Friday. A few of the lesser Financials may increase their payouts also. Most of the Financials are fully priced in my opinion with dividend increases (or not) well baked into their prices.
News of a Hudson's Bay offering will generate considerable interest in this retail friendly environment - even though Lululemon Athletica (LLL-TO) was downgraded today after a monstrous run to over $90/sh, 50x p/e, and a market cap of over Cd$5 billion. This may bring out a few 'shorts'- and I don't mean the 'stretchy' seaweed kind!
Bottom Line: North American markets (including Social Media Tech hysteria) continue to absorb any significant selling pressure irrespective of any calamity - be it natural or engineered or otherwise. Most capital market activity continues to be dominated by large fund flow and 'sophisticated' financial management. The smaller retail investor is still understandable paralyzed by the 2007-08 credit & financial debacle. They appear not to be a factor in current market activity.
I remain positive and look for a significant upside trend to resume early this summer. New recovery recent highs would imply a potential retest of the notorious pre-credit crash all time highs of 2006-08. Key firm stops levels are; DJIA 12,000; S&P 1,275; and TSX 13,250 all on a closing basis should
credit conditions come completely unglued.
More than likely it will take improved sovereign debt and currency issues AND all time highs in all of the major indexes before individual investor 'cocktail talk' turns bullish, confident, or frothy! The 'Darwinian Investment Distribution Theory' suggests that a major cycle is not fully completed until the small individual investor duck starts quacking and get thoroughly fed!
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