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Markets are feeling a bit like the year 2000

I’ve been on radio silence lately. There hasn’t been much to write about although I am noting the ‘vapour equity’ market has seen considerable supply pressure this month. The peak of the dot-com boom (at least as far as the stock market was concerned)…

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I’ve been on radio silence lately. There hasn’t been much to write about although I am noting the ‘vapour equity’ market has seen considerable supply pressure this month.

The peak of the dot-com boom (at least as far as the stock market was concerned) was in February of 2000 when the Nasdaq peaked to 5000 and you had a whole avalanche of initial public offerings, the most notable one was the IPO of Palm (which was owned by 3Com at the time).

After that it went pretty much downhill as valuations were not supported and liquidity was sucked out of the markets. Old-value stocks (a good example being Berkshire, but pretty much any company with genuine profits that had nothing to do with fibre optics, dot-com networking or e-commerce) managed to keep their value, and in many cases some thrived in the ensuing carnage.

Investors in 2000 that kept their portfolio away from the previous high-flyer sectors would have survived to participate in the next run-up (which, in the USA, was anything related to real estate). Indeed, a successful investor across multiple market cycles must know which sectors to avoid at any given time – clearly taking permanent capital losses (anybody invest in Pets.com? EToys? CMGI?) depletes your ability to invest going forward.

We fast forward to today, where technology, software and anything related to Covid (virtual work facilitation, vaccines, etc.) is plummeting.

There is a lot to review, but I will keep things to Canada. There’s a lot more going on in the USA (e.g. anything that ARKK owns, for example). Anyhow, the most prominent casualty is the high-flyer Shopify (SHOP.TO), which used to be the #1 ranking in the TSX index, but no longer! They’re now back to #3 below Royal Bank and Toronto Dominion.

In the span of 2 months, they traded at a peak of CAD$2,200/share and are now down to about CAD$1,100, which is a peak-to-trough of 50%.  Anybody invested in the company since June of 2000 would have lost money. Imagine if you had bought shares of this thing at $1,800 and now a third of your capital has vanished…

Another high-flyer has been Lightspeed POS (LSPD.TO):

The peak-to-trough ratio here has been even more extreme – from $160/share to about $37 today – a 77% drop.

Another highly touted IPO was AbCellera (Nasdaq: ABCL) – a Canadian company that IPOed on the Nasdaq.  They went public at US$20/share and traded as high as US$70 on the day they went public, but since then it has been a decline down to $8.50 today – nearly a 90% peak-to-trough loss.

Looking at some other recent TSX IPOs we have, starting September 2021:

CPLF
PRL
QFOR
DTOL
EINC
CVO

Bringing up the charts of all of them, it’s not a pretty picture. One other notable broken IPO I examined in the past was Farmer’s Edge (TSX: FDGE) and they are down about 85% from their IPO. Another one which I didn’t write about but was an obvious avoid in my books was Eupraxia (TSX: EPRX) which I have to commend the underwriters for vomiting out that firm to unsuspecting retail shareholders.

There’s a few lessons to take home here, but one obvious lesson is that just because something has dropped by 50% or 80% doesn’t mean it is still ‘cheap’.

Many of these high-flyers that make headlines are trading at ultra-premium valuations. Take Shopify – down 50% peak to trough. While the company makes money it is still nowhere near a reasonable multiple of its existing market valuation. An investor is still paying a huge premium for assumed future growth – and the company has to exceed this in order for an investor to get a payout (never mind a dividend!).

Even in the case of companies like Lightspeed that are down 80%, it is very difficult to determine whether an investor will be seeing any returns at the end of the day – they are still losing money in their operations.

Many people got their start in investing during the Covid-19 era. A lot of them caught the right stock at the right time (e.g. Gamestop) and probably started having dreams of trading their way to riches. Without the underpinnings of understanding the fundamentals of companies, inevitably these hordes of retail investors simply traded companies on the perception of sentiment rather than any earnings power. Without having a general idea of an entry and exit point, one could rationalize GME at $100, $200, $300, etc., or Shopify at $1,500, $1,700, etc., and are effectively trading blind. One can also make a similar argument for cryptocurrency markets – functionally a zero sum game.

A good question for these new traders is – do they have the discipline to get out? Or will they try to hold on and “break even”? Or will they average down as these high-flyer shares crash back down to earth? If the 2000-2003 model is similar this time around, there will be a lot of people that will be holding onto ever depreciating shares and the current wave of hype will come to a close.

Keep in mind the simplicity that math offers – if something goes from $100 to $50, there is a 50% decrease in value. If you purchase at $50 and it goes down to $25, the result is the same – a 50% loss (and if you were starting at $100, that’s a 75% loss). In many of these cases the companies’ trajectory will head to zero, and it doesn’t matter what “discount to the 52-week high” you purchase the stock at, you will face losses if/when it heads to zero.

The safety in the markets are in those companies that are producing sustainable cash flows. You will still take a considerable hit if the company in question is trading at a very high multiple. The maximum safety are in those companies trading at low multiples to cash flows and those that are not reliant on renewing excess amounts of debt financing. There isn’t a lot of safety out there, but astute readers on this site have picked up hints here and there as to what offers a degree of safety.

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Economics

Best Day For Discretionary Stocks Since COVID-Crash As Consumer Recession Bets Get Steamrolled

Best Day For Discretionary Stocks Since COVID-Crash As Consumer Recession Bets Get Steamrolled

A week ago, following dismal guidance by Walmart,…

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Best Day For Discretionary Stocks Since COVID-Crash As Consumer Recession Bets Get Steamrolled

A week ago, following dismal guidance by Walmart, Target indicated that it is seeing a shift in the consumer wallet away from the pandemic purchases and into reopening purchases - including apparel - and the pace of this shift caught some retailers off guard on inventory. WMT, COST, and TGT all saw their stocks fall sharply last week as investor concerns around a US consumer slowdown mounted and investors reconsidered just where, if anywhere, you can play "defense" in the current market.

But as Goldman's Chris Hussey writes today, this week, results from companies like DKS, Macy's, JWN, WSM, DLTR, and DG painted a decidedly different picture.

Deep discount retailers Dollar Tree - or rather Dollar 25 Tree - and Dollar General both posted strong results and DLTR raised top-line guidance.

Which isn't surprising: as we discussed in "Middle Class Is Shutting Down As Spending By The Rich Remains Robust" when consumers are trading down - as they are doing now due to Biden's runaway inflation - dollar stores see more business.

As a result, Dollar Tree surged as much as 20% on Thursday, the biggest intraday move since October 2020. Evercore ISI said Dollar Tree's move to a "$1.25 price point" last November from $1 “came in the nick of time" adding that "given the broad-based inflationary cost pressures, the 25% price increase drove material sales and margin upside for both the namesake division and the total company," wrote analyst Michael Montani who also said that while freight, transport, and labor headwinds are real, some of the pressure cited by Target last week was likely company specific.

The analyst concluded that the read-across from DG and DLTR is “favorable,” and it seems that the low-end consumer is “hanging in better than initially thought.” Or rather, the middle-class is getting crushed and it has no choice but to trade down to the cheapest retail outlets.

And with countless shorts having piled up and getting massively squeezed, the S&P 500 Consumer Discretionary Index today has risen as much as 5.6%, its best day since April 2020, as optimism on the health of the consumer returns following a string of better-than-expected earnings reports from retailers.

Top performers in the S5COND index include Dollar Tree, Dollar General, Norwegian Cruise, Caesars Entertainment and Carnival; the Discretionary Index is on pace for its best week since March 18, when the group climbed 9.3%; the index sank 7.4% as Walmart and Target reports spooked investors. The index is still down almost 30% YTD.

"Retail earnings are bullish.... with four blow-outs,” said Vital Knowledge’s Adam Crisafulli, referring to quarterly reports from Williams-Sonoma, Macy’s, Dollar General, and Dollar Tree.  “The overall retail industry is experiencing stark changes and the market is incorrectly conflating these shifts with underlying demand weakness when the actual health of the consumer is much better than it seems,” Crisafulli says, although there are many - this website included - who wholeheartedly disagree with his optimistic view of the US consumer.

Remarkably, thanks to today’s rally, even Burlington Stores, which sank as much as 12% in premarket on disappointing results, is trading up as much as 11% and some say, the rally helped reverse the earlier tumble in NVDA shares.

The discretionary group is also getting a boost from airline operators Southwest and JetBlue, helping travel-related names, while on the economic front, better-than-expected personal consumption (for the revised Q1 GDP print). and jobless claims may be adding to the bullishness according to Bloomberg.

Tyler Durden Thu, 05/26/2022 - 15:00

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Restaurants’ Share Of Food-Dollar Grows To Record 54.9% In April

Restaurants’ Share Of Food-Dollar Grows To Record 54.9% In April

By Nation’s Restaurant News

Restaurants continued to increase their share…

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Restaurants' Share Of Food-Dollar Grows To Record 54.9% In April

By Nation's Restaurant News

Restaurants continued to increase their share of spending in April, reaching 54.9% of the food dollar, according to U.S. Census data released Tuesday. That was a 260-basis-point increase from April last year, when the share was 52.3%, said analyst Mark Kalinowski, president and CEO of New Jersey-based Kalinowski Equity Research LLC.

“Even more impressively, as best as we can tell, this 54.9% market share figure for April 2022 is an all-time monthly high for the U.S. restaurant industry,” Kalinowski said in a note released Tuesday about the April U.S. Census data.

Kalinowski said restaurants, especially multi-unit public chains, were increasing prices but at a more modest rate than retail groceries.

“The key takeaway from this is you have a lot of menu prices going up in the restaurant industry,” he said in an interview.

“And, of course, the fear anytime you're raising your menu prices is that customers will trade down, but that hasn’t happened.”

Kalinowski noted that while restaurant brands were increasing prices, the rate of hikes was less than in grocery prices.

“If you need to eat — and I haven't yet met the person who didn't need to eat — you have got to buy the food from some place unless you're growing it yourself or you have a neighbor who grows it,” he said. “The fact is the restaurant industry offers a lot of convenience. It offers experiences that the grocery stores can't match.

“It is so firmly a part of the American fabric now that Americans don't necessarily want to cut their restaurant spending,” Kalinowski said.

The analyst also noted that larger restaurant brands were being very calculated in how they were raising prices to offset their increased commodity and labor costs.

For example, Kalinowski noted, “McDonald's looks at the food at home inflation and takes that into account with their menu pricing. I would imagine there's definitely a lot of other chains out there that have gotten a little more sophisticated with how they take their menu pricing.”

Those judicious price increases are easier for large, multi-unit chains to institute than for independent restaurants, he noted.

“Independents lack the scale advantages that large chains have,” he said, “so part of the challenge for independence is, in the time of just big commodity cost inflation, how do you battle that. That's not saying it's easy for the large chains — it's hard on everybody just about.”

Over the past two years, he added, the industry has seen the largest shift toward big restaurant brands who are taking increased shares of what is a larger pie.

Census data for April calculated U.S. food services and drinking places posted $83.741 billion in sales, as compared to the April 2022 figure for U.S. grocery stores of $68.906 billion.

Kalinowski said it was intriguing that combined foodservice and drinking place sales with grocery sales had increased significantly from pre-pandemic levels.

“There seems to be meaningfully more spending on food/beverages than there was pre-pandemic,” he said. “The April 2022 combined number of $152.6 billion is 26.4% larger than the April 2019 combined number of $120.7 billion.”

This past April marked the 12th consecutive month for which that number was up more than 10% over the corresponding pre-pandemic monthly number, Kalinowski noted.

“We continue to look for restaurants’ market share in full-year 2022 to be at least one full percentage point higher than the full-year 2021 figure of [positive] 52.7%,” he said.

“All in all, this is good news for restaurant stocks — which tend to be comprised of the very largest restaurant concepts in most cases,” Kalinowski said in his note. “Large concepts have fared better than smaller chains and independents during the pandemic, creating the largest opportunity in decades for market-share gains within the restaurant industry favoring large chains.”

Tyler Durden Thu, 05/26/2022 - 13:40

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Economics

‘Insiders’ Are Buying This Dip

‘Insiders’ Are Buying This Dip

The Nasdaq is in the middle of its worst drawdown since the Lehman crisis and the Dow just suffered its longest…

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'Insiders' Are Buying This Dip

The Nasdaq is in the middle of its worst drawdown since the Lehman crisis and the Dow just suffered its longest losing streak in 99 years.

As that is happening, faith in The Fed is crumbling as Powell faces the central bankers' nemesis of stagflation... and all in an election year (threatening the confidence in The Fed's independence should it falter from its path of uber-hawkishness).

According to the latest BofA Fund Manager Survey, the grim 'market' has sent investors reeling with those equity funds tracked by EPFR Global suffering six straight weeks of outflows (the longest stretch of withdrawals since 2019), and cash levels among investors soaring to their highest level since September 2001.

Additionally, the BofA survey also showed that technology stocks are in the 'biggest short' since 2006.

The 'proverbial' dip-buyer appears to have abandoned hope as the strike on any Fed Put (at which Powell will fold like a cheap lawn chair over the pain) gets marked lower and lower.

But...

There is one group apparently, that is willing to dip a toe in the capital market deadpool - corporate insiders.

As Bloomberg reports, according to data compiled by the Washington Service, more than 1,100 corporate executives and officers have snapped up shares of their own firms in May, poised to exceed the number of sellers for the first month since March 2020 marked the pandemic trough two years ago.

The ratio has surged to 1.04 this month from 0.43 in April.

Notably, the insider buy-sell ratio also jumped in August 2015 and late 2018, with the former preceding a market bottom and the latter coinciding with one.

“It is a function of investors functioning at the '30,000 foot level' or 'macro' whereas insiders are functioning at the 'boots on the ground', company-fundamentals level,” said Craig Callahan, chief executive officer at Icon Advisers Inc. and author of 'Unloved Bull Markets'.

“We believe the company-fundamentals view is usually correct.”

Nicholas Colas, co-founder of DataTrek Research, is not as confident:

“All we know for sure is that the valuation of any stock or the entire market hinges on whether investor confidence in future cash flows is rising or falling. At present, confidence is falling,” he wrote in a recent note.

“This is not because stocks expect a recession. Rather, it is because the range of possible S&P 500 earnings power runs in a wide channel and can become wider still.”

Starbucks' Interim Chief Executive Officer Howard Schultz and Intel CEO Patrick Gelsinger are among corporate insiders who scooped up their own stock amid the latest market rout that took the S&P 500 to the brink of a bear market.

With their share prices plunging, we can't help but wonder if this 'buying' is mere virtue-signaling so that the board won't fire them for their absymal loss of market cap? 

Tyler Durden Thu, 05/26/2022 - 13:20

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