Shades of 1990s in Social Media Earnings Misses: Best of Kass

NEW YORK (RealMoneyPro) -- Doug Kass of Seabreeze Partners is known for his accurate stock market calls and keen insights into the economy, which he shares with RealMoney Pro readers in his daily trading diary.

This past week, Kass pointed to similarities between high-profile social media and biotech earnings misses and certain Internet stocks in the late 1990's, and gave his reading of recent economic data.


 
Summary of Week's Macroeconomic Events
 
Originally published on May 1 at 5:58 P.M. EDT

Positives

1) Initial jobless claims fell to 262,000, well below expectations of 290,000 and down from 296,000 last week. That is the lowest one-week print since April 2000. The four-week average fell to 284,000 from 285,000 last week and continuing claims fell by 74,000 to also the lowest level since 2000.

2) Positive for main street, not so much for corporate profit margins: The employment cost index for Q1 rose .7% m/o/m, one tenth more than expected but noteworthy was the 2.6% y/o/y gain, the most since Q4 '08 where wages and salaries were also up 2.6% y/o/y. Private sector wages and salaries were higher by 2.8% y/o/y, the best since Q3 '08 and is now above the average since 2001 (when data started being collected) of 2.5%.

3) The Fed's preferred view of the inflation world, the PCE, rose 0.2% headline m/o/m and 0.1% core with 0.3% and 1.3% gains y/o/y respectively. By not focusing on the CPI, the Fed downplays the influence of 3.5% annualized rent growth.

4) Pending home sales in March rose 1.1% m/o/m, about in line with expectations of up 1% and February was revised up by 5 tenths to 3.6% growth. On a y/o/y basis, contract signings are up by 13.4% on an unadjusted basis (11.1% seasonally adjusted). The overall index is at the highest level since June '13.

5) The final April UoM confidence figure was unchanged with the initial read at 95.9, about in line with expectations and is the 2nd best read since '07. One year inflation expectations were 2.6% vs 3% in March, 2.8% in February and 2.5% in January.

6) The Fed does the right thing in leaving a June hike on the table as why lean in one direction with so much more data to see between now and then. Either way, market tightens for them with the 2-year note yield up 10 bps on the week to .60%, the highest in 5 weeks.

7) Japan's unemployment fell one tenth in March to 3.4% which matches the lowest level since 1997 and the jobs to applicant ratio held at 1.15, the highest since 1992. The drop in the employment rate however was for the wrong reason as the number of people employed fell but because the number in the labor force fell by more, the overall rate was down.

8) For the BoJ who wants higher inflation, Japanese March CPI rose 2.3% y/o/y headline, 2.2% core (just ex food) and 2.1% core/core (ex food and energy), all .1-.2 above the estimate. The core rate was up .2% y/o/y taking out the impact of the VAT hike vs zero in February.

9) Japan's industrial production in March fell .3% m/o/m but that was better than the estimate of down 2.3%. It's also down for a 6th straight month on a y/o/y basis as we cycle thru the pre consumption tax hike data last year. Household spending was weak in March but not as bad as expected and is off a touch compare last March, right before the VAT was hiked.

10) Annualized M3 money supply growth in the eurozone rose 4.6% in March, the fastest pace of gain in 6 years. Also, private sector loan growth in the region rose .1% y/o/y, the first positive read in 3 years. These 2 data points however help to unleash an ugly week in global sovereign bond markets. German 10 yr yield goes from 16 bps to 36 bps, France from 42 bps to 64 bps, Spanish and Italian yields jump by 10-15 bps and the US 10 yr yield is higher by 20 bps to a 7 week high to name a few.

11) Spain's economy grew 2.6% y/o/y in Q1, the best quarter since Q1 '08.

12) Greek Foreign Minister Varoufakis is asked to take the bench and hopes grow that a deal comes soon for more loans to be made that will in turn be used to pay off previous loans. The other positive is maybe we can stop talking about Greece outside of its beautiful islands.

Negatives

1) The US economy grew just .2% annualized in Q1 vs the estimate of 1%. Of note, a major contributor to the positive print was a .1% drop in the price deflator vs the estimate of up .5%. Thus, nominal GDP was up just .1% vs the estimate of up 1.5%.

2) The ISM manufacturing index for April was unchanged m/o/m at 51.5, .5 pt below expectations and holding at the lowest level since May 2013. New orders rose, employment fell below 50, backlogs remain below 50 and port strike constraints ease with supplier deliveries. Breadth of growth better in April with 15 industries seeing growth vs 10 in March.

3) Construction spending in March fell .6% m/o/m vs the estimate of up .5%. Both private and public sector construction fell. Private residential construction saw an outright decline of 1.6% m/o/m. This data should clip Q1 GDP further.

4) The MBA said mortgage applications to buy a home were flat w/o/w but remain up by 21% y/o/y. Refi applications fell by 3.7% w/o/w but are also up a solid 46% y/o/y.

5) The fallout from the aftermath of the housing bubble continues, the US homeownership rate for Q1 fell to 63.7% vs 64% in Q4 and vs 64.8% one year ago. The 50 year average is 65.3% and this Q1 figure is matching the lowest level since 1990 and is just three tenths away from being at the smallest rate since 1967.

6) The Conference Board's measure of US consumer confidence for April fell to 95.2 from 101.4 in March. That was 7 pts below expectations but is still at the 4th highest level since middle of '07. Both main components were lower m/o/m. There was some moderation in the answers to the labor market questions.

7) Not all April vehicle sales data are out as of this writing, but Ford (F), Toyota (TM), Fiat/Chrysler (FCAU) and Nissan (NSANY) miss expectations. GM (GM) is the only one seen so far that beat.

8) According to the S&P/CS 20 city home price index for February, prices rose .9% m/o/m and 5% y/o/y, both a touch above expectations. By a modest amount the y/o/y gain is the most since August but is well off the double digit increases seen previously. The overall 20 city index on a seasonally adjusted basis is at the highest level since February '08 and just 14% below the peak of April 2006. Higher prices are fine if you own a home but lower price growth is needed to encourage more buying from first time households.

9) Markit US services PMI for April fell to 57.8 from 59.2. It's still though at a good level and the 2nd best print since September.

10) While only a coincident indicator of stock market performance, NYSE margin debt rose to a record high in March at $476.4b, exceeding the previous peak reached in February 2014. As a percent of nominal GDP it's at 2.7%, similar to the peaks in early 2000 and mid 2007 but that will only matter when it does as this ratio has been elevated for a while.

11) China's state sector weighted manufacturing PMI remained around the flat line at 50.1, unchanged with March and basically in line with the estimate of 50. The services PMI fell to 53.4 from 53.7 and is now matching the lowest level since December '08.

12) The UK economy in Q1 grew less than expected. The growth rate was up .3% q/o/q and 2.4% y/o/y vs the estimates of up .5% and 2.6% respectively. The q/o/q pace was the slowest since Q4 2012.

13) UK PMI manufacturing index was disappointing, falling to 51.9 from 54 and is below the estimate of 54.6. It's the weakest since September and Markit blamed the strong pound vs the euro as having an impact along with "slowing global economy."

14) The eurozone unemployment rate in March held at 11.3%, the lowest since May '12 but a one-tenth decline was foreseen and this rate remains well above the pre- recession level of 7.2% in March '08.

15) The April European economic confidence index fell a touch to 103.7 from 103.9. The estimate was for an unchanged print, but it's still at the 2nd best level since 2011.

16)The number of unemployed in April in Germany fell by 8,000, not as much though as the 15,000 drop that was expected. Germany's unemployment rate held at its post reunification low of 6.4%.

17) German retail sales were softer than expected in March but still up 3.5% y/o/y while French spending was in line, down m/o/m but up y/o/y.

18) The flip side of the positive benefits to exporters that is the weak euro for Germany, import price growth accelerated more than expected on a m/o/m basis in March. Import price rose 1% m/o/m vs the estimate of up .4%. The y/o/y drop of 1.4% is the least since October.

 


 
 
The Power of 'Free' (Part Deux)
 
Originally published on May 1 at 7:43 a.m. EDT
 
"When you give away something for free, the prospects for the number of things that you give away look damn good.

I have always marveled at the power of free. For example, it is amazing to behold the draw of free food -- even in the canyons of Wall Street's top banks managing directors and assistants swarm like seagulls to get a plate of wings and cold fries or greasy pizza. It is hard to deny that the free-ness isn't the driver.

Personally, my lunch standards definitely fall at a price of zero compared to full price.

I always come back to the following thought when considering all these great new social media platforms: When was the last time you were deterred from trying something that was free? How is this basic issue not discussed more often?

I sure as hell hope people like your thing or service enough if all they have to do is type in their 20 character email address to use it. If you are selling something at a loss or at cost I would hope you are beating the established players that the market expects to make a profit, right?"

- Kass Diary, Avoid Most Social Media Stocks

Despite some dissimilarities, given this week's recent high-profile misses at LinkedIn (LNKD), Twitter (TWTR), Yelp (YELP), Aerie Pharmaceuticals (AERI), etc., some similarities between social media and biotech stocks to certain tech and Internet stocks in the late 1990s doesn't seem to be too farfetched.

It "bears" repeating this 2014 column from my Diary in which I point out that a lot of things need to go well for the power of free to pay out all that it is promising.



 
Leaning to the Left Coast
 
Originally published on May 1 at 3:00 P.M. EDT

I asked the question early this morning on Twitter whether the establishment of CNBC's fancy headquarters in San Francisco marked a top in the technology and social-media industries.

I received quite a lot of responses to my tweet about this possible thin reed market indicator.

My comment was not meant literally. I was just asking the question and awaiting responses by followers.

That said there are several good counters to my question:

  • Bloomberg TV already had a bureau there where it generates several hours of programming each day.
  • More importantly, business and finance are moving to the West Coast -- especially to Los Angeles, San Francisco and, of course, Silicon Valley.

We, or I, have an East Coast-centric view, but the center of power and action have begun to move out there.

At the time of publication, Kass and/or his funds were long Twitter, although holdings can change at any time.

Doug Kass is the president of Seabreeze Partners Management Inc. Under no circumstances does this information represent a recommendation to buy, sell or hold any security.

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