With the continued horrible economic conditions that have become a norm to a vast majority of Americans, the populous has had to adjust their spending habits substantially. Americans now think differently when they walk into a store, compared to the thought process that once encompassed them, prior to the great recession. A majority of Americans no longer spend frivolously. As a investor you must evaluate what the masses are doing, where they are spending their money, who will set to profit from the new spending habits. The American consumer who was once willing to spend money anywhere, now has the responsibility instilled in their spending habits to shop name brand items at a discount.
The plays in this current environment are Ross Stores and TJX Companies. This move will reward those in a jungle of an economic situation that collapses for the next few years or a climate where we run head first away from an American slow-down. You sit there stumped, wondering how will this play work in both economic conditions? The answer comes simple and straightforward, the American consumers have changed their spending habits and will not be changing them back anytime soon. These "cheap" habits are now instilled in Americas arsenal of shopping weapons. If Americans are no longer forced to shop at discount retailers they will choose to do so freely. If the masses are forced to shop "cheap" due to economic conditions, as they have for the last few years, these stores will continue to profit as well. Why spend 50 or more dollars on a polo when you can pay a measly $30 for the same item. The above example is how Americans are thinking as they go shopping on Saturday, the masses methodology that can be applied to many name brands and items, be it furniture, kitchen appliances, shoes and so on. Call it wealth effect, call it nervousness, call it whatever you like, Americans are scared of being poor again (think 2008, think unemployed, etc.) so they will continually pinch pennies.
Many Americans have seen the dark side, living pay check to pay check, many Americans have lost a substantial portion of their net worth in their houses, they feel poorer. You can attribute the change in behavior to whatever you like, the reality remains the same, Americans will continue to be cheap and the discount retailers will continue this profitable trend from this behavioral switch.
Retail remains a troubling sector, leaving many investors stumped when attempting to pick the best-in-breed company. The key to success in retail has always been to build a following that can not be shaken by economic conditions, by creating a cult like following of shoppers that refuse to take their money elsewhere. Cabelas undoubtedly has a set of hardcore followers, both online and in the retail store setting. By being the premiere outdoor outfitter they have found a unique niche and by continually providing for their specialized set of followers, they have seen enormous success.
What I love most about Cabela's is unquestionably their room for growth. Investors do not have access to many retailers that have as much room to grow as Cabela's. Compare them to a giant like Dick's Sporting Goods, though these two entities serve somewhat of a different populous, the store totals differ substantially. For example Dick's Sporting Goods have almost 500 stores while Cabela's boasts almost 40. From my point of view this can be taken as a plus with huge potential for growth. Though Dick's serves a wider range of sporting enthusiast Cabela's has the distinctive retail offerings that Dick's just cannot compete with. Therefore, both these entities can exist in the same market, suggesting that Cabela's could grow their reach by hundreds of stores.
The way in which Cabela's played the recent economic turmoil was by the playbook. When times were tough they adjusted both margins and ad revenues accordingly, looking after their core consumer. As times improve, which they have as of late, they are adjusting margins accordingly and spending more on advertisements to bring in new customers. The financial arm of this retail giant was once a burden, but as we see the populous better manage their credit card debt, this element of the business will only set to strengthen.
With Cabela's quality offering of outdoor goods, demand for their products, and room to go, this may just be one of the better retail plays for the future.
On a day like today, it isn't rare for one to sit idly by observing the successes and failures of himself and the traders around them. The social media gods have chosen both a winner and a loser. The winner happens to be Yelp, for the time being, and the loser, much to my chagrin, is the gaming giant, Zynga. This game, stock picking, the game of choosing the winners and the losers, is far from the end. I will, as a proponent of Zynga, refrain from an admission of defeat and keep playing "the game." However, we can sit, as more informed investors today, and see where exactly the divergence between Zynga and Yelp emerged.
This tale of two new tech babies can actually be broken down into a war of two tech giants. Yelp has the backing of Apple while Zynga has the backing of Facebook. Apple announced some time ago that Yelp would be an integral part of their next and best iPhone (and iPad, baby iPad, iTV?). Facebook, for the longest time, has derived many of its revenues from the social gamer Zynga. If you can't see the ocean parting these two tech giants, let me inform you using the most basic terms. Yelp has sided with the one and only Apple, the tech giant of our generation. Apple has proven its merit to investors time and time again, even when it was thought to undermine your portfolio. Zynga has built their business around a company that has questionable profits and a questionable business model. In laymans terms: the investing public loves Apple and is yet to believe in Facebook.
Another disparity between these two up-and-coming tech companies happens to be extremely basic (while still playing a major role in the valuation of these names) is size. This may seem like a minute detail, but the size of these new tech darling say volumes about their trading. Simply put, Yelp trades with a takeout premium and Zynga does not. If you recall the small start up Instagram and their purchase price of around a billion, you now see the story emerge. Yelp trades at a range where a large corporation, say Apple, could come into tomorrow and buy them out for access to their valued reviews. If someone wished to buy Zynga, say Facebook, they would have a bit more of a challenge coughing up the $8 billion or so to pay for Zynga at premium cost.
The last and final point that the investing public seems to have fallen for Yelp once again is its use. Yelp serves a purpose, it's the new word of mouth. Yelp allows users to say how they feel and give recommendations in the occasional form of insults. Zynga, in my opinion, serves a purpose as well, though the investing public believes that they can be replaced tomorrow. Yelp has proven it can stand on its own and the recent news out with Apple shows that they are the best-in-breed when it comes to reviews.
It is arguable that good companies trade well and bad companies trade poorly, blah blah. You might say "Zynga is down because it encompasses everything wrong in tech and Yelp trades up because it encompasses all the good in the world;" though you would be premising your argument on flawed logic. Both companies are of quality and will ultimately get their cake (preferably vanilla with chocolate icing) and eat it too. As anyone knows, companies do not always trade where they should, where they will, or where you want them to. I still am a long-time believer in Zynga (though I wish my money had been in Yelp) being that Yelp currently seems to be playing all the right cards.
I ain't gonna lie, I bought Zynga way too early, but time heals all wounds.
A fine line exists between a succesful advertisement campaign and a bad advertisement campaign. More often than not companies waste large quantities of money on advertisements that net them no return. Many companies have looked to commercials or online campaigns with big names to revitalize their lagging business as seen below.
This above ad came out last year mid summer 2011. Take a look at where the stock is today compared to last summer at that time. Yeah. Kenny Powers got his check and K Swiss got a ghetto shoe to the face. The above campaign can be taken as a prime example of what not to do, how to waste money on a failing endeavor. The campaign did lead to a increase in online sales of shoes shortly thereafter, though a faltering business can not be saved in a few sales. "Kenny Powers" could also have just not been a big enough star to get the money spenders going. Either way, this campaign was uh... horrible.
Taking a different approach we can take a look at Dos Equis. We are going to take a look at this company because their ads are nothing short of amazing. Yes Dos Equis does not front a real celebrity, but due to pure marketing genius they have created their own celebrity to give them a bump. The most interesting man was able to increase sales off Dos Equis in the United States while other foreign beers dropped dramatically due to the economy. Now that's good business.
If you watch any television as of late you will have noticed that Burger King has been taking your screen by storm. These advertisements are cute? They have put to work some big stars to sell the healthy options at their stores. An obvious attempt to take on McDonald's perceived healthier menu. The burger King advertisement campaign may be the key to moving the momentum their way. It is nowhere near as creative as the Dos Equis commercial, by the same token Burger King also has a product that's actually worth selling, unlike K Swiss. With such good earnings last quarter and a possible celebrity bump coming soon Burger King may be the king you want to put your money with.
No matter if you are a bull or bear on Burger King, one thing remains true, a good celebrity advertisment can change the landscape for a company. Though Dos Equis created their own celebrity in a sense, many other companies have come leaps and bounds with celebrities. Look around you and heed the celebrities because more often than not that is where the consumers money is headed. If the advertisement campaign is done correctly and the product can actually be sold (unlike K Swiss), then the campaign will net profits.
Here is a good piece by The New Yorker on the guy who plays the most interesting man.
Taking a look first at GDP, we see the same weakness as was at first anticipated. The second quarter does not suggest much improvement either. Being one of the huge barometers for our economy we can only hope that other macro news outweighs the negativity surrounding the GDP.
The housing situation remains inconsistent overall. We have had two back to back gains in the pricing index, though this is a meager movement after an overall horrible few years. Early last year we had a head fake that had the market tricked into thinking things were substantially better. Hopefully if we continue this positive trend we may see a more stable housing market which will bode well for the financial markets and our 'Merica economy. Pending home sales also dropped dramatically and were in harsh negative territory, though at the same time new home sales were looking chipper. These pending home sales may be a blip on the radar but should be something to definitely keep an eye on.
When it comes to jobs, things are once again hazy. We seemed to be moving in good territory for quite some time, though it seems we may look to test that key 400k number once again. Some of the upward movement has been and can be attributed to seasonality. Though, at this stage of the recovery the market and myself expects a much better number and if we keep moving in the direction of 400k I will be squirming in my trading chair. Keep an eye out for the big number Friday it will answer many of my questions concerning our jobs situation.
Since we live in such a consumer based society, we cannot forget the importance of how our consumers are currently feeling. The consumer has had a change of heart. Initially these indexes could be seen as a support for potential spending in the coming months. The public sees the news out of Europe and questions their job situation and current spending habits. When looking at the consumers we do see a continued plus, the price of oil. With lower fuel cost we hope to see increased spending over the summer vacation months.
Here at CapitalOverlook we are trying to consolidate information for the masses. Being that a majority of you are too lazy to compile the information yourself. We wish to streamline the macro situation of the economy into just a brief post. By looking at the past month we can see what to expect for the next month and invest accordingly. In this monthly post we will cover the macro data points that have the most bearing on your money and we find most significant.
In the spirit of this hot southern summer weekend one cannot help think about being out on the water. One of the necessities for any boater comes in the form of a GPS. Even though many see Garmin as a dead company, those fools overlook the potential of the many other aspects of their company. Garmin does not merely make automobile GPS, though this is a major portion of their earnings, around 50% to be exact. The Garmin earnings sheet also consist of outdoor, fitness, marine, and aviation.
I see the most potential in both the avenues of marine and aviation for one simple reason, potential. Both these portions of the Garmin company are geared up to make moves. These are both discretionary spending items, no question, just like automobile GPS systems. Though, automobile GPS are a dying breed being replaced by the boatload of smartphones being sold. When it comes to boating and flying GPS are not an accessory but rather a necessity that will no time in the near future be replaced. As we see Americans go back aggressively to spending on high end pastimes, such as marine and aviation, Garmin will set to benefit.
When looking at Garmin one cannot overlook the fact that they have held up nicely in the lackluster automobile GPS market. With the potential for growth in many other aspects of their company they look like an overall great company that was once thought to be the next RIMM. An example of their commitment to the future can be found in their new product like the Garmin Swim, a device designed for training swimmers to track their workouts and drills in real time. Whichever way you look at Garmin they are compensating for their weakness in automotive and handling the challenges of the current economic situations well.
We are all headstrong and egotistical. We all would not have gotten to the point in our lives where we can put money in the markets if we had failed at all the endeavors we had set out upon. Reality speaks a hard truth, the market doesn't care about your previous successes, be that in the market or out of it. That is why many traders fail, many investors lose money and do so through their own negligence. Many will claim fault on exterior forces but the facts remain that you, the man (or woman) in front of the screen pressed the button, called the buy or sell. Not at all am I suggesting that I am immune to mistakes, I have made some costly ones, but through trial and error I have learned a key to my future success:
If you listen to fools you are nothing more than a fool.
Aligning yourself with the right team, be that news sources, bloggers, tweeters, your mother (I watch what she buys like a hawk to judge the masses) is crucial to successful trading or investor. Below is a clip from one of my favorite shows, Boardwalk Empire. The background is that Chalky White is a man of his people, a supporter of his community. By looking out for those around him they look out for him. The comparison I am drawing is that aligning yourself with quality people in trading or business will benefit you extensively.
In the wee hours of the morning Howard Lindzon retweeted a tweet that I think best sums up Apple. It not only shows the impact of the tech giant on their competition but shows just how successful they are. It makes me wonder if the destruction the iPhone caused was a mere fluke or if Apples competition truly stands no chance. So I took that tweet and looked a little deeper.
The first step to delving deeper is looking at the basic numbers. To get a better overall picture of Apple and their effect on the Television makers we need to take a look at the Apple effect when it comes to their most recent premium product, the iPad. Here is a look at the competition and their reaction since the launch of the Apple iPad on April 3 of 2010.
Apple +157.34%
Microsoft +.05%
Google + .74%
Amazon +71.89%
Hewlett Packard -63.35%
Dell -15.67%
The numbers above speak for themselves. Though looking deeper and trying to understand the overall picture, there are a few points that one should take from the numbers. First off, those established in the market Apple is coming for should be on their A game or they soon won't have any game. Second, Apple has the ability to create a new market which some of their competition may be able to take advantage of. In other words, Apple created a market and the competition often steals their premise to better serve themselves. Google and Amazon are players in the tablet market and even though they have mediocre products compared to Apple, they are still competing (or attempting to) they have not fallen by the wayside.
At the end of the year when Apple launched their next generation product, the iTV, you as an investor will be the one to judge the merit of the competition. As obvious through the above figures their is a right way and a wrong way to survive when Apple is gunning for your business. The companies that focused solely on one product line that Apple could make better, suffered. Those companies that diversified and offered a decent competition or put up a fight against apple, for example Google and their android phones, had a chance. Though the one theme that repeatedly presents itself is that betting against apple when it comes to new products is a fools errand.
Either way you cut it, the television makers are Apples new target and this tech giant is currently using a scorched earth policy when it comes to the competition.
I spend a lot of time in my local coffee shop. Mostly due to the closed door policy at my household often being construed as a "please come in and bother me" policy.The one thing that many coffee shops have in common as their naming suggest, is coffee. This may come as a surprise to many, but the product of coffee can be reproduced very easily. The same can be said about certain restaurants, though everyone knows that a Big Mac taste different than a Whopper. As we see Starbucks take on new markets throughout the world that are dynamically different from the United States, the best coffee play may be those with room to grow here at home.
Yes its easy to say that Starbucks is synonymous with coffee.That does not mean that only Starbucks will sell in America. I know Americans well and they are synonymous with lazy. If you offer me, the average lazy american, coffee at the corner I am at or the corner 5 blocks away, I will choose the former. As I mentioned above, coffee remains a interchangeable product. A cup of coffee from Starbucks can be swapped for that of a coffee cup from Dunkin' Donuts (obviously this does not pertain to the minority of coffee enthusiasts). Just ask McDonald's who has in the past year made leaps and bounds in the breakfast market, in particular in coffee sales, even in the frozen coffee drink sector that was thought to be owned by Starbucks. So as the success as McDonald's and the obvious laziness of the masses suggests, ease of access prevails over branding when it comes to coffee.
Starbucks sits at the head of the class looking to expand globally. Others in the coffee industry still have room to go at home. Yes global growth has worked out well for many a company. When it comes to such a commodity as coffee the game may be different. New markets bring new challenges. I am not sitting here suggesting that Starbucks will fail in its continued expansion plans, though accessing new markets such as China and Latin America will not be an easy task as these consumers are a different beast with differing price points then their United States counterparts. For example tea rules with the caffeine heads of China which suggests that Starbucks will have to adjust its game plan extensively as it enters China. Being that Starbucks is a coffee company this movement should be a interesting ride.
As one looks for growth they can find it safely here in the United States. Some may prefer the riskier growth story, but as the global economy continues to look weak I would rather bet on American breakfast than Greece. It is to early to count out Caribou and other regional coffee shops. A portion of America runs on Dunkin' and the potential is there for growth in an established coffee market. Starbucks is looking at growth abroad in markets that are more challenging and diverse. So to answer the above question simply, no all coffee shops are not made the same. As one bets on the future of coffee, which I will do in about 5 minutes with my second cup of the day, it is best to know where you think the most profits lay.
A few weeks back I wrote a piece about negative perception surrounding Facebook and how it would turn at one point. After today's major sell off in the broader markets and Facebook not giving back a substantial amount of its prior weeks gains,one can infer that perception has changed for the better. A month ago on a day like today, social media would have been destroyed, taken out back and shot. One could not look to hold for the long term because days of down 10% were the norm. With the market selling off like today,social media like Facebook, Zynga, Yelp, and many others would have taken the assault to the face. Today the perception of social media looks to have changed, because a dramatic sell off is far from the case.
This change of heart by the market may be due to the hope of good earnings or more likely the fact that the worst is behind these companies. The worst has occurred, the leader of the social media industry has come to the forefront and flopped completely. We have all recently witnessed the recovery from its near death experience. Does this mean its all clear sailing? No, that is far from the case, though as obvious through its recent positive trading, enthusiasm for Facebook has lifted the stock.
As we look forward to Zynga unleashed conference tomorrow we see that the social media industry has turned a corner. They (social media as a collective) are taking the next steps to allowing mobile to be a giant. As I recently mentioned in I See The Future, the future sits upon mobile, so this move lines up nicely for both Facebook and Zynga. Being that a large portion of both Zynga and Facebook's profits come from these social games, that will now be easily accessed by mobile devices, they are now playing the wall street game.
So the "perception," as I put it sometime ago has in fact changed and it looks as though social media is now playing the Wall Street game. As the social giants have won the social game it is now time for social media to prevail at the game of Wall Street.
Who is to say that poker cannot revolutionize Facebook's profits? With all the talk of Wall Street being unhappy with Facebook's mobile monetization, no one has thought for a moment that maybe mobile monetization isn't even the key. Great companies are built around many revenue sources, so that is why I see Facebook taking a multifold approach to revenues. One could only imagine how popular gambling could be once again, if it involved real money, and your Facebook friends. Those tech all stars that sit upon their billions out in silicone valley are much smarter than we ever thought. The next big thing is unquestionably online gambling, with or without the United States. Who is the global company set up to own this space? Why no other than the social media giant, Facebook.
As investors and traders we sit around all day, thinking, dreaming, trying to figure out what is next. While reading news and more news and more spewing of so called analyst, I pieced two and two together. Facebook will be the king, queen, and full fledged court of online Gambling. Yes, Gambling has been done online before. Yes, it was very profitable for those involved, though many had to give that money back to the U.S. government (suckers). The reality presents itself as this: if online gambling is legalized, Facebook is set to make a killing.
Fulora, leader of Facebook's general monetization product developments recently said, "we hope to simplify the purchase experience, give you more flexibility and make it easier to reach a global audience of Facebook users who want a way to pay for you apps and games in their local currency." I don't know how you read that, but someone with half a brain can see there is much more than meets the eye. Why would Facebook have such a desire to move from their credit system to one focused solely on cash from all nations around the world?
Gambling
The topic of gambling has consumed those that are bullish on Zynga. Now I believe it is time for Facebook believers to get behind the train on online gambling. In my opinion the adult version of gaming is gambling. As we have seen the growth in the older age demographic on Facebook it is fairly obvious that a move towards online gambling will capture the attention of many of its users. Gambling has long been considered a social activity and what better way to gamble and be social then via Facebook.
With the recent news out of Facebook changing their purchasing system to focus on local currency and the success as of late of Zynga Poker, the future seems to be lining up nicely. We have all read the news stories and heard the tales of the profits made from online gambling. Most of these success stories were not done with the power and knowledge of a company like Facebook, nor on the massive level of Facebook. Social and gambling are on the brink of colliding and Facebook has aligned itself perfectly for success.
Many of you will attempt to say that facebook is a family oriented company, they would never delve into gambling. Though the truth of the matter is that being a family oriented company means offering something for every memeber of the family. Facebook's move to allow Zynga Poker means that Facebook sees the future already. Zuck is smart enough to know that daddy may love gambling, and that his 15 year old son should not have access to it. The prowess of Facebook allows for an access to a large market of gamblers (and potential gamblers) and the capacity to maintain a family atmosphere.
Yes, I think this bodes well for Zynga. Though overall the real winner here is Facebook, being that they have access to the many users and information about these respective individuals.
Do you know what they told Henry Ford when he said he wanted to make an automobile? They said you sir are ridiculous. Who would ever quit riding their horse to ride around in something so unreliable as a car. Comical isn't it? A horse was thought to be more reliable than a car, and the rest is history. Do you know what they said about the internet many a moons ago? They said al gore had created another fad and it would fall by the wayside. Well we sit here today reading financial news via the internet, many of you while driving in your vehicle, so we now know both the above mentioned counterpoints to be a falsity. So I sit here once again upon my blogger throne, not suggesting, but informing you, that I know the future.
The future rests on the back of mobile. Mobile in the form of smartphone, games, apps, connectivity, etc. Mobile in reference to the mobility of phone, the mobility of tablets. Every great tech company somehow is correlated to mobile, be it that of Apple, Facebook, Microsoft. Just to name a few. Wherever one looks, mobile surrounds you. Mobile encompasses every aspect of our life. Mobile allows for ease of life, which for those of you who obviously lack vision, means that it is necessary for the future.
Why has Apple been the tech baby of the last decade? They have taken mobile to the next level. They invented the smartphone. By the end of the year they will take it to the next level by making the world between your phone and television one in the same. Microsoft recently announced their launch of the next big tablet. This may be insignificant for many of you, who believe apple cannot be touched, though with an actual quality product by the PC giant Microsoft, the number 2 spot in the tablet world is now up for sale. No matter who stands on the leader pole of the tablet or smartphone industry, one thing remains, the future and dominance of the app world.
The mobile space continues to heat up, as I have said for some time, and with the launch of the the surface tablet, even old tech is decisively saying that the future is in handheld devices (phones and tablets). This means one thing: mobile gaming. We all know the story of Microsoft and Apple. The masses have failed to capture the mobile gaming tale. In the coming months as we will see mobile gamers like Zynga balance social and mobile gaming, pumping gangster rap in an electric powered car headed forward towards a bright future. The mobile phase has just begun. As we see better monetization and a wider customer base in the coming months Zynga shall eat the shorts for a late night snack.
Don't get me wrong either, Zynga is not the only soon to be giant to benefit from this continued trend towards mobile and tablets. Companies like Yelp, Facebook, Twitter, LinkedIn, and the list goes on, will benefit handsomely. One of the basic ideals instilled in every trader is to not fight the trend. The trend is smacking you in the face. Mobile, tablets, they are here to stay. The world of apps has just gotten started and those stupid enough to fight the trend will capitulate when its far too late. The results will be disastrous for the shorts and they will not be able to find a building high enough.
Dollar General has succeded in becoming a power source of its own. It was initially thought that no one could compete with the giant that is Walmart, but as we have seen over the past few years, the size of Walmart can actually be used against it. Dollar General has succeeded by combining the power of cheap with perfection in square footage. While Walmart has many employees running around being completely useless, Dollar General has just a few employees racking in huge profits.
These saving stores have had a great run over the depths of the recession. I am here today to argue that even as fuel prices go down and the economy looks better, these stores will continue to excel. In particular, Dollar General, because it has succeeded in stealing revenues and customers from the bigger discount stores like Walmart. Instead of going to Walmart or Target to pick up a few random needs, Americans are entering their dollar stores like Dollar General. This movement may be due to ease of use or avoidance of the mania in the big price savers, but either way it bodes well for Dollar General. Not only that, but with an expanding landscape of stores and a more competitive line of merchandise their is just no stopping the DG.
The last and final fact that pushes Dollar General to the top of my radar, deals with the change in Americans habits. Americans will stop at nothing to save a dollar. Walk through your daily routine and you will see a mass amount of individuals pinching pennies everywhere. This behavior has stemmed from the tough times that were prevalent for the past few years and still encompass our world. These cost saving behaviors will stay with the consumer for quite some time and penny saving stores like Dollar General will continue to excel in that type of environment. So no matter how you feel about the future of our economy or the global economy, stores that sell bargains will be packed with everyone from the low class to the upper.
"Continuous effort - not strength or intelligence - is the key to unlocking our potential." -Winston Churchill
We all have goals and ambitions, some bigger than others. It is always good to take a moment and focus on the direction we are headed. With the excitement that is to come in the following weeks it is best to take a Saturday and remember why we do what we do. Maybe you get up at 5 A.M. for your family, for yourself, for your love of trading. Remember why you do what you do, what your long term goals are, and this will ensure that the next challenge that arises you will take in stride. Ensure that you are putting out "continuous effort" and this will guarantee that you are on the path to accomplish your goals. Success is not an overnight event, it is an effect that has many causes from a wide range of times and avenues (as the best traders know, the best trade is not a one day 10 % win but rather that 6 month 100% return) . Take today to clear your head, put that to do list aside, and prepare to conquer your long term goals.
Analysts just like a vast majority of traders are reactive rather than proactive. This does not bode well for your portfolio or mine. Over the trading day today, Zynga has been beaten, mutilated, with no regard to its true potential. I had thought over the past week that the suffering had come to a halt, that possibly the end was near. Instead, more have capitulated, more have ran, the price has continued to decline on huge volume. Today the masses have left in exodus due to a negative research note. This note merely supported my earlier thesis stated this year, that Zynga was set up to own the mobile space, and profit handsomely from it.
As I have mentioned in my previous research notes (Assuming Social Media and Mobile Are Dead and Looking Past The Facebook IPO At The Future Of Zynga), which may be more vetted then the piece published today, Zynga has set themselves up to capture the whole of mobile. Zynga has taken the door Facebook has opened for them, profited from it, and has now opened the door of mobile. Why in the world would Zynga buy OMGPOP? Well the masses believe it was to throw away a few hundred million. Those with a little common sense can see it was to become a more dominant force in the mobile community. You think that if the Facebook gaming community was declining Zynga wouldn't know about this, wouldn't have made plans to profit elsewhere? Really? Contrary to popular belief Zynga desires to be profitable and make money for themselves, as well as shareholders. They have been setting themselves up for quite sometime to capture the mobile platform, along with the Facebook, Google play, internet, and soon to be iTV platform. As the rest of the year plays out, as we see many potential sellers turn into investors due to the dramatic price decline, things will get better, if not great for Zynga.
Of course when many around you, including those in the know, suggest a stock is headed towards $0.00 it is easy to capitulate. It is easy to suggest that death is near and that the company has no future. Well more often than not the right trade is never easy, just ask those who bought Yelp at $15.00 last week. Just ask those who bought Zillow at $20 last year when it was headed towards the abyss. Social media will be profitable, especially with the push from investors to monetize mobile. Facebook will monetize, succeed handsomely, and social media will be a darling once again. If you fear that social media isn't the future, just buy Apple, oh wait isn't that tied to mobile? That's right the tech darling of the industry is betting on mobile as well, so I will continue to bet on mobile, elsewhere, where the returns are greater. Mobile is the future, Zynga has been and will continue to be positioned for this. The social media premium has long left us, but it will return. The growth is obvious in the mobile area and as I said in the past, Zynga is set up to profit from many platforms, many cell manufactures, be that of Google, Apple, or the next big thing.
At the beginning of the year I was adamant that higher fuel prices were negative for the overall economy and in turn beneficial for both Walmart and in particular Dollar General. Today, with the decreased price at the pump one could lean towards the opposite end of the spectrum, arguing that with more money in the consumers pocket they will upgrade their spending habits. This assumption is wrong. Over the last few years in the time of this dire recession, Americans habits have changed. Americans have become more money conscious without even realizing it, they have learned to pinch penny's without even attempting to. With continued lower prices at the pump we will see overall better sales in the lower end, in names such as Walmart and Dollar General.
Walmart prides itself on having some of the best prices around and some days Dollar General goes as far as to beat them at this game (due to smaller square footage, aka less overhead). Either way these entities are set up to make a killing in the recent environment that has surfaced. The key to the coming success is their access to consumers. Walmart and Dollar General have a strong consumer base that they have established through the rough part of the recession. Now these consumers will have a few extra dollars in there pockets. So in turn Walmart and D.G. will have a few extra in theirs as well. We will see the consumer base step up and not only purchase more items, but possibly step up to name brand items, that are higher margin. This suggests that even with a somewhat bettering economy both Walmart and Dollar General are places to be (possibly Target, but that's an article for another day).
In the world in which we live and flourish, perception means everything. We buy certian cars, houses and clothes to give others a certain perception of us. We attend specific universities and pay in $100 bills to imprint our identity on those around us. Perception rules our lives. The perception of Facebook since their lift off has been nothing but horrific. Does this perception mean they deserve to lose over $40 billion of market cap? No. Though, perception rules our world and as of late Facebook has a negative perception in the eyes of many (or those that matter in the investing world). In due time the perception will reverse and the social media bulls will be rewarded.
The plight of Facebook has not been helped by the talking heads or the investors that don't even understand the workings of Facebook. I constantly hear comparisons between Myspace and Facebook. At this point I find it ridiculous. It just goes to show how many investors fail to understand the ins and outs of a company before they invest. It shows how ignorance encompases the field of investing. Would you have bought into Apple for the iPhone if you had no idea what a smart phone was? A smart investor would have gone to the store, seen the hype, and explored the product prior to putting money behind his or her thesis. So for all you fools that claim that Myspace and Facebook are one in the same, I have nothing to say to you. You have failed yourself as an investor, because these products are galaxies apart. My mother and her generation did not even know what Myspace was but today she checks her Facebook daily on her iPhone. Event planning for a mass majority of individuals is done via Facebook. That is just a mere example of what separates Facebook from Myspace, oh yeah and the difference of about 870 million users at there peak (though Facebook is still growing strong).
the hatred for the Instagram deal astounds me. Everyone fails to grasp how great of a move it is. Facebook just made an aggressive move against Twitter. Instagram has a majority of their postings on twitter or is linked to twitter. Zuckerberg showed some cojones and marked his territory and now the world is mad at him. The best tech companies are the ones that protect their best interest and hinder that of their competition. A picture says a thousand words, or rather, a picture says everything a profile description says. Facebook wasn't going to miss out on the next thing, it's going to integrate it to be part of its platform. The move was pricey, but a must, and it shows that Facebook is here to stay one way or another.
For those you that are not so familiar with the social media environment, Facebook's competition twitter is set to make a billion in about two years. This should come as a giant surprise to many being that Facebook and all other social media stocks are headed directly to zero. For those of you who believe in the story of Facebook, that has been far from a fairy tale, this should be some conformation in your beliefs. These companies are making money and growing at rapid rates. Though Facebook has failed to monetize mobile yet, it will, and it will do so at the same time as protecting the user experience. Zuckerberg understands that there is a need to balance profits and user experience, because without users Facebook has nothing.
Don't believe the talking heads or the poorly written articles by individuals that have never traded or held stocks. I rode LinkedIn down from $80 to $60 last year then back up, pulling out my hair, fearing for a portion of my portfolio the whole way. Do you know what the know it all skeptics said? They said it was worth $0.00. It was worth nothing, absolutely nothing. Now, today, it is the social media stock to own. So don't get your panties all in a wad, perception can change overnight. In due time Facebook will prevail because it didn't become a giant by luck. It may be a long road, but Facebook will be a stand out in the end.
After this morning it seems as though the world has ceased to be the world we know. Today things seem bad, real bad, but before you capitulate lets take a look at some of the macro data from this past week and attempt to put everything into perspective. As you digest the information in which I am about to share with you, you must also realize that though the beautiful economic data that we immersed ourselves in at the beginning of the year may be faltering, the U.S. remains the best of the worse. Though the rest of the world may be falling apart and many around you capitulating, the U.S. stands to benefit from the misfortunes of those around the world. As the rest of the equities markets will be plagued with horrible economic data in the future, here at home, we seem to be making some progress (or at least not getting worse).
Lets begin with the most important data point, the employment situation. It is by no means as good as anticipated. Though many fail to look at this glass half full, we are nowhere near the grotesque situation we experienced in 2008 and 2009. So what if the recovery takes some extra time, we aren't falling apart like our neighbors across the pond. We in fact are holding up quite nicely compared to the Europeans who employment situation is horrendous.
If you have read any of my previous work, you will know I am very bearish on the housing market as a whole, as I believe the U.S. housing market has been destroyed for a generation. What I am proud to share with you is that the housing market has finally stopped destroying my property value. No one is getting rich via equity of there home any time soon, but it looks like the months of 10 % losses are something of the past. So to sit there and say things are horrible is laughable. Things were horrible and the stabilization we are witnessing is a blessing that we should relish in.
Since jobs seem to be so important, lets take a quick look at the jobless claims. Last year I remember telling my colleagues how I would be much more comfortable with our economic situation if, and only if we get could get jobless under 400k. Look at the above image, we have done that and held nicely. Over the next year if we continue this trend my portfolio will likely have an inverse trend to the above chart.
Another point in which the masses seem to be quite preoccupied with, the GDP. Yes the GDP was revised downward a smidgen. The significance of the number 2 seems to be quite overblown in my opinion. We are by no means even looking at stepping in a negative direction. The GDP has fluctuated around this era for a majority of the recovery and will do so for some time. This negative revision suggests things are not on a steep uptrend in which some idiot analysts previously suggested. Though the number suggests things are just fine. Just like all the above data points suggest, things are just fine. Our economic data is not falling apart due to Europe. Though if the ridiculousness continues across the pond the equity markets will continue to fall apart. At the end of the day we will remain the best of the worse here in the United States and this will benefit our equity markets.
Disclaimer: For those of you ridiculously bullish on Apple (believe it can do no wrong) do not waste your time or my bandwidth reading this article.
Investors and consumers alike are truly in love with Apple. Some are new to this love affair, while others are veterans of a great run. Either way, the remaining part of 2012 lends itself to some interesting action in the stock. I will not serve to bore you with the news you already know, the items in the pipeline, rather, I will bring up a few concerns I have looking at the future of the tech giant. My first concern focuses on the release of the iTV and where it leads Apple.Concern number two revolves around the growing popularity of the iPhone and how this may serve to hinder Apple in the future.
Apple products scream cool and sophisticated. When I think about the Apple stock, all I can think about is wads of hundreds and fast cars. Apple has handily earned the previously mentioned perception, they have done very well for consumers and investors alike. That being said, the iTV has set itself up to revolutionize the television industry. It has been set to do so by both the executives in the Apple boardroom and the masses throughout the world. Assuming that the iTV lives up to the hype, which by looking at Apples previous success, one can give the benefit of the doubt on, will Apple live up to the investors hype? Apple has blown away the investing public time and time again with its extroadinary iPhone sales numbers, but will it be able to replicate that with the iTV? One can take the side of the arguement that the iTV will simply serve as an addition to the many other successful Apple products, meaning that it is merely the icing on the cake. Though if you want to make the argument that the iTV is the next "IT" product for Apple, things are not so clear. To begin with, one must realize that the other television production companies will not go without a lot of kicking and screaming. RIMM merely handed over its market share as if we live in a socialist society, Sony and the other big players will not. Secondly one needs to be very concerned about the price point of the product. The iPhone was able to sell massive amounts of phones because the phone carriers supplemented a majority of the cost. One must ask, what will happen without supplements for the iTV? With the clout that Apple has, they will make the cable companies pick up some of the bill, all this has yet to be seen. So I sit patiently waiting to see how the iTV will play out for investors.
My next concern deals directly with the Apple flagship product, the iPhone. Don't get the wrong impression, I have one sitting beside me as I write this post. My concerns actually stem from the success of the product. What seperates a Range Rover from a Explorer, or a Porsche 911 from a Mustang? Your first thought is likely the cost difference, which is correct, but more importantly the exclusivity that comes with a higher price. Many Americans can go out and get a Mustang or Explorer tomorrow with the help of the bank, very few can do that with a Porsche or Range Rover. The iPhone for the longest time has marketed itself has the foreign car of the smart phone world, attempting to sell itself to the upper echelons of society. What happens when everyone (waitresses to grocery store attendants) from all walks of life has this prestigious product? The iPhone ceases to be exclusive. This may have some negative effects in the future, as Apple suggests as of yesterday, that it will continue to have one size screen (meaning just one new product). I had hoped that they would come out with different sizes and price points, they don't seem to want to. You can sit there and argue that the old version of the iPhone serves as the lower end price point. This may have some merit, but the fact remains the iPhone at $200 is no longer exclusive. A portion of its appeal has disappeared. If everyone can have caviar and Cristal for dinner (or lunch as I prefer), it no longer has the same allure. This may be remedied in the future through the phone carriers giving up supplementing the cost of the iPhone, increasing the price to make it out of the grasp of many. Again we will have to wait and see how this plays out, in the meantime I will go FaceTime my 14 year old niece on her iPhone.
Though I sit here, in deep thought, worrying about the future of Apple, I am still very bullish short term. Apple has held up nicely compared to the devastation that Fecesbook and other social media players have seen. Apple has continue to hold up fairly nicely in this market and I may look to get in soon.
Soon a moment will come when all will capitulate and those standing with hoards of cash will look to make a killing. We have seen the story play out time and time again, when the worst slaps you in the face, those who are willing to take on risk prevail. Look back to the summer and fall of last year when every investor was running away with the fear of the indices going to zero. Those that got into the quality names around that time and held into the rally of early 2012 were handsomely rewarded. Don't misunderstand me, those that bought bad companies were left with just that, bad companies (RIMM). So make sure you trim the fat off that portfolio, companies that will likely keep weighing down as the European hangover remains for some time. It looks like this hangover could continue to resurface in the years to come and the recession may last a decade.
At a certain point the markets become numb to the mess. If you get punched in the face again and again, at a certain point you throw up a block. Things are bad across the pond, but we have known this for a LONG time. There is a slim chance the end of the world (European Union) will come, but we have known this for a LONG time. At a certain point the markets are going to shrug it off as they have done before (many times). Those that are prepared to buy into the fear will prevail. At a certain point, which I am waiting patiently for, one should buy and prepare for greener pastures.
Right now, with all the negativity surrounding the technology sector, let us play a little game. Let us assume that the world will continue to fall apart, that death has come to technology, that social media, mobile and the cloud are finished. The social media critics have finally gotten their moment of glory, they have actually made money on their short positions. The game I hate to inform these bearish fools, has just begun. Let us attempt to create an argument that the future of both mobile and social media has collapsed, attempting to infer the worst case scenario.
In this factitious scenario, everything has obviously fallen apart. One will immediately ask, how will these horrible bubblicious tech companies make it through the next phase of technology growth? The answer comes easy, and the critics shall be dumbfounded, they will take part in the next exciting tech phase. Look at both Apple and Zynga, they have tons of cash. From my modest understanding of business, cash reigns supreme (just ask those that bought stocks in 2009). So assuming the worst has befallen many of the tech companies, mobile phones quit selling, people around the world turn off there cell phones, the 900 million Facebook users quit sharing, many tech companies will be able to profit from the next phase by merely buying into it with their hoards of cash.
Well you say, you have looked past the tech companies like Yelp, that lack cash on hand. Patron of capital overlook, critic of the social media, you sir seem to miss the big picture once again. What would a company like Yelp and those similar to it do without the potential of mobile and the foreshadowed profit from it? Innovate. Being a product of innovation and entrepreneurship, technology companies are some of the greatest innovators and entrepreneurs of our time. Mark Zuckerberg has been compared to Bill Gates and many other greats. These comparisons are not made because these young technology CEO's are stupid. The comparisons are made, because these young men and women are the leaders of their field and will continue to innovate to stay on the top of their field. What seperates them from other companies is the fact that their CEO's are often times serial entrepreneurs, so innovation comes with ease. Even if these company leaders are not serial entrepreneurs, they emanate entrepreneurship, just look at the progress in the last few years of many of their products. This may be a far stretch for some, but Apple did not get its gold star through a lack of innovation. For example, look at the story for Yelp is similar, they see a need and they fill it. If this need exists on a phone, in a tablet, or in a spaceship headed towards mars, they will innovate and profit from it.
Let us make some more rash assumptions, that these new companies have no cash and no innovation. Making the assumption that these technology companies will never be able to monetize anything and that their entrepreneurial spirit is a giant scam, where are we left? We are left with everyone in Silicone Valley being wrong, all the big money supporting the mobile and social media space being, take a guess, WRONG. In this hypothetical world we create, all these new companies that continue to get funding and grow users are not the future. We are assuming all the big and smart money has no knowledge. So again where are these companies left, without mobile and social media (and cloud)? The answer is simple they profit in the old way. They will take the massive amount of date they have collected and sell it in paper form. Yelp will publish reviews on paper and hand them out, Facebook will cease to exist and people will talk to each other in person, and Zynga will produce games for the Nintendo 64. If technology is not the future, go ahead buy stakes in the Yellow Pages and the Nintendo 64, while you are at it, invest in some rotary phones, because hell, the best investing takes place ahead of the curve.
Disclaimer: I am long some social media stocks, the social media critics are coming for me, so I'll stay strapped.
For more of my previous opinions on social media click here and here.
The negativity surrounding Zynga has led to a significant decline in the equity price, leaving many long term investors in the red. This recent price decline can be seen as a counter balance to the price increase seen in the earlier part of the year. At that time, many factors contributed to the increase. Among the most prominent were anticipation of the Facebook IPO and the possibility of a partnership with Wynn Resorts in the future. This exciting news had great benefits for Zynga shareholders as the market took notice of the companies potential. Though Zynga received a bump due to associations with big names like Facebook and Wynn Resorts, the market has failed to realize that Zynga's business model allows for the company to grow and profit heavily through its effective monetization of products.
Considering the large sums of cash on hand and the potential for future profit growth, it would be an insult to associate the terms "unprofitable" and "tech bubble" with this enterprise. Zynga stands poised to make money for itself and investors through delivery of quality mobile gaming applications that are easily monetized. In the recent years, we have seen an increasing number of consumers turn to smart phones and mobile devices to fulfill their computing needs. In the gaming world, there has been a stark increase in the number of games played on mobile devices. In general this shift towards handheld devices and mobile computing will merge resulting in huge profits for Zynga. Apple, a prime example of the growth in the smartphone space, has given a great return to investors through their exposure to the unprecedented growth in the smartphone market. Because of the increase in the quality and availability of mobile gaming platforms, Zynga stands at the epicenter of this revolution to mobile gaming. The mobile games Zynga produces have the ability to be played on all platforms, be it that of Google, Apple, or any other smartphone leader that emerges in the coming years. Even if hype of Facebook and Wynn fails Zynga, Zynga stands ready receive unprecedented profits through the mobile gaming revolution.
With big names like Morgan Stanley and Barclays holding shares of Zynga, the current animosity towards this stock seems excessive. Additionally, many major analyst showed huge support during their latest conference call. The Q/A suggested strong support of Zynga's business model and potential for growth. Skeptics point to the decline in Zynga's DAU in many of its popular titles as catalyst for lower stock prices. These skeptics fail to realize that is part of the natural life cycle of gaming products. Avid console users trade games to GameStop on a regular basis to pick up different title. With current technology, exchanging a game is as easy as deleting it and adding another title. Switching to another game can be equated to changing channels on one's television. With Zynga's varied portfolio of games they are set to profit whenever a smartphone user changes his or her mind, for instance, retiring "Words With Friends" for "Draw Something." Skeptics also insinuate that Zynga has failed to monetize their DAU. That point is valid, but given the context of the situation, remains immaterial. This merely suggests that in the coming months and years that Zynga will be able to better monetize their content, returning profits to shareholders. A prime example of this can be seen in the recent integration of Nike product placement in the "Draw Something" application. This novel method of product monetization highlights Zynga's ingenuity and conjures hopes of furthered creativity in monetization. Mobile monetization, as mentioned recently in the financial news of Facebook, still sits in its infancy. Itis reminiscent of the early days of Google AdWords. The monetization of content by both Zynga and Facebook has ceased to be a choice. With the ingenuity these companies have shown in the past, in the creation of their unique enterprises, they are surely to profit handsomely from their millions of users in the future.
The potential Zynga has as it's own company surpasses the scope of next week, well past the Facebook IPO. Zynga has positioned themselves in a market with massive growth potential, both domestically and abroad. They will be able to profit from all mobile carriers and will not be constrained to one product manufacture. The Electronic Arts CEO John Riccitiello recently spoke out against Zynga, suggesting that they and other companies in the social gaming market were purchasing startups at exaggerated price. With the responding negative price action in Zynga, one can be left wondering about the OMGPOP purchase. An appropriate rebuttal to Mr. Riccitiello's comments would be that he lacks understanding of the mobile gaming market and furthermore that he is blind to the potential in this sector. Zynga, however, is poised to take advantage of this potential, all while taking in massive profits.
You have heard enough advise suggesting what tomorrow will bring, only the tape will tell the true story of Facebook. Whichever way tomorrow trades, up or down, the movie below will get you excited about the day that will go down in history.
The market has turned into a giant game of chicken. I sit and watch the stream of news and ticker prices, wondering who will buck first, the bulls or the bears. On the bull side, I see a group that has the support of the recovering economy of the United States. On the bear side, they sit hoping that Greece falls apart bringing the European Union down with it. Let us take a deeper look into both sides of the argument to see who will prevail in the heated game of chicken.
Looking at the bull side of the argument, we see a lot that was not here a year ago. Economic news has gotten substantially better. One still sits and questions the employment data, knowing that the numbers are not as good as the 8.1% suggests, at the same time, the number is far from the teens. Whichever barometer one looks at the y/y numbers, the data has improved substantially, enough to look past a double dip. The good data has slightly fallen off in the last few months, don't get me wrong, but that is par for the course. One can look at the U.S. economic picture, the company earnings, and look towards the end of the year and see that a double dip is nowhere near part of the game plan. The bull case, or the case in which the world does not end, seems to hold some merit into the last half of the year.
Taking a long hard look at the bear side, a group that I have been part of for a majority of the rally into the first half of 2012, one can be left wondering. Wondering what exactly the consequences are of the Euro mess, what exactly can go wrong in China, and how low the market can go? The Europe mess has legs, no question. If things fall apart across the pond, it will likely not be a good year for anyone. Though, what are the real chances of things falling apart? If the European Union wanted Greece out, wouldn't they have pulled the plug some time ago? The truth seems apparent, the European Union will attempt to stick together, whatever it takes. They may end up kicking Greece out at some point, whatever the E.U. chooses, it will be to preserve a strong European Union. China and the BRIC countries have seen slowing growth as of late, but the hard landing suggested some time ago, has recently lost merit. The bear has had some good support as of late, but U.S. growth, earnings, and balance sheets suggest a healthy business environment for U.S. equity markets.
Obviously there are many more facts that I failed to cover in the short post. One thing remains true no matter what facts are presented, the bull side looks strong. It may take some magic to make new highs, but the end of the world is far from here. The markets have been fooled before, and they may not be the sharpest around, but they won't get fooled this time. I sat hoping and praying for the European mess to fall apart at the beginning of the year, it didn't happen. It didn't happen this year, last year, and the times before that. I suggest one quits hoping and praying for the end and looks at the facts. With or without Greece the E.U. will come back stronger, the recession in Europe will linger, but the recovery will not double dip here in the states.
I was sitting at having coffee with my old man yesterday morning, talking shop. We were talking technology companies, and he said something that baffled me, "It feels like the tech bubble all over again." Initially I was quite baffled. What he said was contrary to all my beliefs and current stock holdings, then it hit me, he didn't get it. It was that simple, he merely did not understand the current market situation for technology companies. I wont go as far to say my fathers a dinosaur or lacks investing intelligence, he just doesn't think about tech companies the way I do, the way investors should in the current market.
It hit me, like a ton of bricks, and made perfect sense. A majority of investors are so worried about their past mistakes they can't see the future right in front of them. So many long term investors are fearful of the chaos the tech bubble of the 90's wreaked on their portfolios, how they were fooled into thinking that companies had potential when they did not. Today, many of those investors are still around, and they watch the market with blinders on. These individuals fail to realize the growth potential of a technology company compared to the ig box store, the growth potential in mobile, the future of the worlds technology needs. No longer are companies coming to market that don't offer services, revenues, or users. The technology companies of today are part of our daily life. The younger generations no longer check the paper for the news, rather log into their twitter from their smartphone. The dinosaurs of the investing world will be missing the growth potential and great returns in the coming months.
I constantly hear that the first day of Facebook will likely be huge, but after that the day of reckoning will come. Why is Facebook destined to trade down? I am not suggesting that the stock will trade in one direction, it's a market, stocks trade both directions. To suggest that the peak of Facebook's stock price and return to investors will be the first day is just ridiculous. This could be the year of tech, or the decade of tech for that matter. The growth potential is huge, the monetization will come, and the returns for investors will be obvious.
Well to get to the point, everything has fallen apart once again. This time around, in year 2012, the market doesn't really care. Yeah we are down a little off the highs, but if the market had really cared it would not have rallied the bears away for the first 4 months of the year. Had Greece really and the Euro really been an issue, it would have never left us at the beginning of the year. The world has far from fallen apart, the VIX has barely moved. The masses, rightly so, are convinced that the United States economy is better. Things are better than they were and we are likely not going to have a double dip recession. The irony of the whole situation lays in the fact that we, the big ole United States, will be able to stand on our own. We are just a giant nation of consumers, our service economy will prevail, because we merely make money off of serving one another. The restaurants will continue to make food, nail places will continue to paint nails and so on. Technology will continue to service the masses and be the place to make monies. If liquidity freezes up again, does it really matter? It's obvious that people aren't buying homes anyways. So the point of my ramblings are simple: we have seen the Greece mess many times before and at this stage in the recovery Uncle Sam will stand fine alone. Even if Greece falls apart Americans will keep doing what they have done for years and likely spend more money. Yes the rest of the world falling apart will slightly hinder our bright future, but it will far from destroy it.
