Monday, December 7, 2015

So....how accurate was Deep Throat this year?......

As an investor, I believe it's important to review my decisions, thought process and results on a periodic basis.  Moreover, I've really enjoyed sharing my thoughts with you over the last year.  That said, in the interest of full disclosure, I'd like to review my posts over the next few paragraphs and let you decide how accurate my advice has been.

Questions received re: my last few posts.....

First, I'd like to post a few additional thoughts to address some general themes in the comments I've been receiving.  

Q: Re: "Why Genius is about to fail.....again"  Why do you hate technology?  High speed trading has benefited investors, reduced the cost of investing and made stock market access available to everyone.

A: I don't "hate technology".  Technology deployment has absolutely driven down trading costs and increased both the quantity and (sometimes) the quality of information.  In fact, this blog couldn't exist without technology.  Re: "Why Genius is about to fail.....again" The only thing I can refer to is the White Paper written by Eric Hunsader and referenced on pg. 280 of Flash Boys.  The paper chronicles the microsecond exchange activity that takes place when a large order is placed on a public exchange, in this case, a Buy order of 20,000 shares of Ford Motor Co. (F) at $17.38 a share.  The microsecond analysis shows how once a large order is submitted, there is a flurry of activity, primarily the cancellation of orders, the immediate withdrawal of liquidity and the inability of the order to be filled in its' entirety at the requested price.  The HFT's "jump the line" controlling shares that should have gone with the initial order, driving the price up.  It's estimated that the cost of this "slippage" (Flash Boys pg. 280) to a large money manager is a "tax" of roughly $240 million on $80 Billion in trades.  The money, of course, comes from Pension Funds, Mutual Funds and retirement accounts.  As a point of reference, today, the NYSE alone handles roughly $30 Billion a day in volume. The significant byproduct of this HFT phenomenon is the evaporation of "fake" liquidity when large orders are placed as described by Carl Icahn on his "Danger Ahead" website..  That said, there are also a number of studies, that HFT profits have fallen off dramatically, decreasing by more than 80% since 2009, yet the "fake" pseudo liquidity still exists.

Q: Why are you so doom and gloom?  You've been talking about this stuff for a year and nothing has happened?  The markets are humming along just fine.

A: I guess all I can say is, to paraphrase Warren Buffett, any good economist or investor can tell you what's going to happen, they/we just can't tell you when or how big it will be.  Next, if I've conveyed any sort of "doom and gloom" tone in my writing, I apologize.  That was never the intent.  I'm simply identifying and discussing odd, out-of-balance, global financial topics.  We've been on a great run over the last few years. We all hope that the ride goes on forever.  I'm just concerned, based on what I see, that it won't/can't....and I want to let my readers know.

Review of Deep Throat posts in date order:

Given the above, here are a few of the observations and projections made within this blog and where we're at today.

November 2014 -  Posted on Laura Logan's CBS News page and re-posted here on  12/26/2014 - Posted Alibaba's numbers are "suspect".  At the time the stock price was at $110.  Today it's at about $80 and has been as low as $57.  Mr. Market is just beginning to figure Alibaba out.

December 22, 2014 - Qihoo 360 was trading at $60.  I gave it a negative review.  Today it's at $70 and has been as low as $41.  Here was my review from last December:

"....the sole purpose of this enterprise is, apparently, to line the pockets of insiders.  Therefore the Intrinsic Value of this business, and the corresponding share value is US$0.00."

Even though the market seems to have, at least thus far, disagreed with my analysis, I'll stick with this valuation.  It's a dog with fleas.

December 23, 2014 - I referred to Lending Club (LC) as an "Impending Disaster" when it was trading at $28.  Today it's at $12 and on life support.

December 24, 2014 - The Valuation Problem.  I opined that the valuations of US Stocks were too high at the time.  At the time the S&P was at 2,060.  Today it's at 2,070, with a little wobble in August.  My opinion and the metrics supporting it, haven't changed.  Those of you who have been out of the equity markets haven't forfeited anything.

January 8, 2015 - Alibaba, the Ultimate Shadow Bank.  Like the Valuation Problem, the market hasn't figured this out yet.  As I had elaborated in the November 18th, 2015 post, I was talking with an analyst..,  there's significant undisclosed credit risk associated with the Alibaba/Alipay/Ant Financial relationship.  This will become apparent in 2016.

January 30th, 2015 - In Once Upon a Time... I discuss the Alibaba 12/31/14 6k and financial statements. Items of note were 1.) US$10 Billion Increase in "Questionable Assets" in just nine(9) months; 2.) Share-Based Comp being 16% of revenue; 3.) The blatant nondisclosure re: Alibaba/Ant and the integration of all of the absurd US$10 Billion in acquisitions accomplished in the prior nine (9) months.  Since then, as I've discussed in posts described below, the buffoonery has accelerated.

February 7th, 2015 - The Chinese Laundry, I provide details on how China's elite have been using Alibaba and other ADRs to move wealth out of mainland China.  Various sources estimate that hundreds of billions of US$ equivalents have been moved to dollar and Euro denominated investments and real estate in the third quarter of 2015.  The US Treasury estimates that capital flight was $200 billion in November 2015 alone. The flight is continuing.

February 17th, 2015 - What the Smart Money thinks about Alibaba.  Analysis of hedge fund holdings of Alibaba.  The conclusion was that Hedge Funds were generally not taking significant positions in Alibaba. The sentiment has continued.   As of the 9/30/15 13F's, only two (Viking & Blackrock) of the 22 hedge funds tracked s had a net-long position in Alibaba.  Ten of the 22 funds had held significant positions as of 9/30/14..

March 10th, 2015 - In The shape of things to come.... I discusses the parallel between NQ Mobile and Alibaba.  I described NQ as:

The answer to the question...."Is this business worth $4.00/share?"  I'm sorry, I don't even know how to answer the question.  I can't even classify this as a real business (It's certainly not run like one) and therefore I have no idea what it might be worth.  It's evolved into some sort of misguided start-up with weird baggage.  I don't know what to make of it and how it exists as a publicly traded security. It's a "money pit".  I can pretty much guarantee it's not worth anything near it's current $300 million market cap.  Like so many ADR's on life support, I expect this one to "go dark" at some point soon.

Today NQ Mobile is still bouncing along at $3.50 a share.  Not dead yet, but it's been given last rites.

March 28th, 2015 - The China Syndrome.  The post contained, among other projections: " The Shanghai, HK & Shenzhen markets would lose at least US$ 4 Trillion (40%) in value.  Again, as a point of reference, these exchanges lost roughly 2/3rds of their value during the 2009 US financial crisis."  Four months later, that's exactly what happened.

April 13th, 2015 -  "China's Dream....Defying Financial Gravity" where I described the inevitable devaluation of the Renminbi and capital flight from China.  Since that post there have been several RMB devaluations and the PBOC has spent nearly $300 billion in US$ Bonds and FOREX reserves to stabilize the floundering economy and protect the mainland equity markets from collapse. This, of course, will continue.

June 15th, 2015 - Alibaba, a year in review.  Review of the year end financial statements.  Elaboration on the "Questionable Assets" and accounting Shenanigans, as well as a detailed discussion on how Alibaba is faking GMV and Revenue.  

July 21st, 2015 - Tencent....10 cents is about what it's worth..... What can I say, the business was a fraud six months ago and it's still a fraud today.  Unfortunately, I don't see how you can short this "beloved" stock.  In the words of John Maynard Keynes "The market can stay irrational a lot longer than you can stay solvent"

August 21st, 2015 - Don't worry...be happy.  A detailed discussion on how the collapse of China's equity markets will impact US asset values.  The discussion focused on Hedge Fund leverage and the consequences of an abrupt liquidity event.  This "open item" remains one of my greater concerns in 2016.

September 14th, 2015 - Anatomy of a Financial Contagion and Kayaking the Chicago Wilderness. A detailed discussion of how Alibaba's inevitable collapse will destroy both Softbank and Yahoo!
  
October 14th, 2015 - Why Genius is about to fail....again.  An analysis of Carl Icahn's concerns about leverage and liquidity, specifically related to ETF's.  

November 2015The four November posts:  Bowenpress estimates 64% of Alibaba's "singles day GMV is fake......; I was talking with an analyst......The Silliness Continues....;  One of these things is not like the others......;  All of these posts discuss the ridiculous financial metrics being reported by Alibaba.  Especially in relation to the "stealth recession" currently underway in China.  I had assumed that investors would have discovered the level of mis-rep by now, but it seems to be taking longer than I had anticipated.  Again, my assessment of the intrinsic value of Alibaba hasn't changed.

Summary

After reviewing my work over the last year, much of the above has either, a.) Already happened; b.) Begun to happen; or, c.) Is too soon to tell.  So far, I've not seen anything I've said where I was "dead wrong". Honestly, based on the dire consequences if my forecasts are at all accurate, I actually wish I was "dead wrong" on much of it.

Again, I can only tell you what's going to happen, I have no way of knowing exactly when it will happen or how big the event(s) will be.

HAPPY HOLIDAYS! 




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