Archive for the ‘Consumers’ Category

We’re honoring heroes today. Which is well and good and proper.

But why aren’t we following in their footsteps… and trying to become heroes, too?

Most of us don’t have to go to war. But we’re still in a war today. Rampant, choking inflation. Climbing interest rates. Pollution. Dependency on the Middle East.

Brave men and women gave their lives for us to have a better world. And when it comes to our big moment to contribute… to be counted on…

… what the hell are we doing?

Squat.

Here’s something you can do to be a hero TODAY: Drive less. Ride a bike. If you have to drive, drive 55.

We ALL can do that. Right now. This very minute. We can reduce our oil consumption by 10-15%.

Let’s throw out the lead foot (i.e., fast starts/stops) and we save another 10-15%.

Why does this make you a hero?

Because we lessen our dependency on oil politics… whether that’s Middle East or in our own backyard.

Because less oil consumption means less pollution.

Because less oil consumption means less demand and therefore falling oil prices. And — CRITICALLY — there is a one-to-one correspondence between oil prices and inflation. Higher oil, higher inflation.

But LOWER oil, LOWER inflation. Everyone has more money in their pockets. Interest rates are lower. Less pollution so everyone is breathing a bit easier, including the Planet Earth.

And just like that… without government intervention… without having to watch the market painfully spiral downward… without really anything more dangerous than a slight change of bad habits… YOU’RE A HERO.

Just like that.

Btw, if you’re someone who’s saying, “forget that, my freedom is the ability to burn as much gas as I please!” … then you’re someone that doesn’t deserve the sacrifice made by our fathers and mothers… because acting irresponsibly does NOT equate to personal freedom… it equates to you being a selfish, unappreciative jerk.

We’re at war… no one is asking you to risk your life… just sacrifice a little bit of speed for a whole lot of good.

Be a hero. Drive 55.

(NOTE: This article was published in Seek Alpha on April 19, 2022, sorry for my delay posting it here!)

SUMMARY:

  • Skillz (SKLZ) announced significant operating changes during their Q4 2021 earnings call, including material cost cutting having to do with ineffective marketing spend.
  • Cost cutting is critical.  But as important is cutting their excessive fee structure (i.e., their “vig”).  Because their problem isn’t getting betting players, but rather keeping them betting.
  • Reducing their dispiriting 50% betting fees to the industry standard 10% won’t affect revenues and could be key to creating sustainable profitability, possibly 1-2 years ahead of guidance.
  • I have a Strong Buy recommendation on SKLZ.
Thesis

Skillz (SKLZ) announced major operating changes in their Q4 2021 earnings call, including material cost cutting having to do with ineffective marketing spend. This cost cutting is critical. One doesn’t need to look past their Q4 2021 P&L results to figure this out.

But even with cost cutting, bears think this situation is unfixable.  That a lot of their revenues were due to “free money” promotions and cutting these will cause revenues to plummet and the company to still crash and burn.  Certainly the current share price reflects this.

But, tactically, the situation has a straightforward fix. Simply reduce the vig — that is, the fees Skillz charges bettors — from their current (and dispiriting) 50% to the industry standard 10%.  Change the vig, change the world.

Bears will counter getting less vig would cause revenues to drop even faster. But they won’t, because when you run the numbers, nothing happens. Well, check that, something important does happen: The revenues become recurring and sustaining.

For my first look at SKLZ, I wrote an overview piece on the company explaining why it was woefully misunderstood and undervalued and tagged it with a “Strong Buy” (and still have that rating). I did so because the company has just too many things going for it to be trading near gross cash levels, including scalable technology, sophisticated infrastructure, a large, established base of paying and non-paying players, a deal with the all-powerful NFL — and now the wildly-popular UFC — partnerships that are sure to attract other top brands, and 3/4 of a billion in gross cash in the bank. But most important for a growth company in this market: An achievable path to profitability.

But it doesn’t have profits right now, which is what the market wants to see. This article examines Skillz’s cost cutting in more detail and its potential effect on profitability, including ways to accelerate profitability 1-2 years ahead of guidance.

Understanding The Other Two Important Numbers In SKLZ’S P&L

Certainly revenues and profits are important numbers in any P&L. But what drives those numbers? And in particular, what drove the gaudy $155 million Skillz spent on Sales & Marketing in Q4 2021?

Two things: $85.6 million on New User Acquisition… and $56.7 million on Engagement Marketing. As the company acknowledged, “Candidly, we spent more than we should have in both user acquisition and engagement marketing in Q4”.

User Acquisition marketing costs in Q4 2021. (Skillz Q4 2021 Investor Day presentation materials.)

Engagement Marketing costs in Q4 2021. (Skillz Q4 2021 earnings press release.)

The company is now committed to cutting User Acquisition and Engagement Marketing costs.  Which is great and needed news.  But the relevant question is why did Skillz feel the need to spend all that money in the first place?

Of course there was great pressure to continue growing its player base.  Like many companies, Skillz was simply offering customer incentives in an effort to kick-start players… the same way it did all through 2021… only accelerated in Q4 in an effort to end the year with a bang.

However, what it really was doing — what it has been doing for a long time now — was trying to make a premium but non-standard fee structure work.  While throwing gobs of money at players did accelerate the top line for many quarters, the “easy money” environment was also distracting from what was happening to the bottom line: Trouncing it. 

Every company needs to incent customers, but after spending nearly half a billion on just marketing in 2021 — compared to less than $400 million for all of 2021 revenue — Skillz now has more than enough proof that its old approach doesn’t work.  Let’s talk about why.

Engagement Marketing That Didn’t Stand A Chance

I’ve always loved the old joke, “The beatings will continue until morale improves!” It kind of reminds me of Skillz pushing “promotional cash” at players and, like the joke, no matter how much promotional cash Skillz doled out, it just wasn’t improving the bottom line.

That’s because it’s not the amount of promotional cash that’s the main issue — that actually did a fine job getting players to open their wallets (as unnecessarily excessive as it was). It’s Skillz’s vig — their commission — that’s chasing away paying players once they start betting. It’s way too high.  Impossibly high.  It’s literally that simple. Change the vig, change the world.

Let’s review: The betting action in a Skillz game — for example, their new NFL 2-Minute Football — is intoxicating… addictive… exactly what you love to see in a legal vice investment. SKLZ is ringing the cash register twice every 60 seconds. Each player wagers a standard $0.60 “entry” fee and Skillz rakes $0.20 every game play. Betting players play on average almost a couple dozen games a day, so the games — and fees — add up fast.

Wow, sounds great if you can get it! But that’s the problem, Skillz isn’t getting it for very long. This is what a Skillz wager looks like to anyone that understands betting — like every NFL and UFC bettor in the world:

Standard bookmaker “vig” vs. Skillz. (The Lone Contrarian’s calculations.)

That graphic says it all, eh? It answers a lot of questions important to the success and/or viability of the business, for example:

Q: Why aren’t players buying in more (i.e., recurring revenue challenges)? 

A: Because it’s impossible to win when the house is taking 5x the standard % rake.

Q: Why was Skillz’s Engagement Marketing “free cash” promotions ineffective in incenting players to buy in again? 

A: Because whether I play with my money or their free cash, I’m going to stop betting once the money’s gone.  Impossible to win.  One and done.

Q: Why does Skillz have so many non-paying active players? 

A: Because players love their games, but not their fee structure… so when they’re done getting hit over the head with a 5x vig, they just continue playing for free. If you are a Skillz player, you know this to be true.

But this is easily fixable: Just change the vig.  That simple.  Change the vig, change the world.

Bears are probably screaming now, if you change the vig from 50% to the standard 10%, revenues will crater!

This is why I believe bears don’t really understand this company. That isn’t the way betting works.  That isn’t the way mobile gaming works.  That isn’t even the way the numbers work. Run the numbers, nothing changes. The revenues stay the same. Well, check that, something important does change, the revenues become recurring. The golden ticket to a sustainable business.

Let’s quickly look at the math: With a 50% vig (what Skillz has today), a $10 buy-in, and evenly-matched games, a bettor playing the $0.60 “Regular Season” game will win $0.40 half of the time and lose $0.60 half of the time. That’s an average loss of $0.10 every game. So $10 buys you 100 plays, not even a day’s action for some players.  And at the end of those 100 games, the house’s take is $10. Because the vig is so high — and it becomes apparent that it’s impossible to win — players don’t buy in again. But they do keep playing for free.

If we change the vig to 10%, guess what, the house’s take is still $10. The only difference is it takes more games for the house to earn the same amount of money… but — and this is the critical piece to understand — these are games that are going to played anyhow whether they’re betting games or on the free practice field… as evidence by Skillz’s sky-high 84% active-but-non-paying player percentage.  Changing the vig won’t even affect the performance of their network… because Skillz is already serving these games.

50% Vig vs. 10% Vig: The house earns the same either way. (The Lone Contrarian’s calculations.)

I’m sure Skillz was hoping it could charge a premium.  After all, what they’re doing is so new.  And exciting.  But it’s just not working.  Bettors know better.

Skillz seems to have forgotten the basis of what I consider its break-through business concept:  Instead of just making mobile games and struggling — like the zillions of other aspiring game developers — to charge for game play, they tried to solve that problem for the entire industry by creating a development platform that positioned game play as something brand new in gaming: A legal wager. Brilliant! 

But critical to that concept: A bettor wants to win money.  That’s why they’re betting.  But it’s virtually impossible to win against Skillz’s 5x rake in an evenly-matched game. Almost all of the players always lose.  And quickly.  So it can’t be anything else but one and done.  Because betting may not be the smartest thing to do, but even the craziest of bettors figure out when the deck is stacked so completely against them.

So Skillz built a fantastic company with fantastic technology and a fantastic infrastructure, all based on a brilliant idea, and they did all of that and then spent a huge amount of effort and time and cash just getting a player to the money table… only to… what?  Chase them away to the free games because of an impossible 5x rake?

It’s time to share the key insight here: Skillz players want to bet. They just invested a lot of time becoming hot stuff at a Skillz game.  All SKLZ has to do is not stack the deck against them.  Give them a standard vig — one that every bettor is used to — and one that’s been in use since betting was invented, a vig that every bettor thinks they can overcome.  If I don’t feel like the deck is stacked against me, I like to compete (that’s why I’m playing video games in the first place) so I’ll buy-in again… because playing for money is just more fun than playing for fun. Buying in again… and again… and again… is the very definition of healthy recurring revenues (as ironic as that may sound :).

The good news is Skillz can easily change their vig — without affecting revenues — literally overnight.  And the $56.7 million they spent on Q4 Engagement Marketing?  Most of that gets saved overnight, too.

From a revenue point-of-view, there’s another enthusiastically welcomed upside: SKLZ has 3 million active, non-paying players… and many might love to bet again if said deck wasn’t stacked against them. Bringing a big chunk of those 3 million active, non-paying players back into the betting fold would put a JOLT into revenues, eh?

But also MONUMENTALLY important:  Skillz must lower the vig before the mass of NFL bettors enter the picture. The sooner the better.  Because NFL bettors are savvy and won’t stand for paying a 5x rake. The NFL opportunity will otherwise be D.O.A. and Skillz will have snatched defeat from the jaws of victory.

We Don’t Need No Stinkin’ New Customers
Skillz Monthly Active Users exited Q4 2021. (Skillz Q4 2021 earnings press release.)

(* A nod to Mel Brook for a variation of a famous quote from his 70’s classic, Blazing Saddles. : )

Why did SKLZ spend almost $86 million on new customers when it has about 3 million unmonetized players — players who love their games enough to still play actively? They might have also forgotten that the easiest customer to get is an existing customer.

Let’s put this in perspective: If they figure out how to get 1-in-5 to pay the average, they could double revenues. Organically. Sustainably.  As suggested above, changing the vig can do this all by itself (and more). Change the vig, change the world. But there’s more revenue to be found here.

Because while this may sound odd to bettors, there are some people that don’t want to bet… they only want to play free games. So figure out how to make money from their free play.  It’s not like that’s new or anything, much of the mobile gaming industry already relies on monetizing free play. For example:

* How about that time-tested approach, having players watch a rewarded video before a free play? (Maybe give them a 30-day grace period, get ’em hooked, then start showing ads.)

* And that other time-tested approach, paying a cheap monthly subscription so you don’t have to watch ads. This is the subscription generation after all.

* In your multiplayer games, how about selling game skins, Leaderboard animations, dances, badges, and such? That seems to work nicely for free games like Fortnite.

* Even something as trivial as a tip jar can turn out to be a revenue contributor.

But maybe as important: How about creating new kinds of money games… designed to attract non-bettors?

Maybe enter a $1 non-bracketed tournament that happens every hour… where I can play 120 other evenly-matched competitors.  We all play three games and the top 10 averages divvy up $100… spreading it out a little bit just creates more excitement, happiness, and engagement.  Maybe the next 10 participants get Ticketz (Skillz’s virtual currency)… and  — as all gamers know — there are bragging rights for making a Top 20 Leaderboard.  As a player myself, I love those odds for a buck. I just took a break from writing this article, played three games, and kicked butt.

How about a “Daily Subscription Tournament”? Pay $9.99 and your subscription gets you into a month of daily non-bracketed tournaments — that’s just $0.33 a day. Same as above, everyone plays three games, but the top 10 averages divvy up $1,000 and the next 90 participants get Ticketz.  More bragging rights, happiness, and engagement.

Feel free to shorten the $1 Tourney cycle time, or run a different Subscription Tournament for each hour of the day as participation dictates.  By holding these daily tournaments, you just know I’m going to be on the free practice field a lot, so that supports the other monetization techniques discussed above, too.

With over 3 million active, non-paying players, Skillz doesn’t have to look beyond its own registration list to get new paying players. And shouldn’t. If for no other reason, they could have their hands full with new players come this fall when their NFL partnership kicks in. Right now, though, keep cutting most of your $85.6 million User Acquisition spend, it’s not needed. This literally could turn the entire quarter around by itself.

So What Does This All Mean For The Numbers?

Glad you asked. Here’s what 2022 Q4… Q3… or even Q2 could look like:

Back-Of-The-Envelope P&L Projections for SKLZ in some quarter of 2022 based on the actions suggested in this article. (The Lone Contrarian’s projected calculations.)

Same Back-Of-The-Envelope P&L Projections as above but without interest expense. (The Lone Contrarian’s projected calculations.)

Assumptions:

* Baseline revenues are Q4 2021’s RAEM (Revenue After Engagement Marketing) and to be conservative I assume no increase (vs. Skillz guidance of “above 30%” growth). Recall that this metric is essentially “net revenues,” i.e., doesn’t include any promotional money in the tally.

Reducing the vig means getting to invite past betting players to wager again. I’m assuming 1-in-5 will try their betting hand again… remember, these are players that want to bet again. So that doubles revenues to $104 million.

I am not, however, including any other recurring buy-ins, digital advertising revenues, newly created cash games, or any revenues from the NFL partnership. Note: I am not including these because the goal was to see the effect of cost-cutting activity on profitability.  Clearly, though, I feel strongly that all of these efforts can drive additional, significant revenues.

* I’m using costs from the December 2021 quarter as a baseline.

* Revenues are decreasing from Q4 2021 but we’ll still keep Cost of Revenues at Q4 2021 level.

* Baseline costs include a 10-15% increase in employee compensation, New User Acquisition cut by 80% (and, per company comments, Aarki to save 30% on the remaining 20% that is being spent), and Engagement Marketing cut by 80% (and Aarki again to save 30% on that remaining 20%, too).

* The company recently registered almost 16 million additional shares.

* I added $7.7 million per quarter for their Dec 2021 $300 million financing that carries a 10.25% interest rate.

* For this back-of-the-envelope exercise, I’m not including any “Change in fair value of common stock warrant liabilities”, “Other income (expense), net”, or “(Benefit) provision for income taxes”.

What’s It All Mean?

Profits!

OK, to be clear, it’s back-of-the-envelope and just $0.003 per share for whatever quarter they decide to change their vig, which isn’t even rounding error to a penny. But given that the average Wall Street analyst is predicting a loss of about -$0.15 per share per quarterany profit should quiet those that believe the company is going to run out of cash soon.

As important: Without their big interest payment, they have a profit per share of $0.02.

Fun to think what adding more recurring revenue (especially from the 3 million active but currently non-paying players), digital ad revenue, revenue from newly created cash games, and NFL revenue (!) can do to SKLZ’s top line.  Jumps by leaps and bounds, as does its bottom line.  But that is for a future article. 

But it all starts with reducing the vig. Change the vig, change SKLZ’s world.  In this case, the results could be moving up profitability guidance 1-2 years.

I like the Skillz exec team and for all I know they’re way ahead of me with all of this. Or have figured out an even better cost-cutting and monetization approach. But what I wanted to illustrate in this article is with just a few easy levers pulled, we can already see a dramatic difference to SKLZ’s bottom line in a short period of time.  It’s why I continue to think this company is woefully misunderstood and undervalued.

Will Smith’s son, Jaden, tweeted this after his dad’s despicable behavior at the Oscars:

And That’s How We Do It.

There were about a dozen different ways Will Smith could have protected his wife’s honor in an honorable way.

But this is what he’s dishonorably taught his son: Violence Matters.

I’ve always loved Will Smith movies. He’s always been such a positive role model. He now needs to voluntarily give up his Oscar so that he can teach his son — and all the other sons out there — that violence is never the answer.

Doing so would convince me that he is truly sorry for the way he handled this situation — and I think second chances are important in life… most especially now with this dangerous and damning “cancel culture” that has infested modern society.

However, if he chooses not to, I’m not sure I’ll ever watch another Will Smith movie again.

To paraphrase Hollywood and Spider-man: “With great fame comes great responsibility.”

P.S. Btw, I was never a big Chris Rock fan… but he just zoomed to the top of my list.

This is not a Reuters headline you want to wake up to… being put on a Chinese “unreliable entity list.”

Looks like we’re heading for a showdown between everyone’s favorite American president and everyone’s favorite Chinese Communist Party.

And, unfortunately, Apple (AAPL) may be caught in the middle.

Ouch.

Apple reporting earnings yesterday.

They beat significantly lowered expectations on top & bottom line.

How excited were analysts?  Not very.  Only a few upgraded price targets (a bearish sign), and then only by small amounts (also a bearish sign).

AAPL tried to rally… but couldn’t make it over $300… and fell back for a loss on the day.

There’s a reason why 80% of analysts CUT price targets going into earnings… because the virus has really bashed Apple. 

Here is the perspective:

Apple’s guidance for this quarter was a revenue range of $63b to $67b.

From Apple’s conference call yesterday, Tim Cook said:

Based on Apple’s performance during the first five weeks of the quarter, we were confident we were headed toward a record second quarter. At the very high end of our expectations.

That means they were on track for $67b.  But actually it probably means they were on track for $68b to $70b… since Apple is notorious for sandbagging guidance.

But, with the virus, they only logged $58b in revenues.  (Still a huge number, btw.)

Assuming even revenue distribution through the quarter, the $67b would have been about $22.3b per month… so theoretically the $58b was $22.3b + $22.3b + $13.4b, since the bulk of the virus problems hit in March.

So… if we take $13.4b as what they did in March… and assume an “uptick” for April (as Cook called it in the earnings call)… and assume things don’t really open up in U.S. or Europe until June… and assume a “normal” June… we could guess revenues might be $14b + $14b + $22.3b or about $50b…

… that’s if everything opens up in June and things go back to the “happy go lucky!” good times of Janurary.

Hello?  Are any of the Apple fanboys bidding up AAPL listening?  That’s still a big-ass revenue contraction… like 30% below a ballpark of what their pre-virus performance might have been… when the stock was hitting an all-time high of $327.85.

So why is AAPL currently trading just 10% below that now?

Because the reality of the next 1-2 quarters hasn’t sunk in for Apple investors yet.

Seems to me my simple, back-of-the-envelope hack calculations suggest AAPL should be down another 20%… or <$240.

And that’s not even including what happens if we see a second wave of infections… or if the market, which shot up in April, naturally cycles down 5-10% in May.

My 2 cents.

I’m a contrarian. It’s my observation that when everyone thinks one thing, the real, outsized opportunity is the other.

But what happens when everyone thinks one thing… but the market is thinking quite another?

Take AAPL. From a low of around $212 a month ago, it’s powered its way to almost $290. More impressively, just about 12% from its all-time high.

Heck, if you went way out on a limb, you could probably say that’s even within a normal trading range.  “Has the whole world stopped?  We didn’t notice!”

But all through this romp upwards, most Apple analysts have been decidedly negative.

Out of about 30 analyst moves in the last two months, a whopping 80% of them were downgrades.

To put this in context, Intel analysts were split 50/50 between upgrades and downgrades going into their earnings last Thursday.  So, relatively speaking, 80/20 to the negative side is a big spread.

 

 

As important, some of the AAPL downgrades were double downgrades… that is, a second price-target cut within just a few weeks.

So what’s the contrarian play here? Go against analysts and buy?  Or go against the market and short?

I think you go against the market. That’s the bigger “everyone” in this case.

Going against the market also seems, well, more rational to me.  I love Apple but I think the current market enthusiasm seems excessive given our uncertain environment:  Uncertain when lock-downs will end… uncertain that people will want to congregate at Apple Stores when they do… uncertain when we’ll see a vaccine… uncertain that a 2nd, or even 3rd, inflection wave may hit… and so on.

This uncertain environment is awesome for a select number of businesses… say Amazon and Netflix… but could be less kind to a (mostly) consumer hardware company like Apple.  Not that I’m not saying people can live without their iPhones — they can’t — but I am saying they may be less quick to buy $1,000 upgrades.

No doubt, what makes going against Apple scary is it’s one of a handful of companies that has the business levers to manage its way around a crisis like this.  And they are notorious for pulling rabbits-out-of-hats.

Still, a V-shaped recovery?  THE ENTIRE WORLD HAS SHUT DOWN.  Does a (mostly) consumer hardware company merit trading anywhere near an all-time high?  Does the market merit trading anywhere near an all-time high?  Somewhere in this equation there has to be some p-a-i-n.

I’m not the first person to say there’s a good chance we’ll see another downdraft.  So if Apple does surprise to the upside, AAPL could still take a tumble along with the rest of the market.  Nice to have a backup scenario in this situation.

P.S. A couple of other quick AAPL trading comments:

  • While Apple has done a terrific job moving into services, these are still only about 20% of company’s revenues. Meaning, Apple is still mostly a hardware company.
  • Intel, also a hardware company, has had a similar run-up as AAPL. Last Thursday INTC blew away their numbers, benefitting from the Coronavirus “work at home” situation. Apparently, with mobile being such a huge focus the last few years, home desktop machines have been ignored and needed updating.
  • In contrast, you don’t need to upgrade your iPhone to work at home.
  • One last data point: Even though Intel blew out numbers, INTC finished flat for the day.

Dow is a hair away from 24,000 as I write this.  Nasdaq a shade over 8,500.  We’re back to being closer to the top than the recent bottom.

Today’s action felt like it’s really, truly going to be a V-shaped recovery… that we should be back at our old highs in no time at all.

But… b-e-w-a-r-e.

Because it was just a few weeks ago that it felt like the crashing would really, truly never end.

And that’s what happens during a crisis… the mania swings in both directions.

Don’t get me wrong:  We have a lot going for us in this crash.  Oil is really low… and that’s my #1 requirement for an advancing economy.  Companies headed into this crisis with a lot more going for them, too (i.e., real growth, real revenues, and real profits).  And lots of technology companies are going to absolutely thrive in this crisis, for example, Amazon, Netflix, DoorDash… anything to do with the cloud… and so on.

And, critically, the government has backstopped everything with TRILLIONS in bailout money.  (“Oh, yeah, that.”)

But let’s call a few spades spades here:  THE ENTIRE WORLD JUST STOPPED!  That’s going to affect many, many more companies than will benefit.  Stocks ran up waaay too much before the crash, too, so even without a crash, they needed a 10-20% correction just to whack them back in line.  And — most significantly — no one really knows when we go back to normal.

This last point is the key.

This V-shaped rally — where stocks go straight down, then go straight back up, forming a “V” pattern — is almost entirely predicated on us getting back to normal soon.

As in, investors already know this quarter is going to be a disaster, but they think they might have the next one in the bag.

But what about the next quarter?

If I’m the CEO or CFO responsible for offering public company forward guidance… in this environment… there’s no way I’m touching that with a 10-foot pole.  That’s a guaranteed lawsuit just waiting to happen.

So, unless I’m one of the handful of companies that are crushing it during this crisis, there’s no way I’m going to be even the slightest bit optimistic about the future.  Because everything is uncertain.  How long this will last.  What the 2nd wave looks like.  Or the 3rd.  Or if people really are developing immunity.  And so on.

So I either give the biggest low-ball guidance in history — or what is happening more and more — I simply refuse to offer any forward guidance.

That’s when the next shoe drops.

When analysts and investors see this negativity… then try to understand this negativity… then realize they’re now really, truly flying blind… that’s when the rug gets pulled out from under them…

… and the market, too.

Because that’s not going to feel like “soon.”  That will, for a period, feel just like FUD (Fear, Uncertainty, and Doubt).

It’s inevitable.

Because mania is inevitable.

Everyone is weighing in on Coronavirus prognostications.

I will try to keep mine to just the ones I feel are fairly unique.

My theme?  We couldn’t be better prepared for exactly the crisis we’re going to be going through.

*  This isn’t like the last two great crashes.

The 2001 “Dotcom Crash” was based on massive valuations with zero profits — and in many cases, zero revenues.

The 2008 “Great Recession” crash was based on artificially pumped up real estate prices, not real productivity gains.  (It was also exacerbated by skyrocketing oil prices, due to political, not fundamental, issues… and had twice the unemployment we have now.)

Whatever we’re calling 2020 — The Corona Crash? — we’re starting with real businesses, with real revenue growth, making real profits, involved in real productivity gains, historically low unemployment, and extraordinarily low oil prices.

In other words, we’re already starting with a much stronger hand.

*  Ironically, many of the productivity gains of the last decade involve remote technologies, i.e., letting employees work from home, ordering pretty much anything online, and, as important, socializing from a far.

So, in many ways, the last decade or two has been great practice for this exact situation:  Remote working, remote living, and social distancing.

*  Not only are the remote technologies in place, but the entire millennial generation prefers to socially distance.

Half the time millennials have their heads buried in their phones — even when they’re sitting right next to each other.  So do you really think they care whether they’re in the same room or a different state?  Not at all.

*  While older generations panic about bailouts and handouts and such, the entire millennial generation knows nothing but bailouts and handouts.

So do millennials think we’re in a crisis?  Absolutely not.  Feels pretty normal to them, like it’s just something we go through every once in a while.  What’s the fuss?

*  And finally:  The market needed to be popped.  Markets aren’t supposed to go straight up, like they did almost the entire month of February.

So we’re down 20%?  I can easily make the case we were 30% overvalued.  Because markets aren’t supposed to go straight up.

I’m not saying it’s not going to be rough, but I am saying we seem to be particularly prepared for this crisis.  It’s like a lot of what we need to do is already done.

We’ll see.

There’s a lot of noise in the market.

But there’s usually a lot of noise.

By definition — at any point in time — 50% of people think there’s enough bad in the market to sell their shares to the other 50% who thinks there’s good.

Can’t have a market otherwise.  That’s why I always scoff when someone refers to “easy” trading periods.  It’s never easy.

What helps guide you through the noise is whether your fundamental investment thesis is still intact.

Is mine?  I think the two biggest drivers of corporate profits — which drive the market — are the price of oil and interest rates.  Let’s see where they stand:

* While oil took a little run to the upside, I wouldn’t call it misbehaving.  In fact, it’s shed much of its 2018 gain

* Interest rates are spooking everyone… but 10-year is sneaking back down… and Trump’s on fire about the Fed messing things up — so much so that a few Fed governors have had to reiterate that they won’t, uhm, mess things up (i.e., “will still be accommodative for quite a while”)

* Sentiment is negative.  While that’s not comfortable, as a contrarian I prefer this

So, for me, at least right now, the noise is… just noise… and what we’re seeing is some healthy “letting some air out of the balloon”… which we like… so it doesn’t pop.

 

P.S.  A great example of “noise” was Caterpillar earnings.  They beat top & bottom line.  But everyone was fretting about China and tariffs… and the stock got pounded… even though if you read their commentary, you find CAT itself wasn’t so worried about the effect of China or tariffs on its business.  Here’s some commentary from their 10/23/18 earnings call:

* CATERPILLAR SAYS FEEL GOOD ABOUT EQUIPMENT DEMAND IN CHINA NEXT YEAR

* CATERPILLAR SAYS EXPECT BUSINESS TO CONTINUE TO IMPROVE IN 2019 VERSUS 2018

* CATERPILLAR SAYS CONTINUE TO EXPECT INDUSTRY SALES IN CHINA FOR 10-TON-AND-ABOVE EXCAVATORS TO BE UP ABOUT 40 PERCENT FOR THE FULL YEAR

* CATERPILLAR SAYS EXPECT IMPACT OF 25 PERCENT IMPORT TARIFF ON ADDITIONAL $200 BILLION CHINESE GOODS TO BE ‘QUITE MINOR’

These are all good things, right?!

No one is really talking about what could potentially be MIND BLOWING at tomorrow’s big Apple announcement.

Sure, lots of talk about the next rev of iPhones.  And bigger iPads.  But Apple TV is relegated to back-of-the-bus stuff.

Why?  Because everyone had been expecting either (1) an actual Apple TV set, or (2) that whole “skinny” bundle cord-cutting thing… so they’re all somewhat disappointed.

But I think — rather, I’m hoping — everyone has it wrong.

And that is that Apple has created a product that will let Apple do to the TV experience that they did to the cell phone experience… and that is completely redefine what we expect from TV.

How will they do this?  By announcing “iOS TV”… essentially unleashing their 11 million or so iOS programmers on TV.

That would change the face of TV as we know it.

It’s been a really long time coming (here and here).  But, in about 24 hours, we could be saying once again, “Do you want to do this with your TV set?  Yep, there’s an app for that!”

Right.

Not for the faint of heart.

On days like Thursday and Friday — where the market was pounded into oblivion — it’s good to take a step back and test popular thinking.

There are two themes driving the market:  China and oil.

China

China is slowing down.  Which businesses are affected?  Certainly the infrastructure businesses.  The fall out?  The commodity free fall.  (Yet another thing pressuring oil downward.)  What about Chinese consumers?  Not so much, China is still growing at 6-7% — considered hypergrowth for just about everyone else — so obviously the Chinese working class is still benefiting.  Remembering that the ills in the Shanghai stock market only affects 1 in 10 Chinese consumers… which (I’m concluding something obvious for emphasis) leaves 9 of 10 unaffected by the volatility… and I suspect consumer spending in China probably feels like Silicon Valley restaurants during the last two stock market crashes:  Still packed.

Oil

Oil is going down, which some people think is bearish because they believe it’s an indication that the world has stopped growing.  I won’t say that’s a good thing…

… but cheaper energy prices means more money in everyone’s pocket… which means everyone can buy more things… like highly desirable iPhones and such… and that means higher corporate profits…

… which is a great thing.

So, weird to me that people are weirded out by falling oil prices… that’s something to celebrate.

BTW, falling oil prices are less a function of lessening demand and more a function of greater supply.  We’re producing more than the world needs right now, no wonder oil prices are coming down.

More Responsible At Home?

On top of all of this, U.S. consumers seem to be acting more responsibly… check a news item that seems to have slipped through the cracks on Friday:

The national average FICO score is now 695 — the highest it has been in at least a decade, according to the latest analysis from Fair Isaac Corporation, the score’s creator.

In Summary

I disagree with the major themes driving the market.

The Chinese consumer isn’t history.

Lower oil prices are good for everyone except for those in the oil business (sorry oil business!).

And, as painful as it is to say, blowing off steam isn’t the worst thing in a bull market that’s lasted as long as this one… in fact, it’s kinda healthy.