Macroblog is the blog of the Federal Reserve Bank of Atlanta and it often posts cogent and insightful analysis of macroeconomic topics. The bank’s most recent post is an analysis of the state of the labor market which focuses on the broader U6 measure of unemployment. The article notes the those who move from that broader series into the work force still have a very difficult time finding work as only 10 percent of those who move into the labor force find a job within a month.
Something called Coupons.com went public with an IPO which raised $168 million. The shares surged post the offering and were up as much as 88 percent from the offering price which attached a $2.2 billion market cap to this firm which lost money last year and had sales of $168 million last year.
This is just another in a long list of stupid valuations. I hope this ends soon while I blog because I love the smell of napalm in the morning.
Via the WSJ:
Coupons.com Shares Nearly Double in Debut
The Coupon-Providing Website Valued at About $2.2 Billion
Steven Boal started Coupons.com Inc. COUP +87.50% in 1998 but didn’t take it public during the dot-com frenzy. Sixteen years later, amid the hottest market for IPOs since the dot-com days by some measures, the digital discount distributor is finally stepping out.
Coupons.com CEO Steven Boal on the trading floor of the New York Stock Exchange on Friday. Reuters
On its first day of trading Friday, the Mountain View, Calif.-based company’s shares jumped 88% to $30, nearly doubling their $16 initial price.
The IPO raised $168 million for the company, and after the first-day “pop,” Coupons.com has a stock-market value of about $2.2 billion.
Coupons.com is no longer just a dot-com. It has tapped into a surge in investor demand for “enterprise software” companies. Coupon.com’s software is sold to retailers and manufacturers of consumer goods, which use it to distribute coupons through the Web, mobile devices and social media.
Mr. Boal, who once worked in derivatives-trading technology at J.P. Morgan Chase & Co., co-founded Coupons.com with his wife and another business partner. Their first big expense was $1.3 million, plus some of the equity in the company, to buy the Coupons.com domain name.
“Blind ambition” stopped Coupons.com from going public in the late ’90s, Mr. Boal said Friday. The founders eschewed venture-capital money because it would come with pressure to expand quickly. Instead they funded the company with their own money and with investments from friends and family.
They wanted first to build a big enough platform to handle potentially billions of transactions. In the early days, the company’s website crashed after a local TV station featured it.
Once the dot-com IPO market dried up in 2000, it took Mr. Boal over a decade—”much longer than I expected”—to convince enough big packaged-goods makers to adopt an online platform on a large scale that would give Coupons.com the size needed to go public. The coupons distributor now counts Campbell Soup Co. CPB +0.43% and Procter & Gamble Co. PG +0.41% among its clients.
Mr. Boal, who serves as CEO, said that having an established customer base was the major difference between today’s IPO market and the dot-com era. “Today, you really have to have a foundation around your business,” he said. “You can’t make up for a bad business model with free shipping anymore.” Post-IPO, Mr. Boal has a 9% stake worth more than $200 million.
The U.S. IPO market has surged in 2014, with the 46 deals so far matching the pace set in 2007, which was the best start to a year since 2000, according to Dealogic. There were also 56 new IPO filings through February, the best pace since 2000, according to Renaissance Capital LLC, an IPO research and investment firm.
Other online discounters have had mixed success after going public. Daily-deals company Groupon Inc. GRPN +0.94% jumped 31% on its first day of trading in 2011, but its stock is now down 57%. RetailMeNot Inc., SALE +1.40% an online-shopping discounter, is up 108% since its IPO last July.
In 2013, Coupons.com recorded $168 million in sales, an increase of 50% from the prior year, on 1.3 billion revenue-generating transactions, up 43%. The company posted a loss last year, $11.2 million, though it was profitable in the fourth quarter, which Mr. Boal attributed to a pickup in the holiday season.
Analysts will look to see how well it retains big-brand customers over time. “Consumer-packaged goods brands tend to spend their budgets on a campaign basis, rather than on a recurring basis,” said Rett Wallace, founder of Triton Research LLC, a private-company data firm. “This makes the business hard to win, and hard to keep.”
This is a rather lengthy article from private intelligence and analysis firm Stratfor. It delves into the process of imposing trade sanctions on Russia and what is necessary to make the action meaningful.
As the standoff between Russia and the West continues over Ukraine, the United States is considering enacting trade sanctions against Russia. However, there is little Washington can sanction that would affect Moscow significantly, unless the White House takes the drastic and unlikely step of banning U.S. firms from working with or in Russia.
Any sanctions regime would require Europe’s participation if it is to pose a meaningful threat to Russia, and enacting real trade sanctions against Moscow would hurt many Europeans as well. Washington will probably have to act on its own if it moves forward with sanctions.
What Can the United States Do?
The Possibility of Allied Sanctions
Russia’s Potential Response
The Wall Street Journal has a long story on the tired bull market in equities. The article notes that stocks are not cheap anymore and the future capital appreciation will need the support of growing corporate profits. The equity market needs to shift to a market supported by company fundamentals rather than by the raging torrent of QE liquidity.
Via the WSJ:
To Continue Gains, Stocks Are Liable to Rely More on the Economy Than Fed Support and Need Higher Corporate Profits
Hitting Bottom: Traders work on the floor of the New York Stock Exchange on March 9, 2009. Reuters
As the bull market turns five years old, stock investors have a lot to celebrate.
The Dow Jones Industrial Average has soared 151% since stocks bottomed March 9, 2009, following the financial crisis. That ranks it fifth in gains among the 32 bull markets since 1900.
It also is tied for fifth-longest-running, in trading days, with the one that ended in 2007, according to Ned Davis Research.
If the current stock advance lasts another 16 trading days, it will be the fourth-longest, surpassing the one that ended in 1987.
The Nasdaq Composite Index is up 242%, and the Russell 2000 small-stock index is up 251% in that time. A bull market is commonly defined as a gain of at least 20% from a market low.
But this bull market is showing its age. The Dow, which rose 30.83 points Friday to 16452.72 on stronger-than-expected job-creation news, is down 0.7% this year. The S&P 500 is up just 1.6% this year, although it closed Friday at a record 1878.04, up 1.01 points.
The question now is whether the still-soft economy can push stocks higher as the Federal Reserve slowly ends the multitrillion-dollar stimulus program that has supported stocks for so long.
The widespread expectation is the bull market isn’t over but will rely increasingly on improvements in the economy rather than Fed support. Many money managers believe the character of the market is changing. “The stock market doesn’t look like it is going to get year after year of double-digit growth as it has in recent years, but the bull market can continue as long as you get continued economic growth pushing stocks higher,” said Russ Koesterich, chief investment strategist at investment firm BlackRock Inc., BLK -0.10% which oversees $4.3 trillion.
But further gains are far from guaranteed, Mr. Koesterich added. Stocks no longer are cheap by historical standards. For them to keep rising, U.S. corporations must push profits higher at a time when profit growth has slowed. An economic glitch or a sudden upswing in interest rates could put an end to the stock gains.
The S&P 500 now trades at 16 times its component companies’ earnings for the past year, according to FactSet. That is double its level of five years ago and almost identical to the level at which stocks peaked and began their decline in October 2007.
A broader measure of stock prices developed by Nobel-prize-winning Yale economist Robert Shiller measures the S&P against a 10-year average of earnings. It puts the S&P at 25 times earnings, far above the historical average of 16.5 but not quite back to the 27.5 hit in 2007.
If you perfectly timed the market, and got in at the very bottom five years ago, how much would at 10K investment be worth now? WSJ’s Jason Bellini reports.
These measures show that stocks are riskier than before but don’t tell what stocks will do next. Stocks can remain expensive for years. Mr. Shiller’s measure, for example, was at its current level in 2003 and moved higher and lower for four years before the bull market ended in 2007.
The problem is that the market faces three big hurdles: expensive stocks, a slowing pace of earnings gains and profit margins so high they are having trouble rising, said Scott Clemons, chief investment strategist of Brown Brothers Harriman Private Banking.
“That means there is no margin of safety in any of those things,” said Mr. Clemons, whose firm oversees $28 billion. The volatility with which stocks began the year could continue. “I think we will have multiple 5% to 10% corrections in the next 12 to 18 months,” he said. He expects the S&P 500 to finish the year with a gain, but only by 6% to 8%, including dividends. That compares with a 32% rise last year, including dividends.
The stock market’s biggest driver so far has been the Fed’s determination to keep the economy out of a depression and heal the wounded financial system. The central bank cut overnight interest rates almost to zero in 2008. Then it pushed down longer-term market rates by buying bonds in the open market, spending more than $3 trillion since 2008.
Now the Fed is slowly trimming those bond purchases and is on track to end them entirely in the autumn. Its next step will be to gradually let short-term rates return to normal, ending years of exceptional intervention.
Because those who bet against the Fed have lost, few professionals now predict a bear market, meaning a sustained decline of 20% or more. If the economy and financial markets falter, many think the Fed will intervene again.
This optimism has boosted stock demand among former skeptics, both ordinary individuals and people at institutions with money to invest.
Ed Green, co-chief investment officer at Foster Group in West Des Moines, Iowa, has a new not-for-profit client whose money was in cash. Mr. Green began gradually moving half to stocks. Late last year, with stocks up strongly, the client asked to move new money into stocks faster, he says.
Individual investors, once the stock market’s backbone, also have begun returning.
Investors put more than $100 billion a year into U.S. stock funds for six consecutive years starting in 1995, according to Lipper Inc. But after the 2008 crisis, they withdrew more than they invested in 2009, 2011 and 2012. Now, some are returning.
Last year, U.S. stock funds received $172 billion, the highest annual net inflow on record. Flows to U.S. stock funds have continued this year, at a slower pace. Net flows to bond funds, widely perceived as safer but less lucrative, surged after the financial crisis but now have declined in size.
“We are returning to a more normal market, with more normal volatility,” says Mr. Koesterich of BlackRock.
Earlier today I wrote a piece entitled “Asset Allocators ” and described the demand for bonds which would flow from pension funds and insurance companies next week in the refunding process. Some of those end user clients have huge gains in their equity portfolio and on any back up in rates they sell some of their equities and buy bonds. In my earlier post I reported how several traders with whom I spoke today had seen evidence of that flow and expected it to continue next week.
Merrill Lynch research has just published a piece which is an excellent synopsis of that process and how they believe it will impact financial markets in 2014.
Via Merrill Lynch:
- Reverse rotation, redux. Our most important theme this year is that we will see an acceleration in pension money being re-allocated out of equities, into fixed income – i.e. a “reverse rotation” (see 2014 US High Grade Outlook and Retiring the pension deficits). This portfolio shift makes sense as the jumps in stocks and interest rates have significantly improved the funded levels of defined benefit plans, especially on the private side. Given the difficult experience of significantly underfunded pension plans during the post-crisis years, the regulatory requirements for private plans, and the fiduciary duty to diversify we expect that many plans will find it prudent to lock in improved funded levels, or at least de-risk I.e., out of equities, into bonds.
- Selling equities, buying bonds. The 4Q Federal Reserve Flow of Funds data shows that the reverse rotation was alive and well at the turn of the year, as in 3Q and 4Q 2013 US pension funds sold on average $39bn of equities and bought $25bn of bonds per quarter. We expect these numbers to accelerate in 2014, as plans increasingly become fully funded, for a reverse rotation worth at least $200bn, although given the size of the underlying pension portfolios any number is possible. However, the decline in interest rates in the beginning of 2014 represents a step back in terms of average funded levels – for example the average funded level for private defined benefit plans declined to roughly 92% at the end of February from about 95% at the turn of the year. (Page 7)
- Driving credit spreads tighter. As interest rates go back up and the reverse rotation accelerates in 2014, we expect pension demand to help drive credit spreads tighter, especially in the back end of the curve. (Page 8)
- Closing the gap between stocks and bonds. This week marked the first in a multiple week period it will take to close the gap between stocks and bonds, developed over the first two months of the year on US economic weakness and EM uncertainties. Today’s jobs report highlights how we close the gap – upside risk to data as the economy recovers from the cold spell. That drives convergence between rates and stocks as diminished expectations for monetary policy easing compounds the sell-off in Treasuries, while dampening the improvement in stocks and credit. In other words, we are looking for meaningfully higher interest rates and modestly tighter credit spreads
I watch 10 year US versus 10 year Germany and that spread is out to 114 basis points. I have lost the ability to chart as I have no Bloomberg but that spread has hovered around 104/105 as recently as February 28. I just spoke to a trader whose brain I pick regularly and he says that except for an episode in 2005 when the spread reached 120 basis points the current level is close to the widest level since man first learned to walk erect.
The salient point is that this and the interest of asset allocators should lead to relative value types supporting the 10 year and 30 year auctions next week.
The Treasury market holds in well subsequent to the initial round of projectile vomiting in response to the better than expected data. In my conversations this morning I have only heard of buyers and an absence of sellers. One trader noted that he thought an asset allocation trade is the reason that bonds hold in and equities are squishy. Insurance companies and pension funds have an ongoing need for long dated assets and were big buyers in January when the 10 year note was in the 2.90s and the Long Bond was around 3.875. The trader said that since rates have backed up 20 basis points off their low yields (admittedly somewhat artificial as the Ukraine safe have trade drove them down) and equities have continued to rally some end users have chosen to book some equity market gains and place the proceeds into fixed income. My trading friend thinks that the refunding auctions in the long end next week will see excellent demand from real money and he thinks that if there is a concession it will mostly be a steepening of 5s 10s and 5s 30s and some in 10s 30s.
Corporate spreads are unchanged today. I spoke with a syndicate desk manager who thought that while spreads are unchanged the tone is heavy as the market digest this week’s heavy supply. The GE deal from yesterday is slightly tighter than pricing levels. The 10 year tranche priced at 75 and it is 74/71. The 30 year priced at 87.5 and it is 87/85. My source reported that the deal was hugely oversubscribed with $6 billion book for $2.25 30 year bonds and a $4billion book for $750 million 10s. He said that his shop had observed buying from some who had received less allocation than hoped for.
Next week should be a much quieter week than this week with reduced issuance.