Smart Money

Bubble Finance At Work: After 2-Year Growth Stall, OpenTable Goes For 112x

Priceline announced last week that it will pay roughly 112x for OpenTable - the reservation app pioneer - even though its growth has stalled for two years, is assailed by numerous aggressive competitors (e.g. Yelp, GrubHub and numerous international players) and is not protected by any evident moat of technology or branding. The bottom-line is that the artificial attraction of massive capital and trading leverage  (through options) into rank speculation like the PCLN/OPEN deal here does not stimulate sustainable economic growth or a true rise in capitalist prosperity. It simply generates unearned rents for the 1% who have the financial assets and access to play in the Fed’s casino. One can't help but thnk of Dubai.

StalingradandPoorski's picture

New All time highs almost every single day, yet market volumes have literally collapsed. On any given day, you would see an average of 2M eminis (S&P Futures, spoos) trade, and now we are seeing barely 1M trade, sometimes even lower. This has left everyone, including big banks, who are now being forced to lay off traders amid the slowdown, asking the same question: WTF is going on?

The Bubble Is Back

For all those analysts who thought the debt binge of the previous decade marked end of the Age of Leverage, well, not so fast. It turns out that memories are short and government printing presses are powerful, and this combination has turned the “Great Deleveraging” into a minor speed bump on the road to something even more extreme. It was just six years ago that soaring consumer spending, massive trade deficits and generally excessive debt caused the biggest crisis since the Great Depression, and here we are back at it. The details are slightly different but the net effect is the same: inflated asset prices, growing instability and rising risk of a systemic failure capable of pulling down pretty much the whole show.

The Carnage Beneath The Bullish Stampede

Risk is no longer priced into anything. Volatility has gone to sleep. Uniformity of thought has taken over the stock market. Complacency has reached a point where even central banks have begun to worry about it: the idea that markets can only go up – once entrenched, which it is – leads to financial instability because no one is prepared when that theory suddenly snaps. But all this bullishness, this complacency is only skin deep. Beneath the layer of the largest stocks, volatility has taken over ruthlessly, the market is in turmoil, people are dumping stocks wholesale, and dreams and hopes are drowning in red ink.

The Average Russell 2000 Stock Is Down 22% From Its Highs

It’s hard to "fully commit" to this rally given "corroded internals," warns FBN Securities technical analyst JC O’Hara in note. As we previously noted, new highs are extremely negatively divergent from the index strength, as are smarket money flows, but what has O'Hara "very disturbed" is the fact that the average Russell 2000 stock is over 22% below its 52-week highs. As O'Hara notes, investors are ignoring "technical signals that have historically forewarned" of a drop; they’re "jumping onto a plane where only one of the two engines is working. The plane does not necessarily have to crash but the risk of an accident is much higher when the plane is not firing on all cylinders."

Groupthink 101: What All Goldman Sachs Clients Believe Will Happen

At the beginning of the year, all - as in all - of the smart money expected a rising yield environment and a recovering economy. They were all wrong. Oddly enough, they still believe pretty much the same, using seasonal scapegoats to explain away their mistakes. As for what the most selective subset of the smart money believes, here is Goldman's David Kostin with the summary: "Almost all clients have the same outlook: 3% economic growth, rising earnings, rising bond yields, and a rising equity market." Goldman's own view doesn't stray much: "Our S&P 500 targets of 1900/2100/2200 for end-2014/2015/2016 are slightly more conservative but generally in line with consensus views." And of course, when everyone expects the same, the opposite happens... even if this is one of those financial cliches we wrote about yesterday.

Climbing A Wall Of Cliches

If clichés reflect overly common (if therefore unappreciated) wisdom, then we finally have a good explanation for why risk assets continue to rally.  No, there are actually not “More buyers than sellers” – money flows are negative over the last month for both U.S. equity mutual funds and ETFs.  And forget about investors “Downgrading on valuation” as stocks climb higher and higher; truth be told, that’s not even really a thing (unless you work on the sell side).  Nope, this is a “Flight to quality”, “don’t fight the Fed”, “never short a dull market” environment with “easy comps” from a long rough winter.  Want to call a top somewhere around here?  Remember that “Markets discount events 6 months in the future.”  A “Santa Claus rally” in June?  That would fit the one cliché we know is actually the market’s True North: it will do exactly what hurts the most “Smart” investors.  And that would be to rally further as the doomsayers double down and the timid cling to their bonds and cash. 

3 WTF Charts

Bad breadth, flaccid flow, and bonds bid - what could possibly go wrong?

Bond Bears Are Scratching Their Heads While Looking At These Charts

Large speculators (read - hedge funds or the supposed "smart money") have shifted their S&P 500 positioning to net short, increased their Russell 2000 short positioning and decreased their NASDAQ longs to one-year lows. Market-neutral funds have dropped exposure notably in the last week and long/short funds are well below market norms for their long positioning. But what has the bond bears really scratching their heads (as they added to their shorts in the last week) is that the last time so many people were convinced that rates can only go higher (based on CFTC data), bad things happened in stocks.