Professor Elam

Frothy Valuations

Monday Sept 13 2021

Andy Kessler has been warning of excessive valuations in his WSJ column for weeks. This weekend we detailed the lack of breadth  in the face o f higher averages. Here is part of his column today.

 

 

 

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Updated Sept. 12, 2021 10:24 pm ET

 

 

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A Joby Aviation aircraft outside the New York Stock Exchange during the company's initial public offering in New York, Aug. 11.

Photo: Michael Nagle/Bloomberg News

 

 

 

Joby Aviation, which plans to begin an electric air taxi service in 2024, is worth more than Lufthansa, EasyJet or JetBlue. Does that seem right? In this market, why not? Heck, earlier this year, Tesla was worth more than the next nine car manufacturers combined, though now only the next six. Beyond Meat, made with pea protein, is worth more than the entire market for peas eaten globally—like the bumper sticker says: Imagine whirled peas. Do fundamentals even matter?

I can go on. Used-car sales platform Carvana is worth more than Volvo, Honda, Ford or Hyundai. Airbnb is worth more than Marriott and Hilton combined. Crypto-exchange Coinbase is worth more than the Nasdaq. I live at the intersection of innovation and disruption, but when companies are worth more than any possible reality, watch out.

How about those meme stocks still getting hyped on Reddit’s WallStreetBets? Those who bid GameStop shares into the stratosphere waved at Virgin Galactic Holdings as they soared by. A year ago, the stock was $6 and it is now $190—some dupes paid $483, game over. Short sellers Melvin Capital, Point 72 and D1 Capital focused on fundamentals and got their assets handed to them. Shorts lost more than $9 billion between January and June.

New Chairman Ryan Cohen, who is driving change at GameStop, may be a retail genius for turning around Chewy, but Redditors may want to put in a call to hedge-fund manager Eddie Lampert, who bought Kmart and merged it with Sears in 2005, as a highly touted “integrated retail” play, combining stores and online sales, eerily similar to the argument for investing in GameStop today. The stock peaked at $135 in 2007. It is now at $0.30 as the company languishes in bankruptcy. A 1970s Sears Johnny Miller leisure suit is worth more.

Do You Understand Payer Spreads?

Monday ajugust 23, 2027

Here is an article from finance.yahoo.com. I recommend reading lots of financial lilnks, see  this weblog and Helpful Websites to gain a better

understanding of accounting and finance. Here is a good example, do you know what citi is recommending?

Bloomberg) -- Citigroup Global Markets says Treasury yields are set to rise, and there’s a way to screen out one of the main risk factors that may push them lower by betting against the yuan.

The U.S. brokerage recommends its clients position for higher U.S. rates and also use options to wager against any strength in China’s currency. The rationale is that a slowdown in Chinese economic growth that would drag down Treasury yields, will also cause the dollar to appreciate versus the yuan.

“While the near-term picture is murky, our conviction on the broader macro picture is supportive of higher” U.S. 10-year yields, Citigroup strategist Jabaz Mathai in New York wrote in a client note. “Given that China weakness is a macro risk for rates, we reduce the premium by selling short-dated out-of-the-money puts on USD/CNH.”

 

Mathai says the outlook for Treasuries over the next couple of weeks is hard to call, but over the longer term a rebound in economic growth and Federal Reserve tapering will see benchmark 10-year yields climb to 2% by the end of 2021.

Citigroup recommends initiating a short position in Treasuries through buying a structure known as payer spreads on 10-year swap rates, with a six-month expiry, aiming for rates to rise by 25 to 50 basis points. Investors should simultaneously sell three-month puts on USD/CNH struck at 6.40.

Treasury 10-year yields were at 1.27% on Monday and the offshore yuan was at 6.4958 per dollar.

Accounting Update

Tuesday June 22, 2021

One of my twelve recommendations in Conquer Accounting is that students should subscribe to the Wall Street Journal. A student subscription is only a dollar a week.

Accounting students will greatly increase their understanding of business context. Here are some examples from today's WSJ.

 

Auditors See Improved Conditions

 

of 5,891 companies audited last year 18.8% received a goinjg concern warning .  Companies included Hertz, Dave and Buster's, and Norwegian Cruise Line.  Hertz took  BK the other two dide not.

 

Ex Trader Sentenced in Spoof Crackdown

A Deutsche Bank futures trader was convicted of manipulating gold and silver prices and sentenced to one year and a day in prison. Spoofing involves sending and then cancelling orders to manipulate the3 market for one's own gain. His lawyers calimed that bluffinga nd misdirection wer commonplace tactics at the time. The Judge did not buy that story.

 

Lordstown Official Sold Shares Ahead of Financial Report. 

Lordstown has yet to sell an electric truck so not surprising they are not making any money;. But executives sold shares for millions of dollars prio to reporetin a net loss of 23 cents a share for the quarter. This is known as insider trading.

 

Goldman Rebuffed on Bar for Fraud Suits

The US Supreme Court rejected Goldman's request to raise the bar (amount)for shareholder lawsuits alleging fraud on GS part. The lawsuit claimed GS had inflated its share price in  2007-2009 by claiming it compiled with ethical rules when in fact  it had undisclosed conflicts of interest in selling mortgage backed securities.

Now here is the funny part.

"Our clients interests always come first and our reputation is one of our most important assets," said the firm.

Read about it at hthis link

 

As for GS stellar reputation read about their recent fine of $2 billion in Malaysia

 

 

SEC Replaces PCAOB

Weekend June 5, 2021

The ew head of trhe SEC removed all members of hrte PCAOB.

Sanders and Warren had urged their removal. Perhaps the PCAOB will do something about all the problem they find in Big  4 audits.

What is Coinbase Really Worth?

Wed April 14 2021

One analyst says more like five rather than 100 B

GE Stock falls on /r/everse Split and $30 B Deal

Wednesday March 10, 2021

GE stock fell after announcing a $30 B Deal to sell its aircraft leasing buseinss and

a 8 - 1 reverse stock split.      The reverse split will raise the stock price by $ 8x and reduce the number of shares outstanding by 1 - 8.

 

SEC Moves for Audit Oversight on Chinese Companies

Wed Nov 18 2020

The SEC will apparently insist by year end on audit oversight of Chinese companies listed on American Exchanges.

Chinese companies like to list here and have shares traded. But they have resisted attempts to be audited by American firms.

Looks like the SEC is going to stop that practice this year, read the link above.

SEC Eases Regulations on Auditor Independence

Monday Oct 19 2020

Page B 5 of today's WSJ

 

The U.S. Securities and Exchange Commission adopted changes that relax some conflict-of-interest rules for companies and audit firms, making it easier for them to avoid violating auditor independence in certain situations.

But honestly I am not sure what this means.

the article says it gives auditors more discretion in assessing conflicts of interest. 

Two SEC commissioners disagreed arguing it would inject moe opportunity for uncertainty and error.

Positive mood results in a  loosening of accounting restrictions near market tops. That appears to be the case here.

GE Stock Declines after SEC Issues Wells Notice

Wed October 7 2020

 

The SEC issued a Wells Notice to GE this past Tuesday.

A Wells Notice is an intent to investigate and gives the respondent a chance to defend past actions against such an investigation.

As beat up as GE has been I would not consider a 6 or  7% decline as falling off the cliff.

Under Jack Welch, GE was turned from a manufacturing giant to 50% financial services.  One of his bad ideas was this 'insurance policy' which was supposed to pay for extended care. Reading the article it look like GE wildly under estimated its liability, ie people are living a lot longer than they used to.

Now GE accounting is under scrutiny.

Jeff Immelt succeed Welch and never had any good luck recovering the firm.

Welch was at least smart enough to retire around  1999 when the stock peaked. GE was the only stock originally in the DJIA which was still in the index, it has been removed since.

Wednesday Walll Street Journal

Wed July  29 220

One of the steps in Conquer Accounting The Twelve Step Method is to have a daily routine of reading the news.

 

Consider these items today in the WSJ

Ethics - former PM of Malaysia given  12 years in prison and $50 M fine

the theatrical window the time a movie is in theaters before it goes on sale or is streamed has been shortened from 75 days toi 17 days,  will that be the end of sit down theaters?

 

Bezos Cook Zuckerverg and Pichall are all testifying before congress, expect show trial type conditions especially given the treatment the AG Barr received yesterday

3M sales drop  12%

Hotels rush to raise money

HD sales fall  27% in quarte 2/3 of dealers will not receive any more inventory this year

SBUX has worse  loos in years $ -704 M

L BRands Victoria Secret owner lays off hundreds, stock jumps four percent, go figure

NIssan annual loss to exceed 6 billion

Pfizer sees long term manufacture of virus vaccine

MCD manages 74 cents a share business down  68% from a year ago, thank good ness for the drive in window