RuleNumberOne

Some things will never change. https://www.wsj.com/articles/governments-in-europe-find-workarounds-to-bail-out-ailing-banks-11577966400 "It is a continuation, critics say, of Europe’s old habit of injecting public money into the financial system as a first resort, many times keeping zombie banks alive and prolonging the painful cleanup of the sector. Nowhere is this clearer than in Italy, where the sector continues to be bogged down by an anemic economy and huge piles of bad loans. While nine banks have got into serious trouble since 2015, none have gone through a proper resolution under the rules. The country’s government is keeping Popolare di Bari afloat by putting money in a state-owned bank that will, in turn, save it."

Found it finally. The Money Game stuff. https://boards.fool.com/the-great-winfield-11848129.aspx?sort=username "The Great Winfield found that he couldn't make money in a speculative market bubble because his memory kept getting in the way. As he said to Adam Smith: "You know and I know that one day the orchestra will stop playing and the wind will rattle through the broken windowpanes, and the anticipation of this freezes us. We are too old for this market. The best players in this kind of market have not passed their twenty-ninth birthday." So, he hired the "kids" to manage the money. "The strength of my kids is that they are too young to remember anything bad, and they are making so much money they feel invincible." So, Adam Smith wants to ask a few questions of a "kid" about some of the swinging stocks he owns, but the Great Winfield interrupts: "Look at the skepticism on the face of this dirty old man. . . . You can't make any money with questions like that. They show you're middle aged, they show your generation. Show me a portfolio, I'll tell you the generation. The really old generation, the gray beards, they're the ones with General Motors, AT&T, Texaco, International Paper, and Dupont, all the stocks nobody has heard of for years. The middle-aged generation has IBM, Polaroid, and Xerox, and can listen to rock and roll music without getting angry. But life belongs to the swingers today. . . . You can tell the swinger stocks because they frighten all the other generations. Tell him, Johnny. Johnny the Kid is into the science stuff."

I agree that it could go on for a while. Unlike Q4 2018 when the Fed said it is far from neutral, right now the Fed has said no hikes in 2020. A risk factor though is the lack of revenue and earnings growth in stocks like AAPL. If central bankers are waiting for Europe to get back on its feet before tightening, tightening can never happen. Germany and Italy have been stuck in a recessionary state for two years already. There is something completely broken in Europe, two years is a long time. https://www.bloomberg.com/news/articles/2020-01-02/euro-zone-factories-end-2019-in-a-funk-as-output-and-orders-fade "Euro-zone orders fell in December, with the rate of job losses the sharpest since the start of 2013, the data showed. Germany was again the weakest-performing country, and the contractions in the Netherlands and Italy were the steepest in more than six and a half years. France saw a slight increase in activity."

I have no idea of Gartman's track record (can't bother looking it up). Just wanted to post the Money Game excerpt because I agree with it. I have never paid attention to Dennis Gartman but I just happened to read this over the weekend and thought the Money Game was very appropriate.

I remember reading Akre's OID interview in 2006. What happened to his older funds? They answer this in the article 8) : Not that these criteria are easy to handle properly, as the discussion above regarding DIS shows. You could also put on an objective-backward-looking hat and wonder how this philosophy would have handled Microsoft (would Ballmer time be "adverse change in management"? would losing mobile phone market be "competitive advantage impaired"? was "Peak PC" indication of "no longer growing at an above-average rate"? Selling at the time when Microsoft was losing mobile, at Peak PC, before Ballmer left was the worst time to sell... Akre apparently managed to side-step Valeant disaster that killed Sequoia performance. They are quite concentrated in cell tower stocks. I wonder if that area could have some event that kills stocks across the bow before Akre gets out. Overall though, they have performed better than a lot of known investors. One could have done well buying the fund after Chuck's talk at Fairfax Lollapalooza couple years ago.

AAPL has added another 3% in 2 days. It is well on its way to rise another 10% in January. https://www.barrons.com/articles/where-to-find-shelter-in-the-coming-bear-market-51577790001 "He describes the current environment as a “kids market,” relying on a phrase introduced in the 1960s by Adam Smith, the pen name of George Goodman, in his classic book The Money Game. Goodman used the phrase to refer to an investment environment in which the traders making the most money are those too young to remember the last bear market. Gartman describes today’s “kids” as “young, brash, utterly naive, ill-educated, egregiously overconfident, neophyte-yet-fearless ‘investors.’” Market veterans such as himself are left to do little more than stand on the sidelines, “fearful yet envious” of the kids’ profits. This isn’t the first kids market that Gartman has encountered in his career, of course. All have ended badly, and he’s confident the current one will too. When it does, the “all-too-easily-made profits [of today’s] kids” will evaporate.” Out of the ashes will emerge the latest crop of poorer, but older and wiser, investors."

The S&P P/E is now 24.14. If the stock market repeats 2019's no earnings growth, P/E expansion performance in 2020, we can achieve the 1999 P/E of 33. Just one more year, we are almost there! The Fed has said no hikes in 2020. Kashkari joins Bullard on the FOMC. Both of them are competing shamelessly for the Fed Chairmanship.

In 19 trading days, AAPL has added another 10%. Up 35% over the last 3 months, 20% over the last 2 months, 10% over the last one month. AAPL has climbed 20% since its Q4 earnings report. That report showed a decline of 9.3% in operating income for the full-year 2019 compared to 2018. Over 2019, revenue fell, gross margin fell, operating income fell even more. https://www.apple.com/newsroom/pdfs/Q4%20FY19%20Consolidated%20Financial%20Statements.pdf

The focus on buybacks increasing EPS misses the debt used to fund those buybacks. https://www.bloomberg.com/news/articles/2019-12-19/this-funny-thing-happened-on-the-way-to-the-stock-market-record "With balance sheets getting too big to fail, the Fed came to the rescue in each recession with interest-rate cuts to reduce the carrying cost of all that debt and to prop up the value of rate-sensitive stocks, bonds, and other assets. It worked like a ratchet. Rates fell in each successive cycle because the bigger balance sheets grew, the lower interest rates needed to be, Levy says. True, households in the U.S. have paid down some of their debt since the 2007-09 financial crisis. But the nonfinancial corporate sector has gotten even deeper into hock. “Corporate America’s fragile debt pile has emerged as a key vulnerability,” Oxford Economics Ltd. senior economist Lydia Boussour wrote on Oct. 31. Half of investment-grade corporate bonds are in the lowest tier by credit rating, vs. 37% in 2011. And 80% of leveraged loans are covenant-lite, vs. 30% during the financial crisis, she wrote. Lagarde has a bigger problem than does Fed Chair Jerome Powell. She’s up against ratios of private nonfinancial-sector debt to gross domestic product above that of the U.S. The ratios in Australia, Canada, China, and South Korea are, in fact, higher than the ratio was in the U.S. at its 2009 peak, according to the Bank for International Settlements. That’s why Levy predicts the next crisis will begin abroad. “It may not be as bad for the United States as in 2008-2009; it is likely to be worse for most of the rest of the world,” he wrote."

TwoCities and MungerDisciple, Sentiment is a bigger driver, not just inflows/outflows. We can see this if we use 100 shares of a company instead of 1 share. If the stock was trading at $5/share on Monday and a speculator pays $15 for one share on Tuesday, we get a net inflow of $10 ($15 - $5), but the market cap jumps by $1000 (100 shares x $10). Consider the stock HEI (Heico). From 2018's peak price of $93 in September 2018, it jumped to $147 nine months later and is down back to $116. That performance was driven by "sentiments", not buybacks. Heico jumped by 60% from the 2018 peak to the 2019 peak, big multiple expansion, no buybacks. On the other hand, we can find less "storied" stocks with multiple contraction but huge buybacks during the same 2018-2019 period - such as CSCO.

European Union GDP has risen a total of 2% in the last 6 years - that is not an average of 2% per year, but a cumulative 2% since 2013. This is why interest rates are set to negative. The German and Austrian savers who were still gorging on Italian debt this year won't get paid. Neither will the French banks who own hundreds of billions of Euros of Italian debt. You don't have to look farther than the European bank stock prices. Just like Italy's GDP growth has stayed in the -0.1% to 0.1% range every quarter for 2 years, European bank stock prices have stayed in single digits since the financial crisis ended. When is the crash? They have been able to cover it up for nearly 10 years now. The FT stopped reporting anything financial and focuses on US politics instead.

I think of the moat in terms of how much engineering effort it would take to replicate the company and whether there are enough engineers hireable in that space to make such a company. The only SAAS company I can think of that is without GAAP profits and that has a big moat is AMZN. Others such as MSFT, ADBE, ADSK already had a wide network-effect moat that just continues with SAAS. SAAS by itself does not confer or widen the moat. There is stickiness associated with NOW and WDAY. But the market caps are way too big and the revenue/employee too small, the technical-effort bar too low. As a reference point, Oracle bought Peoplesoft for $10.3 billion when Peoplesoft had $2.9 billion in revenue with 12,000 employees in 2004. I don't know how much Peoplesoft was trading for before the hostile takeover premium. Also, I don't know the market conditions in 2004 when the takeover happened. I think every SAAS company that has IPO'ed in this bull market will eventually trade at a valuation less than half their current valuation. SAAS means these companies build an app on AWS - but so can their competitors. To fight competition because the technical-effort bar is not high, enterprise SAAS companies price their product well below cost and survive by paying their employees in stock. I can't think of any enterprise SAAS company with a moat that is worth even half its market cap. Right now every house/building in every street in the Bay Area is building a web service on AWS. When the tide goes out eventually, these startups can be acquired in a firesale and there will be plenty of engineers who can build AWS apps looking for work. @Spekulatius, since you know physics, can you tell me what it would take to replicate BRKR?

Contrast this which CSCO which pays out a shareholder dividend per year of $90k per employee. Mr. Market has rewarded NOW + WDAY with a P/S of 15. At the end, shareholders will blame everyone else but themselves. They will blame the SEC, analysts, CEOs, Wall Street. They ignored GAAP and embraced "non-GAAP", but they won't blame themselves. Bernie will show up and rail about Wall Street versus Main Street.

WDAY + NOW have 18650 employees from the latest 10-k, with around $4 billion of gross profit. That is just $214 K per employee for salaries, rent, health insurance etc. This is why they have been public for 8 years and are not profitable. That is simply not enough to pay Silicon Valley employees. According to ValueLine, these two companies have added the following share counts between the end of 2012 and 2018: NOW - 54 million new shares WDAY - 66 million new shares These two have a combined market cap of $90 billion. This process works very well: Offer services to customers at a low price. Pay employees in stock who then sell it in the stock market. Claim non-GAAP EPS.

They did not pay their drivers in stock and report non-GAAP EPS. UBER could have sold itself as a trillion-dollar market-cap company chasing a multi-trillion opportunity with network effects. A million dollars apiece for a billion drivers. It could have shown great growth and non-GAAP profitability by collecting cash from riders and paying drivers in stock. The drivers would have paid their rent/mortgage by selling the stock to investors. This idea has worked for the "cloud" "SaaS" companies: - Collect cash from customers, offer services at a low price. - Pay employees in stock who then sell it in the stock market. - Report non-GAAP EPS.

If you really get 6% earnings growth for long enough, you would own a ball of gold as large as the earth. (Of course I mean real earnings, not fake 'non-GAAP' in which case you might own a big ball of bathroom tissue).

i was reading about the 1970-1971 stock market. The Nifty Fifty had genuine earnings and dividends. This crop of cloud stocks has no earnings and some of them may never have any earnings. These market caps for tech stocks would have been considered impossible just a few years ago. You can get to $10 billion - $50 billion cloud market caps very easily nowadays without any earnings. The Nifty Fifty were wide-moat blue-chips paying dividends. Their P/Es became very high, but at least they had P/Es.

I didn't look at Splunk's acquisitions because it takes too much time. Here is one, SignalFX bought by Splunk for $1 billion a few months ago: https://en.wikipedia.org/wiki/SignalFx VCs put in $103 million and sold it for $1 billion. My point is that they can repeat this same process again and again if needed. This is tech that many teams in Silicon Valley can build. So in this case, would Splunk be justified in writing off $1 billion in intangibles and reporting a non-GAAP EPS? Or should the $1 billion be counted as an R&D expense that was required to stay in business? It is not just Splunk, other never-profitable "cloud" companies are doing the same thing with acquisitions. Nobody bothers with looking deeper.

The ESTC thread made me take a look at SPLK's valuation. Over the last year, SPLK's growth rate has gone from 40% to 30% while its stock has climbed higher and higher. IPO'ed in April 2012, there is no P/E, just a $23 billion market cap.

Even the eurozone consumer may be slowing down. Negative rates didn't change anything, why? https://www.ft.com/content/f4e045da-1734-11ea-8d73-6303645ac406 " However, there was a worrying sign consumers pulling back in October when eurozone retail sales fell 0.6 per cent in October, a steeper decline than the monthly 0.2 per cent fall in September, according to figures published on Thursday. “The second monthly fall in a row shows that uncertainty regarding the economic outlook may be starting to weigh on consumers’ spending decisions,” said Rosie Colthorpe at Oxford Economics, while forecasting that eurozone retail sales would still rise for the fourth quarter overall."

Negative rates proving to be useless in the real economy, though they have ended up boosting the US stock market. https://www.ft.com/content/a1a14220-1801-11ea-9ee4-11f260415385 "Germany’s sprawling industrial sector is suffering its steepest downturn for a decade, underlining how the engine of the eurozone’s biggest economy is sputtering. “Far from bottoming out, Germany’s industrial recession may be getting worse,” said Andrew Kenningham at Capital Economics. “The latest data support our view that a recession is still more likely than not in the coming quarters.”"

The last time I invested in oil companies was 2006-2008, i have no insights into oil. I concluded that oil prices are unpredictable and have stayed away ever since. Buffett himself got it wrong in a big way in 2008, he bought COP around the oil price peak and then it crashed.

If the technological barrier to entry is small, there will be more competitors like we have in the case of WDAY. Whenever GAAP profits and dividends are missing, it is almost always the case that the technological barrier is small. My previous three employers used WDAY, but the current one uses Gusto. Gusto is faster, sleeker, and cheaper. Is this another case of permanent capital loss in the case of WDAY, did the Greater Fool Theory stop working or will it revive again? Things like service, sweet-talking salesmen, zero unit cost are not barriers to entry when competitors have access to the same things. WDAY peaked at $225 in July, today it is at $165.

Yeah, no reason to make profit either because the high-touch customer service costs money. These people providing the great customer service are also paid partly in stock and a rising stock price boosts their morale. It is like an office building whose tenant won't pay rent and cannot be evicted. Their survival depends on not being required to pay rent. On the other hand we have a company like CSCO that trades at EV/FCF of 12, yields 3.1%, guaranteed to be powerful 20 years from now with very high barriers to entry. Barrons's dumped CSCO this weekend in their cloud article even though there is no alternative in networking and won't be either.

My current employer uses Gusto instead of Workday - it is faster and cheaper and better. I have an analogy for unprofitable SaaS companies like WDAY. Suppose you have a great office building in a great location (your capital). You lease your building for eternity to a tenant who will never pay rent. Your only option is to sell it to someone else who hopes to extract rent - but that day never comes. But what if the office building gets sold and re-sold year after year at ever higher prices without seeing a single rent check.