How is it possible to like one song over another? Why does a series of melodies sound better than if I just press my hands on a piano over and over again?
These are the sort of questions I ask my wife on our way to work. Almost always, she gives simple and brilliant answers to my not so thought out questions.
Maybe it’s because we, as humans, enjoy patterns, she said.
Of course! I don’t know if that’s true or not, but it makes so much sense.
Not only do we like patterns in songs, but in objects and painting. Heck, we’ve all been programmed to seek out patterns instinctually.
It’s how our ancestors solved problems, identified plants and knew what to stay away from.
It’s also a major factor driving our stock market. I’m talking about technical analysis…you know, those astrology-types that read signs in tea leaves and look up to the stars for guidance.
You can probably tell it’s not my cup of tea. But some people have been able to make it work for them. A good chart, a pattern. It’s all they need to jump head first into stocks.
And it seems that’s all US investors needed to buy stocks right now too…
Why the hell did people buy LYFT?
I thought US investors had no more catalysts to go off…oh wait, we forget about the ‘Golden Cross’.
The golden what? The Golden Cross!
You know. It’s that pattern that means stock are about to…actually I have no idea either. I’ll let the Australian Financial Review explain:
‘A rally in the S&P 500 on Monday resulted in a technical benchmark, known as a golden cross pattern, that could, if history holds true, indicate more gains in the near term.
‘Considered a bullish signal by chart analysts and other market watchers, a golden cross forms when an index’s near-term moving average of daily closing prices rises above a longer-term moving average.
‘It formed on Monday for the S&P 500 index, for the first time since April 2016, with recent gains in the US benchmark for large stocks pushing the index’s 50-day moving average above its 200-day moving average.’
To be fair, this strategy has equalled or beaten the return of ‘the market’ more than half the time since 1990.
But is this really investing? Patterns in stocks might look pretty. And maybe you make a few bob off the old ‘Cross’.
But is this how stock market millionaires made their fortune…by looking for patterns in the charts and following rules until they don’t work anymore?
Forecasting is another huge force in this business.
Not only technical forecasting, but forecasting near-term financial figures and then drawing conclusions from those estimates.
Problem is, like the technical business, forecasting financials is fraught with pitfalls and mistakes too. Even the mainstream has had it with the guesses Wall Street analysts pump out.
‘By now, some of you may have noticed that I am none too fond of the average Wall Street forecaster,’ Bloomberg’s Barry Ritholtz writes.
‘This isn’t because of some random prejudice, but rather, a view that has evolved based on long experience. It is backed up by solid statistical evidence that forecasters are not very good at forecasting.
‘It bears repeating that: 1) almost all forecasting is folly; and 2) forecasting is marketing. However, with a few small tweaks forecasting could be more useful, or at least more honest.’
With this in mind, why the hell did people buy a company like LYFT Inc [NASDAQ:LYFT]?
LYFT is Uber’s major rival in the US. You might remember not that long ago, there was a ‘delete Uber’ campaign. It was in response to the founder and his unsavoury behaviour.
Who do you think started that campaign? LYFT saw the opportunity and they thought they could bag a few of Uber’s clients.
They also looked at the latest way to create cash, an initial public offering (IPO), and couldn’t resist that either.
Yes, you can now buy part ownership in a ride hailing giant. They might not be as big as Uber. But they have tens of millions of customers. It’s also a company bound to be a part of the ‘new economy’ we’re all about to see…that’s how I imagine the Wall Street investment bankers were selling the stock.
And boy, did they clean up.
While LYFT rose US$2.34 billion in cash, the underwriter received about US$47 billion worth of orders for LYFT stock in an IPO that was 20 times oversubscribed.
Of course, bankers were quick to talk about LYFT’s top line growth figures, stuff like sales and bookings…
Source: LYFT Prospectus
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The bankers spent considerably less time in their presentation focusing on the black hole towards the bottom of LYFT’s income statement. There was a massive hole. And there was little explanation as to how LYFT would plug it…
Source: LYFT Prospectus
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Instead, the bankers provided something like this…
Source: Tech Crunch
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A nice, smooth, not so thought out increase in revenues and income. And clearly investors got sucked in. They looked at the pretty charts, the simplified forecasts, and couldn’t resist.
But what about the problems? What about the fact that this industry has no barriers to entry? That means anyone who can develop an app and drum up support can come in and take customers away from incumbents.
To try and create barriers, LYFT and Uber have had to fund their rides, making it unprofitable for anyone, including themselves, to enter and operate.
It’s also why LYFT and Uber are listing now and not later. These money-losing businesses need more cash to continue spending on anything that will stick. Yet nothing seems to be sticking.
If you’re interested in learning more about these ‘problems’, we shot a short video about the potential pitfalls of Uber. They applied to LYFT as well. You can go watch that video, here.
Amazon is a bubble…there I said it!
Many look at Amazon.com, Inc [NASDAQ:AMZN] the same way…a ‘new economy’ stock that is so large and so dominant that it will be impossible for them not to be larger in the years to come.
While I agree Amazon is a good business — likely far better than LYFT will ever be — they’re certainly not worth the price they trade for today. And of course, they too have their problems.
One of them happens to be Australia…
From the AFR:
‘Amazon’s land grab for the e-commerce and cloud computing markets in Australia have resulted in soaring revenues, but also mounting losses.
‘Accounts just lodged with the corporate regulator show that Amazon Commercial Services, the Australian e-commerce business, made $292.3 million of revenue in calendar 2018, its first full trading year, but lost $5.3 million after tax.
‘Meanwhile Amazon Web Services, which rents computing power to small-to-medium sized businesses and opened its first Australian data centre in 2012, made $306 million sales (plus $12 million as a landlord to related parties) but lost $15.7 million after a $6.9 million provision for income taxes.
‘The 2018 losses compound losses from the 2017 calendar year, when Amazon Commercial Services lost $8.9 million (after a $3.2 million tax bill) on $17.4 million revenue, and Amazon Web Services lost $8.4 million on $206.2 million of income.’
Yet people buy the stock because it’s gone up before. Forecasts for future financials are stellar. Maybe Amazon’s stock is creating one of those nice patterns investors like to look at and admire.
But the problem Amazon suffers from is similar to LYFT.
What is their advantage? No really, please tell me because I have no idea what it is…
They’re big? There are plenty of businesses far bigger than Amazon in specific retail categories. They have a valuable brand? Yet do you ever search Amazon first to buy anything? Maybe for books, but I’ll bet that initial search starts on Google.
You know what Amazon is…a growth junkie, jumping from one market to the next, watching revenues rise sky high, but paying little attention to protecting profitability.
The point I’m trying to get at here is that you might want to stop the guessing games. Forget forecasts, try to live without charting. Focus on making money now, upon purchase, rather than at some far-off date based on projections.
Maybe that means you have no good ideas for the moment. And that’s ok, sitting on one’s hands never hurt too much.
I suspect we could see a dramatic wind down in stocks. And all those businesses with potential only in the distant future will be hurt the most.
Editor, Money Morning
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