A New Sign of a Bottom in Precious Metals
A bad week for SNAP... Even IPO investors are now underwater... Expect more pain ahead for bonds... Speculators are getting more bullish as interest rates rise... A new sign of a bottom in precious metals...
It has been a tough week for popular social-media company Snap (SNAP)...
We warned Digest readers about the firm's outrageously-expensive initial public offering ("IPO") back in March. As we wrote in the March 2 Digest...
This morning, shares of Snap (SNAP) began trading publicly for the first time... The firm – which owns Snapchat, the ultra-popular photo- and video-messaging app – raised $3.4 billion in its initial public offering ("IPO"), making it the biggest social-media IPO since early 2014.
Snap said it sold 200 million shares at $17 each, giving the firm a market value of about $20 billion. At that price, Snap would be valued at more than 21 times this year's sales, according to advertising-data firm eMarketer. This is twice as expensive as social-media juggernaut Facebook (FB), and four times more expensive than Twitter...
Incredibly, it quickly became even more expensive... Snap began trading above $24 per share – more than 40% higher than its $17 IPO price – giving the company a valuation of more than $30 billion. Shares were trading above $25 as of midday trading.
The stock traded as high as $29.44 the following day... and promptly headed lower.
In the May 11 Digest, we noted that SNAP shares plunged more than 20% in a single day following its first quarterly "earnings" report as a public company. That decline sent shares to less than $18... meaning anyone who bought shares following the firm's IPO was underwater.
But now, even folks who participated in SNAP's IPO are in the red...
SNAP fell more than 1% on Monday, to close at less than $17 for the first time. As the Wall Street Journal reported last night...
Snap Inc. shares fell below their initial public offering price for the first time, a setback for one of the most anticipated U.S. IPOs in recent years.
Snap closed down 1.1% at $16.99 on Monday, below its March 1 IPO price of $17 – a sign that the parent of disappearing-message app Snapchat is losing popularity among investors as a hot new tech stock. Snap was valued at more than $20 billion at the time of its debut, making it the biggest U.S.-listed IPO since Alibaba Group Holding Ltd. in 2014.
Many investors scoop up shares of newly public companies betting that they will offer outsized returns. From 2014 through 2016, companies that went public each year have on average outperformed the S&P 500 in that calendar year. Investors who bought shares of Snap are now facing losses.
The decline continued today...
Snap shares plunged another 9% to less than $16, following news that analysts at Morgan Stanley – one of the banks that led the company's IPO – are now slashing their price target on the stock. More from the Journal...
Tuesday's decline came as analysts at Morgan Stanley, one of the lead underwriters on Snap's IPO, downgraded the company to equal weight from overweight and cut their price target from $28 a share to $16 apiece. The bank cited increasing competition, noting that Facebook's Instagram "has become more aggressive in competing for Snap's ad dollars." Morgan Stanley added that, as a result, it expects Snap's ad revenue growth to be "materially slower" than it previously expected.
Morgan Stanley joins other banks that have now tempered their enthusiasm. In March, the average analyst target price was more than $23 a share, according to FactSet. As of July 11, that average target price slipped to a little more than $20 a piece.
Unfortunately, even lower prices could be on the way. Snap's "lock-up" period – the typical post-IPO restriction on stock sales by company insiders – expires at the end of this month.
Speaking of lower prices, the selloff in bonds could have much further to run...
Regular Digest readers know that speculative traders have been extremely bullish on U.S. Treasurys in recent months. These folks tend to be great contrarian signals... They get super-bullish near market tops, and super-bearish at market bottoms.
On Friday, we noted that interest rates could continue higher as these speculative traders begin to unwind their bullish bets on bonds. (Remember, bond prices and interest rates trade inversely. Rates rise as bonds fall, and vice versa.)
But the latest data from the U.S. government's Commitments of Traders ("COT") report suggest even we may have underestimated just how much higher they could go.
The following chart shows net positioning of speculative traders in 10-year Treasury notes. As you can see, despite the recent rise in interest rates, these traders have barely begun to unwind their all-time record bullish bets...
Worse, as you can see in the next chart, traders in higher-yielding 30-year Treasury bonds have actually been getting more bullish as rates have moved higher...
As always, these charts come with a disclaimer: Sentiment extremes are not a precise timing tool. They can always become even more extreme before finally reversing.
But the COT continues to say we're far closer to a top in the bond market than a bottom... and interest rates could move much higher in the coming months.
A new sign of a bottom in precious metals...
Meanwhile, sentiment is sending a much different message for precious metals.
As you can see in the following chart, speculators continue to flee from silver...
Net speculative positions have fallen from an all-time record of more than 100,000 contracts this spring to less than 30,000 contracts today. And they're quickly closing in on levels that have marked important bottoms in the past.
Speculative positions in gold – which didn't surpass last year's record this year – have experienced a similar decline.
Again, this doesn't mean the next rally is imminent... But it suggests we're finally close to a significant bottom in gold and silver.
Stay patient... Your next great buying opportunity is approaching.
New 52-week highs (as of 7/10/17): Allianz (AZSEY), Boeing (BA), National Beverage (FIZZ), PureFunds ISE Mobile Payments Fund (IPAY), iShares U.S. Aerospace and Defense Fund (ITA), iShares U.S. Home Construction Fund (ITB), Nuveen Preferred Securities Income Fund (JPS), KraneShares Bosera MSCI China A Share Fund (KBA), NVR (NVR), Paysafe (PAYS.L), Stanley Black & Decker (SWK), U.S. Concrete (USCR), Verisign (VRSN), and short position in Brinker International (EAT).
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Justin Brill
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July 11, 2017