This Super-Popular Stock Is Plunging
This super-popular stock is plunging... What we learned from Snap's first 'earnings' report... Icahn's big mistake... Down $1 billion and counting in Hertz... Why we recommend trailing stop losses... 'Auto loan fraud is soaring'... P.J. O'Rourke: 0% interest rates – not only wrong, but evil...
We wrote it. Did you not buy it?
From 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.
Clearly, many investors believe Snap could be the next big social-media success. We're not convinced...
Longtime Digest readers know we've warned about several popular technology IPOs in recent years, including Zynga, Twitter, Etsy, GoPro, and Fitbit, among others. Each of these firms soared following their IPO, then quickly began falling.
We suspect Snap may be next.
Today, Snap shares plunged more than 20% following its first quarterly "earnings" report as a public company last night...
Of course, regular readers know Snap doesn't actually have any earnings... But nearly every other important metric disappointed, too.
The company reported revenue of $149.6 million, compared with expectations of $158.6 million. This was also a decline from $165.7 million in the fourth quarter of last year.
The company reported a net loss of $2.2 billion in the first quarter, compared with a loss of $104.6 million last year. Even setting aside the nearly $2 billion in expenses related to its March IPO (more on that in a moment), Snap lost $188.2 million. That's nearly two times more than last year.
Most concerning, daily active users (or "DAUs") – considered one of the most important metrics for social-media firms – came in well below forecasts. Snap said DAUs rose to 166 million, an increase of 44 million from the first quarter of last year.
While this is a 36% increase, it represents the company's weakest year-over-year growth in at least two years. And it's not what you expect to see from a supposed growth stock priced well above 20 times sales.
By comparison, Instagram stories – just one of the "copycat" features recently launched by Snap's competitor Facebook – already boasts 200 million DAUs. And this trend could be accelerating. As the Wall Street Journal reported last night...
Snap's traditional core of users are teens and young adults, a valuable demographic that marketers are eager to reach. Snap has pitched itself as an alternative to traditional forms of media, such as television, rather than a competitor to the bigger social-media networks.
But Facebook has been nibbling away at the features that made Snapchat stand apart. Snap's "Stories" function – collections of Snaps that play in chronological order, and a critical place for Snap to display ads – has been imitated by Facebook and its other platforms.
In a survey last month of 3,000 Americans conducted by Goodwater Capital, 25% of respondents said they prefer Stories on one of Facebook's platforms, compared with the 12% of users who said they prefer Snapchat's Stories.
To be fair, Snap did trounce "expectations" in one area...
Remember that $2 billion IPO expense we mentioned earlier? That was a massive payout to Snap employees, including nearly $600 million to CEO Evan Spiegel alone. This is far more than any other social-media firms have paid out. More from the Journal...
Tech companies often have high stock compensation tied to their initial listings because that is when many of the awards are triggered. But Snap's $2 billion payout surpassed its annual revenue by a wide margin. Twitter and Facebook, for example, paid out compensation equal to a fraction of their revenue at the time.
Despite the poor performance, Snap's young executives don't appear to be worried...
Spiegel remained bullish (and some might argue, delusional) on his first quarterly conference call last night. As Bloomberg reported...
For a guy who just lost about a quarter of his net worth, Snap co-founder Evan Spiegel exuded confidence... explaining away the company's shortcomings and even throwing shade at his bigger – and far more successful – social media rival, Facebook...
After reporting revenue and user growth that missed estimates, Spiegel spoke as if the quarter was a success. He deflected questions and concerns by explaining that people may just not understand the value of his platform yet, or the company's unique business model. For advertisers, the biggest hurdle is "education" about how effective Snap's products can be, he said. And when it comes to adding users, he said Snap doesn't stoop to the "growth hacking" tactics of rivals, like asking people to add all their phone contacts as friends, which he views as unsustainable. It was a subtle dig at Facebook, which routinely suggests friends to add.
Snap closed today around $18 per share, just 5% above its IPO price of $17. Anyone who jumped in after Snap began trading is now holding a loss of as much as 33%.
Speaking of losses, clearly billionaire investor Carl Icahn hasn't been reading the Digest...
If he had, he likely wouldn't be sitting on a mind-boggling $1 billion loss in rental-car company Hertz Global (HTZ). As Bloomberg reported on Tuesday...
When billionaire Carl Icahn bought into Hertz Global Holdings Inc. in summer 2014, he said he thought the shares were undervalued. With prices down almost 90% in the years since, he might be wishing he could take that one back.
Icahn's 29.3 million shares in the ailing rental-car company are now worth about $375 million, according to Bloomberg calculations. That's down from a high of about $1.3 billion at the end of 2014...
As you may recall, we mentioned Icahn's big position in Hertz last fall when shares plunged nearly 50% in a single day. As Porter wrote in the November 8 Digest...
Today, the leading car-rental business in the world, Hertz, saw its share price fall more than 50% in the first few hours of trading. The collapse erased more than $2 billion from the accounts of some of the world's best investors, including Carl Icahn, who owns more than 12 million shares.
Meanwhile, we've been warning investors about the consequences of an unsustainable debt bubble in the auto industry since 2014. Last month, we showed the subscribers of our flagship newsletter, Stansberry's Investment Advisory, why car-rental companies are sure to collapse in a matter of months, as the auto-finance complex collapses under the weight of the industry's bad subprime loans. We recommended shorting both Hertz and Avis (CAR), a move which has led to huge profits in only a month.
While some of the best investors in the world got hurt by changes they never saw coming in the credit markets, many of our subscribers saw their portfolios increase in value by huge amounts.
Now, if you're reading closely, you may have noticed that Icahn owns twice as many shares today. That's because he "doubled down" on Hertz in November.
He invested another $380 million, buying 16 million additional shares at an average price of $23.78. These shares have fallen by more than $180 million – or nearly 50% – in just six months.
Of course, no one is perfect. Even the best investors sometimes choose bad investments. And Icahn is undoubtedly among the most successful investors in history.
But this is a powerful reminder of the importance of stop losses and similar risk-management tools.
If one of the world's most successful investors can make a colossal blunder like this, anyone can. It's why we constantly urge you to follow your stops... no matter what.
Speaking of troubles in the auto industry, data-analytics firm PointPredictive issued an important warning this week...
It says borrower fraud in the auto-loan market is soaring... just as it did during last decade's mortgage crisis. As Bloomberg reported on Wednesday...
As many as 1% of U.S. car loan applications include some type of material misrepresentation, executives at... PointPredictive estimated based on reports from banks, finance companies and others. Lenders' losses from deception may double this year to $6 billion from 2015, the firm forecast.
Those fraud rates are coming closer to the over-1% level for mortgages in 2009, when the financial crisis was boiling and more lenders started reporting incidents to one another, Frank McKenna, chief fraud strategist at the firm, said in an interview...
"We see an extraordinary amount of parallels between the auto and mortgage industries, in terms of the rising levels of hidden fraud," McKenna said.
Once again, this should sound familiar to regular readers. We've been highlighting these growing parallels for years. As Porter wrote most recently in the April 28 Digest...
When the Fed pushed interest rates to record lows following the 2002 recession, Wall Street moved into subprime mortgages in a huge way. By 2006, almost 40% of the mortgages being underwritten weren't prime. You know what happened next...
But it's not all Wall Street's fault. And it's not all the subprime borrowers' fault, either. Both parties were enticed into making a bad financial decision because of the "noise" in the primary financial information channel: The price of money wasn't accurate.
When the price of money is artificially lowered, subprime lending booms. It will happen every single time, because those interest rates create a huge spread between the cost of money and the price a subprime borrower can be charged to borrow it.
I'm convinced the zero-percent interest-rate policies (and even negative interest rates) we've seen in all the world's major economies have created the biggest subprime bubble ever in the U.S. consumer sector.
We're in the midst of a huge subprime collapse. Only this time, the problem isn't in mortgages... It's in credit cards, autos, and student loans.
New 52-week highs (as of 5/10/17): iShares MSCI BRIC Fund (BKF), Morgan Stanley China A Share Fund (CAF), Coach (COH), Ctrip.com (CTRP), 3D Systems (DDD), Quest Diagnostics (DGX), iShares MSCI Singapore Capped Fund (EWS), Global X MSCI Greece Fund (GREK), PureFunds ISE Mobile Payments Fund (IPAY), JD.com (JD), Nuveen Preferred Securities Income Fund (JPS), KraneShares CSI China Internet Fund (KWEB), McDonald's (MCD), Naspers (NPSNY), Nvidia (NVDA), Paysafe (PAYS.L), PowerShares S&P 500 BuyWrite Fund (PBP), ProShares Ultra Technology Fund (ROM), Shopify (SHOP), iShares MSCI India Small-Cap Fund (SMIN), Sanofi (SNY), ProShares Ultra S&P 500 Fund (SSO), Stanley Black & Decker (SWK), Tencent Holdings (TCEHY), U.S. Concrete (USCR), Weight Watchers (WTW), and short position in Hertz Global (HTZ).
In today's mailbag, Steve Sjuggerud answers a big question about China. Send your questions, comments, and concerns to feedback@stansberryresearch.com. And be sure to read on for a brand-new essay from Digest contributing editor P.J. O'Rourke. You don't want to miss his take on the government's insane "easy money" policies.
"I do not understand how statements like this in [yesterday's Digest] can be made, 'The entire world has given up on the idea of owning Chinese stocks. Both here in the U.S. and overseas, no one is interested.' Then in the same issue, [it reports several of Steve's China recommendations] made new highs. In fact, a dozen other Chinese stocks that I follow from time to time are well above their lows of 2016.
"I have followed Steve's advice, own some Chinese stocks and all are profitable. BUT, saying the entire world and nobody likes or is interested in China is totally misleading. Making statements, as printed today, to induce people to purchase is not a creditable position or statement in my view. The timing to purchase may or may not be right on this day, but I certainly agree that long term holdings should prove profitable. So, in my view China is NOT hated by everyone and there is interest in Chinese stocks if for no other reason than they are being bought and sold every day." – Paid-up Stansberry Alliance member Gary F.
Steve Sjuggerud comment: I say that "nobody is interested in Chinese stocks." I believe it's true...
Anecdotally, when I was in China less than a year ago, I couldn't even get Chinese stockbrokers to tell me a bullish story about Chinese stocks. I had to tell the bull story to them! My family has heard my story... And even they haven't bought Chinese stocks. Nobody is stepping up... not the Chinese, and not the Americans.
Looking beyond the anecdotes to the facts... bets AGAINST the market just hit a 12-month record, and stocks reached their most oversold level this year. The market is hated!
You claim that I'm saying nobody is interested to induce people to buy Chinese stocks. That doesn't work, though... If I say "nobody is wearing argyle socks," that doesn't mean people will start wearing argyle socks. If I say "everyone is already in real estate," most people won't get out. Honestly, nobody listens when I say "nobody is in."
Also... just because the stocks are being bought and sold every day doesn't mean they're popular. Gold coins are bought and sold every day, too. But they're not popular. Shares of Verizon (VZ) are bought and sold every day. But they're not popular, either.
Chinese stocks are not hated by every single human on Earth, of course. But very few people (pros or amateurs) are even close to owning enough China. And as they increase their allocation to China, the upside potential is dramatic.
Regards,
Justin Brill
Baltimore, Maryland
May 11, 2017
0% Interest Rates – Not Only Wrong, but Evil
Oh, for the good old days when banks adhered to the "3-6-3 Rule" – pay depositors 3%, charge borrowers 6%, play golf at 3 p.m.
Instead, today, we have 0% interest rates, which are not only economically disastrous... they're immoral.
On April 21, Porter wrote a brilliant essay on the damage being done to the global economy by 0% interest rates, reckless money printing, and "free capital."
I've been pondering what Porter said ever since. It taught me a lot. It also made me think. If Porter doesn't mind, I'd like to add my own two cents. (Which, with the worldwide inflation that's about to explode, will be worth more like .0002 cents.)
The old-fashioned term for borrowing was "renting money." And that's the way we should start thinking about it again. A sum of money is a thing, a piece of property, like a house.
When the government decrees a 0% interest rate, this is exactly the same as the government forcing you to rent a house you own for nothing.
And what kind of tenant will you get for the price of bupkis per month? You'll get somebody running a meth lab – if you're lucky.
Of course, you still have to pay the upkeep on your rental property. In the case of money, this means paying the taxes on what you earned and saved so that you could have a sum of money to rent to someone.
Between the cost of "maintenance" on your money and the cost of inflation lowering the value of your money, what's actually going on is that you're paying money to have money borrowed from you.
Even mafia loan sharks don't go this far.
And 0% interest rates hurt the innocent most – like our moms and dads. There they are laboring away for 30 or 40 years, scrimping and scraping by, dropping coins in the "swear jar," setting a little bit of the paycheck aside every week, and putting their meager savings in the safest possible place – the credit union, the bank, or U.S. savings bonds.
Current yield on a Series EE savings bond? 0.1%. Mom and dad would be better off with their rainy day money tied up in a sock. Yes, they might get burglarized. But you can shoot a burglar. It's illegal to shoot a governor of the Federal Reserve Bank.
What happens to mom and dad? They are forced to seek riskier investments in order to get any return at all.
There's nothing necessarily wrong about us doing that. But it's wrong to make mom and dad do it. They are the children of hardship and wartime. They've seen all the risk they need to see.
Mom and dad are risk-adverse. (Thank God... That's why we're still alive.) It was dad who nixed my plan to ski down Death Gulch on a pair of two-by-fours duct-taped to my galoshes. Mom stopped me from jumping out the attic window onto an old couch cushion on the driveway. And mom and dad acting quickly and in unison to prevent my attempt to use 25 cherry bombs to launch a coffee can into orbit.
Risk isn't right for mom and dad. It makes them feel guilty and uncomfortable. It's like serving roast beef to the parish priest during Lent.
Inflation is immoral, too. We readers of the Stansberry Digest are savvy about the varying value of money. We can formulate investment strategies to offset the dire effects of inflation, maybe even to benefit from them.
But what about poor people? Their only available investment strategy is to invest what little money they have in food and shelter. Inflation is brutal on the poor.
If you were walking through a poor neighborhood and saw a little girl with an ice cream cone, you wouldn't take it away from her. I'm hoping our government wouldn't take it away, either. But somehow, our government thinks it's all right to bring the blow dryer of quantitative easing into that poor neighborhood and stand over the little girl with the hot stream of air from the blow dryer pointed at her ice cream cone until it melts away to nothing.
That's a bad thing to do. And flooding the market with free capital is maybe even worse.
Free capital allows the marketplace to be swamped with business jerks. Some are incompetent. Some are corrupt. Many are both. Again, this isn't a problem for us Digest readers. We're smart. We're well-informed. But what about people who aren't as lucky as we are?
Free capital hurts the frail and the weak. It is they who will be cheated by shoddy products and services and quack investment pitches. We shouldn't blame them for being cheated. Maybe they suffer from intellectual disability. What with the state of our public school systems in America, there's a lot of intellectual disability going around.
The people who are harmed most by free capital are people who are operating at a disadvantage. Being kind to the disadvantaged is a core principle of morality.
You wouldn't trip a blind man. But somehow, our government thinks it's all right to go to the neighborhood where the blind man lives and take all the sewer grates off the storm drains and all the manhole covers off the manholes.
That's an evil thing to do.
Next time you see someone who's in charge of government monetary policy, take a close look at his pants cuffs. Is what you see peeking out from under them a cloven hoof?
Regards,
P.J. O'Rourke