Tuesday, November 22, 2011

GROUPON (GRPN)- A BAD TASTE IN YOUR MOUTH


NEW IPO, SAME OLD SCAM
Groupon (GRPN) is a company that recently held its IPO (initial public offering) where it went public and attempted to squeeze in its fundraising in before the equity markets closed.  Other firms like LinkedIn (LNKD) and Pandora (P) all paved the way for the final scam which is eerily similar to the 2000 Tech Bubble days.

I've felt that many of these firms were not quite worth their initial stock prices, but for me, Groupon is among the worst of the bunch.

Why would I doubt the merits of this company?  I'll list a few below;

1)  NOTHING ABOUT IT IS UNIQUE
The GRPN business model is easy to replicate.  In fact, LivingSocial, is a player in the space that has been operating globally since 2009.  Unfortunately for GRPN, if I had a list of several thousand email addresses, I too could easily go into this business.

2)  GRPN HAS NOT BEEN PROFITABLE
The company took in $1.3 Billion in sales and lost almost $700 million.  GRPN has about $250 million in cash on it's balance sheet.  The argument is that GRPN needed to raise cash so it could scale up its business, I would suggest that it needed to stay put and make its business profitable before taking investor money.

3)  CLIENTS AREN'T PROFITABLE
It seems that it isn't only Groupon that is unprofitable.  Essentially Groupon is used by many retailers as a loss leader in an attempt to get people in the door.  The pitch is simply once they get in the door and try your product, they'll become clients.  In the case I included below we find that if the retailer or small business survives the encounter with Groupon, they probably won't be inclined to sign up again.

London Baker's Experience With Groupon Leaves Bad Taste In Mouth

The baker in the story was overwhelmed by the purchases of 75% off coupons for her products.  In fact, the baker priced their product in such a way that she lost about $3 per dozen cupcakes she sold.  In addition, she had to keep staff working overtime and ultimately lost $20,000 in the experiment with online coupons.

As we evaluate her experience, we must conclude that the baker made a few bad decisions.  So let's not "sugar coat" this.  She obviously didn't understand the demand that the coupon would have.  She obviously didn't price the coupon correctly, and she didn't put a cap on the number that could be sold.  All of these are absolutely correct, and frankly this is in line with what I see from many small retailers, they simply don't understand business and risk mitigation.  This is why so many fail and so many sign up for long term leases at rates that kill their business before they even start.

With all of those items noted, we still need to recognized that the Groupon sales person also is at fault.  Why didn't they put a cap on the sale for their client's first experience?  Why didn't they encourage the client to price their sale appropriately?

Ultimately, Groupon will lose a potential repeat customer because the baker took a bath AND the story hit the national and world media they will probably also lose potential customers.

MARKETING IS GOOD, EXTREME VALUATIONS AREN'T
Look, as a business owner I have always distrusted "marketing" because it is fuzzy and often it isn't measurable.  I do not hate the idea of email coupons, in fact, I have bought a few before (I absolutely hate the rules and conditions they place on them).  In fact, I think that Groupon's business could be a powerful tool for a small business owners to make a quick name for themselves and build a business.  The trouble I have with Groupon is simply that it isn't an "internet company" and doesn't deserve valuations that are sky high and neither do firms like Linked In that ARE internet businesses.  Valuation is important and we've seen that crazy valuations often result in heartaches.

4)  THE CHART IS SICK
While there is not much data here in about 20 days of trading, the chart looks like it will break through the lowest point it has had in its short trading history.  In fact, as I am writing, it has fallen through $22.72 which I identified as support.  I can't even identify any support below this level, so unless we get back up on the close, I think it is a stock you can short with impunity




GOATMUG

Goatmug is an investor that cares about you and your family. Goatmug's Blog - Financial Perspectives From The Mountain Top is a collection of thoughts on our economy and how it impacts the lives of investors and average people. While several specific investments are named in many of his posts, these articles are simply invitations for you to do your own research and reference to these securities does not constitute financial advice. Your situation is complex and unique and you should seek professional assistance with your trading and investing. Please visit Goatmug and share your comments athttp://www.goatmug.blogspot.com/

Tuesday, November 15, 2011

"HAVING GERMANY BY THE SHORT HAIRS"

KYLE BASS ADDS HUMOR WHERE THERE IS NONE
As I was postulating that Euro leaders saw no other way out of their debt problem than to speed up the fiscal reorganization and consolidation of power at a supra-national level, Kyle Bass was giving another wonderful interview with the BBC.  Since Kyle works in Dallas, he absolutely uses Texan slang and references even in the most stoic and formal settings.  In the interview he breaks down the challenges that the Eurozone faces and outlines a result that is 100% the opposite of what I described would happen.  He also logically lays out an argument as to why Germany would be stupid to continue bailing out the other Eurozone "partners".

While Kyle Bass is absolutely correct, I think he gives the leadership in Europe too much credit and assumes that they will be able to realize that they are throwing good money after bad and that it is just better to stop.  Funny, the Euro political class hasn't realized this yet and according to my post earlier today and the article by Clive Cook, they rationally won't either.

LOGICAL LEADERS NEED NOT APPLY
Please check out the EURO NATION which highlights just how disfunctional the thinking is at the ECB level and just why Kyle's logical conclusions may be totally wrong.  I think this is why it is so difficult to judge the outcomes of this situation, because these leaders are not managing the situation as a business owner would, they are driven by ideological motives that they feel are much greater than mere financial concerns.

The interview with Kyle is only a couple of minutes long and I highly recommend it. (Click the caption below the screenshot).


KYLE BASS INTERVIEW ON BBC
And just as I was publishing this, I noted this Tweet from none other than the Fed's mouthpiece Steve Liesman from CNBC.  This message contained within 140 characters summarizes everything wrong with central bankers, Euroleaders, and fiscal union supporters.


Steve basically says, "PRINT, PRINT, PRINT, cause if you don't the Eurozone is going to blow up, so might as well try to print anyway."  Thus, in a simple statement we see why Kyle Bass is so right, but will be wrong in predicting how Euro leaders will react to the situation.

GOATMUG
Goatmug is an investor that cares about you and your family. Goatmug's Blog - Financial Perspectives From The Mountain Top is a collection of thoughts on our economy and how it impacts the lives of investors and average people. While several specific investments are named in many of his posts, these articles are simply invitations for you to do your own research and reference to these securities does not constitute financial advice. Your situation is complex and unique and you should seek professional assistance with your trading and investing. Please visit Goatmug and share your comments at http://www.goatmug.blogspot.com/




THE EURO NATION

SAVING THE EU AT ALL COSTS
If you are like me you wonder what kind of leader knowingly commits his or her country to destruction.  In the case of the Eurozone, (and the US), I find myself asking this question almost daily.  I believe I found an answer to the question today when reading a Bloomberg piece called "Saving The Euro Will Be Easier Than The Alternative" by Clive Cook.

This piece highlights a few of the troubles with the idea of the EU as constructed and even describes the fatal error of the creators of the currency union by growing too fast and not concentrating on deep foundational changes in a core of homogeneous countries.  But, as we know, the planners and politicians didn't so we don't need to focus on that right now.  Cook's piece does make an interesting assertion that there are not many choices available now that the stew is in the pot and this is unsettling because we get a better glimpse into the minds of the EU leadership.

"What politicians have built, you might argue, politicians can unbuild. It isn’t nearly so easy. When you put a currency union together, parities are fixed. When you take one apart, they are freed: Why else dismantle the union but to let exchange rates move? That obvious asymmetry has large consequences. Who would hold a deposit in an Italian bank if Italy were expected to abandon the euro? The new lira, in which those deposits might soon be denominated, would depreciate at the instant of its creation. The mere prospect would trigger a systemwide bank run." 

Going on we find that Clive Cook may simply have opened the playbook and this message gives us the ultimate direction of the Eurozone, if this week's tsunami of debt and financial fear can be held back in the short run.

"Nonetheless, we may suffer the profound misfortune of finding out -- unless Europe’s governments see that the only sane choice is to accept the logic of the currency union they created and the obligations that go with it. In the medium term, that means closer fiscal union. In the immediate term, it means one thing above all. The European Central Bank must be granted whatever powers it may need to underwrite public debts across the EU." 
Did you catch that?

"the only sane choice is to accept the logic of the currency union they created and the obligations that go with it."

That is right, Cook describes how leaders in France, Germany, and elsewhere (even China and the US) see the world.  The dish is beyond the point of return and the main course cannot be made into another entree.  Instead of tossing it into the garbage, all efforts will be made to fix the broth.  The leadership cannot adjust course, because failure in their eyes is just not tolerable.  In a sense, they are now in the "too far along to fail" just like there is the US version of "too big to fail".  Essentially, the currency union cannot be broken without a total fiery crash of all their economies and so the only course of action is to actually speed the process up!


Remember too, that the EU is not just an economic philosophy, it is really a political and ideological movement that attempts to coalesce Europe and make future wars impossible.  These ideas are not quickly abandoned by leadership when economic times get tough.

TONE DEAF OR JUST COMMITTED?
Cook's article helps me clarify that these politicians are not just fiddling away while Europe is burning, they actually see no other choice than to solidify efforts to "save the system".  In their rational thoughts, the undoing of the Euro is not only admitting that mistakes have been made, it is more like surrendering to an army that eats their prisoners.  I detect a hint in Cook's writing that he actually supports the notion that the Eurozone must forge ahead, but as we know there are often many choices that can be made even when we think there is only one.  My sense is that the EU leadership thinks there is only one pleasant choice available, and that is to save the union.  Unfortunately, I don't believe that they agree with the notion that I hold that they can still save themselves if they simply stop now.  There will be suffering and pain, but at least the process with be limited to some countries and they can get working  on recovery.  Unfortunately, countries like Greece, Spain, and Portugal will suffer immensely while the EU groups "saves" them, and then they will suffer even more if the fix doesn't work.  Ultimately a botched job will bring down even more than the trouble spots and will potentially destroy the very large economies like France and Germany as well.

There is actually another choice here that we keep hearing.  The ECB could simply begin monetizing their debt (start printing) and then purchase all of the Italian and Greek bonds in the open market.  The move to do this would immediately crush any bond shorts and it would drive sovereign bond yields down.  What stops the Eurozone leadership from doing this?  Simply the Germans are fearful that the move would devalue their currency and usher in longer term hyperinflation.

PROMISES, PROMISES
There is another problem with printing and it simply is that Europeans all have a promise problem.  What do I mean by that?  Developed countries in Europe and the USA have gone wild promising benefits to aging workers that simply can't be met.  In time, each of these countries is finding that the future obligations of supporting retirees is just too great.  As troubled debtor countries like Greece make attempts to cut those promised benefits we see riots and strikes as a result.  The EU countries have only scratched the surface of their spending problems and until the expense side is adjusted, there are no "fixes" that will solve the debt crisis.  Ultimately, I believe the Germans will not get their wish and the EU will print as there is no fix for this problem other than wiping out  a lot of debt (which won't happen).  Let me be clear as well regarding Italy, despite what we are hearing, the country is not in collapse mode like Greece, in fact, it is the 3rd largest economy in the EU.  Having said that, it is spending too much and is now facing interest expense costs that no developed country can endure for the long term.  The attack on Italy must be dealt with with the overt action of the fiscal leadership to stop bond yields in their tracks.

NEXT STOP, FISCAL UNION
In my opinion, no matter what efforts are made by the ECB and EU leadership, they will fail.  The failure of all bailouts and bond buying will result in the last ditch political move to wrest national sovereignty from the nation states and consolidate economic power where taxation and revenue decisions can be made for the entire region.  Clearly this was the goal all along, we just haven't seen a big enough crisis to push the Europeans to abdicate their self rule.

SO WHERE DO WE GO FROM HERE?
I don't think there is a simple answer to this question.  The reality is that if Europe would go all in and become a fiscal union, I think the short run would make the Euro much stronger and the USD weaker.  US equities would go nuts and go much higher.  You might actually see gold reverse on this news which would be quite odd, but I think it would take the fear premium off of gold significantly even though the act of "printing" should send things higher.  Before this happens I am still convinced that we will remain in this trading range from 12,750 on the DJIA to 11,500 or from 1345 to 1185 on SPX.  The movements in the indices in this range will be driven by rumors and retractions of statements.  The "healthy" market with 2% and 3% moves in either direction will continue till we have some sort of resolution.


GOATMUG

Goatmug is an investor that cares about you and your family. Goatmug's Blog - Financial Perspectives From The Mountain Top is a collection of thoughts on our economy and how it impacts the lives of investors and average people. While several specific investments are named in many of his posts, these articles are simply invitations for you to do your own research and reference to these securities does not constitute financial advice. Your situation is complex and unique and you should seek professional assistance with your trading and investing. Please visit Goatmug and share your comments at http://www.goatmug.blogspot.com/

Friday, November 11, 2011

NO WORRIES THIS WEEKEND, ITALIAN BONDS IMPROVE

Apparently the "ALL CLEAR" has been sounded as Italian 10 Year Bonds are heading higher and bond yields are retreating.  While the sovereign debt issues are still well above the danger zone which is around 5.50% it is significantly better than a 7% handle yield which we witnessed earlier this week.  I wonder who could be buying all of those Italian bonds?  




GOATMUG
Goatmug is an investor that cares about you and your family. Goatmug's Blog - Financial Perspectives From The Mountain Top is a collection of thoughts on our economy and how it impacts the lives of investors and average people. While several specific investments are named in many of his posts, these articles are simply invitations for you to do your own research and reference to these securities does not constitute financial advice. Your situation is complex and unique and you should seek professional assistance with your trading and investing. Please visit Goatmug and share your comments at http://www.goatmug.blogspot.com/

Wednesday, November 9, 2011

PASS THE PARCEL - DEBT GAMES

DEBT BOMBS
Please watch this 4 minute video that highlights the problems that the Eurozone is facing.  Every day that I consider the situation I am still in awe of how the leaders of these countries will destroy their own nations to preserve a broken system and a stack of lies. 

It takes a courageous man or woman to stand up to institutionalized fixtures and fight for what is right and just, especially when it might create short term pain.  Unfortunately there are no courageous men or women in Europe or the US to make this kind of stand.  This thought is only reinforced when we look at the Penn State situation.  In the US we exalt football to the level of religion.  We hear that it is a man's game and rite of passage where leaders are made and it is where the our nation finds its heros.  Yet, even on this battleground of excellence we find silent men that follow procedures instead of doing the right thing.

I'm sure the FED and IMF will attempt to ride to the rescue of Italy and the Eurozone this week, but we all know that it won't help in the long run and by the assessment of the video, it won't help at all next year.

Enjoy.






GOATMUG
Goatmug is an investor that cares about you and your family. Goatmug's Blog - Financial Perspectives From The Mountain Top is a collection of thoughts on our economy and how it impacts the lives of investors and average people. While several specific investments are named in many of his posts, these articles are simply invitations for you to do your own research and reference to these securities does not constitute financial advice. Your situation is complex and unique and you should seek professional assistance with your trading and investing. Please visit Goatmug and share your comments at http://www.goatmug.blogspot.com/


Monday, November 7, 2011

KILLING THE BROKEN SYSTEM BY SAVING THE SYSTEM

UNINTENDED CONSEQUENCES STRIKE AGAIN
So, the question that has been on my mind over the last couple of days, "What Happened to MF Global? and also, "Why?"  We are finding out all sorts of details of mis-management and lack of risk controls at MF Global and the sheer arrogance of Jon Corizine at the helm of the firm. 

I suggest reading Felix Salmon's article at Seeking Alpha for a perspective on the firm.

http://seekingalpha.com/article/304132-what-happened-at-mf-global

Beyond this explanation I think it is important to go further because I believe this week is going to be critical for the markets, currencies, and global economies and we can lay the blame all at the feet of the Eurozone leadership and ISDA and their efforts to save their broken system by destroying their system.

EFSF AND THE GREEK BAILOUT
Remember two weeks ago when markets ripped higher because the Europeans finally came together and agreed to agree on things they would attempt to put together in the coming months?  Remember the Slovakia vote that paved the way for the EFSF and saving all of the Eurozone?  Remember how a 1 Trillion levered SPIV would be the catch all for crummy assets and remember how SOME institutional holders of Greek debt would suffer 50% losses and others 21% losses and even others, no losses?

Ok, so we remember all of that.  What I want to turn your attention to though is that despite the 800 point rally in the Dow in a mere week or two, despite all the agreements, we are actually in a far worse position in funding and liquidity terms than we were just weeks ago.  Why?  As part of the EFSF agreement, banks that form the ISDA (International Swaps Derivatives Association) colluded to state that the write off of 50% losses on holdings of Greek debt IS NOT a default triggering event for their purposes and for the purposes of CDS (credit default swap) protection..  Is this important?  Yes. 

CDS - INSURANCE COMPANY AND HEDGE FUND "INSURANCE"
If ISDA (the banks) can rule that the insurance protection you bought under a standard ISDA document (binding contract between counterparties- many buyers just use the standard contract instead of negotiating their own contractual triggers) even when the rest of the world knows that an "event" did occur, then institutional buyers that just took a bath and other potential buyers of sovereign debt suddenly need to rethink the risk that they have been acquiring in their portfolios. 

If their hedged portfolios are no longer hedged, why would you ever buy a Greek or Spanish or Italian bond?  The answer clearly is, you wouldn't. 

WHY WOULD ISDA CLEARLY LIE HERE?
ISDA would lie for a couple of reasons.  First, the banks would lie because they have written a bunch of this CDS as protection against a sovereign default.  While the total net exposure is probably not huge for Greece, we all know that whatever happens in Greece doesn't stay in Greece and it will be visited upon all of the PIIGS countries, so it is in the best interest of the banking cartel to rule that a 50% loss is not a default event.  If there is no default, they don't have to pay.

Second, a triggering event would immediately call for downgrades of other European banks like the French and German banks that hold alot of these bonds from credit reporting agencies.  Downgrades require more capital and the death spiral continues as the countries that issued the defaulting debt will need to somehow find more money to save their banks that are choking on their own countries exploding debt.  Nice huh?

Third, ISDA would rule in favor of a non-default because it keeps the laughable game going for just a bit longer.  This is the irony of the entire mess in my opinion.  Everyone at the table knows that there is no fix here, it is just a concerted effort to keep the plates spinning as long as possible despite the fact that any extension of the duration of this mess just makes the next mess worse.  It is all a sham.

WHAT IS THE IMPACT HERE?
Well, if you disrupt the natural forces of the market where some win and some lose by ruling that losing isn't losing (no default) you create a situation where all buyers repudiate the offerings in the Eurozone.  Can we substantiate this?  Of course, let's look at Italian bond yields since the heist occurred.


Next like all government interference, we'll see some kind of anti-market forces that try to hold rates down and keep prices up, further distorting the market pricing mechanism.  Take a look at the following  Zerohedge article for information on this escalation.  Italy Calls ECB's Bluff.  By the way, as I'm proof reading my post that I've been working on for a few days, we see that the yield continues to rise another 15 bps or so to 6.65%.  This is not the sign of anything healthy, the Italian crisis is now underway.

WHAT DOES IT ALL MEAN?
So, where we are at today is that the Eurozone, ECB, IMF, G20 solution achieved in the last week along with the outright rigging of the system by ISDA has ushered us one level lower in the death spiral of the Eurozone collapse.  If you had been a buyer of bonds and had excellent risk management techniques by buying protection to offload risk, you no longer have that capability and you actually have a ton of risk on your books.  Essentially, you are very pissed off and scared to death!  Another way of saying it is that you are no longer a buyer of these bonds at any cost.  As a result, the ECB is having to step in an buy these bonds at issuance to keep Italy from blowing sky high, although the damage has been done.

As we can see from Felix Salmon's article, the ECB intervention did nothing to save MF Global, and I suspect that we'll see more of these things as we find that hedgies and even banks that were holders of sovereign bonds are really hurting (Jefferies anyone?) as they don't have the protection they thought they had.  The MF Global bankruptcy and theft and mis-management ranks within the top 10 in terms of size of all bankruptcies.  How can this happen?  How can their be rumors of hundreds of millions of client money missing?  How can this have occurred in this age of significant oversight and regulatory control?  Clearly we've learned nothing and clearly the ECB, Eurozone, or US government are not in a position to save anyone or have any idea how to do it.  The only goal in all of these actions is to extend the time before the implosion finally happens in all of its nastiness.  Get ready, it is still coming.

GOATMUG

Goatmug is an investor that cares about you and your family. Goatmug's Blog - Financial Perspectives From The Mountain Top is a collection of thoughts on our economy and how it impacts the lives of investors and average people. While several specific investments are named in many of his posts, these articles are simply invitations for you to do your own research and reference to these securities does not constitute financial advice. Your situation is complex and unique and you should seek professional assistance with your trading and investing. Please visit Goatmug and share your comments at http://www.goatmug.blogspot.com/