Market Set-Up and Trading Plan
Markets are getting hit today and this recent sell-off action is starting to make the bulls and longs wince at little bit. You know that I’m generally bullish about the next year or so as earnings, the economy, the Fed cycle and the stock market set up/sentiment seem to point to higher stock prices.
Stock markets mixed, not but maybe one or two of our stocks have moved more than 1% so far today. Maybe a day for the markets to catch their breath? Maybe a few days of sideways action? Remember sideways action? I think I remember a time or two when the markets had sideway action.
That said, as I’d noted last week:
“It’s been a while since the US stock markets got hit hard over a European crisis du jour. Which brings us to Brexit and the idea that Great Britain might exit the European Union. Here’s a good run through of the latest headlines and some background about ‘BREXIT’: GAUGING THE IMPACT. I’m not in the business of trying to game the next 5-10% move in the stock market, but I wouldn’t be surprised if we did see the DJIA sell off towards 17,000 into the Brexit vote and the next Fed rate hike, both of which will most likely be non-events after all.”
The DJIA was around 17,800 when I wrote that and it’s now at 17,620. I think we’re likely to get some panicky near-term action as Brexit worries and Fed worries escalate in coming weeks, and I’m ready to to do some more nibbling and maybe sneak in and buy some call options like we’ve done the last few times the markets have gotten panicky. Long-term outperformance is so much about patience and waiting for great pitches and we’ve nailed most of the panicky stock market action repeatedly in the last five years since I started investing/trading again.
Reading Between the Hubs
A subscriber in the Chat Room shared this Morgan Stanley analyst report on our most recent new short position, HUBS:
Stan Zlotsky hosted meetings with the CTO and CFO which reinforced his view that the company has a long runway of sustainable growth ahead driven by a strong product roadmap, while ramping channel and international distribution capabilities should supplement the opportunity to penetrate the large TAM of underserved SMBs. HUBS marketing software continues to be the core of the company’s success, while the new and revamped products brought to market over the last two years are driving upsell and revenue retention hovering around 100%. Management provided updates on the momentum they are seeing with these products:
Websites: this add-on has been around the longest, but last fall it was re-released. The unusual tailwind for this product comes from Google’s push to rank mobile-optimized and SSL (secured website communication) websites higher in organic search results. With many SMBs lacking the resources to ensure both of those factors are satisfied, this add-on is seeing healthy traction. Some of the newer features R&D is working on include APIs to create richer sites with plug-ins into 3rd party vendor solutions, such as eCommerce.
Reports: Expanded reporting has been the single most requested add-on prior to release, so it’s not surprising that adoption has been rapid. Product direction is to get dashboards into as many hands as possible at customers’ companies, to demonstrate value proposition and reduce the “champion” risk (one HubSpot advocate leaves and contract is not renewed).
Ads: Enabling customers to buy digital ads started with LinkedIn and has now expanded to include Google’s AdWords. Early feedback has been positive and management highlighted this product as a natural upsell over time, since they already know which customers buy digital ads or AdWords. Also, pricing that is based on a predictable subscription fee is preferred by some customers vs the typical industry percentage take rate models based on dollar volume of media dollars being spent.
Sales/CRM: Thus far Stan sees these products helping more with attrition, rather than bring in a direct revenue stream. Similar to Reports, Sales/CRM get HubSpot’s products into more employees’ hands, which encourages usage and showcases value proposition, thereby affecting churn.
Management noted that they’ve seen an uplift of several points within the cohort of customers adding Sales to HubSpot’s Marketing. Digging into the decision to eliminate the $10 plan, CFO noted that the economics were not attractive enough vs the $50 plan to offset the buying friction and churn within the $10 product. Management recently revised up their goal to finish FY16 with >$10M Sales run rate, which appears achievable given recent momentum.
My reply: Sounded like some code phrases for “this business model sucks” here:
“Revenue retention hovering around 100%.”
And here: “Thus far Stan sees these products helping more with attrition, rather than bring in a direct revenue stream.”
And here: “Digging into the decision to eliminate the $10 plan, CFO noted that the economics were not attractive enough vs the$50 plan to offset the buying friction and churn within the $10 product.”
Bank Stocks, National Debt and the Stock Market
Q. Bank stocks, both in the U.S. and abroad, have been relatively weak for some time now. The bullish trend in the economy and the markets seems surprising to me without the banks along for the ride as well. How do you think this, along perhaps with an ever-increasing national debt, affects the potential for the bull market to continue upward and onward?
A. (Part 1) – Two very different questions, as to whether the banks stocks will have to participate in any new bull leg and the question about what an ever-increasing national debt means. I do think the bank stocks will have to rally towards their old highs of last year if the markets are going to have another leg higher. Their action right now could end up being a bottoming or it could happen in a few weeks’ or months’ time and the market could pull them up higher with it. On the other hand regarding the bank stocks, I just looked at the XLF and some bank stock charts and they’re a lot like the broader market charts already — they’ve bounced off their February lows and have been in an uptrend, haven’t they?
A. (Part 2) – Regarding the ever-increasing national debt issue, it’s all a matter of timing. We’ve had what seems to be way too much national debt for my entire lifetime and I remember reading bearish dire predictions for the markets and economy back in college in the early 1990s and many of the points they were making back then are the exact same points you see the permabears making today. At some point, probably when Treasury rates are making a serious move back towards 5%, we’ll definitely want to have positioned ourselves for negative impacts of the national debt interest payments. Til then, it’s probably not the most important factor for us to use in our stock market analysis.
Subscriber note: Good point on the bank stocks and XLF trend since Feb. The longer term trend, primarily in big bank stocks, seems to be standout to stagnation in the sector. Regarding the national debt, I agree whole-heartedly with you on “too much national debt my entire lifetime….” I was going to mention in my question when I asked you about that how I remember my parents and grandparents talking about how the national debt was so significant that it was unsustainable at those levels. You eluded to the same thing in your answer. Thanks.
I posted my commentary about the National Debt on Scutify and here’s the full back and forth that ensued:
@CodyWillard @JeffMiller @LunaticTrader @RobertMarcin @ScottRothbort @BobFaulknerThe growing principal of corporate and government debt levels are going to keep interest rates suppressed for the very reason any rise will crush credit demand via increased debt service levels.
This would have sounded insane 35 years ago; it was presumed then debt would increase the incentive to inflate it away. Now efforts to inflate it away lead to deflationary cash balances for central banks.
@ScottRothbort @CodyWillard @JeffMiller @LunaticTrader @RobertMarcin @BobFaulknerThe only way to position yourself is to eliminate duration risk, go long inflation protection and hope currencies aren’t destroyed.
I might add dried beans, distilled water and a comfy cabin in Montana, but the last guy who tried that is in a maximum security cell in Colorado.
@BobFaulkner @CodyWillard @JeffMiller @LunaticTrader @RobertMarcin @ScottRothbort@BobFaulkner And the low rates are suppressing growth by enabling bad business models to stay afloat. This maintains excess capacity.
If, however, central banks shrank their balance sheets, the effect would be a reduction of credit supply in a deflationary environment. That would be 1930 redux.
The path of least resistance is to maintain current policies and invite the atheists to a prayer meeting.
@HowardSimons @BobFaulkner @CodyWillard @JeffMiller @RobertMarcin@ScottRothbort Capacity utilization keeps going down. It’s very hard to get any inflation and new investment when there is growing overcapacity. If more weak companies had been allowed to go bankrupt instead of saving them with QE and low rates, then this problem would have solved itself. => Fed, BOJ and ECB continue to be the cause of their own misery…
@BobFaulkner @CodyWillard @BobFaulkner @JeffMiller @LunaticTrader @RobertMarcin@ScottRothbort @BobFaulkner Badly. But let’s argue the counterfactual for Cyprus as well as Cypress and ask where they would have been had they not maintained then-current consumption levels by borrowing from the future.
I suspect worse at first, and then their economies would have recovered. But asking for austerity in a democracy is political poison. Good thing our candidates don’t promise free stuff.
@CodyWillard @BobFaulkner @BobFaulkner @JeffMiller @LunaticTrader @RobertMarcin@ScottRothbort @BobFaulkner We do nothing but redistribute wealth at the public level in the form of entitlements, pensions and the like. Negative interest rates tax savers to finance transfer payments.
Years ago I questioned my Mexican grain trading clients on the Mexican corn subsidy. They responded tortillas are cheaper than tanks. True then, true today.
@LunaticTrader @BobFaulkner @CodyWillard @JeffMiller @RobertMarcin @ScottRothbortAgreed. But the pressure was on to “do something.”
The odds-on favorite to be the next President crows about saving the auto industry, over-regulating the financial and health care sectors, promoting corporate welfare in the energy industry and favors the Ex-Im Bank, that paragon of crony capitalism.
Failure will not be an option.
in the Loonie Tied Studs of Merka.
@CodyWillard @LunaticTrader @RobertMarcin @ScottRothbort @HowardSimons@BobFaulkner When longer-term rates reach 5%, we will see several other effects at the same time — higher growth, more inflation, and higher government revenues.
Reduced spending and increased taxes are also needed, which first requires political leaders willing to compromise.
Finally, we need to raise the eligibility age on social security and medicare. No one will touch that “third rail” without bipartisan support.