Analysis: Trading Plan, Hubspot, Banks, National Debt
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:
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. @JeffMiller @LunaticTrader @RobertMarcin@ScottRothbort @HowardSimons @BobFaulkner et al
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. Thoughts @JeffMiller @LunaticTrader @RobertMarcin@ScottRothbort @HowardSimons @BobFaulkner et al?
@CodyWillard @JeffMiller @LunaticTrader @RobertMarcin @HowardSimons@BobFaulkner – Correct Cody, but why position yourself now? That’s the perma bears major fault. They position now for an event years in the future and lose out of profitable opportunity along the way. I recall many hedge funds that were short the telcos and dotcoms in the 1990s but had to close because they got wiped out years before the tech bust.
@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@HowardSimons @BobFaulkner The short answer is that when you were a kid Debt:GDP was less than 40% and you could make the argument that you could grow out of it. Now that ratio is more than 100% and there’s no growth.
So it’s all a matter of timing, right? What’s to say the debt to gdp ratio doesn’t get to 150% or 200% before Treasury and corporate rates go meaningfully higher and/or the cards come crashing down? @BobFaulkner @JeffMiller @LunaticTrader @RobertMarcin@ScottRothbort @HowardSimons @BobFaulkner
@CodyWillard @JeffMiller @LunaticTrader @ScottRothbort @HowardSimons@BobFaulkner re the big one, atotal implosion of economy around a collapse in credit, as i have posted, japan and europe prove that one can kick the can down a much longer road than anyone ever thought. japan is 10yrs ahead of europe w this problem and europe is 10 years ahead of us. so yes inevitably there will be a crash, but who knows when. our kids can be having this discussion. unless we do my coordinated debt jubilee!
LunaticTrader@CodyWillard Public and private debt is over 300% of GDP in US, EU, Japan. So, even a mere 5% interest rate would mean more than 15% of annual GDP is needed to pay the interests every year. That’s not possible without wrecking an already weak economy. So, either there will be a global debt jubilee of some kind, and then rates can go to 5% after that.. OR rates will stay near zero and economy will keep limping under the dead weight of too much debt. => Bonds are a no-touch, so stay in stocks.
@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.
BobFaulkner@CodyWillard @BobFaulkner @JeffMiller @LunaticTrader @RobertMarcin @ScottRothbort@HowardSimons @BobFaulkner How’s debt:GDP of more than 100% working out for Italy, Greece, Japan, Cypress, et al.
@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 @ScottRothbort@HowardSimons @BobFaulkner, gents, i agree the debt situation is bad and unsustainable, however lets think about it this way. how long has japan been functioning w debt/gdp ratio above 100% without a debt related financial and economic crash?
@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.
@LunaticTrader @CodyWillard, fed will pull out all the stops to keep economy limping along rahter than confront the debt issue. heck, the fed wont even mention that theres a debt problem. either they are ignorant or concealing concern, i am not sure. but a leverage problem never makes it into their regular discussions. like jeff says, the balance sheet doesnt matter(to academics anyway).
If there’s going to be a debt jubilee is that another way of saying savers will bail out borrowers once again? If there’s ever an announcement of a coming debt jubilee wouldn’t everybody rush to borrow every dollar they can? I’d want to owe as much money as possible if they’re going to forgive it anyway, right? How is a debt jubilee anything other than wealth redistribution? @HowardSimons @BobFaulkner @BobFaulkner @JeffMiller@LunaticTrader @RobertMarcin @ScottRothbort @BobFaulkner
@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@CodyWillard The savers who bought gvmt bonds took the risk. So, they also suffer the loss if the gvmt cannot repay them. In fact they deserve every cent of their losses, because they allowed the gvmt to spend beyond its means in the first place. @HowardSimons@BobFaulkner @BobFaulkner @JeffMiller @RobertMarcin @ScottRothbort
@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.
LunaticTrader@CodyWillard I think a global debt jubilee would come in the form of Bretton Woods type long weekend with presidents coming out telling that US, Japan, EU and China will simultaneously scrap their public debt to the tune of 50% of GDP. In fact QE is first step for such a jubilee. First central banks buy up the local public debt and then they forego repayment. Private debt would not be forgiven, so quickly borrowing $ as much as you can will not work…
deerpuncher13@LunaticTrader @CodyWillard oh I spoke too soon ECB is going to make it up as they go along haha… thats should’ve been predictable
http://www.bloomberg.com/news/…
#QEinfinity
LunaticTrader@RobertMarcin Japan has been functioning with debt/GDP well above 100% for a long time. I think it has been able to do so for 2 reasons. 1 – Other major economies were still well below 100% debt/gdp and as an export economy that helped Japan. 2 – Japan has/had a very high savings rate. => Now that most major economies are in the same situation it is no longer tenable. The chance that EU or US can also continue until 200% public debt/gdp is small imo.
@LunaticTrader @CodyWillard, lunatic is right. the cental banks will buy the debt at 100 cents on the dollar from the open market and simply forgive it. if all nations do this it shouldnt cause currency wars. and the govt really does provide money to all socioeconomic segments of society. Private debt cannot be forgiven this way w/o serious concerns over who gets forgiven. tho i do think much student loan debt will get forgiven in this manner to give a break to kids/ new families.
@LunaticTrader, we will see how long it can persist. infinitely longer than the bears/shorts on japan even imagined! maybe that way here too. no one knows.
LunaticTrader@RobertMarcin Right. And they can package it in very nice wrapping paper. Because they can then say that treasury will no longer need $billions to pay annual interests on the public debt that is forgiven, so the country’s tax rates can be lowered by 2-3% effective immediately. That’s why I would be very very scared to be short stocks. If they suddenly do this kind of debt jubilee then stocks will probably surge on next Open. @CodyWillard,
BryceSmith@CodyWillard @JeffMiller @LunaticTrader @RobertMarcin @ScottRothbort@HowardSimons @BobFaulkner The ECB started buying corporate bonds yesterday. Telecom, insurance, and utility industry. It never stops
BobFaulkner@LunaticTrader @RobertMarcin re: Japan – It’s been such a great growth story too.
bgrumbin@LunaticTrader @CodyWillard @JeffMiller @RobertMarcin @ScottRothbort I recall the “letter to the American people” from the Presidunce of Iran pretending we citizens had any influence whatever on the criminally corrupt and feloniously abusive goofermint. Just saw you recite the same thing with your “allowed the gvmt to spend beyond its means in the first place”. Ludicrous Eurasian “thinking” to pretend citizen influence that hasn’t existed in centuries
in the Loonie Tied Studs of Merka.
seeking-alfalfa@RobertMarcin What’s intriguing though is their stock market didn’t hold up at all–it declined steadily for 30 years and even now is at the level first reached in 1986. Interestingly, it traded over those decades much like a steel stock or other deep cyclical in an industry with structural overcapacity. It would have nice rally for a few years when the global economy was strong, but then tank again, always making lower lows over the decades. Fortunately, value investing did well though.
seeking-alfalfa@RobertMarcin The problem is that the debt causes growth to grind to a halt and also destroys your demographics. Also causes your stock market to do poorly over the long term. All this is much worse than a financial/economic crash. Also, things would have been much worse in Japan if they weren’t mercantilist, and not everyone can be mercantilist (by definition).
seeking-alfalfa@RobertMarcin @LunaticTrader @CodyWillard, In non-peripheral countries, It’s the private debt that causes financial crises not the gov’t debt (the latter does drag down growth though). Japan never had financial crises ’cause they never let any private debt go bad–it’s all in the banking system, and they extend and pretend. Ditto with China, and the banks are gov’t controlled and back-stopped. But, the moral hazard creates a monster as China is discovering (and we got a taste of in ’08).
@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.
seeking-alfalfa@RobertMarcin @LunaticTrader @CodyWillard, Gov’t debt doesn’t have to be forgiven, it’s just perpetually rolled–it’s essentially the same thing. There will never be a coordinated international gov’t debt jubilee. Also, the reason Japan could carry on so long is there is trust in their system/rule of law, i.e. Japanese happy to keep their money in Yen. In China, no trust/rule of law=capital flight=Chinese financial crisis (or RMB crash)=global financial/econ contagion.
seeking-alfalfa@RobertMarcin @LunaticTrader, The global debt problem is far more complex and fragile system than the Japan over-indebtedness problem. Also, at the end of the day, what’s needed to prevent financial/econ crises is the continued funding of un-economic activity (whether it’s Japanese pork-barrel fiscal activity, southern EU welfare spending or US bubble finance endeavors). Excluding private debt forgiveness means capital discipline, i.e. financial crisis to cleanse the system, bad debt goes bad.
seeking-alfalfa@RobertMarcin @LunaticTrader, With the benefit of hindsight, shorting the Nikkei the past 25 years would have been an excellent position. Better yet, long JGBs and short Nikkei. (BTW, long bonds have crushed the S&P the last few years–perhaps a hint of things to come?) Long Japanese value stocks, short Nikkei would have been great too (sound familiar?).
ActualInvestor@RobertMarcin @LunaticTrader, there are many instances of problems that are claimed “unsustainable” but don’t end up to be the catastrophe that some assumed, at least in the time frame claimed. Remember Paul Ehrlich and the population bomb? Or all the “peak oil” claims of the past 40 years? Society may yet collapse from overpopulation, or we may run out of oil, causing unimaginable chaos, but you can’t make investment decisions based on those kinds of worries. The can will get kicked.
@seeking-alfalfa @LunaticTrader, there will be global debt jubilee. only viable option. i guarantee it. cant say when, could be 2020 or 2030. i have no clue. but cant grow or inflate way to healthier ratios and cant add debt/gdp forever either. when something must be done, it will be done.
