Is digital marketing delivering its promise of value to clients?

Google’s earnings revealed that their advertising is worth less (per bid vs Q1), while Facebook also simultaneously said their ad bids are going up. Frankly I’m not so sure that indicates market share / value transfer or more funny accounting.

But I will say this: the world of digital marketing needs an enormous reboot of transparency and quality. Right now if I am advertising on a website and someone clicks my ad, but immediately leaves before seeing any content (less a pixel or two) that counts. That allows automated click farms to partially load content (to save bandwidth) and rapidly click on a multitude of ads around the web to generate revenue for content generators (websites that advertise with Google, Facebook, etc).

That wouldn’t seem like much of a problem, except that 60% of clicks behave that way. That doesn’t even account for what is described as detected click fraud. That’s about 20% of the digital ad spend. So, according to those metrics, about of remaining clicks 20% on ads are viewed by humans and of them perhaps 1%-2% lead to sales.

Now the math gets interesting. Recent studies claim at least $16.4B is lost to click fraud (probably an extremely low ball figure, but let’s roll with it). The smoothed P/E of techs in digital marketing (like Google) is about 33. Google has an average profit margin of about 20%. So $16.4B * 33 = $541.2 billion. 20% of that is $108.24 billion.

That means at least $108.24 billion of market capitalization in this concentrated tech sector is at risk if just click fraud is exposed and eliminated. That doesn’t address the other 60% of ad clicks that are effectively meaningless. That would add another $324 billion of market capitalization at risk. And again, I feel these are low ball figures.

The biggest advertising companies these days are Google, Facebook, Microsoft and Verizon. So I would be most concerned about their long term performance.

Full disclosure: I have a short position against the NASDAQ 100 at the time of writing this article.

Verizon beats earnings on account of unlimited data plans

Yes, when you give people what they want, they will buy your service. This is not really news, as much as observational humor. Verizon removed these unlimited data plans because they were eager to capitalize on metered plans (whereas heavy users pay a lot more money than they would on an unlimited plan).

I applaud Verizon for listening to their customers and bringing the unlimited data plans back. I’m also happy to see them bringing gigabit (or near gigabit) FiOS to many metropolitan customers on the Atlantic coast.

Full disclosure: No position long or short on Verizon shares, preferred shares or corporate bonds.

Karl Denninger at Market Ticker claims Facebook funny business


Now tell me what you believe the probability is that 83% of every possible person over the age of 15, which I remind you includes a lot of people who have no high-speed Internet connectivity at all, a fair number of people who are effectively incapacitated due to age and more — in other words everyone over the age of 15 that is not in prison — is on Facebook monthly.


Art Cashin of UBS says markets are driven by buybacks

SPX is up about +271% since its low in March 2009, so that’s pretty good correlation with the growth in earnings. But the trouble with earnings is that the growth has been mainly accomplished through the use of smoke and mirrors. Sales for these same companies have increased only +32%. Either companies have been extremely efficient in cutting costs (since prices haven’t increased much) or else they’ve done some financial engineering to accomplish earnings growth that is nearly 9 times sales growth.

The smoke and mirrors is of course stock buybacks, which reduces the number of shares outstanding and that in turn drives EPS higher, even if in fact earnings did not improve. With the use of nearly zero- cost borrowing companies have been the primary driver behind the buying of their own stock and hence higher prices. One could argue whether or not it’s smart for companies to be paying top dollar for their stock right now.

We’re back!

The hiatus of is over. I’m going to be posting regularly again to express my views on the markets — and hopefully provide valuable insights! The content is meant for institutional and accredited investors, but everyone is welcome to indulge themselves. Just be aware that I am not providing any investment advice. This is all for educational and information purposes.

A stronger dollar means a weaker everything else

As the dollar surges past 97, toward 100, the rest of the market seems to be catching on that this is a risk off signal. Just about every asset class is selling off today as a result. There’s no single catalyst for the stronger dollar. More a myriad of micro-catalysts:

  • The assumption that the EU, UK, Japan and others will continue QE and ZIRP/NIRP as the US Fed raises rates.
  • The notion that the US Fed will raise rates at a faster pace (than they have in the last 3 years of jawboning about it).
  • The structural economic problems in other economies (making ours seem like the least bad of the bunch).
  • Weakness in demand for assets in Japan and Europe.
  • Brexit and the follow-on economic impact on UK.

With all of that in mind, I believe that the current leg of the US dollar rally is becoming problematic for the goals of the US Federal Reserve. Indeed, a strengthening dollar on top of rising US Treasury yields is in a way a de facto tightening. Liquidity tightens and lending/margin speculation decreases.

Should the rally strengthen I believe it will create a significant downside catalyst for a multitude of other asset classes. And there is some small chance that it could spiral in to a deflationary headwind should the situation grow out of the control. My opinion is that the dollar strength could be utilized as an entry point in to beaten up asset classes, especially commodities and emerging markets.

Let’s watch carefully and see where the market takes us from here.

Remember when major currencies used to be stable?

The British pound keeps reminding me that once a reserve currency loses the confidence of its participants, volatility becomes a big problem.

GBP crash

Crashing, as it had post-Brexit and most recently during an HFT-triggered 2 minute flash implosion, shows that even the most liquid markets can become bidless.

This is, in a nutshell, why diversification of investments, including across different asset classes and base currencies, is critical.

Liquidity is not solvency

Apparently this is not a very well understood concept among the financial elite. Or perhaps they understand it all too well and are milking every incentive and easing measure for all of the salary, stock options and bonuses they can provide.

Not much has truly changed

Other than transferring an enormous amount of risk from the financial system in to the hands of central banks and governments, the underlying fragility of the financial system remains. Further, because the lenders of last resort are now burdened and their arsenal of financial ammunition near empty, there are not many options for the next economic hiccup.

With both US equities and bonds expensive by most measures, the logical alternative for most value conscious investors is to search for value in other asset classes: emerging markets, commodities, foreign exchange and real estate in distressed markets. But these options don’t come without risks of their own as their fates are tied to that of the US dollar (read more below).

With a great rally comes a greater upset

The last 7.5 years have been very generous to equity and bond investors. Perhaps too generous if current valuations are of any indication. What many are not prepared for based on current sentiment readings is a sustained downturn. Yet at the same time expectations of interest rate hikes by the Federal Reserve continue to rise (as they have in fits and bursts since jaw boning about such tightening began in 2013).

When rates rise, lending conditions tighten. And as that happens margin levels shrink, leverage is reduced as the cost of holding positions rises. This means that most of the time a series of rate hikes, as is being priced in to Fed Funds Futures, is the beginning of the end for modern bull markets in equities.

Yet stocks don’t seem to have received the memo. And they usually are last. 10 year Treasury Bonds, however, have seen yields rise from a paltry 1.3% to nearly 1.75% over the last few months. This may be more than just smoke signals as there are many foreign sovereign investors lightening up on Treasury Bond positions over the course of 2016, including China.

King Dollar’s mighty move

The US dollar has been rallying as of late on interest rate expectations as well. This has knocked down many commodities, outside of the energy sector, and caused renewed pressure on foreign currencies. Dollar strength should be watched carefully. If the dollar continues to rally (the dollar index is now testing 97) then we may see a renewal of equity selling as rate hike fears begin to permeate the US stock market.

Fears of the Fed are foolish

They say don’t fight the Fed. But what if the Fed is all talk? Over the last three years, there’s been a lot of talk of higher rates, even normalization. But what we have after all that talk is one lonely rate hike that is almost a year old now. The market seems to key in on every word every Fed official says, almost as if their words were seen as valuable insights.

But if each speaker’s rate forecast, economic forecasting track record and previous speeches are carefully examined the inconsistencies and inaccuracies accumulate. My opinion is that many of these officials, while they probably mean well, don’t have the requisite tools to forecast something as complex and intricate as the US economy. Why? Because no one does. Such tools do not exist.

But one thing is certain…

With a track record as dismal as Fed officials seem to have, their forecasts and banter about tightening should be taken with nothing more than a grain of salt. They don’t have a magic ball  and they can’t see in to the future much more than any other market participant, economist or statistician.

These are the same minds that brought us such failed monetary experiments as quantitative easing, which had the effect of redistributing middle class wealth to the already very wealthy, and bank bailouts which enabled more systemically reckless gambling.

As if flooding the system with credit would resolve the underlying structural solvency problems that our financial system and our government suffer from (hint: it made these issues worse by failing to address them in any meaningful way).

In conclusion, and I’m talking to you Mr. Market, let’s try not to take the hot air too seriously. After all, the people making it don’t seem to recognize the difference between liquidity and solvency.

Inflation data causes stock market to vomit

Rising gas prices are driving what is perceived as a ‘surge’ in inflationary data. Which isn’t all that surprising seeing as how crude oil has about doubled from its low.

Instead, the reaction to this data shows that there’s a lot of nervous market participants who apparently are convinced that this data set will increase the odds of an interest rate hike. And they’re taking their profits (or at least scaling out of positions).

Whether or not there is a hike depends largely on a seemingly reluctant, if not apprehensive Federal Reserve, whose promises to raise rates in 2016 have yet to be fulfilled.

But the data set we got today isn’t telling us anything new or interesting. It’s just a realization of higher energy prices working their way through consumables like gasoline.


Buffet buys Apple after losing $2 billion on IBM

I learned today that famed investor Warren Buffet bought about a billion dollars worth of Apple shares only 6 months after famously losing two billion on former PC maker IBM. Is this a sign of the oracle of Omaha thinking differently about technology investments?

A cursory glance shows Apple as a value stock. A P/E of 10 with a dividend of 2.5% seems attractive. But then an enormous market capitalization and a product pipeline that is heavily reliant on sagging mobile sales calls in to question how discounted Apple’s price truly is at this point.

After all, if the company cannot create another iPhone-like product — and the unfortunately humble Apple Watch does not fit that criteria — then all bets are off and Apple’s days as the world’s most valuable company will surely be behind it.

I remember Mr. Buffet once wisely proclaimed he would not buy what he didn’t understand.

I don’t even think IBM’s own upper echelon of executives completely understand the company they work for. That’s probably more than half the problem with the execution — a lack of vision. But more to the point, if they don’t, how can Mr. Buffet have hoped to understand the IBM that delivered him a massive loss after their share buyback plan imploded their earnings?

Will Apple be any different?