Tuesday, January 28, 2014

Trader Sells VIX Calls in Day’s Biggest Bet on Options

Trader Sells VIX Calls in Day’s Biggest Bet on Options

An investor sold about $18 million in calls on the Chicago Board Options Exchange Volatility Index, a strategy that will be profitable as long as the VIX doesn’t keep extending last week’s surge.
The trade included the sale of 250,000 February 22 calls for about 70 cents each, according to data compiled by Bloomberg and Trade Alert LLC. It happened after the VIX reached an intraday high of 18.99 around 12:20 p.m. New York time. The investor will keep the proceeds if the VIX stays below 22 and the calls expire worthless.
“It’s impressive in size and it’s impressive in timing,” Henry Schwartz, president of Trade Alert, a New York-based provider of options-market data, said in a phone interview. “Whether it’s an outright bet against the VIX rising or hedge against existing positions is hard to say. It’s a large account for sure.”
Stock-market volatility soared last week after data signaling a possible contraction in China’s factory output and a devaluation of Argentina’s peso shook investor confidence. Emerging-market equities have tumbled since the Federal Reserve signaled in May that it could start scaling back bond purchases that boosted demand for higher-yielding assets.
The VIX jumped 46 percent to 18.14 last week, the biggest increase since May 2010. The measure, which tracks the cost of options on the Standard & Poor’s 500 Index, slipped 4 percent to 17.42 today.

Huge Trade

The bearish volatility bet was the biggest single block of options to change hands on U.S. exchanges, according to data compiled by Bloomberg. Before today, the open interest in the February 22 call contract was about 181,000.
“The trade was huge,” Mark Caffray, who brokers contracts on the VIX for clients at Chicago-based PTR Inc., said in an interview. “To say the least, this trade caught dealers off guard.”
There were a record 8.4 million calls outstanding on the VIX before expiration last week, more than twice the level in June, according to data compiled by Bloomberg. Calls on the VIX, a gauge used by investors as insurance against losses because it climbs when equities fall, outnumber puts by the most since 2010 with a ratio of more than 3-to-1.

Tuesday, January 21, 2014

YY: Future Growth Underestimated

Shares of YY (YY) have risen more than 40% in less than a month and are up 140% since my initial article on the company in early June 2013. While the price is extended at the moment, and the stock could pull back in the next couple of weeks, YY has much more potential given its growth prospects and strategic initiatives. YY is still trading at a significant discount to growth, and I believe that the forward estimates will be revised higher in the coming months, which might propel the share price even higher from current levels. My price target is $126, as I believe that analysts are largely understating the company's growth prospects.
Strong growth will continue
YY has grown revenue and earnings in triple digits since going public in late 2012, while profit margins have expanded along the way as the company scales its business. Revenue growth has been strong in all four business segments, and YY Music segment has shown the strongest momentum, with Q3 revenue growing 161% year-over-year, while the segment's revenue increased 184% in the first nine months of 2013.
(click to enlarge)
Source: YY Q3 report
YY Music's strong momentum can be attributed in part to the exclusive partnership with Hunan TV, which brought the popular Happy Boy Show to YY's interactive internet platform. While the collaboration ended, management expects strong momentum of YY Music to be sustained in the future. And YY Music also had strong momentum before the Hunan partnership, since YY Music delivered Q2 2013 revenue growth of 193%. And even if the YY Music momentum stalls (which I do not expect at this point), there are other areas of strength, such as online gaming, and future projects that I will talk about later, which will drive growth in the next couple of years.
New strategic partnership
YY announced a new strategic partnership in late October 2013 with Asiasoft and S2 Games. The partnership enabled YY to license S2 Games' Strife, and will jointly operate the title with Asiasoft, the leading provider of online gaming services in Southeast Asia. Strife was developed by S2 Games, the developer of award-winning hit title Heroes of Newerth. Strife is a free-to-play, Multiplayer Online Battle Arena ("MOBA") title which was slated to start its beta test in Q4 2013, with a scheduled release in early 2014.
This partnership is important for YY in more than one way. It will enable the company to expand outside of China and into international gaming. YY also gets immediate access to Asiasoft's 60 million registered users, and it's adding a highly anticipated S2 Games' title to its gaming portfolio. YY will jointly market, distribute and operate the global version of Strife on an integrated platform with Asiasoft in Thailand, Vietnam, Indonesia, Singapore, Philippines and Malaysia. I expect the partnership to have a meaningful impact on the gaming segment's revenue in 2014 and beyond.
Four major growth drivers in the next couple of years
YY has four meaningful potential growth drivers:
1. Gaming. As mentioned before, YY's partnership with Asiasoft and S2 Games will have a meaningful impact on growth of gaming revenue for the company. Another important consideration here is mobile monetization. The company has established a mobile game team, and is currently aiming at two directions: to increase efforts in mobile game development and to leverage YY's resources to increase traffic. Management said on the Q3 conference call that they are looking to capitalize on the power of the YY platform. The company also has a game portal Duowan.com which has strong traffic on the PC front, and it is consolidating a lot of apps on Duowan.com into mobile apps. This consolidation will contribute to the future growth of the mobile game platform, which is under development. However, the company is still in an early stage of mobile development, and has just recently started to monetize the mobile platform, and we should expect some metrics on mobile monetization soon, and we will be able to better grasp its potential.
2. Education. Online education is experiencing strong growth in China. YY had 125,000 teachers in Q3, which was a 29% sequential increase. The company is still working on a model that is suitable for the YY platform. YY has approximately 3 million monthly active users who come to YY for education purposes. Since the company is currently focused on developing the product and technology, the monetization is expected to be dealt with in a later stage. Management expects to focus on monetizing the education segment in the second half of 2014 or later. Education might be an important growth driver for the company in 2015 and beyond.
3. International expansion. YY started to look beyond China with the S2 Games and Asiasoft partnership. The partnership will enable the company to expand its operations and its brand in Asia. The company also announced in Q3 the departure of its CTO, Tony Zhao. Although Zhao is leaving, YY will form a strategic partnership with his new Silicon Valley startup, and will focus on leveraging YY's platform to expand into promising new verticals internationally. I expect we should soon find out more about this.
4. Mobile monetization. This is perhaps the most important issue for the company going forward. YY is still at an early stage of mobile monetization, and the field holds the most promise for growth in the future. Another important factor is the development and transition to 4G in China, which is under way, and which will enable faster connection and increased user engagement. People in China are mostly using the slow 2G and/or 3G, and this is limiting user experience. Perhaps one of the most important announcements regarding 4G was the China Mobile and Apple agreement in late December 2013. In early December, Beijing issued 4G licenses to all three nationwide telecommunications network operators, and we should see rapid adoption and expansion of 4G in China in 2014 and beyond. This in turn might help YY grow its mobile user base and mobile engagement significantly going forward.
Valuation and 2014 and 2015 growth expectations
YY is currently trading in the upper range of its valuation since going public (see EV/EBITDA chart below). The company will soon announce Q4 earnings, and the ratio is bound to go down due to a sequential rise of EBITDA. Given the growth levels YY is delivering, a forward EV/EBITDA ratio of 30 to 40 would be considered conservative.
YY EV to EBITDA (<a href=TTM) Chart">
This forward expectation should be revised down if the growth slows down significantly in the following quarters, which I do not expect at this point of the company's expansion phase. Continued momentum in the current business segments, coupled with new monetization efforts in mobile gaming and education and international expansion should keep revenue and earnings growing north of 50% in the next couple of years. Based on the EV/EBITDA multiple of 30 for 2015, and my estimates for 2015, the price target I arrived at is $126, which is 76% higher than the current price. If you take the analyst consensus estimate, the estimated upside would be around 50%. However, shares of YY have run up 40% in a short time-frame, and are vulnerable to a pullback. I would use an eventual pullback to buy shares.

Catalysts that could push shares of YY higher might be:
- YY is due to report Q4 earnings soon (date of release is still not available). If YY continues to beat earnings and sales estimates, the stock should continue to rise. FY 2014 guidance would also have a meaningful impact, especially if it is significantly better than current estimates.
- New sell-side coverage and raised estimates. Six analysts currently cover the stock with one strong buy, four buy ratings and one hold. New analyst coverage and raised price targets might push the stock higher. YY is currently trading above the median price target of $63.
- New partnerships and acquisitions. New meaningful partnerships would increase the future expectations for the company. The company had close to $300 million in cash and equivalents at the end of Q3, and might use them for strategic acquisitions going forward. In fact, the company announced a note offering in November, with the intent to buy back shares or use it for acquisitions, but has pulled the offering a few days later.
-The main risk related to YY is China that it is doing business in China. There have been numerous scandals with Chinese stocks, and investors are concerned with accounting risks and potential fraud. Caution is advised with investing in Chinese companies.
- The other issue is China's slowing economic growth and the impact on Chinese stocks. YY has largely ignored the weakness in Chinese equities, and showed impressive relative strength in recent weeks, as did many Chinese small caps, as evidenced in the charts of Guggenheim China Small Cap ETF (HAO) and iShares FTSE China 25 ETF (FXI).
(click to enlarge)
Source: stockcharts.com
- YY also faces stiff competition in China and might not be able to expand geographically into other parts of Asia successfully.
Although YY has gone up 40% in less than one month, the stock still has plenty of potential. I would use any weakness in the share price to buy shares. My price target of $126 is much higher than the current price and the current consensus estimates, based on the future growth prospects. I believe that the stock will outperform the market in 2014, notwithstanding an adverse macro event in China or in the U.S.
Additional disclosure: This article is for informational and educational purposes only, and should not be considered as investment advice.

SolarCity Corp. Downgraded to Neutral at JPMorgan Chase & Co. (SCTY)

SolarCity Corp. Downgraded to Neutral at JPMorgan Chase & Co. (SCTY)

Share on StockTwits
SolarCity Corp. (NASDAQ:SCTY) was downgraded by stock analysts at JPMorgan Chase & Co. from an “overweight” rating to a “neutral” rating in a report issued on Tuesday, TheFlyOnTheWall.com reports. The analysts noted that the move was a valuation call.
SolarCity Corp. (NASDAQ:SCTY) opened at 75.11 on Tuesday. SolarCity Corp. has a one year low of $14.15 and a one year high of $79.86. The stock’s 50-day moving average is $58.26 and its 200-day moving average is $46.39. The company’s market cap is $6.244 billion.
SolarCity Corp. (NASDAQ:SCTY) last announced its earnings results on Wednesday, November 6th. The company reported ($0.43) earnings per share for the quarter, beating the analysts’ consensus estimate of ($0.47) by $0.04. The company had revenue of $48.60 million for the quarter, compared to the consensus estimate of $41.40 million. SolarCity Corp.’s revenue was up 52.0% compared to the same quarter last year. On average, analysts predict that SolarCity Corp. will post $-1.78 earnings per share for the current fiscal year.
Several other analysts have also recently commented on the stock. Analysts at Deutsche Bank initiated coverage on shares of SolarCity Corp. in a research note to investors on Thursday, January 16th. They set a “buy” rating and a $90.00 price target on the stock. Separately, analysts at Robert W. Baird raised their price target on shares of SolarCity Corp. from $71.00 to $81.00 in a research note to investors on Thursday, January 9th. They now have an “outperform” rating on the stock. Finally, analysts at Goldman Sachs Group Inc. upgraded shares of SolarCity Corp. from a “neutral” rating to a “conviction-buy” rating in a research note to investors on Monday, January 6th. They now have a $80.00 price target on the stock, up previously from $65.00. Four research analysts have rated the stock with a hold rating, four have assigned a buy rating and one has assigned a strong buy rating to the company’s stock. The company has a consensus rating of “Buy” and a consensus target price of $76.83.
In other SolarCity Corp. news, EVP Seth Weissman unloaded 7,000 shares of the company’s stock on the open market in a transaction dated Friday, January 10th. The stock was sold at an average price of $66.58, for a total transaction of $466,060.00. Following the transaction, the executive vice president now directly owns 158,777 shares in the company, valued at approximately $10,571,373. The transaction was disclosed in a document filed with the Securities & Exchange Commission, which can be accessed through this link.
SolarCity Corporation (NASDAQ:SCTY) is engaged in the design, installation and sale or lease of solar energy systems to residential and commercial customers, or sale of electricity generated by solar energy systems to customers.

Friday, January 17, 2014

Why We May Have Underestimated Tesla And Its 20-30% Potential Upside, What's Next For The Market

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More...)
Market Overview
The market got whacked a bit to start the week, but it bounced back nicely on Tuesday on the back of solid retail data and decent enough earnings from JPMorgan (JPM) and Wells Fargo (WFC). On the economic data front, we got news about Retail Sales this morning as well export/import prices. Sales were supposed to come in flat to maybe up 0.1%. Some murmurs were that they would be negative, but they beat all expectations coming in at 0.2%. Export/Import prices both showed slight rises as well. That data is definitely a welcome site and shows at least some better than expected sales during the Holidays.
Today was also the start of earnings season in our view with JPMorgan and Wells Fargo reporting earnings. JPM beat analyst expectations with a 1.30 EPS (1.24 estimates) and $24.1B revenue ($23.9B estimates). Yet, the company was hurt by weakness in their investment bank and mortgage unit. WFC saw a 6% drop in revenue but also beat expectations with 1.00 EPS (0.98) estimate). JPM has been mired by scandals/legal action, but the company was able to see another drop in delinquency. Yet, there is still general weakness in mortgage banking (applications down 50%+ year/year). WFC saw similar results, but they were "optimistic" about 2014.
Company News/Deeper Look
On the company news side, we will be focusing on Tesla Motors (TSLA) today. Since there is a lot to cover, we will also make this our daily "deeper look" as well.
We have been bearish on Tesla since the stock zoomed into triple digits. We started out 2013 being bullish on the company, but we have thought is too rich in valuation at these levels now. In recent articles, we have laid out our bear argument. We first laid out our bear argument on October 25, 2013. In that article, we stressed that international success was necessary to support the company's higher valuations, but we worried about their promise. In our latest article from December, we pushed that argument further.
Main Catalyst
On Tuesday, Tesla stock rallied strongly on several announcements from the company:
- Tesla delivered 6900 vehicles in Q4
- The company anticipates to see Q4 revenue at 20% higher than previous guidance
- Tesla is providing a software update "over the air" to 29,000 vehicle chargers to improve safety even further
These three announcements allowed the stock to soar from in the red to over 10% in gains. What we want to do today is put these numbers into context of the bigger picture and within in our main arguments about being bearish on Tesla. We actually found these numbers to be quite incredible, and they may have been the first signs that are some of our original articles were well…wrong.
First off, we want to reiterate some points we have brought up in previous articles. In our last article, we noted that Tesla would be hard pressed to sell more than 15K-20K of their Model S per year:
YTD through October, the largest volume high luxury car sold in the USA was the BMW 7-Series with just over 9000 units sold. That puts the car on pace for 12K for the year. Even if Tesla can become the top luxury car company in the USA, they would be pressed to sell more than 15-20K of their current lineup and more than 30-40K with some of the new cars they have in the pipeline. Thus, the company needs international sales to reach the 90K level we are looking at for them.
In the latest results, the company delivered about 6900 Model S sedans, which would put them on pace for nearly 27,500 Model S sold per year. The most sold large luxury vehicle as of December 2013 was the Mercedes-Benz S-Class at 13K. In the mid-size luxury, the largest seller was the Lexus ES with 72K in sales. Now, the price point for Model S makes it tough for it to ever reach these levels, and the backlog of demand is strong for Model S now. The company is delivering essentially everything they can make. At some point, these levels come down, but we can say its safe to say 20K-25K Model S per year for the next few years is definitely possible. That is an amazing amount of high-end luxury cars to be selling.
The company also has the Model X to debut in the back half of 2014. The price point for this vehicle is expected to be around the same as the Model S, so we are looking at a crossover in the 60K-80K range. Once again, we cannot expect the company to hit the levels of mid-level luxury SUVs that are in the 40K - 60K range, so we have to look at the Mercedes GL at 30K in volumes. That level is around what we believe we can expect for the Model X, potentially as much as 35K in the first couple years. In the best-case scenario, we are looking at 2015 being a year where the company can sell 60K cars domestically.
The Model E or Gen III is expected to release in 2016-2017, and this is the one that matters. When we look at this car in the $40K - $50K range, we can see it selling in the range of 50K-60K per year consistently domestically even up to 80K. Yet, it will be some time before we see it hit the streets. We will say 2017 at the earliest for our model to stay somewhat conservative and given the delays we saw with the Model S.
In reality, we are looking at a 2017 situation where we could see around 120K in domestic sales, and we definitely underestimated in some of our previous models. Let's remove that from the equation for a moment and international growth. With 120K in domestic sales in 2017, we are looking at potential revenue of $7.2B. The company has a goal to have margins like Porsche, which would put them at a 15% operating margin and net margins in the 8-10% range. If the company could execute in this way, that would put net income at 720M in the best case domestically, putting EPS at 5.90 and P/E at 26.4.
We are not high on the international side of things still with charging station issues:
Tesla wants to meet its Supercharger charging station target in Germany by the end of 2014. It's trying to build in a few years what traditional car companies have spent decades doing. This gets to the heart of the short thesis on the automaker's stock. Tesla bears say quarter after quarter that the company is burning through cash too quickly to build the infrastructure it wants, and make the improvements to supply chain that it needs. Bank of America analyst John Lovallo addressed that directly on the company's Q2 conference call, saying: "If we think about cash flow for a minute... free cash flow was a use of about $79 million in the quarter, and I think if you make the adjustments you guys were talking about... $11 million for the DOE payment, a $67 million increase in receivables that may not occur. That looks like the use of about a million dollars. Now, you have cap ex ramping up in the back half of the year so how are you thinking about free cash flow generation through the remainder of the year into 2014?" Tesla CFO Deepak Ahuja could only reply that Tesla "want[s] to be very careful about burning cash...We want to stay as close as we can to a free cash flow position... but that's not something we necessarily want to guide to. We're going to manage it... and spend the cap ex where we need to to ensure we're growing at the right pace."
There are a lot of question marks here, so we will use two scenarios. On the low-end, we will assume the company can grow sales internationally to 25K by 2018 and on the high-end put it at 75K. Just so you know, 200K in sales would put the company at the global footprint of Porsche's expected 2014 sales to put things in comparison. Overall, the fact of the matter is that demand is strong domestically for Tesla, and the product is starting to become a household name. With the growing attraction of electric vehicles, tax credits, lack of gas payments, and other benefits, we have to admit we are warming up to the name a bit more.
There is still a ton of speculation, but let's get a bit deeper into pricing the stock.
Revenue -
In our model, we assume an average price point of $60K (Model S and Model X will be higher, but the addition of the Model E will make up around 25% of sales and have a price point in the $40K - $50K) with operating margin at 15% (this is a best-case margin). In this scenario of 195K models, we can see revenue at $11.7B in 2018. In our worst-case scenario of 125K models, we can see revenue at $7.5B (along the lines of our previous estimates).
Tax Rate -
We assume no taxes in 2014-2015 with up to 20% in 2018.
Margins -
The company has a goal to get to Porsche-level margins, which is around 25% gross margin, 15% operating margin, and 8-10% net margin. That compares to a company like BMW (BMW), who has gross margins at 20%, operating margins at 11%, and net margins at 6-7%. The company hitting these levels would definitely put them at the top of the class. In our best-case model, we will use 15% for operating and 12% in our low-end model.
Other -
CapEx will grow especially with the dedication to building out in Europe and Asia. We see at least $550M in CapEx by 2018 and depreciation growing to around $380M. We use a cap rate of 3%, which is very low discount rate, meaning that the company is a high-growth name with a lot of future income pricing in and needs to be discounted less.
In this new model (195K volume), we come up with a price target of $195. Now, this is the absolute best case of everything happening as we can see it now (outside of Europe). The question mark still remains that as well as execution. In our low-end model, we come up with a price tag of $110 in our model. In our mid-level we are looking at $155 price tag. The difference is obviously that we underestimated sales in the best-case scenario, and that is our main change.
Speculators that believe in this company have an argument for upside at least of 20-30% from these levels, and that can be even higher when one considers Gen III potential. What it comes down for Tesla is execution. The latest results were pretty outstanding and show the company doing well with supply chain, manufacturing, and delivery - something we questioned earlier. This is a good sign for the company. Buyers need to understand, though, that the company has to be perfect to see more upside. If the Model X is not delivered in the 2H of this year, the stock will drop significantly. If Model E does not start to show up in auto shows next year, downside will happen. If international sales do not start to ramp up significantly this year, downside will occur. If the company does all of those very well, though, there is still some upside. We will admit that we have underestimated the company and have been incorrect in our earlier assumptions.
We are still sticking with a conservative approach and using a $155 price tag, but we can understand the argument for higher prices. We are not speculative investors; therefore, we will not recommend shares to our own clients. Those that buy stocks for the future…its very understandable to us now to get behind this name. And yes, we were wrong in some of our earlier assessments. We did not fully appreciate the demand as we are seeing it now.
Charting The Markets
The S&P 500 (SPY) broke out over 1800 but has failed at the 1850 level. We also broke key 1820 support yesterday. Now, we are sitting on key 1800 support where the 50-day MA as well as mental support sits at for the market.
(click to enlarge)
The Dow Jones (DIA) has resistance at 16500 right now with support sitting at 16200 along with 16000. The key support is 16000 since its mental and the 50-day MA. If those lines break, we don't see much support until 15700.
(click to enlarge)
Nasdaq (QQQ) has strong resistance above it and has failed at the 88 area. There is support at 85 and 86 area. The index is very tight right now and should either breakout to the upside over 88 or could retest 85 then potentially move lower.
(click to enlarge)
Russell 2000 (IWM) is in a tight consolidation pattern with 116 resistance and support just below it. If that area fails, we see good support at the 110-111 area. If it can break 116, we do not see much resistance until 118 area.
(click to enlarge)
Wednesday's Outlook
The market got its much needed comeback on Tuesday, and it looks like it could continue if things go well with earnings and data Wednesday. At the same time, we are in a very choppy market right now. As the market moves up and down, it will be very headline-oriented, and we do not expect long trends to develop for a large part of the year at least not the first half. Wednesday, the market will be watching closely for the MBA Mortgage Index, PPI, Empire Manufacturing, and Fed Beige Book reports. The MBA Index is interesting because of recent results showing weak demand for mortgages that could show some housing concerns. Additionally, we will get a key Empire Manufacturing report that is supposed to improve from 1.0 to 3.5 for December. Finally, the Fed Beige Book will be parsed for signs of what it means next for the Reserve. All that comes along with earnings from Bank of America (BAC) Wednesday morning. We are expecting a good report from them as we laid out in our weekly outlook article.

Monday, January 13, 2014

Tesla: Is Another Major Short Squeeze Coming?

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More...)
Tesla Motors (TSLA) was one of the most surprising and impressive stocks of 2013. The company's staggering rally gave the stock cult status, and it became one of the biggest battleground stocks on this website and many others for several months. As 2013 ended and 2014 has begun, Tesla's stock has calmed down and now investors can probably start to focus a little more on the business and not the day-to-day movements of the stock. In mid-December, I discussed how short interest in Tesla was starting to spike again. I noted that while a short squeeze didn't seem extremely possible at that point, I would continue to watch the numbers. Well, the end of 2013 numbers are out, and a short squeeze is definitely becoming more possible. Today, I'll look at the latest short data for Tesla and discuss where the name stands now.
The latest update:
We have now seen five consecutive increases in Tesla's short interest, with the end of December update being the latest one. Yes, short interest numbers are usually delayed by about 10 days to 2 weeks, but it takes a while to get all of the data and then report on it. The importance is that you can definitely spot trends in sentiment regarding certain stocks. For Tesla, as seen in the chart below, short interest has rocketed higher.

In the final few weeks of December, short interest increased by 1.3 million shares, following a nearly 1.2 million increase in the first half of the month. The jump in December follows a nearly 7.75 million share increase in November. Tesla's short interest bottomed out just under 18.5 million shares back in July. Since then, short interest is up by more than 13 million shares, a rise of 71%. This is a significant move, and it puts short interest at its highest point since the middle of March.
Tesla Motors has become a highly shorted stock again. According to Yahoo! Finance, the company had 122.59 million shares outstanding at the end of Q3 and as well as a float of 83.89 million. That means that 25.82% of the outstanding share count and 37.73% of the float is shorted. This can easily lead to a short squeeze on good news. We've seen this happen before with Tesla, during 2013, and with other momentum favorites such as Netflix (NFLX), Green Mountain Coffee Roasters (GMCR), and Deckers Outdoor (DECK), just to name a few.
The short count isn't the only thing rising:
The other interesting item to look at for Tesla is the days to cover ratio. This is a measure that calculates the number of days it would take all short sellers to cover, based on average volume. If a stock has 30 million shares short, and the average volume is 6 million, it would take 5 days for all shorts to cover. Some of my readers in the past have discussed the idea that the days to cover ratio for most stocks is a lot higher than the actual printed number. These readers argue that if you were to eliminate day traders and other short term traders (like computer trading), the actual volume would be much lower, and thus the days to cover ratio would be higher. It is a good point, but unless we had concrete volume statistics on those types of traders, we can't really calculate that higher number. For that reason, I will continue to only use the days to cover number as provided by NASDAQ going forward.
At the latest short interest update, Tesla's days to cover ratio was 4.08. Usually, I don't consider a number less than 5 to indicate a potential short squeeze, when the days to cover ratio is looked at in isolation. As the days to cover ratio gets into the high single digits or double digits, it makes a short squeeze even more possible. However, Tesla's days to cover ratio was just 2.04 at the end of November, and as low as 1.18 earlier in 2013. Why has this number suddenly spiked? Obviously, the ratio should rise as short interest increases.
Also, Tesla's daily volume has really dropped. In November, only three trading days saw daily volume of less than 10 million shares. Between the start of December and December 19th, there were six days that saw volume of less than 10 million. From December 20th until last Friday, volume did not touch 10 million in any single day, and there was only one day where it topped 8 million. Yes, part of that is due to the holidays, but it also may be due to Tesla fatigue. When volume comes down, it helps to push the days to cover ratio up. When you combine the rising days to cover ratio with a large amount of the float short, it definitely makes a squeeze possible. Tesla's days to cover ratio is at its highest point since the end of April, when it was near 8.00. That's when short covering in the name really started to pick up, and shares rocketed higher during May.
Revenue estimates going higher:
Tesla's short interest isn't the only number that's increasing. Analysts are increasing their revenues estimates for both 2013 and 2014. The table below shows Tesla's average revenue and earnings per share estimates for 2013 and 2014 going back to the third quarter report.

*Revenue growth number for 2014 based on current estimate for 2013 at that time. The 2013 number will continue to change until we get final yearly results from the company.
Analysts have continued to up their revenue numbers for Tesla, which makes sense given how Tesla has continued to beat revenue estimates handily in recent quarters. Unfortunately, despite a huge revenue beat in Q3, Tesla did not beat big on the bottom line. As a result, analysts have trimmed their earnings per share estimates on the name since Q3, although estimates are flat since my latest update. The key here is that analysts continue to believe in the growth story of Tesla. Now, it is up to the company to prove these analysts right.
Final thoughts:
Tesla's short interest has continued to spike higher, and when you combine that with much lower volume, it does appear that another short squeeze could be coming. Tesla's short interest is at its highest point since March 2013, and that was around the time shares started to rocket higher as investors began to cover. I'm tagging this article as a long idea on the basis that one piece of good news could lead to some significant short covering in this name, which could push this name substantially higher. However, investors do need to realize that this is a very risky play, and we could easily see a lot of covering with the stock falling if the next piece of news is bad. For now, analysts have been increasing their revenue estimates on the name, so expectations will be high going forward, especially for a stock that has rallied so much. One thing is sure. With every short interest update showing higher and higher short interest, the chances of a squeeze have jumped dramatically in the past two months.
Additional disclosure: Investors are always reminded that before making any investment, you should do your own proper due diligence on any name directly or indirectly mentioned in this article. Investors should also consider seeking advice from a broker or financial adviser before making any investment decisions. Any material in this article should be considered general information, and not relied on as a formal investment recommendation.

Wednesday, January 8, 2014

Did Goldman Sachs Just Call The Top In SolarCity?

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More...)
After warning investors back during mid-May to not fall for the hype on the soaring SolarCity (SCTY), the stock spent the next five months in a downtrend. Only recently had the stock moved slightly higher than the warning level until Goldman Sachs (GS) issued an upgrade that caused the stock to soar over 11% at one point to a new all-time high at $67.14.
SolarCity is a leader in the rooftop solar panel market and famously has Elon Musk as the Chairman of the Board. For those living under a rock, Elon is a revolutionary investor and inventor that is the CEO of both Tesla Motors (TSLA) and SpaceX. SolarCity offers solar power directly to consumers, businesses and government organizations for less than they spend on utility bills while taking care of the design and permitting process to get the panels installed. In addition, it handles all the monitoring and maintenance to ensure the rooftop solar panels continue to work properly.
The stock ended the day down 5% from the initial highs bringing up questions whether the Goldman Sachs upgrade caused a short-term spike allowing traders to exit their positions. In essence, did the call create a top in the stock? Though apparently not a major concern to Goldman and other investors that have pushed the stock up to astronomical values, the company has yet to prove how providing all those services to consumers at low costs actually generates profits. Remember, what is good for the consumer isn't always good for the business and ultimately the investor.
Goldman Sachs Call
On Monday morning, Goldman upgraded SolarCity to a buy from neutral forecasting that the company would benefit from fast rooftop solar-installation growth. The investment bank increased the price target on the stock to $80 a share, from $65. The solar stock offers an intriguing value to Goldman considering it provides the best stock in the rooftop sector that offers the highest margin and least policy risk.
Nominal Contracted Payments
The excitement around the SolarCity trade revolves around the large remaining contracted payments from 20-year terms. As of the end of Q313, the estimated nominal contracted payments remaining soared to over $1.7 billion (see slide from Q313 presentation below). The numbers jumped significantly from the $1.1 billion at the end of Q312, so one can quickly see how investors get excited about the quickly rising payment stream.
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Investors need to keep an eye on the expense items carefully because payments are only part of the equation. In the latest quarter, operating expenses were $46 million. With operating expenses approaching a $200 million run rate, the nominal payments aren't looking that large anymore. Remember, these amounts don't even include the cost of revenues that were $8.4 million during Q3.
Retained Value
The retained value is where investors need to key onto the value proposition of the company. With a market valuation of around $5.5 billion (88 million diluted shares), the question should be why investors are willing to pay that much with the company defining the retained value as only $846 million, an increase from $662 million at the end of Q213.
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As the company explains in the definitions section copied below, the retained value is basically the net present value of the energy contracts with one large assumption. The retained value of the contracts is actually only $496 million with a big $350 million addition assuming 90% of customers agree to renew the contract for another 10 years. That number appears high considering customers will probably want new solar panels after 20 years. The outdated panels might even provide an aesthetic requirement to be replaced to prevent the house value from taking a hit.
Retained Value under Energy Contract represents the forecasted net present value of Nominal Contracted Payments Remaining and estimated performance-based incentives allocated to us, net of amounts we are obligated to distribute to our fund investors, upfront rebates, depreciation, renewable energy certificates, solar renewable energy certificates and estimated operations and maintenance, insurance, administrative and inverter replacement costs. This metric includes Energy Contracts for solar energy systems deployed and in Backlog.
Retained Value Renewal represents the forecasted net present value of the payments SolarCity would receive upon Energy Contract renewal through a total term of 30 years, assuming all Energy Contracts are renewed at a rate equal to 90% of the contractual rate in effect at expiration of the initial term. This metric is net of estimated operations and maintenance, insurance, administrative and inverter replacement costs. This metric includes Energy Contracts for solar energy systems deployed and in Backlog.
No doubt SolarCity will generate more value in future years using the presented retained value calculation, but paying 11x the contracted value and 6.5x the bullish renewal case doesn't make a lot of sense. Sure Goldman Sachs is factoring in the NPV of future signed contracts, but it requires a substantial amount of new contracts in order to even match the current stock value, much less a jump to $80. Hence, such a call can signal a top in the stock especially when it gaps up and closes near the low for the day. The popularity of Elon Musk makes the stock almost impossible to short, but it sure doesn't offer any value at these levels.
Additional disclosure: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.

Monday, January 6, 2014

SPY 1% Off Record High While ECRI's WLI Is At A 191-Week High

Disclosure: I am long SPY, . (More...)
On Friday January 3, 2013, the S&P 500 index closed just below its all-time intraday high of 1849.44. Currently at 1831.37, the S&P 500 is only 0.98% below its all-time record high while ECRI's Weekly Leading Index, WLI, is at a 191-week (3.7-year) high. SPY, the exchange traded fund for the S&P 500, is also only 0.98% off its recent all-time high.
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Chart 1 Showing S&P 500 from 1997 through January 3, 2014
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S&P500 Chart Scan
Table 1 showing Recent S&P500 Data
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In my February 2011 article "How to Play Expected Inflation from the TIPS Spread," I wrote I was long SPY, as one way to benefit from expected inflation. "I also believe it is a good time to own equities including SPY, the exchange traded fund for the S&P 500, for both inflation protection and income."
I have been correct to recommend SPY here on Seeking Alpha for the past few years despite ECRI's fears of a recession. Currently, SPY adjusted for dividends remains well above past highs. The raw price index for SPY, without dividends and shown in green on my graph below, also remains above prior highs made in 2000 and 2007.
Chart 2 Showing SPY Adjusted for Reinvested Dividends.
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SPY Chart Scan
Table 2 showing Recent SPY Data
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Despite the markets making new record highs and the current press release from the Bureau of Economic Analysis estimating Q1-2013 GDP grew at a modest 4.1% annual rate, ECRI said the "recent U.S. GDP release featured significant revisions, with extensive conceptual changes enacted back to 1929." ECRI believes that similar 1.4% revisions, perhaps years from now, will show the US was in a recession in Q4-2012 through Q1-2013.
From an August 30 Snapshot of ECRI's Website
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On Friday January 3, 2013, the Economic Cycle Research Institute (ECRI), a New York-based independent forecasting group, released its latest readings for its proprietary Weekly Leading Index (WLI) for the period ending during the prior week. In the latest release, for the week ending December 27, 2013:
  1. WLI was 132.9, up compared with the prior week at 131.9
  2. Important WLI highs for the last 3+ years back to 2010 are:
  3. September 20, 2013 = 132.7 (177 week high)
  4. April 15, 2011 = 131.7
  5. May 7, 2010 = 131.9
  6. April 30, 2010 = 134.9
  7. The lowest reading for WLI on record was 105.3 for the week ending March 6, 2009.
  8. WLI growth was flat at positive 1.8% compared with the prior week at positive 1.8%.
  9. The lowest reading for WLI growth on record was negative 29.9% on Dec. 5, 2008. It turned higher months before the stock market bottomed on March 6, 2009, at 666.79.
  10. Occasionally the WLI level and growth rate can move in different directions because the latter is derived from a four-week moving average.
Chart 3
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Annual WLI growth: Based on a simple, year-over-year annualized basis, annual WLI growth rose to 5.2% up from the prior week's reading of 3.5%.
Chart 4
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If ECRI is correct that we had a recession that will show in future revisions to GDP, would it be one of the 20% of recessions that come without a bear market in stocks? ECRI's managing director, Lakshman Achuthan, said "In three of last 15 recessions there was no bear market, 1980, 1945 and 1926-27. (The) '80 recession was really short, '45 was end of WWII and '26-'27 was Roaring Twenties."
Does SPY Lead WLI or Does WLI Lead SPY?
Since ECRI releases WLI numbers for the prior week, and the stock market is known in real time, you can sometimes get a clue for next week's WLI from the weekly change in the S&P 500 or its exchange-traded fund, SPY. But this is not always the case. Specifically, in the lead up to the last two recessions, the WLI turned down months before the stock market did.
Chart 5: S&P 500 vs. ECRI's WLI Growth Rate (click to enlarge)
(Note, I would plot SPY vs. WLI, but I don't have the weekly data in my spreadsheet going back as far since I only started trading SPY in early 2007.)
Over the next 10 years, I expect the S&P 500 will keep up with inflation and the dividend it pays should grow with or even exceed inflation. An added benefit to owning equities is that the dividends and capital gains currently get favorable tax treatment. Finally, Treasury rates are artificially low (see Current U.S. Treasury Rates at a Glance) giving all bond funds significant interest rate risk.
I was asked in my Facebook group, "Investing for the Long Term" why I own SPY: "I'm confused - if the ECRI is projecting a recession, why are you long SPY? Is it a market timing strategy?" My answer was:
"I don't believe in 'all or nothing' market timing. I explain it more in my newsletter, but I'll adjust my allocation to stocks based on many things including ECRI's outlook. My last two moves for SPY was to sell SOME shares earlier this year when higher and buy them back on June 4, 2012 at $127.50 using 'Auto Buy and Sell targets' in my monthly newsletter. Hope that helps. (Seeking Alpha requires its writers to disclose if we hold a position. Thus, I would report I was long SPY even if SPY was only 1% of the portfolio with the other 99% in cash.)"
We had a good discussion of the first estimate of Q1-2013 GDP release in my "Investing for the Long Term" Facebook Group. Several questioned how ECRI could think we are in a recession with 2.5% GDP growth.

I posted Lakshman's answers to our group at Q1 GDP and ECRI Clarification on Recession Call. ECRI believes future revisions to GDP will prove them correct. Here is a key excerpt:
  1. You're not alone in thinking our recession call was wrong. Still, the facts are that the GDP release on August 28, 2008 - with the economy eight months inside the Great Recession - revised Q2/08 GDP growth to 3.3% from 1.9%, up from 0.9% in Q1/08. But both of those data points, as well as GDP data for the first two quarters of the 2001 and 1990-91 recessions, were subsequently revised by 2 to 4 percentage points over time. This is how real-time data often behave during recessions.
What Does The Future Hold?
The S&P 500 fell 0.5% last week which will give the market a small, negative influence on WLI for the next weekly reading. It is very possible that SPY and several of the stocks in my newsletter "Explore Portfolio" that lead out of recessions and bottomed months ago are pointing to an economic recovery even before most economists agree with ECRI that we had a recession. So far, the 2% payroll tax increase on everyone and the slowdown in government spending due to the "sequester" were not enough to cause Q1 and Q2 of 2013 to record the first quarter of negative GDP growth in many years.
Will future revisions to GDP show Q4 2012 and Q1-2013 were negative values typical of a recession?
Chart 7: Excerpt from my 12/23/13 newsletter showing GDP by quarter:
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The current data suggests ECRI was wrong when they said a new recession was unavoidable. Future negative revisions may show they were correct. ECRI was correct that the economy was not healthy. ECRI was also correct that the job market would suffer, but it seems to be slowly improving. Clearly taxing savers with massive QE by the Federal Reserve to help the government spend more than it takes in appears to have worked to avoid an "official recession."
What do you think?
  1. I trade SPY around a core position in my newsletter's "Explore Portfolio" and with my personal account. With dividends reinvested, my explore portfolio holds 132.575 shares of SPY with a "break-even" price of $102.80. I also have the index fund version of SPY in both my newsletter's "core" portfolios.
  2. ECRI uses the WLI level and WLI growth rate to help predict turns in the business cycle and growth rate cycle, respectively. Those target cycles are not the same as GDP level or growth, but rather a set of coincident indicators (including production, employment income and sales) that make up the coincident index. Based on two additional decades of data not available to the general public, there are a couple of occasions (in 1951 and 1966) when WLI growth fell well below negative 10, but no recessions resulted (although there were clear growth slowdowns).
  3. For a better understanding of ECRI's indicators, read its book, "Beating the Business Cycle."
  4. SPY is the exchange traded fund for the S&P 500 Index.
  5. VTI is Vanguard's "Total Stock Market" exchange traded fund. If you want to invest in a single fund, that is my first choice over SPY. I recommend SPY and several others in my core portfolios for more opportunities to rebalance.
  6. VOO is Vanguard's new exchange traded fund that tracks the S&P 500 Index. It is a lower cost alternative to SPY. I own and write about SPY, as I have many years of data for it, but VOO could do slightly better than SPY over time because it has a lower expense ratio.
  7. S&P500 Chart Scan and SPY Chart Scan
Disclosure: I am long SPY and own the traditional index fund versions of VTI and VOO bought long ago in various taxable and tax deferred accounts. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Friday, January 3, 2014

Market Timing Report: Buckle Up For 2014

Editor's note: This report was initially released to the author's subscribers on 12/15/13. All references to specific dates should be read accordingly.
Any skillful manager must end each year by analyzing performance for the previous year and also looking forward to what may occur in the year to come. Is there anything that should have been approached differently? Should a new tactic be used in the coming year? We ask the same universal questions here at LMTR.
Even though the bears were overbought a month or two ago, and fall liquidity has carried us higher than anticipated, our negative position is not nullified. In fact, the current market environment has taken a nosedive. Sentiment is more extreme, and the bears have hit a 30-year low (a number not seen since 1987). There is aggressive insider selling, and the breadth of the market is definitely beginning to wane. When volatility picks up to the downside, the investment community will receive a large “gut check”, and the indicators will adjust thereafter. As margin debt remains at an all-time high, one must wonder what will take place when the market inevitably declines and margin calls occur for these weak-handed owners. Without a doubt, 2014 is going to be a bumpy ride!

Anecdotal Observations

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LMTR has highlighted the contrarian concept of bullish magazine covers in past issues. In the last 6 months we’ve focused your attention on 3 specific covers, but recently more such periodicals have published overtly bullish cover stories. Please note the recent issues of the Economist,Time magazine and Germany’s Wirtschafts Whoche. Periodical covers are a lagging indicator, meaning that by the time media is placing such events on their front covers the story has already occurred.
Last month’s LMTR indicated that operating margins were at a 60-year high. The widespread disparity between wages as a % of GDP has trended downwards, and this current situation is about the best corporate profits can expect in relation to gouging their workers. Such profit spreads are the most advantageous that corporations have seen in the past 50 years. In our opinion, such a large profit spread is unsustainable.
IPO’s tend to flourish in more mature stages of a recovery, so it is relevant to investors that Renaissance Capital recently launched an ETF (IPO) that tracks/invests in IPO’s. We are currently experiencing the highest secondary market in the past 19 years…..but keep in mind, records do not go back further than 19 years. Thus far, 2013 has hit $55 billion in IPO’s, which was only outdone by the $62 billion that occurred in 2000. This mature trend cannot be sustained.


The Rydex family of funds carefully tracks their own asset flows, thereby producing some interesting indicators. This particular chart, produced by Ned Davis, tracks Rydex money market assets as a percentage of their long stock mutual fund assets. One should note that during periods of serious downward market pressure, the indicator jumps up to the 80+ range. Conversely, during overbought markets the indicator falls. A reading of 30 or below is negative, demonstrating that the general market participants are leaning too aggressively on one side. The current reading is at a very negative 19.3.
The McClellan Osscillator and Summation Index is currently positioned with a great deal of negative divergences. As the S&P has continued to hit a series of higher highs, the indicators have begun to hit a series of lower highs. This shows that breadth and sponsorship are beginning to fall off, which is negative.
The High-Low Logic Index is one of my personal favorites. It was created by Market Logic and is displayed through Ned Davis Research. This tool is produced by calculating the lesser of the NYSE new highs or new lows divided by the total number of issues traded. A number is derived, and thereafter a ten-week moving average is used to smooth out the data. This indicator allows us to monitor new highs or lows in a quantitatively driven fashion. When we see a buy or sell signal, it can reinforce other indicators that are being used concurrently. The most recent sell signal, generated several weeks ago, remains intact. At 5.3, we are clearly in an “out of gear” position.


Crowd Sentiment is Ned Davis Research’s primary sentiment gauge. It is currently at 71.4, which is an overly optimistic number. To illustrate the track record for this indicator we have included a bar chart and data table, both going back 19 years. These tools give the reader an idea of what to expect with such high sentiment.
This shows a -16.6% annualized decline after the extreme has been set.
After periods of high sentiment, this indicator has achieved 100% accuracy.
Sentiment data indicates that history is about to repeat itself. Sentiment numbers are released every Wednesday by Investors-Intelligence Chart Craft. Their data, which goes back 50 years, is gathered from 150 newsletter writers. The bears have now reached a 30-year low, even though bullish sentiment has not reached a 30-year high. This 30-year low is a highly complacent number that has not been seen since 1987. At that time sentiment remained low all through the spring and summer (even dipping to the 12-range) right up until the 1987 crash. Since history does repeat itself, investors should be cautious.
The next chart, also provided by Ned Davis, shows the Investor’s Intelligence bulls/bears figures on a 40- year chart. The bulls have reached 58.3, which is indeed high and overly optimistic. However the bears, at 14.3, are at a 30- year low. This shows that the bears are in a tremendously complacent position, one not seen since the spring of 1987.
The Vickers’ Insider Index, created by the Argus group, monitors corporate insider activity. When the gauge is below 15, it indicates that tremendous insider selling is taking place in the marketplace (bearish). When the gauge reaches +2.5 or higher, it indicates that large amounts of insider buying are taking place (bullish). We are currently well below –15, which suggests that an excessive amount of insider selling is occurring. This is a very negative reading.


In the past few issues we’ve indicated that margin debt is at an all time high. Interesting new calculations, created by Cross- Currents.com, reinforce our initial assertion that leverage is indeed at excessive levels. The first chart analyzes margin versus stock market capitalization, and the second focuses on mutual fund cash minus margin debt. This type of speculation has historically been highest at market tops and lowest towards market bottoms.
NYSE volume should also be noted. When the stock market is rising, it is important to see volume accelerate upwards because it shows that institutions are continuing to accumulate securities. While a rally can occur on light volume, such a move tends to be suspect. This chart displays an upward trend over the last 25 years. A rally took place until the last 2-3 years, and at this point volume actually began to decline. Such a move tells us that “big money” is not supportive of the current rally.
Credit spreads (the difference between corporate and government debt) are now trading at a 30-year low. This shows that general complacency has dropped to an extreme, where basic corporate debt is trading parallel to government debt. While our government has the power to print money to cover debts, corporations do not have such a luxury. Therefore, the inherent bankruptcy risk is much greater in the corporate arena. Currently, credit spreads are far too complacent.


After reviewing various indicators, we continue to keep our bearish stance and plan on raising our short position to become more fully invested. This will occur at some point in January, and at this time subscribers will receive an LMTR alert. One never knows exactly what type of correction to expect. But with so many extremes, a reversion to the mean is likely to occur within the next few months. Buckle up and get ready for this bumpy ride!
Lamensdorf Market Timing Report is a publication intended to give analytical research to the investment community. Lamensdorf Market Timing Report is not rendering investment advice based on investment portfolios and is not registered as an investment advisor in any jurisdiction. Information included in this report is derived from many sources believed to be reliable but no representation is made that it is accurate or complete, or that errors, if discovered, will be corrected. The authors of this report have not audited the financial statements of the companies discussed and do not represent that they are serving as independent public accountants with respect to them. They have not audited the statements and therefore do not express an opinion on them. The authors have also not conducted a thorough review of the financial statements as defined by standards established by the AICPA.
This report is not intended, and shall not constitute, and nothing herein should be construed as, an offer to sell or a solicitation of an offer to buy any securities referred to in this report, or a “buy” or “sell” recommendation. Rather, this research is intended to identify issues portfolio managers should be aware of for them to assess their own opinion of positive or negative potential.