Wednesday, May 22, 2013

Sell in May and go away - 2013 version

Seems like a themed party that didnt work out.

The chase for yields continues as free money drops from the sky. Everyone is massively printing money which has literally thrown the global economy is disarray, losing its much needed equilibrium for an actual recovery to set in.

Post Fraser & Neave bidding war saga, it seems the play on inflation was right. It remains that globally, the scenario where an ever increasing pool of capital is chasing a limited set of assets and options.

Some continued signs of the staggering chase includes:

  • US$1.1B acquisition of "Tumblr", a microblogging and social network site which in the past 7 years has recognized close to or 0 revenues. (Nice!)
  • "Twitter" was last valued at US$1B, and investors were quoting on its fast growth in revenues, estimated to hit an "eye popping" US$1B. (What about earnings? to speak the least)
  • "Oxley Holdings", a Singapore based residential real estate development company setting up a S$300M MTN Programme and issuing S$150M 4 year unsecured at barely over 5.10% (Have fun reading their financials)
  • "Croesus Japan REIT IPO popped up 20% on IPO day, with yields of over 8%. (The BOJ Put at work! Mind you, the so called shopping malls are suburban "Wal-Mart" type of malls)
  • India Tata Communications/Steel/Auto each raised debt funding in Asian markets despite their financials. Subsequently they raised the money and Tata Steel wrote down assets by US$1.6B within a coincidentally close date after the fund raising. (Check the financials)
  • The US$23B "Heinz" acquisition carried a valuation tag of over 14x trailing EBITDA while peers are 10-11x. Note Buffett is this case is the financier, not the acquirer.
  • Claims of China's hyper-inflated trade surplus with on the ground testimonials! See the article courtesy of Bloomberg HERE (I wonder what goods people trade this days with that sort of quantum)
  • In the 2011-2012, we also saw US$1B acquisition of photo sharing site, "Instagram", game acquisitions such as the US$200M acquisition of "Draw Something", a mobile game application and Hewlett Packard (HP)'s US$11B acquisition of software provider, "Autonomy Inc".
  • Asian equities are also enjoying high valuations. Thailand, Philippines, Indonesia etc are having across the board price to book of 2.6-3x which may be anecdotal but sure is a record event.

It may be all happy and rosy with rising asset prices. However the world is usually force-neutral. When theres a cause, theres an effect. Costs are creeping up (technically not true, they are silently moving up aggressively) and it seems that costs are likely to rise exponentially more than sales can grow.

This is far more true when Asia is known to not be a product/service leader and naturally with low levels of automation and/or innovative internal processes. Further, if one would assume a higher level of automation or better internal process, dont forget the capex to implement it, which is of course is much higher upfront now. The underlying value of an enterprise (of which price is partly based on), is the end result of these interactions. For sure, when you cannot successfully maintain a low cost level commensurate with a higher sales level to generate profits, a manager would cut the next most obvious and immediate cost, the raw materials or inputs. That translates to a lower commodity price level which we have witnessed and certain to persist.

As I write this on a related note, I regretfully read that theres 3 new suicide cases at Foxconn plants in China.

It is tough to fight the tide, and it sure looks like its getting stronger.
Perhaps I should just get a drink and sit back for a while.