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“THE FED DID IT, WITH QE, IN THE BOND MARKET”

I tend to agree with @aswathdamodran here. As a collective we are obsessed with the FED, even if we aren’t. I remember a time when the chatter was “the thickness of Greenspan’s briefcase” – sheer idiocy. Quit being rhapsodic about the FED. Unless we’re talking Roger.

Here are some of my notes from the video :

NOTES BEGIN:
– myth #1 = fed sets rates
– myth #2 = fed has kept rates low
– myth #3 = low interest rates “reason” for stocks doing well
– myth #4 = biggest danger to fed: market will react “badly” to change in rates

MYTH #1
– fed sets ONE rate: rate at which banks borrow at the federal window
– it indirectly sets the “fed funds rate”
– ffr: rate at which banks borrow and lend with each other
– the fed: DOES NOT set any other rates
– fed funds rate is connected to other short term market rates
– that is the extent of the direct connection
– everything else is implicit
– the effect the fed has on really long term rates: “much more tenuous”
– really short term rates are set by the market, not by the fed

MYTH #2
– rates => low for the last six years because “fed has kept them low”
– true: the t/bill and t/bond rates @ levels we haven’t seen in decades
– but is it the “fed” that is “doing this”?
– to answer that Q => AD went back to econ 101

– fisher equation: ties nominal interest rate to expected inflation + expected real interest rate
– @aswathdamodaran “made one leap of faith”
– leap: assumed growth in real gdp appoximates real interst rate
– calls this sum an “intrinsic risk free rate”
– expected inflation + real gdp growth = “intrinsic risk free rate”
– see 4:45 for a graph of intrinstic risk free rate
– graph includes the historic 10yr t/bond rate superimposed
– when inflation is non-existent/ growth anaemic => rates are low
– this pehom occurs with or without fed’s tinkering!
– @aswathdamodran suggests:
– the primary reason interest rates have been low =>
=> because fed’s actions have not worked
– this is contrary to conventional wisdom!

MYTH #3
– low rates = bull market
– 2008 => forward looking ERP => 8.5% ; T/BOND = 4.5%
– ERP = equity risk premium = investors’ expected return on stocks
– per AD :
– if rates were the driver of stock prices => ERP should have dropped to ~6.5%
– August 2015: expected return on stocks: 8.5% (roughly same as 2008!)
– what is causing stock returns to be so high?
– per AD:
– answer is straight-forward “US companies returning insane amounts of cash”
– reasons for returning cash:
– profits at historic highs, operating margins, cos earning more than ever
– returning proportions of earnings that are unheard of
– 2014 – US cos returned 91% of earnings as cash flows
– much higher than 80-85% in last decade and ~70% prior to that
– AD’s view: that is the biggest danger to stocks!
– if cash flows stay at current levels with rates up => fine
– but if cash flows drop and rates rise => danger!
– see table at 7:50

MYTH #4
– “rates up – stock and bond markets collapse”
– AD : there are two other scenartios that are “far more dangerous”
– 1) fed raises rates, and nothing happens
– 2) fed doesn’t raise rates: and rates go up anyways (via inflation)

In Summary:
– the fed does not “set” rates; but it has credibility
– investors assume =>
– “fed raise” = “economic strength” and “fed lowers” = “economic weakness”
– as long as fed acts consistently => has credibility
– biggest danger to the fed => anything that attacks the notion of credibility
– if the fed acts and nothing happens to bonds/stock markets => not good!
– tells chanteclier story: rooster crows in the morning and the sun comes up
– the barnyard animals think that the rooster’s crow caused the sun to come up
– per damodaran: this is the fed situation => investors may wake up!
– per damodaran: “we don’t know how equity, bond markets will react”
– “obsession with fed has gone on long enough, lets move on!”

END NOTES.

janet dominatirx

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Dregs. $TST

Recently a colleague queried me: “Let me know if you think there’s any thing left there… cramer’s buying!”

Response below:

TST piques my interest for one reason: the state they are focused on “transition from primarily serving retail investors to also becoming an indispensable data and business intelligence source for institutional clients”, which I think is a better strategy than mesmerizing fools online with its sage advice.

I am skeptical of the demographics of their retail clientele. Since their media business hinges on access to that segment of the population, I fear that it will get “found out”. That said, its averaging $3million in revs over the last 11 quarters.

From the filing:

· #1 Website with readers having a portfolio value over $1 million;
· #1 Website with readers having investable assets over $500,000;
· #1 Website with readers having household income over $75,000; and
· #1 Website with readers checking stock quotes.

Really? Who checks quotes on TheStreet.com? Subscribers perhaps? Confounding. Do the niche sites attract a wealthier demographic? Does wealth necessarily correlate with sophistication? I don’t know. There doesn’t seem to be much in-depth content on the site. If sophistication beckons for anlaysis beyond the perfunctory, I don’t see the purported subscriber/reader matching up to the content offered. Of course, I can’t speak to what is beind the paywall.

It is true that the name is loosely synonymous with “financial information online” and that is a draw for ad dollars. How long does the ruse last?

Does the media business dwindle over time? Mobile traffic up 217% ytd and 35% of uniques are mobile. “Flat is the new up” — says the CEO (of the media business). Which probably means about to crack to the downside. Right now, 70% of traffic comes from desktop and they explicitly state that desktop users are critical to media sales. Would untrammeled migration to mobile devices be deleterious to the subscription business as well as the media business? A potential hairline fracture in the B2C story, in my opinion. I’d inquire about this phenom at any opportunity.

The chief menace to the story (imho) is its association with Cramer. Am I naive? Does Cramer have animalistic appeal? Is there really no sex in the champagne room? Perhaps, as is the case with WWE there will always be a steady flow of animals who get turned on to cramer/cnbc/madmoney cycle. They churn, others take their place, the cycle continues. But a cursory google suggests that his charm is waning (bottoming?). CNBC and its ilk are despondent, at best.

This begs the question: how much of the subscription business is tied to the Cramer brand? Difficult to discern. The company claims its 20% per the most recent call (~$13mil of TTM).

I spoke to a couple of sales gents (who quoted me different rates for the same product). The “deals” were only available “this week”. Anyhow, one guy tried to entice me to “action alerts plus” – Cramer’s real-time calls. Out of 80,000 subs, 50,000 are AAP, he declared jauntily. Of all the products, this was the one that was the most sought after! So, roughly $10 million in revs/year at the discounted “special” price and $20 million a year at the full rate. Unclear what the average subscriber pays. So, perhaps the $13 million (20% of revs) figure is about right?

As a sidenote: on a third call in to the sales desk, the lady tells me that $199 is a rate avaiable year round. Also, a comprehensive subscription package known as “The Chairman’s Club” costs $2k (via phone) or $5K (online) per year. Pick a rate! Per salesperson #1, they purposely keep the subs down to 300-400 people to “maintain exclusivity”. Odd, no?

Let’s assume that all media traffic is driven by the love of Cramer which amounts to about $12 million per year in revenue. Then, if Cramer related subscriptions are (conservativley) about $15 million at an average of $300 per sub per year and 50,000 subscribers, rather than $13 million per the company, total “Cramer Exposure” for the year about $27 million on the high end. TST says only ~20% of revenues are exposed, but I think its more. No other fools on that site are household names. Trailing twelve month revenues at ~$68 million. What if he drops dead?! Probably an aggresive haircut to take $27 million of the topline though. Hmm.

B2B seems solid, predictable. At 400 staff in Chennai and 40 in Wisconsin = $1.8 million in wages. Roughly 30 million in revs on a TTM basis. 90%+ renewals on The Deal. Deal + RateWatch = 30% of revs or ~20mil.

Sentiment is at all time lows for the likes of Cramer and CNBC. What I can’t tell is if its “bottoming”. With WWE, the WWE consumer knows that he/she is being “entertained” — does the TST consumer also know this? Or are we evolving to a world where this kind of shit is no longer tolerated? If so, the B2C business is at risk. Yet the co states mix will stay roughly 55% B2B and 45% B2C despite all the talk of transition!

Taking off $20 mil (instead of the aggressive $27mil) from the top line for Cramer Exposure (cocaine risk) + Media Sales gloom we’re at just above ~1x revs. At $30 mil in cash (of course enough deferred revs to offset), basically breakeven operations and 6% div to boot — still doesn’t sound like a no brainer. Nor does it seem like a 0.

To answer your question, yes I think there is something left but I don’t think it has much to do with its media properties aka “the front porch” — and thus the comparisons that they make to Vox, Buzzfeed and BusinessInsider are moot. What do you pay for the B2B biz? At $30 million in sales, and assuming operating margins are same as blended (roughly 3%) — its a 1 million pre-tax perpetuity at best? Then you’d be getting the rest of the business for “free”, I suppose. That’s a bit extreme, but doesn’t seem cheap given feeble B2C.

JG

PS:
BC Partners, a London-based private-equity firm, agreed to buy financial-data provider Mergermarket Group from Pearson Plc for 382 million pounds ($624 million). Nikos Stathopoulos, managing partner at BC Partners, said in an e-mailed statement today that the company will team up with Mergermarket Chief Executive Officer Hamilton Matthews’s group to invest “in the growth of the business through product development and geographical expansion.” Mergermarket, which was founded in 1999, operates in 65 countries and controls brands such as Debtwire, DealReporter, Infinata, Wealthmonitor, and Xtract Research according to the statement. The London-based company had revenue of 100 million pounds and operating income of 25 million in 2012, Pearson said.

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