As Lyft IPO nears, traders wonder whether the numbers match the hype

Lyft IPO prospectus

Kate Rooney | CNBC

«I think buying new offerings in a hot market is something the average investor should not think about at all.» said Warren Buffett on CNBC Thursday, when asked about buying into the Lyft IPO, which is scheduled to begin trading on Friday.

I got a call from a trader friend Thursday afternoon, someone who’s been trading IPOs for a long time. Like a lot of traders, he’s a bit baffled by the Lyft phenomenon.

«The economics are completely upside down, and their biggest competitor is coming in the next few months,» the trader said. «And guys are just guys falling all over themselves to get in on the deal. And they can’t get in. They’re telling me, ‘If I get 5,000 shares I’ll be happy.»

My friend, who must be anonymous, is trying to separate the Lyft fundamentals from the action of the markets in general. He understands that the IPO market is hot because it’s been closed for four months, the stock market is up 12 percent this quarter, there’s a very limited float of about 13 percent and Lyft is a well-known name.

But people are wondering whether the fundamentals justify the valuation. The company’s last round of private funding last June valued it at $15 billion. Now the company seems to be looking at a valuation of about $22 billion, 50 percent higher in less than one year.

Have the fundamentals improved that much in a few months? Santosh Rao, who evaluates IPOs at Manhattan Venture Partners, says the improvements have been only marginal. «Fundamentals did pick up in the fourth quarter. They are getting more efficient with the drivers and the incentives. But there is a little bit of hype too. You see the squeeze, demand is way above supply.»

Like many on the Street, Rao is trying to justify the nose-bleed prices Lyft is likely to command.

The biggest problem are the huge losses. The company had $2.2 billion in revenue last year with losses of $911 million.

And this is where the Wall Street guys really get into «magical thinking.» Rao explained the reasoning: «Revenues grew 100 percent in 2018, but losses only grew about 40 percent. In that sense, the margins are improving. The sequential progression is improving.»

Rao doesn’t know when Lyft will make money, but he insists they have bought themselves a lot of time. «The cash burn was $350 million in 2018, but they have $2 billion in the bank, and they are going to raise another $2.5 billion or so in the IPO. So they have a little room. $4.5 billion divided by $350 million implies they have 10 years.»

When pressed on all this «magical thinking,» Rao admits, «A lot of investors just want growth at any price.»

Ah, there it is. Not growth at a reasonable price, but growth at any price.

And this is where things can go terribly wrong.

All signs are pointing to a big gain on Lyft’s first day of trading Friday.

In addition to demand, Art Cashin at UBS made an interesting observation about the timing. He noted that, perhaps not by coincidence, the Lyft IPO is coming on the last day of the quarter.

This means that those who would normally sell on the first day of trading, especially if the stock is up big, might be very reluctant to sell because the 13-F disclosure form they have to file in the next 90 days would show they don’t own it, and if they want an Uber allocation the underwriters might hold that against them, arguing that they are not long term holders. That might help support the price throughout the day.

Once the show is over, let’s see what happens. Let’s see what happens in two or three months when another 50 or 60 IPOs come down the lane that are not as famous, and it all gets a little blurry.

Stocks head for best quarter in 7 years despite rising fears of a recession

We are ending the first quarter on a note of modest anxiety over lower Treasury yields, but investors should be very happy with their investment portfolios.

It’s not just that the S&P 500, up 11.9 percent, is having its best quarter since 2012. Everything is up, and I mean everything, including stocks and bonds. The S&P Midcap 400 index is up about 12 percent, and the small cap Russell 2000 is up 12.9 percent

The gains are broadly based. Technology stocks are the biggest gainers, up 17 percent, but energy stocks also were strong as oil rallied from $42 at the end of December to nearly $60. Industrial stocks, which were dramatically oversold at the end of the fourth quarter on global growth concerns, snapped back as well, up 15 percent.

Overall, 90 percent of the S&P is up on the quarter even as fears of an inverted yield curve, a reliable recession indicator, have crept up here near the end of the period.

What’s more, bond portfolios have also gained. Exchange-traded funds for high-yield bonds, corporate bonds and Treasurys are all up, not including dividends. The iShares High Yield (HYG) fund is up 6.1 percent; the iShares Corporate (LQD) is up 5.3 percent and the iShares 7-10 Year Treasury (IEF) is up 2.2 percent.

What’s it all mean? Let’s look at a typical ETF portfolio, which has a mix of 60 percent stocks and 40 percent bonds in it, broken down by weighting this way:

  • S&P 500 ETF (SPY) 30 percent (stocks)
  • Russell 2000 ETF (IWM) 30 percent (stocks)
  • iShares High Yield (HYG) 10 percent (bonds)
  • iShares Corporate (LQD) 15 percent (bonds)
  • iShares 7-10 Year Treasury (IEF) 15 percent (bonds)

With this breakdown, an investor with a $100,000 portfolio on Jan. 1 would have a value of roughly $109,000 as of Wednesday. That’s an overall 9 percent gain, without the dividend appreciation.

Not bad for three months work.

Backlash as Donald Trump is cleared of election collusion with the Russians

Donald Trump declared America the “greatest place on earth” today after it was revealed Special Counsel Robert Mueller found no evidence that his campaign colluded with Russia to win the 2016 US presidential election.

But the president’s elation was tempered by demands from Democrat leaders for the release of Mr Mueller’s full report and accusations that Attorney General William Barr, who issued a summary of the Special Counsel’s findings last night, was not neutral.

In his four-page summary, the Attorney General wrote that the 22-month investigation “did not establish that members of the Trump Campaign conspired or coordinated with the Russian government in its election interference activities” during the 2016 campaign.

On allegations of obstruction of justice, Mr Mueller’s report “does not conclude that the President committed a crime, it also does not exonerate him”. Rather than reach a conclusion himself, the Special Counsel “sets out evidence on both sides of the question”. 

But Mr Barr said he and Deputy Attorney General Rod Rosenstein decided there was insufficient evidence to charge the president with any offence.

Donald Trump: the US President called America the “greatest place on earth”  as he arrived  back at the White House following the publication  of the Mueller  report summary (AP)

There was an angry backlash from Democrats who had hoped to build a case for impeachment. House Speaker Nancy Pelosi and the top Democrat in the Senate, Chuck Schumer, issued a statement to Congress claiming the Attorney General’s letter “raises as many questions as it answers”. They said Mr Barr, who was appointed by the president a little over a month ago, was “not a neutral observer”.

“The fact that Mueller’s report does not exonerate the president on a charge as serious as obstruction of justice demonstrates how urgent it is that the full report and underlying documentation be made public without any further delay,” they added. 

The chairman of the House Judiciary Committee, Jerrold Nadler, said he will call Mr Barr to testify “in the near future” because of the “very concerning discrepancies and final decision making” at the Justice Department.

Robert Mueller (AP)

As he arrived at the White House after a weekend at his Mar-a-Lago private club in Florida, Mr Trump said only: “I just want to tell you that, America is the greatest place on earth.” 

Earlier, the president blasted the inquiry as “an illegal takedown that failed”. He also tweeted: “No Collusion, No Obstruction, Complete and Total EXONERATION. KEEP AMERICA GREAT!” Mr Trump’s daughter Ivanka Trump shared a quote on Twitter from former US president Abraham Lincoln. She wrote: “Truth is generally the best vindication against slander.”

The White House followed the president’s example by ignoring Mr Mueller’s insistence that he was unable to clear the president of claims he obstructed justice. The allegations stem from an accusation from former FBI director James Comey that Mr Trump suggested to him he could drop a probe into his then National Security Adviser Michael Flynn over his communications with a Russian diplomat. 

The initial findings were seen in Washington today as a boost to Mr Trump’s re-election hopes in 2020.

Mr Barr wrote that he intends to release as much information from the report as he can within the boundaries of the law.

The stock market rally got mugged by economic realities and a global slowdown

Traders monitor offers in the S&P options pit at the Cboe Global Markets exchange shortly after the Federal Reserve announced it was raising interest rates on September 26, 2018 in Chicago, Illinois.

Scott Olson | Getty Images News | Getty Images

So much for the rally. On Thursday, the S&P 500 got within 2.4 percent of its historic high only to tumble on Friday. We got mugged by slower global growth again.

Remember the bull narrative: The Fed and the central banks have our back, the tariffs are going to go away, the Chinese are going to stimulate their way out of the slowdown and the Europeans…well, this is probably the bottom in the lousy economic numbers.

While we do have a dovish Fed, that factor is now priced into the market. The president has made clear there may be no immediate reduction in tariffs, and the European manufacturing data — particularly Germany — was so bad that 10 year bond yields over there went to zero.

Here in the U.S., the yield on the 10-year bond fell below the 3-month yield, a so-called inversion that has in the past signaled a recession is around the corner.

So, the bull narrative is running up against reality. If this weak global economic growth narrative stays with us, it means stocks are pricey at this level.

The low interest-rate environment is having an effect on the markets. For the past several weeks, new highs on the S&P 500 have been exclusively interest-rate sensitive stocks of REITs (Equity Residential, Essex Property, Kimco, Mid-America Apartment Communities) and utilities (NextEra, American Electric Power, Exelon, Xcel).

This week, consumer stocks (Merck, Procter & Gamble, General Mills, Kimberly-Clark, Mondelez) have joined the crowd. It’s a defensively-priced new high list.

Regional banks are getting clobbered. Fifth Third is down 11 percent, Comerica is down 9.7 percent, KeyCorp is down 9.6 percent and Huntington Bancshares is down 9.3 percent.

While many worry about how a flat yield curve affects banking business, for most regional banks short-term interest rates are the most important determinant, and with 2-year yields essentially at their lowest levels in 12 months, that’s a problem.

A bank’s loan book would typically consist of a mix of commercial & industrial loans, most of which are tied to a shorter-term variable rate. Fixed-rate loans like auto loans are also tied to medium and shorter-term rates. Mortgage loans are tied to longer term instruments like the 10-year, but they are typically only 20 percent of the book of most regional banks.

Bottom line: Low rates are both a blessing and a curse for investors.

IPOs are red hot, doubling the return of the market, as Levi Strauss kicks off wave of offerings

After months of waiting, the 2019 IPO pipeline will finally open on Thursday with Levi Strauss. It is a perfect moment for the long-stalled IPO market.

Investors are salivating at the ocean of well-known names seeking to go public: The IPO market has continued to rebound since February, and the Renaissance Capital IPO ETF (IPO) is up a whopping 32 percent this year, more than double the S&P 500.

But there are plenty of warning signs:

1. The pipeline is getting ever larger.

Renaissance Capital, which tracks the IPO market, counts 37 companies in registration targeting $10 billion of proceeds. But that’s just the beginning: Renaissance has 234 companies targeting 2019 IPOs with valuations of nearly $700 billion, with a strong possibility that 2019 will be a record $100 billion year for IPO proceeds, passing the 2000 record of $96 billion.

It all sounds terrific, but there’s a simple problem: Who’s going to buy all this stuff?

«We are concerned about how the public markets will absorb all this issuance,» Kathleen Smith from Renaissance Capital told CNBC.

Her point is that the market is very different than it was 20 years ago. There are fewer individual investors. Many don’t even have brokerage accounts. They have financial advisors who do asset allocation using index investing and ETFs. These financial advisors often aren’t even stock pickers and don’t follow the IPO market. They are asset allocators.

«The era when your broker called you up and said, ‘We’ve got a hot deal for you,’ is mostly over,» Smith said.

2. There may be a disconnect in private valuations

«It appears to us like private valuations are very high,» she told CNBC.

Sure looks that way with Lyft: the last round of funding was $15 billion, and now the ride-hailing company is reportedly trying to get $23 billion. «We have a hard time coming up to that number,» Smith said.

Same with Uber: The last funding round for the ride-hailing rival was $76 billion, but the talk is they could try to get as much as $120 billion.

3. Low quality, higher prices

While early IPOs with reasonable valuations (Levi Strauss) might do well, the broader worry is that as the number of IPOs increase into 2019, lower quality companies will be coming and there will be less pricing discipline. That’s when we could see problems: «That’s how the market could roll over. In IPO land, the market builds up a head of steam, and then everyone loses pricing discipline,» Smith said.

4. Too much supply

The tidal wave of offerings could take investment away from the broader equity market and slow down the rally. Several traders expressed this concern, and on the surface it seems to make sense. There’s only so much money out there invested in public markets. But is a $100 billion investment in IPOs, which is the top end of the expectations, really enough to slow down the stock market?

Smith doesn’t think so: «Our studies show that early in the IPO market recovery, returns are typically good for investors because the issuers will be higher quality companies offered at reasonable valuations.» She cited Levis Strauss as a good example.

And think about this: Alibaba was a huge deal, and it didn’t kill any rallies.

Bob Pisani | CNBC

Regardless of the concerns, Wall Street is excited that a major part of the capital markets business is finally starting to function after a better than four-month hiatus.

How excited is it? There’s a sign on the floor of the NYSE today: «Reminder Trading Floor Community: Thursday, 3/21 Wear BOTH your Jean Jacket & Jeans.»

Twenty feet away, at the bottom of the stairs, there is this sign: «Blue jeans are not permitted on the trading floor.»

Big IPOs waiting in the wings

  • Uber $76 billion
  • WeWork $47 billion
  • Palantir $41 billion
  • AirBNB $31 billion
  • Pinterest $12.3 billion
  • Robinhood $5.6 billion
  • Peloton $4.1 billion
  • Postmates $1.9 billion

Source: Renaissance Capital

CEOs warn about slowing global growth, but that doesn’t mean stocks are headed for a fall

Traders and financial professionals work ahead of the closing bell on the floor of the New York Stock Exchange.

Johannes Eisele | AFP | Getty Images

CEOs are again warning about slower global growth, particularly in Europe and China, and the question is whether this means the stock market is headed for another December-like tumble.

Not so fast. Earnings may not be as bad as many fear.

Sure, it seems bad now that executives from several big companies — Federal Express, BMW, UBS — are warning about slower growth.

Federal Express, one of the few companies with a February-ending quarter, has elicited particular concern, as it has lowered guidance for a second time in a row. The Street was well aware of the global economic slowdown and weakness in China, the main issues cited by management. Indeed, Federal Express’ stock dropped 30 percent in the fourth quarter to reflect those concerns. It has staged a modest recovery since then but is still down 25 percent from the start of the fourth quarter.

Bulls that had been hopeful that Federal Express would not again lower full year guidance, or that the cut would be modest, were disappointed. The company’s guidance for full year earnings was cut about 8 percent in December, and was again cut about 3 percent on Tuesday.

Are we in for a tidal wave of earnings disappointments and even lower guidance when earnings season ramps up in a few weeks?

Maybe, but the odds are against it.

Word of a slowing Europe and China sent analysts into a panic in December and January. They aggressively slashed earnings expectations for the first and second quarter.  «They may have gone too far,» Nick Raich at Earnings Scout told CNBC.

At the start of the year, first quarter earnings for the S&P 500 were expected to be up 5.3 percent, but by the middle of February the estimates had turned negative. Since then the rate of decline has slowed, and in the last week it has settled. The expectation is that first quarter earnings will be down 1.6 percent, according to data by Refinitiv.

So far, so good

So far, six companies with quarters ending in February have  reported, and only FedEx has missed. The other five have all beat, including Autozone, Costco, Adobe, Oracle and Wednesday’s report by General Mills.

And of the group, only Adobe and FedEx gave lower than expected guidance.

Most importantly, those six that have reported have beaten estimates by 9.1 percent, Raich said, well above the normal beat rate. And that includes FedEx.

«Consensus earnings estimates were cut so dramatically, it looks like the beat rates will likely be above normal,» Raich told CNBC.

In recent years, companies have typically been beating consensus estimates by two to three percentage points. And that could mean earnings for the first quarter will turn positive.

That means that the much-feared «earnings recession,» where earnings decline at least two quarters in a row, will likely not happen. Or, at least, it will not happen in the first quarter.

The stock to watch on Wednesday is Micron, which reports earnings after the bell. Like FedEx, the chip company gets significant revenue from China and Europe. Like FedEx, it, too, dropped 30 percent in the fourth quarter on concerns about slower global growth. Like FedEx, it, too, issued guidance below forecasts at that time.

Will Micron follow FedEx and issue weaker than expected guidance?

My bet is that they will, but nothing like December, when first quarter estimates dropped about 30 percent from $2.40 to $1.60. Consensus is now at $1.56. Would another 5 percent to 10 percent cut in estimates drop the stock? Likely yes, but a drop would be more likely in the 5 percent range, rather than 30 percent we saw in the fourth quarter.

Where is the floor in the market? With so much bad news already discounted, the hope among the bulls is that the global economy stabilizes, central banks remain accommodative and further earnings cuts will be modest.

This survey of global investors is useful because it often pays to do the opposite of the crowd

Traders work at Goldman Sachs booth on the floor of the New York Stock Exchange in New York.

Scott Eells | Bloomberg | Getty Images

You have to hand it to the global fund managers. They’re a great bunch to play against.

Every month, Bank of America Merrill Lynch conducts a survey of roughly 200 global fund managers. What the trading community wants to know is how long or short they are certain key segments of the market?

Why? Because these are often contrarian indicators.

This month is no exception. For nearly three months, the market has been in an uptrend, but fund managers have turned defensive. They are long cash, REITs, utilities, health care, and emerging markets.

They are short equities in general (allocation to stocks dropped to the lowest since September 2016.), industrials specifically, and the UK and the Eurozone.

If you use this as a contrarian signal, it’s pretty clear: high cash levels is a buy signal for equities.

Even the authors of the report, which include Chief Investment Strategist Michael Hartnett, admit the value of its use as a contrarian signal: «contrarians would be long stocks vs. cash; long EU vs. EM stocks, long industrials vs. REITs.»

What’s all this mean? It means the «pain trade» for stocks is still up, as the report admits. That is, the market trend that would cause the most pain to the most participants is a continuing rise in the markets.

China slowdown is top fear

What worries this global bunch the most? The top risks remain a slowdown in China and a trade war. These were the two biggest worries of 2018, and they have remained so into 2019. What’s not on the list any more is fear that the Federal Reserve or ECB would make a «policy mistake» by hiking rates too fast. This was the big worry more than a year ago, but it has faded.

Investors have come to believe that central banks have their backs, and that is the primary driver of improving macro sentiment.

Another favorite to watch, «most crowded trade,» was to short European equities. Again, this is another classic contrarian indicator. «Long FANG» stocks was a favorite most crowded trade more than a year ago, and of course that went wrong in the fourth quarter.

Not surprisingly, «short European equities» is showing signs of playing out. After underperforming the United States for over a year, Europe (STOXX 600) has been outperforming the United States this month.

Fund managers get defensive (March Merrill Global Fund Manager Survey):

  • Long: cash, REITs, utiltities, health care, emerging markets
  • Short: equities, UK, industrials, eurozone
  • Contrarian signal: high cash levels is a buy signal for equities.

Now that the market has broken through key resistance, here’s what’s next

Traders work on the floor of the New York Stock Exchange.

Brendan McDermid | Reuters

The S&P 500 closed up 2.9 percent for the week, its best so far this year. It’s now at the highest level since early October, after breaking through key resistance levels near 2815, where it failed several times.

The S&P is now less than 4 percent from the old historic closing high (2,930 on September 20).

Key observations:

1) Traders increasingly believe global central banks have their backs.

2) With the CBOE Volatility Index at 12, its lowest level since October, strategies driven by volatility would likely add to stock exposure.

3) Bond yields continue to drop, remaining near the lows of the year. The new-high list this week was littered with interest-rate sensitive stocks (utilities, REITs) that rally when rates remain low.

4) Quadruple witching (quarterly expiration of index options and futures, and stock options and futures) has added a lot of volume this week and likely contributed to the upside rally. But the question is whether the expiration exhaust near term demand. The S&P 500 tends to be lower in the week after quadruple witching.

5) Europe (and the U.K.) have outperformed the U.S. this month. There are some hopes for a bottom in the recent poor economic data.

6) Downward earnings revisions are slowing to a crawl. The rate of downward earnings revision for the first quarter was intense from January into mid-February, slowed in the next several weeks and has essentially stopped this week. First-quarter earnings are now expected to be down 1.5 percent for the S&P 500, according to Refinitiv. If it stays in that range, there is a good chance earnings will be positive for the first quarter (companies tend to beat analyst estimates), and we will avoid an earnings «recession,» at least one that began in the first quarter.

7) The key to a further rally: positive comments on global growth. The two key names next week are Micron and Federal Express, which are both scheduled to report earnings. Both had big drops last quarter and saw lower earnings estimates on concerns over China and (for Micron) increasing competition.

How established companies can be bigger market disruptors than start-ups

6:53 AM ET Thu, 7 March 2019

Scott Snyder, partner at Heidrick & Struggles and fellow at the Wharton School, joins «Squawk Box» to explain the thesis of his new book «Goliath’s Revenge: How Established Companies Turn the Tables on Digital Disruptors.» He says that the market’s true disruptors may be big legacy brands like MasterCard and General Motors.