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The Great Wall Street Marketing Machine: How To Protect Yourself From The Hype

Summary Wall Street firms, Research analysts, CNBC, Ratings agencies, and Brokerages have one job: Sell you, John / Jane Q public, overpriced stock just before its “best before” date. Sales efforts always intensify near major market inflection points, both to sell you stock, and keep you from selling your existing hyped stocks (before they do). The more they promote a stock as being “world changing”, “unlimited potential”, “new paradigm” and such terms, the faster you should run from investment. The later in an investment cycle we are (like today I believe), the more cautious you should be about all high valuation / beta / “future potential” stocks. Watching a group of high-beta leaders can provide an early window into future, broader “risk on” appetite. Canaries in the coal mine. “Those who tell; don’t know, those who know, don’t tell” Or maybe those who tell….are being purely deceptive. This article is a follow-up to my May Article, “What Wall Street Doesn’t Want You To Know: The Foolishness Of Chasing The Most Popular Themes”. I strongly encourage a review of that article at this time. In that article I led with the following points: Summary As Warren Buffett opines, in the short run, the market is a voting machine, and in the long run, it is a weighing machine. The analyst community and many investors who follow it are so often late to the party regarding a popular stock, and so are doomed to long-term underperformance. Wall Street is not a friend of the individual investor. Early-stage investors and insiders use aggressive Wall Street buy ratings to offload positions bought at an earlier stage. The best way to outperform – focus less on the popular theme and more on the next sector rotation in the market. Remember this Core Value: Wall Street firms, Research analysts, CNBC, Ratings agencies, and Brokerages; including the vast, vast majority of Financial Advisors have one job: Sell you, John / Jane Q public, overpriced stock, IPO’s, “special products”, and leveraged loans and debt offerings, all just before their “best before” date. They are not your friend and ally! Accept this fact and take personal responsibility for self-education, and you will avoid future large losses, accompanied by those infamous words “No one could have seen this coming”. Yeah, Right. In this article, we will examine case studies of various high-potential stocks, and how their story and performance have evolved, from the peak period of excitement to today. It is my goal to raise awareness of how the Wall Street marketing machine works, and how one can defend themselves against being swept up in the hype, through a skeptical eye, close focus on the integrity of management, and thorough, common-sense research. Note: Y Charts are not working. I’ll attempt to add later. CASE STUDY #1. GoPro (NASDAQ: GPRO ) GoPro went public in July 2014, first traded at $30.00 and rapidly rallied to over $95.00 by September. What is notable was the accompanying commentary and related world view on this company promoted as fact at that time; which is the purpose of these studies. Whenever at $80 – $90 and above questions came up about valuation for this mobile action camera maker, the answer was simple from the many promoters: “It’s not a camera maker – it’s a Digital Content Platform, acquiring high quality Video that can be Monetized for Billions of dollars by GoPro – therefore its growth potential is Unlimited and it Can’t be valued as a Camera Maker” It’s becoming a “movement” according to FBN , just prior to its highs. Along with a charming and “cool” CEO, note the exciting language often used by Wall Street: CEO has an awesome vision; Digital Content Platform; Content to be Monetized; Growth potential is Unlimited; Valuation metrics are different. (than everyone else) Sounds exciting, doesn’t it? Too bad the stock makes one want to shoot a GoPro horror movie. It is currently making post-IPO lows in the $28.00 area, with no support in sight. What’s FBN saying now about the stock? Still trying to suck you in. Think you should ever listen to FBN again? Makes you wonder what conflicts we may not know about. Others are throwing in the towel. Perhaps they have less conflicts, or have had enough embarrassment. Kind of late though isn’t it? Ironically after a large wave of downgrades, GoPro may be a better risk for those inclined, as the Wall Street hype machine…changes channels. Case Study #2. Shake Shak. (NYSE: SHAK ) Shake Shak is a New York-based burger chain that went public to amazing levels of hype, as if the hamburger had been invented. It ran from its IPO range in the $40-50 area from February of this year all the way to – again – the $95 area, and has been selling off since, threatening now to break its post- IPO lows, not an uncommon theme these days. The problem with Shake Shak and many New York IPOs is, while due to the huge and dynamic population in the New York Metro area, there is room for many, many successful ideas of all kinds, that are not necessarily transferable at the same growth rate to Topeka, Kansas, or anywhere else. This is where the Wall Street hype machine gets into gear. Take a modest sized, wildly popular – partly because it’s “new”, and adventurous New Yorkers love new, cool things – NYC-based burger chain, extrapolate its growth rate and valuation per store. It was something in the area of $15 million, far, far greater than McDonald’s by many orders of magnitude – across the entire nation – and take it public! So with my family, I did some personal research. On my next trip to New York, I went to….Shake Shak. It’s a burger place. I was frankly underwhelmed when considering the quality in the context of the hype level. There are a lot of good burger joints. This stock I could see surviving, as I can GoPro, but both at much lower prices than today’s, as the hype machine fades in light of results typical of a…Burger joint! And ultimately…it should be valued as such. See folks, for every Chipotle (NYSE: CMG ) there are a hundred, a thousand busts. If turns into the next , I don’t need the hype to convince me. Their organic growth will prove it over time. The Street thinks SHAK is a great deal. Too bad, insiders don’t think so. This massive insider offering – at post-IPO low prices – is a massive red flag, ‘get out now’ signal. Not that Wall Street will ever tell you that. Their job is to “hold your hand” so you don’t sell! Do what I say, don’t watch what I do. Wall Street’s Motto. Case Study #3. Tesla (NASDAQ: TSLA ) Talk about a hype story! This stock is truly the king of them all. If you invest in Tesla at today’s valuations, even its bulls will tell you, you aren’t investing in a car company, at car-company valuations. The first trick Wall Street uses is simply change the label. It’s not a camera company, it’s a content provider. The stock isn’t valued on earnings!!! – it’s valued on “clicks”, “unique visitors” or some other metric, because the good old-fashioned GAAP (how quaint) earnings present so ugly. Notice nobody on TV wants to talk about GAAP earnings? Tesla isn’t a car company, although it sells cars. So, what is it? It’s a new technology company It’s a revolutionary energy company It’s an environmental savior It’s changing the world Its CEO, Elon Musk, is a hero and grand visionary The inference is, you should buy the stock after each one of Elon Musk’s tweets, and pay no attention to either the valuation, or risks of this investment. This is dangerous thinking. And the stock is starting to soften as the analyst community backs off of its all-in bullish stance, just a fraction . The risk on any growth stock, or potential growth stock, may well be expressed as an inverse relationship to the amount of hype expressed on that stock. The truth is – I’m not about to start a fundamental debate on Tesla, and we have a few of those on SA if you’ve noticed – is that perhaps Tesla will live up to all of those accolades I listed above. I think the Model S is an amazing car from all reports, and I commend Elon for shaking up the industry. But admiring the (first) car, admiring the vision, does not make the stock a great investment! These are 2 very, very different discussions, and when risking hard-earned capital, pure vision is far from enough. The bottom line is Tesla is a car company. It is a young, disruptive, energizing car company, but with enormous financial risks, looking out 3 or 4 years. And so, it is only even considerable as an investment candidate, if it is valued as a car company, and carefully weighing all factors – the risks alongside the potential. There are dozens of examples, folks. The risks are high and everyone is rooting to discover the next Apple (NASDAQ: AAPL ) or Microsoft (NASDAQ: MSFT ), but truthfully they don’t come around too often. I trust this post will help evaluate the hype and story through a different lens, and help filter the noise around different opportunities we are all presented with. It’s all so much about expectation levels, and identifying when those are too high, for our chosen investment ideas. If we can do this, we can decrease portfolio risks and increase long-term results. Best wishes to all investors.

Same old song: Apple, Beats top teen headphone brands

Stereo headphones from Apple (AAPL) and its subsidiary Beats Electronics drown out the competition when it comes to U.S. teen consumers. Piper Jaffray’s semiannual survey of U.S. teenagers found that Beats by Dr. Dre is the No. 1 brand of headphones. Asked which brand of headphones they planned to buy next, 44.2% of teens said they planned to get Beats, up from 41.9% in the spring and 43.7% in fall 2014. Apple ranked second with 31.7%, up from

Tax-Free Income From Municipal Bond CEFs

Municipal bond CEFs can provide attractive yields free from federal taxes. I survey the tax-free CEF category in this report. The category has seen an upsurge in interest which has begun to take a toll on the attractiveness of some funds. Tax Free Income I’ve been spending a lot of time looking at tax-free-income, closed-end funds (municipal bonds) recently. It would appear that I am not alone. For the last two months, muni bond CEFs have sustained the highest relative strength index of all CEF categories as classified at ETF Screen . This chart showing RSI for CEF categories is built from their data. (click to enlarge) I find it interesting that the upsurge in RSI for muni bond CEFs dates from just about the time I wrote a series about them ( Tax Free Income from Municipal Bond Closed End Funds ) in mid-August when I felt the category was rife with bargains. It seemed clear to me at the time that the category was ready to move up. In light of the intense interest the data in the chart indicates, I thought I’d take another look. Keep in mind, however, that chart technicians tend to see RSI values this high as an indication of being overbought, so the chart may well be trying to tell us that this is not the time to be adding municipal bond CEFs. As I’ve done in the past I want to try to paint a graphic picture of the space and follow up with a brief look at some funds that look interesting. I’ll follow up in a few days with details on specific funds. First, a look at distributions. Here’s the spread for the whole muni bond category of CEFs. (click to enlarge) To put the tax-free return in perspective, I’ll add this table of equivalent taxable returns for federal tax rates assuming normal interest income. (click to enlarge) Regular readers know that I like to buy funds at a discount, especially at a discount that is outsized relative to the fund’s recent history. This chart shows the current distribution of discounts and premiums for the 99 funds in the category as listed on CEFanalyzer . (click to enlarge) Over the past six weeks the range has shifted toward lesser discounts. The average discount has lost two points. Discount/Premium 25-Aug 12-Oct Average -8.81% -6.84% Median -9.86% -8.31% Low -14.68% -13.12% High 7.36% 12.87% Z-Scores tell us a lot about the directions discounts and premiums are moving. Here are current Z-score distributions for 3, 6, and 12 months. (click to enlarge) (click to enlarge) (click to enlarge) What we see is a strong shift over the past year toward more positive Z-scores demonstrating reversion to the mean for discount/premiums across the category. A year ago the median Z-scores stood at -1.43%; today it is 0.13. Another interesting metric is the relationship between NAV distribution and discount. What makes this indicator valuable is the tendency for CEFs to move toward some price distribution yield equilibrium through adjustments of discount status. CEF investors are primarily investing in the income. We see the repeated occurrence of high discounts on funds with lower distributions on NAV as buyers are less willing to pay for the lesser income distributions. Similarly more modest discounts, even premiums are found on funds with higher distributions on NAV. This relationship is seen in the next chart. I’ve added labels, but the amount of information here is such that the labels are in many cases, unreadable at this scale. The primary point of the chart is to show the overall relationship, so it should not matter except at the edges, which are readable. I’ll zoom in on the most interesting cluster next. (click to enlarge) The trend line here shows the positive relationship between NAV distribution and discount/premium. Funds that lie below the trend line tend to present more attractive entry points than those above the trend line. That is not to say that funds above the line are unacceptable for purchase. There are many complex factors that go into the market’s pricing of any given fund, distribution yield is only one, an important one but not the only one. The r 2 for the linear trend is only 0.15, so this relationship only accounts for 15% of the variation in discount/premium. Quality factors especially will often override the tendency shown in this chart. A fund might be priced at a lesser discount because, for example, has a more attractive portfolio on credit quality or effective duration. My own bias is to avoid funds at the upper ranges of distance from the trend line and to use this chart to identify candidates for a closer look. With that in mind, let’s look at that dense cluster crowded around the -10% discount and 5.5% NAV distribution point. (click to enlarge) I’ll note here that some of my favorite funds lie just above that line: The Dreyfus Strategic Municipals (NYSE: LEO ) and the Blackrock Investment Quality Municipal Trust (NYSE: BKN ) are two that I have owned in the past and I consider them both to be good funds. Note that the cluster most distant from the line holds a large fraction of Nuveen funds. I don’t know why it is, but Nuveen funds seem to hold deep discounts over long time frames. Last time I looked at this, I picked out 13 for a closer look. Five of these were Nuveen funds which, as I noted, tend to carry a perennially deep discount, so this is not a great indicator for those funds. Those 13: The MFS High Yield Municipal Trust (NYSE: CMU ) and the Municipal Income (NYSE: MFM ); the Dreyfus Muni Bond Infrastructure (NYSE: DMB ); the Eaton Vance Municipal Bond I (NYSEMKT: EIM ) and II (NYSEMKT: EIV ); Nuveen’s Muni Advantage (NYSE: NMA ), Muni Mkt Opps (NYSE: NMO ), Select Quality Muni (NYSE: NQS ), Dividend Advantage 2 (NYSEMKT: NXZ ) and 3 (NYSEMKT: NZF ); and Invesco’s Muni Investment Grade T (NYSE: VGM ), Adv Muni II (NYSEMKT: VKI ) and Muni Opps Trust (NYSE: VMO ). The 13 funds have a total gain of 2.51% which sounds good until I add that the entire muni bond space averaged 2.41% over the same time frame. Here are those 13 and their returns since that time. The funds in green beat the category average. Note that if we drop the Nuveen funds from consideration, the average goes to 3.05%. That’s not to say that Nuveen funds should be avoided, merely that I don’t think this indicator applies as well to them as it does to funds with more volatile discounts. If we look at the Nuveen funds alone it turns out there is no correlation between discount and NAV distribution. (click to enlarge) This suggests that the indicator has no value for evaluating Nuveen’s muni bond funds. There are other factors driving discount dynamics that are more important for this set of funds. Of course discounts alone are not sufficient to make a decision on a fund. Duration is an important consideration, especially with interest rate anxiety so prevalent in everyone’s thinking. The nature of how data is reported means that one can only screen on average maturity, which is a much less telling metric than effective duration. The top five funds for portfolio maturity and a distribution greater than 5% are the Deutsche Municipal Income (NYSE: KSM ), the Deutsche Strategic Muni Income (NYSE: KTF ), the AllianceBernstein Nat Muni (NYSE: AFB ), the EV Municipal Bond II and the Putnam Municipal Opportunities (NYSE: PMO ). Working from this list, we can go to Morningstar where effective duration, leveraged and unleveraged, plus weighted average credit ratings for the portfolios can be found. Note that Morningstar’s weighted credit rating score may differ from that of other sources as their weighting system more heavily weights lower credit quality holdings. (click to enlarge) We see that the screenable metric, maturity, is a poor predictor of the more relevant metric, duration, but it’s the best starting point we have for a group of funds this size. EIV would seem to be the choice here. It rose to the top at my last look and it is still there today. It is paying 5.9%, somewhat under the category median of 6.1% and right on the category median. The discount just beats the median of -8.31%. Portfolio maturity is in the top 10 and effective leverage is the best of the five top funds for average maturity and distribution greater than 5%. Its weighted average credit rating is the best of the lot. Also worth noting is that EIV is an AMT free fund. The two Deutsche Investment Management Americas funds (KSM and KTF) are interesting. They are yielding about a half point more than EIV. Their modest discounts, especially KSM, and lesser credit quality puts them a step behind EIV for me. KTF beats KSM on credit quality and discount, but lags on distribution and duration, so it’s a bit of a wash choice between the two. Expenses on the Deutsche funds are modest at 0.64%, well below EIV (1.20%), AFB (1.04%) and PMO (0.96%). Leverage for each of these is in the mid 30% range which is typical of the category. For those who prefer to avoid leverage, there are two funds with under 2% leverage. They also have the shortest portfolio maturities in the category. As expected they have significantly reduced yields relative to the leveraged funds. These are the BlackRock Muni 2018 Term Trust (NYSE: BPK ) and the Nuveen Select Maturities Muni (NYSE: NIM ). (click to enlarge) Fees on these two funds are low, 0.64% for BPK and 0.58% for NIM. Yields are, as noted, low relative to the leveraged CEFs, but competitive with unleveraged municipal bond ETFs such as the iShares National AMT-Free Muni Bond ETF (NYSEARCA: MUB ) which has an effective duration of 6.34 years, weighted average credit rating of AA, and at 2.58% yields significantly below either of these two funds. It is AMT free, however. BPK is 28% subject to AMT, but NIM is only 3.2%. I’ll be back with a closer look at interesting funds that may provide attractive entry points at this time.