In terms of analysis, is Twitter the new Facebook?

After reviewing what analysts are saying about Twitter’s earnings report yesterday, I find it hilarious and coincidental that much of what Wall St. is saying mimics exactly what we heard about Facebook a year+ ago. Even though Twitter more than doubled their revenue YoY, all of the focus has been on their user growth. User growth for the year was only 25% rather than the expected 30% (#OMG!). Active users increased 5.8% over the quarter (#SMDH).

I thought it would be worth reminding everyone that while Facebook’s user growth was still frowned upon in May of 2013, the stock would go on to almost double in price over the next 7 months. This is because regardless of what short-term focused analysts will have you believe, price eventually reflects growth in revenue, profits, and earnings… not users.

To that effect, investors should be pleased that Twitter’s revenue is growing so quickly. That growth should eventually translate into better earnings. Not to say Twitter will double in the coming months or that they will ever grow to be the behemoth that is Facebook… but maybe a -10% day is a bit dramatic.

Profit Margins: The Epicenter of the Valuation Debate

Is this market overvalued… or have valuations actually reached a “new era”?

via Profit Margins: The Epicenter of the Valuation Debate.

It’s my opinion that a combination of increased availability of information (the internet), and falling wages and rates since the 80’s/90’s have pushed valuations to a new normal that is higher than historical norms would suggest. I do believe we will witness margin compression as wages and rates rise sometime in the future (sooner than later hopefully)… however, IMO, this would be a short-term issue that would self-correct as demand increases due to increased wages and yields. This would push revenue and earnings higher regardless of moderate margin compression.

Great read. Take a look when you can and share with your buddies.

What if I told you this bull was born in 2011?

Did everyone just re-write history by forgetting we had a 20% correction (i.e. end of a bull market) in the fall of 2011 on a intra-day basis? Granted, this was on the heels of a downgrade on US debt and mainly a politically driven drop… but it did happen, didn’t it? Maybe I was just drunk and that whole time frame is a distorted memory.

Food for thought for those of you who think this bull market is getting long in the tooth. If you decided not to forget about 2011, we’re really only approaching this run’s 3rd birthday. Considering this, if we go back to the “start” of this “new” bull market on October 3rd, 2011 (closing low during that period), we would say that the base for this latest run began at 1099.23 on the S&P 500. Let’s take a look at some data from S&P on the average annual returns of all Post-WWII bull markets to begin our new comparison:

Now, lets compare those average annual returns to what we have witnessed since our “new” 2011 bull market:

Using the historical averages of modern bull markets, we should expect the S&P to be somewhere around 1800 on October 3rd of this year. That would mean at Friday’s close we were actually overvalued by slightly more than 2%. Given today’s early gains we are actually even more overvalued. This would seem to support election year seasonality in the fact that we would need a sell-off or sideways trading for a decent period of time in order for the market to become overly attractive again. 

I would expect volatility to increase from here regardless of geopolitical events. We need a new catalyst to really send this thing higher when considering valuations, earnings growth, and potential for margin compression as wages rise. Long-term I remain very bullish on equities, but I wouldn’t be surprised to see 10-year yields fall back to 2.5% and equities suffer in the short-term.



Monday’s Goods

Howdy. Here’s a few things you should read today:

I definitely recommend reading the piece on Sir John Templeton. Anyone who has bought a mutual fund has probably at least heard of Franklin Templeton… but they probably know very little about the person who founded the company. 

Inflation, and Sentiment, and Wages… OH MY!?

With all the craziness going on it’s nice to see that things may be (and I want to emphasize “may be”) calming down as investors start to realize this probably isn’t the end of the world and rather a healthy drop in the market. That’s not to say there aren’t plenty of things to worry about, but there also a few positives starting to show up that could help stabilize equities. Here’s a glimpse of what others are saying today: