The yield curve among German government bonds is currently inverted. There are few more reliable signs of an impending recession than an inverted yield curve.
Chart source: Bloomberg, September 25, 2011 15:02 AKST
Disclosure: I am short EUR/USD.
The movements of Moody’s BAA corporate bond yields are a little hard to anticipate in advance, but over the past few months they have been forming a distinctive falling wedge pattern, often seen as the harbinger of a reversal. With the end of QE2, it seems reasonable to expect a rise in interest rates, with a likely trajectory being the one that interest rates began to follow before QE2 took effect. Nobody knows for sure exactly what will happen with interest rates over the next few weeks or months, but it may be a good time to consider moving to a net short position.
The LinkedIn IPO has generated quite a bit of buzz lately, and from a look at the relationship between their revenue and operating cost, it’s not hard to see why: It looks like they may have entered a stretch of increasing marginal operating profit, which might support rates of growth that increase over time.
It does look like perhaps LinkedIn has had some trouble handling high rates of growth in the past, particularly in 2008, when operating costs increased sharply. Revenue and operating cost appear to pretty closely follow exponential rates of growth, but there isn’t a lot of confirmation that revenue is actually growing faster than operating cost… odds of success look about 50/50. Then again, if revenue really is growing faster than operating cost, at those rates, LinkedIn could experience extraordinary rates of growth. How long the growth might last is an interesting question. LinkedIn is large and well-known, but they are surely far from saturating the market for professional social networking services. I estimate that their revenue could potentially multiply itself by several times over the next decade.
Be aware that LinkedIn shareholders are selling only a very small percentage of its shares today. Their revenue growth is not a sure thing but appears to have quite a bit of potential for investors who are not risk averse. But given the small amount of cash that will be raised relative to its valuation in today’s IPO, it is a good idea to wait if you want to grab a piece of LinkedIn.
Bonds have rallied over the past few weeks. The rally has been surprisingly strong, and bonds appear to be overpriced. They may rally further, but there doesn’t appear to be a lot of upside potential to the rally. The blue channel looks less likely to guide interest rates than it did a few weeks ago.
Source: SEC
As you may be aware, Zipcar has an IPO tomorrow. I’d suggest that at this point, Zipcar looks like a poor investment. They will most likely turn profitable at some point, but that looks unlikely to happen in the next year. It is plausible, but the odds of profitability over the next 12 months are less than 50/50. There is quite a bit of buzz surrounding the IPO, but I would suggest that if you want to purchase Zipcar for the long run, understand that it carries a rather significant amount of risk, and it may be a long time before you get a return on your investment.
Considering all the excitement surrounding the IPO, the shares may soar, or Zipcar may turn into the next Vonage. Check to see which way the wind is blowing before sinking your teeth into any Zipcar shares.
A quick look at Moodys BAA corporate bond yield suggests that they may be near the top of a channel that looks likely to extend in the near term (so bonds may be a good short-term buy), but as the Fed ends QE2, BAA yield rates appear likely to rise. Expect most financial markets to take a haircut as interest rates rise.
Note: The contents of this article are highly speculative, and should be interpreted as such. Consult with your financial adviser before making any investment decisions.
Greetings. I have been busy lately, but I thought I would drop an update on IBM. As suspected in an earlier post, IBM was showing indications that its price was too high. But where is IBM headed now?
It’s hard to really say for sure, but I think it is most likely headed upwards. Why? Well, IBM recently experienced high trading volume, and it is now trading above the price level where most of the high-volume trading happened. This indicates some degree of price support; a lot of investors (or investors with a lot of money) thought that IBM was worth buying at not much lower than its current price. While it is true that a lot of investors (or investors with a lot of money) also thought that IBM was worth selling below its current price, most likely, those investors were panicking and therefore less likely to make rational decisions than the ones who bought IBM at those prices. Make sense? I think so. Be wary, though, if the price drops below 153.
Consult with your investment advisor before making any investment decisions.
Update 2011/03/18 09:00 AKST: I was shocked to learn today of allegations of bribery against IBM. It is reported that they have decided to settle for $10 million, without admitting fault. Their stock price appears to have been affected little by the allegations. Often when large computer companies get charged with a crime it means one of their competitors is about to get awarded a lucrative government contract, so perhaps HPQ or MSFT is a better bet in the short term.
Update 14:30 AKST: I wouldn’t buy it, but despite the allegations, IBM’s price is still looking bullish.
If you look at a lot of stock charts, you probably know that IBM’s price pattern over the last few weeks looks particularly ominious. The rain hasn’t started yet, but the clouds are gathering.
Perhaps its price pattern will clear up soon, perhaps it won’t, but IBM looks more bearish than bullish.
Update 07:07 AKST: IBM spent most of the morning in the red, jumping into the black briefly following the publication of this Motley Fool article. It is currently back in the red but trading somewhat higher than prior to the publication of the article.
Update 07:34 AKST: IBM has been flitting in and out of the red and currently appears to be on an intraday uptrend. It’s hard to say exactly what the outcome will be, but it looks like profit taking may start around lunchtime on the east coast.
Update 08:02 AKST: Demand evaporated at 11:44 EST, prior to a precipitious decline that brought IBM into the red, where it so far remains. Here’s the chart:
Update 08:12 AKST: Prices have rebounded somewhat from their earlier lows, and market activity is showing signs of small bullish investors (via Yahoo!):
Update 08:45 AKST: Prices have continued to climb, apparently driven largely by small bullish investors. They are currently bouncing in and out of the red. I wouldn’t be surprised to see some selling after the bears return from lunch, but we’ll see.
Update 09:00 AKST: It looks like an intraday peak is forming.
Update 09:06 AKST: Prices have pulled into the red and appear to be slowly cutting through the line of small bulls. Apparently some small bears have also joined the fray.
Update 09:15 AKST: The bears have been pushed back, and prices are currently in the black by a small margin.
Update 09:17 AKST: The bears pushed back, and prices are currently in the red by a small margin.
Update 09:19 AKST: The bears have continued to push prices downward
Update 09:24 AKST: Prices are currently flat.
Update 09:44 AKST: The bulls have been gaining momentum and have pushed prices into the black, with the small bulls nowhere to be seen.
Update 09:47 AKST: The bulls have continued to push prices upward on increasing momentum.
Update 09:48 AKST: Looks like a good time for a short sell limit order at 163.50.
Update 09:51 AKST: Scratch that. There are some high volume bids coming in.
Update 09:53 AKST: On second thought, the bids are getting filled…. So yeah. 
Update 09:59 AKST: Prices fell and have settled around 163.43 in what looks like a bear flag cycle.
Update 10:08 AKST: It looks like they are bottoming out at 164.24.
Update 10:14 AKST: Nope, prices dropped even further and are now back in the red.
Ok, so… as entertaining as all this is, I have work I need to do. If I’d been playing with real money today, I would have made about 0.32%–minus commissions. So if I had $25,000… I would have made about $65 today, after commissions, or about 0.26%. That’s only about 68% per year, not counting risks, effort, and stress–and I wouldn’t be able to spend the money as I make it. Obviously, another approach is needed.
Update 1:00 AKST: Here is today’s chart.
If I ever decide to spend this much time following IBM again, perhaps I should get a Twitter account.
Moodys BAA corporate bond yields have spiked upwards over the past week (a look at the daily chart reveals some sharp declines as well). It looks like yields will most likely fall over the next week, returning to current levels before long.
IBM’s price has continued to climb on declining volume. I don’t see any impending doom on the horizon, and most technical indicators look fantastic, but if volume doesn’t pick up, a correction is inevitable.
