Introducing the TechCrunch Bubble Index

Today, I thought it could be interesting to introduce the TCB Index that has been making the ‘headlines’ lately. First of all, what does the Index tell us? The TCB index counts the number of headlines on TechCrunch (blog: see techcrunch.com) over the past 90 days relating to startups raising money (‘startup fundraise’ means that the amount raised was at least $100K and less than $150mio). Therefore, the higher the index, the better the fundraising environment.

For instance, if we have a look at the chart below (source: Todd Schneider’s website), we can see that the startups business has been going through a difficult time for the past few months. On November 16, 2014, the TCB Index was at 209, which means there were 209 TechCrunch headlines about startup fundraise in the 90 days preceding that (roughly 2.3 per day), down from a high of 346 in April this year.

bd3d54b425264b6a7e36457106aac14a.640x400x1

 (Source: Todd Schneider)

Quick thoughts on Twitter’s IPO and the dotcom bubble 2.0

It makes me think the way I felt when I saw the headline ‘Twitter files for IPO’ last year. As a reminder, the company sold 70mio shares on the IPO (November 6, 2013) at $26, raising $1.82bn in its Initial Public Offer. In addition, I was asking myself how a company, that wasn’t profitable at the time it went public, could be valued over 10 billion dollars?

In its first public financial statement, Twitter reported $79.4mio in losses for the year 2012 (after a negative net incomes of $67.32mio in 2010 and 128.3mio in 2011), and was predicting even steeper losses for 2013 (guess what: losses reached 645.32mio that year).

I concluded that we were in a second dotcom bubble. Below I added a chart from the Wall Street Journal (which sums up briefly what I just said).

Val

(Source: Wall Street Journal)

 Is it just the beginning?

Today, as the TCB Index shows us, there is less money in the startups business and we are starting to see some weaknesses. For instance, we heard lately that Fab (a design-focused commerce company), a once-to-be Silicon Valley’s darling valued $1bn back in June 2013, is about to sell for $15mio according to some sources (the acquire: PCH International) as it had struggle to sustain its growth. With the Fed considering starting raising rates for the first time since 2009, are we going to experience more of those cases?

 ‘A thing is worth only as much as it can be sold for.’

Publilius Syrus

Quick thoughts ahead of the Fed’s minutes…

Last month (October 8th), while many investors were quite confident on the US Dollar strength momentum, the minutes of the FOMC’s September 16-17 policy meeting clearly showed us a message from US policymakers.

If you ask me if I see a stronger dollar in the LT against most of the currencies, I would answer yes and without any doubt. I think the Fed is comfortable with a Dollar appreciation, however I strongly believe they want the process to be slow and gradual. Despite strong recent fundamentals (another NFP above the 200K level in October for the 9th consecutive time, an annual 3.5% first Q3 GDP estimate, ISM Manufacturing PMI still above 50, Housing Start fluctuating around 1mio for the past year…), global economic issues will weigh on US policymakers this time.

Let’s start with the first issue: the decline in oil prices. December Crude Oil WTI futures contract (CLZ14) is down $30 since end-of-June’s high, now trading below the $75 level. While we mentioned in one of our previous article that the decline in oil prices will be problematic for a lot of OPEC countries (see article Oil Breakeven Prices), it is now entering into critical levels even for the US. I heard and read that low oil prices could be seen as a stimulus for consumers, however it is now at levels hurting US shale production. According to some experts, most shale oil fields breakeven is seen between $70 and $75 per barrel (see chart below from Barclays Research).

ShaleBreakeven

(Source: Barclays)

 As a reminder, the US, now producing around 8.5 million barrels per day (8.65mio in August 2014 according to the Energy Information Administration), was expected to surpass Russia within the next 10 years and grow its production by 35% to approximately 11.5mio barrels per day (see chart below from the Wall Street Journal).

OilProduction

(Source: Wall Street Journal)

Therefore, if prices continue to fell, the party could end earlier than expected. In addition, lower oil prices will add pressure on inflation expectations and the 2-percent target that the Fed is watching desperately. Important figure to watch tomorrow, CPI inflation is expected to remain steady at 1.7% in November. Any print below that would create a bit of US Dollar weakness as traders will start to lose credibility on the quantitative definition of ‘considerable time’.

Speaking of disinflationary pressures, let me go to the second issue: Dollar strength. Back in the minutes, Fed officials mentioned that they saw ‘rising dollar as a risk to exports and growth’. At that time, the USD index was trading at a 4-year high above the 86 level, and up 8.5% approximately since July low of 79.78. Today, the index is trading at even higher levels (87.60), thanks to the BoJ and the Yen development and EM meltdown. We saw that September US trade balance printed its biggest deficit since April at $43bn (vs. $40.2bn consensus), up from $40bn the previous month, due to a decline in exports (down 1.5%). In my opinion, ‘Dollar strength’ will be one of the topics tonight, therefore we could see some dollar weakness after the release. In addition, Dollar strength will also weigh on inflation expectations in the US (I don’t think the inflation effect of dollar appreciation is negligible, especially couple with lower oil prices).

Therefore, I see a bit of disappointment this evening, and I will encourage some of the US Dollar bulls to cut some of their long positions. The Euro and especially the British pound could recover from their recent losses, technical resistances are seen at 1.2670 and 1.5800 respectively.

Don’t fall in love with your US Dollar positions…

As you know, the Fed stepped back from the market by announcing the end of the QE3 era last Wednesday. However, another major central bank, the BoJ, took over by increasing [eventually] the amount of its current bond-buying program by 10tr Yen to 80tr Yen (and tripled its purchases of ETFs to 3tr Yen). You saw the consequences since then, with USDJPY that tested a new 7-year high at 114.00, up almost 5 figures in two business days. The Nikkei closed above the 16,400 level on Friday (16,413.76), but didn’t participate to the overnight development as Japanese market were closed due to Culture ‘holiday’ Day.

To sum up, the Fed is done with QE [for the moment], however we have two other big players – ECB and BoJ – which are trying to do whatever it takes to keep pushing asset prices higher. As a reminder, the ECB plans to increase its total balance sheet by 1tr+ EUR within the next couple of years to come (now is it possible? That’s a different story. See article ECB dilemma: Whatever it can…).

It looks to me that the chart to watch now is the total big-4-central-bank balance sheet. As you can see it on the chart below, 10.5tr USD were injected into the market since the GFC; and from what I hear and read, we are far from done…

CBs

(Source: Barclays)

One thing that makes me uncomfortable at the moment is the sharp appreciation of the US Dollar against all the currencies. I believe even though US policymakers are conscious the USD will strengthen in the long term, however I think that they are looking for a slow and gradual increase.

In its last minutes, the Fed expressed its concerns about the rising dollar (too fast indeed is what they meant) and its negative effect on inflation and US exporters. The market has to accept that, otherwise the topic will come back on the table each time (minutes, meeting, semi-annual testimony…).

Quick update on the Euro

The single currency broke its strong support at 1.2500 against the greenback (which represents the 76.4% retracement of the 1.2040 – 1.3991 interval) and the pair is now trading at a 2-year [and 2-month] low, down 11% over the past six months. There are rumours (ECB Source) that the Fed launched currency war telling the ECB not to push it too fat (concerning its exchange rate). It tells you that the next and final retracement traders will look at is the 1.2040 low reached on July 20 2012.

EUr03Nov

(Source: Reuters)

FX positioning

I am still comfortable on being short EURGBP, targeting the 0.7750 retracement (entry level 0.8000, stop loss decreased to 0.8000). Watch the ECB and BoE meetings this Thursday.

I would like to add another position on today’s update: short AUDNZD at current levels (1.1270), with a target at 1.1140 at first and a stop loss above 1.1360. I know that the late inflation figures in NZ (which came in lower than expected at 1% YoY vs 1.3% consensus) will weigh on RBNZ officials to consider getting back in the tightening cycle, but I am comfortable with short the pair at the high of the range as you can see it on the chart.

AUDNZD03Nov(Source: Reuters)