As seems to always be the case, the market has started to tank while your author is traveling. Regardless, here's my quick take on Monday's dramatic selling.
Monday saw big losses for global equity markets. The US indices were all down close to a percent, and this was far from the worst showing globally. In fact, most countries saw heavier selling than the US markets.
This was very much reflected in some classic risk-off trades. Volatility was one big mover. After going dormant since February, the VIX index sprang back to life, up 23% on the day to put in its first close over 20 in more than three months.
The volatility ETFs - VXX, UVXY, SVXY and so on - made huge moves. VXX was up 14.8%, good for its 8th-largest one day percentage increase ever. Normally, VXX moves with about a four-to-one ratio to the S&P 500 (NYSEARCA:SPY). As such, you'd generally expect a roughly 4% gain on the day. Instead, it rose close to 15%.
Make no mistake, this is a market that was heavily short volatility and got caught badly off balance now that new highs have been decisively rejected. On a similar-sized drop in stocks on Friday, the VXX was up less than 10%.
What happens next? This sort of mounting fear while stocks slide steadily often leads to a big washout sort of day. I'd be cautious buying the dip just yet - the move in volatility implies something big may be coming.
While it's tempting to say people are overly worked up about the possibility of Brexit, the selling isn't just about that. There have been plenty of pent-up reasons to sell stocks. Among them are renewed weakness in China, poor earnings, rising recession odds, and troubling action in the credit markets.
While Brexit may be the straw that broke the camel's back, there were plenty of reasons to think the odds of a correction were mounting as the S&P 500 struggled to top 2,100.
Speaking of bonds (NYSEARCA:TLT), they continue to soar to rarely-seen-before levels. And yields continue to slump to record lows abroad in places including the UK, Switzerland, and Germany. The credit markets are preparing for some sort of deep global economic freeze.
I was left puzzled when stocks surged following the poor jobs data recently. Yes, it's a bit of a plus that the Fed isn't going to hike, but what it implies - that the economy is too weak to support even a modest rate hike - is far from a good thing.
Without a rapid turn in sentiment, we will have now entered a correction. I see little reason to buy stocks before the S&P tests at least 2,025. Bulls had plenty of chances to push through to new record highs, and they failed. Now sellers are in charge, and I'm in no rush to buck the trend.
Microsoft: Late To The Party
While Microsoft (NASDAQ:MSFT) has seen improved fortunes in recent years, its reputation for a lack of vision as to the future of technology remains firmly ingrained. To that end, its latest deal - an all-cash buyout of LinkedIn (NYSE:LNKD) - is straight out of the company's well-worn playbook.
Like Microsoft heading into the MP3 player market well after Apple had conquered it with the near-dead on arrival Zune, the deal for LinkedIn strikes one as being tardy and ill-planned.
For starters, there's few clear synergies between Microsoft and LinkedIn. What are they going to do - make us upgrade to Windows 10 in order to keep logging onto the site? Better mobile integration between LinkedIn and the vanishingly small number of Windows phone users?
The deal is dilutive to earnings and far too expensive. Is LinkedIn really such a hot property that you want to pay almost 100x EBITDA for it? Generally, as a investing strategy, paying $26 billion in cash for a property yielding $300 million of annual free cash flow would be judged as a poor deal.
While Microsoft remains a cash cow - Windows has held up much better than most people were expecting - there's still little investment rationale for the company if it wastes the money on non-core, overpriced acquisitions.
If you're long Microsoft, you want the company using that stream of free cash flow to pay dividends or buy back stock. If it can find profitable ways to internally reinvest money, that's good too. But buying a fading social media has-been property after the buzz is long gone? It adds neither immediately accretive profits or much real potential for such in the future. Not only is there no steak, you hardly even get any sizzle.
The only real winners here are LinkedIn stockholders. If you held through the quarterly earnings report back in February, where the stock got hit for about 40% of its value overnight, Microsoft has offered you a graceful chance to exit without a loss.
Beyond that, this deal seems like a loser for just about everyone. If you're a LinkedIn employee, it's probably time to update your resume, given Microsoft's ownership of web properties generally ends poorly.
As for other social media names, there may be some "me too" trades into companies like Twitter (NYSE:TWTR) or Yelp (NYSE:YELP). I'd be wary of chasing the buzz, though - I don't think Microsoft overpaying for one sector player will spark much of a broader M&A rush.
Finally, famed short seller Citron Research was out with a call to short Facebook (NASDAQ:FB) on Monday. Citron didn't disclose the reasoning for this, citing media distraction in the wake of the tragic shooting over the weekend as a reason to stay mum for the time being. Regardless, I can't imagine what the thesis will be other than overvaluation, which everyone is already aware of.
To be frank, I see little exciting on either the long or short side of social media. By the time Microsoft starts picking over the remaining M&A targets, the herd would long have moved to greener pastures.
Disclosure: I am/we are short SVXY, UVXY.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.