QE Can't Save These 2 Stocks

Includes: CRM, MSFT
by: Hedgephone

Whether warranted or not, the last two rounds of Quantitative Easing saw broad equity market gains and proved to everyone who was paying attention that fighting the Fed is inherently a loser's game.

What makes the latest round of QE "sterilized" in my view (and no we aren't talking about Op. Twist, reinvestment, or hypodermic needles) is the fact that the equity markets are quite top-heavy and overvalued, the fact that the world has become much less stable, and the fact that most developed economies are suffering from bloating debts and ineffective and/or corrupt bureaucrats. We keep hearing that increasing globalization is vital for business success, yet the world we live in has become increasingly more unstable in part due to this globalization and new technologies (the revolutions aren't televised but they are organized via Twitter).

The big issue around the globe and for Europe in particular, of course, is long term debt and government largesse. If you want to save the world, organize and think locally and take action one step at a time -- relying on the State to eschew an egalitarian and socially just socialism to replace the capitalist system is not only naive but also incredibly un-American.

It would seem that Europe has essentially become the victim of a well planned "debt for control" hostile takeover investment strategy (basically, loan someone or a nation money against undervalued collateral and try to bankrupt them so you can foreclose).

If corporations are indeed people, then some corporations are doing a good job of oppressing their human competition. Nevertheless, the unfolding economic order emerging around the planet right now is one of oligopoly and with a scientific backbone and so far many of the solutions proposed by world leaders benefit the 1/10th of the 1% the most (like QE3 for example) but are usually spun to look as though they are helping the little guy flipping burgers. Yes, the environment is faltering (my number one concern as a citizen) and population control is essential (isn't that why we have planned parenthood?) but placing people into the highly technological urban control grid described by Alex Jones of Infowars.com is going too far.

The Apple (NASDAQ:AAPL) iPhone can track your every movement, your search history will be sold to the highest bidder, and your Facebook status could be beamed directly to Fusion centers to see whether or not you might be the next "White Al Qaeda."

While most of us are all for national security and defense (though not pre-emptive defense or world policing), we of course recognize the Golden Rule and that the unending quest for empire and riches are in conflict with almost every major religion throughout the world and is unsustainable environmentally. Unfortunately, the people's reaction to the crises unfolding became Occupy Wall Street. OWS went from centering on the horror of complex derivatives, banksters, fraud, and the need for Glass Steagall to protesting things like hard work and economic freedom (aka capitalism).

As they say, don't get angry, get even. Don't bash Joe the Plumber. Instead, pick out some hyper-bubble stocks to short against your undervalued long positions and see if markets violate the 50 and 200 day moving averages or form a double top that can be equitably sold short. QE may stop that from happening but stagflation is the result.

We think the major investment banks are to blame for most of our nation's problems and it's obvious that they have reaped billions by dumping hot dot IPO shares onto the public markets. Here are some of the most frothy issues we can find in the stock market, why we think they are overpriced, and how investors can bet against these shares either to hedge existing longs or to bet against the companies outright. We are quite bullish on commodities and bearish social media right now, but we obviously recognize the game changing nature and power of teenagers chatting it up over the internet.

LinkedIn (LNKD) -- Linkedin shares have actually done quite well even while Facebook's (NASDAQ:FB) stock has cratered to some degree since their disappointing IPO. Trading at 967X trailing earnings and 90X forward earnings, we think LinkedIn shares are pricing in overly optimistic growth assumptions. Sure, this is not your ordinary company with a 2% return on equity, but the lack of profitability has to be dealt with soon or the 12.7 Billion dollar price tag investors are putting on LNKD might prove to be vastly inflated over the long haul. As far as cash flow is concerned, LinkedIn is badly lacking any type of recurring operating cash flow since the majority of cash flow from operations comes from increasing liabilities -- a red flag but not a gigantic one since most internet growers exhibit this same trait. Insiders are also dumping millions of dollars of LNKD stock each day and this too is a red flag. All told, if you think stocks may fall despite QE, selling LNKD call spreads makes sense. We think selling the October or November $120 calls and buying the $130 calls is a wise "trade" for conservative investors who want to hedge the technology or social media stocks in their portfolios.

Salesforce.com (NYSE:CRM) -- To me, Salesforce shares are the ultimate bubble. The company is not profitable, has little to no cash flow, and operates in a highly competitive market. The CRM market is also quickly becoming a commodity because competitors are trying to do the same thing as Salesforce for a fraction of the price. Already, cloud based services are marketed based on a "low cost leadership" model in that the price points for Cloud data storage are lower than hardware storage -- sure they are maybe more convenient and "social" but at the same time many argue that data is less secure on the (someone else's) cloud. Sure, the cloud is the future in many ways for many companies, but we don't think the hype will turn into meaningful return on capital for investors buying CRM shares at $152. With an EV/EBITDA of 117, CRM investors are vulnerable to advances made by competitors such as IBM who are looking to grab market share in the cloud. Tangible book value has fallen almost every year at CRM and this is a long term trend toward bankruptcy not "becoming the next Microsoft."

Disclosure: I am short CRM. 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.

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