Ed’s Daily Notes for July 22nd   4 comments

Market Watch: Yellen encourages ‘fully-fledged equity bubble,’ says Jeremy Grantham

Jeremy Grantham blasts Janet Yellen and her predecessors at the Federal Reserve in his latest quarterly letter.

The Fed chairwoman is “sticking faithfully” to the “clearly wrong” policies of Alan Greenspan and Ben Bernanke, writes Grantham, who is the founder of Boston-based money manager GMO and has a reputation for sniffing out market bubbles early.

He says:

“She will not use interest rates to head off or curtail any asset bubbles encouraged by the extremely low rates that might appear. And history is clear: very low rates absolutely will encourage extreme speculation. But Yellen will, as Greenspan and Bernanke before her, attempt to limit only the damage any breaking bubbles might cause.”

Grantham criticizes Fed officials for not learning from history:

“I had thought that central bankers by now, after so much unnecessary pain, might have begun to compromise on this matter, but no such luck, at least in the case of the Fed. The evidence against this policy after two of the handful of the most painful burst bubbles in history is impressive. But not nearly as impressive as the unwillingness of academics to back off from closely held theories in the face of mere evidence.”

He said Yellen’s statements in early July have boosted the chances that the U.S. stock market will become completely bubbly:

“This affirmation of moral hazard – we will not move to stop bubbles, dear investors, but will help you out when things go badly wrong – should be of great encouragement to speculators and improve the odds of having a fully-fledged equity bubble before this current episode ends.”

On the other hand:

In addition, Grantham backs his prior call that the bull market probably won’t end for a year or two, not before the S&P 500 rallies past the 2,250 level.

I have a ton of respect for Grantham. He is a value investor in the mold of Warren Buffet, but without the good ole boy b.s. that Warren likes to peddle. Pay heed.

Business Week: Netflix’s 50 Million Subscribers Face a Flood of New Shows

Netflix’s second-quarter results popped out Monday afternoon, and here are the highlights: The company posted revenue of $1.15 billion vs. $837 million in the same period last year. Its net income hit $71 million, up from $29 million, and it now has more than 50 million customers worldwide—50.05 million, to be precise. Investors gave Netflix (NFLX) a pat on the back for increasing its subscribers at a healthy clip, sending shares 1 percent higher in after-hours trading.

The article goes on to point out all of Netflix’s new content, which is a fairly impressive list. But the rest of the analysis nails Netflix’s competitors:

…you have to feel gobsmacked after digesting Netflix’s list of shows. Whatever Amazon.com (AMZN) and Hulu are working on can’t match this in quantity or quality of talent…

Netflix has spent more and risked more to become a real competitor to HBO (TWX) and Showtime (CBS) in programming while maintaining a technology edge over everyone. When Netflix first set out on this strategy, it was easy to predict a bleak future in which the company would spend itself to death buying shows that no one watched. Netflix took a huge risk, although hindsight and the rising subscriber numbers are making it harder to remember just how gutsy the move was.

Neither Hulu nor Amazon seem as good at making or marketing their shows. Hulu’s shows tend to come off as amateurish, while Amazon’s are just hard to find and trapped in the company’s clunky interface. It’s unclear to me how either company will compete with Netflix over the long term unless they’re willing to go bigger and risk more.

In my view, Netflix IS the future of television. Amazon will eventually wake up and get on board with the new paradigm. Hulu is still a big question mark.

As for Netflix’s stock, it is still overpriced (if you swapped Apple’s earnings report for Netflix’s, then NFLX might be properly valued). With a potential market crash looming on the horizon (next year?), there just isn’t enough upside to take a chance on NFLX right now. But when the markets crash, Netflix should return to a valuation that makes it far more appealing. NFLX is still on my watchlist.

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4 responses to “Ed’s Daily Notes for July 22nd

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  1. Ed, nice read on netflix. I like the company and management LT. Love to buy but as you say, not at these prices. If there is a significant drop at any point in time, I’ll take another look.

    • We are big time and long time Netflix users. We did have cable for six months back in 2003 but thought this was a waste of money and just aren’t into commercials.

      I thought the market crash was to happen early this year not next year?

      • Was that DeMark again? Isn’t he always right? Timing is just off.

      • I do read that Grantham believes the market will move up another 14% before his market predicting crash.

        Lost my train of thought. I just looked up to see a mother and two baby Bobcats walking through our front desert, up into the front patio — outside the window maybe 10 feet away, and then around the east side of the house.

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