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Friday, April 12, 2024

Friday Finale – This is the End – But for Who?

SPY DAILYA day late and a point short on the S&P.  

Our senior index finished the day at 1,358.04, just 0.96 under our 10% line at 1,359.  Oddly enough, it never actually crossed the line that we had predicted would be the top of this run in April of 2009.  It's a simple 2% overshoot of the 100% run from the S&P bottom at 666.  

If the S&P can get over the line and hold it – we will be THRILLED to finally redraw our Big Chart but, if not, then this is just the blow-off top of the range, reeling in the suckers ahead of the big reversal that no one could have possibly seen coming (except this guy but he's like 100 and just got divorced, so he's bound to be in a bad mood).  

Is there anyone who was born SINCE radio who is willing to still be bearish?  As you can see from David Fry's chart, since December 19th, other than a few red days out of over 40 – it's been tough to be a bear.  This is what it was like in 1999, when the experienced market players would be well-hedged and missing the rally while some kid who works for him quits because he bet his student loan money on Yahoo and now drives a Porsche.   

Sure 9 months later the Porsche was repossessed and the kid was flipping burgers but WE WANT TO BE THAT KID – IT'S FUN TO BE THAT KID – until it isn't again.  The funny thing is, we only gave those dot com companies Millions when they IPO'd – now we give out Billions because, of course, this time is different, it's a new paradigm, this changes everything, you have to understand the new metrics, sock puppets rule….  

McDonald's was founded in 1940 by two brothers actually named McDonald.  Ray Krok bought the chain from them and created the World's greatest franchise which now has over 26,000 franchise operations and over 6,000 company stores employing about 1.7M people worldwide selling $24Bn worth of food a year with a $5Bn net profit.  Facebook has 3,200 people but they generate $1.2M in revenues per employee ($3.8Bn) and drops $1Bn to the bottom line.  Facebook's assets are mainly IP and those are about as valuable as MySpace's assets now that people have lost interest.  McDonald's has $30Bn of cash, plants, equipment and real estate and only $2.5Bn of "Goodwill," which includes their brand name.  

Facebook likes to say they have 800M users and I remember when McDonalds first rolled their sign into the 1,000,000,000 range.  Now 27M people a day eat there, 9.85Bn people a year – enough for every man woman and child on earth and clearly, the MCD customers are generating 4 times the revenue of the Facebook customers and 5 times the profits.

McDonalds' value was discovered over time and it's actually short-changing MCD to say they are "only" worth $100Bn as people forget that CMG, the new "hot" chain was spun out of MCD and now has $2Bn of sales of it's own with $200M in profits – perhaps not as good as MCD but they get a phenomenal $12Bn valuation (2.5x MCD's p/e ratio) because they are new and exciting and this time is different and it's a new paradigm which changes everything and you need to understand the new metrics and I hear they are getting a sock puppet (they already have the happy cartoon pigs getting brutally slaughtered).  

Think about it, when you steer your car to a McDonald's, you have made an affirmative decision to take $5 of your hard-earned money and exchange it for food.  Not just any food – their food!  They sell you food and they drop $1 to the bottom line and they do that 27M times a day – THAT'S A BUSINESS!!!  What does Facebook do?  They are free, so of course people like them – they sell advertisers your eyeballs at a rate of $3M per day for 800M eyeballs, which is 0.375 per eyeball.  MCD makes 25 times more per customer than they do in profits alone!  

Will Facebook get 25 times more customers?  Not unless we colonize other planets (Newt says the Moon is nice) as that's 20Bn people on Facebook.  Will Facebook be able to convince advertisers to pay them 25 times more for each current customers or – let's say they double the number of customers and get advertisers to pay them "just" 12x more per customer – 48 cents each for people who are not even buying anything directly sounds steep, doesn't it, especially when MCD, for a FACT, makes $1 from each of their customers and that's a Dollar that the customers carry in AND HAND RIGHT TO THEM!  Wow, it's just like we learned about way back in business school

Of course my BUS101 teacher had long hair in a pony tail so what did he know?  I had this same conversation with people in 1999 about Yahoo and many other dot com companies and boy oh boy was I proven wrong – for about 6 months.  I've been wrong calling a top in this rally for over a month now.  To this moment I'm still too cautious because – as I keep reminding our members – we can make 20% or so anytime we want to with our Buy/Writes in a bull market but, as I explained last night:  If you lose 20% you have 80% and then even if you make 20% back, you only have 96% whereas if the market drops 20% and you are hedged and don't lose, then you can afford to buy 125% of the stocks that you liked when they were 20% higher (using our same hedges to protect against an additional 20% drop) and, when those come back 20%, you have 150% of your original money.  

A person chasing a rally has to be right 2 and half times to catch up to a patient, well-hedged player who is right once.  This is why Warren Buffet likes cash (and he did just cash out some major positions) – he plays for the long-run.  While we all want to be the kid who gets rich quick and drives away in the Porsche – it's also nice to be the guy who retires with money and gets to relax sipping lemonade on the porch.

Have a nice weekend, 

– Phil


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