Daily Note – Teenager Kicks-Facebook v WhatsApp?


Facebook v Whatsapp:  What’s the business model?

United States: Fed Minutes along with comments from Williams hits US stocks

China: Flash Manufacturing PMI slows further suggest further easing from the PBOC

United Kingdom: Strong employment report despite tick up in unemployment rate

Eurozone: Poor French PMI Data sends the Euro lower

Morning from a sunny Istanbul.

The fog that shrouded the Golden Horn yesterday has lifted and the full magnificence of the city is there for me to take in from our room overlooking the Bosphorus. While physically the atmosphere may have changed here, a long chat with old Turkish friends – successful business people  – indicates that all is not good. When the middle classes start to pay for Canadian passports and send their kids abroad to school, you know there is something deeply wrong.

“Everyone has an exit strategy” was how one businesswoman put it.

The slow flight of the middle classes, if it becomes a generalized trend, is far more concerning than the fast flight of “hot money”. While the hot money affects the currency, the movement of the middle classes – who are as worried about Islam as much as economics – is more disturbing.

We will come back to that with an investment idea for you when the trip is over and I have assessed everything.

On an entirely different matter, I have just conducted my own personal experiment with four teenage girls who are with us on a two family holiday here. The girls, who are all still in bed, are glued to their phones.

When I ask the Facebook or WhatsApp question, they are all for WhatsApp. When I ask why, they all say it is quicker. Interestingly, they didn’t seem to notice that there are no ads on WhatsAPP, which may say more about the effectiveness of ads to this generation than anything else. One thing is clear: the speed of WhatsApp is crucial to them. In addition, the notion that they’d pay anything material – more that €0. 88 cents per year – for the pleasure seems an anathema to them. They all concluded that they’d miss a lot if they weren’t in their various WhatsApp groups.

This global teenage angst is what Facebook paid up for yesterday.

Overnight Facebook bought WhatsApp for $19 billion.

Since it was founded in 2009, WhatsApp has surged to the top of the fast-growing mobile messaging app industry. Some 450 million use the service each month and 70% of them are active on any given day.

It remains unclear what Facebook will actually get for the deal. The chat app’s founders have not been shy about voicing strong antipathy toward advertising-supported business models. If they don’t want advertising, how will they make it pay?

At the end of 2013, WhatsApp founder, Jan Koum, stated nonchalantly,

 “We view monetization as five, ten years down the road.”

The WhatsApp philosophy is that the more you concentrate on advertising, the more complicated the coding job becomes from engineers and it takes  away from focusing on the job of being the fastest messaging service around.

This is the major challenge for Facebook. How, apart from hovering up a potential competitor, will it make this mega-deal pay?

Is it any wonder that Facebook’s shares are down this morning?

 Given that this was the biggest VC -backed start up deal, the way to these riches is finding the next WhatsApp via the best VC funds and deploying a bit of capital there. We will look around for ourselves. We already have some exposure and will continue to monitor opportunities because when one comes in, it really does come in!

United States: Fed Minutes along with comments from Williams hit US stocks.

US stocks were hit yesterday as the geo political situation in Ukraine worsened. We warned you about this in our big bets for 2014 piece in early January.  The tone was also affected by Fed comments which suggested that the likelihood of a pause in “tapering” is remote, despite the weaker data. Again this is what we’ve been telling you for some time, particularly in the light of how QE exacerbated inequality which is something that goes against Yellen’s DNA. See piece here.

Highlights of the FOMC minutes

  • Several officials wanted ‘clear presumption’ in favour of $10 billion cuts to bond buying at each meeting
  • A number of officials said tapering plan should be adjusted if economy substantially deviated from expectations
  • Participants stressed it would soon be appropriate to change forward guidance on the first rate rise
  • Market expectations for QE and rate rises well aligned with Fed view
  • Some participants wanted the statement on goals to explicitly say below-target inflation is as undesirable as above-target inflation

The Minutes to the January 28th-29th FOMC meeting provided some useful insight into the way that the Committee views the recent economic data, the future of forward rate guidance, and the future for tapering. Specifically, the Minutes indicate that widespread support for the ongoing tapering process remains intact in spite of the weakness in the economic data leading up to the meeting. The Minutes also show that there is widespread distaste for the use of the 6.5% unemployment rate threshold in the forward interest rate guidance. There is no clear consensus on exactly how the guidance should be changed, but there is a common view among the Committee members that it should be changed soon.

Meanwhile at a financial conference FOMC board member and super dove Williams made some interesting comments regarding the threshold for pausing the “taper” of asset purchases

  • Recent data has been somewhat disappointing
  •  ‘Hurdle is pretty high’ for changing taper pace
  • Now is not the time to for pulling back on taper

Williams was speaking on CNBC. The Fed has been united on these messages.

  • Fed needs to move away from thresholds and back to verbal guidance on first rate rise.

Sounds like the Fed (along with the BoE are feeling a little boxed in.

In plain English, this means that the Fed is a little bit confused as to how to get out of the corner it has boxed itself into. My understanding of all this is that the Fed will keep things as easy as possibly for as long as necessary.

After a sustained rally in stocks in recent days, and given that the economic data has not followed (see Mondays note) the equity market higher it may now be time to take some short equity market exposure against our long China position. As we have talked about our preferred market to be short is the French market through the


We will update readers on Twitter should we decide to make this investment. Just to note short equity positions tend to be shorter duration positions.

United States: Housing market weakens as Producer prices rise more than expected. 

Table 1 20 feb

Housing starts collapsed by 16.0% in January (consensus -4.9%) to 880k from an upwardly-revised 1048k in December. The decline was roughly even across categories with single family starts down 15.9% and the more volatile multifamily category was down by 16.3%.

Weather again was cited by respondents as a major problem in yesterday’s Homebuilders’ Index. In the Midwest, where weather conditions have been especially adverse relative to seasonal norms in recent months, starts fell to their lowest level in the 55-year history of the series. In fairness, anyone who has ever worked on a building site, including myself, knows you don’t lay foundations on frozen ground!

On the inflation front, both headline and core producer prices rose 0.2% in January (vs. consensus +0.1% for each). Prices paid for finished goods rose by 0.5% – the largest gain since 2008.

With CPI data out later today, we continue to see inflationary pressures building in the US economy

China: Flash Manufacturing PMI slows further suggest further easing from the PBOC

Table 2 20 feb

The much anticipated China HSBC/Markit Flash PMI data came in at 48.3 in February (Bloomberg consensus: 49.5); down from the January final reading of 49.5. Most of the sub-indices showed signs of a cyclical slowdown. Production index declined to 49.2 from 50.8 in January, and the new orders index decreased to 48.1 from 50.1. The only exception is the new export order index – it inched up to 49.3 this month, from 48.4 in January.

As we have talked about before China January and February activity data are normally distorted by the Chinese New Year effects. Even taking account for this, the PMI number is a disappointment, with further weakness in February from what was already a poor number in January. The January-February average of most indicators showed signs of a cyclical slowdown. Given the degree of weakness in recent data we can be fairly sure that growth has been weakening since 4Q 2013.

The weaknesses are likely to be the combined result of tight monetary policy stance and heightened anti-corruption and anti-pollution campaigns. While January exports data were very strong, they may have been distorted by the Chinese New Year effects or over-reporting by exporters to facilitate FX inflows. There is no conclusive evidence to gauge how large these effects are at the moment, though final February data as well as trading partners’ imports will help to complete the picture in the coming weeks.

There are some signs of a slightly less tight monetary policy stance since the start of the year amid signs of slowing activity growth and falling inflation (including property prices). The 7-day repo rate has fallen to around 3.8% in recent days. However, the decision to re-start repo operation to drain liquidity by the PBOC signals that it is not in a rush to loosen policy aggressively.

China stocks were unchanged overnight despite the weaker data. For the moment the market is more concerned about the liquidity picture and weaker data suggest a need for losing of current PBOC policy. We remain long the largest 25 China companies through an ETF traded in the US on the NYSE.

South Africa: Inflation accelerates faster than expected 

Table 3 20 feb

CPI inflation came in at +5.8%yoy in January, slightly above consensus (+5.7%yoy) expectations. Core inflation was stable at +5.3%yoy, flat for the fifth month in a row. The acceleration was driven by energy prices (due to the weak Rand) and food prices (due to drought conditions). This inflation is consistent with the SARB’s recent revision of its inflation forecast motivated by a revision of its assumption for the Rand and the impact of extensive droughts on food prices.

This acceleration in inflation, if sustained, would likely lead the SARB to hike rates further. Like Turkey, we see scope for the macro economic backdrop to get worse in South Africa before it gets better. Although we have some personal exposure in SA and the higher deposit rates may generate “hedged” income for us.

United Kingdom: Strong employment report despite tick up in unemployment rate

Table 4 20 feb

The British are creating jobs at a fair rate these days. Even though, the headline unemployment rate rose from 7.15% to 7.21%, behind the headline rate, employment was strong.  193,000 jobs were created in the three months to December. This rise was accounted for by a 68,000 rise in participation and a 124,000 decline in unemployment.

The number of jobless claims fell by 27, 600 in January, while the decline in December was revised up to 27.7k. The amount of people claiming the dole has now fallen by 220,0000 in the past six months. Despite the continued decline in unemployment, earnings growth remains weak. The annual growth rate of Average Weekly Earnings (exc. bonuses) averaged +1.1% in the three months to December.

Looking at the chart below you can see a move down in the unemployment rate over the last 18 months from 8.3% to 7.2%  and you can see that the trend in average earnings (black line) is still down.

Figure 1: UK Unemployment & Avg Weekly Earnings

Chart 1 20 feb

This is all good news for Carney who is seeing a real drop in the UK NIARU – see our earlier note .

This all means that we still want to buy Sterling.

After Sterling’s recent good run, we saw some profit taking on the tick higher in the unemployment rate. We continue to be patient on GBP looking for an entry level above 0.8400 against the Euro to get long GBP.

Eurozone: Poor French PMI Data sends the Euro lower

Table 5 20 feb

Just out this morning we got further evidence of a slowdown in the Eurozone, with further weak (final) inflation data for January and a very poor flash PMI number for France. This suggest further downside to our short Euro and potential short French stock market investment.

Portfolio: Hawkish FOMC minutes help out our portfolio 

Table 6 20 feb

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