Trader Talk: An analysis of the markets this morning

Good morning,

Markets are called lower this morning. This is what's happening today:

• The euro was little changed at $1.2725 and touched $1.2722 yesterday, the lowest since Jan. 17;

• The Shanghai Composite Index slid 0.4% after reports over the past week showed slowing Chinese growth, with exports, industrial production and new loans missing analysts’ forecasts;

• The political impasse in Greece deepens speculation the country will have to leave the 17-nation currency bloc. Greek leaders will seek agreement today on new elections as early as June 10;

• Japan’s economic growth probably peaked in the first quarter, a Bloomberg News survey showed ahead of a report tomorrow. Analysts forecast the pace of expansion will halve by year-end as the boost from earthquake reconstruction fades;

• The U.K. jobless rate probably increased to 8.4%, according to the median forecast in a Bloomberg News survey before a government report at 9:30 a.m. in London;

• German Chancellor Angela Merkel and French President Francois Hollande said they would consider measures to spur economic growth in Greece as long as voters there committed to the austerity demanded to stay in the euro;

• Facebook’s shares are set to price tomorrow and begin trading under the symbol FB on the Nasdaq Stock Market the following day. The world’s largest-social networking website is increasing by 25% an offering that was initially set at 337.4 million shares, the people said, asking not to be identified because the change hasn’t been publicly disclosed;

• 10-year Italian debt is yielding 5.864%, 10-year Spanish debt is yielding 6.347% and 10-year Portuguese debt is yielding 11.421%;

• Brent is trading at $111.16/barrel.

We are seeing weakness in the markets and in my opinion it can get much worse than it already is, wiping out all the gains the markets saw in Q112 especially if the a Greek political party opposing the bailout package is elected in June. Investors are putting risk back on the table as the Greeks go to the polls increasing the probability of the country exiting the Eurozone. As volatility in the markets increase so does the value of the VIX index which came down heavily from its high in Sept 2011. My advice is to stay out of Europe and stay out of financials for the time being. Europe is fundamentally cheaper than the US though the future of the Eurozone is still a question mark. There is no visibility and when there is no visibility, it is hard to call a bottom.

It is true that the Chinese economy is suffering from the lack of demand and foreign direct investment from Europe. However, the Chinese economy is still growing at a healthy rate and it is only a matter of time before the Government carries out further expansionary monetary policy.

Moving on to the US, companies keep on reporting good results despite the weakness coming out of Europe. So it is good to monitor these companies and when we start getting some clarity out of Europe, start purchasing these stocks. If you stay long the dollar and are exposed to low beta stocks, your portfolio shouldn't be the victim of large volatile swings.

I wouldn't rush into selling stocks at this point in time especially if you took my advice and invested in US corporates and emerging markets ETFs. The strength of the dollar is acting as a hedge to your portfolio. Stay overweight the Dollar and US and Emerging markets stocks. Remain underweight the Euro and European equities for the time being. There will come a time when it would be wise to shift out of the US and into European stocks. Though this could take months or even years before we start seeing some positive news coming out of Europe.

BUY LINKEDIN before the Facebook IPO

Everyone is waiting for Facebook to come to the market so that they can get a piece of the action. It is true that in hindsight these types of IPO lead to a rally on the very first day of trading though keep in mind that valued at the upper end of the new range, Facebook would be valued at 26 times trailing 12-month sales, more than double Google Inc.’s valuation when the search-engine operator went public in 2004.

Ask yourself why do you want Facebook shares? I am convinced that most of you haven't gone through an extensive valuation model to try and determine an intrinsic value for the share but have just based your decision on gut feeling. My advice is to buy Linkedin instead of hoping for a remote possibility of getting an allocation for Facebook. Linkedin closed the session at $110.56/share yesterday. The company reported a strong 1Q, with continued 100+% revenue growth as well as EBITDA upside at 20% margins. JP Morgan are bullish on the stock. Hiring Solutions, Marketing Solutions, and Premium Subs all exceeded expectations and they are raising our outer year estimates considerably to reflect stronger than expected growth and continued secular shift. JP Morgan expect shares to respond favorably to LNKD's steady upside and margin outperformance, and they are raising our price target to $135. Goldman Sachs have a price target of $150/shares and Piper Jaffray have a price target of $145/share.

Main points from a JP Morgan report on Linkedin:

• Revenue continues to grow 100+%. Hiring Solutions rev of $103M came in ahead of our $99M estimate driven by better than expected LCS customer additions. We are encouraged by the positive feedback LinkedIn has received on Talent Pipeline and believe it will further strengthen the value proposition of the Recruiter platform. Marketing Solutions growth of 73% exceeded our 55% estimate as the business benefited from increasing engagement and improving click rates. And Premium Subs rev growth (+91%) accelerated from recent quarters, with members paying for premium subscriptions growing more than double the rate of overall members.

• EBITDA upside despite headcount. 1Q EBITDA came in at $38.1M (20% margin), above our $28.1M (16% margin). Gross margin leverage drove some of the upside, resulting from greater revenue scale, sales taxes passed onto customers, and LinkedIn's new local payments platform. LinkedIn added 331 employees during the quarter, most of which expanded the company's international salesforce, and 2Q headcount is projected to increase by 350-400. Despite anticipating some deleverage in sales and marketing, we are raising our 2Q EBITDA estimate to $45M (20.6% margin) from our previous estimate of $40.6 (19.4% margin).

• Thoughts on SlideShare acquisition. LinkedIn announced the acquisition of SlideShare for ~$119M in cash and stock, inclusive of retention fees. We believe the acquisition fits nicely into LinkedIn’s strategic mission of building and sharing professional identities. We do not expect much impact to 2012 numbers, though we expect modest revenue build up over time from SlideShare.

• Raising estimates and PT to $135. Our 2012 revenue comes up 5% to $904M and our EBITDA up 9% to $181M. We are more significantly raising our outer year estimates to reflect strong fundamentals and continued secular shift. Our PT goes to $135, representing ~14% upside to current levels (based on after-market pricing).

For further information on Linkedin or other stocks we follow, contact our offices on 25688688.

Good day and happy trading!

Kristian Camenzuli