Archive for June, 2011

Just Move Bonds To Electronic Markets Already

By: ispeculatornew | Date posted: 06.30.2011 (5:00 am)

I’ve discussed many times how much I appreciate the arrival of bond ETF’s because it helps retail investors such as myself have a fair shot at trading bonds. It’s amazing to me that in this age of transparency and speed trading, bonds remain an OTC market where buyers and sellers pay wide spreads to enter or exit their positions without truly knowing if they are paying a high price. That has made life miserable for smaller investors who usually end up getting screwed when buying and selling bonds.

It’s Easy To Understand Why Things Have Not Changed

One big reason of course is that the brokers that buy and sell these bonds do not really want to move to electronic trading. Why? There are many different reasons but a big one is the fact that these brokers would see much diminished spreads/profits on their bond trades losing an important part of their profits. Another part of course is that listing bonds is much more complex than stocks as there are millions of listings with different features, etc. That would certainly make things interesting for the exchange.

The Case For A Move To Electronic Markets

I think it’s about time that someone launched a better way to trade bonds. Why?

Volume is way down: You could argue that part of the story is the lack of volatility and the record low yields that are not attracting buyers. But that is only part of the story. Offering a fair chance for all parties involved would certainly help pick volumes up.

Added transparency: In an age where regulators are seeking increasing transparency, I think that moving all or most of bond trading to electronic trading would do a lot to increase confidence

It can be done: A decade ago, traders thought it would be impossible for futures to trade electronically as stocks had done and yet that is exactly what has happened with even the Nymex moving to the 21st century trading world.

Good for the economy: If companies could get a more clear vision of what their borrowing costs are on the bond market, it would help them better manage their debt more efficiently.

What is the Downside?

Even if not all issues (some are very illiquid) became listed overnight, I still think it would be a good idea and would improve the overall bond markets. Do you agree?

Reader Question About Beta Considerations In Our Trading

By: ispeculatornew | Date posted: 06.29.2011 (5:00 am)

Today, we are answering a very good question that we received by email. As always, we are more than happy to get feedback and are more than happy to answer your questions.

Kenneth – “I had a question about your long/short portfolio. It seems to be that your long positions tend to have a higher beta than your short positions. This is just a cursory impression and I have no firm evidence of this. For example, your recent paring of BIDU and RST. This becomes a problem in a bear market, when BIDU drops faster than RST. Do you have an opinion about this?

First off, I would like to start by saying that this is a very interesting question and one that I’ve been thinking about but had not done appropriate search on the subject. Before getting started, I think it’s appropriate to explain what a “Beta” is in case some of you have not heard the term. A beta is the “correlation” of a stock with the overall market. A stock that acts exactly like the market (increases by 2% for a market increase of 2% and vice-versa) would have a beta of 1. A stock that reacts the complete opposite of the market would have a beta of -1.

I think it’s safe to say that the average technology stock has a beta over 1. These stocks outperform markets in good times and do much more poorly in bad times. The point that Kenneth makes is a very valid one and before looking at the data, I would tend to agree. Why? Because one of the more frequent ways that I use to select new trades is finding two stocks that trade at similar P/E ratios but have different growth outlooks. In such a case, I think it’s fair to assume that I would generally end up being long the higher beta and short the other one.

Why Being Long Beta Matters

In short, if I always own stocks that have a higher beta than the stocks that I short, it would mean that when the market rises, I would (all else being equal) gain and I would lose on market declines.

Difference Between Long/Short Trading And Market Neutral

I am well aware that my portfolio is not “neutral” and it is not intended to be. Generally, hedge funds separate these two categories. Long/Short funds will have the ability to buy and sell stocks but have a market exposure while “market neutral” funds should be dollar neutral (beta neutral would be even better but that is much more difficult to achieve).

How Big Has Been The Exposure?

I decided to take a look at all the picks made this year to get a better idea:

[table “294” not found /]

Average Beta on Long Positions: 1.17
Average Beta on Short Position: 1.15

Surprising Result?

I’m very surprised to see that the beta is so close. I think what might have driven both Kenneth and my own impressions were trades like Long Baidu (BIDU) and Short Rosetta Stone (RST) which fit very well into that “beta exposure” example.

I’m not entirely certain but I will consider adding the beta to future trades as it will help me monitor residual market exposure to my positions.

Finding Shareholders In Unconventional Ways?

By: ispeculatornew | Date posted: 06.28.2011 (5:00 am)

Having a rising stock price is a good sign for any company because, it makes it easier to raise money, take on new debt, attract and retain employees (through stock and options based compensation), etc. I think it’s fair to say that any company would love to have its stock move higher if given the choice.

How To Increase Your Stock Price 101

Standard education suggests that the best way to have a strong stock is to have strong results, a solid balance sheet, transparent operations, excellent management and clear guidance.I don’t think any of you would argue with that right?

How To Increase Your Stock Price 201

It seems like some companies are trying alternative methods (we’ll call them that way for lack of a better term) in order to attract investors to their funds. Some try to appeal to specific investor segments such as dividend investors (by providing a strong and growing dividend), social investors (being green, ethical) and many other types of investors. One thing I had not seen however was a company trying to attract investors by more unconventional methods. Look at the different ads that I’ve seen running multiple times around the internet. If you look quickly, they might look like ads for a dating website, for Hooters or other types of activities geared towards men. But no, these are actually ads for potential investors for Obscene Jeans (OBJE), a low trading, lower priced stock that wants more attention. Needless to say it’s an original way to find potential investors.


Good Idea?

I think there many different ways such a tactic could be viewed:

-Pros:

-Ability to get investors to consider the stock who might have never heard of the company
-Certainly an original marketing plan that might reflect a smart management style

-Cons:

-Is this company really spending funds on this advertising campaign? As a shareholder, I’d much prefer they paid out a dividend
-It does not reflect the most professional

What are your thoughts?

New Stock Pick: Long Apple (AAPL) & Short Yahoo (YHOO)

By: ispeculatornew | Date posted: 06.27.2011 (5:00 am)

After being able to close out 2 trades last week, I can open a new one today which is great news, especially after I decided to no longer open trades after October…time flies by and I’m hoping to get a few more in. Most of you will not be surprised to see that we are opening this trade. Over the years, we have consistently been long Apple (AAPL) and short Yahoo (YHOO). It’s always a bit worrying to go long a stock (Apple) that everyone loves but the numbers are the numbers right? Before getting started, let’s look at the numbers for both of these companies… as you will notice, both stocks are going through difficult times, they both have the same terrible trend analysis score.:

[table “295” not found /]

Long Apple (AAPL)

I don’t think anyone thinks that Apple’s growth can keep up and I’m not a believer of that either. That being said, there will still be growth which makes its current P/E ratio look cheap. Seeing Apple currently trading at a smaller P/E ratio than Yahoo is very odd. Of course, while Yahoo has a few possible events that have upside potential, the opposite is true for Yahoo. The stock continues to struggle as investors worry about the state of CEO Steve Jobs’ health. Can he return to the company that he turned around? Apple is the most admired company in the world and has been successful in each of its last launches, the last one being the incredible domination of the tablet market thanks to the iPad. Can Apple continue to come up with these products year after year? I am hoping this trade can lag a bit and hopefully see the Iphone5 being released in a few months. That will certainly remind everyone that there remains a lot of growth.

Short Yahoo (YHOO)

Yahoo is probably the one company that I have picked on the most. Its CEO, Carol Bartz has helped Yahoo keep its decline going and despite growing calls for leadership change, the board has not acted yet. Yahoo, one of those internet content companies that I’ve enjoyed hating. Yahoo fits in so well because it tries to be great at so many different things and ends up being just average which is simply not good enough. Most of Yahoo’s value at this point comes from its ownership of Chinese assets that have tremendous value (because Yahoo is not managing them???). Even in those, Yahoo is screwing up. There are 4 possible problems with going short on Yahoo at this point:

1-If CEO Carol Bartz is replaced, the stock could jump
2-Yahoo selling off some of its Chinese assets could monetize Yahoo’s value
3-The always existing risk that Yahoo could be acquired at some point
4-Yahoo has a lot of cash and assets and almost no “value” assessed to everything else. If Yahoo could just manage to get on the right track, its stock could rise again

I had discussed the risks of being short Yahoo but I’m betting on the fact that status quo seems to be the best Yahoo shareholders can hope for these days and if that’s the case, I should be fine on this trade.

Disclosure: No positions on Apple (AAPL) or Yahoo (YHOO)

Financial Ramblings

By: ispeculatornew | Date posted: 06.25.2011 (8:19 am)

You would barely notice that it is the summer with all of the rain… hopefully things get better soon! In the meantime, here are some good readings:)

Improve your trading by using moving averages @ TheDividendGuyBlog
What’s next for the markets? @ Balance Junkie
The Prince Who Blew Through Billions @ VanityFair
Facebook now has 750M users! @ TechCrunch
When to buy a dividend stock @ WhatIsDividend
Stock Trades: Bought Pinecreast Energy @ BeatingTheIndex
Exxon Mobile returning cash to investors @ Dividend Monk
Understanding your risk tolerance @ SmartDividendGrowth
Is the Fed the world’s largest fixed income hedge fund? @ The Big Picture
Who should buy Covered Call ETF’s? @ CoveredCallETF’s
Better investment fee and performance disclosure might help @ MoneySmartBlog
Paulson announces exactly how much he lost on Sino-Forest @ ZeroHedge
Passing the CFA by luck alone? @ SmartFinancialAnalyst

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Putting Your Expenses Back In Context

By: ispeculatornew | Date posted: 06.24.2011 (5:00 am)

I must confess, I have not always been a dividend investor and while the concept of passive income was something I believed in, it was not something I spent as much time thinking about as I do now. I always receive a lot of comments about the fact that my long and short technology picks are such a big contrast to the safer and consistent passive income approach. It is, but it works very well with me thanks to my buckets approach. Anyway, back to the subject. The fact is that I now see every dollar that I spend as something much more powerful.

Every Dollar Spent Is Lost Future Income

In the context of dividend investing, every $100 spent on a night out could be seen as a choice between a night out, income for years to come, or a bigger sum of income once I reach retirement or start living off of retirement. How do I do the math? Here is the choice explained clearly:

$100 = 1 night out
$100 = $3-4 per year for my entire life
$100 = $20 per year starting in 30 years (assuming it is reinvested at a 6% return)

Once you start to see that night out as an annuity to be paid out for your entire life and that can then be paid out to future generations, it becomes a much more difficult $100 to shell out. Am I the only one that translates even a regular night out as a sacrifice of future income?

Don’t Worry About Me

I know, I know… Using this mentality could lead me to cut almost all expenses and never truly enjoy that passive income. I am very far from that situation. I am simply stating that I now make my choices much more wisely thanks to dividend investing and hopefully I’m not the only one that is getting better at putting current expenses in perspective.

Management System

Personally, it remains a race where the start is everything and because of that, accumulating assets in these earlier years is key in my opinion. That being said, the system that I use is simply to set pre-determined amounts to be set aside and do my best to increase those amounts over time. I have to admit that an early move that turned out to be the best investment of my life is certainly helping in that regard but I still think that the key (at least for me) remains to use a systematic savings and investment method.

Dividend Aristocrats, Who They Are And Why They Matter

By: ispeculatornew | Date posted: 06.23.2011 (5:00 am)

If you are a passive income investor and have been researching dividend investing, you have surely run into multiple references to Dividend Aristocrats. They are usually deemed the best of the best in the dividend world. They might not be the most spectacular names but they are stocks that have been able to offer reliable payouts for a long period of time.

What Is A Dividend Aristocrat?

-The company must be part of the S&P500
-The company must have increased its dividend for at least 25 straight years
-A market cap of $3 billion or more
-Be an actively traded stock
-No sector will represent more than 30% of the index
-There is a minimum of 40 stocks included in the index

Who Maintains This List?

The Standard & Poors Company maintains the index. It is reviewed each December.

Why It Matters?

Since December 31st 1999, these stocks have returned 141% (including dividends) compared to the S&P 500’s return of close to 13%. Amazing isn’t it?

Can Dividend Aristocrats Keep Up This Payout?

It’s impossible to predict of course but one thing is that in sideway markets, investments like dividend stocks and covered call etf’s are generally expected to outperform other more volatile investments. Will it always be the case? Certainly not.

How Many Stocks Are Currently In This Index?

42! The top sector is consumer staples which includes companies such as Pepsi Co (PEP) and represents 26.2% while Consumer Discretionary is at 19.1% of the index (including companies such as McDonald’s (MCD).

As you can see, we already cover many of these stocks and will continue to do but I think it’s interesting to track this index, which companies are included in it. You can even track a similar index by buying SDY, the S&P ETF that tracks the S&P High Yield Dividend Aristocrats Index.

Closing 2 Trades (CTRP, VCLK, AAPL, NILE)

By: ispeculatornew | Date posted: 06.22.2011 (6:20 pm)

Good afternoon! Trades are certainly being closed out more quickly these days and I won’t be complaining about it, you can count on that! Tomorrow morning, we’ll be closing out 2 trades that both reached their limits. It’s not great news but there is one good and one bad trade in there so I can’t complain. Fortunately, this means that I will be opening 2 new trades in the near future which is great news! Our annualized return so far this year is: +75,26%

First Trade: Long CTrip (CTRP) and Short Valueclick (VCLK) -20,25%

Second Trade: Long Apple (AAPL) and Short Blue Nile (NILE) +20,05%

I Don’t Get It? No One Saw This Coming? (TRE)

By: ispeculatornew | Date posted: 06.22.2011 (5:00 am)

Last week, I wrote about my growing doubts about China and investing in Chinese companies despite China’s growing place in the world economy. I did write a line or two about reverse mergers, and about Sino-Forest (TRE) specifically. The company listed on a Toronto stock exchange (and as a pink sheet in the US) is based in Hong Kong and up until a few weeks ago, very few would have believed that such strong allegations could be made about it. Independent research company Muddy Waters released a very striking report calling the company a Ponzi scheme, saying that financial statements were mostly exaggerations if not pure fabrications, etc. The report is very telling and given Muddy’s past success in finding such frauds, the market gave Sino’s stock a serious beating right before the stock was halted by the exchange.

In such circumstances, it becomes very difficult for retail investors such as myself to judge a company like Sino-Forest. On one hand, Muddy Waters has been successful in finding such frauds in the past. However, wouldn’t institutional investors such as John Paulson, research analysts in major banks and brokers, regulation agencies and audit firms have found clues years ago? If Muddy Waters conclusions were even partially true, how could everyone miss it? It seemed impossible to many and like many others, I was anxious to see how all of these parties would defend their work on Sino-Forest…. Weeks later, I am still waiting.

Yesterday, John Paulson confirmed that despite being the company’s largest shareholder just a few weeks ago, he has now sold all holdings of the company, even selling off his bond positions thus realizing a loss of $750 million. That is incredible. Is it just me or should I be surprised/shocked that this is happening? I can understand the fact that as a retail investor, it is difficult and probably unthinkable to investigate such companies in order to determine if there is a scam. However, when an investor is going to put over $1 billion, wouldn’t it make sense to send a few analysts over for a few weeks to investigate the company, its holdings, financial statements, etc? Am I crazy to think that? Are guys like Warren Buffett and John Paulson relying on the same financial statements that I use when investigating these companies?

How about the analysts? Several of them had buy or strong buy ratings on Sino-Forest. What were those based off of? If there were so many inaccuracies in the financial statements, shouldn’t they have been able to find those and accumulate enough doubts to be more reserved? Also, this company was publishing audited reports… so an auditor, as well as regulatory agencies were supposed to be confirming what the executives were reporting. I do understand that investigating what is mostly a Chinese company is an enormous challenge but isn’t that what they are being paid to do?

What am I missing here? How do so many powerful agencies get conned by a company like Sino-Forest?

Is Research In Motion (RIMM) Really Trading At A P/E of 4?

By: ispeculatornew | Date posted: 06.21.2011 (5:00 am)

Yesterday I received an interesting question from a friend of mine who has been thinking about getting involved in Research in Motion. Why? The Canadian company has been crushed over and over and we have been among those who have been very critical of the company for months now. That being said, the stock has been getting killed over the past few months and it’s been even more intense in the past week after Research in Motion announced dismal results. Its stock closed out yesterday’s action at $25.89 because of its earnings restatement among other things. The company announced it expected to make a profit per share of between $5.25-$6.00 this year.

P/E Of 4?

How can a profitable company such as Research in Motion be trading at a P/E of 4? You might think that there is something wrong with your math, and go verify that data at a site such as Google finance. They will give you the same number– a P/E ratio of 4.11. It’s an incredible bargain right? What kind of stock trades at a P/E of 4?

Wait A Second… P/E Is Not Perfect

There are no perfect ways to evaluate a stock and while I’m a big fan of using the P/E ratio, it’s not perfect. In this case, most of the market anticipates that Research in Motion’s revenues and profits will continue to decline which makes it very difficult to use the P/E ratio. Why? Here are a few scenarios:

Current Price: $26

Expected Earnings 2011: $6.00
P/E ratio: 4.33

Expected Earnings 2012: $4.00
P/E ratio: 6.50

Expected Earnings 2013: $2.00
P/E ratio: 13.00

Now let me ask the question differently. I know that you are willing to buy RIMM at a P/E of 4.33 right now. But would you be willing to buy a company that has declining profits and a P/E of 13? Probably not right? That could very well be RIMM 2 years from now and if the majority of the analysts expect it to be the case, they will not even buy it at its current P/E of 4.33.

RIMM Might Be A Bargain

There are plenty of reasons why RIMM could be a good purchase. The stock is cheap, it might be oversold, it could be acquired, it still has a shot at making a great phone, it’s been knocked down in the past and always came back stronger, etc. All of those could be very valid reasons to buy the stock today. Seeing a P/E ratio of 4.11 isn’t however. In some cases, such as this one, P/E only tells a small part of the story.