Archive for July, 2011

Financial Ramblings

By: ispeculatornew | Date posted: 07.31.2011 (5:27 pm)

The mood is clearly negative in the blogosphere these days.. bleak GDP numbers, a government that is trying (is it?) to avoid what would be tragic and investors around the world start to wonder what the impacts would be. Could the map at the bottom of this post take a turn for the red? It is a nice map and credit to Reuters for posting it! Take a look at the 2 trailers below as movies about the last financial crisis start being released… or we already ready to enter a new one? Oh crap… Better enjoy the summer for now!

Margin Call Trailer

Inside Job Trailer

Oh well… in the meantime, here are some good readings from the past week:

Wall Street Plummets on Debt Fears @ Hope To Prosper
Global Energy ETF for exposure to International Oil and Gas stocks @ OilandgasETFs
Facts about the US debt @ Dividend Monk
A look at my latest trades @ TheDividendGuyBlog
Why this is no market for couch potatoes @ Balance Junkie
Are you still bullish on long term investing? @ Lazy Man and Money
Will future returns suck? @ CanadianFinanceBlog
Why is it so darn hard to save money sometimes? @ The Smarter Wallet
Our Mountain of Debt @ The Big Picture
With the US economy sliding back into recession, what the Fed will do @ Zero Hedge
Foreign Dividend Tax Treatment @ WhatIsDividend
CFA: Signing up for the December 2011 or June 2012 exam @ Smart Financial Analyst

Should Walmart (WMT) Be Worried About Amazon (AMZN)?

By: ispeculatornew | Date posted: 07.29.2011 (5:00 am)

Would it be a stretch to think that as retail shopping slowly moves from physical locations to digital ones, giant Walmart (WMT) is starting to feel the heat from Amazon (AMZN) ? Perhaps, but I think these two companies will be facing off increasingly in the coming years and it’s not a surprise that Walmart is among those that have been lobbying for Amazon’s tax status to be changed. Does it see in Amazon a credible threat? Or is Walmart getting ready to crush Amazon? I am personally very bullish on Amazon’s long term value and find this developing rivalry fascinating.

How Is Amazon Facing Off With Walmart?

Distribution network: In terms of distribution, both Amazon and Walmart are world class organizations. Amazon has by far the best network for ecommerce retailers with shipping and storage all over the US and in many parts around the world. In terms of virtual storage and distribution, Amazon’s s data services, AWS are arguably the best out there and is becoming a major player with clients such as Zynga and Netflix (NFLX) using Amazon’s services. I don’t think anyone could beat Walmart’s incredible distribution network as it has stores in thousands of neighborhoods.

Suppliers Relationships: Both Amazon and Walmart have a lot of power with suppliers. Simply put, having products sold at Walmart is the difference between a healthy business and one that isn’t sustainable. That gives Walmart incredible power when it negotiates prices. In a similar way, selling digital or physical products through Amazon is the place you need to be to sell on the internet. To be fair, while Walmart sells millions of different products, while, up until a few years ago, Amazon was mostly about books and dvd’s. That has been changing fast though as Amazon expands into all kinds of different products from gardening to electronics and cloths. It has been launching several fashion websites to accompany Zappos, its leading shoe and clothes e-retailer.

Prices: No one can beat Walmart right? That is probably true. But with few employees, limited storage and land costs, Amazon is basically limited by shipping only. As it tries different experiments such as delivering groceries and other products, it will be interesting to see how that impacts the prices that Amazon will be able to offer.

Sales Taxes: Those low prices are helped in a big way by the way Amazon operates which helps it avoid sales taxes in much of the United States, an incredible difference, especially for larger items such as tv’s. It’s unclear how Amazon’s current feud with a few states will end up but I think it’s fair to say that the longer Amazon can keep this situation going, the bigger it can build its distribution network and market share. The main law that Amazon relies on is the fact that companies that do not have a physical presence are not required to charge sales taxes to their customers.

New Economy: As a growing part of the economy moves to digital such as apps, virtual books, digital services, Amazon seems incredibly well located in the market with app stores, an established ebook reader (Kindle) poised to become a tablet, and other services. Those will help Amazon keep up solid growth rates for years to come.

Reinvesting: Few companies apart from Google and Apple have been putting up so much money to improve their companies. For Amazon’s that translates mostly into new niche websites, storage and shipping facilities, improved technology, and virtual services.

Shopping Experience: Running around trying to find items in large stores is still appreciated by many but doing shopping from the comfort of their own homes is certainly becoming a very appreciated experience. Ecommerce has made holiday shopping a lot less stressful for example and as the years go by, the Amazon shopping experience has been getting better. Can Walmart compete?

Amazon vs. Walmart, The Real Deal?

While I don’t expect these two to knock heads right now, they will increasingly face off as Amazon continues to make strides. Amazon is destined for greatness in my opinion and even being compared to Walmart is a sign of how much Amazon has already done in its sector.

How To Dump Dividend Stocks Before They Reduce Their Payouts

By: ispeculatornew | Date posted: 07.28.2011 (5:00 am)

Building a sustainable dividend income is a long term project no matter how you look at it and depending on the number of stocks that you actually decide to hold, one of the major keys to increasing your passive income as quickly as possible is finding stocks that have attractive features (see the 20 things we look at when judging dividend stocks) but also dumping stocks that become less attractive through time. Ideally, holding stocks that are increasing their payouts by 5% or so per year on a consistent basis is ideal. You might hold a few stocks that have little to no growth. One thing that you cannot afford though is to hold a stock that is reducing its dividend-dump it like an online UK credit card. First, I need to reassure you, very few companies are decreasing payouts these days. In fact, in the past quarter, Bloomberg reports that only 1.39% of Russell 3000 companies cut their dividends.

Which Sectors Cut Dividends?

You will not be surprised to hear that the two sectors that reduced payouts the most are communications and financials. Communication companies often top our top dividend rankings every month but also tend to pay more than they can afford to do in the long term which translates into cuts eventually unless the company can figure out a way to increase profitability very quickly. As for financials, things continue to be difficult for many of them because of the economic context.

What To Look For When Judging Your Portfolio

There are many different elements to look out for and most can be looked at rather quickly when these companies announce earnings:

Revenues: Are they still increasing or do they expect to do so in the medium to long term futures?

Management Discussions: When companies are considering cutting the dividend, analysts usually see it coming and will start asking about it well aheads of time, you can certainly track such discussions in earnings calls

Earnings Per Share: Are they still increasing? Is the payout ratio being kept at a reasonable level?

Diversification

I often discuss this but it’s important to not put too many eggs in one basket. You might have thought that financials were a great dividend play 5 or 10 years ago but those that put too much into that sector are certainly regretting it by now.

Sustainability

Some companies such as Intel (INTC) are currently seen by myself and others as sustainable companies but as they operate in a quickly changing environment, things can evolve and you would probably prefer selling once you start having serious doubts. Why? There are many good dividend candidates so you do not have to settle for stocks that could have a much

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How to Invest When Your Country Is Going Bankrupt

By: ispeculatornew | Date posted: 07.27.2011 (5:00 am)

A few months ago, it seemed as though only Greece was having financial trouble but things appear to have been spreading quickly. Some very credible economists such as John Mauldin have been discussing and forecasting this issue for over a year now and the reasons are multiple: demographic factors mean less workers per retiree, rising health costs, diminishing or stable revenues, etc. Governments around the world have borrowed too much and the recent credit crisis has made the situation very complex. Add to that the reality that is sinking in about the fact that yes some European Union countries will more than likely default on their debt. As if all of that was not enough, the US is playing around with the renewal of its debt ceiling with a deadline of August 2nd. While that deadline would not put the US in default, it is quite representative that things are going this far after Bush and Obama combined for record deficits that have caused rating agencies to openly discuss a US debt downgrade. That was unthinkable a few years ago.

In a world where the default of some governments is almost certain in the next 5-10 years, what does that mean for investors in those countries? I don’t think anyone truly knows because such large scale government problems have never occurred. Sure, there has been the occasional default with Russia and Argentina being good recent examples. However, we have never lived a scenario where several industrialized nations needed so much help in terms of bailouts, etc. The US and Germany are rich and ready to help, but they have limited resources and saving countries such as Spain and Italy could be beyond their capabilities. There’s also no need to tell you how even the growing possibility of a US fiscal crisis could affect the world economy.

Trading Ideas For An Uncertain Outlook

Asset Diversification: There is no doubt that if things start to happen, it could go down very quickly. Just think about how quickly Lehman and Bear Sterns went down and it will give you a very good idea. You will have no time to react if governments start defaulting so your portfolio might as well be prepared on any given day. One way to start is to be diversified. Having stocks, bonds, exposures to both local, international, and other emerging markets is a good start. Bond exposure should not all be governments and ideally be in a few different currencies/countries.

High quality corps: When you look at the assets, debts and activities, some corporations seem to be much safer investments than a lot of countries. Tbills are still regarded as the safest investments and many European countries might still be seen as without any risk. However, when you look at fundamentals, companies like Exxon (XOM), many think that in a world where the US was downgraded, Exxon could very well keep its AAA rating as some corporate bonds would become “safer”.

Inflation Bonds: One thing that could happen to governments that are struggling is for them to start printing money. Among other things that would happen in such a scenario is worldwide inflation pressures. Owning some inflation hedges such as inflation bonds or even better tip ETF’s might prove to be a very good strategy.

“Hard Assets”: In a world where governments are unable to keep their word, currencies can lose value quickly and what could do well are hard assets such as metals, that can be purchased either physically or through ETF’s, futures, etc.

Holding Cash Is Not Good Enough: Many worried investors tend to keep a lot of cash when things start to get “iffy”. I would argue that it could be a big mistake. Just talk to anyone that was keeping cash in Argentina when inflation got out of control and they will tell you well that worked out. Staying cash is a good and safe strategy when things go wrong in the market, but not when the actual currency becomes worthless

Any other ideas?

Closing Trade: Long Ebay (EBAY) And Short The Knot/XO Group (XOXO)

By: ispeculatornew | Date posted: 07.27.2011 (4:35 am)

This trade had been opened before the recent ticker change of The Knot from KNOT to XOXO but no matter what ticker and name the company has, its poor business has been paying off for me! I will close off the trade at today’s open as it now stands at +27%!!

 

One Day I Would Love To Become

By: ispeculatornew | Date posted: 07.26.2011 (5:00 am)

Each one of us has dreams when growing up. Being a policeman, an air force pilot, and many other professions are the most common dreams for young boys and I was no exception. Growing up, I did end up gaining increased interest in numbers and finance became the most obvious choice. As you can now see, I was lucky enough to get a job in the financial markets, doing something I love. I know very well that only a minority actually love their job and look forward to the always evolving challenges. In my case, the job is always about making money. There are a million different ways to get it done in finance and we do our best to make the most money by limiting risk.

As you can see by reading this blog, I have grown interested in two specific types of investing in recent years:– dividend investing and long and short technology stock trading. Why tech companies? I think there a few reasons. First off, I’m fundamentally interested in technology, in innovation, and how it is transforming our lives. Because of that, I have been able to build myself a good network of people and sources of information to keep me updated on what is happening in the tech world. That is certainly part of how we’ve succeeded in getting solid results for the past 3 years. I do still have a lot of room to improve but I think that overall it’s met my expectations.

But There Is An Even Better Job Out There

Lately, I’ve became very interested with “Angel Investors”. What are they? They are generally defined as individuals that extend capital to businesses in return of equity in the company. The difference of course with buying shares is that companies that receive angel investments are generally very young ones that are not public. Some larger ones such as Facebook could also receive angel investments but it’s safe to say that most angel investors focus on much smaller companies.

Why It’s So Interesting

Personally, I find the process of looking at companies that are starting on and judging them for what they can be incredibly interesting. It is very risky of course but it’s all about trying to understand the tendencies, what is working, what consumers and businesses will want in the future, etc.

Is It Impossible For Me To Get There?

I would not say so but I’ve certainly got my load of challenges. I do not have enough money to do such investments right now, do not have the network to meet those working on the projects of tomorrow and would likely need to move to Silicon Valley in order for this dream to be possible. New York is starting to get into the tech scene as are a few other places around the world but mostly it’s only been happening in Silicon Valley making it much more difficult for outsiders to get in.

Am I The Only One?

Do you have a dream job or any type of dream that you aspire to? Are you unhappy in your current situation or very happy such as myself? I guess it becomes much easier to make drastic moves when you are not in a good position.

New Stock Pick: Long Google (GOOG) and Short Valueclick (VCLK)

By: ispeculatornew | Date posted: 07.25.2011 (5:00 am)

After closing out 4 trades within a few days of each others, I have the opportunity to open some new ones and today I am happy to say that I had an easier time finding a good trade opportunity. I’m not saying that it will necessarily work out better but it did seem fairly obvious when looking at my dashboard among the stocks that we follow. Our return has been amazing so far this year, at close to 150% on an annualized basis. Seems too good to be true and it probably is but let’s hope that things can continue to go well as the earnings season continues. I was somewhat tempted to go long Amazon (AMZN) which I love, but it is difficult to pair these days given its profile (the best candidate I see is Netflix but I can’t see myself shorting the stock, I have learned my lesson about shorting high growth stocks!). As well, Amazon is reporting earnings tomorrow (which I am very much looking forward to seeing). Back to today’s trade though, let’s take a look at the numbers that we used:

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Long Google

Last week’s earnings announcement and calls were incredibly positive on all fronts and despite continued worries about rising costs, revenues seem to be keeping up so far thanks to display ads among other things. I have also been impressed with Google+ so far and while it’s far from certain that it will eventually have any kind of impact on Google’s earnings is impressive enough. For Google to even have a decent shot at social is a very big deal. My biggest worry in buying Google has to be the fact that the stock has already risen so much in the past few days and could have a letdown. However, on a valuations basis, I still think the stock is incredibly attractive with revenues growing at over 20% per year and an anticipated 14 forward P/E ratio. I understand that many doubters still think that Google has too much going on and too much competition but the reality is that it is making huge progress in display, mobile and now social while it is keeping its huge lead in search despite Microsoft’s online division pumping in hundreds of millions to help out Bing.

Short Valueclick (VCLK)

Valueclick remains one of the important players in the online advertising field but it has been unable to show off much to make me think that growth (which has been non-existent in the past years) will eventually pick up again. It has few properties, its products are not being improved, it is losing sales people and its technology is falling behind. A turnaround is always possible but I just don’t think that the odds are very big that this will happen. It certainly does not warrant a P/E ratio that is comparable to Google’s. How in the world is that justified? The company has been hiring but it remains unclear what Valueclick’s edge is when it competes with companies such as Google, Facebook, Yahoo, Microsoft, Groupon, etc. Valueclick will be reporting results on August 2nd so that should certainly be an interesting day for this trade.

Adding Zillow (Z) To Stocks We Follow

By: ispeculatornew | Date posted: 07.22.2011 (5:00 am)

After recent IPO’s by LinkedIn (LNKD), Pandora (P), Yandex (YNDX) and others, the recent IPO by Zillow (Z) went nearly unnoticed. I had been waiting for the stock to go public and while I’m disappointed that this is yet another low float IPO, I am still adding the stock to the stocks that I follow and like the company and what it has been doing. The question, as always, will be if the valuation is right to trade on.

What Is Zillow?

Zillow is a fairly simple company to understand, it operates a website that tracks prices, sales and other information regarding real estate. It is highly valuable information for anyone involved in real estate markets in the US, especially for real estate agents.

Where Do Revenues Come From?

They are twofold for the moment as Zillow sells subscriptions to agents that get premium services and locations. As is the case for most big internet listed stocks, the majority of its revenues is derived from advertising however. In that sense, I consider Zillow to be a fairly simple business to understand and could see myself trading it in the near future. To give you an idea, Zillow generated $11.3 million of revenues in the first quarter of this year, much lower than recent internet IPO’s that we’ve discussed. It has also yet to turn profitable losing a bit less than $1 million in the first quarter.

Valuations

On a comparative basis, Zillow has a more reasonable value to revenues ratio. It is trading at a similar ratio as Pandora (P) (13.3) and much cheaper than LinkedIn (LNKD) (26). I do think that Zillow has a lot less upside potential in the short term than a company like LinkedIn (LNKD) but it could still be an attractive target.

No Trading on Zillow For Now

Of course, you should not expect any trades on Zillow from me in the near future because the stock is still highly volatile making trading like I do become more about luck than anything else. I know some would argue that all trading is based on luck but I would certainly like to think there’s a bit more to it!

How Dividend Investing Can Help You Stay Away From Ponzi Schemes

By: ispeculatornew | Date posted: 07.21.2011 (5:00 am)

The last few years have seen many different trends in the financial markets. Unfortunately, one of them has been the explosion of frauds related to capital securities. Insider trading, market manipulation, and many other types of frauds are taking place at an increasing rate. One fraud that has been in the spotlights more than any other has been the Ponzi scheme. There have been small ones, big ones and then the Bernie Madoff one. These schemes have been happening a lot more than you would think but only the biggest ones got attention from the mainstream media.

How Ponzi Schemes Work

You can find much more detailed information but the basic concept is that investors buy shares in a fund. The manager then manages to publish falsified valuations making the returns look much better than they actually are. The effect is twofold:

-Current Investors Put More Money Into the Fund
-New Investors Come Knocking To Invest

This can go on for a long time because the basic ways such a scheme will get caught are if authorities catch on or when investors start withdrawing money which the fund often does not actually have. That is what happened to Madoff. If the financial crisis had not occurred, investors would have perhaps left their funds invested for many more years and the Ponzi scheme could have gotten much bigger. Other frauds such as Enron relied on different accounting frauds.

How Dividend Investing Can Help You Avoid Frauds

Diversification: While it is not unique to dividend investing, the truth is that dividend investors tend to have much more diversity in their holdings than the average investor’s portfolio.

Type Of Company: Generally, dividend investors tend to like long term, sustainable dividend companies such as the dividend aristocrats that have often been running for 50, 100 years or even more . While such companies can end up being fraudulent, the risk is much smaller than when investing in newer companies

Take Money Out:One of the great things about dividend investors is that they take money off of the table in form of dividends. The only Bernie Madoff that did not get destroyed were those who had taken out money over the years instead of always reinvesting into the same funds.

Dividend Investors Beware

I think it’s still important for dividend investors to look out for opportunities that look too good to be true. A company cannot keep increasing dividends by 10% per year for decades, it’s just not possible. Still, I think that as a dividend investor, my odds of being caught up in a major fraud are diminished.

Do you agree?

Should Socially Responsible Investors (SRI) Drop Amazon (AMZN)?

By: ispeculatornew | Date posted: 07.20.2011 (5:00 am)

Amazon (AMZN) is the top retailer on the web and has always been obsessed with efficiency in every one of its operating fields. Tax efficiency has been a primary concern in all of its acquisitions and how it does business in general. Why? As a retailer with no “physical stores,” it does not fit in the old version of what business should be taxed.

That is changing in some states as the state governments, looking for money to balance their budget are changing the definitions of what type of business should pay these taxes to include “ecommerce.” Amazon has been fighting this very hard, threatening to close out any business ties in states that pass such laws. Its threats have worked in some states that either dropped the law projects or gave “exceptions” to Amazon. These are not empty threats as Amazon has closed some offices in some instances.

California Follows Steps By Smaller States

The most recent event occurred in early July when California lawmakers  decided to include Amazon in the businesses that must charge (and pay) sales taxes. Amazon followed that threat by dropping its 10,000 affiliates (sale partners) in California:

“We oppose this bill because it is unconstitutional and counterproductive. It is supported by big-box retailers, most of which are based outside California, that seek to harm the affiliate advertising programs of their competitors,”

How Hard Is Amazon Fighting Such Measures?

To give you an idea, the main reason why Amazon is rumored to not buy LivingSocial entirely is because that would create a presence in many states which would draw costs. Instead, Amazon is a major shareholder in this and other ventures,

Is Amazon doing the right thing by minimizing its taxes at any cost, in order to maximize (among other things) shareholder returns? Or is fighting taxes like this morally “unacceptable?” The question is certainly open for debate but I personally think Amazon has every right as a business to maximize its profits. It will eventually have to pay those taxes in my opinion but it has every right to delay that for as long as it can. I can see how other retailers such as Target find it unfair to compete when they must charge taxes to their consumers that Amazon does not have to but those are the current rules and it would be bad business for Amazon to not search for better tax efficiency.

What is your opinion?