Archive for October, 2011

The Ultimate Temptation For Long/Short Traders

By: ispeculatornew | Date posted: 10.31.2011 (5:00 am)

I am currently reading a book about the history of hedge funds, which I will discuss in greater detail in the near future. One of the very interesting things that I’ve read is how funds that initially start being neutral have temptations to change that over time. What do I mean by “neutral”? There are many different ways this is used but the most used interpretation is when a fund owns and shorts an equal amount of dollars.

When we do long and short trades, we do exactly that as in a trade such as our only live one, Long Google and Short eBay, we will be buying $2500 worth of Google (GOOG) stock and selling the same amount of value of eBay (EBAY) shares. The objective of course is for market movements to have no impact on the trade as a 2% gain on all stocks would result in no gain or loss.

One would certainly argue that from the moment the trades goes live, it is no longer “neutral”. Why? Because if the price of Google increases by 1% while eBay’s doesn’t, the $2500 would now be worth $2750 and the fund would be “net long” $250. That is one reason why funds are rarely “100% neutral”. As of writing this, that trade is slightly up giving me a small “positive exposure”.

Another interpretation of being neutral is looking at the beta which we took a in-depth look into earlier this. Why? Some stocks such as Baidu are much more volatile than others like Exxon so being long on one and short the other would not necessarily make a fund “immune” to big market movements.

The End Goal For Me Remains To Be Market Neutral

While I do not want to be constantly rebalancing my trades, I do start them all as neutral trades which gives me a very small exposure in terms of dollars and even from a beta perspective. The impact is that my returns should be judged on an “absolute basis” rather than compared to market returns. In many ways, it is good because it provides additional diversification from more standard portfolios or even from dividend investing. Absolute returns means that every year, my trading objective could be a 7-8% gain with the hopes of having some exceptional years (such as 2011, with a 90% return so far) and limit losing ones. That compares with “long only” funds that will try to do a bit better than the indexes every year. Even beating the market by 1% can often be seen as a success, no matter i the market returns 20% or -20%.

Temptation Arrives

In the past few years, markets have been very volatile but the overall result has been fairly steady which has been neutral from my perspective. However, think about a market where indexes rise 20% per year for 3 or 4 straight years? My 7% would still be good considering my fund but I would be underperfoming “long funds” severely and there would certainly be a temptation to shift my trading towards being “long”. How? For example by being long $2500 and short $2000 for example.

Once that is done, I would probably be tempted to increase that amount event more and in the end might not be doing as much of the “shorting” part. That is precisely what has happened to a number of large hedge funds over the decades as they changed their trading styles to better profit from trending profits but did not reverse in time to avoid the inevitable market correction. The opposite would also be possible as a fund that has great success in shorting stocks during a market crash could slowly “abandon” the long parts of the trades.

Please Call Me Out

If ever you see trades, commentary or anything else here or on our free newsletters that seems to indicate that my technology trading is shifting and that I’m falling to the “temptation”, please call me out, I would certainly appreciate it.

Please Tell Me

Have any of you suffered temptations to change your trading or investing “style”? What caused it? Market trends? Personal events? Anything else?

Financial Ramblings

By: ispeculatornew | Date posted: 10.28.2011 (7:02 pm)

Happy Halloween!! I hope you’ll have a great weekend and that you will spend some time giving out to those trick or treating:)

Want to be rich? Choose Your Friends wisely @ GreenPandaTreeHouse
Completely Conquer Credit @ Studenomics
Is Amazon the latest victim of Apple? @ TheBigPicture
5 Reasons I love Investing with DRIPs @ DividendNinja
9 Dividend stocks that go Booom @ TheDividendGuyBlog
Looking beyond Europe @ ZeroHedge
What Is The Dow Jones Industrial Average? @ MoneyCrashers
The 1950s and 60s are not a reasonable basis for setting expectations @ Curious Cat
On the evils of market timing @ Balance Junkie
Feel overwhelmed by the CFA preparation? @ SmartFinancialAnalyst
Investing in oil: 5 junior oil stocks for 2012 @ BeatingTheIndex
What is a dividend payout ratio? @ WhatIsDividend

 

 

Scouring The Globe For Dividend Stocks

By: ispeculatornew | Date posted: 10.28.2011 (5:00 am)

One very interesting and surprising fact is that despite the fact that dividend investing is bigger than it has probably ever been US companies continue to avoid paying out earnings as much as they should. If shareholders want to get higher dividend amounts, why aren’t public companies answering those needs? The biggest reason is that US companies are hoarding cash a lot more. The portion of their earnings that is paid back to shareholders through dividends has been decreasing for years now.

Why Companies Are Keeping Their Cash

For some such as Apple, the two main reasons have been:

Willingness to keep large amounts of money to have more M&A/R&D options
Refusal to give its shareholders and employees the impression that growth will slow down (common perception about dividend paying companies)

For many others however, the main problem is that much of their huge cash reserves are stuck overseas. A company such as Google has a corporate structure that minimizes is every way possible the amount of taxable income in the US. That means most of its revenues are cleverly “credited” to its overseas operations. That means bringing back those huge cash reserves right now for a company like Google would result in important payable taxes which is something they want to avoid.

How To Fix This Issue

There are few easy ways out of this issue. Many large companies like Google are asking for a one time exemption (as has been done in the past) for them to bring back the cash with a “tax holiday”. That could of course be done as a quick fix but it does not resolve the underlying problem. As long as big corporations “earn” most of their cash abroad, it will be difficult for them to pay out as much as they and should pay out to shareholders. What must be done for corporations to earn more of their revenues in the US? Probably two main things; Diminishing the corporate tax rate and eliminating loopholes. That would not solve all cases, far from it in fact. But it would be enough to ensure that a bigger share of earnings would be earned and taxes in the US.

In The Meantime…

There are many different ways to improve your chances of getting bigger dividends and strong dividend growth. One such way is of course to look abroad which is exactly what we did when discussing investing in China. However, I thought it would be interesting to take a quick look around the globe to see dividend yields and how things are looking up for dividend investors:

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It could be tempting to look at France and Spain as great dividend plays but the reason their dividend looks attractive is very simple; their financial institutions are in big trouble and could suffer severe losses which will in the end result in big dividend reductions.

However, an index such as Brazil certainly looks very attractive and its resource-based economy could suffer if the world economy drops back in recession, I think the dividend is fairly safe. How would you buy Brazil? The most obvious way would be to buy an ETF, the main one being EWZ which yields..3.69%! Not very far from its target index right?

Definitive Guide To Investing In China

By: ispeculatornew | Date posted: 10.27.2011 (5:00 am)

Yesterday, we took a deeper look at China and why I think it needs to be a significant part of your retirement holdings. While the value of those assets will fluctuate a great deal, I think there’s little doubt that over 20 or 30 years, you will be much better off than if you decide to stick to already developed economies. I can see how some would argue for more diversification among emerging economics (BRIC and others) and I do understand that but I still think that there are significant advantages to being the world’s most important economy which is exactly what China will become in the near future.

Once someone decides to invest in China, the big question becomes what type of investment should be made. First, we can take a look at the biggest names on the Hong Kong exchange (where most large Chinese corps have generally gone in the markets)

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I think it’s easy to start off by excluding direct trading in China. Not only are there complications with trading in the Chinese currency but there are also a number of legal issues to deal with that make it only worthwhile for large institutions to be active. That leaves a few different options:

Buying ADR’s on US markets: Here is the list of the largest ones:

[table “333” not found /]

You can certainly get exposure to some of the bigger names such as Baidu (BIDU) that trade on US markets which also gives some level of assurance that the financial statements by these companies are legitimate. I think the main issue when doing this is to get exposure to the right names, as many large Chinese corporations are not listed in the US.

Buying Pink Sheets: We had discussed pink sheets trading and it can certainly be a viable option but I think that becomes rather risky for many Chinese corporations. There have been so many scandals and frauds in the listed stocks such as Sino-Forest that buying companies that operate under even less restrictions becomes very risky. How in the world would you verify what you are actually buying.

Buying ETF’s: Personally, I think getting exposure through ETF’s is by far the best way to get long term exposure to China’s stock market. Not only are the costs more reasonable but you have a manager that is paid to do do stock selection and has access to the best companies no matter where they are traded. Here is a list of US traded China ETF’s:

[table “334” not found /]

Personally, as unoriginal as it may seem, I think FXI is a great play. Why? Because it’s difficult to know which Chinese companies will dominate 10 or 20 years from now but I think it’s easy to imagine that going with the biggest ones is a good bet. Over time, the index will add “emerging ones” and as China becomes a global leader, it is likely to promote national champion companies as it has done with Baidu (BIDU) in the internet giving the company a very favorable environment against competitors such as Google (GOOG). So personally, I think FXI should be a significant holding in any very long term portfolio, do you agree?

Investing In China For Your Retirement? (FXI)

By: ispeculatornew | Date posted: 10.26.2011 (5:00 am)

China has clearly been a very volatile market in the past few years and very often, that has been marked by important declines. That is bound to happen over and over in China but I would still argue that China should be a significant portion of your holdings if you have a long term horizon. My main point would certainly not be that it will be a smooth ride but rather that it is almost certain that over 30 years or so, the Chinese market will rise more quickly than US and other markets If that is the case, wouldn’t you want to have at least 25% of your holdings in China?

Am I crazy to think that even holding 30-40% of my assets in China could be a great decision?

I’ve written about my convictions regarding Chinese internet stocks but I think that Chinese stocks will also tend to overperform significantly over the next couple of decades.What makes me think that?

Economy will grow rapidly: You might know that stock markets do not track the economy, especially in the short to medium term. However, as the Chinese economy overtakes the US and becomes the focus point of the world economy. I agree that on a GDP per capita basis, China will still remain well behind most industralized nations but in a nation of 1.3 billion people, the best performing companies are certain to do well. A company such as Baidu has the potential to be at the center of ecommerce in China, and many more leaders will emerge over the next few years. I would argue that the explosion of the economy will lead to incredible profits for the market leaders in dozens of different markets. Those are the companies that you want to own.

No debt: China and other emerging economies have one big difference with other leading economies, they have basically no debt which in a world where Europe and the US are becoming increasingly fragile. China will have incredible opportunities to buy valuable assets from desperate nations in Europe and abroad. I think it will also help China invest at home to help those companies that will be able to create jobs.

Attractive Valuations: Because of the fact that few investors currently hold Chinese assets and that the risk (especially for those investing with a shorter time frame) is more important, the valuations are much more attractive. For example, the forward P/E of Chinese stocks is below 10 while US markets continue to trade at a 13 forward P/E or so. Over time, as China becomes more established, that difference will narrow and the earnings of Chinese companies will no doubt increase much faster than US ones.

Solid dividend yields: While US companies have generally been decreasing the portion of their earnings that they pay out, companies in emerging markets continue to pay out high dividend payouts making them very attractive for dividend investors. If you compare at FXI for example, which invests in the 25 largest Chinese companies to the Dow Jones Industrial average (30 blue chip US companies) you will see:

FXI: 3.88%
DIA: 1.87%

That is a staggering difference and the difference is comparable if you take broader indexes. I’ve talked many times about the benefits of international diversification and clearly China would be near the top of the list of places that dividend investors should look for.

Less exposure to European banks: If you have been following the news lately, you will remember that many of the largest banks in the world have been very volatile because of their direct and indirect exposures to sovereign bonds. Take the example of Morgan Stanley which does not hold huge positions in Greek bonds but it has large interests in French banks that do have those exposures. That has caused Morgan Stanley to be highly volatile. Emerging countries banks and China in particular tend to have much smaller exposures to the type of issues that the world economy is currently facing.

Strong currency: The Chinese Yuan continues to be under the radar in terms of world trade although it is quickly gaining importance. The US government has made it crystal clear that it thinks the Yuan is massively undervalued but the Chinese government is looking to let its currency appreciate only very slowly over the years so that it can adapt to a stronger currency. That will have a very big impact on all Chinese assets that will also benefit from this appreciation. Add to that the fact that the Yuan is likely to slowly become a second “reserve currency” which will also add tremendous pressure upwards and I can only imagine how much more the Chinese Yuan will be worth 10 or 20 years from now.

Tomorrow, I’ll take a look at different ways to invest in China

Turns Out The World’s Richest Man Was in Libya…!

By: ispeculatornew | Date posted: 10.25.2011 (5:00 am)

It’s incredible isn’t it? We all know that rankings such as the “Forbes World’s Richest Men” are approximations and there have always been a few that complained about the accuracy of the rankings but today we found out just how wrong these rankings have been about the world’s richest man. Look at the latest rankings on the right and you will notice that Carlos Slim is miles ahead of the competition with an estimated net worth of $74 billion.

However, new information has come out about someone that should have been at the top of these rankings for many years. In fact, not only should he be at the top of these rankings but most recent estimates are that his net worth was higher than the next 3 guys on the list (Carlos Slim, Bill Gates and Warren Buffett)…! Incredible isn’t it?

Who Is This Man?

In case you have not guessed yet, his name is Moammar Kadafi, the former leader of Libya, who was a dictator over the country for 42 years and was able to divert billions of dollars every year into a multitude of different places, bank accounts around the world under dozens of names, real estate, etc. To give you an idea, this equals about $30,000 per person in Libya, a staggering amount anywhere but especially in a country so poor.

What Will Happen to The Money Now?

The first issue is that most of this money had been frozen by countries all around the world so there will now be a process to unfreeze the accounts and hopefully turn them over to the Libyan government. Honestly, I’m not sure how this can possibly go well. Having hundreds of billions of dollars appear will certainly create a lot of temptations for the new Libyan government and it will be interesting to see how efficiently that money can be managed.

How Many Others Are Out There?

My fellow readers, you might know someone who has a few billions and is missing on those rankings? Maybe you would know such a person very well? 🙂 If that is the case, please be sure to let us know and we can certainly give you some help evaluating your fortunes if necessary. Just fly us out to your private islands and private properties around the world, we’ll be glad to spend a few days (or more!) to give an accurate evaluation:)

Thoughts On 5 Technology Stocks

By: ispeculatornew | Date posted: 10.24.2011 (5:00 am)

After what has to be considered an exceptional year of trading, I still have one trade that is live (long Google and short eBay) but no matter how that turns out, the yearly return on the long & short technology trades is likely to be around 80-90%. As much as I’d like to take credit, I have to say that there’s no way I’m that good!:) Luck helped somewhat and a few trades that turned out very well. That being said, as proud as I am about my year of trading, being up 3 years in a row is even better and that is the streak that I really would like to keep going.

Technology Stocks Newsletter

First off, after doing a survey a few weeks ago, I got a lot of positive feedback regarding a technology newsletter where I will be discussing my opinions about certain of the stocks that I follow, more discussions about my current trades, etc. As the current newsletter is mostly focused on dividend investing/passive income, I think that adding a second one makes a lot of sense. For now, I will be sending this newsletter out every 2 weeks and that may change over time.

If you are interested, you can sign up here, it is free of course:

Feel free to let me know of any questions or comments regarding these tech companies, I’ll be more than happy to answer as best as I can!

Removing Ku 6 Media (KUTV) From My Radar

I currently have 38 stocks that I follow with Groupon to be added very shortly. The great thing about having so many stocks is that it gives me so many possibilities when trading but the challenge of course lies in the fact that tracking and staying up-to-date on these companies is always a challenge, especially the Chinese ones. Today, I decided to remove KUTV from the stocks I follow, mostly from lack of reliable information about the company which makes it impossible for me to trade the name in the near to medium term. That might change if KUTV can become a serious challenger to Youku (YOKU) but for now, I’m taking it off the board!

IS Tech Stock Thoughts

Since I will not be opening any new long & short trades for 2 more months, I thought I’d share my thoughts on a few names today. I’ve already written about my rationale for being a believer in both Amazon (AMZN) and Netflix (NFLX) recently so I will ignore those 2. They are both reporting earnings this week so I might discuss them more in the next few days. While I do have good impressions on LinkedIn (LNKD) and bad ones on Pandora (P), they are based off of too little given these companies are so new so I will also refrain! Here are some thoughts on others:

Blue Nile (NILE): Negative Outlook: The stock that I have loved to short in recent years has continued to trade at expensive prices. Sales are rising a bit but it’s coming at the expense of earnings which are more or less flat  How in the world does such a company justify a 35-45 P/E ratio beats me.

Baidu (BIDU): Positive Outlook: I’ve been vocal about my long term belief in Chinese internet stocks, especially in leaders and Baidu is the best example you could hope for. The stock is certainly risky because of its activities, the fact that it relies so much on the Chinese government, etc. I do still think that on a valuations basis, the stock looks cheap and I would certainly be positive about its perspectives.

Apple (AAPL): Positive Outlook: Again, not much of a change for me, I do still think that despite its huge size, Apple remains undervalued as it can still put up some growth. I am very much in belief in the fact that the earnings miss was more than anything about millions of customers putting off a purchase in anticipation of the release of the latest iPhone (4S). Over the long term, the company is still very much setup for long term growth and while it does face an increasing amount of competition, I think the group of loyal consumers continues to increase which will translate into more use of all of its other products. Buying Apple at a 10.03 forward P/E is a bargain no matter how you look at it.

Yahoo (YHOO): Unknown Outlook: I know, this view might not help much. My point however is that Yahoo outlook is increasingly uncertain as the bidders come in and out, management goes over different strategies concerning all of its assets. I have been very bearish on Yahoo in the past few years with much success but until the situation does become more clear, I will personally not trade Yahoo either long or short. It becomes a guessing game unless you have a great deal of (insider) knowledge.

Travelzoo (TZOO): Positive Outlook: Because of the way Travelzoo has set up its business, it has a strong and loyal customer base with a stronger contact point (email) than most competitors which has helped it a great deal put up strong growth in recent quarters. I do expect that tendency to continue in the short to medium term making its current valuation very attractive.

I would love to hear your thoughts on these 5 stocks or others on our radar, I will leave you with the numbers for these 5 names:

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Financial Ramblings

By: ispeculatornew | Date posted: 10.22.2011 (8:59 am)

 Today I got a very interesting email about what Facebook might look like if Microsoft ever bought it out:) I’m a believer in buying Microsoft’s stock these days but still thought the image was very funny…! I’ll get back to preparing for the upcoming winter (sigh..) but here are some readings well worth your time:

Dear Investor, Why Are You Paying Those Fees? @ TheDividendGuyBlog
What Are Stable Value Funds? @ ObliviousInvestor
A Historical Look At CEO Pay @ The Big Picture
Best International Dividend Stocks @ WhatIsDividend
The 1% Ain’t What It Used To Be @ Clusterstock
Building Wealth: Income and Expenditure @ Dividend Monk
Aroway Energy analysis @ BeatingTheIndex
Are Low Interest Rates A Solution or a Problem? @ BalanceJunkie
Joint CFA and Masters Program @ SmartFinancialAnalyst
Apple (AAPL) Misses @ Zero Hedge

Days Away From Zynga (ZNGA) and Groupon (GRPN) IPO’s?

By: ispeculatornew | Date posted: 10.21.2011 (5:00 am)

Every time that I hear about upcoming tech IPO’s, I’m always a bit anxious for the one that I’m waiting for more than any other, the one that I’ve said to be the best investment opportunity out there; Facebook. Unfortunately, there is nothing to report on that front and Spring 2012 still seems like the most likely timing for the social network to go public. That being said, we might see two new public companies join our universe of stocks in the coming days as both Groupon and Zynga have officially filed, disclosed their tickers (ZNGA for Zynga and GRPN for Groupon) and expect to turn public within the next 30 days.

Groupon (GRPN) To Make Jump First

The New York Times has reported that three people with knowledge of the situation have confirmed that Groupon will turn public later this month at a valuation near $10 billion, much lower than the initially discussed $30 billion from a few months ago. Why such a decline? We have discussed a few of the concerns that we and other investors and regulators have voiced over Groupon, its business model and its accounting “tricks”. Because of the “quiet” period, we have not gotten much of an answer from CEO Andrew Mason regarding all of the allegations and there could very well be some logical explanations but I am personally going to be very cautious about trading this name for now, much as I have been about Demand Media (DMD), which is down nearly 80% from its high (April 6th 2011) after going public earlier this year.

Zynga (ZNGA) Looks Much More Attractive

Very recently, we did a comparison of the valuations of Zynga compared to 2 leading gaming companies and while the stock does look a bit expensive and risky, I still think that the upside is very significant for Zynga and could very well imagine buying up some of the shares that will be released (it all depends on the price of course). How does it compare to other companies such as LinkedIn (LNKD), Pandora (P). I’m stil unclear about LinkedIn which looks expensive but has incredible potential but I think it’s a no brainer when compared to Pandora.

The recently announced “Project Z”, should end up being a major positive for the company if it can diminish its reliance on partners such as Facebook. It will certainly be a long term project and could take some time to lift off but any business it can generate will be very important. Honestly, there isn’t much the company can lose by going this route.

One Key Thing To Remember

I have wrote a few times about the dangers of shorting high growth stocks. I can tell you right now that you would probably be crazy to start shorting either one of these companies, which will probably be highly motivated to generate big numebrs. You would also likely be going against what are sure to be very excited investors buying into the “next big thing”… I can already imagine the headlines:

“Groupon, the 21st centure merchant”

Or

“Your only chance to invest in social gaming, a market predicted to triple within a few years is with Zynga”

Now the question goes back to you, do you intend to buy one or the other of these stocks when they turn public?

Dividend Battle: Procter & Gamble (PG) vs. Johnson & Johnson (JNJ)

By: ispeculatornew | Date posted: 10.20.2011 (5:00 am)

One of the comments that we received in our latest was a request for more dividend matchups such as the one on Coca-Cola (KO) and Pepsi (PEP) which we revisited in our free newsletter last week, in case you have not yet joined our free weekly dividend focused newsletter, we highly encourage you to do so now:



Back to today’s subject though. We looked at several of the best dividend stocks out there and two that seemed like natural fits to face each other were Procter & Gamble (PG) and Johnson & Johnson (JNJ), two of the bigger consumer staples names out there, two of the most stable, consistent and reliable companies that do well no matter how the US economy performs. Both could certainly be held in a dividend portfolio but chances are that you would be choosing between them. So the matchup makes a lot of sense and we will be using the top 20 things that we look for in dividend stocks mostly and also consider their sustainability (both would likely not have any issues there). Without further wait, let’s get started:

Dividend Metrics

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Johnson & Johnson (JNJ)

Procter & Gamble (PG)

I think that while both have very interesting profiles, JNJ’s higher yield and higher 5 year dividend growth are enough for to call them a winner in this section. That being said, both stocks qualify as dividend aristocrats thanks to their impressive long term dividend payouts.

Company Metrics

[table “329” not found /]

Another very difficult pick but I will have to side with PG on this one, mostly because of its higher sales and earnings growth. Earlier this week, JNJ announced that while sales increased a bit, margins got worse resulting in net income dropping 6.4% mostly because of generics cutting into sales of a few of its products. Most of the other numbers are comparable but sales and earnings growth will make a big difference in long term dividend growth.

Stock Metrics

[table “330” not found /]

Johnson & Johnson (JNJ)

Procter & Gamble (PG)

Industry Metrics

The fact that Johnson & Johnson has exposure to pharmaceuticals makes it somewhat different from Procter & Gamble in the fact that it depends on patents for some of its sales and as those expire, sales do end up declining a bit.like they did in the most recent quarter. As for their other activities I think both companies are fairly similar in the fact that they own very strong brands in industries that are very resistant to fluctuations in the economy. Both continue to spend important amounts in marketing to solidify their leading positions thus reinvesting to ensure their long term future.

Fit Within Your Portfolio And Sustainability

While both stocks would clearly be great choices, I would personally tend to stick with Procter & Gamble over Johnson & Johnson and could easily have included one or both in the Ultimate Sustainable Dividend portfolio. Do you agree?