Archive for June, 2012

Why You Should Never Buy Another Physical Bond

By: ispeculatornew | Date posted: 06.29.2012 (5:00 am)

I know, I know, I wrote about how much bonds you should own in your portfolio so you are probably thinking that I’ve turned insane or something. I assure you I have not. But today, I was reading about the new Pimco Bond Total Return ETF fund (TRXT) and trying to think about how quickly things have changed for investors.

Even 5-6 years ago, someone that wanted to buy bonds had to do it the hard way. They would buy the bonds through their broker, either online or by calling them up. In general, you get a price that you can then buy or sell. If you have decent size (like $XXX,XXX), you might be able to negotiate a slightly better rate.

Now you did get exposure to that bond you wanted but the downside is that you have little to no diversification. So ideally, you buy a few different bonds like this. Now let’s look at the quotes of a bond that you might typically see:

Bid: 103.20
Ask: 105.50

Let’s imagine that the fair price of this bond is in the middle so 104.35… The critical part is that someone buying this bond will lose about 1% instantly on this bond! If you were to get similar quotes on a stock like Apple (same %), it would look like this:

Bid 524.42
Ask 536.10

When in reality this is how Apple trades:

Bid 530.25
Ask: 530.26

Can you imagine trading in a market like this? If you simply buy and sell 1 share, you basically lose 2% of your money.. Would you trade in such a market? That makes a major difference!

The ETF Way

Of course, the big difference is that big institutional investors and funds buy bonds millions of dollars at a time. By doing that, they get much better markets and can trade in a way that is much more comparable to how stocks are traded. The key here is that thanks to bond ETF’s and mutual funds, you can get all of the advantages of these big funds, get very solid diversification, all for a very reasonable fee. The fact that the biggest bond fund in the world, Bill Gross’ Pimco Total Return has launched an ETF that charges 0.55% of annual fees. That seems like very little to pay. Owning such a fund or alternatives like Vanguard’s Total Bond Market gives exposure to hundreds and even thousands of bonds, something that is nearly impossible to achieve without investing tens of millions on your own.

It Would Still Be Great If…

No doubt, I would love to see bonds eventually trade electronically so that smaller investors such as you and I could also get access to decent pricing. However, that is very unlikely to happen anytime soon. Why? There so many different bond issues that it would be very difficult to pull off technically to have an “exchange”. Also, bond brokers have more to lose by doing this. Why? Right now, in markets like these, bond brokers make big spreads on every trade with retail/smaller investors… why give this up? It’s the same thing for all off-exchange products.

How To Avoid Losing Sleep Over Market Crashes

By: ispeculatornew | Date posted: 06.28.2012 (5:00 am)

Sleep is supposed to be between 25% and 33% of our life. It’s such a simple concept. Just watch a baby or a small kid go to sleep and you’ll remember how it felt like to go to bed without an ounce of worry. How things change hey? And it only gets worse when you have a first kid. That is when sleep becomes the most valuable thing in the world. Take a look at any new parent and you will see just how desperate we can become for a few extra hours of sleep. Why?

I guess those end up making the difference between a joyful, happy day with family, friends and co-workers or a dismal, frustrating, never-ending day. We already lose sleep for so many things in life; kids, worrying about friends or family, about things we did or didn’t do, ideas that should be written down, others that should never have entered our minds, etc.

There Are More Than Enough To Make Us Lose Sleep…

Believe me, there is no need to create yourself additional reasons to have a less than optimal night of sleep.  Money can be great but it can also become a source of stress for individuals, couples and entire families. But when you start to wonder if you did the right thing, if you’ll have enough, etc. Then it cane become a source of stress, of broken dreams, of stress which can lead to a whole other group of problems. I’ve personally always felt like one of my goals was to never put myself in a situation where I would be unable to sleep or getting into arguments over money.

7 Steps To Never Lose Sleep Over Money

I guess there are no miracles but here are the steps that I personally follow and that (knock on wood) have worked out well.

1-Have a LONG Term Financial Plan

If you need money for short term goals, travel, etc, then it should not be invested in risky assets. Plan for the long term. Any trips includes unknown adventures but if you keep the end goal in sight, you will tend to reach it over time.

2-Only Invest What You Can Afford To Lose

I do not only mean what you can afford financially. If you know that losing $20,000 within a month will generate stress and panic, than make sure that it does not happen by having a safer portfolio, etc.

3-Do Not Worry About Short Term Fluctuations

Since the money you have invested is not needed anytime soon, it should not matter how much the market gains or loses in a single day or week. You are in it for the long run.

4-Improve Your Financial Security Every Year

You will not always have winning investments but if you are able to constantly save money, and increase your recurring savings plan by more than your income increases, you will both ensure that you are living within your means and that all things being equal, you are putting yourself in a better situation every year. If for example you are getting an average increase of 2 or 3% per year and increase your automatic savings plan by 3%, you will be putting yourself in a great position.

5-Have An Emergency Fund

Nothing can add stress like knowing that any type of bad luck or unexpected expense (such as the car breaking or any other unexpected item) but if you can slowly build yourself an emergency fund that is always there, available to be used if needed, that will already be a huge step in reducing stress.

6-Use A Strong Investment Methodology

As you know, I’m a strong believer in using a consistent investment method and in many ways, dividend investing might be exactly what you are looking for. It’s important to have defined entry and exit points in order to avoid acting through panic. For example, selling off after a big decline can end up costing you big.

7-Have Faith

Through the last century, there have been many different moments of crisis with historically bad markets, a depression, a tragic 9/11 event combined with a tech stock bubble, a huge credit/housing bubble crisis, etc. In all of the cases, some argued that it was the end of markets, that the markets would basically go to 0, etc. But markets recovered in big ways, they tend to always do that.

Bonus Tip

Discuss with your significant other about money,  your objectives, etc. Not only in times of crisis but on a regular basis, in order to avoid surprises and to be more comfortable talking about these things when things are more difficult.

In the end, you might not be able to sleep as well as some but you won’t be too bad off either:)

What Are Your Thoughts? Do You Tend To Lose Sleep Over Your Investments?

Once A Run On Banks Starts….

By: ispeculatornew | Date posted: 06.26.2012 (5:00 am)

There are many symptoms of the current European crisis. Some of the symptoms are also the causes in a very vicious cycle. The fact is that our whole system relies on confidence as I mentionned a week ago but also on a strong banking system. Why? Banks acquire money from central banks and depositors. They then put that money to use by lending money to small and bigger companies, to individuals, they invest money in the markets, help companies do merger & acquisition activity, etc. Without banks, there is no economy in much of the West. That is also why in the recent credit crisis (2008), the US and other governments had NO CHOICE but to rescue several banks. They did try not doing so with Lehman and it turned out to be a terrible mistake.

Europeans Banks In Big Trouble…First in Greece

A few months ago, some investors started worrying about Greek, about its possible departure from the Europe, about its never ending deficits, etc. That caused some investors to withdraw their funds from those Greek banks. Why? To avoid losing their money in the event that the bank goes default. Or having those Euros converted to Dragha in the event that Greek had to exit the Euro currency. That was a major problem of course but since Greece was so small, it wasn’t tackled seriously. Other European countries simply agreed to lend capital.

Then It Got Much Worse

Of course, when you hold money in a bank and you hear about friends or family taking their money out, you start to worry. Eventually, you also do the same, tell your friends about it, etc. And why wouldn’t you? There’s much more to lose by having your money in a Greek bank than having it an ultra-safe German one. The major issue started though when residents in the much bigger Spain and Italy started to feel the same way. Add to that the fact that Spanish banks have been known for holding very shaky real estate loans on their books for much more than they are worth and you can see how dozens of huge banks have been facing liquidity issues.

That is another vicious cycle. Once news starts reporting such liquidity issues, other banks stop issuing short term loans to those banks, more clients withdraw their funds, etc.

Where We Are Now

Even these days, the so-called peripheral banks are losing nearly $1B in deposits every day. You don’t need to be a rocket scientist to know that this spels major trouble. The countries involved such as Spain, italy and Greece do not have enough funds to bail out their own banks so they depend on international or European institutions in order to save their banks. Given the hundreds of billions required, it’s very much unclear how they will be able to get this done…

The Leverage Problem

US banks were highly leveraged in 2008 which made the problems much worse. Europeans banks though are even more leveraged so the issue of having a run of banks (which the US did not have to deal with in 2008) could become much more problematic.

No Easy Solution

A big part of the problem is that while Canadians and Americans have protection if their bank goes default, that is not so much the case in Europe. Since most of these countries are in a bit of a hole themselves, offering such a guarantee would be pointless. And it’s doubtful/improbable that a country like Germany would be willing to back such a measure…

It Will Only Get Worse

I don’t see any reason for someone to hold funds in such banks or transfer back. That will make life very difficult for those banks, for local businesses and the economy, making things even worse for those economies. At some point, we will see citizens being unable to withdraw their funds from their banks which will create panic…

It’s already very ugly and I think it will get much worse..what are your thoughts?

Is Microsoft (MSFT) About To Make A Major Comeback? Is It The Berkshire (BRK/B) Of Tech?

By: ispeculatornew | Date posted: 06.22.2012 (5:00 am)

Microsoft… it’s not the sexiest company in the world by any means but in many ways, Microsoft has been flying under the radar. Just think about this for a minute. When you look at Berkshire Hathaway, you have a company that is mostly powered by its strong insurance business. Thanks to that continued cash flows from that business, the company led by Warren Buffett has been able to diversify its business, buy strong holdings that required a lot of cash and investments such as rail road companies, etc. Then you have Microsoft, the company now led by Steve Ballmer. I don’t think many would put him in the league of Buffett and I’m not arguing that he should either. However, I think it’s fair to say that Microsoft is making a solid charge for the next generation of tech. It was built on the foundation of a dominant operating system (Windows) and software (Office) and has been able to build several incredibly strong businesses thanks to the cash flows generated by those businesses. I might be stretching things a bit but it’s not as crazy as you might initially think.

What MSFT Has Done With Its Cash In Recent Years

#1-Return Cash To Shareholders – While companies such as Google and Apple have continued to come under fire for their reluctance to return cash to shareholders, Microsoft has been able to both pay out dividends  and buy back shares.

#2-Invest In Key Businesses – Microsoft has like Google been involved in trying to build other businesses but I would argue that at least in some regards, they’ve had better success. What exactly?

XBox Console: A few years ago, many thought the venture would fail but it has proved to be incredibly valued. Not only is it the top gaming console on the market but it is giving Microsoft a very valuable lead going into the transformation of the living room. I caution all of you to not underestimate this part. Google, Apple, Sony and others are all trying to lead this effort to transform the living room where users might end up switching from cable to a subscription from one of these companies. Microsoft already has its foot in the living rooms, has millions of users already paying a monthly bill and it will not be that big of a stretch to continue adding content and services to what is already much more than a gaming console.

Online Businesses: There is no doubt that these businesses have been money losing businesses for several years now but Bing and other services have at least made themselves the top alternative to Google, has a great relationship with Facebook thanks to its early investment, etc. Not many companies would have had the resources to even make a run at these businesses but Microsoft has set itself in a great position in what is quickly becoming a very connected world.

A Look At the Microsoft (MSFT) Numbers

Let’s take a look at the numbers for Microsoft:

[table “406” not found /]

I personally feel like Microsoft should be trading at a higher P/E given the strength of its businesses and both the recent growth in sales and earnings but also potential for that growth to keep up going forward.

What are your thoughts on Microsoft? Do you think it’s a good purchase this price?

At What Point Does Research in Motion (RIMM) Become Cheap?

By: ispeculatornew | Date posted: 06.20.2012 (5:00 am)

RIMM, the Canadian technology jewel has been losing its luster very quickly for the past 2-3 years as it continues to fall behind heavyweights Apple ($AAPL) and Google ($GOOG). I wrote about the fact that it was a falling knife. I’ve made some wrong calls but I was certainly right about calling RIMM as a falling knife to avoid while saying that BP and Netflix could be trusted. So RIMM continued to fall as you can see in the chart below:

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What Is $RIMM Worth?

I’ve been staying far away from RIMM in the past few years. I’ve had it near the bottom of my 2012 Tech Stock Power Rankings. Despite that fact, I’ve been scared of shorting the stock for fear of a rebound or worse, an acquisition. It’s one of those stocks that I’ve stayed away from trying to short. Thus, I kept looking at the stock fall, unable to profit from it.

The problem with valuing for RIMM is that I have to say that it’s beyond my ability to value a stock like this. Why? I trade based on P/E ratios or on future expected P/E ratios. In RIMM’s case, I don’t expect the company to become profitable anytime soon, if at all. Just look at the trend in terms of revenues and earnings per share.

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The company has already confirmed that it would be losing money in the very near future. Its market share is shrinking very quickly with no end in sight as it is now losing many of its more loyal, corporate clients.

So What Is RIMM Worth?

The company has tons of assets. It has clients, it has models, it has patents and phones that could be used. Some companies such as Facebook or Microsoft have been rumored to have interest but it’s far from a done deal. I don’t have any doubts that RIMM has many valuable assets as well as what will soon be growing debts. Is the net worth $1? 2$? 10$?

Stop Blaming Investors & Hedge Funds

By: ispeculatornew | Date posted: 06.19.2012 (5:00 am)
I always find it very interesting, almost fascinating when countries start complaining about governments causing their economies to fail. When you look at some European leaders that blame their issues on short sellers and on funds that speculate on their bonds and stocks, I find it a bit extreme and vastly incorrect.
Any company or government has the choice of using debt markets to finance their activities and in reality most if not all of them do. There is a huge difference between companies that end up taking debt simply to reduce their cost of capital and those that gradually become desperate. Most of EU countries have VERY generous social programs. If you offer early and generous retirement and unemployment programs, subsidised education, free health care, have a population that pays little taxes and very little productivity, you would likely start running deficits at some point. Over time, the debt level becomes more important which leads to one critical thing.

Depending On The Debt Markets

A company such as Google has issued bonds in the past but it is on the other extreme as it could buy them back and not issue any more for decades. A country like Greece or Spain has too much debt to even consider that. They depend on debt markets not only to run their yearly deficits (with no end in sight) but also roll over the current debt. At some point, investors start to worry about the weight of debt and once that starts to set in, rates can start jumping. I’ve heard many say that the US should not worry about its debt level because it pays almost no interest.That is insane. Rates might increase over time. But they could also jump very quickly. Just a few years ago, Spain and Italy had almost no one worried about their bonds. In recent years, the level of panic has jumped and yields have increased sharply. That means billions more in interest charges which puts even more pressure on the government. Starting to reduce deficits when that cycle starts is very very difficult.

Why Put Yourself In Such A Situation?

I don’t think it’s right to blame investors that suddenly do not want to buy Spanish bonds. I sure would stay far away from them. Even if you did blame them, what are you going to do? Force them to buy? Have someone (EU, Germany, etc) bail you out? All of those usually lead to very difficult conditions. Compare that to some other countries in Scandinavia or Canada that have been able to balance their budget. Sure, it would turn out badly if their yields rose quickly but they would have much more time to react.

New Stock Pick Long LinkedIn ($LNKD) & Short Zillow ($Z)

By: ispeculatornew | Date posted: 06.18.2012 (5:00 am)

Ah well, when things are not going your way, it can get tough. Just one day after closing my trade on Zynga ($ZNGA), I saw the trade gain over 10% on Friday in what would have been a big turnaround. Hopefully that moment comes sooner than later. What has helped has been the fact that markets have been sluggish making the comparison a bit better although the overall return is still poor this year for long & short tech stock picks! Today I am happy to open a new trade with one stock that I’ve been a big believer in. Let’s start off by looking at the number for Dice Holdings and Monster Worldwide: [table “405” not found /]

Long LinkedIn (LNKD)

LinkedIn has been a stock and company that I’ve been a big fan of. Lately, in our free tech stock newsletter, I looked at its valuation in comparison to Facebook’s and it does remain more expensive although you could probably argue that there is less risk involved. It’s been a few difficult weeks for LNKD lately following a major security breach but I do still think the stock looks great. It does remain difficult to trade given the sky high valuation but I do think that in some circumstances such as today’s, it becomes a very decent opportunity.    

Short Zillow (Z)

Zillow has been able to do much better than what I would have expected but I do think that despite all of its momentum, the fact that it relies so much on the still very weak real estate sector has been a major issue. The bottom line is that I think Zillow is priced for higher growth than it can actually achieve.

Disclosure: No positions on LinkedIn (LNKD) and Zillow (Z), this trade will be opened on Monday morning

Weekend Readings

By: ispeculatornew | Date posted: 06.16.2012 (7:27 am)

Hey everyone, I hope you are all doing well, with a great weekend just getting started! I’m really looking forward to tomorrow’s Euro action and seeing the results of the Greek elections.. should be very interesting:) Here are some readings if you have some free time!

Not All ETF’s Are Cheap @ BuildYourETFPortfolio
Does investing in gold make sense? @ Dividend Ninja
Making the case for cash @ Monevator
Should asset allocation change with age? @ ObliviousInvestor
House buyers: Is 20% always better? @ MoneySmartsBlog
Washington vs The Middle Class @ TheBigPicture
The Definitive Lesson In “New Normal” European Geography @ ZeroHedge

Dividend Investing Readings:

The investing fee that makes a $300,000 difference @ TheDividendGuyBlog
Starbucks (SBUX): Substantial optimism is built in @ DividendMonk

Tech Readings:

Has Zynga Peaked? @ Wall St Cheat Sheet
Facebook exchange, a new revenue source? @ TechCrunch

On The Verge Of A European Collapse? Spain Prime Minister “The Euro Is At Risk”

By: ispeculatornew | Date posted: 06.15.2012 (5:00 am)

More than ever, we live in a connected world, one where the Global Economy is more connected and more diversified than ever before. A few decades ago, Russians and Americans argued about what the best economic system truly was and it’s very clear who won. To be clear, it’s also crystal clear that this capitalist system has been superior, has lifted more people out of poverty than any other system in the world, etc. It is a true miracle that the number of poor continues to diminish and while there are still too much poverty, we are lucky to have institutions such as Charity Water, the Bill and Melinda Gates Foundation and others that are working hard to rid the world of this poverty.

One Major Weakness

The one big problem though in our global economy is that it relies on one commodity more than anything else: “Faith”. It relies on the belief that we work hard, earn money that we can invest in the market, make decent returns that will help us fund our retirement, especially when you add your company and government pensions. Faith in the system basically.

It’s Disappearing… 

Over the past few decades, we have seen a few big companies go under, such as Enron, Worldcom and even a few countries default on their debt (Argentina and Russia are the first two to come to mind). Lately though, things have started to slip. There was the 2008 credit crisis that took out several global players such as Lehman and Bear Sterns while requiring massive government bailouts for so many others.

Then Greece Happened…

The European Union is in many ways the most important economic zone in the world and while the single economic zone and currency seemed like a brilliant idea to many, others wondered how it would be able to face major challenges. Greece has clearly provided that first test. It turns out that it forged its finances (thanks to Goldman Sachs help) to enter the EU in the first place, has a dysfunctional system, a weak economy, banks that are quickly going under, a government that has been unable to turn things around, etc.

The Contagion Has Started

Then, after a few years of trying to patch up things, we seem to be on the brink of a much much bigger problem. If the possible exit of Greece from the EU was the only problem, everyone could live with that scenario. But we now have Ireland, Spain, Italy and others all looking at needing bailouts with many others starting to look vulnerable. If you look at the banking system, the backbone of our wonderful system, you will  see that banks in those countries are quickly running out of money as investors and clients lose faith and move their funds elsewhere. The problem is that no one is able to tell who is now vulnerable, who isn’t which is quickly freezing up credit in ways which could end up making 2008 looking like a piece of cake. EU countries have already discussed the idea of limiting ATM withdrawls… can you imagine the panic?

No Clear Solution

Governments, Central Banks, international institutions such as the EU the World Bank and the IMF have all been looking for solution to get out of this mess as have major banks but there are no clear solutions. It’s not even that solutions would require this person or country to accept. It’s much more critical. No one knows how this could end up well….

A Difficult Market

One clear consequence has been a complete lost of faith by investors in the market as they try to protect their assets as best as they can. Generating yield through dividend investing or by holding safe government bonds (the American ones.. not the Greek/Spanish ones.. just to be clear). It gets worse though. Markets have lost much of their value but there are also legitimate worries that some currencies could end up suffering greatly. Other assets such as real estate which have been losing value all around the world see few signs of slowing down.

What It Has Come To

The Ideal

It relies on the belief that we work hard, earn money that we can invest in the market, make decent returns that will help us fund our retirement, especially when you add your company and government pensions

The Reality:

Unemployment rates are sky high everywhere, especially for young people in Europe. 50% People under 30 years old are jobless in Spain, almost 23% of the entire Greek workforce is looking, the US unemployment rate has climbed back over 8%, well over its target as it. –Markets outlook is gloomy, interest rates are near 0% with no sign of rising anytime soonRetirement ages are being raised as governments try to cut down on their costs –With many companies running high deficits, they are eliminating benefits such as pension funds or going under without the money –With dozens of huge industrialized countries under threat of default, the odds that they will be able to deliver on their promises towards current and future retirees is very unlikely at best….

Saving Greece Is NOT Enough

Greece will have elections this weekend which might turn out well (or not). Europe might find a solution for Greece… but even if it does, that likely will not be enough. All of these countries are running massive deficits and are unlikely to turn those around anytime soon…

What are your thoughts on all of this? Am I the only one this worried?…

The Value Of Using Research When Investing

By: ispeculatornew | Date posted: 06.14.2012 (5:00 am)

As you can see on this blog, I do many different types of investments but the two main ones are centered about long term retirement investing and shorter term more speculative picks. In both cases, I often use research done by analysts in order to help me get a better idea of the companies that I am considering but also finding ones that I didn’t know or didn’t think of. In general, my main questions are:

Speculative Picks: Is there an opportunity for greater gains with this stock than the market seems to anticipate?

Long Term/Retirement Dividend Picks: Will this company be able to increase its dividend at a high rate over the long term and if so is it trading at a reasonable price?

It’s Not Just About Numbers

I’m able to get a lot of data about these companies, either through public websites or sources such as Google Finance, Bloomberg, etc. However, numbers don’t always tell the whole story. I wrote a bit of an ironic post about that last week comparing a Facebook analysis to how Groupon was being valued. My main point was that I can easily accept the fact that someone thinks a stock is overvalued or undervalued but only if there are some good arguments behinds them. I might not agree with them but I can certainly understand and respect them. Sometimes, number simply cannot tell the whole story.

Many different things such as the moves by competitors are difficult to judge without some level of analysis.

A Recent Example: Canadian Tire (CTC/A)

Last week, I received what I thought was fascinating research regarding Canadian Tire in a newsletter by The Successful Investor.

Basically, the research discussed the impact that the entry of US store Target (TGT) into Canada would have on Canadian Tire (CTC/A) and how there might be a very good opportunity in buying. It explained exactly how CTC/A should be able to compete with Target and continue to do well. I also learned about their acquisition of some sport merchandise stores which provides great diversification in a fast growing sector of the economy. You would have to read the 2 page report but that was enough to convince me to look a very strong look at Canadian Tire (CTC/A). Its dividend is a bit under 2% but everything else seems to compensate for that fact.

How I Don’t Use Research

Research is a good starting point and of great help to get a better opinion. But I would never:

-Using a buy or sell rating as my only basis…there are too many terrible stories
-Use the target price as any kind of indication

Research That I Use

In general, I visit a few select websites and also receive a few newsletter that help me make better decisions in my trading. The two main ones that I’m using are:

John Mauldin’s Newsletter: It is mostly about macro-economics so it might not be very specific (rarely gives out a specific stock) but having a great perspective on what’s coming and what is going on has been invaluable to me. It is free so very much worth the try (newsletters are a bit lengthy but very interesting)

The Successful Investor: I rarely give out recommendations regarding products but I do believe this one can greatly help, it has done that for me. They discuss Canadian stocks, provide research and commentary about specific stocks to look out for. I did let them know that I would be discussing the newsletter in the blog and they were nice enough to offer a special discount for any of you who wish to sign up. You can get half off by clicking here.

Do you use research? If so, how?