Intelligent Speculator

In the past, we discussed sovereign wealth funds and how they are now having a significant impact on capital markets all around the world. One of the main differences is that these funds often do not disclose what they are doing. There are some exceptions though as they do have to comply with exchange regulations where they trade. In the US, that means reporting important holdings of US stocks. Interestingly enough, China Investment Corp, the Chinese government’s wealth fund, is now getting involved in some ETF’s, specifically in some commodity ETF’s. It recently confirmed it now was the 4th largest holder of USO, a crude-oil ETF. It also made important purchases of GLD, the very known Gold ETF. Is anyone monitoring their activities and specifically the timing of their transactions?

So what is the problem?

Well, the thing is that when buying stocks, it is illegal to do insider trading right? Why? Because it gives an unfair advantage when someone knows information that will impact significantly the stock price. The same rules should apply to commodities, except they don’t.

Imagine being the Chinese government. You know that you are about to announce some major purchases of gold and that these purchases will put upward movement on the price of gold futures. You could simply buy gold in the few days before announcing the gold purchase. Once the announcement is made, you simply start selling those ETF’s and get some profit. From what I understand, this is not currently illegal but it certainly gives governments and such funds an unfair advantage.

Hedge or speculation?

Of course, the counter argument by these funds is that they are using these ETF’s not to make money but simply to hedge their pricing risk when buying commodities. And that point could be defended. After all, China is a mass buyer of commodities and price increases can hurt the country greatly. Having long positions in ETF’s would act as a good hedge to profit from those prices increases.So yes, it would make sense.

Where do you draw the line though? It is obvious that the Chinese fund could gain a lot financially by knowing important news that will affect commodity prices. It would be very tempting for managers to add a few millions in profits thanks to this information, especially since it is not “technically illegal” and also because there are no organisations that could currently regulate such trading.

Any thoughts??

I have written a few times about the anticipated IPO’s by Facebook, Twitter and LinkedIn and while all three continue to gain importance in the internet sphere, we do not have any more details about the timing of their public offerings. All networks are doing their best to show that they are the “popular choice”. Why? Because many believe that there will only be a few survivors in this new battle.

Social networks showing off????

Just take a look at the impressive graph posted by Twitter yesterday showing an exponential growth in activity. Facebook posted less than two weeks ago about reaching 100 million users and they do seem to be the two major leaders right now. But investing in both is next to impossible right now for regular investors so we are left with smaller players.

Other possibilities???

Yahoo owns Flickr, which in my opinion remains its most valuable property. But that being said, as regular readers of this blog would know, I am not a fan of Yahoo and would certainly not be the one to recommend using them as a social play. That leaves Google, which owns both Youtube and the recently launched Google Buzz.  Youtube is huge and will surely become an important center of profit in years to come but the problem is that at least for now, Google is hardly a play on social. Truth is that an insignificant portion of the revenues and profits come from Youtube and obviously from Google Buzz.

Stuck with nowhere to go then???

So that leaves us with no other option than patience, which is a shame as in many ways, Social and Search are now the two most important aspects and would certainly provide many investing opportunities.

Am I the only one anxious to get in the game??

Oil did rise significantly in 2009 after a dramatic drop from 145$ (in July 2008) to 42$ at the start of this year. There is still so much speculation about oil, how much of it is left, if alternative energy sources will replace oil and just how high it can go!

The most problematic part of this for me is that the correlation between oil (and most other commodities) and the US dollar. Since it is very unclear where the US dollar is headed, it makes it much more difficult to predict commodity movements. However, oil still seems like a very solid bet for 2010 for many reasons including:

-Institutional investors continue to increase funds allocated to oil and other commodities as a hedge against inflation but also to be able to deliver what have been very solid returns in the commodity sector in recent years.

-Stimulus money spent all over the world has generally been very bullish of oil both because of the way it is spent (generally in oil/energy needy projects) but also because of its general impact on the world economy.

-Oil demand is expected to move higher after suffering what turned out to be its biggest percentage loss since 1982 this year. Amazing isn’t it that oil prices moved so high despite diminishing demand? But don’t expect demand to stay low for much longer. There is so much growth in emerging markets that peak oil continues to be a much discussed subject.

There is of course risk for price downturns but we have to consider the risks to be much smaller than the potential profits made from oil investing at this point. It is very unlikely that oil will go back down under 50$ but an increase over 100$ seems very possible/likely.

With that being said, here are a few suggestions for crude oil investors:

US ETF’s

OIH: Oil services holders trust
OIL:: Tracks Goldman Sachs Oil Total return index
XOP: S&P Oil & Gas exploration & Production ETF

US singles names

XOM: Exxon Mobile (largest oil company)

Canadian ETF’s:

HOU: 2x daily movement of Crude Oil
CLO:: Crude oil companiessuch as Suncor, Ivanhoe Energy, Imperial Oil
ZEO: Companies involved in the oil & gas index

A few weeks ago, I had made 3 picks for the 4th quarter of 2009 so I thought it might be a good idea to take a quick look at how the positions have been doing since they were put in place.

Basically, the average of the 3 trades made that week is up 1,20%, which is not bad.

Here are the returns so far:

Long AAPL-Short INTC:     +7.19%
Both companies have announced good earnings but there is still a lot of momentum on this trade and I am hoping the launch of the Ereader will be enough to push this trade past 20%!

Long CTRP-Short EXPE: -13.22%

I have been a bit surprised by the underperformance of this trade given that this is a valuation trade, I still believe in this position am hoping it does not breach -20%…!

Long GOOG-Short IACI: +9.64%

This trade lost a few feathers but it is still up almost 10%. Google has been a bit on the defensive this week regarding its competition with Bing but remains as strong as ever while IACI remains unable to do much to impress

I can’t say I am disapointed to see the quarter come to an end as I am back on top of the rankings, with a comfortable lead. Actually, I’ve been fortunate enough to have been leading most of the year but I did slip into 2nd place long enough to actually not be first in Q2.

Choosing picks for an entire year will always be quite a challenge as so many elements can change. As I have discussed in the past, if I were able to update my positions right now, I would probably get rid of at least 1. But overall, I’m quite satisfied with the return and obviously with the ranking. I do feel like I was less aggressive than many other participants, especially those that went into these categories:

-Commodities
-Leveraged ETF’s
-Small caps

Many different strategies can work and I guess it’s logical to be aggressive to try to win but I did try to go for positions that I believe not to have much downside risk. And while for example I thought oil was going to rebound, there was just too much uncertainty in the world to actually think about taking all 4 picks around oil. So I diversified in a way. Will it end up being enough to win? Tough to say but let’s say I prefer being in my position right now! Without further wait, here are the returns of my 4 stocks:

The picks

USO – +9.34% - Like many, I had imagined that if the world economy could fight its way out of the recession, oil would surely benefit and while it might not reach the levels of a year ago, it seemed like a safe bet to expect a rise in the price of the “blood of the world”. I’m a bit surprised oil did not pick up more steam but I’m confident with my position and do think it has more upsize in the remaining quarter. It also turned out to be a bit of a hedge against those other bloggers who took oil stocks (although those who did usually picked a few picks so probably would not have helped if oil had been up to 150$).

GLD – +14.25% – This was another fairly safe pick as I did believe that the uncertainty regarding the world economy would help take gold to new levels. As well, with all of the money that was pumped into the systems, many still regard inflation as a significant threat and gold seemed like a good bet in 2009. It has not proved as profitable as hoped but that is mainly because the stock markets have moved much higher and my two next bets were the ones that would really profit from a market recovery

Technology picks:

Technology is probably the area I know most about and so I did choose two companies that I believed to be undervalued, Baidu (BIDU) and Ebay (EBAY):

EBAY – +69.13% – Ebay has been picked on for a few years now but 2008 was a very tough year for the stock and as I had wrote, I believed that most analysts were not picking up the value of Skype & Paypal when evaluating the stock. When the stock market recovered, Ebay decided to sell a majority portion of its Skype business, thus obviously “helping” investors notice how much the business was worth. Ebay even mentioned the idea it could sell Paypal. While that does not excite me very much in regards to Ebay’s long term future, these actions certainly do help Ebay’s current valuation.

BIDU – +199.13% – Out of all picks made by the bloggers, this is the winner so far! Bidu has nearly tripled as it continues to hold its ground against Google in China. It is now even thinking of expansion in Japan. One of the big reasons why I think Baidu had been undervalued was that many analysts believed that Baidu will end up having legal problems because of many of its activities. As I have written in the past, I think it’s important to remember that Baidu operates in a very different environment and for the moment, Chinese authorities have much bigger issues to worry about. At this point, I do not have many expectations for the 4th quarter for Baidu considering its already very impressive ride this year.

So these 4 picks give me a 73.05% return, here is the ranking so far. As other bloggers publish their articles, I will add links towards their analysis:

1-IntelligentSpeculator    73.05%
2-TheWildInvestor 56.78%
3-FourPillars 44.26%
4-Wheredoesallmymoneygo 43.01%
5-TheFinancialBlogger 24.49%
6-DividendGrowth 11.51%
7-MDJ 8.49%
8-MyTradersJournal -3.16%
9-ZachStocks    -13.17%

Amazon has a lot of momentum these days and thus commands a very high P/E valuation. To be certain, Amazon’s retail store remains its core and will be so for the foreseeable future. The recent acquisition of online shoe retailer Zappos certainly fits in that model. But Amazon is increasingly counting on growth coming from its portable electronic reader, better known as the Kindle. Is it fair to assume that the Kindle will mean to Amazon what the Ipod has been to Apple?

Different release strategies

While the Ipod was not perfect upon release, it was still a very high tech product that ended up taking months and probably longer to be matched by competition. Part of it was the brilliant design and part was the fact that generally speaking, competitors did not take the Ipod threat seriously enough until it was too late. Releases by Microsoft (Zune) and others were late and in most cases did not even match the features from the first generation of Ipods. This gave Apple the opportunity to grab early market share but also take prices down making it more challenging for competition but also ensuring that their product would become the “standard” both from the user and developer’s point of view.

Amazon meanwhile has had a different strategy and a different environment. While its product is certainly the best in the market right now, thanks to its slick design and high capacity, its high pricing as well as some lacking features (colour screen, superior central platform, etc) have left it vulnerable to competition from the outside.

What is Kindle’s competition?

While Apple has been denying any plans to enter the market with a reader, the Ipod/Iphone is certainly more than capable of competing. It is also impossible to discount Apple entering the market with a cheaper, better looking and superior product. It would not be the first or last time that Apple denied entering a market before a major release.

For now, what seems like the real competition for Amazon is Sony with the launch of its “Reader Pocket Edition” in a few weeks. It will be retailed at 199$ which is about a third cheaper than the Kindle. This will probably put pressure on Amazon’s pricing power. And there is of course Google, which has also been very vague about the possibility. It’s a dangerous prospect for any competitor as Google has been digitizing books, newspapers and magazines for a few years now and is years ahead of everyone else. So a potential Google product would have a lot more possibilities in terms of content.

There is so much more to do…

What Apple was always able to do was stay ahead of the curve with its Ipod, with high resolution, pictures viewing, video capabilities, etc. The key was that Apple was always first to initiate. With the Kindle however, it is not clear at all that Kindle will be first in line. Obviously, adding high resolution colours will be in future E-reader editions, as well as wi-fi connections to download content, etc. But the big question is: Who will be launching product with these more advanced capabilities? Because if Kindle is not first to step up, it could very well lose its lead….

Target date funds? Ever heard of them? They are basically funds that are set up as either ETF’s or mutual funds. Not much of a difference between the two, the fees are obviously more important in mutual funds. Anyway, so these funds generally have a date attached to them that they target to. For example, being almost 30, I can expect to retire in 2040 so in Canada I could invest in the TZV Ishares fund. The advantage of course is that in theory I could be investing a significant amount of my savings in this fund as it is diversified but also the fund’s asset allocations will change over time to take on more risk in the earlier years and as retirement approaches, this fund would take less risk and become more geared towards fixed income securities.

In theory, it is great and I honestly was looking into investing in this type of security. That was until I read the fine print. You see, this fund (and many others like this one) actually invests in other ETF’s. So for example, if you have a portion of your investment in US securities, they would take a portion of the cash to invest in an ETF that tracks the S&P500. The major problem here is that you have an additional layer of fees. You are investing in a fund that invests in more funds and thus you are paying two level of fees. If these investments were complicated and difficult to manage it might be worth the trouble. But given that there are only so many investment asset classes, the rebalancing could be done easily by myself and I would be saving 0,20-0,30% on my investment. Sounds small? Think about how much it adds up to over decades and decades. I think it would be very easy to re-allocate anyway. You select the 5-6 asset classes and how you will invest in them (which ETF’s for example). Then, you can simply determine the % you should have in each one and each time you buy new funds, you buy the one that are undervalued on. It’s not perfect but I would expect this to overperform the target date funds significantly over a few decades.

If you read this article for example, you can see how they make it seem so difficult to manage these funds ourselves when actually these target date funds are barely changing their investments and allocations making it very easy to replicate.

But I’d be interested to know if you have looked into other target date funds and if they are all built in this way. I would imagine that mutual funds built this way would be even more of a “bad investment” as the fees will add up even more quickly.

A few weeks ago, I went long S&P500 at 793 thinking that the S&P seemed to be back on its way. The trade went down slightly to start off, but it is now up 9%. I did so through XSP, a Canadian dollar ETF that tracks the USD return of the S&P 500. It is exactly what I was looking for as I do wish to be exposed to the S&P 500 but given that all of my costs are in CAD$ and that the near future direction of the CAD$ is very unclear, I did not want to have the return of my trade affected by the exchange rate fluctuations.

I had decided I would close out the trade if I made 10%, waiting for a retreat as the economy is obviously not out of its misery yet. Of course, now that the trade is nearly up 10%, I’m hesitating about my early decision. Knowing that closing trade discipline is essential, I will probably be respectful of my initial thought. But the question remains… is the S&P 500 rally about to end??

I did find an interesting analysis using the triangle model, you can take a look at a video here, it’s free:) It does confirm that the S&P 500 is running into a lot of resistance right now and it is quite unclear if I would be better served by exiting my position and re-entering at a lower point. There are so many different ways to look at this debate:

-Time and time again, research has showed that trying to time the market has resulted in poor results (TFB wrote about it last week here)

-However, there is a very heated debate right now about the notion that buy and hold can still be a successful strategy

By the way, I did not report this trade in my positions here because it is not a “trading position”, it is in my retirement account! Just wanted to clarify that!

After a spectacular rally from the lows seen last month, the S&P appears to be running into overhead resistance and for this reason I am evaluating the position. What I will probably end up doing is respecting my initial trade and close out my position if/once I reach the 10% profit to analyze the trade once more. If I do come up to the conclusion that the S&P 500 is headed back up, I will be more than happy to re-enter the trade and see how that turns out.

So once more, feel free to go check out the video, I’m sure you will agree with me that is very interesting and helpful analysis, see it here

A few days ago, we received an email inquiring about investing in Citibank. Honestly, I find it quite difficult to judge the US banks and the financial sector in general and personally would stay away from it. There are many factors that have created such an uncertain environment and I would generally consider a play on Citi or Bank of America as a gamble. The environment is just too difficult to predict, especially in the financial sector. Here a few of the reasons why:

-Accounting methods: There was speculation that much of this crisis had occured because of the changes to force mark-to-market accounting. And the government ended up changing some of those laws in order to help financial institutions. However, the new laws are unclear and it is nearly impossible, even for executives of the company, to know what effect this will have on their earnings in the next few quarters. As well, this has major implications on the capital levels of these instutitions and given their leverage, on the trading they will be required to do to account for those losses.

-Timonthy Geithner has usually been blamed for not being clear about his plan and about the context. But last Sunday, he was very clear in saying that some banks would require further capital. A few banks such as Goldman Sachs and Bank of America have been vocal about their intention to pay back the capital as soon as possible. The same echo has not been heard out of Citi so far and that would be another warning sign in my opinion.

-Because of its huge size and complexity, Citibank becomes difficult and perhaps almost impossible to get a clear picture of which makes it difficult to forecast future earnings. The US government will clearly not let Citi fail but how it would rescue it is far from clear as is the impact on bondholders and shareholders.

Because of those reasons and many others, I would still consider Citibank to be too much of a gamble to qualify as a good investment. If you do not have time to visit a casino though, Citi might be a good shot at fortune!

Back in December, during the mostly volatile trading months that ended 2008, when I was approached to join this stock picking contest, I was quite unsure about how to play it. I usually do picks based on specific valuations that can be closed weeks later. But this time, our picks were for the entire 2009 year. Like the other competitors, I was to base my picks on what I expected for the year. Was it going to be a rally back to the 2007 levels or would it be more pain in the financial markets?  You can see the post with my picks here.

Without further wait, here are the results for Q1, I am obviously very happy about my 1st place but also about being the only one in positive territory:

And the results of my 4 picks:

Turns out that the first quarter saw a little bit of both. Overall the market is down with the S&P500 dropping from 903.25 to 796.08 (-11,86%) and I would say that played in my favor. I was a little surprised I must say at how aggressive the other picks were with lots of leveraged ETF’s, and small companies that would be bound to have a solid bounce back if the markets went along. But instead, I went for 2 broader picks as well as 2 companies I thought were clearly undervalued.

USO and GLD were clear plays on gold and on oil. I’d say that both picks were correct and I’m happy with the 4.35% return of GLD for Q1. What I had not anticipated was the contango effect’s drag on USO and its inability to match the return of oil over the first few months. I am hoping that does not keep up and that USO can pick up more steam in the upcoming quarters.

As for the internet plays, I seem to be clearly wrong on Ebay and still have trouble believing how low of a valuation it is getting, I really think the stock will bounce back unless a major player launches a competitor to Paypal, their online payment division. The stock is down 12,24% though which is not too far from the market’s return and something I can live with. The pick that has put me at the front so far is clearly Baidu(BIDU), the Chinese search engine that continues to dominate despite great efforts put forth by both Google and Yahoo. At the time, Baidu had just gotten slammed because of reports it was accepting advertising for “fake” pharmaceuticals. My opinion was that the markets had killed Baidu too much ignoring that the company operates in China, far from the much more severe US regulations. Even Google does things in China it would never dare doing in the US, it is just a different environment. The 35,25% return is obviously above my expectations and at this point, I’m hoping more out of Ebay than Baidu for the next 3 quarters….

Upcoming shortly will be reviews by other members of the contest, I will add links as they are published so stay tuned!