Archive for October, 2009

Financial Ramblings – Dow at 10,000

By: ispeculatornew | Date posted: 10.17.2009 (5:44 am)

djiGood weekend everyone! An up and down week and commodities continue to show extreme volatility, here are some of the more interesting readings I enjoyed in the past week:

-Will Oil reach 100$ in 2009 or perhaps even earlier?
Technical analysis of Baidu (BIDU)
Inspirational article about charity on GLBL
Travelling with credit cards rewards, how to do it without hassles over at Best Canadian Credit Card Finder.
-Very good article from MDJ about who should pay for dates🙂
-TheDigitariLife has its opinion on the Dow at 10,000… it may not last!
-TFB shows how we are not exactly living the 2nd great depression
-In general, I’m opposed to market timing except for speculative investment, here are some pros and cons
-Hopefully not an article you will need, preparing for an emergency
-Is gold still a good investment, read a few arguments here

The Dow hit 10,000..that is so last century

By: ispeculatornew | Date posted: 10.16.2009 (5:00 am)

Wall StreetYou may have heard about it, the Down Jones Industrial average, better known as the Dow, hit the high mark of 10,000 yesterday, a cause for celebration in trading rooms and living rooms across the world, or is it? When I mention in the title that the Dow Jones hitting 10,000 is so last century, it is not an exageration. Fact is, the index hit 10,000 in 1999.

So did we just lose 10 years of investing? Not quite. We actually learned a lot, lived through the tragic 9/11, the technology bubble, the more recent credit crisis and housing bubble. As well, many of the Dow components (30 stocks of large US companies) do pay dividends so the return is not exactly 0% in the past decade..although it’s not a whole lot better either.

I’ve attached a chart of the Dow Jones Index since January 1st 1999. It has moved a lot but overall there is little to show for it.

dji

But seeing the news of getting to 10,000 all over the news, tv screens, newspapers and soon on magazine cover pages brings up a few questions.

Is the Dow Jones even relevant?

I’ve discussed this in the past. Basically, I do not really understand how the index is even still relevant and why it is discussed so much. Truth is that an index that has only 30 components and where bad performers are taken out to be replaced by “better” ones seems like an index that is bound to perform well no matter what. It’s not that surprising that a decade ago some were predicting that the Dow would reach levels of 20,000, 30,000 and in some cases even 50,000. To me, there are some indexes that are worth looking at such as the S&P500, which gives a much better indication of the global US economy as well as the US markets as a whole.. But the Dow Jones? Please!

Are there even consequences of getting to 10,000?

Absolutely. I’ll be the first one to tell you reaching 10K does not make any stock more attractive but the reality is that it does change things. When reaching 10,000, the Dow Jones generates interest and news. Reporters will discuss it, write about it, get ideas ofr their next magazine covers. You can be certain of one thing. Even someone who is not interested in the stock markets will probably still hear about the index getting to back to this level.

Psychological effect

And this of course will have an indirect impact on the market. Think about all of those passive investors that have been scared for months to even look at their portfolio. Suddenly, it seems as if things look a lot brighter. Consequence? They might call their advisor and tell them they’d like to get back in the market, or go out themselves and buy. Pschology has a huge impact on the financial markets and reaching a milestone like this is bound to create feelings for investors. This of course creates opportunities as well..the question is where we can find those of course!

More proof that compensation limits do not make sense…

By: ispeculatornew | Date posted: 10.14.2009 (7:34 am)

citiRemember a few months ago when it was reported that Citigroup trader Andrew Hall was earning a 100$M annual bonus? Many expressed the opinion that it was crazy, an exageration and that no one should be making that amount of money. My view however was that it can be justified. If a trader is able to generate 1 billion dollars of profit and he signed up to get 10% of his profits, isn’t it still a good deal for the bank to pay him his dues? You would certainly think so.

A few had commented that it depended on how much capital he was using. Of course yes. But generally, traders are charged for their use of funds. So if a trader uses up 1 billion $ of capital, he will be paying intterest on that amount that will be deduced from his “trading profits”. Just wanted to clear that point up.

In any case, Barack Obama responded to the outrage about compensation by setting limits on companies that are using public funds. This prompted companies such as Goldman Sachs and Morgan Stanley to pay back the government. Obviously, other companies such as AIG and Citigroup are not able to do that just yet. So in the meantime, they have to find alternatives.

In this case, they had 2 main choices:

andrew-hall1-Get rid of the highly profitable trader to avoid dealing with the issue. The major downside of course is that the major profits generated by Hall will be gonee…

2-Sell the unit where Andrew Hall trades and probably still let the unit manage Citi funds. This way, no “Citi employee” will be making insane bonuses (the employee will no longer be employed by Citi) but also Citi can keep giving the unit big amounts to manage.

Of course, #2 was chosen. So congrats Barack Obama, you got what you wanted. No Citi employee named Andrew Hall will be making 100$M in profits, he will be receiving his check from his new boss, Occidental Petroleum.

So what has changed really?

Nothing in fact, as compensation will be exactly the same, except Citibank will have a little less control over the unit. This is exactly why I think these laws do not really work and they are more for show than anything else. Did the public really want Citi to lose out on 900$M by not inesting through the commodities unit anymore? Really???

What can be done then?

Some would say that the Obama administration should impose limits on all managers, not just ones that are using TARP funds. Again, that is very short sighted. First off, Citi and other banks give billions of dollars to manage outside of the country, No need to say that the US government has no control over what happens in those countries and how compensation is done. And putting too many limits on the US banks would put them at a majorr disadvantage with their foreign competitors…

So what is the solution???

I don’t think it’s that difficult. Explain things to the American public, how the compensation system work, why some managers make so much money, how it compared to other industries, etc, etc. I think the public is smart enough to understand the point. No doubt, it is easier to simply critic and add legislation but in the long term does that really work? My answer is no…

Top 10 reasons ETF’s are superior to Mutual Funds

By: ispeculatornew | Date posted: 10.12.2009 (5:00 am)

calculatorOver the past few months, I have not been shy about my preference for ETF’s over mutual funds and how eventually I would expect ETF’s to take away a lot of the funds under management currently invested in mutual funds. I was having a good discussion with my friend Mike from TheFinancialBlogger and while he had good points, I remained convinced that in almost all cases, ETF’s are a better product for the investor. We finally agreed not only to disagree but to voice our arguments in writing on our blogs. So after reading this post, you can go on TheFinancialBlogger and read Mike’s arguments in favor of mutual funds. I’m still having trouble believing he thinks mutual funds are superior (will explain later) but it should be interesting to see what he can come up with You can read his post about ETFs vs. Mutual Funds.

Just before starting, I will point out a few differences between the two:

-Mutual funds are basically funds that investors can buy units of. Investors buy the units directly from the fund manager and can then sell the units at any point on time in the same way.

-ETF’s are similar funds but they are traded on stock exchanges and can be traded at any time of the day.

So here we go, the top 10 reasons ETF’s are superior to mutual funds

10-Trade at any time: Why would you settle for a mutual fund where you can only trade at the end of each day. If at noon you see market crashing and want to get out, with a mutual fund you are out of luck. You will send an order, but will only get the end of day price!

9-Rebalancing: As the market and the economy changes, you will likely want to change how you allocate your investments, perhaps putting more emphasis on fixed income or on emerging markets or simply scaling back into safer, less volatile funds. Guess what, with an ETF, you are about 2 clicks away from changing your asset allocation. With mutual funds? Well, first start by calling the managing company, explain what you want and hope that it is possible without too many extra fees!

8-Do like the big guys: Do you think it just happens to be that big institutions and brokers do not invest or trade mutual funds? Think it just happens to be that the only thing they do is sell them? They do not want to pay more, have less flexibility, etc. ETF’s on the other hand are getting huge institutional volume because they are liquid, cheap and easy to understand.

7-Transparency: Ever wondered what exactly is happening inside the mutual fund you purchased? Well, with some luck, you will be able to see the biggest positions that were held in your fund at the end of the last quarter. No, not all of them, not the cash, but the bigger positions, usually the top 5. Compare that to ETF’s. On any given day, you can see exactly what is in each share, which positions, how many, and how much cash. To me, that feels a lot more transparent

6-No entry or exit conditions: Many mutual funds carry conditions. You must invest a minimum, or commit to regular investments. You have to remain invested for a given period of time or pay a penalty, etc. Again, ETF’s do not have such conditions, you can buy and sell in a minute, a month or a year, it makes no difference, you are FREE!

5-More options: ETF’s offer almost unlimited possibilities. You can buy positions on sectors, commodities, bonds, inflation protected bonds, target specific countries or regions, etc. Generally, mutual funds are less flexible and usually are only used to track specific equity indexes or do active investing compared to an equity benchmark.

4-Strategy flexibility: You want to trade on margin when buying ETF’s? Or do you want to do an options strategy to limit your downside during a crash instead of selling the whole investment? Maybe you were thinking of having a short position for a little while? Good luck doing those things with mutual funds, they are pretty much impossible. But with ETF’s? Easy!

3-Tax Efficiency: As you get closer to retirement and assets grow, the important of tax efficiency in your investments takes a growing important. For various reasons, ETF’s are much more tax efficient! There are many reasons for this. One of them is that with mutual funds, every time an investor buys or sells shares, the total number of shares changes. Because of this, there is a lot more trading “inside the fund”. For example, if investors sell an important amount of shares, the fund will have to sell shares from their index, while will cause capital gains taxes. If those same investors come back to buy, the fund will get back to that initial quantity but will have paid more taxes. On the other hand, ETF’s have less problems because investors selling will be selling to other investors so the underlying index owned by the ETF company is not affected. Over time, this has an effect on the return.

2-Commissions: Most mutual fund buyers are convinced to do so by sales people or financial advisors. Wonder why? Commissions!!! They actually get an annual commission in most cases on your assets. So it’s a good deal for them… You pay a little more fees, but they get more commissions, win-win right? Oh except you are the loser!

1-Less Fees: Mike’s argument will be that you have to pay a commission on every ETF trade while every mutual fund transaction does not carry fees. That is true of course, but considering a 3000$ investment, the commission of 10$ from a standard broker represents .33%. Mike actually asked me to compare an ETF (XIU) with a mutual fund that tracks the same index from Altamira. They had a .40% fee difference. So even keeping that investment for one year will make you a winner. Imagine if you keep the investment for 10 years… you will end up saving .40% annually!!!

Let’s get to the point though.. all of these arguments are great but numbers only will close the debate right? Then, here are some numbers! Over 5 years, these are the returns of the TSX60, and the two funds:

SPTSX60              =        56.73%
XIU                        =        55.70%
ALTAMIRA        =        52.80%

Do you even need to hear more? Didn’t think so. Case closed! 🙂 You can still take a look at Mike’s post about ETFs vs. Mutual Funds 🙂 And also, be sure to read about the 6 things to look at when selecting an ETF.

Stock Pick: Google(GOOG) vs IAC Interactive(IACI)

By: ispeculatornew | Date posted: 10.09.2009 (5:00 am)

googIn this first full week of the fourth quarter, I’ve already announced two stock picks, first going long Apple(AAPL) against Intel(INTC) and then on Wednesday going long Ctrip(CTRP), short Expedia(EXPE), and it is now the time to do my third pick of for the fourth quarter, an internet advertising play.
These are two companies that I’ve picked in the past so regular readers will not be surprised that I have decided to go long Google against IAC Interactive. This is more of a relative play than a plaay on Google because really, Google has already increased so much in recent months that it is difficult to say how much more it has to go in the current environment that is very challenging for media companies as advertising budgets have decreased drastically.
Going for Google is the fact that it keeps innovating and growing. Its mobile position is very strong and it has also recently put more emphasis into:
-Maps (with advertising starting to be added)
-Books (with their much publicised deals)
Going forward, I expect Google to continue to outperform the market but especially its web only competitors that are too reliant on web advertising. Sure, Google is almost 100% dependant on advertising but is has became such a key player that most of the industry still expects it to pick up more business even in such a downturn because of companies trying to move where their advertising dollars perform best, which is usually on Google.
iaciIAC Interactive on the other hand is a company that has struggled for years after going through many acquisitions to increase its business. It never did succeed in getting most of these off the ground. Ask.com, Expedia, and many others are more know for what they were than for what they now are. IAC is now very active in the dating industry that is very difficult to compete with because you are basically competing against others that are willing to offer your product without charge. Just take a look at the last few earnings announcements by IAC and you will see what I mean; they are not headed in the right direction… They have actually seen revenue decrease in 4 straight quarters. No matter what the economic situation is, a technology company should be able to avoid such a performance.
So there you go, my 3 picks for Q4!

Q4 Stock Pick #2: Ctrip(CTRP) vs Expedia(EXPE)

By: ispeculatornew | Date posted: 10.07.2009 (5:00 am)

ctrpIn my start of year 4 stock picks, my biggest success by very far was Baidu who had suffered terribly in 2008 for numerous reasons. No need to tell you how happy I’ve been with that pick with BIDU up about 200% this year. There are still many possibilities in China and with the emergence of the middle class and China’s new open mind, travel is increasingly becomming a major economic engine. I’ve been looking into a few different online travel companies and feel like Ctrip.com (CTRP) is one of the major potential stories and perhaps the best pick on my list for Q4 and beyond.

Ctrip is already up in 2009…

To be fair, the stock has already gained a lot in 2009 rising almost 200% as well. But I do think it still has a lot of upsize, especially compared with some slower growing American companies such as Orbitz and Expedia.

You can take a look at Ctrip’s financials, they are, as you would expect, very impressive. The company is the leader in a market that is currently going through very high growth.

expe

Expedia has tough times ahead

Compare that with Expedia(EXPE) which is in a much more competitive US market and has been struggling to achieve any growth, as you can see in their financials here. As well, while the Chinese are certainly not experiencing economic growth like the one of years past, there is no doubt that the travel industry is doing better than it is in the US (comscore estimates numbers will be down 5% this year from 2008). Expedia in fact got so desperate that it dropped its fees drastically a few months ago in order to stop the market share losses to Priceline, Travelzoo and others.

Expedia was formerly a part of IAC Interactive, a company I have been no fan of, and while they are now separate entities, I believe Expedia will be just one of the many franchises  that were slowly mismanaged and become obsolete…

What are your thoughts on this trade? Think Ctrip is the next Baidu?:) Is it the stock pick for Q4?

Apple-AAPL-a stock to buy?

By: ispeculatornew | Date posted: 10.05.2009 (5:00 am)

AppleI have been in and out of trades with Apple in the past 2 years and while it does remain a volatile stock, I do believe now is a good time to get back on the train with Steve Jobs.

Every day, I am reminded of how dominant Apple is. There are so many examples but here is one. I went to the gym this weekend and was impressed with the new cardio machines. Not only were they very nice looking and of the latest generation but they were also made compatible with Apple’s latest Iphone and Ipod Touch products. By compatible I mean that it can record performances for comparison purposes but also that any video or multimedia on the Ipod can be played on the large tv that is attached to the runmill.

The technology of course is very impressive but the fact that the equiment maker and gym made it possible is even more so. It is a great display of how dominant Apple is. There are many other examples (hotels that have alarm clocks that will play your Ipod’s music, etc) that all show how mainstream the Ipod has became. And it is more clear every day that Apple will indeed soon release its new tablet, that will compete with Amazon’s Kindle. Knowing Apple, I have little doubt that Apple will quickly take the lead in this new market. At this point, as I have written in the past, Apple looks beyond reach even to companies such as Sony and Microsoft.

To be fair, Apple does trade at an expensive premium already. It trades at a P/E ratio over 30, which is comparable to Google. But I do think that if Apple was able to do so well in the tough environment of the past few months, there is little to worry the company for now.  I do believe that its Ipod and Iphone business will continue to drive the show with the tablet to become an earnings contributor probably only 1 year from now.

intcAs is usually the case, I will take this trade against against another tech company, going short on Intel (INTC). This is actually not a knock on Intel but simply a trade that I believe in because these are similar companies. Both are very dominant in their markets and thus have good pricing power. Intel also trades at a similar P/E and has also enjoyed high growth in the past year.

One of the major differences is that consumers are willing to pay an increasing amount of their budget for Apple’s products while the prices for Intel’s cannot be sustained as easily because of the falling prices of pc’s.

This can easily be seen in the sales growth. While Intel has seen fairly flat sales in the past 4 years, Apple has nearly trippled its sales with new products being released to keep the growth coming.

I will be using the opening prices today on both of these stocks to evaluate these trades and will of course be using a stop loss at -20%!

Financial Ramblings

By: ispeculatornew | Date posted: 10.03.2009 (12:35 pm)

rio-olympicsNot to go all ego, but since this week saw the end of the third quarter, I had the opportunity to announce that I am still in first place of the stock picks competition, you can see my picks and results here. Thursday and Friday were brutal days in the markets, with bad employments numbers, gloomy forecasts, it was a difficult time for most investors as volatility shows signs of life. It will be very interesting to see how the markets react on Monday and if we’re set for a rebound or will the markets struggle in the upcoming week as well? At least one market did well yesterday as Brazil celebrated its success in getting the 2016 Summer Olympics!

Here are some of the more interesting readings I had this week:

-TFB discusses alternatives to inflation investing. I’m still not set on the debate between those who believe inflation is the concern against those who think deflation is still a concern but in any case it made for an interesting read.

-One of those questions many of us ask ourselves when looking for cash.. is taking money out of retirement accounts a good idea? Read MDJ’s view on the subject.

-Four Pillars discusses strategies you should avoid when starting to invest, many good ones and a simple but useful article for any beginner.

-Been declined for a mortgage? Here is what to do🙂

-Interested in buying shares of Dollarama? I’m far from convinced but Canadian Capitalist brings up some good points in his post.

-Here are 5 ETF’s that could do well if we are headed for a new bear market

-And yes, as I said earlier, Brazil did rally upon the news that it would get the 2016 Olympics!

And finally, GLBL discusses the heavy burden of debt!

Are we standing on a cliff?

By: ispeculatornew | Date posted: 10.02.2009 (5:00 am)
01-standingIt brings back bad memories for most us… a day in October where stock markets fall, the Vix (volatility index) explodes, investors jump towards treasury bonds and banks come out with gloomy prospects.. October started one day ago and yet it seems like we’ve all lived this. Of course, last year was perhaps the worst period for most investors as uncertainty about the stability of the US economy brought the stock market to major lows.
Unfortunately, some believe we are headed right back there. The main arguments are:
-Last year’s problem are not resolved resulting in a weak economy that is unable to create jobs fast enough to get back to full employment
-The housing market collapse is much more important than previously
-Deficits by the US government signal long term problems for the US and world economy
-That the US and Europeans financial systems are on the verge of a major collapse

Honestly, I can see how most of these points do make sense. There are obviously many problems right now and the Fed remains overwhelmed in a sense. Watching the VIX rise by 10% as well as rumors of some investors buying puts on the S&P are putting back some fear in the markets. However, I do not believe that we are heading back towards another blood bath. While there remains much to be done, I think it’s easy to become dramatic.
Fact is that it is difficult to time the market and I know a few investors who have been out of the market since January. They had the chance to miss a huge stock market rebound as they continue to wait for a 2nd market crash. I don’t think we’re heading there! Companies like AIG, Goldman Sachs, Citibank are still leveraged but they are much healthier than they were a year ago and the government has a much better grip on what is going on. Remember that when the crisis hit with Lehman Brothers, almost every investor was caught by surprise and truth be told, we all learned a lot, especially about illiquid investments and extreme leverage. I do believe that we unfortunately will forget most of those lessons.. but in less than a year? Not so fast…
Instead of staying completely out of the market, I would personally prefer investing in assets that would perform well in a more difficult environment, such as health care companies as well as certain technology companies. Next week, I will give out 3 stocks that I believe will do well in the coming weeks/months. We’ll see and hopefully I can do as well with those picks as I did in our stock picking competition.