Archive for September, 2010

Financial Ramblings

By: ispeculatornew | Date posted: 09.18.2010 (5:00 am)

Hi everyone! Unfortunately, it feels like summer is really over now. Sure, technically we are still in the fall but with labor day weekend now past us, it is time to get back to business. We will also be restarting our “Daily news” after a quick 2 week break!

Here are the top readings from last week:

Think about the future: Who can increase its dividend @ TheDividendGuy
Volatility in Asian currencies @ Macro Man
You want to be a good investor? Learn to ignore people @ AndrewHallam
Household net worth in the US is plunging @ ZeroHedge
The Investor sentiment cycle @ Kirk report
Top stock pick for silver picks @ Bloggingstocks
The liquidity trap: How can the US economy fight back? @ GreenPandaTreeHouse
Ideas for developing a trading strategy @ InvestInthemarkets
The US wealth barbell @ TheBigPicture
Dividend stocks poised to beat inflation @ DividendsValue
Financial Goals while turning 30 – Part 1 & Part 2 @ TheFinancialBlogger

Research in Motion (RIMM) announces earnings – profits up 68%

By: ispeculatornew | Date posted: 09.17.2010 (5:00 am)

Research in Motion, the Canadian smart phone maker that competes with Apple’s (AAPL) Iphone and rivals that run Google’s (GOOG) Android has had more than its share of bad news and bad press this year and even has started being compared to Palm. It would also seem to some that the company is doomed. However when we entered our most recent trade on RIMM, the basis was mostly fundamentals.

For all of which is written about the company, you could almost believe that the company is on the brink of bankruptcy but even in recent quarters, Research in Motion has continued to experience both growth in revenues and in profits. There are concerns about the future especially when new phones like the Torch are released but it’s too easy to be overly negative about RIMM. So you would not be surprised to learn that Bloomberg reported that short interest had doubled to over 31 million (double from mid-April).

Today, Research in Motion announced solid results and it’s safe to say that short investors will not have a great day tomorrow as RIMM announced earnings of $1.46 per share, a 68% increase from last year and $0.10 per share more than what analysts had expected. The stock gained 2.1% today and is up over 7% after hours today as guidance was also stronger than expected. Sales for the past quarter increased 31% to $4.62 billion. Combined with solid results from Oracle, it looks like Tech stocks will have a good day tomorrow.

The big question of course is what direction RIMM will now take. Its guidance was much better than expected but it is not strong enough to reverse momentum that has taken the stock down from about 85$ one year ago to around 50$ in today’s after hours trading. It will be interesting to see what kind of future products RIMM can produce in order to regain more new consumers. It is key in my opinion for the company to make big initiatives that will encourage developers to work on apps for Blackberry. The lack of apps is the main reason why there is a lack of excitement for its products at the moment. It now has 50 million subscribers and given the right incentives can be a very attractive platform. In fact, according to comscore, RIMM still has the largest market share for smart phones.

Personally, I’m mildly optimistic and am feeling better about the long position on Research in Motion. Oh and while I’m not sold on the Torch or other initiatives such as the upcoming Blackberry tablet, the executives confirmed in today’s earnings call that the Torch had strong sales and was a big part of the strong results/guidance. Knowing all of this, what is your view on Research in Motion?

Zynga gaining power, how close is the IPO?

By: ispeculatornew | Date posted: 09.16.2010 (5:00 am)

We have discussed Facebook’s IPO frequently but as was made clear in yesterday’s post, it seems unlikely that Facebook will do its IPO in the near future so we are left looking for other candidates that could fall into our pool of stocks that we follow. Zynga, which we have discussed in the past is looking like a great candidate at. Initially, we had written about Zynga’s dependance on Facebook but it did reach a long term deal to ensure its place on Facebook and has also been gaining market share on other gaming platforms through Yahoo and more importantly through Apple’s Ipod/Ipad/Iphones on Itunes.

Just as a reminder, Zynga is a company dedicated to gaming,but has been reaching out to gamers on non-traditional platforms. Instead of targeting users of Xbox, Playstation and Wii platforms, it has been gaining access through social networks such as Facebook and is now making a big name of itself on Itunes. The company is taking over an area that “traditional” gaming companies such as Ubisoft and Electronic Arts took too long to get involved in.

The games

Zynga’s success has come because instead of working on dozens of games, it has focused on games that are highly addictive and that can be played with/against friends. Ever thought of managing your own farm? Probably not. But if you have signed up to manage one at Farmville (named WeFarm on Apple devices), you are probably taking good care of that farm and are probably checking out your friend’s farms in order to see how they are doing, do commerce together, etc. The result has been a growth like none other. Just to give you an idea, on Facebook’s structure alone, Zynga now welcomes over 50 million users every day!! That is amazing by any metric….

Branding

If you have a Facebook account, you for sure have heard about Farmville but even newer ventures such as Mafia Wars are quickly getting a name for themselves through aggressive marketing. The company has been able to multiply marketing efforts on its games in many different ways, mostly through social media (getting users to talk about the game and invite friends) but through non-conventional ways as well. For Mafia Wars, Zynga hired an agency that printed “fake” dollars with information about the game and have them put in streets across major US cities. It has been controversial because of the cleanup costs (which will end up being paid by the company) but has certainly generated advertising…

Revenues

Just in case you were wondering, Zynga is already making money through its games. While playing them is free, many users pay up to gain an advantage. For example, you could buy extra land (virtual of course) to help you build a more efficient farm, you would be forking over real dollars. Zynga aspires to build several successes similar to the one that rival Vovia has had with “Angry birds”. The game, which has been downloaded 6.5 million times and costs 5$, is now also launching a new “power bird” that will cost real dollars and a movie inspired from the game is being worked on. These are just a few of the examples of how such games can mean big dollars. For now, Zynga seems mostly concerned (rightly so) with users but revenues will surely become a bigger priority in time.

How much is it worth?

In my opinion, there is no doubt that Zynga has a model that would be very interesting from an investor’s perspective. Gaming in the US, especially on mobile devices is a fairly new model that can generate high growth for many years with very solid margins. Honestly, Zynga has an ideal position, a partnership with the top social network (Facebook of course) and is growing stronger on Apple’s devices. I would be a buyer if/when the IPO happens if the prices is fair. How about you?

Why you should pay attention to the rise of developing nations like China and India

By: ispeculatornew | Date posted: 09.15.2010 (5:00 am)

Today I listened to an interesting interview with former British Prime Minister Tony Blair about a variety of subjects one of them being developing nations like China, India, Brazil, Indonesia, etc. I have written about this many times in the past but I think it’s critical for all investors and individuals to think about the impacts of these changes. The geopolitics and the world economy are going to take a drastically different form within a few decades.

What to do?

Obviously, almost any individual can prepare for this new world by learning Mandarin, preparing for a new landscape or a better understanding of these developing nations. However, as you can imagine, I will focus on the investment side of the question. In that regard, there are many different investment possibilities that we have already discussed which include ETF’s that track these market indexes and also ETF’s that track the currencies. There are even some ETF’s such as ELD which track sovereign debt of these nations.

If you think outside the box…

In a world where two countries that each have a population of over 1 billion, can you even start to imagine what the needs are in terms of resources? While a country like England is debating building a new runway at Heathrow, China is currently in the process of building 70 new airports. Can you even imagine all of the material that is required to build so much infrastructure? China and others have been purchasing resources in many countries but its needs are so much more important.

That is translating into growing demand for commodities, agriculture resources, as well as food and other resources such as wood, etc. To me, demand from these countries is the best way to play the new world and in that regard, you can generally do one of 3 plays…

#1-Buying a commodity ETF

We have discussed commodity ETF’s quite often on this blog and they do generate a lot of interest but I think it’s important to remember that these ETF’s generally struggle to track over very long periods of time because of how they are created; they track futures that must usually be rolled every month

#2-Buying commodity producers ETF

A good example of such a trade would be buying gold miners. While it is a very different trade than going long on Gold, the ETF would be the equivalent of buying gold miners which will do very well in a context where emerging economies are important buyers

#3-Buying individual commodity producers

If you look in large natural resources exporters like Canada, Australia and Russia, you can find many different companies that will profit greatly from the explosion in demand in all of these commodities. Many of the mining companies in Australia for example have seen their business take off in recent years with Chinese customers willing to buy as much as they can produce. You would want companies with large untapped inventories

Do not let the train pass by you

In a decade or two, you might have large regrets about not going into this trade, there are many different possibilities but the important part is looking at what the landscape will be rather than what it is.

Could Facebook avoid an IPO forever?

By: ispeculatornew | Date posted: 09.14.2010 (4:00 am)

As much as I would like to trade Facebook, the company is right to stay away from turning public in many regards and I believe that it is making the right decision.

Facebook’s founder Zuckerberg official stance

We aren’t planning to go public anytime soon. As a company, I think we look at going public differently than many other companies do. For a lot of companies, going public is the end goal and they shoot for and optimize around it. For us, going public isn’t a goal in itself; it’s just something we’ll do when it makes sense for us. Since we compensate people at Facebook with stock and we took investment, I view it as my responsibility to eventually make that stock liquid for people, but that doesn’t have to happen in the short term and our primary responsibility is still just to make sure Facebook develops to its full potential.”

Focus on growth instead of profits

If Google executives care at all about the stock price, it must be very frustrating to see the stock struggle so much despite the fact that it continues to display strong traffic and market share growth in segments such as Youtube and Android. Facebook has been able to largely escape questions about its profitability as it remains mostly closed to the scrutiny of financial analysts. Instead, Facebook has put its energy to improve its product and launch new services such as Facebook Places. Is Google focused on long term growth? Yes, I think it is. But it must be tempting to do shorter term moves to calm down anxious investors that are checking each quarterly statement in detail. That temptation is much smaller for Facebook as it deals with a smaller, more patient group of investors.

Avoid costs

Any public company will tell you that the costs associated with producing all the required reports and dealing with all the procedures are very important. While Facebook must follow some regulations, the load required is less important and that has an impact on the bottom line. Could the company be more effective if it avoided turning public?

Investors can still get out

This is a major change compared to companies even 5 or 6 years ago. Private companies have now found ways to offer shares to many outside investors and the shares can be traded through “brokers” such as SecondMarket. While the shares are not on an exchange and available to most retail investors, they are trade able and that is the most
important. Why? Because some of the venture funds that may want to sell back some or all of their investment to cash in a significant investment.

Companies like Digital Sky have offered proof that the demand on this secondary market is important and any investor wanting to sell back its shares can do so at a fair price.

A new breed?

Is it possible that companies like Facebook and others in the future might delay going public for years and maybe even longer? I think that if secondary market brokers such as SecondMarkets can continue to grow and provide additional liquidity, the incentives for companies like Facebook to go public will be greatly diminished.  I would be sad as an investor and certainly hope to see an IPO very soon (as I do for others like Twitter, LinkedIn and Demand Media) but it’s difficult for me to blame executives, they just don’t have that much to gain by going public.

Two very interesting upcoming movies

By: ispeculatornew | Date posted: 09.13.2010 (6:45 am)

Being part of the financial industry or even on the outside always brings a fascination towards the Wall Street culture, life, etc. The past few years were great examples of how far away Wall Street is from Main Street and there are now tens of books that give us a better idea of what was going on. But the arrival of Wall Street 2 – Money Never Sleeps, starring Michael Douglas and directed by Oliver Stone is being released later this month to great reviews.

If you have not seen the first movie, released in 1987, it would be advisable to see it, no matter if you intend on seeing the sequel. Even if it is over 20 years old now, it remains one of the best and most accurate looks into Wall Street’s Culture, why it becomes so addictive and thrilling but also how it almost always leads to excess. I for one cannot wait to see the sequel and will probably watch the first movie again just to set the right mood!

If you have nay interest into Wall Street, you will need to see these two movies.

The second one is a deeper look into Facebook. Much has been written about it and I have reviewed Ben Mezrich’s excellent book about everything that led to the creation of what could become the most important tech company with 500 million users already. I doubt that I will learn that much through the movie since I have already read a lot about the founders but it will certainly be an interesting movie, should be entertaining. I am also very curious to see how the masses will react once they know more about everything that went into launching the top social network website. Will it affect trust in the company? I doubt it but you never know and Facebook investors are probably not thrilled about the movie.

Will it have a major impact on Facebook’s valuation? I would clearly say no but momentum can change so quickly that Zuckerberg and others will probably sleep much better a week or two after the movie is released. Anyway, it’s not as if Facebook is ready to do its IPO right away either.

So will you be seeing these two movies? Do you have any expectations or hopes about them?

Ultimate diversification: sports betting fund

By: ispeculatornew | Date posted: 09.09.2010 (4:00 am)

It is not the first time that I discuss sports betting because while most users are doing so as a lobby, others are taking it as something much more serious. We recently wrote about diversification in a dividend portfolio and we certainly believe in the benefits of diversifying a portfolio. That being said, once a certain level of wealth is reached, diversification from the stock market in general is often necessary or recommended. There are many alternatives each with its own characteristics, here are some of those:

-residential real estate
-commercial real estate
-owning individual businesses
-arts
-antiques

But there also seems to be growing interest towards non market trading. We had mentioned event trading in the past but right now sports betting seems to have all the momentum. Sports and financial markets are a lot more similar than you could imagine and opportunities that are much more difficult to capture in financial markets might still be there on exchanges such as Betfair.

BusinessWeek recently did a profile about one such fund, Centaur Galileo, a London based fund that invests its assets into sports betting.

Similarities

For years, many investors have been analyzing investing psychology in sports betting because it is stunningly similar to what we experience in the financial markets. Think about it.. When you buy Microsoft shares, you are betting on the short to long tern outperformance of the company compared to its peers. If you were to put money on the Indianapolis Colts to win the Super Bowl game (to be played in 2011), you could close out that bet once your trade objective or stop loss has been reached. If all games had a 50/50 chance of going either way, you could basically generate a solid return by getting 11/20 bets right. That is what Galileo is betting it can do.

The managers are former hedge fund managers who believe the best opportunities right now are in sports betting. And that might be because even more than in the markets, sports betting money is mostly invested through emotive betting, fans that “hope” their team can win it. Any hedge fund manager would tell you there is nothing better than trading against investors that trade based on their passion rather than the facts.

Day trading

In the financial markets, millions of traders look at movements by the second to profit from short term mismatches. The same can be done in sports betting when investing in live events which are even more volatile than most financial assets.

Longer term investing

Betting on the next world cup, the next Super Bowl or the next Olympics is a longer term investment that could be considered similar to buy and hold investing. While you cannot hold that position for decades, you would still see the value of that position move as the team you bet on makes moves on and off the field.

Modelling

Like in the financial markets, tons and tons of data about the bid & ask and actual trades is available which makes it possible to find patterns and develop models. That is exactly what Galileo is doing with is five traders and four analysts.

Liquidity

You might think that there is a liquidity problem for a fund like Galileo which is looking to raise 50$ millions to start off. Not true according to Betfair as gambling revenues are expected to reach $528 billions by 2015!!! Through platforms like betfair, tens of thousands can be bet on a single tennis match or golf tournament without having major effects on the market making it possible for large funds like Galileo to operate efficiently.

Illegal in the US

Unfortunately, laws in the United States from 1961 (Interstate Wire act) and 1992 (Professional & Amateur Sports Protection Act) have made online gambling basically illegal and prompted industry leaders such as Betfair to ban US residents from using its platform. Rumor is that those will eventually be reversed because:

-The ban was ruled illegal by the WTO in 2005
-It could bring important tax revenues to state and federal governments

Different risk

I don’t think I need to argue this one for too long, the correlation between sports events results and the stock markets would be close to 0 so this type of investment would be very good for any portfolio if the returns can meet expectations. Business Week reported that Galileo posted a 8.58% return during the first 3 weeks of this year’s World Cup. Can it keep things up?

Now the big question, would you invest in a sports betting fund? I would…!

ThePirateBay continues to defy odds

By: ispeculatornew | Date posted: 09.08.2010 (4:00 am)

The website that hosts Torrents has been written about on this blog in the past and its fascinating story continues. It is incredible to me that this company founded in 2004 continues to exist despite so many legal violations. Granted, most of these laws are laws that apply to other countries most notable American laws but it is still stunning that the website has became such a powerful force.

Politics

We had written about the Pirate Party, which obviously promotes ideas behind the website and has elected a representative to the European parliament. I cannot imagine a similar situation occurring in the US where a party dedicated to something like drugs or any other “illegal activity” would be granted some power in the government. Could you?

The next chapter should be fascinating

The Pirate Bay’s stories might be a much more famous one in a year or perhaps a bit more. How? Because there will be a documentary about the website, its impact on the world, on media distribution, etc. It will also discuss the pressure that the US government is putting on Sweden’s government to get the website closed. What has gone on and continues to go on behind the scenes must be incredible.

How can they actually release this movie?

The Pirate Bay has been smart about getting it done. You would probably think that no media company would want to work on this project and that no “legit” company would want to invest the necessary amount of money to get such a movie done right? And you would be correct. But the Pirate Bay simply asked internet users to contribute money towards getting the documentary done. Their goal? Raising $25,000 in 30 days. Sounds like a difficult objective don’t you think? But they actually raised over $28,000 in 3 days, more than enough to get proper editing done.

This surely is a perfect example of how media production and distribution is changing. Through the web, raising funds and producing content has became accessible to companies that never would have had a shot at it in the past. In this specific case, they might distribute the documentary on the internet only to start off as it is doubtful that media distribution companies (the main victimes of Pirate Bay’s business model) will jump on board of promoting a movie that will probably be very much “Pro Pirate Bay”.

An opportunity for the next Blackwater? Cyber warfare

By: ispeculatornew | Date posted: 09.07.2010 (4:00 am)

If you have followed news about the US offensive in Iraq, you know about Blackwater, which no longer exists officially. The company was renamed “Xe Services LLC” after its name was greatly tarnished. Blackwater and its personnel was found guilty of many illegal activities in Iraq, as one of the main subcontractors of the US government during the Iraq war. It is basically a private army, that had been hire in Iraq to help out the US army.

Why does the US army need private contractors?

There are of course many reasons to do so. One might be lack of personel but there are other reasons as well. Having a contractor to do the “dirty work” can help the government claim innocence and dissociate itself from anything immoral or illegal that was done. If things turn sour, the private company will end up taking the blame which is exactly what happened in Iraq as the company was even banned by the Iraqi government. Many of the operations that Blackwater became involved in had very particular challenges that made it very convenient to operate through the private contractor. Of course, there are limits over what foreign governments can do to a company like Blackwater given the fact that it is backed by the US government. Seems like the best of both worlds right?

It is a new world

We keep hearing about cyber warfare and how it will change the world. There is no doubt that wars are being fought far differently than a few decades ago. It’s no longer about man power, or at least not as much. Nowadays, it is about technology and information. Increasingly, cyber attacks can do great damage to the opponents, no matter if they are countries or international organizations such as Al Qaeda. Being able to dismantle the electronic capabilities of a country prior to an attack would give a huge advantage.

To give you an idea of how different the current wars are. The post 9/11 conflict (Iraq & Afghanistan) is the 2nd most expensive war of all time for the US with a cost of $784 billions (far away from the 2nd World War at $4.1 trillions). But the conflict is only 7th in terms of men involved in the conflict at 2.1 million.  Wars and conflicts will never be the same as they once were.  At the same time, cyber crime is also becoming a major issue. Barack Obama quoted a cost of $1 trillion

Is it bad luck that Georgia had serious issues with its internet and communication services in the hours prior to the attack from the Russian army? These attacks are believed to originate from the Kremlin but it’s not clear because it remains very difficult to make such a case.

To a certain degree, this is not a story about the future but rather about the present. Countries like China and Russia have already been connected to a great number of attacks, spying and other such crimes. They have been able to steal secrets both from corporations and from governments in order to obtain classified information for either commercial or military purposes. Also, criminal organizations are gaining knowledge and operational capabilities to deliver attacks, steal and create mayhem in what could be comparable ways to 9/11. Just imagine someone taking control remotely of a nuclear building in the United States. It may seem like a story from Hollywood a lot more than reality but I don’t think anyone wants to find out how truly serious these threats are.

What is needed?

I think there is a great opportunity for a company to become a private contractor for the US government’s cyber warfare unit. There would be many different tasks but here is what I see as the main ones:

Spying: Doing the same activities to our enemies to gain knowledge about who they are, their capabilities, objectives, etc. This is critical to our security but is certainly an activity that the US government would not want to be associated with. “Cyber-espionage is the biggest intelligence disaster since the loss of the nuclear secrets” said Jim Lewis of the Centre for Strategic and International Studies.

Cyber attacks: Being able to dismantle groups that are preparing to attack us is critical. But it can also be tricky. The US government would not want to be directly associated with an attack on a private group in Russia for example as that could be seen as an attack on Russia itself.

Investigation: When a private company like Google complains about cyber terrorism, it is very tricky for the US government to dig too much into those activities. But having a private group

Why I want to find the next “cyber Blackwater”

Private contractors such as Blackwater have very special relationships with the government as you can imagine. They are allies in crime. Because of that, companies like Blackwater often do not have any competition when they are bidding on federal contracts and are usually paid high amounts to compensate for the risks taken by the executives and workers at those companies. That creates very interesting possibilities for the companies that can become the next Blackwater. Trying to find the right one is the big challenge as these companies will obviously not advertise themselves for what they do. They would instead simply be Government Contractors

I will be on the lookout for the companies that could fit this profile, I’d also be very interested to hear any opinions or ideas as well!

Happy Labour Day

By: ispeculatornew | Date posted: 09.06.2010 (4:00 am)

Not much going on here today with the markets closed and good weather to enjoy outside. Hope you’re having a great long weekend! See you tomorrow!

Happy Labopur Day!

IntelligentSpeculator