Archive for October, 2010

New Stock Pick: Long Ebay (EBAY) & Short Yahoo (YHOO)

By: ispeculatornew | Date posted: 10.25.2010 (5:00 am)

It’s been a wild ride in the past 2 weeks as we have been closing trades left and right, in general with mixed results. Our overall yearly return of about 35% is still well above our objectives but we still hope to get things back under control.

Long Ebay (EBAY)

Ebay is a stock that we have been trading often because we think the stock is being traded as an auction website which it is in some ways but in reality I still see Ebay as something completely different. To me, Ebay remains the dominant internet payment system which is the leader in a market that continues to experience very strong growth. It wasn’t a mistake that Ebay executives discussed Paypal before any of its other units in the latest earnings call. Ebay is now an online bank with some auction and electronic shopping segments. Possible alliances with Google’s Android to make it the official payment system on Android phones would be a very big deal for Ebay. The main risk in my opinion would be some competition from Facebook’s upcoming virtual currency or if some other competitors joined in.

That might happen but it could take some time so I prefer trading Ebay several times before that happens at the risk of having a losing trade at some point.

Short Yahoo (YHOO)

What to say about the company led by Carol Bartz? They never cease to amaze me. I did have a good time listening to their earnings call as the company displayed its lack of direction in many obvious ways. Hearing that Yahoo is working on a “Yahoo connect” feature to rival Facebook’s alternative is another example. Launching the same feature two years later does not seem like most brilliant idea. Besides, why would Yahoo users be excited about using their accounts as a “center” for their web experience? All Yahoo’s most important products such as email, finance & games have barely improved in the past 5 years, especially compared to rivals. Yahoo continues to be a jack of all trades instead of being a king in a few distinct segments/markets.

Someone would need to tell me where Yahoo sees itself in 5 or 10 years… I don’t see it, I don’t see them gaining business without buying something big.

The main risk in being short Yahoo remains the same every time, seeing someone come up with a serious plan to buy Yahoo. It has been discussed for years and has not happened. There were bigger rumors recently but those have died out a bit.

The numbers

[table “179” not found /]

When I look at the P/E ratio and the growth rate, you can see exactly why I am making this pick. I am a bit surprised to see that the trend analysis score for Yahoo is so high because the stock is down significantly since April.

The Charts

Financial Ramblings

By: ispeculatornew | Date posted: 10.23.2010 (5:00 am)

Good morning, I hope you have a great weekend planned, I sure do and although my Indianapolis Colts are off this weekend, I might be watching some football tomorrow.

Here are some of my favorite readings in the past few days:

40, is it too late to invest for retirement? @ DoNotWait
Taibbi, Roach: Magic Money Printing Machine at The Fed @ The Big Picture
Government debt as a % of GDP @ Curious Cat
Investing is NOT sexy but the result is @ TheDividendGuyBlog.com
Why do so many candidates fail the CFA? @ SmartFinancialAnalyst
Changing the direction of The Financial Blogger @ TheFinancialBlogger
Getting real about real estate @ ZeroHedge
Investment property: How to make it a success @ SimpleFinancialFreedom
A primer on real return bonds @ Million Dollar Journey
What to do with your money in your 20s, 30s and 40s @ FreefromBroke
Microsoft: The big short @ SeekingAlpha

Closing Trade…

By: ispeculatornew | Date posted: 10.23.2010 (3:00 am)

We will be closing out another trade Monday morning, the trade where we are long Research in Motion and Short Monster Worldwide, which now stands at -23,91%. That takes our yearly return to 34,95%, you can see the details of our trades here.

I like where WisdomTree is headed….

By: ispeculatornew | Date posted: 10.22.2010 (4:10 am)

I have long been a fan of fixed income ETF’s because they can help in big ways to be more efficient in that portion of passive income portfolios. Some time ago, I wrote about WisdomTree’s first fixed income ETF, ELD, which is gives exposure to Emerging Markets local debt. I have complained about the fact that you have tens of ETF’s dedicated to Treasuries and hardly any international fixed income ETF’s. ELD was a step in the right direction.

It seems like they are getting ready for the next step; giving exposure to individual debt markets. First off, Wisdom Tree has filed to create a Brazil Bond ETF. This opens many new opportunities and is hopefully the start of something much bigger. In equity ETF’s, we can easily trade individual country ETF’s but that diversity was lacking for fixed income.

Many governments issue bonds at much greater yields than you could get in the US, even for a similar level of risk. The best way to compare it is to find similar yielding corporate bonds. We had written about Microsoft’s (MSFT) insanely low yields on its corporate bonds. Why not get a bond on a country like China or Brazil instead of looking for a few extra yields points in a US corporation? It’s at least worth it to include in your portfolio.

So what is so great about Brazil bonds?

First off, they currently yield around 11.3% and they offer additional exposure to the Brazilian Real (currency), the interest rate and inflation situations in Brazil and also make it possible to make more sophisticated investments in Brazil without all of the complications. That explains why foreign investors have tripled their investments in Brazil bonds in the past 3 years to $89 billion. Of course, that is almost all done by institutional investors because of the costs and complications involved. Hopefully that will come to an end soon…!

One thing that is not clear is how taxes will work for this ETF as the Brazilian government is planning on taxing foreign investments

How would I use this ETF?

I must say that in a retirement passive portfolio, I would probably be more inclined to hold a diversified ETF such as ELD. That being said, a more speculative or aggressive portfolio would maybe be a perfect place to hold this upcoming ETF.

When will it start trading?

No clue as of now, as the ETF is still looking to get regulatory approval.

Who is next?

Personally, I am hoping to see bonds on Canada, China & Russia among the next ones. They all provide something unique and would give much more yield than US treasury ETF’s with limited additional risk.

Corporate bonds

Of course, the following step would be giving the possibility to invest in foreign corporate bond markets… It’s probably more difficult because these markets are not as liquid and are much much smaller than what you can find in the US corporate bond market. But there will be interest, I have no doubts about it.

Quick news – October 21 2010

By: ispeculatornew | Date posted: 10.21.2010 (8:01 pm)

Tech news: (concern the stocks we follow)

Amazon (AMZN) reported earnings of $0.51 (est $0.48) on revenues of $7.56B (est $7.37)
Travelzoo (TZOO) reported earnings of $0.22 per share (est $0.11)
Amazon (AMZN) was upgraded to “Buy” by Bank of America
Netflix (NFLX) was raised to “Outperform” by Oppenheimer
Netflix (NFLX) was raised to “Buy” by Merriman Curhan Ford & Co

Best return:          Travelzoo (TZOO) +18,78%

Worst return:        Dice Holdings (DHX) -2,56%

Closing trade: Long Amazon (AMZN) & Short Travelzoo (TZOO)

By: ispeculatornew | Date posted: 10.21.2010 (8:00 pm)

Wow, that was fast.. we opened this trade on Monday and it is already closing, unfortunately it was an unsuccessful trade as Travelzoo jumped big time thanks to impressive numbers that were released today. Probably our worst pick of the year and we will have to review what happened here. We’re never a fan of making picks a few days ahead of earnings but oh well. Things are still going well this year as we are up over 35% this year…

Correlations between asset classes

By: ispeculatornew | Date posted: 10.21.2010 (5:00 am)

Recently, we wrote about having exposure to the international markets through ETF’s. We are obviously very strong believers in this principle. Among the comments that we received that day, we were asked by John about correlations between markets:

” For me diversification is important. I’ve invested in EFA (around 10%) and VWO (5%). I know that EFA is correlated to US markets. How can we find the correlation between the EFA and US markets? But it’s showing great performance.

What do you think about that ETF? Can you compare this one with other int’l ETFs?  ”

Then yesterday we came across this huge chart of correlations between asset classes over the past year, compiled by Fidelity investments. There wasn’t anything that really shocked me but many things were quite interesting in the chart. I will give you my thoughts on a few things and would love to hear yours. I will comment on correlations with the S&P500 which is more or less the standard when discussing equities investing with US (and even worldwide) investors.

Developed countries (MSCI, EAFE, Europe, etc): Not a huge surprise to see that the correlation is nearly perfect (1). Developed economies are growing more and more dependent on each other and it’s not a big surprise to see big countries in Europe and others like Canada and Japan. It’s easy to see how integrated these markets are. Actions by European, US or Japanese central banks have similar impact on all of these markets.

Emerging Markets: This was a surprise for me. I would have expected the correlation with BRIC Countries and emerging markets in general to be a bit smaller. I think it’s fairly known now that when there are major market crashes, all markets seem to crash simultaneously and correlation tends towards 1. But in a year where the market is recovering like this year, I would have expected correlations to be smaller.

Bonds (30 day tbills, investment grade, etc)
: Very low correlations as we would expect. These markets have been much easier to get involved in thanks to bond ETF’s. They have a lot of attractive features, they provide income, generally have less volatility and as you can see correlation with the S&P500 is fairly small.

REIT: Real Estate Income Trusts have suffered quite a bit in the recent real estate crash but they have been recovering and while there is still a lot of uncertainty, REIT ETF’s have been a great way for investors to get exposure to the real estate market in the US and abroad. I honestly would have expected real estate to be more diversified than what it has turned out to be.

Gold: We have written about gold and it’s potential to reach $3000 as well as the arguments that point to gold being a bubble. What we do know however is that most investors have been getting involved in gold because it was a great way to get protection from a system/market/economy meltdown. It does turn out that gold is one of the few assets on this list that actually has a negative correlation with the S&P500. There could be many explanations but I think it’s clear that every time uncertainty spikes up, equity markets suffer and gold rises.

The Precious metals category
, a broader term for metals such as gold & silver. We have discussed silver as well and honestly it’s not a huge surprise to see the correlation being basically 0 (0.01).  While gold is the ideal hedge because it very often moves in the complete opposite direction, other previous metals like silver are not as directly opposed to the market but they are still not very correlated.

Base metals:
This is one subject that we have not discussed much yet but copper, nickel, lead and other base metals have also been doing very well in recent months. They have a higher correlation than precious metals because they are very correlated with the general economy as they are more “demand based”.

Thoughts?

I could have went on for a while about the chart but I wanted to cover the main points. What are your thoughts on the results? I would love to see multi-year results. Will this change the way I would build a portfolio? Maybe over time it will, I still need to go deeper into the results though. What about yours?

Quick news – October 19 2010

By: ispeculatornew | Date posted: 10.21.2010 (4:18 am)

Tech news: (concern the stocks we follow)

Ebay (EBAY) announced earnings of $0.40 per share (estimate $0.37)
Netflix (NFLX) announced earnings of $0.70 per share (estimate $0.71) with stronger guidance

Best return:       MonsterWorldWide (MWW) +6,53%


Worst return:       Rosetta Stone (RST) -1,15%

Predict which bubble will blow up next…

By: ispeculatornew | Date posted: 10.20.2010 (5:00 am)

A couple of weeks ago, I wrote a post about the signs that we missed before the 2008 credit crisis blew up, namely the financial star power of Lenny Dykstra. Think about it for a few seconds… since 2000, we have been in bubble after bubble

Early 2000s: Tech Bubble
Mid 2000s: Commodities bubble (remember $150 oil that was going to $200-300?)
2008: Credit Bubble
2009: Real Estate Bubble

Why we do week getting these huge bubbles that take down the markets when they collapse? Some such as Matt Taibbi blame Goldman Sachs, but most others think that it’s because the way that our system is now being managed. We do so much to avoid tough times that we go into excesses the other way around. The 2001 Tech bubble collapse combined with the tragic events of 9/11 were a tragedy. But taking down interest rates to almost 0% in an attempt to revive the economy created a whole new set of issues that helped blow up the entire system a couple of years ago. I think it’s fair to assume that as of right now, some new bubbles are being created. The trouble is seeing which ones. As was commented in our post about Lenny Dykstra, it is much easier to see the signs after the facts. That does not mean we should not try to see them before they blow up though.

Betting on a blow up can end up being a very difficult though. Why? Because the trade can go against you for much longer and much further than you can generally assume is possible. Bubbles tend to do that. But being prepared and aware of a possible bubble is still a prudent thing to do. I would love to hear your thoughts on these or any other bubbles that you can think of.

US dollar

The US dollar is a source of debates around the world. Its value is difficult to assess because it not only has a fundamental value as a currency of the United States, but it is also the currency used for reserves around the world and for much of international trades. It is not quite clear what will happen because the strength of the dollar depends mostly on investor confidence towards the US government. We have discussed the need for diversification and part of the reason behind is because of the uncertainty regarding the government’s fiscal position. The US government has high deficits and a debt level that is not that far off from countries such as Greece.

It would not be impossible to see some start to lose confidence in the ability to repay its debt. If that were to happen, the cost of debt would move higher which would add pressure to the government. Where would it end? Difficult to say but it’s fair to assume that China and Japan have very important roles in keeping the confidence high in the US government. They do own much of the debt themselves and have many $USD denominated assets so you would think that they would have strong incentives to keep the dollar flying high. But if it did start to lose value, things could go very quickly.

Real Estate #2

Yes, I know, we did already suffer from a huge drop in real estate prices in the US and in most of the world (Canada being a lone exception). But research shows that prices may still be overvalued and they did require a lot of government help to get some more buyers into the game. As in anything, giving too many incentives usually only gives a short term stimulus. In the long run, the correction could continue. Some markets such as Florida have already lost so much that it’s difficult to see how much worse things could get. But inventories are so huge, there are just not enough buyers to fill the gap in many places right now. Also, a lot of the predator loans that were used and which make it almost impossible for the homeowners to keep paying the house are approaching reset dates that will likely force them to either sell the house or simply abandon it.

Gold

We did write a post about Gold and its anticipated rise towards $3000 but also discussed the counter arguments. Gold is a source of much debate because it’s value is mostly based on confidence and lack of confidence in the US dollar and other assets. The one thing that screams bubble is when everyone on the street or in the mall thinks that something’s value will go up. Remember when everyone was buying tech stocks that had no earnings or when everyone was buying 2-3 houses and putting them up for sale the following day at a 10% premium? A similar thing is happening with gold. Magazines, newspapers, tv shows are all advertising gold as the big thing that we should all get involved in. Just take a look at this video

Doesn’t that scare you? No matter why you are long gold, that certainly screams bubble.

China

China has generated much of the world growth in the past decade powered by its population of over 1 billion. It has been able to finance US spending, generate much of the world’s stuff. But there are many big questions regarding China. What will happen with the Yuan? How reliable are the government provided numbers? How much longer can a central government rule over such a huge economy? Many assets are overheating in China including real estate, financial assets, etc. I read that a quarter of the Chinese corporations were investing in the stock market. Why? A market that goes up almost all of the time is an easy way to increase profits.

I think you are starting to see that many things could go wrong in China and many anticipate that they will. When will it happen and how severe? That is open for speculation. But once that happens, the impact on the world economy could be devastating. You can imagine how demand for commodities would crash if China was to suffer from a severe recession which would take down natural resource countries such as Australia & Canada. The impacts would spread quickly….

Questions…

So my question to you is.. do you think that some bubbles are currently being created? If so, which ones and how are you/will you prepare for those?

Quick news – October 19 2010

By: ispeculatornew | Date posted: 10.19.2010 (8:02 pm)

Tech news: (concern the stocks we follow)

Yahoo (YHOO) reported earnings of $0.16 per share excluding one time items (estimates $0.15) on revenues of $1.12B (estimates $1.13B) with lower guidance
Google (GOOG) was cut to “Hold” by GmbH research

Best return:     IAC Interactive (IACI) +0,16%

Worst return:      Travelzoo (TZOO) -5,03%