Archive for November, 2010

How to trade on the Korea conflict (EWY)

By: ispeculatornew | Date posted: 11.30.2010 (5:00 am)

If the North commits any additional provocations against the South, we will make sure that it pays a dear price without fail,” – South Korea President Lee Myung-bak

If you have been living on another planet, I can tell you right now that things are spinning out of control in the Korean peninsula since last week’s breakout. You can read more detailed summaries on websites like the New York Times but one thing that is easy to find out is that there is a lot of tension right now as the US and South Korea have initiated more preparation drills… preparing for what? A possible war with North Korea. Obviously, there are a lot of things to consider when thinking about what a military conflict between these countries would mean. It is a very delicate situation for quite a few reasons:

North Korea has one of the largest militaries in the world
-It is within striking distance of Seoul and other huge Korean cities
-North Korea has some nuclear capabilities although it’s unclear how much
-The US has an alliance with South Korea and will be heavily involved if things derail
China is very much involved for many different reasons (relationship with North Korea, physical proximity, growing world power, etc)
Korea is one of the more important economies in the world

How bad could things get? Very bad. This is serious and unfortunately, it’s impossible to assume that North Korea’s leader Kim Jong Il is smart enough to avoid letting this conflict go too far.

Here are some of the investments that you should consider using

-South Korea ETF’s

No doubt, the South Korean ETF’s will be very volatile as the crisis goes on and there are certainly opportunities to do well. Just take a look at the chart from the past few days:

[table “195” not found /]

Unfortunately, there are no ETF’s on the South Korean Won at the moment as that could have been another very interesting play on the crisis.

-China ETF’s

China has been trying to establish itself as a world leader and having a crisis next to home is a threat. There is no doubt that China will want to have a major say on this crisis and if it ever exploded, it would have consequences on China and on its place in the world.

[table “196” not found /]

-Nuclear Energy ETF’s

It’s unclear how advanced North Korea’s capabilities are but that they have been working on nuclear technology for over a decade now and if ever this conflict did go nuclear, it would have profound impacts on the global landscape.

[table “197” not found /]

-Gold ETF’s

We have been discussing gold over and over in recent weeks and months but that is because it is a hedge for inflation and for uncertainty and both are scaring investors around the world at the moment. Chances are good that an escalation of a conflict in the Korean peninsula would create a spike in the price of gold. Would it be enough to bring gold to $3000?

[table “198” not found /]

Quick news – November 29 2010

By: ispeculatornew | Date posted: 11.29.2010 (5:21 pm)

Tech news: (concern the stocks we follow)

Netflix (NFLX) stock hit $200 today, which implies a valuation over $10B
Google (GOOG) is rumored to have closed a deal to buy Groupon for $2.5B…
Ebay (EBAY) was cut to hold by Stifel Nicolaus

Best return:   Blue Nile (NILE) +5,39%

Worst return:     Baidu (BIDU) -1,82%

No new trades for today

By: ispeculatornew | Date posted: 11.29.2010 (5:00 am)

Monday is usually one of the big days on IntelligentSpeculator as we open new trades based off of our long & short model on technology stocks. I am sad to announce that there will be no new stock picks….until the new year begins:) You see, these picks are based off of fundamentals and are medium to long term picks. Since I will be closing out the existing positions on the close of December 31st (to start off 2011 fresh), it does not make sense to open new trades with less than a month to go.

For some time Friday I had hopes of closing a trade as the Long Ebay (EBAY) & Short Yahoo (YHOO) trade was up +17% or so for most of the day but in the end, the day was not short enough which meant that it did not reach my stop which is up or down 20%. Since I do not use intraday stops, it would have needed to actually close past that point too.

I will be doing a recap of the year of trades later in December but I did want to do a small recap of what has been happening in the current live trades. As always, you can find the return of those trades in our “performance page” but usually the only commentary on those trades is found in IntelligentSpeculator Premium.

June 1st 2010: Long Google (GOOG) & Short AOL (AOL) +11,14%

It has certainly been a difficult year for Google and at some point, even the more optimistic of investors like myself started to have some doubts about where the stock was headed. It’s not been an easy stock to trade. But the stock has been showing signs of life and looks like all of the negative momentum is gone for now.

On the other hand, AOL is a company that I was very vocal against in the start of the year but a company that I do not love being short of right now. They do still have tremendous issues and are far from being out of the woods. But I do like a lot of their more recent moves and would certainly consider going long in 2011…time will tell.

September 27th 2010: Long Amazon (AMZN) & Short Blue Nile (NILE) +11,45%

This is a trade I would do over and over as Blue Nile seems to be consistently overvalued. I did get burned a couple of times last year but overall going short on Blue Nile has been a winning proposition.

October 25th 2010: Long Ebay (EBAY) & Short Yahoo (YHOO) +17,51%

I have written about Ebay and how I consider it more as an online bank than anything else and that is what drives me to be positive towards the stock. There is some competition but apart from Facebook, the threats do not worry me for now.

November 1st 2010: Long Apple (AAPL) & Short Research in Motion (RIMM) +1,29%

Research in Motion cannot compete with Apple right now in terms of product quality and sales which has translated into its stock rising this year while buying Research in Motion has been compared by this blog to catching a falling knife.

November 8th 2010: Long Baidu (BIDU) & Short The Knot (KNOT) -3,07%

This is the most recent trade and it is the first time in almost one year that we`ve gotten involved into the leading Chinese search engine but given Knot`s very expensive valuation, it certainly continues to look like a very promising trade.

I will only discuss the previous/closed trades in my year end recap but needless to say that the 33,82% return so far this year has been beyond what we were hoping to accomplish!

Financial Ramblings

By: ispeculatornew | Date posted: 11.27.2010 (5:00 am)

Happy Thanksgiving to all of you. I personally would love to thank my wife for always supporting me, my family and friends and all of you readers who make writing this blog so much fun. Best wishes to all of you! Here are some readings from the past week!

Socially responsible dividend portfolio @ TheDividendGuyBlog
Please Santa, let this be the last Christmas where… @ The Big Picture
The Federal reserve’s Visa statement @ Zero Hedge
The Beginning of the End @ Macro Man
November Net worth update @ TheFinancialBlogger
Henry Blodget talks sense @ CanadianCapitalist
Apple sold 2 million songs from the Beatles @ Business Insider
If you don’t have a will, you will have problems @ DoNotWait
Thoughts on GM IPO @ Balance Junkie
The 80/20 rule applied to the CFA @ SmartFinancialAnalyst
Think long term when shopping black friday and cyber Monday @ Free From Broke
Why are inflation and deflation important @ Momvesting
6 new volatility ETF’s @ Vix and more

Battle for talent

By: ispeculatornew | Date posted: 11.26.2010 (5:00 am)

Most of the tech companies that we follow are based in Silicon Valley and it is becoming very clear that the biggest problem that they are facing does not involved technology, financing, investors or getting the next big ideas. Instead, the major problem that these companies are facing is the lack of talent. Not that there’s no talent in Silicon Valley. But engineers and capable programmers are becoming a scarce resource. I think the main difference is that the digital economy is quickly becoming a critical part of the economy. A big part of that is because of the fact that the internet is now at the center of our lives, our social networks, our entertainment, our shopping and much more. That has spurred a wave of innovation and as the number of internet companies continues to explode, the number of solid workers has been unable to keep the pace.

It struck me in the last wave of earnings call to hear the vast majority of these companies discuss the importance of talent search and being able to retain their most talented employees. The biggest problem of course is that creating an internet company is very easy and it becomes very tempting for the best engineers from any of the big tech’s to head for the exit and start their own project.

How are companies like AOL, Yahoo, Google and Facebook  trying to keep their employees? Here are a few of the tactics being used:

Work environment

It’s now famous how Google has set a new standard in terms of work environment. Among other perks, they have several types of food cooked by talented cooks, served for free to all employees at all time. Add to that equipment to help Googlers rest and get more oxygen, rest areas and giving them one free hour per day to work on personal ideas or projects.

Raising Salaries

But having a great and stimulating work environment does not seem to be enough, even for Google. Why? Because a few weeks ago, the search company announced that after doing surveys, it found what its employees were looking for the most was a better salary. For that reason, they decided to give a 10% increase for all employees around the world. That certainly says a lot about how determined Google is to improve its retention rate. Another tactic that tech employees routinely use, especially in the earlier years is giving out stock and options to keep employees extremely motivated. The effect of course is to make employees care more about the company’s future as well as tie the employee (since these options & stocks usually cannot be sold in the earlier years).

Buying Companies

As crazy as it may sound, it certainly looks like buying companies is now seen as a good way to recruit top talent. AOL recently discussed this in their earnings call as they said that the days where they would buy a company only to see the founder exit were gone. These buyouts are now being made with strict conditions for the founders…the carrot and the stick:

Carrot: Major incentives offered on a performance basis for the founders
Stick: The sale contracts generally have strict conditions regarding the founder staying put

Think I’m exaggerating? Just think about Facebook which recently made an acquisition of NextStop and decided to close down the website. Why buy it then? Because by doing so Facebook was able to get the founder and the technology/idea. And since talent is the rare commodity, making a purchase might be worth it. If a big proportion of the more talented engineers are working on their own start ups, the best way to get access to that workforce for a few years is to buy the company..

Being “In”

It’s unfortunate for some… but working for Facebook and Twitter is seen as “cool”. In finance, working for Goldman Sachs is seen as the top of the world and that same hierarchy exists in Silicon Valley. There is no doubt that you will impress friends and family if you are working for Facebook & Twitter or maybe even Google. You probably will have a more difficult time if you work for Yahoo, AOL, MySpace or others. It’s difficult to explain and is certainly difficult to control. I think it’s mostly about the prospects for the company. While Twitter and Facebook are already major successes, most would still expect the companies to be much bigger in 3 or 4 years.  That is not as clear for companies like Yahoo or MySpace which seem to have their best days behind them…

What does all of this mean?

In my opinion, it means that I will be looking more closely at the efforts made by these companies in order to attract talent because it will be a major factor in their medium to long term success

Black Friday Dividend Stock match up: Coke (KO) or Pepsi (PEP) ?

By: ispeculatornew | Date posted: 11.25.2010 (5:00 am)

It is a universal question. Almost everywhere in the world, consumers are subjected to a choice, Coca-Cola or Pepsi. They each have their leading brand of beverages but have expanded into many different products such as juices and water. I am personally a Pepsi drinker above Coke and while I can live with Coke, it will never end up being my #1 choice. Both picks are debatable and some often dispute that we can see the difference. I beg to differ but in the end it really does not matter that much does it?

Looking for some deals for Black Friday?

Don’t get me wrong, there are many good deals right now and you could probably get a major upgrade to your tv set for under $2000. But my question is the following, if you were to buy a dividend stock instead of a tv, wouldn’t that end up being a much better choice? Every month, I take a look at the top 100 dividend stocks in the S&P500 and then subscribers to our free newsletter receive a more in depth analysis where I filter according to the important factors that I consider to be key elements for winning dividend stocks. Both Coca-Cola (KO) and Pepsi (PEP) have appeared as top picks so it seemed fitting to match them up and determine the top dividend stock. Obviously, I don’t expect to find an obvious winner because the companies are so similar that they are treated in a similar manner by investors. If you did have to pick one of these names for your Black Friday present, which one would it be?

Dividend Metrics

First off, let’s take a look at the numbers and marks:

[table “192” not found /]

You can also take a look at the dividend payout charts for both companies:

Coca-Cola (KO)

Pepsi (PEP)

I have to say that I would give a slight edge to Coca-Cola for the dividends. It has a slightly higher dividend yield and while its 5 year growth is a bit lower, I think that is mainly because Pepsi had offered low dividend growth for a long time. When you take a look at the dividend payouts of these two stocks, it becomes clear that the patterns of Coca-Cola seem:

-More sustainable
-More systematic

Edge: Coco-Cola (KO)

Company Metrics

First off, take a look at the numbers:

[table “193” not found /]

I think the advantage is fairly significant in favor of Pepsi here. The company has better sales growth, earnings growth, a lower P/E, a lower payout ratio and a superior return on equity. I would consider the margins growth and debt to capital ratios to be more or less the same.

Edge: Pepsi (PEP)

Stock Metrics

[table “194” not found /]

Not much of a difference here, Coca-Cola has a small edge on volume but not enough to become a factor. In terms of trend analysis, Coca-Cola has a major advantage but it is not enough to to make a long term change in my opinion. It would simply mean that I might trade more quickly into Coca-Cola right now than Pepsi.

Edge: None

Industry Metrics & Fit within portfolio

These two sets of criteria are usually a very important portion of the analysis but not in this specific case because both have an almost identical situation. They are in the same industry, are basically an oligopoly as both are giants with little threats from smaller players and since they are both in the same industry, I would consider both as either fitting your portfolio or not. Both companies are great dividend plays, they have reliable and steady businesses that have been able to consistently pay and increase their dividends…

Edge: None

The winner is….

In my opinion, Pepsi remains the better dividend play at the moment as its underlying business is in very good shape and should be able to sustain more dividend growth over time. It is a close one as expected but I would expect dividend growth to be as high as Coca-Cola if not a bit superior.

Quick news – November 24 2010

By: ispeculatornew | Date posted: 11.24.2010 (8:14 pm)

Tech news: (concern the stocks we follow)

Rumor is that Research in Motion’s (RIMM) playbook will be priced at $399
Shanda Interactive (SNDA) was cut to “Sell” by Roth Capital
Google (GOOG) is meeting resistance regarding its digital music service (more)

Best return:  Monster Worldwide (MWW) +9,61%

Worst return:   Netflix (NFLX) +0,56%

Back to the basics: ETF 101

By: ispeculatornew | Date posted: 11.24.2010 (5:36 am)

It’s a basic question but one worth looking into. I received a few emails in the past few weeks inquiring about it and while I did discuss the reasons why I prefer ETF’s over mutual funds, I have not really taken the time to explain what an ETF is, what purpose it serves and why it has gained so much traction in the past few years..

What it is

An ETF is a short name for an exchange traded fund. Say what?

Chances are that you know what a mutual fund is. Basically,  imagine a fund manager that wants to manage $100,000. He could simply sell 10,000 “units” at $10 each. Every time an investor wants to buy or sell units, he can do so at the end of a trading day.

An ETF is very similar except when you buy, you’re not buying from the fund manager in almost all cases. You are buying a unit from someone else as if you were buying a stock. How? You simply open a brokerage account, deposit some money and then can buy the ETF as if you were buying any other stock. That means you can get in and out of your position at any point during the day which is certainly an advantage.

Short and long term investing

Because of the way they are built, ETF’s have been used increasingly both for short and long term investing. Because of their very high liquidity, ETF’s have been a great way for sort term traders to gain exposure or hedge against specific events. Before the arrival of ETF’s, gaining exposure quickly of specific investments such as metals involved trading futures and often ended up costing a fair amount of costs.

In my opinion, the bigger advantage goes to long term investing though. Investors that were using mutual funds can now get the same exposure and pay between 1% and 3% of fees less than what they were paying. Over time, those fees make a huge difference and will often result in tens or even hundreds of thousands of dollars. ETF’s are not perfect but for long term investing, the upside is very significant.

Low Fees

Speaking of low fees, the difference is very significant. I met someone from Fidelity, one of the major mutual fund players who told me that the average fee on its funds was a bit over 2% per year. Compare that to ETF’s… We looked at unknown ETF facts recently and the most expensive ETF’s are about 1%. But for the more mainstream exposures such as the S&P500, the fees are generally under 0.10%. That is a major economy for the average investor over the years. Why do they charge less?

ETF’s are much more transparent: Since comparing mutual funds is much more difficult, it’s nearly impossible for you to prove that your adviser is not truly “working for you”. In the ETF world however, you can easily compare funds and the fees that they charge which makes it easy even for average investors to get the “best deal”.

Sold by advisers: Mutual funds are usually sold by someone who is getting a cut on your investment every year, a trailer fee. That person does not necessarily have the motivation to get you the “best investment” as it is not what will give him the best revenues.

More efficient structure: In a mutual fund, much more trading must be done in order to meet all of the investors buy and sell transactions. That results in more trading fees and less tax efficiency. Since ETF’s have a more efficient structure, their fees are minimal which makes it possible for them to charge less.

Exposure to additional asset classes

Until recently, it was complex and costly for individual and smaller investors to get exposure to asset classes such as commodities and bonds. Yes, in theory an investor had the possibility of opening up a futures account, deposit margin and start trading futures. But in practice, it was much more difficult. In the same way, trading bonds was possible but since small investors have to trade much smaller quantities, they usually end up paying much more for bonds than a larger investor would. That made it difficult and not very attractive for investors to trade such asset classes. But thanks to ETF’s, it is now much easier for these investors to go long on gold, oil or gain exposure to corporate or government bonds.

Another aspect was getting international exposure to fixed income or foreign markets. Some of these companies did list shares on US exchanges as ADR’s but I think it’s safe to say that ETF’s have improved the scope of possibilities for small and even large investors and for that we should all be very thankful.

Targeted exposure

While there are thousands or mutual funds, many of them cover the same exposures. Every mutual fund issuer (there are hundreds) has a fund that covers the S&P500. Why? Because every adviser will generally recommend the funds issued by his firm or his affiliated firm. In the ETF world, you will rarely find more than a few ETF’s that cover the same exposure. Even the S&P500 is covered by only a few ETF’s.

What is very interesting is that ETF issuers are moving into new and very interesting areas. Not only can you get exposure to the Chinese equity market (FXI) but you also get exposure to the currency, small caps, large caps, Chinese technology stocks, industrial or other sectors. The possibilities are almost endless. That gives investors with very precise views to make investments on those specific scenarios.

Future of ETF’s

It is unclear how ETF’s will evolve but for now they certainly look like they will continue to gain assets and market share and will force mutual fund issuers to reduce their fees much further than what they have done up until now. I do expect investors to also start paying more attention to the fees they are paying through using mutual funds. It will take time but we will get there.

Quick news – November 23 2010

By: ispeculatornew | Date posted: 11.24.2010 (5:26 am)

Tech news: (concern the stocks we follow)

Netflix (NFLX) was cut to “Average” by Caris & Company

Best return:    Open Table (OPEN) +2,88%

Worst return:     Priceline (PCLN) -2,99%

Is Google (GOOG) the next Yahoo (YHOO) ?

By: ispeculatornew | Date posted: 11.23.2010 (5:44 am)

I think it’s fair to say that I have not been 100% consistent regarding internet content networks such as AOL, Yahoo and IAC Interactive. (IACI). One of my main criticisms of their business model is how they try to do so many things instead of focusing on their core strengths. It’s certainly a challenge to not grow when you see how well the strategy has worked for players like Apple (AAPL) which have created their own little galaxy. That being said, I still think there is some cause for concern when looking at how Google is developing. If not concern, then it’s probably worth at least discussing their overall strategy.

The “Old Google”

Five to ten years ago, things were very simple for Google. You could say that the company had two important activities that kept executives busy.

-Search: Many have called Google a one trick pony and while it might not be as true these days, that one trick that Google does well, is done better than anyone else in the world. Search used to be the activity at Google both in terms of energy and resources invested.
-Advertising: Advertising is closely linked to search because in the opinion of most users, the ads generally succeed in enhancing the user experience. They are also the reason that Google has been able to generate profit.

This decade’s Google

If Google used to be about search and advertising, you can hardly see it now. Yes, they are still the two core activities and remain the primary focus of the search company but Google is now about a lot more than search and advertising… here are Google’s “new” priorities:

-Enhanced search: Search used to be crawling the internet for websites and displaying them when  users went through Google. But now, Google is helping users search through images, local businesses, news, financial data and a lot more

-Enhanced advertising: While Google used to do advertising in a very simple way, it has greatly evolved. Google used to offer spots for text links on as well as other partner websites. Through purchases of Doubleclick, AdMob and other advertising plays, Google is now active in the display ad, has experienced with offline ads in newspapers, magazines, radio stations and even tv.

-Operating System: Android is now a wildly successful browser that is dominating the mobile space and has given Google a great position in the mobile space

-Browser: Google Chrome is part of Google’s strategy to capture more data from internet users as well as take market share from Microsoft’s Internet Explorer

-Google Docs: This is as much about profitability as it is about hurting Microsoft and gaining market share. Its docs line of products offers solid competition to Microsoft’s Office

-Content websites: Google is getting into the travel booking business thanks to its proposed purchase of ITA (which is being opposed by many other travel companies such as Expedia). Google also launched, a fashion website and has other products offered

-Alternative energy: Google has been building wind energy centers and while it’s not clear how it fits with the overall company strategy, it seems to be a clear priority

-Electric Cars: Another “green” priority as Google has worked on an electric car and has been making inroads

-Google TV: It is unclear how this initiative will turn out since it is so new but Google TV aims to change the way TV is distributed and viewed. It has had a difficult time, as are other “innovative players” such as Apple but it is a clear priority of Google.

-Google Music: Google will be launching a service to compete with Apple’s Itunes, an online music store

-Apps: Through Android, Google has now gotten very much involved in the exploding apps business and has set its looks on more apps business in the near future for its other products.

-Youtube: Youtube is the dominant video player on the internet thanks to what now looks like a bargain, its purchase of for $1.65 billion.

-Social: This has been by far the biggest struggle for Google as it continues to try to develop an alternative to Facebook, Twitter and other “social” players.

-Ecommerce: Google has developed Google Checkout which is meant to be a “marketplace” that helps buyers and sellers of traditional and digital goods. The success has been limited but it also seems to be a fairly low priority for the company. Google has also been working on its Ebook arm, Google Books.

-Google Ventures: Google created a small  fund that is basically a venture capital fund within Google. It invests in startups, usually in the technology or green technology sectors.

How much is too much?

Looking at the chart almost makes me dizzy. The reality is that Google has a lot on its plate and seems to be joining new initiatives every few months. My big question is how much they can do without getting lost among all of these projects and losing focus on its core; search, advertising and information. I think there is certainly danger involved and I personally have trouble seeing how some of these fit in the global strategy of Google. The company used to be a simple one to understand but that is less true every year.

The difference with Yahoo and IAC Interactive

The main difference in my opinion is that I don’t think Google is “settling” for average products. While Yahoo has basically ceased to innovate and improve some its core properties such as Yahoo Finance and Yahoo Email (except very recently), Google has mostly become either the leader or an emerging force in almost all of these initiatives. Android, Chrome, Youtube are all incredible successes and other initiatives such as their Green Energy products certainly look promising even though it will be difficult to judge them in the short term.

Am I still in love with Google’s stock?

Remember how I said I had fallen for Google’s stock? In  fact, I am still very much a believer. Do I wish the company was a bit more focused? Certainly. But until I get the impression that they are losing direction, I will give the direction the benefit of the doubt. That being said, I will be monitoring how much revenues and costs these initiatives bring into the company in the quarterly results as much as possible in order to continue to get a more precise opinion.