Archive for November, 2010

Sovereign crisis and what it means for your portfolio

By: ispeculatornew | Date posted: 11.22.2010 (6:01 am)

If you have been following up on economic events in the recent past, you know that there are many doubters about the current situation. I was watching Meet The Press this weekend where Dr Alan Greenspan and others were discussing the the problems that the US economy is facing related to its huge deficits. This is not a trivial issue and while I have been reading about it for months, I have postponed writing about it because it just seems like such a complex issue that getting around it seems impossible. But it is an important issue… And there might be serious consequences in the next years/decades. How should your investment strategy be adjusted? It’s a complex issue but I’d love to get your thoughts about it.

Government debt & deficits

Governments have more debt these days than at any points in history. They have borrowed during the good times and with the economy struggling, most governments have done as the US Government and the Fed has done… borrow massive amounts to stimulate the economy. It has worked to an extent but the world economy seems sluggish at best and governments are unable to get back to a no deficit environment. The prospects for the next few years are dramatic as well. Think about it… In developed countries, the population is aging very quickly and the governments do not have even close to the amounts that will be required to pay for everything that they’ve promised. Planning on living off of a government pension? Think again.

The big problem is that economists and governments know that the numbers do not add up but are unwilling to take the fight. Who could blame them? Barack Obama attacked the health care issue and the French government attacked the retirement age. In both cases, what they proposed was not even close to being a good step. It was like taking a first step in a 1 hour race… it’s a start..but so little. The problem of course is that in both examples, the governments had to settle for less amid huge backlash from citizens and opposition parties. That will certainly not encourage governments to take action. Rather, they will “kick the can” further down the road, as we’ve been doing for years. But at some point, we will need to tackle the issues.

Will it be too late?

S&P is a credit agency that is well known and respected. They do not get any fun out of publishing gloom report. Yet the report that they recently posted about sovereign debt and deficits is very alarming. The conclusion is that by 2045, 60% of governments would have their debts rated as “Junk”. The report is done with assumptions of “no major changes”. Of course, some changes will be done before then. But how late will we wait and how dramatic will things be by then? Just imagine that if a government’s debt is downgraded, the investors require a much higher interest rate which puts the country in further trouble which creates more debt… it’s a vicious cycle.

It’s happening already

Remember the problems that Iceland encountered, and Greece? Both are being helped by European Union members and now that Ireland is also in serious trouble, it’s not as clear how Europe will help. The more serious issue is that bigger countries like Spain and Italy also have a very upward hill to climb in the next few years. They have huge deficits, struggling economies and worst of all.. they cannot be saved easily. Europe and even the US have huge reserves, but saving huge G20 economies might be beyond what they can do right now.

I could go on and on and I’m not even trying to be pessimistic here, these are all serious studies being discussed by very credible economists. The issue could be discussed for hours and days but there are no easy ways to resolve it.

Impact on investment strategy…

I think it’s far from clear how to prepare for such an environment. There are no clear answers. Betting on government bankruptcies 10 or 20 years from now is not an easy thing to do and not an easy scenario to protect ourselves from. Here are some conclusions that I draw from this dark but far from impossible scenario:

1-Do not count on government help: No matter what the government tells you… if you are not yet retired, assume that it will go back on its promises. It has no other alternative. I assume that I will receive none of the money that I should be getting in theory from the government once retirement comes. It will probably not be entirely true but reality will not be that far off in most cases

2-Prepare for the doom scenario: If governments fail, it’s unclear how things would go. Massive cash printing? Interest rates going much higher? I think that avoiding leverage as much as possible is critical. Staying as debt free as possible is the best way to do so. If ever things go wrong and rates go much higher, the impact will be minimal. Having a very valuable house but a huge mortgage with it can be much more difficult to deal with.

3-In terms of investments: It’s quite unclear how this type of thing will play out. There are many leveraged and inverse funds that help you go short on US government debt but the outlook is so long term that those investments would be eaten by the fees on over time. I think that over time some ETF’s will be created for this purpose but in the meantime, safe bets might be:

Gold (uncertainty hedge?)
-Other metals (silver, platinum)
Inflation protected bonds (through ETF’s)

Do any of you have other thoughts on this?

Financial Ramblings

By: ispeculatornew | Date posted: 11.20.2010 (5:08 am)

Weekend time!! If you have not seen any of these “robot” videos, you need to see the one at the bottom of this post about Quantitative Easing, it is very funny!  This week was actually fairly slow in terms of news but I did find a lot of interesting readings, here are a few:

How to build a socially responsible dividend portfolio @ TheDividendGuyBlog
Dividend ETF or Dividend stock: which to choose? @ The Passive Income Earner
Why are you so interested in gold? @ TheFinancialBlogger
Indeed blasts past Monster as the top job website @ TechCrunch
Warren Buffet thanks the US Government @ Ny Times
Stock investing is a political act @ BalanceJunkie
Getting by on $1 million per year @ James Altucher
More tricks to get going: Saving enough for retirement @ DoNotWait
Is China considering raising its gold reserves? @ ZeroHedge
By the numbers: Institutional investor assets @ The Big Picture
CFA Preparation: Crunch time @ SmartFinancialAnalyst
Intel Corporation (INTC) Dividend stock analysis @ DividendMonk

Trouble when trading high growth stocks (OPEN)

By: ispeculatornew | Date posted: 11.19.2010 (5:00 am)

If you live in the US or have been on a trip to the US in recent weeks, chances are that you booked a dinner reservation on the internet through Open Table. It’s a simple concept really. Open Table is the “Expedia” of restaurants. It will help match those looking for a free table and restaurants with tables to serve. Both parties like the convenience and Open Table gets a small cut in exchange for the service (generally 1$). The service has gained popularity and while the concept is simple, it would certainly be a big challenge for a competitor to compete on a National level. Why? It becomes difficult to only serve a few dozen or a few hundred restaurants when you are competing with OpenTable which serves over 14,000 restaurants and it becomes a much bigger challenge.

Because of the simple but brilliant concept, Open Table has been on a tear and sales continue to grow. That has led the stock to jump by almost 200% this year alone as it now commands a P/E ratio over 100… At that level, it starts to become a bit of an exaggeration and I liked the point made by hedge fund manager Whitney Tilson as he explained why he was shorting the stock .  The stock is even trading at 18 times sales! It’s not that the company has bad management or a bad business model but simply that it becomes difficult to see how Open Table could ever justify such a valuation. Now I did say that I liked the argument but since I did have problems going short Baidu in 2009 when it was flying (still is in some ways but not as much).

Bubbles…

In a way, it becomes similar to trading a bubble. Even if you are convinced that a valuation is unrealistic, it can be very difficult to keep the trade alive. In the case of Whitney Tilson, that is exactly what could be happening as he shorted OpenTable a few days before the company announced earnings… and when those earnings hit, the stock jumped even higher…. Now we do not know if Mr Tilson eventually decided to exit his position but I’m guessing he didn’t.

Shorting a bubble

Why did he not? Because he knew what he was doing and probably assumed that the trade would go against him for a little bit of time. There is almost no way of predicting the moment when a stock that has been going up for what seems like an endless amount of time will land back on earth. Trying to guess that exact moment will probably mean that you will miss the opportunity. I think that the only way to do such a trade is to do it while expecting to lose early. That is, in such a trade I would personally set the stop loss further away than in a regular trade. Yes, that does mean the loss could end up being bigger but it at least gives you a chance at a winning trade.

Quick news – November 18 2010

By: ispeculatornew | Date posted: 11.18.2010 (6:30 pm)

Tech news: (concern the stocks we follow)

Dell (DELL) reported earnings of $0.45 (est $0.32) on revenues of $15.39B (est $15.74B)
Rumors are that Google (GOOG) made a bid earlier this year for $2.5 Billion
Blue Nile’s (NILE) CFO resigned and is replaced by Vijay Talwar
QuinStreet (QNST) was rated a new “Buy” by UBS

Best return:  Travelzoo (TZOO) +7,52%


Worst return:   MakeMyTrip (MMYT) -0,65%

20 things to look at when judging a dividend stock

By: ispeculatornew | Date posted: 11.18.2010 (4:00 am)

This was published in the IS Newsletter, which is sent every week by email. I usually keep the content there exclusive and do not repost it on the website but I was told by many members that I really should post this one on the blog. Since I will be referring to it in future posts, I went ahead with the idea. It will not happen very often though so I would recommend joining our free newsletter if you would like to get access to more content about dividend stocks, ETF’s and technology stocks. It is free:) Simply fill out the form below to join!

There are a multitude of ways to find solid dividend stocks to include in your passive income dividend portfolio. We received a few questions regarding those that we are using and decided to make a list of those criteria. They are in no particular order!

Dividend Metrics

Current Dividend Yield : Ideally, I consider stocks that pay at least 2% of dividend. Obviously the higher the better but a very high yield might be a sign of trouble so keep that in mind at all times.

Dividend growth rate (A minimum history of 5 years and ideally over 10 years or more) : One of the more important indicators. You want a company that has increased its dividend by 3-4% per year for some time. That is a sign that your holdings will not only be able to give you a good passive income but that this income will increase by more than the inflation rate.

Dividend consistency : You want a company that has been consistent in paying its dividend, not a company that pays special dividends once a year . Many companies in the natural resources sector for example pay a low dividend every month or every quarter and then pay a portion of their remaining profits at the end of the year. It can result in significant income for shareholders but is often the first expense to go for these companies when things get tough.

Dividend momentum: If the company has recently reduced its dividend, I would avoid it if possible .Generally, companies do their best to avoid decreasing their dividend. Why? Because it’s a bad sign towards their investors. If a company has taken this step, you can expect that the dividend might stay there for some time and it certainly does not point towards a payout hike.

Company Metrics

Sales growth : It’s a sign of the company’s health. You can do all kinds of things to show higher profits in the short term and cutting costs is always good but what I look to see is growth. In these more difficult economic times, even small growth is good enough for me and obviously, the more, the better.

Earnings Growth : Bottom line growth is the only way that a
company will be able to increase its payout over time. Solid dividend stocks
would display earnings growth year after year.

P/E ratio : Reasonable P/E’s are necessary to avoid capital losses . Depending on the growth that the stock displayed, you would be looking for a P/E ratio that is ideally between 10 and 15. There are exceptions though and you should judge the P/E ratio in tandem with growth in earnings and in sales.

Margins growth : A company that is seeing its margins diminish could have its earnings/dividends under pressure. Since one of the important characteristics of a dividend stud is for the company to be able to keep its pricing power when we experiment inflation, having a steady or growing margin would be a very good sign.

Payout ratio : I have written about this on the blog in the recent past, conventional wisdom would encourage you to look for a very low payout ratio (below 40-50%) but I think there are positive signs to having a higher payout ratio, you can read more about it there. One thing that is certain is that you should avoid any stock that has a payout ratio over 80%, especially when the ratio is over 100%. Those are not sustainable over a decade or more, which is the horizon you should be looking at.

Return on equity : Quality companies are able to make good use of their capital and it’s a very good sign if the company you are looking at can maintain a high ROE. A ratio over 5% is generally the minimum that I am looking for.

Long term Debt ratio: Does it have a clean balance sheet? After living through the recent credit crisis, you can imagine how important it is for a company to avoid using debt too much. When things get more difficult, either for the company or in the general economy, a lot of debt can put a major strain on the company’s financial’s. Ideally, the company would have a debt to capital ratio under 30%.

Management: What is their attitude about dividends? Some companies take great pride in paying their shareholders through dividends while others simply consider it a temporary way of using the extra cash. There is a fundamental difference between the two. Obviously, you are looking at buying stock that has a pro-dividend management.

Stock Metrics

Trend Analysis score : I have discussed trend analysis in the past and always use it for my technology stock picks but it can be useful for all stock picks. While most of the aspects that I look at are considered “fundamental”, I think it’s important to still consider the technical point of view as well. Some stocks are trending either up or down and you want to avoid buying a stock that has a strong down trend. Ideally, I would buy stocks that have a score of at
least 60 on Ino’s trend analysis. (you can sign up for a free trial here).-Price : This makes little difference but I would only caution against buying stocks that trade at less than 5$. These stocks are generally seen as speculative, have less long term buyers and many bigger institutional clients cannot buy stocks that trade under 5$.

Trading volume (stay away from stocks that trade too thinly ): This will not be a problem if you buy a stock that is part of a major index like the S&P500 but others might not have enough volume and that would make it difficult for you to get a good price when you trade it. I think looking for stocks that trade over 50,000 shares per day is very reasonable.

Industry Metrics

Industry: Is it a declining industry? is it volatile? Some industries such as solar energy are much more promising in the medium to long term than other industries in the manufacturing business for example. It is important to consider the industry and its future perspectives. Another point to consider the competitiveness in the industry. In the telecommunications industry, competition is so fierce that it is putting significant pressure on the earnings power of the companies and thus on the potential for dividend payouts/growth.

Market Share Is it a dominant player? Does it have good pricing power? It makes a world of difference if you are investing in a market leader, it will result in a holding a company that has better growth opportunities and can come out on top in difficult conditions. Coca Cola and Pepsi are two market leaders that are strong dividend stocks.

Potential threats to the industry: Certain industries are in a fragile condition either because of upcoming legislation, technologies, etc. For example, the music industry has been through a very difficult decade because of the major changes that the internet caused in the sales of music. Technology could have a huge impact on the movie industry, software companies or others.It’s important to look down the road for such a criteria.

Potential opportunities: Facebook is not listed yet but we have discussed what the company could become at some point and the tremendous impact it could have on its future earnings. A pharmaceutical company that is doing research on a cancer drug would be another example. A company that evolves in an industry with big potential could be a nice addition to a passive income portfolio.

Fit within your portfolio

Industry Diversification: You want a stock that helps further diversify your passive income dividend portfolio. If you already have a high concentration invested in the financial sector, you should look elsewhere. There are plenty of good dividend stocks out there and no valid reason to focus only on one sector. Just think of the impact of the recent financial crisis on financial stocks. It was dramatic. The impact on a passive income portfolio invested only in financial stocks would have been tragic for the investor.

Economic cycle diversification : Some companies perform better in tough economic times, you need a few of these. Holding companies in the utilities sector or in the medical business is a nice hedge because those companies will tend to perform well no matter what the economic reality becomes. That is not necessarily true for companies that are in the luxury business for example.

Is it possible to find a stock that will score high in all 20 of these? Probably not. But this is a good guide to help you find a good dividend stock to include in your passive income portfolio.

I would love to get your comments and thoughts on these!

Despite common knowledge..Raising taxes on the “rich” is not always the answer

By: ispeculatornew | Date posted: 11.17.2010 (4:00 am)

I rarely get into rants but today is going to be one. I’ve been tired about this for years and just can’t understand why as a society we cannot get to more sophisticated thinking. We have a tendency to simplify problems and solutions usually because it is much easier to debate. I will give one example…Tax Cuts.

For or against them?

My argument is that those debating both sides either do not know enough about the issue or they simply prefer to stay on the safer side of the argument. Yes, yes, I will explain myself. There are complex relationships involved in raising or diminishing taxes. If you increase taxes on the corporations, the government WILL NOT receive 10% more taxes. It will likely be slightly less than 10% but could be less and in some situations, the government might even end up receiving less money. Why? Let me go to an example that I read about last week. I must say, I am not putting Google or Bombardier on the spot here because all multinationals have these decisions to make. No matter if you are building airplanes or selling intangible assets, there are ways to change the tax burden of a corporation.

Example A – Bombardier: This is a fairly simple exam. Let’s imagine that Bombardier, a Canadian company that has entities in Mexico, Canada and the United States builds an airplane to be sold in the US. Let’s imagine a scenario where the tax rate is the same in all 3 of the countries.

Major pieces of the plane are built by Bombardier Mexico
Plane is assembled in by Bombardier Canada
Plane is sold by Bombardier USA sales team

If the costs involved for each part are the following

Bombardier Mexico        $10M
Bombardier Canada         $5M
Bombardier USA             $5M

Now, let’s imagine a scenario where the plane is sold for $30M. You can imagine that each entity would gain 50% of profits which means:

Bombardier Mexico        $5M
Bombardier Canada         $2,5M
Bombardier USA             $2,5M
Total = $10M

If the level of corporate taxes is the same, at 25%, this translates into:

Mexican Government    $1.25M
Canadian Government    $625,000
US Government        $625,000
Total = $2,5M

Now, let’s imagine a scenario where the US government raised taxes to 35% (on rich corporations). For Bombardier, this would translate into $250,000 of additional taxes on that plane. You might say that they can afford it. You might be right…

There is another way…

Instead of paying $250,000 of additional taxes for each plane sold, Bombardier would likely switch for a more tax efficient structure. A lot of words but it’s actually very simple…. Basically, Bombardier Canada would sell the plane at a higher price to Bombardier USA. That would result in higher profits for Bombardier Canada and lower profits for Bombardier USA. Instead of selling the plane for $22.5M, let’s imagine that it sells the plane for $24.5M. In this scenario, the profits for Bombardier are the same:

Bombardier Mexico        $5M
Bombardier Canada         $4,5M
Bombardier USA             $0,5M
Total = $10M

That results into these taxes =

Mexican Government    $1.25M
Canadian Government    $1,125,000
US Government        $175,000
Total = $2,55M

End result = Bombardier loses $50,000 (compared to the pre-tax scenario), the Canadian Government receives $500,000 more and the US Government receives $450,000 less. This is much more common than you could imagine and it becomes much more difficult to regulate when you have 20 or 30 countries involved instead of 3. Increasing the taxation level in this specific case results in less income for the US government.

Google

Google continues to be a growth company as its revenues increase every year. Despite that fact, it cut its taxes by $3.1 billion in the past 3 years thanks to increasing profits in its operations in Bermuda, Ireland and other “more favorable” tax centers. How much more favorable? Google’s overseas profits were taxed at a rate of 2.4%!! You could read a much more in depth analysis of how the company is doing it but needless to say that the US is making less out of Google than it was a few years ago despite rising profits. Like other multinationals, these methods are far from illegal and they are in fact very difficult to dispute. How can you prove where the profit & revenues should be made.

Basically, any company that did business with Google’s advertising likely did business without knowing with Google’s Ireland operations as 88% of the $12.5B from  the sales of advertising were “made” by Google’s Ireland operations which then funnel the money to Bermuda through complex but legal steps.

Who should be blamed?

It would be easy to blame Google or Bombardier but that would be too easy:

They are acting legally
-They are in direct competition with other similar structures
-Their duty is to maximize returns for their shareholders within the rules

What to do?

I personally think this is the more interesting question. Next time you hear someone talking about taxing the rich as the miracle solution, please remind them that it’s much more complex than that. Raising the taxes might be a good idea but it should be decided after considering all of the direct and indirect impacts.

Ask French citizens how much more they are making on taxes from their wealthiest citizens. The answer will get you a sad face as a large proportion of the richest French have moved to neighbor countries to avoid the tax increases.

There are no easy solutions and these problems should be treated as what they are: Complex Global Problems.

I’d love to hear your thoughts on this. Am I the only one who is tired of these simplified arguments?

Quick news – November 16 2010

By: ispeculatornew | Date posted: 11.17.2010 (2:04 am)

Tech news: (concern the stocks we follow)

CTrip (CTRP) was raised to hold by Deutsche Bank  and rated a new Buy by Stifel Nicolaus
Apple (AAPL) was able to sign a deal to get the Beatles music sold on its Itunes platofrm

Best return:        Rosetta Stone (RST) -0,15%


Worst return:       Sohu (SOHU) -3,45%

20 Things you did not know about US ETF’s

By: ispeculatornew | Date posted: 11.16.2010 (4:00 am)

1-The only ETF among the top 25 (by holdings) that does not pay dividends? GLD  – SPDR Gold Shares

2-The best performing ETF so far this year?  AGQ (ProShares leveraged Silver ETF)  +118,36%

3-How many leveraged ETF’s would you find in the top 25 ETF’s this year?  8

4-How many leveraged ETF’s would you find in the bottom 25 ETF’s this year?  22

5-Top Yielding ETF ? REM (Ishares NAREIT Mortgage Plus Capped)  – +10,41%

6-Youngest ETF ? NORW-  Nov 10th 2010 – Norway ETF

7-OIdest ETF ? SPY – January 1993 – S&P500 ETF

8-Biggest Fees ? Powershares CEF Income Composite – 1.81%

9-Smallest Fees ? VOO – Vanguard S&P500 – 0,06%

10-There are over 1000 ETF’s but the top 5 ETF’s account for 28% of assets

11-The Top 5% of ETF’s control 69% of ETF assets

12-Less than 16% of assets in ETF’s are invested into commodities despite all of the talk about them

13-GLD, the Gold ETF holds more physical gold than China’s government and is ranked only behind 7 other entities (US, Germnay, IMF, France, Italy, Switzerland & Japan)

14-Worst performing ETF so far this year? ZSL – ProShares UltraShort Silver: -71,15%

15-Best performing ETF in the past 5 years? IAU iShares Gold Trust +239,47%

16-Biggest country (by GDP) without an ETF to its name – Saudia Arabia (world #26 economy)

17-Most volatile  ETF in the last year: DRV –  Direxion Daily Real Estate Bear 3x Shares – 87.32%

18-While Ishares has 210 ETF’s (19.6%), they have 27 of the top 50 ETF’s ranked by assets

19-Guess which ETF is ranked #28 in terms of market cap but is actually the 2nd most traded ETF in the past 30 days? XLF Financial Select Sector SPDR Fund

20-Over 300 of the active ETF’s have been created since the start of 2009

Quick news – November 15 2010

By: ispeculatornew | Date posted: 11.16.2010 (2:00 am)

Tech news: (concern the stocks we follow)

Facebook unveiled a new initiative to offer email to its users
Rackspace (RAX) was cut to “Sector Perform” by RBC

Best return:      Travelzoo (TZOO) +5,64%

Worst return:            CTrip (CTRP) -3,38%

Incorporating company assets into my stock picks

By: ispeculatornew | Date posted: 11.15.2010 (5:49 am)

As regular readers know, I am an avid user of the P/E ratio when selecting stock picks. There are many reasons why I trust this ratio above others and I have written about it but I’m not blind either, P/E ratio does have its flaws and limitations. One of those is its inability to help us see what a company owns. A few of the stocks that I follow such as Valueclick (VCLK) are stocks that have strong cash positions and a strong balance sheet in general which makes the P/E ratio give an incomplete picture of the reality.

Yahoo (YHOO)…

One of the best examples is Yahoo (YHOO), a company which I routinely bash on this blog but which is not as easy of a short as you would think. Why? Because when valuing Yahoo, I think it’s important to consider 3 main things:

Strong balance sheet: Yahoo has almost 7 times as much assets as it has debt.
Yahoo owns a major stake in Yahoo Japan which is a very profitable somewhat independant company
Yahoo owns a major stake in Alibaba, one of the more important ecommerce companies in the world, located in China

What does it all add up to? Honestly, I think it’s important to consider the balance sheet saituation of a company when making stock picks. It sounds obvious when saying it but the P/E ratio would not consider it. In Yahoo’s case, the book value per share, the net assets per share is worth about 9$. Imagine if that number was 12$ or 13$… The company would need to be making almost no profits for the stock to be a good buy

What I will be doing from now on

There is no perfect solution to this and I will be doing some experiments but for now what I will be doing is incorporating the book value per share in my analysis, in the tables that I present when I do new stock picks and in the charts presented in the IS Premium newsletter. I have been monitoring this number and am not convinced that it’s the best way to go but there is no doubt about one thing: Adding this ratio will add valuable information for my future stock picks. In that regard, I think it will be very interesting to see how things go.

Would love to hear from you on this, do you look at the book value per share when making stock picks and if so, how do you consider them?