Archive for May, 2011

Is Passive Income Just An Illusion?

By: ispeculatornew | Date posted: 05.18.2011 (5:00 am)

I bet some of you are tired of hearing about passive income by now. Why? Sadly, many have either been disappointed or discouraged enough to stop believing in it. No matter how many experts or bloggers tell you that with as little as $5000, you can start off a dividend portfolio, it doesn’t matter. My M35 partner and I are working on a project about passive income that will be unveiled in the coming months and I think it’s important to make sure that living off of passive income does not become some “impossible goal”. It’s far from it.

I’m always surprised when I hear about some people’s long term financial goals. Why? First off, the biggest problem is that most do not have concrete long term goals. The most basic concept is that without concrete plans, no matter what the field, results are dramatically inferior. There are all kind of stats out there and I could point to any number of them but they all come up to the same thing; goals that are not clearly defined will never be obtained. For some reason, many of us always postpone setting goals, especially long term financial ones. Why?

“I have no idea how much I will need/want”
“How would I know if it’s even possible?”
Etc

Of course it’s a challenge but you are not setting some permanent goal that will define the rest of your life here. You are defining goals that can be adjusted as often and as much as you desire. Without a goal however, what will you be adjusting for?

Once the goal is set, the next step is to create a MAP (massive action plan). How much do you need to save up? How must it be reinvested? Is it possible? Or do the goals need to be revisited? Some try to improve their chances by taking more risks with their portfolio but as we discussed, that is not the way to go. I’ll tell you right now.. If like most Americans you are saving less than 5% of your income every year, making your goals come true will be quite a challenge. You need to set a quality lifestlyle at a reasonable cost and as your income improves, your lifestlye should improve by half or so of that amount.

The problem is often that when employees get a $10,000 raise, they increase their expenses by that amount and often even more. That’s a vicious cycle that makes saving a big challenge.

After the goal and objectives are set

Once the two main steps are done, it’s all about deciding what type of passive income you are looking for (dividend? Etf? Etc) and starting to invest your assets in a smart and consistent way. Every week we discuss dividend investing and that is certainly one way to do so. Having a more aggressive approach for “surplus” savings can also be a winning formula as can many other things.

Picture Your Pasive Income Lifestyle

If you could make enough money to enjoy life, make as much money if you were working, travelling around Europe or just spending time at the beach, how would such a life be? When would you retire? It’s easy to forget how this lifestyle is possible to almost anyone…. Personally, living off of passive income is very much a reality and only time stands between myself and this life goal if I can stick to the plan. How about you?

Is LinkedIn (LNKD) The Next Big Thing Or Just A Poor Man’s Facebook?

By: ispeculatornew | Date posted: 05.17.2011 (5:00 am)

LinkedIn (LNKD) is very close to going public having even set the price of its soon to be public shares between $32-$35. The latest rumors are that LNKD will start trading this Thursday!! That should be great news by all accounts right? LinkedIn was one of the companies that we were anticipating to trade and while it’s not Facebook, it remains one of the more interesting business models and becomes the best way to invest in the new “social web”. I remain very bullish about the company but I thought it would be interesting to examine the pros and cons of buying LNKD, one of the companies that I follow that has not turned public yet.

Pros:

Potential: LinkedIn already has 100 million users and while the level of “commitment” is probably much smaller than rival Facebook, I think the “money value” of each user is probably superior.

Great niche/angle:  Facebook has a great audience but I think in many ways LinkedIn users could end up being more profitable a on “per user basis”. Why? Because LinkedIn can become a superior alternative to websites such as Monster Worldwide (MWW) which helps employers recruit. LinkedIn could also start gathering and selling data to consulting firms about tendencies, wages, etc.

Great value to employers: Having a more reliable history of possible candidates including their past experience, colleagues, etc.  I have to think that this huge value will translate into revenues and profits at some point.

Being able to get exposure to the “social web” might be too good to be true. Let’s face it, Facebook is one year away from turning public and while I think the sector will see tremendous growth in the coming months, LNKD seems like the best way to profit from this growth.

-As crazy as valuation seems to many (more on that later on), LinkedIn is cheap compared to the recent IPO of the Chinese Facebook, Renren which sold at 78 times revenues

Cons:

Valuation: LinkedIn is scheduled to Ipo valuing the company at $3.165B. While that number is nowhere near what Facebook seems to be commanding at the moment, it still does represent a very important number especially when compared with the current financials of the company. Revenues in the most recent quarter were slightly under $94 millions with earnings of close to $2.1 million. That still means the company is trading at over 8-9 times annual revenues in a similar way as Open Table.

No voting power: From what I understand, there will be two classes of stocks with class B stocks owned by founder Reid Hoffman keeping 99.1% of the voting power despite only representing 21.7% of the shares

Bubble?: Goldman Sachs (GS) had a stake in LinkedIn and has decided to sell it off in this public offering, are the valuations just too great to keep the shares? If so, would we be crazy to buy right now?

Conclusion:

While I’m not as excited as I would be about buying shares of Facebook (even at a $100 billion valuation), I will still be looking very carefully at this IPO and could very well end up buying. In terms of the long and short trades, going long against a company such as Monster (MWW) seems like a virtual certainty at some point. I also feel like I have a better understanding of LNKD compared to more recent additions to the stocks on my radar such as Youku and thus could end up trading LNKD sooner than later.

New stock pick: Long Baidu (BIDU) & Short Rosetta Stone (RST)

By: ispeculatornew | Date posted: 05.16.2011 (5:00 am)

On Friday I did close out a trade where I was long Amazon (AMZN) & Short Yahoo (YHOO) in thanks to Amazons recovery but also because Yahoo seems to be heading down once again. Regular readers will not be surprised to read that I was somewhat happy to see Yahoo decline this way. It’s a company I enjoy shorting and seeing Carol Bartz continue to take the company down is enjoyable for me.

Yahoo stock believers usually do so because the company can only improve. How so? They own cash and valuable Asian assets that make it “nearly impossible” to go much lower. Valuing a stock based off of assets that Yahoo does not control was always going to be risky to some degree and now Yahoo seems to have been “screwed” by its most valuable investment; Alibaba (interesting piece about it on the WSJ). I honestly did think about going short Yahoo again today but it seems risky as the situation with Alibaba remains unclear and it could bring volatility in Yahoo.

For those familiar with the story, doesn’t it remind you a bit of how Eduardo Saverin, the Facebook co-founder got played and ended up losing much of his value in social network. Saverin was able to go to court and regain some his investment but that all took place on US ground. What can Yahoo do with its Asian assets that are often under Chinese law? The next few weeks will be very interesting for Yahoo shareholders.

I would like to thank Vitalogy80 who asked me to update our stock picks performance list, it was well overdue and it will certainly make things easier than looking through all of our stock picks! Back to the subject now, as today we are opening a new trade! Before going further, here are the numbers we used when judging these two companies:

[table “283” not found /]

Long Baidu (BIDU)

It might seem risky to many to go long Baidu (BIDU) at a time when many are predicting that the Chinese internet stocks are at “bubble” like valuations, a bubble that could end up popping at any point now. I do think that Baidu, and a few others should be considered in a different context. Baidu’s place in the Chinese internet space is very solid and I do not think that growth will slow down significantly anytime soon. It is trading at a high P/E but faces little competition in China and I do think the next few years will be very good for China’s top tech company. I did discuss how strongly I believe in Chinese stocks right now and Baidu is at the top of that list. I did not take out any traffic measures on Baidu because I do not currently have reliable sources for Chinese traffic that can provide charts in the same way as Compete can provide for US ones.

Short Rosetta Stone (RST)

Rosetta Stone is one company that I personally like very much and I am a user of their products. That being said, their business model is a simple one but one that will not generate strong growth. The company has been trying to bring in users to pay for monthly services but that is a challenge and I do not understand why Rosetta Stone trades at such an expensive valuation. Last year I traded Rosetta Stone once and it did not turn out so well, so hopefully this time around things will go better. I just think that Rosetta’s stock continues to be priced for higher growth which it is very unlikely to achieve.

Disclosure: No positions on Baidu (BIDU) or Rosetta Stone (RST)

Financial Ramblings

By: ispeculatornew | Date posted: 05.14.2011 (9:00 am)

I talked about in on my Twitter feed, I read an interesting story by Matt Taibbi: The People vs Goldman Sachs. Taibbi has written many interesting posts and I’ve been following him for a long time. The guy has guts and while I don’t agree with all of his views, I have to admire his writing. In any case, I recommend that you take a look, it has been said that this article actually caused Goldman Sachs to be downgraded by at least one firm. Here are some other interesting readings for the week.

Verizon Dividend Analysis @ TheDividendGuyBlog
Dividend Champions List @ WhatIsDividend
The Gold/Silver ratio revisited @ ZeroHedge
Did silver trigger the commodity sell off? @ BeatingTheIndex
Opportunity Cost and Opportunity Lost @ Balance Junkie
Commodities are rubbish @ Macro Man
Thoughts from the silent partner @ TheFinancialBlogger
Crossing limits and lines, how I almost killed myself @ Prompt Retirement
37 companies with 20-29 dividend growth streaks @ Dynamic Dividend
How Corporations avoid paying taxes @ The Big Picture
How to tell your boss you failed the CFA @ SmartFinancialAnalyst
Facebook planting stories about Google in the news @ LA Times

Why you need exposure to foreign currencies in your portfolio

By: ispeculatornew | Date posted: 05.13.2011 (5:00 am)

Watching the world currency in these current market conditions is like watching a race to find out who the slowest person is going to be. Countries around the world are all dealing with the same problems and listening to some of the commentary and market news the best investment opportunity is to find the country that can holdout the longest before being overwhelmed by its debt.

Where to hold your assets?

Unfortunately I don’t like any of the major currencies at the moment and believe that it is going to be some of the secondary currencies like the Canadian Dollar, Australian Dollar. Let’s just take a look at the U.S. dollar, which was once considered the reserve currency of the world is now wobbling on its pedestal and if the spending habits of the government don’t change it could fall fairly quickly.

Anywhere but in the US?

The reality is that more and more international investors are losing faith in the U.S. dollar. Looking at a long-term chart we can see that the U.S. dollar index has been in a sharp decline since early 2002. Although the financial crisis provided some short-term momentum in 2008 and 2009, it has continued it is downward trend since June 2010.

On April 27 the U.S. dollar index hit its lowest point since 2008 and is hanging around 73.34. The index has dropped about 17% within the last year. In June of 2010 it rallied to a high of 88.70.

From a technical perspective, the long-term chart does not support higher prices. There appears to be a strong double top forming around the 90.00 area, which is providing some resistance. A break below around 70.00 would mean a continuation of its long-term downward trend.

Unfortunately the fundamental outlook does not look any rosier. The government is trying to spend their way out of this recession (oh wait apparently that ended in 2010 but don’t tell anyone who is still looking for employment) and all they are doing is adding to the bill that they will eventually have to pay off later. On April 27 Fed Chairman Ben Bernanke said that the second round of quantitative easing will end as planned in June but that only address one problem. Currently the national debt is well over $14 trillion and climbing and unfortunately nobody has any new ideas on how to resolve this. We even did discuss the idea of shorting the US government.

We can already start to see the cracks forming in the once solid foundation. A few weeks ago Standard and Poor’s released a confusing outlook on the country’s sovereign debt. Although the country is holding on to its AAA rating but the global rating agency lowered its outlook to “negative” from “stable.”

The reality is that the economy remains under pressure and this will continue to impact the U.S. dollar. The unemployment picture is starting to improve but the unemployment rate is still high and consumers are still extremely timid. The reality is, if U.S. consumers are not spending their hard earned money, the global economy and the U.S. economy will not improve.

It could be worse

As I said at the beginning of this article, the U.S. isn’t even in the worst shape. The European Union is dealing with some major debt problems in several countries, which include: Ireland, Spain, Portugal and Greece; however this is all old news so nobody is paying much attention to them now.

Japan is also in pretty bad shape. In March Standard and Poor’s lowered the sovereign debt rating to AA- (minus) and just released a report, which downgraded the country’s debt outlook to “negative” from “stable.” The country continues to pile on the debt as they try to rebuild their country.

The only positive news about the U.S. is that it is too big to fail. According to the U.S. Treasury Department in February China held about $1 trillion in U.S. debt. Japan is in second place and holds about $890 billion and the United Kingdom owes about $290 billion in government bonds. If the U.S. dollar falls too low these investments will be basically worthless.

But as I said in the beginning of this article none of the major currencies look great. The U.S. dollar might start to rebound but to use my favorite expression; trying to time the bottom is like trying to catch a falling knife. With a little bit of patience you can find better investment opportunities.

So what can we do?

Personally, what I take from all of this is the importance to be diversified. It’s difficult to predict how assets and economies will do in the near future. Greece, Ireland and other European countries could take European assets on quite a ride and it’s always possible that your own country could be next. With all of these sovereign credit issues, I think it’s critical to have a strong diversified portfolio. For a passive income portfolio, that means adding international names. They can still be listed on US markets but would be international companies that have a correlation with international currencies. In the case of a passive ETF portfolio, this is just a reminder of how important it is to include international ETF’s. In terms of rewards vs risks, adding international exposure is a no-brainer…

Closing Trade: Long Amazon (AMZN) & Short (YHOO)

By: ispeculatornew | Date posted: 05.12.2011 (7:54 pm)

We are thrilled to report that we will be closing another trade tomorrow morning (Long Amazon & Short Yahoo) as yesterday Amazon (AMZN) had another nice day while Yahoo (YHOO) was slightly down. That sets our current return at 21.21% and above our current “stop”. We will be closing out the trade on tomorrow’s opening and also opening a new one next Monday which should be nice as there are many opportunities at the moment. This trade had some rough times as Amazon’s stock got crushed following its last earnings report when costs ended up being much higher than anticipated by analysts. Thankfully most analysts ended up seeing that these were investments to improve Amazon’s future operations, not added costs that will reduce profitability.

We now hold an annualized 90% return this year…too good to be true, but lots of trades are left so we hope to keep things going well.

As always, please feel free to ask any questions!

Oil stock Dividend Analysis (COP, OXY, XOM)

By: ispeculatornew | Date posted: 05.12.2011 (5:00 am)

Earlier this month, we published a list of the top dividend stocks in the S&P500 based off of the dividend yield only. Of course, that is only useful to some extent. Current dividend yield is a small part of what makes a stock solid enough to be included in your passive income portfolio. A few days later, in our free newsletter, we did some filtering in order to find the best stocks based on potential for long term growth. That search gave us 13 results. Some of them are being looked at more closely in the newsletter, others have been reviewed recently on the website (such as Intel-INTC, Coca-Cola-KO) but there are still a few interesting ones that we will look at. Today, we decided to look at the 3 oil-related stocks to make the list, in order to find the most promising and solid one and also see if any of them could/should be included in your portfolio in order to help you retire when you want.

As you can imagine, we will be looking at the three stocks based off of the 20 things that we look at when evaluating dividend stocks. Let’s get going without further wait:

Dividend Metrics

[table “279” not found /]

Conoco Phillips (CON)

Exxon (XOM)

Occident Petroleum (OXY)

Wow, what I can say is that on the surface, the 3 companies have very attractive profiles. They all have a reasonable dividend yield and two of them have double digit 1 year and 5 years dividend growth. If I would have to rank them, I would say that COP is the top rank here with OXY coming in 2nd and XOM in third. But honestly, I think at this point, they all could qualify as great dividend plays in a passive income portfolio.

Company Metrics

[table “280” not found /]

On the surface, these companies look fairly similar. They have similar sales growth both in the short and long term, while Occidental Petroleum has been showing very impressive earnings growth. However, that comes at the price of a higher P/E. The payout ratio of all 3 companies is very solid and while Conoco Phillips has higher debt, it is still very reasonable. I would personally give them all high grades in terms of their financials. Seeing OXY and XOM having basically no debt would perhaps put them slightly higher but barely so.

Stock Metrics

[table “281” not found /]

Industry Metrics

These companies are all diversified players in the oil sector. OXY seems to be more concentrated in the exploration phase which is becoming more expensive and is certainly more risky but the continued high prices in oil certainly makes oil discovery more profitable and easier.

Fit within your portfolio

Yesterday I did discuss the importance of having some exposure to commodities in any long term portfolio and it would certainly seem like buying at least one of these companies would a whole lot of sense. As to which one (s)? It’s much more difficult than it has been in past matchups I must admit and I would have to say that the three of them represent potential buys depending on the number of stocks that you own in your passive income portfolio. I’d feel very comfortable having 1 out of 10 stocks be “oil” stocks so a 20 stock portfolio could easily hold 1 or 2 of these names.

Trading those crazy commodities (Silver, Gold, Oil)

By: ispeculatornew | Date posted: 05.11.2011 (5:00 am)

The past few weeks has seen incredible action in commodity prices. Oil and Gold have suffered greatly but nothing was even close to the collapse in Silver prices. It’s a challenge to draw any conclusions from such dramatic movements. For months, these metals had been gaining steam because of both retail and institutional buying. Then last week, news came out that some of them had started closing their long positions on silver. It’s not clear if they knew something or if they’re selling created even more selling but that pretty much marked the start of a spectacular decline. Just take a look at the charts and you will get an idea. Part of the cause was also the exchanges themselves. Seeing what they considered “excessive” speculation, the CME raised its margin requirements on silver contracts making life more difficult and more expensive for silver traders.

Investing In Commodities

Seeing commodities become so volatile certainly raises some questions. Should you have commodities or commodity exposure in your passive income retirement portfolio? I would personally say that yes you do. Commodities are already an important portion of the world economy and with Chinese and other Emerging markets demand, that is bound to continue its increase. Thus, in the long term, it certainly seems like a no-brainer to own them. Commodities are also uncorrelated to most of the markets and so they have a valuable contribution to your portfolio in terms of risk/reward. That being said, I think events like what happened last wek give a good example of why you do not want to have commodities as the main part of your portfolio. I do believe that over the long term commodities will increase significantly. However, fundamentals are kind of lost in a sea of traders when it comes to commodities making life much more stressful and difficult for those with a long term view.

Should Speculators Trade Commodities?

It’s a fair question isn’t it? Since commodities started trading because farmers wanted to hedge their crops, times have hcnaged quite a bit. Now, actual buyer and sellers are involved in high stakes poker games where it becomes very difficult to predict where it’s not clear what is taking prices up and down. There are underlying more serious issues. Honestly, how could you possibly try to determine who is “hedging” and who isn’t it? Millions of companies have some kind of exposure to silver making it virtually impossible to determine what is hedging from what isn’t. For gold, that would be unthinkable as many use gold as an inflation hedge. There’s just no way it could work.

When It Extends To Food

Paying more for energy or metals is unfortunate for most but speculators trading commodities truly starts to get attention when it affects food prices. Billions of people around the world depend to some extent on food prices and having these prices fluctuating by 10-20% or even more can make life very unpredictable for the billions that do not have enugh to tolerate such movements.

How To Get Some Commodity Exposure?

There are many different ways but by far the cheapest and most efficient solution involves ETF’s. We have discussed the top ones many times but I think you want to focus on two types of ETF’s:

Commodity ETF’s that hold physical commodities (such as GLD)
Futures based (focus on ETF’s that do not roll monthly but rather infrequently.. They will suffer less erosion)

Feels like everyone is investing in Facebook…except me

By: ispeculatornew | Date posted: 05.10.2011 (5:00 am)

Facebook has been the hottest property in tech for a while now. Sure, I’ve been able to participate in trades on Apple (AAPL), Microsoft (MSFT) and other big and hot names. But that is not where the real action is going on. If you did see the movie “Social Network”, you will remember the sentence spoken by Justin Timberlake (playing Sean Parker):

“A million dollars isn’t cool. You know what’s cool? A billion dollars”

The fact is that he seems to have been right about Facebook, its potential and how important the social network has been for the internet in general. I have been talking about Facebook for some time now, have described what I would do if I were Mark Zuckerberg for a year and have been raving about the greatest opportunity of our investing lifetime, being a Facebook shareholder. The problem of course lies in the fact that Facebook is not a public company meaning only venture capitals that invested seed money can profit from the incredible growth right? Not exactly

Feels like everyone else is invited to the party

Thanks to secondary markets, it’s been much easier for high net worth individuals to get involved and when Goldman Sachs bought a stake both for itself and its clients, I took it personal. Honestly, I love the process of these secondary markets as they make it much easier for these smaller companies to keep their employees happy, provide more accurate valuations and more transparency. That being said, sometimes it feels like everyone who truly wants to get in on Facebook stock has already done so.

I want to buy Facebook stock

Some have said that at this point, Facebook’s valuation has become a bubble, that having a company like this trading at $60-70B is insane. That is crazy. No matter if there will be a 2.0 dot com crash, I still think Facebook is a bargain. According to a recent Wall Street Journal article, Facebook is  on pace to earn over $2 billion in earnings before tax this year. How fast are things improving? Revenues this year are expected to come in at over $4 billion, more than double last year’s $1.86 number, that is growth of over 100% for both revenues and profits with no slowing down in the horizon.

So just how much is it worth?

If companies like Amazon (AMZN) and Baidu (BIDU) are currently trading at P/E ratios between 40 and 50, I think it’s fair to say that Facebook should trade at a significantly higher ratio. How much? I would imagine between 75 and 100 at its current growth which would put the company somewhere between $150-200B. That is significantly higher than where it’s currently trading and I would thus put Facebook as a strong buy. It is growing fast now but could enter into so many new different activities to keep or even increase its top and bottom line growth.

My Big problem

Of course, my big problem lies in the fact that buying shares that are 50% undervalued is not possible for me right now. I truly hope that Zuckerberg will take his company public soon (even though I probably would not if i were him) because eventually all investors will see the same thing that i see, a great company trading at a big discount….

Disclosure: Unfortunately, none to declare:)

Things not looking so great for Betfair (BET-L)

By: ispeculatornew | Date posted: 05.09.2011 (5:00 am)

A few months ago, we did write about Betfair, the promising peer-to-peer gambling website that has been a rising star in Europe. That post generated a lot of comments and attention not only from people familiar with the company but also many others.

US Legislation Being Relaxed?

One of the more promising aspects of it was that it seemed like the US government was perhaps considering making life easier for these offshore gambling websites to operate within the US. It’s critical not only because the US is the biggest potential market (by far) but also because if it’s illegal for a company to operate in the US, I’m not entirely certain how the rules would apply to anyone investing in those same gambling companies.

Ironic

Not only was the US looking at fault after having lost a few court decisions regarding these bans in front of the International Court but it also seemed kind of ironic to have all of these websites such as PokerStars getting visilibity in the media, on tv, and everywhere. They were not promoting paid (and illegal) gambling but rather the free variety through their sister websites. Of course, once you are playing for free, they would certainly make life easy for you if you wanted to wager some real money. That would involve a few complicated steps to avoid US restrictions on money transfers to gambling websites. That being said, it was going on in front of everyone.

Then it stopped

On April 15th, eleven individuals including the founders of three of the largest poker websites ended up being charged while PokerStars, Full Tilt Poker and Absolute Poker were all closed. In the process, millions of players had their money frozen (with little to no recourse) and in a matter of hours, completely changing the online gambling landscape.

It’s not all that bad for Betfair

Betfair was one of the companies that has been very much compliant with US regulations making it very difficult to even log in from the United States. That has certainly turned out to be a great decision and you can imagine that if one day the US does open its markets, it will be much easier for a company like Betfair to do business in the country.

That being said

Betfair’s stock has been suffering because its growth has been stalled. Why? Because it is already a big player in the UK and all kind of regulatory issues make growth abroad much more tricky. Revenues are still increasing but not as quickly as we could hope. Revenues for 2008, 2009 and 2010 turned out to be 242.4M, 301.2M and 340.9M British Pounds with profits actually declining in 2010. I’m personally starting to think that these gambling stocks are becoming long term opportunities but it could take a long time depending on how US and other foreign legislators change their rules.