Archive for August, 2012

New Trade: Long Google ($GOOG) & Short Microsoft ($MSFT)

By: ispeculatornew | Date posted: 08.20.2012 (5:00 am)

No trades to be closed today and what is truly surprising to me is the fact that next week, the final week where I will make long and short picks in 2012, might be my first opportunity to have 7 live trades (my limit). Trades have been closed rather quickly so far this year which contrary to the previous 2, has not turned out to be a great thing. I’m hopeful that I’ll be able to turn things around, including my today’s new trade:

Let’s get right to it and look at the numbers:

[table “430” not found /]

Long Google (GOOG)

I’ve been a big fan of Google for some time now and after making the case for being a long term GOOG bull, I am now also ready to take a shorter term position on the stock as I think Larry Page has been doing an outstanding job of taking Google back to its old culture. Is it there already? No, and it might never get there. But it is taking bold steps once again, and growth seems to be following the company which will mean good things for the search giant. Google has been very aggressive in mobile, local, social, etc. The big negative has been diminished margins & profitability but that was to be expected for the first few years of a Larry Page regime.

Short Microsoft (MSFT)

It wasn’t easy for me to finally decide to short Microsoft. It’s a company that I believe in and one that might be making a significant comeback. That being said, even with its recent announcement of Office 13, I still think Microsoft has a lot to lose in this new era of cloud based software where it will likely face more competition. However, I wanted to face Google with a large, stable company that was priced at a similar P/E and I do think that while Microsoft is doing a lot of things right, competing with Google is a whole other ball game.  The stock has been very stable in the past few years and I expect more of the same in the near future, especially if it remains so conservative with its cash.

Disclosure: No positions on Google (GOOG) or Microsoft (MSFT), this trade will be opened on Monday morning

Weekend Readings

By: ispeculatornew | Date posted: 08.19.2012 (5:38 am)

We all know that airlines are struggling because of the high cost of fuel.. but how would you face if your pilot asked you for money, to be paid in cash, in the middle of your flight? That is what happened on an Air France flight.. insane isn’t it? I’m certainly glad I wasn’t on that flight:) Read more about this and other stories here:)

General Readings

Air France asks passengers to pay for refuel in cash @ Reuters
How much life insurance do you need? @ MoneyCrashers
How would you fare in a bond market crash? @ Monevator
What did the London games teach you about life? @ InvestItWisely
Which USA do you work in? @ Blog Maverick

Dividend Readings

Quick guide to analyze dividend funds @ TheDividendGuyBlog
Three insurance stocks raising dividends every year @ DividendMonk
Exxon dividend stock analysis @ DividendGrowthInvestor

Tech Readings

Trulia IPO coming up @ TechCrunch
Facebook investors cash out @ WSJ
Groupon disappoints again @ TechCrunch

Dot Com Bubble Bursting V2.0?

By: ispeculatornew | Date posted: 08.17.2012 (5:00 am)

10 years ago or so, the entire market suffered a major decline, which was mostly caused by a huge decline in the Nasdaq Index. Why? Internet companies such as Pets.com, Boo.com, InfoSpace, Broadcast.com, ended up being subject of huge hype that led to sky high valuations. It went higher led by momentum, analysts such as Henry Blodget pumping up the stocks despite the knowledge that these companies weren’t worth crap, etc. It all ended in a train wreck and within months, dozens of these companeis were worthless or had suffered huge losses. A few such as Amazon (AMZN) which had declined to $7/share eventually recovered but for the vast majority, there were many big losers, especially among retail investors…

It Was Obvious All Along

These companies did not really have a business plan, they were trying to get as many eyeballs as humanly possible knowing that would be enough to have investors believe in the potential. In those days, that is what it was all about.

Web 2.0

After the first online generation that had been led by websites, search and other features, we are now in what is commonly known as web 2.0 where social rules, where Facebook is the king followed by other social players. Companies are now focused on their Facebook pages, their Twitter accounts, etc. It’s not so much about making it profitable as it is to have a social presence in case someone proves that you can earn money from it.


Cartoon from the economist.com

Bubble Bursting 2.0?

It didn’t take long to see a few names that have started to suffer. Just take a look at these charts from Facebook, Zynga, Groupon and even Netflix, these newer players that have been collapsing.

It’s Not The Same Story

I’d argue though the story is very different this time around. First off, when you look at a company such as Facebook (disclosure, I am long Facebook), it is profitable and while it’s true that I think much of its valuation depends on other revenue sources that it will be able to generate, the company is already profitable and trading at multiples that would be high but not bubble like even other revenue sources do not come to fruition. I guess both Groupon and Zynga also have their own stories.

Groupon has been questionable from the very start as I had written about while Zynga has been suffering from a lack of hits and a general growth slowdown. Netflix on the other hand has been described as a falling knife on this blog and while I still think it will be able to fight its way back, it faces more competition than ever from the likes of Google and Amazon.

I would argue that apart from Groupon, these companies are all fairly sound and while some are fighting to remain profitable, they do have actual revenues, a business plan, are not spending millions of dollars on Super Bowl ads, etc

Where Do We Go From Here?

Not all stocks have been declining and while some from the older generation such as AOL (AOL) and eBay (EBAY) are making comebacks, others like LinkedIn (LNKD) are also doing very well. Just take a look:

Is LinkedIn the next to go? Or perhaps Demand Media? It’s difficult to say but I personally don’t believe in the “bubble theory” this time around. Very few of these companies could be reasonably expected to go out of business or have severe financial problems anytime soon.. I’ve already explained why I believe in Facebook and the idea that Facebook’s fall is a sign of a bubble collapse is laughable in my opinion

What are your thoughts? Are we in the middle of a tech stock bubble? Or has the collapse already started?

 

Optimizing the USDP – Enabling The DRIP

By: ispeculatornew | Date posted: 08.16.2012 (5:00 am)

When I started off the Ultimate Sustainable Dividend Portfolio (USDP), I had mentionned that I would not be using a DRIP feature to automatically reinvest dividends. As a reminder:

What Is A DRIP?

A DRIP is a dividend reinvestment plan, makes it possible for an investor to automatically reinvest the proceeds of a dividend into that stock. To be clear, the investor or fund is still receiving the dividend in cash. I say this because you’d still have to pay taxes on the dividend even though it was never truly added to your account. This can be offered either by the stock or the broker that you do business with.

What Are The Main Benefits?

The three main reasons why I will finally start doing this exercise next week are:

I will be able to keep my money invested in the portfolio. Currently, I have a significant portion invested in $, that originates from the diividends I have received in the past year. It will be much more efficient to automatically reinvest

While it’s far from a majority, certain stocks offer discounts when using the DRIP. For example, on a 5% discount, you would be paying only 95% of the price when buying the stock. That becomes free money and would clearly help the long term return of the USDP. The impact is limited but small improvements can make a big difference over the long term.

This would diminish the number of trades needed to be done manually and thus the transaction costs, the time needed to manage the portfolio, etc.

Why Did I Wait So Long?

To be honest, I don’t have a good reason. My main reason was to keep the money in order to be able to more accurately rebalance the portfolio but that has not been done and to be honest, I should be able to do it no matter what. Currently, some stocks in the index have a bit more or less than the 5% target (100%/20 stocks) but I will be able to adjust those once in a while.

When Will I Get Started?

Next week, I will be making a trade to replace at least one of the name in the USDP. I will also reinvest whatever money is in the fund at that point and start using the DRIP which should mean that there will be little to no money that will be left “uninvested” going forward.

 

How Do You Feel About Being A Lab Rat? Do you trust Ben Bernke, the Fed and the other central banks?

By: ispeculatornew | Date posted: 08.15.2012 (5:00 am)

It’s funny how some things work. We use all kinds of tests to verify that our food, medicine and more are safe and that we use sophisticated software to make sure that our cars can sustain the impact of an accident. We have incredibly complex flight simulators that can help to determine what modifications in an airplane equipment, weight or other changes could do.

We Are Not Testing Everything

Did you know that you and I are currently taking part in a huge experiment? After a big technology bubble exploded, central banks tried to pump out money but also maintain very low rates. For a while, it looked like we had escaped the crisis thanks to the Fed’s action. Of course, we found out a few years later that these low rates had created a major housing bubble and a credit crisis unlike anything we had witnessed in several decades. Some thought the whole system was at risk of a collapse and it turned out to be scary times.

How did the Fed react? It took unprecedented action, pumping trillions into the system, trying to manipulate interest rates to keep them as low as possible. It went even further by not only working on short term interest rates but also using “Operation Twist” to create record low long term rates. The federal government has been piling up debt but as worrying is the fact the explosion of the monetary base:


Source: Wikipedia 

Economic theory says that over the long term, inflation is very much linked to the amount of money in the system. So seeing this much money being tossed around has many including myself truly concerned. Worst of all is that no one, not even the guy in charge of all of this, Ben Bernanke, knows what the consequences will be. Are we headed for massive inflation? Or perhaps still headed for a Japanese style of recovery? Or will turn out well? It’s easy to see why so many are moving some of their money into assets that would do well if inflation ends up exploding such as gold, TIP’s and more.

It’s possible that even he knows that pumping out money like this could end up creating the biggest bubble that we have ever seen. But he wouldn’t tell us. Why? We have a system that’s built on confidence and until he has no other choice, he will continue to try to look positive and confident about the economy.

I know that I’m personally far from convinced that what is being tried here will result in success, especially over the next few years…What Are Your Thoughts?

Ultimate Sustainable Dividend Portfolio – August 2012 Update

By: ispeculatornew | Date posted: 08.14.2012 (5:00 am)

Last September I did some in-depth research to find long term sustainable dividend stocks and have been doing updates on this Ultimate Sustainable dividend portfolio since then in the attempt to show how well such a portfolio can perform over the long term but also show how I would manage such a portfolio. I have said it before, I do not believe in stocks that you can hold “forever”. Thus, even in a long term portfolio such as this one, I will end up making some trades from time to time.

Actually, I expect to do 1 or 2 new trades next week. I will be discussing my search for new high quality sustainable dividend stocks that will be added in our free mailing list, if ever you would like to receive those types of updates, please join, it’s free:


Keep in mind that this portfolio was built by selecting 20 stocks out of thousands. The goal is not to pick the 20 best dividend stocks but rather to pick a diversified, high quality portfolio that will keep dividends increasing over time.

Here are the holdings as of last night to start off (please note that currently, dividends are not reinvested automatically through a DRIP strategy.. more on that later this week):

[table “427” not found /]

Dividends Received

The Month of August is a fair good month in terms of cash flows month for the Ultimate Sustainable Dividend Portfolio:

 

Ultimate Sustainable Dividend Portfolio News

Two of the stocks that are paying dividends have increased their payouts, as you can see:

[table “428” not found /]

I also took a longer look at the stocks that I currently own this week. Take a look at this table:

[table “429” not found /]

You can note that because of the spin-off, COP’s negative sales growth is actually not “real”.  The weakest stock at this point is Linear Technology Corp (LLTC) which I will probably be selling out of the portfolio next week.

Returns

Not much change, the USDP did outperform the S&P500 slightly over the last month but still trails by a few dollars…!

 

Trades

No new trades for today but I will be making a new trade next week so stay tuned:)

New Trade: Long eBay ($EBAY) & Short IAC Interactive ($IACI)

By: ispeculatornew | Date posted: 08.13.2012 (5:00 am)

This continues to be a very up and down year for me with these tech long and short stock picks and while in general things are improving. I will be closing one trade this morning as the trade with a long position on Priceline ($PCLN) against XO Group ($XOXO) has reached its stop loss after Priceline came up with very disappointing guidance for the next quarter because of the weakness in the European economy. The trade stands at -22%!

This week, I’m ready to short a stock that I’ve been very surprised by so far this year (not as much as AOL though) and I simply don’t expect it to keep up. When I looked at a stock like Quinstreet (QNST) and read its most recent earnings call transcript, I had a strong feeling that much of the resistance that it is facing would also affect IAC Interactive.

Let’s get right to it and look at the numbers:

[table “426” not found /]

Long eBay ($EBAY)

eBay continues to impress me with the growth they have been able to display. Its Paypal unit continues to dominate the web payments scene with no signs of slowing down while the eBay platform seems to be a winner so far in mobile. Why? Convenience. One login, one website makes it easy to shop for pretty much anything. In the mobile space, that is turning out to be a key factor (similar story for Amazon as you can imagine). For that reason, I do consider eBay to be priced attractively and I’m much more of a believer in eBay’s growth story than IAC’s so seeing them trading at what is basically an identical P/E ratio makes this one a fairly easy choice to make.

Short IAC Interactive ($IACI)

IAC has performed very well both on the markets and in its fundamentals and I do expect a slowdown here, especially compared with eBay which faces less competition and is in much slower growing  segments.  I have not traded IACI much lately but I think that its most recent surge makes it a great short opportunity.

Disclosure: No positions on eBay ($EBAY) or IAC Interactive ($IACI), this trade will be opened on Monday morning

Weekend Readings

By: ispeculatornew | Date posted: 08.11.2012 (5:00 am)

Good morning to all of you!! Have you been watching any besides the Olympics? One show that I’ve recently discovered is the Newsroom, a new HBO series, which has been really interesting.. an interesting preview below which discusses the state of the US.

General Readings

Knight’s Algo was buying $2.6M every second @ ZeroHedge
What would happen if your digital life was destroyed? @ TechCrunch
How large corporations skirt taxes @ HopeToProsper
6 reasons why you should buy life insurance @ MoneyCrashers

Dividend Readings

27 things you must know about dividend investing @ DividendStockAnalysis
Set small objectives to make big savings @ TheDividendGuyBlog
Two duopolies to look into for value investors @ Dividend Monk
Chevron Corporation (CVX) Dividend Stock Analysis @ DividendGrowthInvestor

Technology Stock Readings

The Twitter hijacking of the $tag @ HowardLindzon
Yahoo to keep money from Alibaba sale? @ AllThingsD
Is Google+ Already A Ghost Town? @ MarketingPilgrim
Square Teams Up With Starbucks ($SBUX) @ TechCrunch

Do You Mind Income Inequality?

By: ispeculatornew | Date posted: 08.10.2012 (5:00 am)

Ideally, each person in your family, your co-workers, friends former classmates would all be earning very good incomes. I guess in a way, if you compare their incomes with those of many other countries that is the case. But it’s much easier for us to always compare with the guy next door, our brother or best friend. In that sense, it’s true that the disparity seems to be increasing.

The Rich Are Getting Richer

The rich, for many different reasons, continue to gain more wealth than the average American making the discrepency worse and worse. I guess there are many reasons why. First off the rich have been able to invest money in the markets, to start businesses. They’ve sent their kids through private schools, Ivy league schools, etc. It’s not just a myth that it’s easier to make money once you’re rich. You’re also able to hire fiscalists, etc.

They Do Still Pay A Lot Of taxes Though

For all of the discussions about the rich not paying their faiir share, there are arguments that say they do. For example, the richest 1% in the US pay almost 20% of the taxes in the US every year. And actually about half of Americans do not pay taxes to the federal government. It’s so easy to pick on the rich or to say that basic problems could be solved by increasing taxes on the rich. To some degree it’s true but with capital being more global and mobile than ever before, simply increasing tax rates is not a winning strategy. Just watch France for the next few yeatrs after they gave full power at all 3 levels of the government to socialists which aim to tax any income over $1M/year at a 75% tax rate… In theory that works well but if you’re a wealthy individual or company, chances are that you will move your business elsewhere. In that case, it becomes a losing proposition.

We’ve Tried This Before

Many countries including the once great USSR have tried a model where there would be little to no income disparity. Needless to say that it wasn’t a big success. Of course, to say that both are the same thing would be a bit extreme but my main point is that the government is not effective, and certainly not anywhere as effective as the private sector. Just think of almost any interaction you’ve had with a government provided service and you’ll know exactly what I mean. Redistrubition of income usually means more state involvment which might help the poor but at what cost?

A Poorer “Equal” Society?

Is that what we truly hope for? I personally do not. My perception is that a few services should be considered essential and those should include a certain level of health care or education. But once that is achieved, then income inequality should not be considered a problem but rather a good thing that helps our economy prosper

What are your thoughts?

image credit: Econfix

Beating The Market? Who Cares When You Have Dividends

By: ispeculatornew | Date posted: 08.09.2012 (5:00 am)

Some of you might have noticed in the most recent updates of the USDP (Ultimate Sustainable Dividend Portfolio) that while its performance has been incredibly solid, it does lag the total return of a broad market index such as the S&P500. I do compare the two every month because it does help me in evaluating the returns of the USDP. That being said, there seems to be a big debate about the over or underperformance of dividend portfolios when compared with traditional long market portfolios, which are now easy to replicate thanks to ETF’s (more on that later). That is nonsense. I’ve been testing my theory with a few hundred members from our dividend focused newsletter. Today, I wanted to explain why I don’t think it makes sense to compare for most dividend investors.

I would love to get feedback from both dividend investors and critics. Here are the reasons why I think your focus should be on cash flows rather than beating the market.

Different Mindset and Objectives

Hedge funds, private equity, insurance companies, retail client and sovereign wealth funds… There are so many different types of investors and they each have their own objectives. I think it’s fair to say that asset allocation and other investment decisions should always be made in regards to one’s investment objectives. There are many different possibilities but in the end, as investors, we must all find our own. As you know, I’m a believer in many different types of such strategies. I’ve been very vocal about my dividend portfolio, long and short tech stock picks, my ETF portfolios but also longer term speculative picks such as my purchase of Facebook ($FB) last week. All of those are not mutually exclusive. I could easily move to more or less strategies over time (day trading, momentum, etc). For now, those are the 4 that I use for my own portfolio.

It’s easy to knock down any one of those strategies but the recent surge in popularity of dividend investing has made it a popular target. Dear critics, who are you to knock down dividend investing? I would venture that in general dividend investors are looking to create a stable, growing passive income stream that can either supplement or fund their lifestyle at some point. Dividend investors generally have very clearly defined objectives which are not calculated in terms of portfolio value but rather the amount of money they can expect to receive every year. There is tremendous value in having clear investment objectives as I will discuss later on in this post.

Different Returns

I will start by stating the obvious. Dividend stocks should and do react in different ways compared with other assets. You could always find exceptions but it’s safe to say that as a general rule, dividend stocks are more stable, less volatile than broad market indexes such as the S&P500. Why? There are many reasons but generally, companies that pay dividends are more mature and reliable.

Since there is no such thing as a free lunch, it means that in some periods, dividend stocks as a whole would tend to outperform the broad market while in others they would not. In this case, dividend stocks will tend to outperform in declining/flat markets but would underperform in rising markets. This would not always be the case and depends on the type of dividend stock that you take (higher yield, focused on growth, etc).

Total Return Still Matters

One argument that I often hear regarding dividend investing is that only the dividend matters. That is silly of course and I don’t think many dividend investors focus only on that aspect. If so, buying high risk stocks such as FTR in the US would be their main strategy. My main strategy is to look for long term sustainable dividend stocks that will not only pay high and fast growing dividends but also have a strong underlying business which will ensure that the stock price also follows. I think this is a critical aspect that is often not explained enough by dividend investors giving some the impression that we only care about dividend yield. That isn’t the case of course.

Different Psychology

That being said, when I looked at the differences between buying an annuity or a dividend portfolio, one important point that I stressed was the fact that dividend investors should have a different mentality. If your investment objectives are expressed in terms of cash flow that you are and will receive in the future, then you should not be looking at the daily fluctuations of your portfolio’s value on a daily basis. It’s not that I don’t care about total return but simply that since my objective is not measured in those terms, there’s no point in being too focused on it either. My portfolio’s main goal is to provide income that I can live off of. I don’t care if it performs better or worse than my neighbour’s. Obviously, depending on market conditions, many types of portfolios would outperform mine. But trying to time your portfolio strategy depending on the market will very rarely be a winning strategy.

I would compare it to my house which I intend to live in for a very long time. I do stay updated on its value but its not a huge focus because the main objective of my house at this point is simply to live a comfortable life.

Dividend investing provides system/methodology

As a reminder, one of the main reasons why I’m a believer in dividend stocks is the fact that it provides a clear investing methodology. As an investor, I can simply look at the following:

-How much is this company paying?
-What can I reasonably expect payments to be given its history, its underlying business?

This becomes a much easier decision to make than buying or not Facebook ($FB) or Apple ($AAPL) at its current valuation.

Diversification

While I don’t care about beating the overall market, I do still want to optimize my returns for a given level of risk. In most cases, that means holding a diversified portfolio that holds small and large stocks from different sectors of the economy and that operate in different locations around the world.

Alternatives To Dividend Investing

While it’s true that dividend investing is a great fit for many investors, it’s very possible that you will prefer investing some or all of your resources in other strategies. In terms of long term/retirement investments, I personally consider building an ETF portfolio as the main alternative, that can also work out very well.

What Are Your Thoughts? Are You A Dividend Investor?

If so, do you care about being indexes?