Archive for November, 2012

I’m Hopeful That Grover Norquist’s Pledge Is About To End

By: ispeculatornew | Date posted: 11.19.2012 (4:00 am)

I know, some of you will hate this post because you adhere to the same “never ever ever raise taxes” philosophy. Believe me, I’m very much against raising taxes as a solution to all of our problems. It’s too simplistic, not as easy to implement and there are high costs to raising taxes which are rarely discussed by the left. That being said, I’ve also been discussing the fiscal cliff. I applaud Obama for also taking a very strong stand. I HATE when politicians make a promise like the one many Republicans made to Grover Norquist. I mean honestly.. what happens if all democrats decide to never again sign a bill that doesn’t include taxes increases for the wealthy while republicans pledge to never agree to a tax increase. Nothing would ever get done. And while other things did end up happening, in terms of budgets, deficits and addressing the main issues, that is exactly what is happening.

So Why Do I Applaud Obama For Taking This Stand?

I’m contradicting myself right? In a way, yes. But I also think that doing this is the only way to force both parties to make some type of compromise. I just read an interesting article on salon (“Is it game over for Grover Norquist”). That is probably exaggerated. Low taxes make a ton of sense, the rates are too high in the US and I don’t see an “anti-taxes increase, smaller government going away anytime soon. That being said, if we can at least get rid of a ridiculous idea such as a “pledge”, then we’ll at least have a possibility that both parties can work together for a better compromise. When both Democrats and Republicans have such strong stances that they’ll be seen as “weak” no matter how small the compromise, there is no chance that things will actually get settled.

What’s Next?

For one, I hope that both parties can come to a compromise in order to resolve the fiscal cliff, ideally well ahead of year-end (though I’m not holding my breath on that). I’m hoping to see:

-massive spending cuts
-reduced tax rates across the board
-closing loopholes that will result in net increase in revenues

Am I too optimistic? Probably….Unfortunately! How Do You Think This Will End Up?

Weekend Readings

By: ispeculatornew | Date posted: 11.16.2012 (4:00 am)

I wrote recently about Best Buy (BBY) and how bad things look…ideas like this and these make that fact even more obvious.. Anyway, back to something a lot more interesting:) Here are a few readings for this week:

General Readings

The Not So Lost Decade @ LongTermReturns
My best financial tip @ FreeAt33

Dividend Readings

Investing trends in dividend stocks, munis since election @ DarwinsMoney
The fiscal cliff and its impact on your portfolio @ DividendMonk
Best Canadian dividend growth stocks @ TheDividendGuyBlog

Tech Stock Readings

Of course, many Facebook investors keeping shares @ TechCrunch
Intel (INTC) into the abyss @ BeSpokeInvest

So What Happened On Facebook ($FB) Yesterday? And Other Tech Stock Thoughts

By: ispeculatornew | Date posted: 11.15.2012 (4:00 am)

It’s always amusing to me. Yesterday, as many of you know, was a big lockup day for Facebook shares. What does that even mean? A company like Facebook offers early investors and employees a lot of shares. It’s a way to compensate them without shelling out tons of cash and also gives them a big reason to stick around. It doesn’t always work but in most cases it ends up working. Why? Because those employees cannot just sell the shares. They own restricted shares that can only be sold on a given day. Every few months, employees have new shares that can be sold. In the case of a huge recently turned public company, those dates are significant. Take today. Facebook had a bit over 1 billion shares being traded as of yesterday. This morning, almost 800 million shares owned by these employees and others were made available for sale.

So The Stock Is Going To Tank Right?

Conventional thinking makes us believe that the stock is going to tank. If this morning, 800 million shares are for sale, that will make the stock tank right? After all, that is what happened on the much smaller date a few months ago. And so the headlines were all over the place, on tv, newspapers, blogs, etc. As an investor, I always find such events interesting. As a Facebook shareholder, I was obviously curious to see how the day would go.

Nothing Is As Simple As It Seems

No one could ever predict that a stock will tank weeks in advance just because a lockup period is coming. That is insane. Just think about it for a second. If that were the case, wouldn’t investors sell their shares the previous day to buy it back once the decline had happened? It would be a no-brainer. It’s not that simple.

Everyone knew this would happen: investors that wanted to trade on it did so weeks ago, not just today. For example, some investors that wanted to buy the stock waited for the lockup period hoping for a cheaper entry point. If enough investors do this, it can dwarf the for sale stock
Valuations remain the same. This is critical. I bought Facebook at a $45B market cap or so because I believed it was cheap. The fact that 800M shares are made available does not change the value per share, the P/E earnings, etc. All of those account for ALL shares, not just the ones available for sale
Don’t assume that everyone that CAN sell shares is doing so. Many leaders including Mark Zuckerberg and Sheryl Sandberg are selling tiny parts of what they own and keeping the vast majority. I would expect many others to be doing the same.

Facebook ended up having a spectacular day… rising more than 10%…

Obviously, I’m not saying this will happen on the next lock-up date.. I’m just saying that it’s never obvious weeks in advance that a stock will increase or decline..if it were, investors would already be trading on that event/news.

One More Reason To Avoid Intra-Day Stop Loss Orders…

Monster Worldwide (MWW) crashes after it confirms it has not found bidders for the company:

Pandora (P), which I have been very bearish on continues to struggle with competition from Spotify and others and a soon-to-arrive Apple radio

Speaking of Apple (AAPL), still not understanding why it keeps sliding.. has it lost SOME mojo and come up with an underwhelming iPad mini? Perhaps.. but it’s trading at a P/E of 12!

Blue Nile (NILE), the stock I’ve been most bearish about for years now had a terrible day, still looks vastly overpriced..60 P/E for a company that grows <5% year… need I say more????

Disclaimer: Long Facebook (FB), Long Apple (AAPL), Short Monster Worldwide (MWW), short Blue Nile (NILE)

Ultimate Sustainable Dividend Portfolio – November 2012 Update

By: ispeculatornew | Date posted: 11.14.2012 (5:14 am)

In September 2011, 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.

The USDP is obviously a critical part of my now very public quest to replace my job income with passive income. you can see my most recent update here

The USDP continues to do very well!! Very exciting stuff and I’m thrilled with how things have gone so far. I have done a couple of trades and continue to work on optimizing it, 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:

[table “466” not found /]

Dividends Received

The income increased significantly from October 2011 to October 2012 but that was not the case in November. What could have caused it? Since no companies have decreased their dividends in the history of the USDP (hopefully I’m not jinxing it!!), I’d have to say that some companies maybe changed their dividend dates slightly. It will hopefully increase as the companies increase their payouts and as my positions increase thanks to my use of the DRIP.  Take a look at the progress:

 

Ultimate Sustainable Dividend Portfolio News

This time around, there was very little news in fact, no dividend increases which not happened in a while!

Returns

Overall, the USDP portfolio did perform fairly well in the last month as it outperformed the S&P500 in the past month! This is certainly a very good indication that the portfolio could do very well in down markets which is certainly a goal that I have.

 

Trades

More details to come in the near future but I do expect a bit more trading in the coming months in the USDP:) Should be very interesting

Real Estate – Diversification And Hedge Against Inflation?

By: ispeculatornew | Date posted: 11.13.2012 (4:00 am)

In my quest to become financially independent, I’m building income streams that will hopefully get me there early with a few stable and growing sources of money. I do write about my progress every month and while I currently generate my income mostly from my online company and my retirement investment accounts (dividend and ETF), I’ve also discussed the desire to buy some real estate in the medium term (a year or so). I will be providing an update frequently but today I wanted to give a better breakdown into why I think real estate is a great addition to my portfolio.

Diversification

One clear benefit is that there is very little correlation between real estate and the stock market so the chances that both sources of income would be knocked down at the same time are much smaller than if I was 100% in stocks.

Hedge Against Inflation

You might think that the recent housing crisis proves that it’s difficult to rely on real estate but I think most of us would agree that there was a bubble in housing. I read a very interesting piece by Cognitive explaining that real estate prices increase by the sum of inflation and real wealth increase, as you can see in the following chart:

If you’re not quite convinced yet, look at this much longer term chart which spans over a century:

That is valuable because I don’t necessarily want to hold on to the major inflation hedges right now. Gold has no yield and inflation bonds bring extremely small returns (like most bonds these days) until inflation shows up.

Major Downside

The main downside of course to real estate is that its illiquid. It’s difficult to sell quickly, especially in weak markets and there are tremendous transaction costs (closing, agents, etc) which makes flipping houses or commercial buildings very difficult to pull off. It’s not something that I’ll be looking to do personally. I’m much more interested in buying a few great values in some emerging neighborhoods in order to generate consistent and rising income over the very long term.

 

Here We Go Again.. Fiscal Cliff, Downgrades, Recession, etc

By: ispeculatornew | Date posted: 11.12.2012 (4:00 am)

Quote from the WSJ:

Obama said any “fiscal cliff” compromise would have to include higher taxes on wealthier Americans, putting him directly at odds with Republicans hours after Boehner said the GOP wouldn’t agree to higher income-tax rates.

No matter who you think is right about this debate, I imagine that you are also discouraged about the prospect of another fiscal cliff debate. Feels like we just went through and it was a painful experience. So why go through it again? Most of you know that an important number of Republicans have signed a pledge to never raises taxes. I think that’s insane. I mean seriously… what if democrats made a pledge to not sign a new deal without new revenues… Then what? We wait until one of them accepts to “break its pledge”? Seems a bit childish to me.

What do you think? Am I way off here? I personally do think that while revenues are a part of the problem, deciding that revenues should not be increased no matter how or for what reason is crazy. It’s not a way to run a government. You might imagine that I’m this far left-wing democrat but believe me, it’s far from being the case. I have written time and time again about the taxes debate, how much more complex it is and how raising taxes is a popular thing to propose but it’s also a very simplistic (and idealist) view of reality.

So What Happens Now?

I guess we’ll keep hearing the exact same story from both sides for a few months until the deadline gets closer. At some point we’ll get warnings, possibly more downgrades, some of us will be affected and hopefully one of the two parties will end up backing down in order to reach some type of compromise. At this point, while I do hope that taxes are not raised significantly or much at all, I’d probably be happy if any type of reasonable deal gets done. I just hope that both parties know the risks that they are playing with in always

I certainly love the idea of eliminating tax loopholes but I have not heard a single good idea of how to get this done. If a few of them “don’t make sense”, how in the world will we determine which ones? Each company will be lobbying for loopholes that help them making it nearly impossible to get rid of even smaller ones…

 

Weekend Links – Priceline ($PCLN) Acquires Kayak ($KYAK)

By: ispeculatornew | Date posted: 11.09.2012 (4:00 am)

I love the move by Priceline, it gives it a solid entry point into one type of travel business (search) that was a weakness. Priceline is offering $40/share, about 30% over its current price. As a big believer (and user) in Kayak, I’m very happy to see this deal happen!

General Readings

Reasons to be optimistic about stock returns @ Monevator
How I made $500K with HFT trading @ JSPauld
Total losses from Sandy? $100B @ ZeroHedge

Dividend And Passive Income Readings

How much money do I need to retire? @ InvestorJunkie
Exxon Mobile (XOM): reasonable in the $90’s @ DividendMonk
What to do about low interest rates? @ ObliviousInvestor
How to find the best dividend stocks @ TheDividendGuyBlog

Tech Stock Readings

Priceline acquiring Kayak @ TechCrunch
Groupon coming up (way) short! @ TechCrunch
Amazon dissing Apple’s iPad mini @ AllThingsD

Amazon ($AMZN) Is Crushing It

By: ispeculatornew | Date posted: 11.08.2012 (4:00 am)

Last week, I asked you if you’d prefer investing in Amazon, Apple, Google or Microsoft for the next 10 years. I said my two picks would be Google and Amazon. Some agreed, while others pointed to Amazon’s sky-high P/E ratio. I know, it’s scary. If Amazon started trading at a more reasonable Facebook-like P/E of 46, the stock would be worth a fraction of what it’s currently trading for.

Amazon Is Difficult To Value Based On P/E

I’ve explained in the past why I use the P/E ratio and in general it has led me to some solid results. It does not work in all cases though and you can see why I have not traded Amazon in my long & short tech stock picks in a while. Amazon continues to do incredibly well based on some metrics but not as well when you look at income, earnings per share, etc.

The Jeff Bezos Way

The issue is that Amazon continues to focus on its underlying business more than any other I can think of. They say that the biggest challenge for companies that turn public is to avoid the temptation to focus on short term goals, objectives, etc. Jeff Bezos clearly doesn’t give a crap. Everything he is doing is built on the very long term.

Building This Incredibly Complex Shipping & Distribution Network: Not only does Amazon sell through its website but it is now able to ship at little to no cost. Packages get there within a day or two (and it’s getting closer to same day delivery). There is no other company that comes remotely close to this network. The scary part for competitors is that Amazon’s lead is only growing bigger thanks to huge reinvestment in warehouses, robots that automate the actual shipping, distribution centers close to big centers like New York, etc. It’s no wonder that companies like Best Buy (BBY) and Walmart (WMT) are starting to freak out as they lose business to Amazon. Now, Amazon is even working on adding electronic lockers to facilitate life for consumers.

Vertical Domination: Amazon started dominating the physical book selling business through its website forcing all other big bookstores in the US to close. It is now going one step further with 2 initiatives:

Kindle market (through both its Kindle device and its Kindle apps for other Apple and Android devices), Amazon has completely taken control of the ebook market with close to 90% of the market share.

Publishing business: Amazon is now taking it one step further as it has started publishing its own books, trying to overtake the book publishing business as well. Tim Ferriss, one of my favorite authors who wrote best sellers The 4 Hour Workweek and The 4 Hour Body is now set to publish his next book “The 4 Hour Chef” through Amazon. It will be interesting to see how much success it will get as many top retailers are refusing to sell the book. I’m still convinced it will do extremely well which will certainly be a reality check for those publishers.

Selling At 0% Margins: In some businesses, Amazon seems determined to grow market share by offering rock bottom prices. In cloud computing, Amazon’s AWS prices are so competitive that it has locked in much of the bigger players such as Netflix. In the exploding tablet business, Bezos confirmed that he was not trying to make a penny in profit by selling the device. Instead, it’s focused on making money when consumers use it (by selling content).

Prime Service: An already popular service will certainly gain traction as Amazon started offering a monthly fee (instead of the annual one). In return for $7.99 per month, members get access to a “Netflix like” streaming service, free shipping on physical goods and tons of other benefits. How can Amazon make this work? No surprise in the fact that Prime members tend to increase their Amazon spending significantly once they sign up. Win-win?

The Business Will Be A Big Winner.. What About The Stock Though?

The big problem is that even though I’m 100% convinced that Amazon’s business will end up being HUGE and it will continue to transform retail, it’s not as clear what kind of margins and profits it will be able to generate. Thus, it’s a challenge for me to see how high the stock could end up going. There is a lot of upside, but some (others would argue all) is already priced in. First off, I wanted to take a look at the main underlying numbers:

[table “465” not found /]

Then you can see the progression in sales:

AMZN Revenue Quarterly Chart

AMZN Revenue Quarterly data by YCharts

I’ll show the progression in EPS but I personally don’t give it much value since Amazon is reinvesting so much of its revenues:

AMZN EPS Diluted Quarterly Chart

AMZN EPS Diluted Quarterly data by YCharts

In an ideal world, I’d be able to back out most of the reinvestments to get a more accurate profit figure but the reality is that it’s impossible. The entire Amazon business model depends on those prices right now. So as much as I am a believer, in Amazon, I have more trouble justifying the valuation. I still try to find comparables and believe in the long term case, but I’d love to hear your thoughts on Amazon..bull or bear? How do you justify either?

Using Dividend ETF’s For Foreign Stocks?

By: ispeculatornew | Date posted: 11.07.2012 (4:00 am)

I’ve discussed the need and importance for any investor to hold international stocks in any investment portfolio. That is something that I’ve been focused on in the Ultimate Sustainable Dividend Portfolio. Earlier this year, I added Aflac (AFL), a top dividend stock that is based in the US but has a significant part of its business abroad. There are obviously many other possibilities as well as ADR’s.

Still Many Missing Pieces

The problem though is that for various reasons, many of the largest companies in the world do not have listed stocks on US markets. That means companies such as Nestle are available either through pink sheets (which I’m not a fan of buying) or in other cases the only way is to simply trade on foreign markets in Europe, Asia and elsewhere. That is certainly something that’s possible and brokers such as Interactive Brokers make it possible. However, it’s usually a very complex and expensive solution because you must deal with all of the complications of trading foreign stocks.

One Alternative

Trading and holding ETF’s has been something I’ve believed in for a long time and I think there are many different benefits. One clear benefit for dividend portfolios is gaining exposure to foreign markets. For example, an easy to manage and fairly cheap way to buy dividend stocks in emerging markets, Asia and some European countries is to simply buy ETF’s that track such indexes. Why? They’ll take care of all of the foreign currency transactions, taxes, paperwork, etc. It’s a no-brainer really and I think any strong dividend portfolio should include one of them. Here are a few of the options:

[table “464” not found /]

You can certainly expect me to start adding a position in at least 1 or 2 of these in the USDP in the near future. I’d love to hear your thoughts on this. Do you hold a dividend portfolio? If so, do you hold international stocks? Did you buy them on US markets? Abroad? Through ETF’s?

Are All Of Your Assets Locked Away In Retirement Accounts?

By: ispeculatornew | Date posted: 11.06.2012 (4:00 am)

For the past few months, I’ve been putting more energy into tracking my passive income flows, doing my best to be able to live off of that income as quickly as possible. It’s not that I need or even want to retire right away. I do however aim to be able to do it fairly early. We hear more and more about people that are able to retire in their thirties or forties. They usually don’t do it, but just knowing that it’s a possibility is already a major step.

I’ve been able to steadily increase my passive income, in large part thanks to my dividend investment and my ETF holdings. I do expect my online company and other projects such as real estate to end up being significant but there’s no doubt that investments will likely be the biggest part of my passive income strategy.

One Major Issue

There are very clear benefits to investing in retirement accounts such as RRSP’s in Canada and 401K’s/IRA’s in the US. Mostly because of the fiscal impact, it becomes much more advantageous to use such account types and that is mostly what I’ve done up to now. The problem though is that I’ll suffer penalties if I eventually have to retire money from those accounts. So do I have significant amount of assets that generate decent dividends? Yes. Can I use them to retire early or even in case of emergencies? Not as easy…

Going forward, I will start paying more attention to this. Yes, I want to optimize tax savings but I also want to be able to have a decent amount of savings in standard savings accounts. The best and ideal way to do it of course is to save enough to both cap my yearly limit in retirement accounts and save a significant amount in non-registered ones. It doesn’t happen overnight but if you’re able to do that, there’s a decent chance that you’ll be able to retire early.

What About You? Do you Hold Most Of Your Assets In Retirement Accounts? Do You Care At All?