Tuesday, August 25, 2009

Why is Vonage up 500% in 5 days?!

As I begin this, Vonage is trading at over $2.40 in the aftermarket.

Vonage was trading below $.40 just five days ago.

The (investment) world is looking for an explanation. Barron's tech writers have been blogging frequently over the past few days, marveling at the huge move. The Yahoo! message boards are abuzz.

To me, this looks like a euphorically-driven chain reaction.

A short squeeze might have triggered this rally, but it isn't responsible for the majority of today's move. According to Yahoo! Finance, around the end of July, there were 4 million shares sold short. 41 million VG shares traded today, so short covering can't be credited with this move.

There also hasn't been any significant news within the past few days. VG reported optimistic results in the recent past, and they also announced a new international phone service last week. Vonage's comment on the situation seems to imply that the entire world just realized these couple tidbits and all tried to enter at once. I'm not buying that. I think that's the equivalent of saying "we have no idea why our stock is up 500% in a week, but we're just as estatic about it as you are!"

So my conclusion is that this is a euphoric rally driven by people going long. Owners at $.40 (who may have been underwater from previous purchases) probably aren't selling into strength, driving price even higher. Coverage in the media likely attracts new investors to this hot stock.

VG has been prone to such explosive moves; I was lucky enough to own it in the past prior to a positive announcement; shares jumped 100%.

Buying (or shorting) VG today or tomorrow is simply gambling. Without a clear driver of this extreme movement, there's no concrete reason why shares are worth so much more today than they were last week. At the same time, shorting against such powerful upward movement is insane. Three times during the day today, VG moved up over $.20 (representing 20+% moves) in mere minutes. That's not the kind of momentum I'd want to be shorting into.

This is certainly an interesting story, and it'll be interesting to see how and where things settle down. Stay tuned.

Buy a Kindle 2

Wednesday, May 27, 2009

FSLR Downgrade; Falls; Is Still Overvalued

Originally published at The No Buy List:

Barrons wrote about First Solar's weaknesses and competitive threats this weekend (Reuters coverage of Barron's commentary here), and an analyst, FBR Capital Markets, followed up Barron's with a downgrade on Tuesday morning.

The FBR analyst, who slapped an "underperform" rating on FSLR, mused that "recent checks indicate at least one of First Solar's top customers has already switched from First Solar to a silicon-based module vendor for a project that is currently under construction."

The Yahoo! article covering the analyst downgrade elaborated. "Hosseini noted that FBR's meeting with the KfW Bank Group, a Frankfurt-based development bank that lends especially to economic, social and ecological projects internationally, revealed that its year-to-date photovoltaic project backlog has shifted dramatically toward silicon-based modules compared with its 2008 thin-film-focused mix."

I have previously drawn similar conclusions on this blog and on Student Stocks. First Solar is a company that is ALREADY overvalued even before considering the significant, growing competition that they face from both silicon-panel makers and thin-film outfits. Though the share price unfortunately increased after my last article, I made (real) money in the past shorting FSLR from $280 to $140. Though shares have fallen $20 (10%) since the Barrons and FBR pieces, shares still should have plenty of downside room. I tried to short FSLR a few weeks ago (shares were at levels similar to today's price) but none were available.

I continue to dislike FSLR shares at this price, in this environment. I'd never go long, and I will be considering initiating a short position.

Support This Blog (and Author) by buying anything at Amazon.com

Monday, May 25, 2009

Final Kindle Thoughts: Good Device, Way Overpriced

I have enjoyed writing about the Kindle and Amazon.com on multiple occasions over the past few weeks, so I decided that I'd try to bring everything together in one last post on this topic.

Both the Kindle 2 and the Kindle DX are attractive devices that perform niche functions spectacularly. If you're into reading books, both devices can make that hobby better. The Kindles have the ability to carry an entire library of books everywhere, and the ability to add to that library instantaneously from anywhere courtesy of a Spring-powered network. The e-ink in the reader is easy on the eyes, allowing for extended reading without the eyestrain that often comes from extended reading of an LCD screen.

One of the best aspects of the Kindle (which often goes unreported) are the thousands of free titles available for it. Virtually every book that is off-copyright can be read for free on the Kindle (as on any other e-book reader). A Kindle user can read all of Shakespeare, Mark Twain, and more without spending a cent on the literature itself. The content is often available for free in the Kindle store (which means easy wireless downloads anywhere) or can be found in PDF format, which the Kindle can also utilize.

That function, coupled with a price decrease could be the feature that expands the Kindle's market appeal. The current price of $359 is still prohibitively expensive, as the $5 bills saved on Huck Finn or The Merchant of Venice take way too long to add up. But if Amazon was able to offer Kindles to schools for a price closer to $100, the savings would add up and schools may be motivated to integrate the Kindle into textbook curriculum.

So my reoccurring analysis is that the Kindle is a solid device that prices itself out of practicality. The bookiest of bookworms may be able to see some savings and yuppies may buy the device for the "cool" factor, but it is not yet practical to substitute the Kindle for paper books. But more and more e-readers are entering the market, which should force Amazon to price its reader more competitively in the future. I don't doubt that there will be a day when many 7th-graders read Uncle Tom's Cabin on an electronic reading device. But today is not that day.

And the same overpriced thesis can be applied to Amazon shares. Amazon is a great company that has allowed me to make money (via selling on the website, not by owning the stock). As eBay continues to slide towards irrelevancy, Amazon will become even more dominant in e-retail. But shares are ahead of themselves, and the potential for medium-term price appreciation from this point seems minimal.

Lastly, I feel compelled to acknowledge that my affiliate promotion of Amazon.com has surprisingly generated some decent results. I have sold two Kindles and a few other miscellaneous items via my promotion links (like the one at the bottom of this post), which have generated almost enough money for me to pay for one half of one accounting textbook. So thank you for reading this blog, and I humbly ask that if you ever make any purchases from Amazon.com, please start those purchases by clicking the link below.

On a final note, I have started my summer internship and writing will take a backseat to my real work. But I plan on continuing to post regularly, so check back for the content that you can't live without. Also, visit The No Buy List, which is a more frequently-updated compilation of short ideas.

Saturday, May 16, 2009

Why I Voted Against Barack Obama

I was reading some WSJ today and came across an article that linked to this graph, which I hadn't seen before.

Graph of US budget deficit:

Please vote against big-government supporters in the next election, no matter what political party they may be affiliated with.

Buy a Kindle 2 or anything else at Amazon.com

Wednesday, May 13, 2009

Follow up to Amazon Short-Call

Originally published at The No Buy List:

Though I myself didn't short shares of Amazon.com (AMZN) despite all of my recent negatively-slanted pieces, I am glad to report that shares are sitting lower than they were on every date that I published anything about them.

AMZN's recent decline can be attributed to the general market pullback, but looking forward, shares may continue to underperform. Below is a six month chart of AMZN:

Shares are still trading at $75 though the company is only expected to earn roughly $2/share next year. Even a 50% upward surprise (meaning yearly earnings of $3/share) still wouldn't make shares look cheap.

Looking at the chart, shares seemed to touch resistance (both 50 day moving average and some previous lows) today, so further movement downward could be looked at as a weak technical sign. Shares have also clearly broken the upward trend that began in march. Looking downward, there had previously been consolidation between $60 and $65, which could be a reasonable mid-term price if the wider market continues to correct. There's still a glaring gap between $50 and $57, but I wouldn't expect that to be filled anytime soon.

The bottom line, once again, is that Amazon is a great company but AMZN shares are still overvalued. I'm personally not initiating any short position at this point, but I'd rather short than buy long AMZN shares tomorrow.

And as always, if you're in the market for one of Amazon's new Kindle readers, please do through so my link below.

Buy a Kindle 2, Kindle DX, or anything else at Amazon.

Time to Short Treasurys?

Originally Published at The No Buy List:

Is it time to short treasuries?
Seeking Alpha contributor Larry McDonald thinks so.

Many market analysts and observers have been screaming to short Treasurys for months as rates have hovered near all-time lows. Even Warren Buffet has now acknowledged that the current treasury situation appears to be bubble-like.

I agree that the current Treasury bond environment is unsustainable, but "when" is the key unknown. I was early when I called for an oil-bubble implosion, and I have also been early on shorting stocks like FSLR and CMG. But yields for Treasurys can't really get much lower, so it seems like downside risk for the shorting instruments (TBT) might be more limited.

The article is worth a read, and you can check it out here:
Read "Rising Treasury Yields Could Mean Its Time to Short Them" at Seeking Alpha.

Buy a Kindle 2

E*Trade Monthly Statistics Give Investors Hope

Today, E*Trade (ETFC) released its monthly customer statistics, and the statistics were pleasantly surprising.

The full run-down of statistics can be found here on Yahoo! Finance, but I'll summarize some important stuff below:

Total gross new accounts:

Net new accounts:

End of period total accounts: 4,518,638
Total customer assets:
$ 121,779,000,000


"Total Daily Average Revenue Trades (“DARTs”) increased 7.2 percent sequentially and 34.5 percent from the prior year to 230,345." Plus, "Asset flows continued to be positive, as the Company realized $300 million in net new customer assets during April, marking the seventh consecutive month of positive inflows." (quoted from linked article).

ETFC's brokerage business is obviously healthy, which is an encouraging sign considering the overall company's murkier picture. ETFC recently announced that it would sell $150 million in common stock, boosting capital reserves to meet regulatory requests. The shares would be sold "from time to time at market prices" by JP Morgan.

As I wrote in March, ETFC shareholders will have to wait and see if the thriving brokerage business can endure and outlast losses from the asset-holding component of the business. The capital raise and continued healthy customer statistics are promising, though the battle is likely far from over.

I have accumulated some more shares of ETFC over the past few weeks after shares fell nearly $1 from the recent highs near $2.50. I plan on continuing to occasionally buy shares on weakness as long as ETFC's business doesn't change materially.

On a final note, I'd like to criticize another analyst (partially because my material is often scrutinized by commenters here and on Seeking Alpha). where he did a great job demonstrating that he knows nothing about E*Trade.

He writes "Either way this is a brokerage growth story." Sorry, Aristotle, but that is incorrect; it is a story of inadequate capital cushions to cover losses on portfolios of mortgages and other troubled assets. Any naive investor who thinks about buying ETFC shares based on that article will have been horribly misled.

It is very dangerous and unprofessional for Motley Fool editors to let that article hit the internet. As someone who has been criticized for not thoroughly researching, I don't know how a professional writer can publish an article where so much material information is omitted. Shame on you, Motley Fool.

On a related note, I'm available for hire for freelance writing. Motley Fool, if you're interested, feel free to contact me at studentstocks@gmail dot com.

Buy a Kindle 2

Friday, May 8, 2009

Time to Short Chipotle Mexican Grill?

How's this for a nice throwback - Short Chipotle Mexican Grill (CMG).

On this blog, I have written plenty about CMG's ridiculous valuation in late 2007 and early 2008. I was never actually able to short CMG shares, as I could never find any available, but that was ok - my initial call on October 31, 2007 was a bit early, and I would have probably covered as shares rose from $130 to $150. However, my thesis was eventually vindicated as shares fell from $150 to about $40 over the course of 2008.

Now shares have recovered back to about $80, and armchair analysts are once again labeling CMG shares as too expensive. Though company results have been impressive over the past few quarters, there appear to be some cracks under the surface that will cause a slip-up going forward.

Two article below are worth reading: The first, at Zachstocks, is a general overview on the bearish CMG case. The second is another piece at Seeking Alpha about recent insider sales of CMG shares.

Read the article "Chipotle - A Tasty Short Opportunity" at Zachstocks.
Read "Why are Insiders Losing their Taste for Chipotle" at Seeking Alpha.

Buy a Kindle 2

Wednesday, May 6, 2009

More Kindle DX Details: Still Not Impressed

Originally published on the No Buy List:

Well, most leaked pre-release facts seem to be right: the new Kindle is big, pretty, and textbook- and newspaper-friendly. As I mentioned in my last post, a few colleges will be participating in trials to see if the Kindle textbook experience can catch on.

A troubling new piece of information is the price of the Kindle DX: $489. For $500, a consumer can buy a newest-generation iPod or iPhone, competing ebook reader, or one of many high-quality netbooks. I think that Amazon has priced the device far too high, as the allure of a device with relatively-limited functionality diminishes considerably as price increases.

And once again, Amazon is paying 10% to anyone that can sell one, which is a very significant amount of foregone revenue. On a similar note, if anyone was looking to buy a Kindle DX, feel free to put $48.90 in my pocket for (old-fashioned) textbooks, you can click this link to pre-order a Kindle DX.

My original thesis before the release of the Kindle 2 was that the new Amazon e-media readers would not be game-changers, and I stand by this sentiment. The function-to-dollar ratio for the Kindle 2 and Kindle DX cannot compete with an iPod or a netbook. The Kindle family is a wonderful niche product for a certain group of people - bookworms that travel - but I still cannot conceptualize mass appeal at this current level of high price and low functionality. Amazon's core business is still growing healthily, and shares may continue to enjoy a rich valuation, but I wouldn't expect the Kindle to add materially to Amazon's bottom line anytime soon.

Buy a Kindle 2
Buy a Kindle DX

Tuesday, May 5, 2009

Amazon's Kindle 2.5? Nothing to Get Excited About.

Would you like to buy a Kindle 2 or a Kindle DX?
Check them out at Amazon by clicking this link?

This post was originally published at The No Buy List:

Amazon is holding a press conference at a New York university tomorrow to probably announce what many optimistic investors had been waiting for: a Kindle with a bigger screen.

Much of the reason for the press conference seems lost as the important info has been leaking out over the past few days. Engadget, a popular electronics blog, published this post about the new Kindle, including leaked pictures.

Supposedly, the new Kindle will feature a 9.7 inch screen, enhanced browsing capabilities, and a built-in PDF reader, adding some more functionality to the device. However, the Kindle is still far from being a full-fledged computer-alternative (I'd argue that the most recent iPods are much more functional) so I don't know if the Kindle buzz is merited.

Newspaper and textbook publishers are looking to this bigger Kindle to try to increase popularity of their products: apparently, Case Western, Pace, Princeton, Reed, Arizona State, and Darden School at the University of Virginia will be participating in a trial where Kindles will be used in the classroom.

However, as a college student, I don't see this application of the device gaining much traction. Traditional textbooks are convenient because they can be taken everywhere (though not necessarily all at one time). The new Kindle will replicate this ability, with the added convenience of carrying a single device weighing ounces instead of lugging a half-dozen textbooks weighing 20 pounds. However, the appeal ends there. Paper textbooks can easily be marked up to enhance the learning experience; even with some sort of highlighting or annotation feature, the effect is largely lost on-screen. The best part about paper textbooks are their reusability; books used year after year are very cheap to buy secondhand, and even new books can be returned or resold for a significant portion of their face value. Though the user will likely be able to keep their Introduction to Macroeconomics book forever, it retains little value after the course is over.

I also think that there is an emotional objection to electronic textbooks. In my Penn State-mandated public speaking course, the required text was electronic. It amounted to a PDF with links to a limited-access website with additional material and assignments. For this, the publisher charged about $70 - a hefty price for intellectual property. Students were outwardly angry and hostile, and many, like myself, didn't bother to even purchase the textbook. People would rather spend $100 for a paper version that they can sell to a friend or the bookstore for $50 than pay for material that feels like it should be free.

Maybe schools like Princeton will have free course materials or heavily subsidized textbooks, but I don't see the Kindle catching on at Penn State.

The other highly-touted new application is the reading of newspapers, and struggling companies like the Times are hoping that they can sell a lot of $10 monthly subscriptions to help stop the widespread bleeding. But as other bloggers and writers have pointed out, why would someone pay $10/month for the Times limited-feature Kindle edition when their regular website features much deeper and richer content for free?

Unless there are some mind-blowing details that haven't been leaked yet, I don't see this new Kindle creating much of an addition to Amazon's bottom line anytime soon. I think that Amazon's shares are already more than fully valued, so if AMZN shares do pop tomorrow, that pop simply provides a juicier entry point for a short position.

Monday, May 4, 2009

Buying BGZ as a Hedge and Speculation

Originally posted at The No Buy List:

My portfolio is made up of plenty of high-beta stocks with questionable futures.... I am proud to hold 1000+ shares of ETFC. Other winners (note to reader: that's typed sarcastically) include AIG. Rounding out some other holdings are Penn Gaming and US Steel.

To hedge this exposure and to attempt to profit off of a market correction that I believe is overdue, I just purchased some shares of BGZ, one of Direxion's 3x ETFs. BGZ is 3x bear Large-Caps, so I expect it to more closely track the indexes (S&P 500/Nasdaq) than any of their other highly-leveraged instruments.

The Direxion products are widely criticized for destroying share value simply because of the details of how it leverages up performance, so holding it for forever isn't recommended. But with market strength today, I figured I'd buy it with a one- to two-week timeframe due to stock-market strength and the potential for forthcoming weakness (such as stress-test results released later this week).

As with any volatile instrument, I entered a stop-limit sell order to protect against huge losses. My stop-limit is currently at $38.50, which may be adjusted up if the shares move up as I think they will. My intended exit is roughly $50/share, which should happen if the market is down 2%/day for 3 days in a row.

So this is how I'm attempting to trade what I feel is current exuberance in the market... We'll see how well this method really works.

Buy a Kindle 2

Wednesday, April 29, 2009

Do Not Buy FSLR

First Solar is set to release earnings after the market closes (in about 7 minutes), and I believe that it will be hard for FSLR to impress the street. Their disappointing results last quarter led to a huge drop in share price.

Read my full analysis at The No Buy List.

Buy a Kindle 2

Tuesday, April 28, 2009

Revisiting VMWare: Still Not a Buy

I have previously written about VMWare on this blog. VMW provides many different IT services to corporations and consumers, primarily focusing on virtualization and cloud computing.

I last wrote about them exactly one year ago on the day of an earnings release; back then, shares traded at $56. Today shares only fetch $26.

I published a brief article about the challenges that VMWare continues to face. Check it out at The No Buy List.

Buy a Kindle 2

Monday, April 27, 2009

Continue to Avoid Swine Flu-Related Stocks

Originally posted at The No Buy List:

This morning, I wrote about huge daily declines in share prices of companies that have exposure to any business that may be adversely affected by the swine flu (or simply a reluctance to travel/go out because of fear of it). Shares of such companies continued to fall throughout the day:

  • Carnival Corp. (CCL), -13.5%
  • Royal Caribbean (RCL), -16.3%
  • Southwest Airlines (LUV), - 9.4%
  • US Airways (LCC), -17.4%
  • Smithfield Foods (SFD), -12.4%
All five companies mentioned saw a slight rebound in aftermarket trading (generally 1-2%), suggesting that investors were ready to expose themselves to some risk.

The pace of new developments in this swine flu saga seems to be slowing, pointing to a possible end of such knee-jerk declines. However, some entities continue to escalate their reactions: Russia has temporarily banned meat imports from Mexico and a few US states, and more recently announced that it will begin checking planes arriving from the Americas. The World Health Organization has also raised its alertness level, and new cases are continuing to pop up in different corners of the globe.

So how does swine flu relate to stocks right now? I would not yet dabble in companies and industries (travel, meat, etc.) that are effected (actually or psychologically) from this swine flu concern. If and when the panic blows over, investors that jumped in at the right time will realize healthy gains from stocks like CCL. However, it is too soon to discern the extent of this swine flu problem, so prudent investors should avoid buying any affected companies in the immediate future.

Buy a Kindle 2

Do Not Buy Swine Flu-Related Stocks

Published at The No Buy List:

As the world is freaking out about a possible swine flu pandemic, travel related stocks are being sold off. The damage that swine flu will inflict on airlines and cruise companies is likely (much) more psychological than tangible, but I would still avoid buying any travel-related stocks until this swine flu hype (hopefully) blows over.

For example, Carnival Cruise Lines (CCL) shares are down 10% as of 10 AM Monday, and its main competitor, Royal Carribean (RCL) is down 15%. Airlines are taking a beating too - Southwest (LUV) is down about 9%, while US Air (LCC), which was also downgraded by UBS this morning, is trading down 15%. Here is a little article on MarketWatch showing the price declines of airline stocks.

Actual bookings for things like cruises and flights may decline if this fear doesn't pass over quickly. But the market will continue to sell these stocks as long as the swine flu scare is making news. Eventually, there will be a buying opportunity after the fear subsides, but I would not be buying any of these stocks today.

Buy a Kindle 2

Tuesday, April 21, 2009

Do Not Buy Amazon.com

Written and originally published by myself at The No Buy List - a blog focused on negative analysis of companies.

Amazon.com began as an internet book retailer and has expanded into sales of goods of all kinds. A consumer can now buy everything from groceries to the latest G-Unit CD on Amazon. Amazon's product offerings only continue to grow as they add more products to their site directly and invite outside sellers to sell through the Amazon portal. Amazon has even begun developing and selling its own products: the recently-introduced Kindle 2 created much buzz and will fluff Amazon's bottom line as they are the sole retailer of the high-margin product: "A teardown analysis of the Kindle 2 by market research firm iSuppli estimates the cost to build the device at $185.49, or about 52% of its retail price of $359" (Businessweek).

With other offerings like apparel, foodstuffs, and mp3 downloads, Amazon is attempting to diversify into a seller that can supply almost anything a consumer could want. The strategy does seem to be working, as revenue and profit keep increasing despite a sour economy. However, Amazon's weakness has always been tight margins, and margin expansion is unlikely. The internet is an ultra-competitive animal, as many websites (like SlickDeals.net) exist solely to alert consumers to good deals. Amazon's decision to allow outside sellers to sell products on the website (via the Fulfillment-by-Amazon program and the simpler Selling on Amazon option) allows sellers to attempt to match or undercut Amazon's prices, making it more difficult for Amazon to retain healthy markups (except on niche products like the Kindle).

When Amazon can't increase margins, they increase volume, which has worked thus far. I believe it will continue to work, as consumers will increasingly turn to Amazon to meet all of their discretionary needs, so I do believe that Amazon will continue to be a growing, healthy, and increasingly profitable company.

However, Amazon makes the Do Not Buy List due to an overly-rich current valuation. Amazon is expected to make $1.50 per share this year, slapping a price to earnings ratio of over 50 on shares. Even next year's earnings, currently estimated at $1.94, will maintain a P/E of over 40. Since I believe that Amazon will continue to perform well, I'll say that Amazon will make $2.75/share next year - even with such results, the shares would still trade at a 29 P/E. These ratios are much, much higher than competitors, and seem unsustainable despite recent enthusiasm.

eBay, Amazon's most comparable online competitor, trades at a P/E of just 10 (though that is partially attributable to problems with eBay's business). Wal-Mart, the diversified brick-and-mortar retailer, trades at a P/E of 15, while Target, Wal-Mart's smaller competitor, trades at a similar valuation. Best Buy, the electronics retailer, trades at roughly a 17 P/E.

Amazon's business model does differ from these retailers - Amazon is less of a pure-retail play with the addition of revenue streams like music sales, the Fulfillment by Amazon program, publishing, and more - but at its core, AMZN is a retailer. Amazon does have a world-class supply chain and does not have to pay for retail square footage like the aforementioned competitors do. But because a consumer can buy the same books, movies, and groceries from Target or Best Buy, Amazon's margins on such commoditized items will always remain slim.

The bottom line is that Amazon.com is a great company that trades at a somewhat-ridiculous valuation. AMZN will report earnings later this week, and I have a cannot believe that any news could propel shares much higher at this point. Therefore, Amazon will be placed on the Do Not Buy List for the short- to medium-term until margins show signs of improving, or earnings increase to a point where AMZN's P/E falls closer in line with competitors.

Buy a Kindle 2

Sunday, April 12, 2009

Amazon.com Offends Gay Community

Amazon.com will likely take some heat tomorrow as it has become known that they apparently have been systematically "hiding" books deemed to be about non-heterosexual topics by changing classifications and making them ineligible for their ranking systems.

A reasonably-thorough article is available here, but expect more news on this tomorrow as the mainstream media picks up this story.

I know of this now because of the already-huge backlash on Twitter. I recently signed up for a Twitter account (to promote my ski wax company, Whacks Wax, which is coincidentally sold on Amazon.com) and the website's millions of microbloggers are tweeting furiously about this topic. (On a related note, I think Twitter is pretty pointless and unmonitizable, though that doesn't mean some bigger company won't buy it [after all, Google bought YouTube and eBay overpaid for Skype].)

Though some people are already tweeting for a total boycott of Amazon.com, that's obviously ridiculous. There will likely be some protests and LGBT spokespeople complaining through various news mediums, but this drama should blow over shortly. The only people that I feel are very wronged are the authors and publishers of the blacklisted books, so I do hope that the problems will be fixed and that their personal wrongs will be righted.

I think that Amazon's results may be materially affected by this in one of two ways.

On one hand, the calls for boycott may keep some people from making purchases. It is possible to still buy books from physical bookstores or other websites, so Amazon may give up a couple of percentage points of market share in the very immediate future (the next few days or weeks). But I expect that Amazon will quickly apologize and hope that this is all forgotten, and I don't expect any huge long-term effects. The simple truth is that Amazon is too big, popular, and powerful to get hurt by such a minor slip-up.

On the other, Amazon might actually benefit from this negative publicity. An unintended positive consequence may actually be additional traffic and sales on Amazon.com within the next few days. Amazon is obviously already a household name, but the attention Amazon may receive will likely drive MORE people to the site, as people read the site's name in their newspapers and hear it on the evening news. Amazon sells anything and everything - from books to banadages - so visitors may just curiously type in a desired item and end up buying it.

The bottom line is that huge companies like Amazon shouldn't bother to try to sneak things like this past the watchdog that is the internet community. It would have been better for them simply to have stated upfront that "due to new company policy, books with strong homosexual material will be ineligable for popularity rankings" rather than try to cover it up. In the age of Googling, Twitter, and blogging, someone is bound to stumple upon these types of things, and the discovery of secrecy causes a stronger backlash than what would have been initially suffered.

Amazon.com may be a little embarrassed that they got caught enacting this shameful policy, but they will continue to perform strongly as a company nonetheless.

Buy a Kindle 2

Monday, March 30, 2009

Unconventional Way to go long Financials

Once-proud financial-service companies have been humbled, and currently trade at lowly prices usually reserved for unknown, unremarkable companies.

Citi (C) ended at $2.31 at Monday's close. American International Group (AIG) closed below a dollar. Both stocks are up roughly 250% off of all-time lows, but the future of the shares (and companies) are hazy at best. Risk-adverse investors don't necessarily want to gamble on such risky companies, especially while daily price fluctuations are so extreme. At the same time, however, bullish investors may want to be exposed to potential upside in shares of such trampled companies.

Rather than owning the shares of stock, investors could gain exposure to upside movement by selling naked put options.

Selling "naked" puts refers to selling puts without actually being short shares of the stock, which would sometimes create a riskier situation for the seller. However, with C shares so close to $0, even the worst-case scenario is very clear.

When puts are sold, the seller's account gets credited with the amount of the sale and an outstanding obligation shows up. If shares do move lower, the size of that obligation increases as the puts increase in value, and the seller essentially loses money. If shares increase in price, the size of the obligation gets smaller, and the seller enjoys some paper gains.

Below is a table of C January 2010 puts (courtesy of Marketwatch.com)

Though there is little to no volume in the far in-the-money puts, the bid and ask spreads remain reasonable and transaction costs do not inhibit using this strategy. Options close to the current share price retain time value, providing a bonus for the seller.

At the $2.50 level, options traded hands yesterday at roughly $1.25 (we'll take the bid), implying that investors expect C shares to be worth no more than $1.25 in January of 2010. If shares close below that level, the put seller will lose money. If shares became completely worthless ($0) before then, the put seller would essentially owe $250 per contract while he was only credited $125 at the time of sale. However, if shares only appreciate 10% (to over the $2.50 strike price) within the next 10 months, the seller will get to keep the entire credit at the time of sale.

Utilizing this strategy with in-the-money options changes the risk and reward involved. If a seller sold $10 puts for $8.05, he has a possibility of making $800 per contract (if shares close above $10 in Jan '10) while only potentially losing $200 (if shares go to $0).

Selling even farther OTM puts exaggerates the risk/return profile further. Selling $40 puts in the bid/ask spread at $38 seems possible, even though its highly unlikely that C shares will see that share price within the foreseeable future. However, the trade can still be made. Again, downside risk is limited to coughing up $200 if shares hit $0 (which means repaying $4000 compared to an initial credit of $3800), while profit potential remains intact (a $10 share price close would net the seller $800 of profit, essentially). And with C, AIG, BAC, and many other companies trading relatively close to $0, this strategy can be employed for an entire portfolio of companies.

Requirements for selling naked puts differs based on broker, and the strategy isn't for everyone. Like owning shares, downside risk is limited (paying the entire difference between strike price and $0) if the shares become worthless, but gains are capped too (at the initial selling price of the contract). But this strategy may offer an interesting way to expose one's portfolio to the possibility of bullish performance without sacrificing too much capital.

Buy a Kindle 2

Wednesday, March 18, 2009

More Positive ETFC News

Since I wrote about ETFC last week, shares have crept up from $.66 to $1 (in pre-market action this morning; last night's close was $.91).

The Wall Street Journal put out a little article this morning discussing a few monthly updates that ETFC released today. The article may (or may not, depending on if it's subscription-based) be seen here.

Not only did trading volume stay steady, but more importantly, loan delinquencies among its portfolio are on the DECLINE. "The company said Wednesday delinquencies of 30 to 89 days have fallen 16% in the first two months of the current quarter, while delinquencies of 30 to 179 days are down 1%."

That is obviously wonderful news for ETFC. They have already provided loss provisions far beyond realized losses, so if things are bottoming (or improving) now, they might not have to increase provisions anymore, allowing them to return to profitability. This may sound a little crazy, but maybe write-ups are hiding in the not-too-distant future.

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Monday, March 16, 2009

From Laggards to Leaders

Monday's market action was volatile and interesting, with a couple surprising underlying themes.

The S&P 500 opened higher, peaked midday while up about 2%, and ended up closing marginally lower. Many of the previously worst-performing stocks (financial) had daily charts that resembled the S&P's movement, albeit with supercharged movements.

As AIG made news by listing important counter-parties and declaring that it planned to pay bonuses, the shares exploded higher.

Shares logged a few trades at $1, which was an 100% daily move. Even as trades ticked lower with general market weakness at the end of the day, shares still logged a 66% daily gain. Though the percentage gain is obviously impressive, it pales in comparison to the enormous wealth that was lost as AIG fell from real-company valuation to penny-stock territory. But theoretically, an investor that plowed some money into shares at $.33 recently would have been very pleased with this recent performance.

Some other examples of beaten-up stocks that outperformed today:

E*Trade (ETFC): +9% today (read my recent article about ETFC shares here)
Citi (C): +31% today
Bank of America (BAC): +7%
Freddie Mac (FRE) +21%

Obviously all stocks mentioned are ultra-risky, and some may ultimately be worthless. But such extreme movements are heartening for investors who own shares of said companies, and if any major development in the market or indivual stocks (like ETFC getting TARP money, or the alteration of M2M rules) happens, shares could explode higher. But "investing" in any of the five companies I named (I own shares of ETFC and AIG) is still more like gambling than rational, careful capital allocation.

People courageous (or stupid) enough to invest will continue to see gains or losses that are characatures of the general market.

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Sunday, March 15, 2009

This Week Crucial to Investor Emotion

Though I'm currently being taught that many scholars and businesspeople believe that stock market prices represent the entirety of all available information, I disagree. I see the stock market as a much less rational creature; along with true facts and information, fear, emotion, rumors, and expectations share responsibility for driving prices and creating price swings.

The major markets (S&P 500, Dow, NASDAQ, and most international markets too) have endured wild fluctuations over the past year and a half as they shed 50% of their value. Below is a chart of the S&P 500 over just the past six months, after the index had already lost a significant portion of its value.

After establishing a new multi-year low late last week, the S&P 500 had a spectacular rebound, rising roughly 80 points - adding more than 10% to the index's value.

I was on spring break this past week, which allowed me to waste plenty of time lounging around watching CNBC. While I don't take too much from that channel to heart, watching the various personalities, traders, and interviewees provides a good sense of sentiment on the street. At the end of the week, the depressing fog certainly seemed to be clearing and some people seemed downright cheerful. A few actually resented the steep rise as they had hoped to initiate some long positions at better prices.

The week was kind to the general markets, but certain beaten-up stocks did even more exceptionally well. GE bottomed at $5.87 last week, but recovered to nearly $10 by Friday's close. General Motors (GM) more than doubled from an intraday low of $1.27 last week to close at $2.72 on Friday. PNC, a bank of national (and moreso local, due to my Pittsburgh roots) significance, began the week under $18 and closed at $28.

Last week's rally may have been caused by any different number of factors. Some scary unknowns became known; both GE and Berkshire lost their AAA ratings, but credit outlooks were reset to stable, allowing investors to feel a little relieved and reassured. Mark-to-market rules are under review, and any suspension or alteration of them would likely lead to writeups and increased capital cushions at virtually every financial institution. Other commentators think that some sidelined money may have flowed into the market, and after the gains began early in the week, additional investors threw even more tinder on the financial fire.

Some people are less optimistic. Considering the depressed, pathetic pre-rally prices of stocks like GE, GM, and many others, some people argue that much of the reason for the rally this week was short covering.

No matter the reason for what is now history, the market action this week may stifle and reverse, or enhance, the movements of this past week. The S&P 500 now sits at approximately its November low; it may not be able to cross that resistance level, but if it does, it should have a new level of support. (Note: I'm not a technician and I don't believe too deeply in technical trading, but because enough investors do, it sort of becomes a self-fulfilling prophecy).

Disregarding any technical indicators, simple emotional sentiment is hinging on the first few trading days of this week. After a 10% gain, many people want to believe that the market has turned a corner; they may be willing to commit more capital or cover any outstanding shorts if they see a little more proof that the markets will continue skyward. On the contrary, the good feelings of this week will be forgotten if markets stutter early in the week, as investors are inches away from writing off any gains as a bear-market rally in a formerly-undersold market.

Various nuggets of news will likely drive sentiment this week. FedEx (FDX) reports earnings, and they are often considered to represent the general economic environment; a positive report will reassure jittery investors, while a bleak one may estinguish existing goodwill. Nike (NKE) and Oracle (ORCL) also report earnings, while GE will provide some information about their financing arm. A spattering of other economic news and company reports will augment the aforementioned ones.

I don't have any fresh capital to invest at this point, but I'm eager to see how the markets will move. On one hand, I too share the opinion that I don't want things to go up too far, too fast - I'd like to buy some good companies at the current firesale prices! However, I think many stocks are currently oversold, and an extention of last week's rally doesn't seem irrational to me. Only time will tell...

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Thursday, March 12, 2009

E*Trade: Worth Ten Dollars or Ten Cents?

E*Trade (ETFC) shares have suffered one of the greatest declines of all (non-bankrupt) financial service companies - a whopping 97% from pre-meltdown levels. (From the start of 2006 through the first half of 2007, ETFC was a $20+ stock.)

The verdict remains out on ETFC. Obviously the possibility (or probability?) of bankruptcy is priced in, as shares changed hands at $.66 on Thursday. However, the core brokerage business remains strong... if only management had had the foresight to have avoided banking and investments over the past five years.

Shares slumped Thursday amid the strong rally after a Citi analyst slapped a "sell" on the stock this morning. The Citi analyst provided a price target of $.25/share. However, along with that bleak statement, he pointed out:

"E*Trade is a tale of two companies. On one hand, the retail brokerage operation is steady. The segment has averaged over $500M of annual operating earnings and 41% margins over the past five years. The institutional business, however, remains an albatross as a result of its $25.5B loan portfolio. While we believe current management is doing all they can to address the company's legacy balance sheet issues, the long-term viability of the company remains in doubt, in our view."

(Source: StreetInsider.com)

There are about 500 million ETFC shares outstanding, so theoretically, the brokerage-only component would be making $1/share per year and trade at $10-$20.

However, the institutional component, which focused on investing in mortage securities, threatens the viability of the company. ETFC hasn't reported a profit since 2007 as mark-to-market writedowns of assets have forced ETFC to take losses. However, management has proactively dealt with the losses and associated need for increased capital; they sold E*Trade Canada for over $500 million (after taxes) and sold a portion of their asset portfolio to private buyers.

They now seem well capitalized, and a recent stress test confirmed that conclusion. (Read the article here.) The analyst concludes that while ETFC would need more capital in a (harsher than realistic) immediate full-writedown scenario, it would be able to maintain a Tier-1 capital ratio if the writeoffs happen over a few quarters.

The wild card that could still significantly change things is ETFC's still-outstanding request for TARP funds. ETFC requested $800 million, which would cover all losses even in the aforementioned analyst's doomsday scenario.

The bottom line is that ETFC will do one of two things - go bankrupt, or go way, way up.

When it comes to the financial services sector, the most important thing now is survival. For the past year (or more), companies have written down assets repeatedly thanks to mark-to-market accounting. Assets have to be written down to prices they'd fetch on the open market, while in reality, many instruments have intrinsic value (based on interest payouts, etc.) above their current marked values. Eventually, these assets will be written up. Some firms will fail or be bought out before they have the opportunity to do this; others, whether due to good management or the government's good graces, will survive until the day they report a gain on their held assets.

Even ignoring any writing-up of ETFC's assets, if they can survive to the day that their non-brokerage business no longer impairs their results, the shares will skyrocket - eventually back to double-digit (dollars, not cents) territory. (Note: Seemingly ridiculous claim is based on $1/share brokerage-component earnings). However, current market pricing indicates that most investors don't think that will happen.

I find buying ETFC a bet worth making - The slim possibility of a 10- or 20-bagger makes the probability of bankruptcy worth betting against. I currently hold some shares, but I'm planning to add to my position if shares stay at current levels. ETFC shares are not for everyone, and I'd almost classify going long as closer to gambling than true Buffet-like investing... but I'm young and I like taking risks. I'm hoping that management can continue to bail water out of this sinking dingy until the storm clouds have cleared.

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Wednesday, February 25, 2009

First Solar Tumbles After Earnings

As I posted yesterday, I was watching First Solar's earnings closely when they reported after the bell.

Earnings for the quarter ended were strong, but FSLR's future outlook was even bleaker than I had imagined. Unfortunately I was not short the stock, but anyone that was short or held puts fared very well - shares fell $30, nearly 22%.

FSLR's executives had many troubling things to say - the economy is tough, the solar business is tough, and they expect it to get tougher in the near-term. According to the company, up to 15% of 2009 shipments could be at risk of "customer default." To make up for waning corporate credit, FSLR is even financing or taking stakes in projects (rather than simply selling panels) which complicates their business model and casts even greater doubt on their future prospects.

So being right really didn't positively effect me, but I enjoy seeing rationality return to one of the only market segments where euphoric expectations still reigned king.

Tuesday, February 24, 2009

First Solar Reporting After the Bell

I have published previous articles about shorting First Solar starting in April 2008 as the stock hovered near $300/share. At that time, general economic, stock market, and solar business prospects were much better than they were now.

Thanks to weaknesses unique to FSLR (and now, general market weakness) my short worked out very well - I shorted in the high $200's and rode it down past $150 before covering. I haven't had any position in the stock for a while.

FSLR reports earnings after the bell today, and i have not initiated any position prior to the announcement (nor do I plan to initiate any position after). However, I love me some schadenfreude... I mean, First Solar is still way overvalued compared to its fundamentals. The P/E is sky high, margins are slipping and growth is slowing. Competition is tough. Though there are some green energy incentives in the stimulus bill, it may only make up for what would have been an astronimical drop by real businesses and consumers facing tougher spending decisions.

Who knows? They might beat and raise, if some footnote in the bill specifies that FSLR's panels will be placed on every police station in the US. But based on the overall economic malaise, I expect a "we expect a tough year due to the economy" type of commentary during the conference call.

Analysts, on average, expect earnings next year of $7/share. That's a PE of about 20 at today's market price, which is rich considering the decline of most tech high-flyers. Unless FSLR's executives forecast above that consensus, my gut tells me that shares will more likely fall than rise.

Whether shares pop or drop tomorrow, I'd stay away. There is a glut of solar capacity in a world that has shifted focus back towards cheap energy instead of green-at-all-costs energy.

Ski Wax
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Monday, February 23, 2009

TCLP Follow Up

So clearly my calls expired worthless, as TCLP failed to rally on Friday as I had hoped.

However, the stock is still a conservative yet wonderful (nearly guaranteed 10% yield is looking tastier by the day) choice for an investor in today's increasingly-disappointing market.

Ski Wax
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Thursday, February 19, 2009

First Options Trade in a Months: TCLP Calls

I have followed TCLP (Transcontinental Pipelines), a pipeline trust, for a very long time now.

Under normal market conditions it was a very stable stock (as it is in a widows-and-orphans industry), but during the last six months the stock has been effected by increased volitility as the general stock market became more unpredictable.

Below is an approximately six-month chart. As the candles show, there have been numerous days when the stock has risen (or fallen) by greater than $1.

TCLP reports earnings tomorrow morning, and I'm speculating that the stable numbers will reassure antsy investors. Obviously this trade is more lottery-ticket than science, but I was willing to throw down a little money and take a chance.

I was able to pick up at-the-money $25 calls for $.30 per contract this afternoon. If earnings please investors, a $1 or $2 pop will pay off nicely.

(As an aside, I have followed TCLP for a long time because of its very high dividend - the shares currently yield about 11%. The 5 year average dividend payment is only 6.6% [according to Yahoo Finance], which might point to share appreciation in the future. I think that TCLP is a great conservative long-term investment regardless of the outcome of my options trade tomorrow.)

Ski Wax
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Friday, February 13, 2009

Final Thoughts on Stimulus Bill

I hope that the bloated, pork-heavy stimulus bill doesn't pass today and has to be re-written. The final version contains over 1,000 pages.

An example of an element that I have an issue with is the inclusion of a tax credit for firms who employ "disconnected youth." I pulled the definition of that term from the bill.

The term ‘disconnected youth’ means any individual who is certified by the designated
local agency—

‘‘(I) as having attained age 16 but not age 25 on the hiring date,
‘‘(II) as not regularly attending any secondary, technical, or post-secondary school during the 6-month period preceding the hiring date,
‘‘(III) as not regularly employed during such 6-month period, and
‘‘(IV) as not readily employable by reason of lacking a sufficient number of basic skills.’’.

As to why employers would want to employ workers lacking the skills that have thus far kept them from holding a job? I don't know.

Ski Wax
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Wednesday, February 11, 2009

Thoughts on Amazon and Kindle 2

Amazon shocked the street recently as its holiday quarter numbers held up as the wider retail industry suffered through a horrible holiday season. Analysts and investors digested Amazon's reasonably strong performance favorably and tried to assess why they are succeeding while others are struggling.

As that euphoria was fading, Amazon kept its buzz strong by announcing the Kindle 2, Amazon's new and improved ebook viewer. The Kindle 2's release was anticipated after Amazon allowed the first Kindle to go out of stock during the holiday shopping season; the new Kindle will start shipping on February 24th. Many retail investors seem excited about the Kindle's prospects and some equate it with the early iPod. I think that such hopes are misguided.

The Kindle 2 is a very good product, and Amazon taking the time to upgrade it was a smart move. The new kindle is lighter, slimmer, sleeker, holds more books, can "speak" any text on the screen, has a sharper e-ink display, and still utilizes the free-forever cellular networks to quickly deliver content. The device retails for a hefty $359, but the yuppies that the Kindle is marketed to should be willing to pony up that price for the newest, coolest device.

Amazon is estimated to have sold about 500,000 of the first-edition Kindles. The Kindle 2 should surely break those numbers (rather quickly), and sales of the Kindle should help fluff Amazon's bottom line for years to come. But expectations of a game-changing device (as iPod-comparers imply) will lead to disappointment.

The iPod revolutionized how consumers accessed media. The iPod allowed consumers to carry their entire music library in their pockets for the first time ever, and there were no alternative devices at that time that performed any sort of similar function. It took a while for iPod sales to really start accelerating, and sales eventually boomed as internet speeds and music downloads (both legal and illegal) increased exponentially.

The Kindle 2 is the sleekest ebook devise on the market, but the market is much more limited than that which the iPod filled, and Kindle's market will only shrink. Virtually everyone has a few hundred songs that they'd like to be able to listen to at any time; a much, much smaller pool of people have a few hundred books they'd want to be able to read at any time. (I'm aware that the Kindle 2 can show newspapers, blogs, and more, but my point is the Kindle's less-universal appeal). Plus, netbook sales are increasing dramatically and prices are very affordable (even sometimes less than the Kindle), and some forthcoming tablet netbook will surely be able to emulate the Kindle's book-presenting abilities.

Amazon also seems motivated to sell as many Kindle 2's as possible. I have had an affiliate account with Amazon.com for years, though I have never attempted to sell products. Recently I noticed an email from Amazon announcing that Kindle commissions would be roughly double that of normal everyday sales. To me, this seems to indicate that Amazon's margins on the Kindle are fairly wide, which would obviously be good for investors. Amazon is willing to give up 10% of the cost of the Kindle to anyone who can sell one. (On a similar note, you have likely noted the hyperlinked "Kindles" littered earlier in the article; if you plan on buying a Kindle, please click one of the links above or this one here.)

I anticipate that Amazon will report good top- and bottom-line numbers over the next year as the Kindle should sell strongly; a couple million units are definitely within the realm of possibility. However, I wouldn't buy Amazon's stock on the expectation that they'll eventually sell 100,000,000 Kindles. The product is good, but the market is limited.

I also get another peek into Amazon's operations via my status as a seller on Amazon.com who is engaged in the Fulfillment-by-Amazon program. (I have discussed this program before; basically, a seller pays a fee to use Amazon's warehousing and supply chain - Amazon stores products and ships it when a customer makes a purchase).

I recently received a few emails from them about expanding my product lines within my category (sporting goods). In the most recent email, they were specific enough to suggest about 100 brands that they "want to get into FBA." Listed brands include major sporting icons like Nike, Burton and K2.

Obviously Amazon is urging sellers to expand to further their own interests, and this is a brilliant strategy. Rather than risking their own capital by buying, storing, and selling themselves, Amazon can have independent sellers do that for them and sit back, while collecting a significant chunk of revenue. Amazon charges FBA merchants a percentage of the purchase price (about 10% on average) as well as a base monthly fee, monthly storage fees (based on cubic feet of actual warehouse space used), and three fees per shipment - one base fee, a fee per item, and a fee based on total weight. Increasing FBA sales is the quickest and easiest way for Amazon to increase profits without increasing their own risks whatsoever.

I don't want my tone to suggest that I am unhappy with Amazon's attitude - the FBA program allows me to run my small business (Whacks Wax) from any internet-accessible computer. Without FBA, I would have quit selling ski wax from my bedroom became less attractive when I moved to college. If I had access to any of the brands Amazon is asking for, I'd gladly sell them through Amazon. Every experience I have had with Amazon and FBA thus far has been positive, and they are very smart for attempting to grow that segment of their business.

As a company, Amazon's prospects clearly seem positive as buyers look for deals and sellers try to make money. As a stock, these good prospects seem to be fairly factored in already, so I would neither buy nor sell shares at this point. The purpose of this article was simply to inform the public on my limited yet increased insight of some of the behind-the-scenes workings of the thriving internet retailer, and my observations indicate likely continued success for Amazon.com.

Ski Wax
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Monday, February 9, 2009

A Deflationary Mindset

Phil Gramm famously stated in July that "this is a mental recession." He followed up with further quotable remarks and some explanation of his statements (you can read a Washington Times writeup here). Dispite anything else he said, his comment implying an imagined-recession as Americans were paying $4 for gas and fearing pink slips was what grabbed media attention. Though Mr. Gramm was quickly proven wrong by economic data that confirmed the existence of a very real recession, I understood his point: The current dire warnings perpetrated by our president and media that are predicting economic catastrophe are NOT promoting a quick recovery. A consumer is not encouraged to stimulate the economy via purchases, investment, or job creation if he is being force-fed predictions of the end of the world.

Alongside the general discussion about shrinking GDP and worsening employment numbers, many observers have been debating whether the current stimulative policies will result in massive inflation or crippling deflation. Proponents of the first idea claim that the rampant creation of money (TARP, Bailouts, Stimulus Bill, etc.) will result in Zimbabwe-like hyperinflation. Though the government is creating a couple trillion dollars, I personally believe that the huge stock, commodity, housing and derivative market losses will offset this fresh money. I nevertheless strongly disagree with the recent stimulus bill (at least in its most current forms), but for other reasons. I disagree because it is full of pet projects and pork, it will surely increase America's borrowing costs over time, and it will be my taxes that eventually pay off these debts. I'd like to keep much of the money that I plan to make.

Therefore, I think that deflation is the more likely monetary problem, though the condition that I'm calling "a deflationary mindset" is the primary concern.

Capital and capital markets remain relatively frozen. Credit card and loan companies have raised lending standards, lowered lines of credit, and have generally slowed their rates of lending. Leveraged buyouts are non-existent. Many companies still holding mortgage-related assets have decided to let portfolios run-off (whereas their business model pre-meltdown was the continued accumulation of such assets).

Even more bleak and reflective of my "deflationary mindset" principle is the change in consumer purchasing habits. The savings rate has approached 3% of income over the past few (recessionary) quarters, while it averaged below 1% from 2005 through the first quarter of 2008 [graph below]. Most retailers and restaurants (excluding a few value-oriented entities) are suffering huge month-over-month and year-over-year declines in overall and same-store sales.

Frugality is in vogue.

The attitude of both boomers and younger adults has changed from overconsumption to penny-pinching - thus, my "deflationary mindset." Advertisements are now being written to appeal to cost-conscious consumers - the words "in this economy" are uttered annoyingly frequently. Recent CES and various auto shows have been scaled back in comparison to the excess of better years. Corporations are canceling purchases of jets and corporate retreats as the media started to crucify any corporation that is still actually stimulating the economy. Though this frugality is good on an individual level, and was obviously absent from American culture over the past few years, this attitude will prolong the recession as consumers are reluctant to buy their next iPod (AAPL), car (TM, GM, F, NSANY) or computer.

For the vast majority of Americans that will retain employment during this recession, low prices on consumer discretionary purchases will make consuming fun. I don't expect a long Japan-like deflationary period (mainly due to the huge government money injections), so purchase your LCD TV reasonably if you want to snag the best price.

I may one day eat my words, but I am currently not afraid of the Big Bad Recession. Obama can attempt to scare the public into supporting a bloated stimulus bill, but the economic truths are likely not as bleak as he'd have you think. Right now, spending normally (though within your means) is the most patriotic thing you can do for your country.

Ski Wax
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Thursday, February 5, 2009

The Stimulus Bill

I am disgusted with the Obama/Democratic administration's handling of the stimulus bill. Here are a few articles that can articulate why you should be upset too.

Article 1

Article 2

Thankfully, Republicans are standing firm and attempting to trim pork and make this bill a little more acceptable. If you're unhappy, let your Congressman know.

Ski Wax
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Tuesday, February 3, 2009

And He's Out...

Clearly, my disgusted post was what caused Tom Daschle to withdraw his nomination to become the Health and Human Services secretary.

I bet he wishes that Obama wouldn't have nominated him in the first place, so he wouldn't have spent $126,000 paying taxes that should have been paid years ago.

Monday, February 2, 2009

Government Employees Don't Need to Pay Taxes

An ugly fact has surfaced in the past weeks, and no entity of importance seems to care. Congress (thanks to the huge Democratic majority) looked past Timothy Geithner's $26,000 tax error that he conveniently recognized and paid back as he was being examined for Treasury Secretary.

Even worse is Tom Daschle, Obama's pick for Secretary of Health and Human Services. Daschle recently reported income and perks that generated more than $120,000 in tax liabilities, which he quickly and quietly paid. Robery Gibbs, press secretary, downplayed this blunder with a simple "Nobody's perfect."

But most people aren't criminals, and clearly Geithner and Daschle are. Obviously neither politician had any intention of paying taxes on their unreported income/perks unless they ever needed to, like when facing something like this (or an audit). I can guarantee that there are many politicians like them who inaccurately, whether purposely or accidentally, report their incomes and owe the IRS lots of money. There are also many normal Americans that also cheat on their taxes, but policymakers SHOULD be held to higher standards. As the Democrats aim to expand government with this stimulus package, why not hire a couple more people at the IRS to audit audit every Congress(wo)man's return every year?

I wish that Obama-mania would end so that Americans would be as disgusted at this as they should be. Geithner and Daschle certainly appreciate Obama's continued support, but Obama should make an example of them and withdraw his recommendations in light of these issues. If he is honestly aiming to promote change (via government clarity and accountability), allowing these crooks to hold significant offices under him is laughable. Americans need to sober up from their Obamahigh and realize that it's business as usual (if not worse than usual) in Obama's Washington.

Here's to change.

Wednesday, January 28, 2009

Russia and China Boasting

Before I had a chance to write anything more significant, I thought I'd throw up a link to this interesting article at FT.com.

China and Russia have heavily criticized Western economic policies at this year's Davos conference; not that we're perfect, but last time I checked, Russia is an authoritarian state that's also in a recession, and China's economy is grinding to a halt as our demand for cheap stuff dries up....

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Tuesday, January 20, 2009

If I had Dry Powder...

I'd be buying PNC today.

The shares are currently down 30% on general financial-sector weakness. However, (to my knowledge) there is no relevant bad news actually about PNC that has leaked today.

Other banks have reported lower earnings and bigger unrealized losses. State Street's shares have declined about 50% today after acknowledging about $9 billion of such losses.

I can't promise sunny skies for PNC, and buying National City certainly put them at a greater risk of reporting disappointing news, but for now, PNC looks like a gift today. Of course, my recommendations are never really "recommendations," and always thoroughly research your investments, but my instincts tell me that PNC's intraday decline is an overreaction.

Tuesday, January 13, 2009

Soda Stocks: Falling Flat or Plenty of Fizz?

As economic and stock market conditions continue to show little improvement, investors naturally look for safe havens to make investments. The good-times goal of appreciation of almost seems like wishful thinking; preservation of capital is the more important goal for many investors.

One usual area of perceived relative safety are consumer necessities. Companies like J&J, McDonalds, and Wal-Mart have attracted investors as stocks of more discretionary purchases (premium clothing, travel, premium restaurants) have tanked.

As an appreciator of many things fizzy, I decided to take a look at various beverage companies who may enjoy some benefits in a rough market as an area of perceived safety.

First is Coca-Cola (KO), a company that has been a longtime favorite of Warren Buffet. KO has actually fallen by an amount similar to the general market - shares are now down about 30% off of their 52-week high. Coke is one of the most recognizable brands worldwide, and shares have historically enjoyed generous valuations because of that valuable brand power. Though the stock's current PE of 17 doesn't seem cheap, it is compared to KO's 5-year average of 20. KO's PE is even higher if the time frame is expanded beyond five years; during the rougher few prior years, KO's PE was close to 30 for much of the time. (Full table here from Morningstar.com) Price-to-sales and Price-to-CF ratios are trading at similar discounts to historical levels, implying that KO could realize 30+% of upside if it were to trade back at historical valuations. In the mean time, the stock is currently yielding roughtly 4%, which isn't bad considering the pathetic yield in Treasuries at the moment.

Many parallels can be drawn between KO and Pepsico (PEP). KO's beverages do outsell Pepsi's worldwide, but Pepsico owns the valuable Lay's snackfood brands and has done well increasing sales of non-soda beverages. (Pepsi's purchase of Quaker Oats years ago brought the Gatorade brand under the Pepsi umbrella, and other drinks such as Tropicana juices are also great sellers). Pepsi is trading at cheaper valuations relative to KO and to its historical averages: PEP's PE is now 14.7, compared to a 5-year average of 20.6. PEP's P-to-S ratio is 2, compared to a historical average of 3. With strong brands providing stable sales, an investor should be able to park money in either Pepsi or Coke, enjoy respectable yields (Pepsi's is about 3%), and eventually sell the shares for a nice capital appreciation.

Looking beyond the two biggest players, there are some other noteworthy opportunities.

Cadburry spun off Dr. Pepper Snapple Group (DPS) about a year ago as capital markets were freezing and a highly-leveraged private equity buyout was no longer an option. DPS was initially sold around $25/share; after touching $27 soon after the spin off, shares sunk during general market weakness and now trade for around $16. DPS has a narrower focus than KO and PEP, with a much more limited brand spectrum and operations in only North America, Latin America, and the Caribbean. (DPS also engages in some bottling and distribution activities, while KO and PEP sell primarily syrups and let bottlers do the less profitable work). However, DPS looks very cheap compared to its two bigger peers, which may even make it a takeover target. DPS is expected to earn about $1.75/share this year, giving shares a very attractive 9 P/E. Price to sales are just 0.7, compared to PEP's 2 and KO's 3.2. Price-to-Cash Flow for DPS is just ten, providing a buyer with a steady stream of cash from its investment. With a market cap of just $4 billion, compared to KO's $100b and PEP's $80b, DPS may seem too attractive to pass up soon. (KO actually currently has $8b of cash sitting on its balance sheet, so a buyout wouldn't need any additional financing). Investing solely on the basis of expecting a buyout is risky, but DPS's fundamentals justify buy shares nonetheless.

Hansen Natural (HANS) is a maker of energy drinks, notably the Monster brand. HANS is a faster growing company than the soda makers, but skeptics often worry that energy drinks may be a fad. As a consumer, I can understand both bullish and bearish arguments about the business model - I do buy and love energy drinks, but I have cut back consumption as cheaper alternatives (coffee) exist. Also, energy drinks are becoming commoditized; I saw 99 cent energy drinks popping up in convenience stores in Pittsburgh, which should erode market share from the $2.29 Monster. HANS has done a good job of widening distribution and introducing new beverages (coffee-like drinks, etc.), but I have to believe that the growth will fizzle out eventually. Since the topic of this post is safety stocks, I'll exclude HANS - but there is a good chance that it may outperform KO, PEP, and DPS if management continues to execute well.

Lastly, I'll throw Jones Soda's name into the blogosphere. JSDA is a maker of relatively expensive, high-quality sodas. JSDA has had some successes getting their sodas into more stores, but the company isn't profitable and trades at $.38 for a reason. However, JSDA might work out as a very speculative bet. Jones Soda drinkers are often very fond of the brand, and thanks to wide distribution in Starbucks in the past, it has become somewhat of a household name. A recovery is clearly priced in as being unlikely, but if management can turn the company around, take it private, or sell out, there could be huge upside.

In conclusion, KO and PEP provide great places to park money in a wild market. DPS trades at a cheaper valuation than KO and PEP, and should recover strongly or be bought out. HANS has been one of the hottest stocks of the past half-decade, but such companies often fizzle out. And, if you're too cheap to fly to Vegas, buying JSDA might mirror betting on a single number in roulette; you'll likely lose, but any winnings should be big.

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