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Smart Phones, Smart Investments?

Andrew Snyder — Mon, 08 Jun 2009 23:07:22 +0000

The cell phone industry is making big moves today. Palm’s (NASDAQ:PPL) new phone release is taking its share price down. While speculation over Steve Jobs and the iPhone is creating its own problems for Apple (NASDAQ:AAPL).

It is a pretty dismal day on Wall Street. With thoughts of surging interest rates, an unstoppable rise in unemployment levels and bank fears remaining high, plenty of investors are taking their recent gains and heading back to the sidelines.

With the S&P plunging below the 930 level today and volatility on the rise, it is not a day to put a news release on the Street, especially if it contains less-than-stellar news.

Palm (NASDAQ:PALM) is learning the lesson the hard way today. After releasing its highly anticipated Pre over the weekend and promptly selling out of just about every phone it had available (about 50,000 units), its shares are down by close to 10%.

The hot-selling left 15,000 Pre buyers on a waiting list, but it is opening Palm to increased pessimism. Investors are worried the company will not be able to deliver phones to the market fast enough to fight off fierce competition from rivals, especially strong market leaders like Apple (NASDAQ:AAPL).

There is likely nobody sweating Palm’s productions problems more than Sprint (NYSE:S). The company has just six months to be the exclusive seller of the Pre phone. After that, Verizon (NYSE:VZ) and its army of wireless customers will have access to the product.

Customers that do not get locked into Sprint’s network between now and then will have ample opportunities to check out Verizon’s offering. Sprint needs Palm to deliver every phone it can.

Is the Apple ripe?

Then, of course, there is the 800-pound gorilla, Apple’s iPhone. The phone with a seemingly unlimited amount of downloadable applications has taken the market by storm, making Apple a dominant player in the cell-phone market, a notion that was unthinkable just a few years ago.

But it proves one heck of a good point.

The cell-phone industry is product driven. Produce a high-demand product and a company can be catapulted to the top of a fickle industry. Just because Apple is in charge now, does not mean it will stay that way.

It will be interesting to see what the next generation of the iPhone will bring. Fortunately, we will find out soon enough. Apple and its conference are generating plenty of headlines this week.

As investors, there are multiple ways to play the situation. With volatility on the rise, well-played options contracts will certainly lead to strong profits. But even without the leverage of derivatives, investors can expect to have multiple double-digit profit opportunities.

Palm may be down by 9% today, but the move is certainly not finished. One hint of positive news could reverse the action. Or a single press release can turn it into a long-term trend.

Apple is teetering as well. The iPhone has created a lot of buzz. It will be hard for the company to live up to current standards if the economy does not make the fast rebound that was priced into the markets over the last few weeks.

And then, of course, there is always the risk associated with Steve Jobs’ health. Talk about a wild card.

The point is today’s action has created multiple trading opportunities. Take advantage of big, psychological market swings. In the long run, the market is rational and will work itself out. But all too often (like today), emotions make for wicked short-term mistakes.

Take advantage of them.

Source: Smart Phones, Smart Investments?

Looking Back

Christian Hill — Thu, 05 Mar 2009 18:17:52 +0000

Being a writer in the financial industry means that your words often come back to haunt you.

No matter how strongly you feel that a stock is going to go up, the minute you put the words to paper, your performance as a stock-picker is there for the entire world to see.

Over the last few months, this has been painfully obvious. The market has gone down the toilet, and our picks and recommendations that we all made a few months ago have likely taken it on the chin, unless it was a bearish recommendation.

I wrote a piece for our sister publication Early to Rise back in early December that suggested it was time to buy shares in some household names that were at the time trading at very low prices. With the absolute carnage in the markets since then, I was sure that the picks I gave were probably down at least as much as the market over that time, maybe a little worse, given some of the names on the list (such as AIG, which took a third government handout on Monday).

Sure enough, there are some ugly numbers on the list. Alcoa (NYSE:AA) is down 32 percent since I made the list, Citigroup (NYSE:C) is down 68 percent, and AIG is down 71%. By comparison, the Dow is down 14.98 percent over this same time period.

Happily, some names on the list have made large jumps since then. Yahoo (NASDAQ:YHOO) is up 34 percent, Sun Microsystems (NASDAQ:JAVA) is up a little over 47 percent, and the big mover is Sprint (NYSE:S), which is up almost 90 percent since then.

To get an overall idea of how you would have done had you invested in the picks, I totaled the share prices for all 16 picks that day and compared them to prices on March 2. You would have spent $84.03 to buy one share of all 16 picks (excluding commissions). Had you sold them this past Monday, you would have gotten roughly $84.54. That’s a small profit, but remember the overall market is down 14.98 percent in the mean time.

Not only would you have beaten the market, but you would have managed to make a small gain. Not too bad in this market.

Looking back at the list, I wouldn’t really change anything. I mentioned that they were speculative plays, and with that, large losses can occur. I would still encourage buying these names, as almost all are still viable companies (AIG is questionable) and still have tremendous upside. Those that have dropped further have even less downside assuming they manage to survive (AIG).

As I mentioned in the original piece, I don’t suggest buying huge amounts of shares, but perhaps picking 10 of the companies and investing $500 into each one. You will only have $5000 invested, and the upside could be huge.

Source: Looking Back

Black Monday Brings Massive Layoffs – Economists Say Some Jobs Could be Gone for Good

Don Miller — Wed, 28 Jan 2009 15:00:05 +0000

The unemployment picture took on an even more ominous tone this week as new layoffs emphatically underscored a worsening global economy. Now, fear is rising that the losses represent a major restructuring in the business world and that some, if not most, of the jobs are gone forever.

Monday began with several European companies, including electronics giant Philips (PHG) and insurance and banking conglomerate ING, announcing job cuts of 6,000 and 7,000 employees respectively.

The gloomy start to the workweek quickly turned into a bloodbath as more than 75,000 jobs were lost in a single day, when a who’s who of U.S. household names launched a gauntlet of layoffs:

● Sprint Nextel Corp. (S), the wireless phone carrier said it is eliminating about 8,000 positions in the first quarter.

● Caterpillar Inc. (CAT), the world’s largest maker of mining and construction equipment, is in the process of shedding about 20,000 jobs.

● Pharmaceutical company Pfizer Inc. (PFE), is buying rival drugmaker Wyeth (WYE) for $68 billion, and said it would cut 8,000 jobs as part of the merger strategy.

● Home Depot Inc. (HD) the home-improvement retailer said it was closing four small business units, trimming about 7,000 jobs in the process.

● General Motors Corp. (GM) said it will cut 2,000 jobs at plants in Michigan and Ohio.

● Texas Instruments Inc. (TXN), which makes chips for cell phones and other gadgets, said it will axe 3,400 jobs.

And the bad news continued yesterday (Tuesday) as Owens Corning (OC) said it is cutting 3,500 jobs, or 13% of its payroll.
It was a stark reminder of how rapidly the recession is claiming jobs. Already 170,000 jobs have been lost in January. The U.S. economy lost 2.6 million jobs in 2008.

Moreover, a growing number of economists say the U.S. has only reached the halfway mark of job losses expected for this recession.

“Some of the worst job losses are ahead of us, not behind us,” Wells Fargo & Co. (WFC) senior economist Scott Anderson told USA Today.

Anderson expects 3 million Americans to lose their jobs in 2009. Approximately 2.6 million were cut last year – the most since 1945, the final year of World War II. The layoffs are happening in “all industries in all areas of the world,” Anderson says.

The worst news, though may be that the U.S. economy is not just shedding jobs temporarily, but is undergoing a fundamental restructuring process that will eliminate some types of jobs for good.

“They [represent] structural, not cyclical, changes to the economy,” Peter Morici, a professor at the Robert H. Smith School of Business at the University of Maryland told BusinessWeek. “We’re looking at a permanently smaller economy with prolonged unemployment at an unacceptable level.”

Morici says that housing, real estate, automobiles, finance, and retail sectors are resetting to “permanent lower levels” of employment.

Mike Montgomery, an economist with IHS Global Insight, asserts that many jobs in autos, manufacturing, apparel, and textiles aren’t coming back. Those industries “have been in a long-term decline, and the recession is knocking them out.”

Jobs began disappearing in home building and mortgage operations early in the recession, then across finance and banking more generally. Now the ax is falling across large swaths of manufacturing, retailing and information technology sectors.

The news ratchets up the pressure on the Obama administration and Congress as lawmakers debate an $825 billion stimulus package intended to save or create millions of jobs.

“These are not just numbers on a page,” President Obama said citing the layoff announcements in remarks Monday. “As with the millions of jobs lost in 2008, these are working men and women whose families have been disrupted and whose dreams have been put on hold.”

The House of Representatives will vote on its version of the bill today (Wednesday), and Senate committees will begin pulling together a companion bill this week.

But Obama’s stimulus package is based largely on an estimate that the unemployment rate will rise to between 8% and 9% this year, according to the proposal summary from the House Appropriations Committee. If unemployment soars into double digits, as some economists expect, the financing may not be enough.

Many economists see the nationwide jobless number rising to at least 9% this year, possibly reaching double digits in 2010. Thirteen states are already above the national average of 7.2%, with Michigan (9.6%), Rhode Island (9.3%), California (8.4%), and South Carolina (8.4%) topping the list.

But as Money Morning reported Monday, the government’s recently released official unemployment number of 7.2%, already vastly understates the number of jobless Americans because it fails to account for “discouraged” and “unattached” workers who have given up even looking for work.

Our research further indicates that if the number included unemployed farm and self-employed workers, “real” unemployment levels would approach 18%. Whatever the unemployment number is, the new administration’s stimulus plan is the only glimmer of hope for newly laid-off workers.

While stimulus spending on public works may take some time to get going, some companies could bring back displaced workers quickly if the government initiative generates new orders.

And because many businesses were already operating with a lean workforce when the recession began, there is some hope they will fill vacated positions when the economy improves.

“The vast majority of the job loss is strictly short-term,” said Global Insight’s Montgomery. “When consumer demand and sales come back, the jobs will come back.”

But as Univeristy of Maryland’s Morici contends, many companies may not rush to increase staffs even if business begins to pick back up. “We are very early in the cycle,” he said. “We are going to see the fury of the Old Testament for what we have done to the economy.”

Source: Black Monday Brings Massive Layoffs – Economists Say Some Jobs Could be Gone for Good

A Value Investor Looks at China

Vitaliy N. Katsenelson — Thu, 14 Aug 2008 21:57:30 +0000

China is all the rage for the next few weeks as the Olympics are going on. Many are calling this China’s time to showcase itself to the world. I have a lot of friends and analysts who are big China bulls, believing that the next few years will see continued high growth in China, although less than the above 10% of the past few years.

What do Starbucks (NASDAQ:SBUX) and China have in common? A lot! Both got us hooked on consumption: one of fancy, expensive caffeinated liquids; the other on cheap foreign made goods. Both have defied the conventional wisdom – they grew faster and longer than common sense told us was possible. They also share another striking commonality: both are suffering from late stage growth obesity (LSGO).

The Starbucks story

With the beautiful benefit of hindsight we know what happened to Starbucks – it grew too fast, opened too many stores, and sacrificed its own standards to meet unrealistic targets. The company first claimed that it only had a few hundred stores that it needed to close, and then the few hundred spilled into six hundred. Weak consumer spending will likely push Starbucks to re-examine its store count again, doubling or tripling the store closures.

Starbucks percentage of new stores growth in 2007 was only slightly lower than it was in 1999. But in 1999 it had 2,000 stores; in 2007 it was pushing a 10,000 company owned stores mark. Let’s put this in perspective: in 1999 Starbucks opened 447 stores – 1.8 stores per working day; in 2007 that number more than tripled to 1,403 stores a year – 5.5 stores per working day. At this level of growth physical limitations come in: there is only so much real estate that fits a company’s criteria at a certain point in time. Management started sacrificing on the quality of their decisions, compromises were made that were unthinkable several years before. Stores were opened too close to each other or on the wrong side of the street, expensive leases were signed, they even hired baristas that would have fit in better at McDonalds (NYSE:MCD) – you get the idea.

Unfortunately the present and the future will pay for the decisions of the past: stores will need to be closed, long-term leases terminated, charges taken, corporate costs created in hopes of high growth eliminated, and corporate culture of partnership strained by barista layoffs.

Starbucks needs to go on a permanent growth diet (at least in the US), and realize that it has the metabolism of a 37 year old and can digest fewer new stores. By tightening its standards for opening new stores the company will be on the way to recovery, though at slower growth. Starbucks is blessed with financial strength, capable management and unbelievable brand. If management admits to themselves that the heydays of growth are behind, recovery should be fairly painless. Starbucks generates tremendous operating cash flows, which in the past were completely consumed by opening new stores. If the company were to go on the LSGO diet, its capital expenditures would decline and free cash flows balloon – the value unlocked.

But this discussion is not about Starbucks, it is about what is taking place in China.

The Great China story

The benefit of hindsight that provides clarity in analysis of Starbucks today is not there for China, at least not yet. But if you were to open your mind and look past today’s cheery newspaper headlines you’d see that China is suffering from a severe case of LSGO.

Ten for ten. Since 1998 its GDP has grown at about a 10% annual real growth rate, and its economy more than tripled in size (in real terms). There were no recessions, just expansion – the Chinese miracle growth? The origins of China’s tremendous growth are well known: large population migrating from low (farming) to higher productivity (manufacturing) activity, cheap labor, a capitalism-friendlier communist government, and insatiable demand from the US and the rest of the developed world for cheap goods.

Unlike Starbucks – a private enterprise that has free market principles deeply inbred in its DNA – China is a communist country. Though it is moving towards free market capitalism, it is not there yet. The rule of law is weak, the country infested with corruption, and due to central planning and tight government control of the banking system capital is often allocated based on cronyism (or political relationships) not merit.

Prolonged high growth in this environment results in inefficiencies that are compounded year after year. In other words, though the growth is high, the quality of growth is low, thus asset allocation decisions are likely to be poor. The ten year super-high growth marathon put China at high risk, actually more likely of a certainty, of a severe case of LSGO.

From today’s perch we can only guess of the consequences of LSGO, but we’ll gain that clarity after the fact – a luxury we don’t have. Newspapers that are praising the Chinese growth miracle today will write exposes on what went and is going wrong in China.

I have absolutely no facts to back up what I am about to say, but it is not hard to imagine future stories about poverty stricken farmers that moved to big cities for a better life and found despair; or that inland migration (from farming to factories) only brings a onetime productivity jump as poorly educated farmers-turned-factory-workers add little to productivity improvements afterwards; or how weak and debt ridden the financial system is; or the devastating impact that pollution has on health and productivity; or how the biggest shopping mall in the world, that happens to be in China, is almost completely empty.

Oh wait, the story about the shopping mall is not a figment of my imagination (I am not that good) but has already taken place. In 2005 NY Times ran an article titled China, New Land of Shoppers, Builds Malls on Gigantic Scale, it talked about the biggest shopping mall in the world that happened to be in Dongguan, China. The article said:

“Not long ago, shopping in China consisted mostly of lining up to entreat surly clerks to accept cash in exchange for ugly merchandise that did not fit. But now, Chinese have started to embrace America’s modern “shop till you drop” ethos and are in the midst of a buy-at-the-mall frenzy…. by 2010, China is expected to be home to at least 7 of the world’s 10 largest malls… Already, four shopping malls in China are larger than the Mall of America. Two, including the South China Mall, are bigger than the West Edmonton Mall in Alberta, which just surrendered its status as the world’s largest to an enormous retail center in Beijing.” (emphasis added)

Fed Set to Keep Interest Rates on Hold

Christian Hill — Tue, 05 Aug 2008 12:07:12 +0000

Christian Hill at Investors Daily Edge looks ahead so some important data releases and earnings reports this week. Top of the bill is today’s Fed meeting, where Bernanke & Co are almost certain to keep rates unchanged…

There is no shortage of important reports this week, but the attention will definitely be on the FOMC Policy Meeting later today. As it stands, there is a 90 percent chance that the Fed will keep the Fed Funds rate the same.

While the Fed tries to get a handle on where the economy is going, I wouldn’t expect them to make a change. After all, Q4 2007 GDP was just revised down quite significantly, so I am not sure the Fed knows what to do now.

Also today, the ISM Services report for July comes out at 10:00 AM. Expectations are for a slight decline to 48 versus the June reading of 48.2. A reading over 50 represents expansion and anything below 50 marks contraction. Since this report measures purchasing expectations from financial, insurance, and communications companies, a decline should be no surprise. These sectors are still struggling with the current economic conditions, and are unlikely to be purchasing anything other than boxes of tissues.

Thursday sees the release of the June Pending Home Sales report. The market expects a decrease of over one percent from May, signaling no end in sight to the real estate collapse. With lending getting tougher, home buying will likely suffer a little while longer.

Earnings Calendar:

Tues: Cisco Systems, Inc. (CSCO), Proctor & Gamble (PG)

Wed: American International Group (AIG), Quest Communications International (Q), Sprint (S), Time Warner Inc. (TWX)

Thurs: Toyota Motor Corp. (TM)

Source: The Fed Lurks on Tuesday, Earnings Reports Slow Down

Ride Out a Bear Market… and Come Out Richer in the End

David Newman — Fri, 01 Aug 2008 13:28:24 +0000

Right now, stocks look uglier than the Wicked Witch of the West having a Bad Hat Day. So what do you do if you’re convinced we’re in a bear market…and stocks may be at today’s levels two to three years from now?

Here are your options:

1) Take your lumps. Say you can’t really predict the markets, and lose 20% to 30% of your portfolio’s value over the next few months (or years). Tell yourself you’ll eventually ride the recovery, and after all is said and done you’ll average 10% a year or so (6% or so after inflation). Accept that’s the best you can do.

My verdict: Hogwash. You don’t have to leave your money prone to the big dips. You may not be able to predict every crest and ebb of the market, but you can spot the big trouble heading your way like a pack of sharks, and have the prudence to swim to safer waters.

2) Go to cash. This is where you throw in the towel, accept 2% to 3% yields on safe cash (although you’re losing money in inflation-adjusted terms). You wait until you hear the “all clear” signal, and then you cautiously head back into the markets.

My verdict: This choice makes some sense, except the “all clear” signal never sounds as “all clear” as you like. Sometimes the “all clear” can be a false rally, or just another landing on a long flight of stairs down. Or you can wait so long for the rally to be verified that you miss the most compelling values the bear market created for you. We think it’s better to stay invested, but stick to the best value markets and sectors.

3) Opt for dividends. Dividends make up around 33% of long-term total returns of the market. So the wise ones in the investment world say you should always go for dividends.

My verdict: It’s not always as wise as it sounds. Buffett has never paid a dividend and rightly so. He can reinvest the earnings far more profitably for you than pay them to you in a taxable event. So why not let him? His reinvestments, when done well, will show up in increasing retained earnings and in a greater store of income-producing assets bought with those earnings. Microsoft, similarly, never paid a dividend for 20 years while it was making its investors the biggest returns.

Also, lately blue-chip companies from Sprint (NYSE:S) to GM have been slashing their dividends to generate some emergency cash. (Last week, Wachovia (NYSE:WB)announced they’re cutting dividends to five cents a share to help raise US$5 billion.) So dividends are dandy, but they’re not the whole story – especially when companies are taking their dividends back.

So I say, if you can find value with a high dividend during a bear market, take it – particularly if it’s a guaranteed dividend that a company can’t take away when times get hard. The regular cash payments will help you tolerate the ups and downs of the share price.

4) Take advantage of extraordinary opportunities for high income now. There are certain structured vehicles that will pay far more than even the best dividend paying stocks. In fact, you can collect 15% and 13% on investments related to Apple (NASDAQ:AAPL) and Home Depot (NYSE:HD). You don’t get any of the upside, but that’s okay. You’re not trying to swing for the fence here. You’re bear market investing. The main premise is there isn’t going to be much of an upside if any at all! And your downside is reduced. On many of these investments, the stock has to fall 20% or even 40% before you risk loss. But you collect 10%, 15%, or 20% in cash all the while, as the market gyrates.

My verdict: This is the best option by far.

Lately, I’m researching some of the special “extreme dividend” payers that give you all the benefits of these extraordinary opportunities. They pay far more than the best dividend blue-chips. Plus, unlike Wachovia or Sprint, these extreme dividend payers can’t stop paying you dividends anytime soon.

These types of extreme dividend payers may not be for everybody, but they sure make a lot of sense if you’re looking for continued income throughout this bear market.

Guaranteed Cash Payments, Low Initial Cost, and
100% Investment Protection

As I mentioned, these payers pay out huge “cash dividends” delivered directly to your account every month. All of these extreme dividend payers require very low initial investments. Many offer full, 100% investment protection from any losses.

How about “win – win” investments? If the stock goes up you win…it goes down you still win. Plus, these investments are great for your IRA.

I’ve only found one drawback to this type of investing. It’s that some of these investments have longer holding periods (2 -5 years). But many are totally liquid and are traded on the major U.S. exchanges, so you can easily avoid holding them that long.

Moral: Don’t just duck your head in cash or take your lumps in this market. Instead, go far outside the mainstream for greater protection, and guaranteed income with these incredible opportunities.

DAVID NEWMAN, Market Analyst

Source: Ride Out a Bear Market… and Come Out Richer in the End

Global Investing Roundups Tuesday, May 6, 2008

William Patalon III — Tue, 06 May 2008 16:54:20 +0000

U.S. Service Sector Shows Signs of Life; Morgan Stanley to Slash More Jobs; Random House to Turn the Page on Chief Executive; Countrywide Rated “Underperform”, Shares Dive; Sprint Nextel Corp. Considering Spinning Off Nextel; Warren Buffett’s Warning; Principal Financial Slumps; Wal-Mart Widens Drug Plan Scope

The U.S. service sector grew in April for the first time in four months, Reuters reported. The Institute for Supply Management said yesterday (Monday) that its non-manufacturing index was 52 in April, up from 49.6 in March. ISM’s jobs gauge for the sector posted its biggest improvement in seven months, however, inflation pressures remain at their highest in five months.

Morgan Stanley (MS) will reduce another 1,500 employees from its securities-firm workforce, CNBC reported. The company rebounded in the first quarter of 2008, reporting net income of $1.5 billion, but business conditions remain weak and profit margins are tight throughout the securities business.

Shares of Countrywide Financial Corp. (CFC) fell almost 15% yesterday (Monday) after a report from Friedman, Billings, Ramsey & Co. suggested that Bank of America Corp. (BAC) back out of its takeover. The report lowered Countrywide’s price target to $2 a share, down from $7, and cut its rating to “underperform” from “market perform,” Bloomberg reported.

Sprint Nextel Corp. (S) is considering spinning off its Nextel unit, The Wall Street Journal reported, citing sources familiar with the matter. In 2005, Sprint bought Nextel Communications for $35 billion. Cyren Call, a company founded by Nextel co-founder Morgan O’Brien, is trying to reel investors to buy Nextel from Sprint.

Warren Buffett spoke to a record 31,000 shareholders at Qwest Center in Omaha, Nebraska on Saturday for Berkshire Hathaway Inc.’s (BRK.A, BRK.B) annual meeting. “There is absolutely no question” that Berkshire’s returns will decline, Reuters reported Buffett said. “Anyone that expects us to come close to replicating the past should sell their stock. It isn’t going to happen. I think we’re going to get decent results over time, but we’re not going to get indecent results.” Both classes of Berkshire Hathaway stock slumped over 2% yesterday (Monday).

Late yesterday (Monday) afternoon, Principal Financial Group Inc. (PFG) announced first quarter revenue fell to $2.5 billion from $2.66 billion for the same period last year. The results were below mean analyst expectations of $2.87 billion, Thomson Financial reported. Shares slumped 74 cents, a 1.28% decline, to close at $57.18 after the announcement.

Wal-Mart Stores Inc. (WMT) announced yesterday (Monday) that it would expand its generic prescription drug program to cover over 1,000 over-the-counter medications for $4 or less. “We expect that today’s extension will generate additional pharmacy volume for the company, especially given the current weak consumer environment and rising health-care costs,” wrote Uta Werner, a retail analyst with Sanford C. Bernstein & Co, in a research note, Reuters reported.