Friday, December 23, 2011

Will Tesla Take Large Chunk of Market Share From Traditional Automakers?

Long-time readers will notice that this is the first time I have commented on the electric car company Tesla Motors (NASDAQ: TSLA).  Its CEO and Product Architect is Elon Musk, a Co-Founder of PayPal.  Of course, PayPal was sold to Ebay for US$1.5 billion, allowing Elon Musk to start Tesla Motors and SpaceX.

For a time, Tesla was an extremely niche player.  By selling only the US$100,000 Roadster (and in limited quantities each year) there was little earnings growth potential.  However, that is all about to change in 2012.  Tesla's lower-cost Model S is scheduled to begin deliveries in mid-2012.  The base price is a much more affordable US$49,900 (after US Federal tax credits).  Interestingly, this price point was first announced by Tesla in 2009.  For investors who have never heard of Tesla before, the ability of the company to stick to a promise it made 3 years ago shows credibility.

The Model S' battery allows you to drive 300 miles on a single charge.  That is 7.5 times longer than the Chevrolet Volt's 40-mile range.  The Model S goes from 0-96 kph in 5.6 seconds.

It is because of the huge expected increase in volume (as a result of the Model S) that TSLA was able to trade very close to its 52-week high, by staying at about $34 in late November and early December, when world markets were hammered by the euro zone debt crisis and the weak U.S. economy.

TSLA has two major advantages over the traditional automakers:

1) Marketing by Elon Musk

As a colleague of mine who is a car enthusiast pointed out, marketing is everything in the auto industry.  For example, BMW has grabbed significant mindshare with its ConnectedDrive commercials on TV and Youtube.  In fact, the next vehicle I purchase will most likely be a BMW (either 1 series or 3 series)  unless I go for the Chevrolet Volt or even the Tesla Model S.

With Elon Musk, widely referred to as the "Iron Man" of our time, as Tesla's CEO and Product Architect, he has the ability to out-market nearly every other automaker.  It's not simply creative commercials.  Appearing on various magazine covers, as he has done in the past, would certainly help sales.

2) Dominating Electric Vehicles

As my car-enthusiast colleague pointed out, the auto industry is characterized by Toyota's obsession to ensure that the Camry remains the leader in its category, while Honda is similarly obsessed over Civic staying ahead of the Corolla and the Elantra.  Thus, these traditional automakers simply don't have the focus needed to make a strong push in electric cars.   

The only exception is Nissan-Renault.  In fact, some believe it's the only real competitor to Tesla (ignoring GM and its Volt).  The Nissan Leaf has gained quite a bit of mindshare, thanks to its marketing.  Thus, Nissan-Renault will likely be able to be very competitive against Tesla.  However, it is nearly impossible to see how Nissan could have better marketing than what Tesla's ultra-famous and super-popular Elon Musk can muster.

Partnership With Toyota

Tesla Motors is benefiting from a partnership with Toyota.  This partnership actually validates my suggestion above that most of the traditional automakers are too focused on their traditional models to make much of an impact in electric vehicles.  While some might consider Toyota a pioneer in hybrid vehicles with the Prius, it had to partner with Tesla to get its electric packs for future Toyota electric cars.  Partnering with the automaker that was recently number 1 in the world in volume allows Tesla to earn additional revenue.

Looking Ahead to mid-2012

Tesla is expected to post losses for 2011 (adjusted EPS of -US$2.175) and 2012 (adjusted EPS of -US$1.900).  But the number to watch for is sales.  It's expected to increase from $203.5 million in 2011 to $550.333 million in 2012, an increase of 170.43%.  This number alone is likely the reason why the stock has held up relatively well amid the horrendous stock market this year.  As Tesla offers additional models (another one is expected in 2014) revenue will only increase further.

I will be test driving the Roadster within the next three weeks, and will be posting an article after.  If any of my readers follow Tesla, please leave a comment to let me know what you think about their products.

Sunday, December 4, 2011

US Markets Post Largest Weekly Gains Since March 2009

US markets edged lower on Friday, after posting their largest percentage weekly gains since March 2009. On Friday, the S&P 500 closed lower by 0.30 point or 0.02% to 1,244.28. The Dow slipped 0.61 point or 0.01% to 12,019.42. For the week, the S&P 500 soared 7.4%, while the Dow climbed 7%.

US Unemployment Falls to Lowest in 2.5 Years

On Friday, November US unemployment rate was lower than expected, as it fell from 9% to 8.6%. It was the lowest level in 2.5 years, and it beat the lowest estimate from a Reuters poll of 67 economists, which was 8.9%.

6 Central Banks Add Liquidity to World Financial System

On Wednesday, as banks in Europe faced a liquidity crunch due to their exposure to euro zone debt, 6 Central Banks added US dollar liquidity to the world financial system. In addition, China slashed its RRR (reserve requirement ratio) for banks by 50 basis points. As a result, the Dow rallied 400 points on Wednesday.

Looking Ahead to Next Week

On Monday, French President Nickolas Sarkozy will meet with German Chancellor Angela Merkel to discuss changes to the EU Treaty. On Friday, the 27 members of the EU will have to vote on the changes in a summit. With Italian and Spanish 10-year yields close to the unsustainable level of 7%, investors have pegged Friday the 9th as the last day to save the euro zone.

With such important developments occurring next week, markets will likely be extremely volatile. Since the debt crisis started in early 2010, EU leaders have shown time and time again that they are indecisive. Thus, markets could head lower in the early half of next week if euro zone leaders are unable to quickly reach agreement. However, if they are able to reach a deal on Friday, world markets will likely soar. If leaders in Europe are unable to reach a deal on Friday, it becomes more likely that the ECB will have to conduct a massive round of quantitative easing to save Italy and Spain.

Tuesday, November 29, 2011

RIM Surges 9% on Bernstein Upgrade and Birinyi Interview

Shares of RIM surged 8.15% intraday in Toronto (9% on the NASDAQ) and closed up 5.53% at C$17.95.  Analyst Pierre Ferragu from Sanford Bernstein upgraded the stock to a "hold" from "buy" today.  However, that upgrade alone likely would have resulted in a 3% rise in the shares.  More importantly, Laszlo Birinyi from Birinyi Associates said on CNBC that RIMM was one of his top 5 picks for 2012.

Just yesterday, Shaw Wu of Sterne Agee downgraded the stock from "buy" to "hold".  Meanwhile, Gus Papageorgiou reiterated an "outperform" rating on the stock, and said it was "absurdly oversold".

Looking Ahead to Q3 Earnings on December 15th

During RIM's Q2 earnings conference call, sell-through was an incredibly strong 13.7 million units.  In addition, even though BlackBerry 7 smartphones had been available for less than a month in Q2, sell-through for the new devices were very strong.  With the well-designed and popular Bold 9900/9930, RIM likely shipped at least 12.5 million smartphones in Q3.  The availability of the Bold 9900 at AT&T also likely provided a boost to shipments.  With Q3 having ended on November 26th, shipments also benefited from the launch of the Bold 9790 in Indonesia on November 25th.  Thus, it would be reasonable to expect the shares back in the high $20's and low $30's in 3 months.

Sunday, November 27, 2011

US Markets Fall on Trio of Euro Zone Downgrades

North American markets fell for a 7th consecutive day on Friday. Markets were plagued by bad news for the entire week, as Portugal, Hungary and Belgium were downgraded. After a shortened session on Friday, the S&P 500 fell 3.12 points or 0.27% to 1,158.67. The Dow lost 25.77 points or 0.23% to 11,231.78. For the week, the S&P dropped 4.7%.

Trio of Downgrades

On Friday, S&P downgraded Belgium from AA+ to AA because of concerns about funding and market pressures. In addition, Moody's downgraded non-euro zone member Hungary's rating, from Baa3 to the junk rating of Ba1. Earlier in the week, Hungary had asked IMF and the EU for assistance. Furthermore, on Thursday, Fitch downgraded Portugal from BB+ to the junk rating of BBB-.

Italy and German Auctions Disappoint

On Thursday, Italy auctioned $10 billion euros of half-year and 2-year bonds. The yield was 6.504% and 7.814% respectively, about 300 basis points above last month's auction.

On Wednesday, Germany planned to auction $6 billion of 10-year bonds. However, it was only able to auction $3.6 billion. It was considered a disaster by investors, and the yield on 10-year German debt rose to 2.08%, a rise of 7%.

Looking Ahead to Next Week

With the trio of downgrades this week, the situation in the euro zone is dire. The biggest fear since the debt crisis started in early 2010 has been contagion, and it appears that has occurred, with Italy and Spain needing imminent help from the EU and IMF. The inability of the U.S. Senate supercommittee to reach an agreement has not helped markets this week.

However, promises by Germany and France to take drastic action could provide markets with a temporary lift next week. In addition, Black Friday retail sales is believed to have been strong, which could provide a lift. With the beating the market has endured in the past two weeks, it does not take much good news to send markets temporarily higher. As the euro zone crisis continues and more quantitative easing is needed, gold is likely to increase in price.

Sunday, November 6, 2011

Apple Stumbles With Battery-Gate and Siri Server Crash

With the launch of the iPhone 4S, Apple is stumbling in a similar fashion to the way it did when it launched the iPhone 4 last year. While last time there was Antennae-Gate, this time there are Battery-Gate, Yellow-Gate, iOS Error 3200, among other problems.

For Battery-Gate, many users have reported that the battery lasts only for 4 hours, even with minimal use of the phone. In terms of Yellow-Gate, many users have reported yellow spots on the screen. This actually occurred with the iPhone 4 as well in 2010. Apple admitted to the problems in the middle of this week, but said that a fix would be weeks away.

Adding to the quality issues, Siri was down for an entire day this Wednesday, when its server crashed. This was in addition to problems users outside the U.S. have had with Siri, in which the location features do not work. Apparently when Apple engineers were testing the iPhone 4S, they only tested the device in Cupertino, California. Thus, they were not aware of the fact that Siri's location features do not work outside the U.S.

Revaluing Apple?

Samsung recently surpassed Apple in the smartphone industry with its latest quarterly earnings report. Samsung sold 23 million smartphones in its latest quarter, while Apple only sold 17.1 million. With Wall Street's preoccupation with being number 1 in the smartphone industry, Apple falling behind Samsung will likely cause its shares to be revalued. However, with people still lining up for Apple products, the big question is not if the shares will be revalued, but when.

Analysts Displaying Herd Mentality to the Extreme

At a time when 49 out of 54 analysts covering Apple have either a Buy or Outperform rating on the shares, they are clearly displaying herd mentality. The analyst from BGC is perhaps the one investors should pay attention to, since he downgraded Apple to a Hold just before the company announced its latest quarterly earnings, and the shares subsequently fell 7% after-hours.

Apple Has Lost its Magic

Antennae-Gate in 2010 taught investors that Apple products were no longer perfect. It also caused many institutional investors to dump the shares, though many other institutional investors bought the shares when the PR nightmare was over.

At a time when many of Apple's customers are in their 50's and 60's, and buying Apple products in the hope of being “cool”, the company has clearly reached its peak. With Steve Jobs gone, Samsung having surpassed Apple and a long list of problems plaguing the iPhone 4S, Apple's magic has diminished. Its shares will be revalued by Wall Street soon enough.

US Markets Fall For 1st Time in 4 Weeks

U.S. markets fell on Friday ahead of a confidence vote on Greek Prime Minister George Papandreou. On Friday, the S&P 500 fell 7.92 points or 0.65% to 1,253.23. The Dow lost 61.23 points or 0.51% to 11,983.24. For the week, the S&P 500 fell 2.5%, while the Dow dropped 2%. The retreat in markets broke 4 consecutive weeks of gains.

U.S. Data Fails to Inspire Optimism

On Friday, the U.S. Labour Department reported gains of 80,000 non-farm jobs in October. It was worst than the 95,000 that the market expected. While the government shed 24,000 jobs, the private sector added 104,000 positions.

Even though the unemployment rate fell in October to 9% (from September's 9.1%) it was not a big enough drop to lift markets.

Greece Takes Markets on Roller Coaster Ride

Greek Prime Minister George Papandreou survived the confidence vote on Saturday. Today, he agreed to a deal with the opposition to form a coalition government to pass the $130 billion euro bailout package, before early elections take place. However, investors have lost a lot of confidence in Greece after George Papandreou tried to take the bailout package to a referendum. Investors will be weary of any setbacks in Greece in the near future.

Italy Now in Focus 

Investors are increasingly troubled by Italy, as the yield on the country's 10-year bonds closed at 6.37% on Friday. It was an increase over the previous day's close of 6.194%. If the yield remains over 6%, investors would become increasingly concerned since it is considered unsustainable, and could force the country through the same debt crisis as Greece.
On Friday, Italian banks UniCredit and Intesa SanPaolo, heavily exposed to Italian soveriegn debt, fell 6.6% and 4.8% respectively. Italian Prime Minister Silvio Berlusconi, who turned down a funding offer from the IMF, placed the country under IMF financial supervision on Friday.

MF Global Goes Bankrupt

MF Global declared bankruptcy this week, as the brokerage had billions in PIIGS sovereign debt. The market then began speculating on the next brokerage to go under. Shares of Jefferies Group fell 7.4% on Friday, and lost almost 20% this week. The company had to issue a statement to say that it had a very small exposure to Portugal, Italy, Ireland, Greece and Spain.

Looking Ahead to Next Week

Volatility will remain the name of the game next week, as investors evaluate developments from Greece and monitor the situation in Italy. For the next few weeks, it will likely be a tug-of-war between improving US economic data and the euro zone debt crisis.

The situation in Italy will have a significant effect on markets. Ever since the debt crisis began in Greece in early 2010, contagion was the biggest concern. As the yield on 10-year Italian debt remains above 6%, investors will brace for a significant shock to markets.

As gold remained firmly above US$1,700 this week and gold miners reported increasing margins, I sold about 75% of my positions in Barrick and Goldcorp (at C$52 for both). Once the shares pull back, I will add shares at around C$47.

Sunday, October 30, 2011

US Markets Surge on Europe Deal and Economic Data

U.S. markets rose on Friday on relief over the European debt deal and strong corporate earnings. Markets cheered the euro zone's Thursday agreement. In addition, Merck and Chevron beat expectations with earnings.

On Friday, the S&P 500 rose 0.49 point or 0.04% to 1,285.08. The Dow rose 22.56 points or 0.18% to 12,231.11. For the week, the S&P 500 climbed 3.7%. It is up about 13% this month, and is on pace for its biggest monthly gain since October 1974.

Markets Rally on Euro Zone Deal

The euro zone agreement on Thursday consisted of 3 points. 1) Leverage the EFSF from $440 billion euros to $1 trillion euros. 2) With the agreement of banks, write down Greek debt by 50%. 3) Provide $100 billion euros of funding to European banks. European leaders finally agreeing to a comprehensive deal was a sign of relief for investors.

Troubles Remain for Italy

While the deal was aimed at helping Greece, there was nothing for Italy and Spain. Immediately, troubles appeared for Italy when its 10-year bond yields surpassed 6% for the first time in history.

Is MF Global the Next Lehman Brothers?

MF Global was in the spotlight this week on concerns about funding issues. Its shares tumbled 16.1% on Friday to close at $1.20. Reports indicate that customers were moving money from the futures brokerage. Rumours could lead to a self-fulfilling prophecy that causes the company to become the next Lehman Brothers.

Strong US Economic Data Increases Optimism

On Friday, data showed US consumer sentiment improved in October for the 2nd consecutive month. U.S. quarterly GDP growth of 2.5% also met expectations. With the improving data, JP Morgan raised its 4th quarter GDP forecast to 2.5% from 1%.

Gold Soars on Leveraging of EFSF

Gold rose 6.5% this week to settle at US$1,743.10/ounce. Earlier on Friday, it was at a 1-month high of $1,751.99/ounce. Clearly, the market is considering the leveraging of the EFSF from $440 billion euros to $1 trillion euros as quantitative easing. Thus, while the gold price was weak when the debt crisis appeared the bleakest, it has rallied on a $560-billion-euro QE program ($1 trillion minus $440 billion).

Looking Ahead to Next Week

Investors will be looking to the G20 meeting in Cannes, France next week. They will be eyeing any effort to stabilize world financial markets. In addition, euro zone manufacturing and services data will be released Wednesday, which could confirm an entry into recession. In the US, employment data will be released Friday, with consensus expectations of 95,000 new non-farm jobs.

While the European agreement has removed a major concern for markets, many headwinds remain. Italy is facing significant problems, and MF Global could be a temporary shock for world financial markets. The market's direction in the next few weeks will be determined by whether the optimism and potentially positive economic data will outweigh the lingering problems.

Investors can expect gold to continue to move up to the $1,800, $1,900 and $2,000 levels in the months ahead. In addition to the market embracing the leveraging of the EFSF as a QE measure, investors expect the Fed to conduct QE3 in the months ahead. This would boost the price of gold even more.

Sunday, October 23, 2011

US Markets Rise for 3rd Week on Euro Zone Hopes

U.S. markets rose for a 3rd week on hopes that euro zone officials would come to a concrete solution for the debt crisis during a meeting this weekend. On Friday, markets rose on rumours that the EFSF would be combined with the ESM, increasing the bailout fund to $940 billion euros. The rumour sent German and French markets up 3.6% and 2.8% respectively.

On Friday, the S&P 500 gained 22.86 points or 1.88% to 1,238.25. The Dow rose 267.01 points or 2.31% to 11,808.79. For the week, the S&P 500 gained 1.1%, while the Dow rose 1.3%.

China growth slows

On Tuesday, China's 3rd quarter GDP data was announced. The 9.1% growth was weaker than the 9.3% the market expected, and was the 3rd consecutive quarter of decline.

US economic data eases fears

In addition to hopes that euro zone officials would agree on a plan to end the debt crisis, markets received a boost this week from better-than-expected US economic data. US jobs data show the jobs situation is stabilizing, retail demand has firmed and a regional manufacturing survey show a rebound.

Looking ahead to next week

Investors looking for the euro zone leaders to entirely solve the debt crisis this weekend will likely be disappointed. EU officials need to recapitalize European banks with at least $100 billion euros. They also need to leverage the $440 billion euro EFSF in order to increase its size. Finally, they need to decide the amount of write-down for Greek debt, which is currently expected to be between 20% and 60%.
Considering how ineffective EU leaders have been since early 2010 in trying to resolve the debt crisis, it is very unlikely they would accomplish all three above tasks within a weekend. Thus, investors will likely be disappointed when markets open Monday, leading to a downward direction for markets.

Investors will also be watching the US GDP data on Friday. The market expects a 2.5% annual growth for the 3rd quarter (July to September) which is almost double the growth in the 2nd quarter. The number meeting expectations would reinforce the belief that the economy is growing steadily. Meanwhile, a worst-than-expected reading could erase the gains the market has been accumulating in the past three weeks.

Sunday, October 16, 2011

U.S. Markets Rise on Hope for Action from Euro Zone Leaders

U.S. markets rose this week on better-than-expected economic data and hope that euro zone leaders will take action to resolve the debt crisis. On Friday, the S&P 500 rose 20.92 points or 1.74% to 1,224.58. Meanwhile, the Dow gained 166.36 points or 1.45% to 11,644.49. Since its intra-day low of 1,074.77, the S&P 500 has risen 14%. 

For the week, the S&P 500 climbed 6%, while the Dow gained 4.9%. Investors were hopeful that euro zone leaders would take concrete action to resolve the debt crisis following the G20 summit. 
U.S. Retail Sales Better Than Expected

On Friday, September US retail sales rose 1.1% over August. It beat consensus of a 0.7% rise, and was the fastest growth in 7 months. In addition, August retail sales growth was revised up, to 0.3%. 
Consumer Sentiment Still Weak

However, consumer sentiment fell in early October by more than expected, to the lowest level in more than 30 years. The October reading was 57.5, lower than the 59.4 in September. It was also lower than consensus of 60.2. 
Looking Ahead to Next Week

Equities could continue to receive a boost from earnings, with results from Apple and IBM expected by the Street to be strong. Markets could continue rising if investors continue to be hopeful that euro zone leaders will finally take concrete and effective action. 
However, major banks including Citigroup, Goldman Sachs and Wells Fargo are also reporting earnings. With disappointing results from JP Morgan on Thursday, the banks are unlikely to post impressive results.

Investors will also be eyeing economic data next week. Industrial production and capacity utilization will be announced Monday, with producer and consumer inflation on Tuesday and Wednesday respectively. The final reading of the Reuters/University of Michigan consumer sentiment index will be announced Friday. 
While the upward bounce in the market this week has some momentum, I see it unlikely to last more than another two weeks. Greece has yet to default or take a haircut on its debt. In addition, euro zone leaders have failed multiple times since early 2010 in resolving the debt crisis. I continue to expect markets to bottom only when Greece defaults or forces investors to take a haircut. While markets may not be hit hard by the 30% haircut that is being discussed, a 50%-60% haircut could drive up the yield of Italian and Spanish debt, causing markets to tumble.

Sunday, October 2, 2011

US markets fall on euro zone and China

U.S. markets fell on Friday on fears of U.S. banks being exposed to the euro zone debt crisis, and on fears of a hard landing for China. The S&P 500 dropped 289.98 points or 2.5% at 1,131.42. The Dow fell 240.60 points or 2.16% at 10,913.38. 

Shares of Morgan Stanley tumbled 10.5% on Friday on fears that it was the most exposed U.S. bank to a default in the euro zone. For the week, the S&P 500 lost 0.4%, while the Dow fell 1.3%. For the quarter, the S&P 500 fell 14.3%, while the Dow dropped 12.1%. In September alone, the S&P fell 7%.

China PMI data eyed

Investors became increasingly concerned about a hard landing for the Chinese economy this week. On Friday, Chinese CDS rose to their highest level since March 2009. However, the CDS were indicating a 10.6% chance of default for China, lower than the level for Korea and Japan.

Because of this concern, China's September PMI was the center of attention for markets. On Saturday, the reading was announced at 51.2, an increase of 0.3 over August. It was the second consecutive month of increase, and will likely soothe concerns over China on Monday. 

The Trioka returns to Greece 

On Thursday, representatives from the EU, IMF and ECB returned to Greece to examine the country's finances. The “trioka” will decide on October 13 whether to release the next tranche of $8 billion euros to Greece. 

Germany approves expanding EFSF 

On Thursday, the German Parliament passed a vote to expand the EFSF from $250 billion euros to $440 billion euros. However, Germany and other countries are split over what steps to take to increase the size of the EFSF beyond $440 billion, since the current size is seen by the market as inadequate. 

Gold rises 8% in quarter

Despite falling 11% in September, gold rose 8% in the quarter, its biggest quarterly rise this year. On Friday, December gold futures closed up $0.30 at $1,622.30/ounce. This week, as gold mining shares fell on weak a weak gold price, I added shares of Goldcorp (at $47.00) and Barrick (at $47.00). This was done using a strategy in Gold Investing Mastery Guide.

I also initiated a position in Silver Wheaton at $31. I see Silver Wheaton as a clear bargain, as I expect the price of silver to quickly rebound in the coming days after the current correction, especially if the euro zone debt crisis worsens.

Looking ahead to next week 

Investors will get some relief on Monday, as Saturday's China September PMI was stronger than expected. Markets will also be focused on a series of US economic data this week. The US September employment report will be announced Friday. US manufacturing data from the ISM will be out on Monday, while the ISM services sector index will be released Wednesday.

Markets will of course also be focused on the euro zone. Since Greece has yet to default or take a haircut on its debt, the worse is not yet over. The worry that Greece will default will likely continue to drag markets lower next week.

I see a rebound in gold and silver prices as imminent after the recent correction. Clearly, gold has significant support at $1,600/ounce. Thus, I added to my positions in Goldcorp and Barrick this week, and initiated a position in Silver Wheaton, using a strategy in Gold Investing Mastery Guide.

Sunday, September 25, 2011

Markets tumble on Greece default fears and Operation Twist

US markets rose on Friday after tumbling for four days in a row. On Friday, the S&P 500 rose 6.83 points or 0.60% to 1,136.39. The Dow added 37.19 points or 0.35% to 10,771.02. For the week, markets tumbled on fear of an imminent default by Greece, and the Fed's unimpressive Operation Twist.  For the week, the S&P 500 dropped 6.6%, while the Dow tumbled 6.4%.

Operation Twist disappoints markets

On Wednesday, Ben Bernanke announced Operation Twist. With the Fed's assets at $2.65 trillion and its Treasury holdings at $1.65 trillion, the Fed will sell $400 billion of its Treasuries that mature in 3 years or less. The proceeds will be used to purchase an equivalent amount of Treasuries that mature in 6 to 30 years.

As a result of the move, yields on 2-year Treasuries rose 20% to 19 basis points, while yields on 30-year Treasuries fell 6.85% to below the 3% level, the lowest level since January 2009.

Gold and other commodities tumble

Because Operation Twist does not involve any new money, gold and other commodities sold off as investors realized that this Fed operation would affect commodities differently than QE2. December gold futures dropped 9.6% this week for its biggest fall since 1983. On Friday, December gold futures fell 5.9% or $101.9 to close at US$1,639.80. 

Meanwhile, silver December futures fell 17.7% on Friday to US$30.101, its biggest one-day fall in history. In addition, copper fell 16.6% this week to US$3.28/pound, while WTI crude fell 0.8% on Friday to US$79.85. 

I see the pullback in gold as the perfect buying opportunity. Nothing has changed for my thesis for investing in gold. Greece has yet to default. Even if Greece were to receive the next tranche in its bailout, the inevitable solution is either a haircut or a default. While markets were disappointed that Operation Twist may not benefit gold as much as QE2 did, an additional round of QE is likely needed, which would boost the price of gold. 

Euro zone officials soothe markets

On Thursday, euro zone officials calmed markets by stating that the EFSF will be expanded to prevent the crisis from spreading. 

China data disappoints

Helping to push markets lower on Wednesday was HSBC's reading of China's September PMI, which fell to 49.4, the 3rd consecutive month below 50. The number raised concern that China might not be able to prop up world economic growth as European and US economies falter. 

Italy downgraded 

On Monday, S&P downgraded Italy from A+ to A, citing slow economic growth and political instability.

Looking ahead to next week

If Greece defaults next week, US markets will likely take a 3%-4%. Banks, in particular, could face a large sell-off. A small haircut, on the other hand, would be better received by markets.

If Greece receives the $8 billion tranche of its bailout from the IMF, EU and ECB, then markets will likely receive a short-term lift. The expansion of the EFSF would also boost markets. However, expanding the EFSF requires each member country to approve the measure, which would take weeks. At current levels, good news could provide markets a temporary lift.

I see current gold and silver prices as a good buying opportunity. Kinross closed at C$15.67 on Friday. It is trading at about 0.7 times NAV, and is below the $16 level which I usually buy, as discussed in detailed in Gold Investing Mastery Guide. Meanwhile, Silver Wheaton closed at C$33.14, which is close to the $30-$31 level that I consider as a very attractive buy.

Sunday, September 18, 2011

US markets rise as central banks take action

US markets rose on Friday, as investors gained confidence from the talks among five central banks. The S&P 500 rose 6.90 points or 0.57% to 1,216.01. The Dow gained 75.91 points or 0.66% at 11,509.09.

For the entire week, markets received a boost from the meeting of five central banks and euro zone finance ministers.  Markets also rose in anticipation of Bernanke's announcements on 20th and 21st.  For the week, the S&P 500 rose 5.4% after rising for five consecutive days, while the Dow gained 4.7%.

On Friday and Saturday, Timothy Geithner met with euro zone finance ministers in Poland. Geithner urged his euro zone counterparts to adopt a TALF-like measure, which the U.S. did during the financial crisis. However, they did not reach any agreements.

Italy rating in the spotlight

There was concern in the markets on Thursday that Moody's might downgrade Italy's rating. However, after markets closed on Friday, Moody's re-iterated its rating on Italy, but warned that it may be downgraded in the near future.

Five central banks act

On Thursday, five of the major central banks in the world announced an united effort to extend lending of US dollars to euro zone banks. The loans last for 3 months, and an auction will be held once a month from October to December. As a result, shares of French banks deemed to be facing a credit crunch, BNP Paribas, Credit Agricole and Societe Generale rose 16%, 10% and 9.3% respectively. The euro also rose against the US dollar, rising 0.49% to 1.3824.

Initial jobless rates disappoint

Once again, US initial jobless claims were worse than expected. On Thursday, the number rose 11,000 last week to 428,000. It was higher than the 411,000 that economists expected.

Euro bond proposal face German resistance

On Thursday, Jose Manuel Barroso stated that a euro zone bond proposal would be announced shortly. However, Germany has repeatedly stated that it was against such a move.

Moody's downgrades two French banks

On Wednesday, Moody's downgraded Societe Generale and Credit Agricole. It was because of their large exposure to Greek sovereign debt, which could cause the banks to face large losses. In addition, Moody's did not rule out the possibility of downgrading BNP Paribas. 
Italy asks China for help

On Tuesday, Italian officials stated that Italy's finance minister met with representatives from China Investment Company (CIC) last week. Italy asked China to purchase significant amounts of Italian government bonds, in exchange for allowing Chinese companies to invest in Italian utilities and energy companies.

Germany open to Greek default

On Monday, German finance minister Philipp Rosler wrote an article in a German newspaper stating that Europe should not treat a Greek default as taboo. To ensure the stability of the euro, he wrote that Greece should be allowed to default in an orderly manner in a worse case scenario.

Gold rises on Friday

After falling earlier in the week, gold rose 1% on Friday on a gloomy economic outlook by US consumers. Gold futures rose $33.30 to settle at $1,814.70/ounce.

Looking ahead to next week

While the S&P 500 posted a remarkable 5%+ rally this week, much of the problems troubling markets in recent weeks still remain. The EU and IMF have yet to approve the next $8 billion in bailout funding for Greece. In addition, Greek CDS still indicate a 90% of chance of default. Meanwhile, despite a push for a euro bond, Germany remains unwilling to accept such a measure. With Angela Merkel's approval ratings at a low level, Germany's stance is unlikely to change.

In the US, initial jobless rates continue to be worse than expected. This raises the possibility that the next monthly employment report will indicate a rise in the unemployment rate.

Markets will be paying close attention to Ben Bernanke, as the Fed meets on the 20th and 21st. While Ben Bernanke is well-known to be a dove on interest rates, there are few measures left that he can implement. The relatively high inflation in the US will also make it difficult for him to take drastic measures. Having already promised ultra-low interest rates until mid-2013, he can purchase long-dated US Treasuries and/or lower the interest rate from 0-0.25% to 0-0.1%. If he takes less action than markets expect, US stocks will likely sell off.

While gold suffered a 2.5% fall this week because of a strengthening US dollar, I see that as a temporary pull-back.  With the euro zone debt crisis far from resolved, gold will likely head higher in the coming weeks.  In addition, Ben Bernanke's actions are positive for gold regardless of what he chooses to do.  If he conducts a significant QE3 measure, gold would rise on the availability of cheap money (as it did during QE1 and QE2).  If Bernanke takes little action, gold would rise on fear of a double-dip recession.

Tuesday, September 13, 2011

RIM Earnings Preview: Expect Guidance Raised by up to $0.50 in EPS

On July 25th, with RIM shares having closed at C$25.19, I wrote that I expected the shares to rise 20% in the next 2-3 months. On August 15th, with RIM at C$26.59, I increased the target to a 30% upside in the next 2-3 months (to C$34.57). When RIM announces earnings this Thursday, I expect a jump that continues the current rally, and takes the shares to C$56.05 over the next 12 months, an increase of 88.72% (over today's close of $29.70). The following are 5 reasons why.

1. RIM benefits as Samsung, Motorola and Nokia are temporarily handicapped

On August 24th, a Dutch court banned Samsung from selling Galaxy smartphones across all of Europe effective October 13th. This ban includes the Galaxy S, Galaxy S II and Ace. With RIM having a large market share in Western Europe, the removal of competition from Samsung will increase demand for OS 7 devices. In addition, it could allow RIM to leverage its dominance in the UK to increase market share in neighbouring countries such as Germany and France.

Meanwhile, Motorola is in the process of being bought by Google. This process usually slows down projects at the company being acquired. Of course, RIM would likely not feel the benefits from this slowdown until about 3-6 months after the announcement (August 15th) which would be November-February. With RIM expected launch the first QNX superphones in early 2012 (rumours from BGR are indicating before end of 2011) the uncertainty at Motorola could provide RIM a window to strike.

While WP 7.5 Mango is expected to launch in October, and Stephen Elop having stated that he wants Nokia WP devices available before the end of 2011, Nokia's recent record of slow product development makes a 2011 launch unlikely. Elop's strategic mistake of essentially telling the world that Symbian and MeeGo are garbage is significantly hurting sales of Symbian and MeeGo devices.  I expect Nokia's share price to tumble at some point late in 2011, as losses mount. In fact, with WP 7 adoption having been extremely weak, WP 7.5 is unlikely to change Microsoft's fortunes in mobile the way the company hopes. Thus, disappointing sales of WP 7.5 would once again ignite takeover speculation of RIM by Microsoft.

2. Earlier than expected launch of OS 7 devices

When RIM gave guidance of $0.75-$1.05 in EPS for Q2, the low end reflected what would result if RIM missed the back-to-school season completely. However, RIM launched OS 7 devices much earlier than expectations of August 26-31. The first OS 7 devices were launched in Canada August 10th, India on August 11th, UK on August 12th and US Verizon enterprise customers August 15th. RIM stated on August 3rd that more than 225 carriers have commenced or completed over 500 certification programs for the 5 new handsets. Adding in the Curve 9350, 9360 and 9370 (announced August 23 and already launched) and the yet-to-be announced Curve 9380 and Bold 9790 makes this global launch even more impressive. 

2. Reviewers and users like the Bold 9900

All 8 new BlackBerry 7 devices launched in August have received excellent reviews and comments from users. The Bold 9900 is particularly favoured, with sell-outs common in the US. This is a stark contrast to the same time last year, when some reviews complained about the Torch 9800 not having a faster CPU. Many non-BlackBerry users have observed that the Bold 9900 is the only other smartphone that has the hardware beauty and quality that is on par with the iPhone 4.

Thus, the Bold 9900 will be able to prevent most BlackBerry users from defecting to Android or iOS. In fact, the device is likely to cause a sizeable number of former BlackBerry users (who currently use Android or iOS) to switch back, and win over many first-time smartphone buyers.

4. Software announcements and launches could boost shares

RIM has been aggressively making announcements in recent weeks, which is part of the recent why the share price has recovered from the 52-week low of C$21.40. For example, RIM launched BBM 6.0 on July 28th, announced 5 new BlackBerry 7 devices August 3rd, hosted the first ever BBM Hackathon August 11-12, announced the Curve 9350, 9360 and 9370 on August 23th and BBM Music on August 25th. With the share price less than half of the 52-week high of C$69.30, it is likely RIM will continue to aggressively announce new hardware and software. I expect management to at least give updates on major software on Thursday.

Updates on software that could provide a boost to RIM shares include: native email, calendar, BBM for BlackBerry PlayBook, Android Player, BlackBerry Java Player and NDK for PlayBook. What most analysts fail to mention is that the powerful QNX NDK is currently in closed beta. RIM could announce partnerships with major gaming companies (e.g. EA) which would make the PlayBook the best gaming tablet on the market. However, I expect this to occur after Thursday.

RIM is also poised to make a big PlayBook 2.0 launch once most of the above software is available. The Android Player could be a big catalyst for consumers to buy the PlayBook, since they can enjoy both the 200,000+ apps on Android and the multi-tasking ability of the PlayBook QNX OS.

5. Competition from iPhone 4S internationally is over-blown

RIM is already benefiting as the iPhone 4S and 5 have been delayed to early-mid October. The fan-favourite Bold 9900 will likely be able to hold its ground against the iPhone 5. In addition, threat of the iPhone 4S is overblown, as the Curve 9350, 9360 and 9370 (with NFC chips) are major improvements over the best-selling Curve 8520 and 9300. In addition, the all-touch Curve 9380 will compete head-on with the iPhone 4S.  Apple's offering is essentially a 16-month-old product, and is unlikely to undercut RIM's on price. 

I expect RIM to sightly beat Q2 consensus of $0.89 EPS and $4.47 billion revenue (I expect $0.93 in EPS and $4.6 billion). However, shares will benefit mostly from a raised guidance for Q3, Q4 and FY 2012. I expect RIM to raise its FY 2012 guidance from $5.25-$6.00 to $5.65-$6.00. This would be a big boost, since the low end would be $0.53 higher than consensus of only $5.12.  Using a forward P/E of 9.5 on FY 2012 EPS of $5.90 (slightly below the high-end of what I expect to be management's guidance on Thursday) I expect the shares to reach C$56.05 over the next 12 months, an increase of 88.72% over today's close of C$29.70.

Q2 Guidance Q2 Consensus My Q2 Estimates
Shipment (units)
11-12.5 million

<12 million 12.3 million
$4.2-4.8 billion
$4.47 billion
$4.6 billion
Gross Margin
N/A 41.00%
EPS $0.75-1.05 $0.89 $0.93

FY 2012 Guidance FY 2012 Consensus My Estimated FY 2012 Guidance (to be announced Thursday)
FY 2012 EPS
$5.12 $5.65-6.00

Steve Jobs enraged by new Android app?

Sunday, September 11, 2011

US markets tumble; gold poised to surpass $2,000 this week

US markets tumbled on Friday, after Juergen Stark, a governor at the ECB, resigned over the ECB's bond-buying program. The S&P 500 fell 31.67 points or 2.67% to 1,154.23; the Dow tumbled 303.68 points or 2.69% at 10,992.13. For the week, the S&P 500 dropped 1.7%, and is down 8.2% year to date. 
German plans scare markets
On Friday, Bloomberg reported that German officials were preparing German banks in case Greece defaults. The news caused investors to become more concerned about the possibility of the a Greek default. In Europe, the German DAX dropped 4%, while the euro fell to 1.365 against the US dollar, its lowest level since February.

Chinese CPI shows inflation has peaked
On Friday, China's August CPI showed an increase of 6.2% over last year, indicating that inflation peaked in July. However, it was only 0.3% lower than July's reading, which disappointed consensus expectations of a lower inflation rate. The high reading indicated that despite the worsening global economy, China will not be in a hurry to loosen monetary policy.

US initial jobless claims disappoints
Once again, US initial jobless claims data disappointed investors this week. Claims fell 12,000 to 409,000, but was higher than the 405,000 that economists expected. In addition, claims from two weeks ago were revised up to 421,000 from 417,000.

Obama announces massive stimulus plan
On Thursday, Barack Obama announced a $447 billion jobs plan. It included infrastructure spending, unemployment benefits and cutting taxes. It was larger than the $300 billion that the market expected. Some economists expect the plan to add 1%-3% to GDP, create 1 million jobs and decrease the unemployment rate by 0.5%. However, US markets still ended in the red on Thursday because investors realized that getting the bill pass Congress would be a difficult task.

German participation in bailouts is legal
On Wednesday, German courts ruled that Germany's participation in the bailout of Greece in 2010 was legal. It eased fears that a different ruling would prevent Germany from participating in any future bailouts of euro zone nations.

Switzerland pegs the Franc at 1.20 euros
In order to prevent the Swiss Franc from rising any further due to safe-haven buying, Switzerland pegged the Franc at 1.20 euros on Tuesday. As a result, gold rose to $1,920/ounce, since the Franc was no longer a competing with gold as a safe-haven for funds.

Euro zone market crash starts off week
On Monday, while North American markets were closed for the long weekend, European markets closed down over 4%. It was partly due to Geman Chancellor Angela Merkel, whose party lost in a state election. It caused investors to become concerned that it will be far more difficult for Germany to fund bailouts in the future. The German Daxx crashed 5.3%, while the French CAC tumbled 4.73% and the FTSE fell 3.58%.

Dutch Bank CEO confirms dire lending situation
Also on Monday, the CEO of Dutch bank ABN Amro, Gerrit Zalm, confirmed a suspicion that investors have had for several weeks. He confirmed that euro zone banks were facing a funding difficulty because they were unwilling to lend money to each other, out of fear that their counterparts were too heavily exposed to PIIGS sovereign debt.

Looking ahead to next week – expect gold to reach $2,000
North American markets will likely end lower on Monday, as a result of continued concern about the euro zone. Late on Friday, there was concern on Wall Street that Greece would default as early as this weekend. Fear of a Greek default will likely continue to affect markets early next week.

Gold remains the best asset class for investors. As the S&P 500 and Dow tumbled on Friday, gold rose 0.11% to settle at $1,859, near its record high of $1,920. In addition, gold mining stocks, Barrick Gold, Goldcorp and Kinross closed on Friday at US$54.55, US$55.27 and US$17.95 respectively, all withing $1 of their 52-week highs. With the Swiss Franc no longer an option for safe-haven funds because of the peg, gold will likely see increased demand. In fact, if concerns about the euro zone debt crisis continues to cloud markets next week, gold will likely break above the $2,000 level for the first time ever.  For the individual investor, the most cost-effective way to invest in gold is using strategies for bullion ETFs and gold mining stocks, as explained in Gold Investing Mastery Guide.  
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Monday, September 5, 2011

US Markets Tumble on Ugly Jobs Report

US markets fell on Friday on a US job report that showed zero job growth for August, which was significantly worse than the gain of 75,000 jobs that economists expected. As a result, on Friday, the S&P 500 fell 30.46 points or 2.53% at 1,173.96; meanwhile, the Dow dropped 253.16 points or 2.20% at 11,240.41. Friday was the biggest drop for the S&P 500 in 2 weeks. For the week, the S&P 500 was down by 0.2%, while the Dow lost 0.4%.

Zero job growth in August
The US jobs report showed that August unemployment remained at 9.1%, the same level as July. It was better than the 9.2% economists expected. However, June and July jobs figures were revised lower by a combined 58,000. 

Greek bailout in question
On Friday, the IMF, EU and ECB delayed negotiations on the release of the next $800 million in bailout funding for Greece by 10 days. It was due to the Greek government raising its deficit projection for this year from 7.6% of GDP to 8.1-8.3% of GDP.
Meanwhile, the Italian government modified its austerity package announced in August. It cut a key increase in taxes, and decreased the rate at which local governments were to conduct austerity. This move raised questions about the ability of Italy to reduce its deficit. 

Funding shortfall for euro zone banks
On Thursday, the IMF estimated that, because of the sovereign debt crisis among PIIGS nations, euro zone banks faced a $200 billion euro funding shortfall. If investors become more concerned about the condition of Europe's banks, their shares would fall further in the coming weeks. 

US ISM and factory orders better than expected
On Thursday, US ISM for August was 50.9, a decline from July's 50.6. It beat expectations of the reading falling below 50 for the first time since 2009. However, also on Thursday, the White House downgraded its GDP growth projection for this year (from 2.7% to 1.7%) and 2012 (from 3.6% to 2.6%). On Wednesday, US factory orders in July climbed 2.4%, the biggest increase since March. 

US consumer confidence tumbles
On Tuesday, US August consumer confidence was announced as 44.5, worse than the 52 that the market expected. It was also the lowest level since April 2009, and a 25% decline from July's 59.5. 

QE3 hopes raised by Fed minutes
On Tuesday, the minutes from the August 9 Federal Reserve meeting were released. They showed that members of the Fed were pushing for new stimulus measures. The news lifted markets, as investors became more hopeful for a QE3 to be announced September 20-21.

US housing market still in deep hole
On Tuesday, the S&P/Case-Shiller index of 20 US cities showed that home prices fell for a 9th consecutive month in July. The value of houses has a significant effect on the wealth of Americans, and this data shows that the US housing market still has yet to rebound. 

Gold shines with backdrop of US jobs report and euro zone problems
On Friday, gold rose almost 3% to settle at $1,882/ounce, as the ugly US jobs report caused concern among investors. On August 28, I wrote that I decreased my positions in Goldcorp and Barrick Gold by 25% when gold hit $1,900/ounce, and the former reached C$53.85 while the latter reached C$52.23. On Monday August 29, I increased my position in Barrick Gold back to the 100% level, when it fell to $48.60. This was consistent with a strategy outlined in Gold Investing Mastery Guide. On Friday, I reduced my position in Barrick Gold back to the 75% level, when it was at C$52.90. This was done once again using a strategy in Gold Investing Mastery Guide, and resulted in a gain of 8.85% in 4 days. 

Looking ahead to next week
When North American markets open tomorrow after the long weekend, stocks will likely be pulled lower due to Friday's ugly US jobs report. However, Barack Obama will announce job-creation measures on Thursday, which could provide a boost for markets on Thursday and Friday. On the other hand, if the market perceives the measures as being not enough, stocks could fall after the measures are announced.

Meanwhile, in the euro zone, markets will likely be pulled lower next week, as the next $800 million euro bailout funding for Greece is put on hold. In addition, as the IMF pointed out, there is a funding shortfall among euro zone banks, due to their exposure to GIIPS sovereign debt. This could raise fear among investors, especially if they believe that the funding shortfall is greater than the $200 billion euros that the IMF estimates.
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Sunday, August 28, 2011

US markets rise on Bernanke statement

US markets rose on Friday on Federal Reserve Chairman Ben Bernanke's statement from Jackson Hole. After opening 4 points lower on Friday, the Dow fell 220 points on a lack of action from Ben Bernanke. However, the Dow rose after investors became hopeful of QE3, due to Bernanke extending the Fed meeting next month to 2 days. The Dow rose 134.72 points or 1.21% at 11,284.54. The S&P 500 gained 17.53 points or 1.51% at 1,176.80.

For the week, the Dow gained 4.3%, while the S&P 500 climbed 4.7%. US markets received a boost all week, as investors looked forward to Ben Bernanke's statement on Friday. However, all week analysts and economists were downplaying the likelihood of a QE3 to be announced on Friday, which decreased the market's expectations.

Initial jobless claims worse than expected

On Thursday, the initial jobless claims report showed claims rose 5,000 to 417,000, worse than the 410,000 that economists expected. In addition, initial claims in the week before were revised up to 412,000 from the previously-announced 408,000

Buffet invests in Bank of America

Bank of America had been plagued by bad news in recent weeks. On Monday, its shares were at $6.03, down 40% from $9.71 on August 1st. However, Warren Buffeted announced a $5 billion investment in Bank of America preferred shares on Thursday. As a result, the bank's shares rose 15%, and shares of other US banks gained as well.

Greece Bailout in Doubt

Finland reached an agreement with Greece early this week, in which Greece deposits $500 million euros into a Finish national account, as collateral for Finland helping other euro zone nations to bail out Greece. However, this will cause other nations to try to reach similar agreements with Greece, which throws into question the effectiveness of the euro zone bailout of Greece.

Durable goods orders impresses

On Wednesday, US July durable goods orders rose 4% over the June level, which was higher than the 2% increase expected. This helped to alleviate some double-dip recession concerns.

China manufacturing reading rises

On Tuesday, HSBC's China August PMI showed a reading of 49.8, which was a slight increase over July's 49.3. Although it was below 50, indicating contraction, it indicated that a hard landing is unlikely for China.

Rebels in Libya capture Tripoli

Oil fell after rebel forces fighting against Gaddafi captured Tripoli. Brent Crude settled on Monday at $108.36. However, as the week went on, analysts and traders realized that it could be 1-2 years before Libya reached full oil production. On Friday, Brent Crude was higher, settling at $111.36.

Gold surges past $1,900

Amid concerns about a double-dip recession, and hope for QE3, gold surged this week past the $1,900/ounce level. After the quick surge, gold corrected by about 8%. On Friday, gold futures settled up 1.93% at $1,797.30.

Using a strategy outlined in my e-book Gold Investing Mastery Guide, I decreased my positions in Barrick Gold and Goldcorp by 25% each, as the former reached C$52.23 and the latter reached C$53.85 on Monday. I also sold all my holdings of the SPDR Gold ETF, GLD, as gold hit $1,900. The rise was clearly too quick, making the metal prone to a correction. However, my outlook for gold is still very positive, with gold reaching $2,100 being a possibility before the end of 2011.

Looking ahead to next week

Because analysts and fund managers had talked down the possibility of QE3 for Friday, markets rose on Friday despite Bernanke taking no action. This slightly positive effect of Bernanke's statement is likely to continue next week. However, investors will be paying attention to the August non-farm payrolls, the revised July jobs report and the minutes from the Fed's August 9 FOMC meeting.

Market sentiment is now slightly hopeful, as investors look forward to QE3 during the September 20-21 Fed meeting. However, jobs data next week can have a big impact. Worse-than-expected jobs data would increase concerns of a double-dip recession, sending markets lower and perhaps causing the panic that was seen earlier this month. On the other hand, better-than-expected data would alleviate some double-dip recession concerns. 

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