Sunday, January 30, 2011

US markets fall on poor earnings and Egypt

US stock markets fell this week on disappointing earnings from major corporations and unrest in Egypt. On Friday, the crisis in Egypt caused the S&P 500 to fall 23.19 points or 1.78% to 1,276.35, and the Dow to drop 166.13 points or 1.39% to 11,823.70. 

As tens of thousands of people demonstrated across Egypt, calling for the President's resignation, tanks entered Cairo. For the week, the S&P 500 fell 0.5%, while Dow ended 0.4% lower.

Disappointing earnings helped to pull markets lower. Amazon shares fell 7% after posting revenue that was below consensus estimates. Meanwhile, Ford dropped 13% after posting a drop in quarterly profit.

Gold and oil benefit from Egypt

While stock markets fell on unrest in Egypt, oil and gold gained. Brent crude rose 2.1% on Friday to US$99.42/barrel, the highest level since October 2008. Meanwhile, gold futures added $21.90/ounce or 1.7% to $1,341.70/ounce.

Investors encouraged by US economic data

Early in the week, it was reported that US 4th quarter GDP grew 3.2%. Even though it was lower than the 3.5% economists expected, investors liked the composition of the growth. In addition, consumer sentiment rose in January.

Troubles continue in Europe

The Prime Minister of Ireland resigned as the leader of his political party this week, paying for his decision for Ireland to accept a bailout. 4th quarter GDP from the UK shocked markets this week, as it was reported to have decreased 0.5%, far worst than the expected growth of 0.5%.

Debt crisis spreads to Japan

While countries in the euro zone have frequently been downgraded by ratings agencies in recent months, Japan was downgraded by S&P this week, from AA to AA-. The country has a debt-to-GDP ratio of 181%.

Outlook for this week

Some market watchers see the turmoil in Egypt continuing for 2 to 3 weeks, pulling US markets lower. In fact, some expect a correction of 5% to 10%. I expect a correction of about 10%. With North American markets having made considerable gains since late August, markets have clearly run out of steam after poor earnings from companies such as Goldman Sachs, Amazon and Ford. The unrest in Egypt is likely the catalyst that will cause a correction. I wrote in a January 4th article on this blog that I expected a 7% to 15% correction for North American equities in the first quarter.

Tuesday, January 25, 2011

RBC sees 4 million PlayBooks sold in 2011

RBC Capital Markets analyst Mike Abramsky wrote in a report today that the BlackBerry Playbook could sell 4 million units this calendar year, and 6 million units in 12 months after launch.  He used a survey by RBC of 1,100 people.  The survey was conducted between Jan. 6 and 8, after CES 2011.

Mike Abramsky also noted that the PlayBook will appeal to early adopters and power users, because of its speed/power, security and IT integration.  He also stated that the PlayBook's tethering ability might be an advantage.  He calculated that sales of 4 million units would add $1.8 billion to RIMM's revenue and $0.30 in EPS, assuming ASP of $450.

 I expect RIM to sell 3 to 4 million PlayBooks in calendar 2011, with an upside potential of 5 to 6 million.  There is a large pent-up demand from corporations for the PlayBook, with companies such as Manulife and TD Bank having already expressed interest.  The ability for IT departments to easily integrate the PlayBook into their existing architecture is a plus.  The legendary BlackBerry security and the ability to tether (have the PlayBook display information from the handset but not store the information) are additional advantages of the PlayBook.

As for the consumer market, with 55 million subscribers, RIMM will see success by simply selling to a fraction of the installed base in the first year.  The PlayBook's dual-core processors and QNX OS gives users the performance and multi-tasking ability that is unavailable on other tablets.  As was mentioned on this blog previously, analysts got a hands-on experience of the PlayBook running a HD video, video game, pictures and other apps at the same time during CES.

 Thus, sales of the PlayBook will surprise the bearish analysts, many of whom are based in the US.  With pent-up demand from corporations, and its performance and multi-tasking ability appealing to consumers, RIMM will be able to sell 3 to 4 million units of the PlayBook in 2011, with an upside of 5 to 6 million units.  

Sunday, January 23, 2011

S&P 500 ends 7 weeks of consecutive gains

The S&P 500 fell this week on worst-than-expected bank earnings, ending the index's 7 weeks of consecutive gains. Meanwhile, the Dow managed to record an 8th consecutive week of gains. On Friday, the S&P 500 edged up 3.09 points or 0.25% to 1,283.35, while the Dow rose 49.04 points or 0.41% to 11,871.84. For the week, the S&P 500 fell 0.8%, while the Dow rose 0.7%. 

Last Sunday, I wrote on this blog “With the S&P 500 having risen for 7 consecutive weeks, it is susceptible to a sell-off...With the US banks having very weak earnings last year to compare their earnings season to this earnings season, it could be easy for them to post stellar results...However, one or more worse-than-expected earnings from a major bank could start a sell-off in a market that is ripe for a correction.”

In fact, that is exactly what happened. Goldman Sachs, Wells Fargo and Bank of America reported disappointing earnings this week.

US data mixed

On Wednesday the US reported housing starts that were below expectations. However, on Thursday, US initial jobless claims last week was reported to have fallen 37,000, to 404,000. It was better than markets expected, and the largest drop in initial jobless claims since February.

Euro zone troubles continue

News reports showed this week that Spain is issuing debt to nationalize its troubled regional banks, called Cajas. This blog first reported on the Cajas back in May, when they were under the spotlight as the Greek crisis erupted. Spain is expected to raise $30 billion euros in total to help its Cajas.

Chinese GDP strong, scares investors

Early in the week, China reported 4th quarter GDP growth of 9.8% and December CPI of 4.6%. The faster-than-expected growth and high inflation caused commodities to fall on concerns of further tightening measures. 

Outlook for the coming week

With the S&P 500 having ended its 7 weeks of consecutive gains, further corrections are likely ahead. With commodities prices having risen significantly since QE2 was announced on November 4th, the threat of further tightening in China will likely push commodity stocks lower. Euro zone troubles are also far from over. Thus, investors should expect North American markets to head lower in the coming week.

Friday, January 21, 2011

Gold has fallen 5% so far in January

While Gold rose 29.6% in 2010 for its 10th consecutive annual gain, it has performed poorly so far in 2011.  On Thursday, gold fell 1.7% to US$1,346.5/ounce.  Today, it fell again to $1,342.7.  So far in 2011, gold has fallen 5%, while silver has dropped 11%.

This correction is primarily due to the improving economic data from the US.  The same data has also caused US stock markets to return to their September 2008 levels.  Rising inflation and increasing interest rates in China has also caused investors to feel concerned, since a higher interest rate increases the opportunity cost of holding gold.  Hedge fund manager Dennis Gartman has sold 2/3 of his gold position.

However, improving US economic data may not continue for much longer.  While the US economy is currently receiving a boost from the extension of the Bush tax cuts, economist David Rosenberg believes the US economy will slow in the second quarter and beyond.  He believes that some current estimates for 4% GDP growth in 2011 are too high.

In addition, the euro zone debt crisis is far from over.  Portugal is paying 6.7% on 10-year government bonds despite purchases by the ECB, which makes a bailout imminent.  After Portugal, more nations may need to be bailed out.

Yesterday, news emerged that the Spanish government is raising money to bail out its regional savings banks, called Cajas.  The Cajas were the centre of attention back in May 2010 when Greek crisis erupted, since the bankruptcy of the savings banks would devastate the entire financial sector in the euro zone.

Thus, economic worries from the US and the euro zone are far from over.  Charles Morris, who manages HSBC's US$2.5 billion Absolute Returns fund, has retained half of his gold position.  He believes the long term prospects for gold are good.  In addition, it is far safer to hold gold company stocks than the bullion through ETFs such as GLD.  While bullion-backed ETFs do not pay a dividend, many gold mining stocks do.

In addition, with a gold mining company that is increasing production, the shares will go up even if the price of gold remains flat.  For example, Kinross Gold Corp (TSX: K) is expected by TD to increase its production by 104% over the next 5 years.  Thus, I expect the shares to rise considerably even if the price of gold remains flat or decreases slightly.  In fact, I expect the price of gold to continue to rise in 2011 to $1,750/ounce and peak in 2012 at $2,000/ounce.  I currently hold Kinross and Goldcorp (TSX: G) in my porfolio and other portfolios I manage.

Sunday, January 16, 2011

Markets rise on successful Portuguese bond auction

US markets rose last week on better-than-expected results from euro zone bond auctions. Markets rose on Friday on better-than-expected earnings from JP Morgan Chase. The S&P 500 gained 9.48 points or 0.74% to 1,293.24, while the Dow gained 55.48 points or 0.47% to 11,787.38. For the week, the S&P 500 rose 1.7%, while the Dow gained 1%.

 JP Morgan reported 4th quarter earnings that rose 47% over last year, pushing EPS from $0.74 to $1.12. The S&P 500 also rose for the 7th week in a row.

However, not all news from the US was positive. It was reported on Thursday that initial jobless claims last week rose unexpectedly. In addition, sales at US retailers rose less than expected in December.

Successful euro zone bond auctions

Early in the week, Portugal auctioned $599 million and $650 million euros of 4- and 10-year government bonds. On the 10-year bonds, the Portuguese government paid a yield of 6.71%, which was lower than the 7% that investors had expected. It was also lower than the 6.8% in the November auction.

However, 6.71% is still an unsustainable rate. In addition, the lower-than-expected yield was partially caused by the ECB buying bonds of troubled euro zone nations. Thus, Portugal is still expected to be receiving a bailout from the EU and IMF.

Gold falls

As a result of the successful bond auctions in the euro zone, the price of gold fell on receding fears. On Friday, spot gold fell 1% to US$1,359.5/ounce. Gold recorded a loss of 4.3% in 2 weeks.

Outlook for the coming week

With the S&P 500 having risen for 7 consecutive weeks, it is susceptible to a sell-off. The euro zone debt crisis is also far from over. While one successful bond auction may be encouraging, Portugal alone needs to auction $20 billion euros of bonds this year.

Thus, there are many more euro zone bond auctions ahead this year. In addition, with the yield on its debt at current levels, it is clear that Portugal will need a bailout. The bigger question is which country will be next after Portugal.

With the US banks having very weak earnings last year to compare their earnings season to this earnings season, it could be easy for them to post stellar results. Thus, good bank earnings could limit downside in the markets. However, one or more worse-than-expected earnings from a major bank could start a sell-off in a market that is ripe for a correction.

2011 is looking very bright for RIMM

2010 was a rough year for RIMM.  The company's shares were down about 20%, while Apple's were up more than 50%.  In a way, RIMM's disappointing performance in 2010 was to be expected. 

In April, the company launched the Bold 9650 and Pearl 3G.  The former was nearly identical to the Bold 9700, while the latter's size made it far less popular than the Curve 8520.

In August, RIMM launched the Torch, its first ever touch-screen and keyboard slider.  It was also the first BlackBerry to launch with OS 6.  While the Torch was definitely a move in the right direction, its specifications were less impressive than iPhone 4 and many Android devices.

RIMM also launched refreshes in the final quarter of 2010, including the Curve 3G and Bold 9780.  While these two replaced models that were extremely popular, they were simply refreshes.  Thus, they provided little catalyst to the share price.

While 2010 was disappointing for RIMM shareholders and BlackBerry loyalists, there were a few bright spots.  RIMM continued its push in international markets.  It was the #1 smartphone brand in the UK, and #1 in Latin America for 4 quarters in a row. 

RIMM also made record shipments quarter after quarter.  In the quarter ending August, RIMM shipped a record 12.1 million devices.  In the next quarter ending November, RIMM broke its record by shipping 14.2 million devices.  The company also surprised bearish analysts by delivering a beat-and-raise (beat expectations and raised its forecast for the next quarter).

PlayBook impresses analysts

3 weeks into 2011, it is reasonable to say that this year will be much better for RIMM.  This is the year that RIMM makes a big push in the high-end of the smartphone and tablet markets, while maintaining its enormous market share in international markets.

In CES from Jan. 6 to 9, RIMM provided analysts and tech bloggers with their first hands-on with the PlayBook.  Because the QNX OS was designed from the beginning for multi-tasking and multi-core devices, its performance and smoothness impressed many.  Analysts got to experience the PlayBook running a 1080p movie, a video game, pictures and other apps at the same time.

For example, Mike Abramsky from RBC Capital Markets wrote:

Hands-on PlayBook demonstrations at CES showed its differentiation in multitasking and performance, which may be difficult for Apple/Android to rival. RIM showed simultaneously running desktop/business applications, 3D games, 1080p video, mobile desktop, Flash-based browsing, apps – possibly a unique advantage, if this experience becomes “Table Stakes” for Tablets.

Meanwhile, Gus Papageorgiou from Scotia Capital wrote:

We found the device to be well-built, with a very responsive user interface, incredible display, and were impressed with the seamless tethering of the tablet to a BlackBerry smartphone.

The PlayBook offers multi-tasking performance and security that are unmatched by the iPad (and iPad 2) and Android tablets.  It is scheduled to launch by the end of March.  RIMM also announced that a 4G PlayBook running on Sprint's Wi-Max network will launch in the summer.

High-end BlackBerry smartphones in 2011

In addition to the PlayBook, high-profile leaks by BGR this week show that BlackBerry smartphones in 2011 offer the high-end specifications that were missing in 2010. 

The BlackBerry Apollo will be the newest update to the highly popular Curve 8520/8530 and 9300/9330 series.  It offers enhanced specs such as 480x360 display and a 5 MP camera.  With an attractive and well-built form factor, it will surely be another wildly popular phone in the series.

The Dakota will be next addition to the Bold line, and the first BlackBerry to have a touchscreen and (non-sliding) keyboard.  It offers impressive specs such as HD video recording and 3G mobile hotspot feature.

The Torch 2 was also leaked.  It will likely launch in August, a year after the original one.  Its CPU is clocked at 1.2GHz, which is double the speed of the Torch.

Most importantly was the leak about the Storm 3.  Long expected as the touch-screen device that can finally compete against the iPhone and Android devices, it offers a top-of-the-line 1.2Ghz CPU with a 3.7'' screen.  It also has the highest resolution ever for a BlackBerry (800x480) and 720p video recording.  With Storm 1 being launched in Nov. 2008, and Storm 2 in Nov. 2009, Storm 3 should be expected for the first quarter of this year. 

Expect RIMM shares to rise

2011 will see RIMM's entry into the booming tablet market.  The PlayBook offers performance and security that will be unmatched by Apple and Android tablets.  Its ability to tether to a BlackBerry smartphone and run Android apps are also significant advantages.

The launch of Storm 3 gives RIMM the long-awaited answer to the iPhone and high-end Android devices.  Meanwhile, the Apollo and Dakota are updates that preserve the popular nature of the devices, while introducing important innovations.

Thus, 2011 will see RIMM shares making significant gains.  With a forward P/E of less than 10, RIMM is currently trading at a discount to peers such as Apple, Motorola and Nokia.  I continue to have a target price of US$90 on the shares.

Sunday, January 9, 2011

US jobs data disappoints

US markets fell on Friday, as bank shares took a hit after Wells Fargo and US Bancorp lost a foreclosure court case. The S&P 500 edged 2.35 points or 0.18% lower to 1,271.5, while the Dow fell 22.55 points or 0.19% to 11,674.76. For the week, the S&P 500 gained 1.1%, while the Dow rose 0.8%.

US employment data disappoints

US non-farm payrolls rose 103,000, less than the 150,000 that was expected. However, jobs gained in November were revised upward from the initial 39,000 to 71,000. While the December unemployment rate fell to 9.4%, lower than the 9.7% expected, it was attributed to a large number of people who gave up searching for a job.

The disappointing jobs report reconfirmed investors' view that the Fed will continue with QE2. Earlier in the week, an ADP report showed the US added 297,000 private-sector jobs in December, the largest monthly gain since 2001. This had buoyed investors' hope for strong job gains.

Portugal on the verge of a bailout

Newspaper reports from Europe today show that Germany and France are increasing pressure on Portugal to accept a bailout from the EU and IMF. Portuguese government 10-year bond yields rose to a record high of 7% this week, as investors looked ahead to a $1.25 billion auction on Wednesday. Analysts and investors will be paying careful attention to the auction.

Last week, Portugal auctioned $500 million euros of 6-month bonds. The country was forced to auction the bonds at a yield of 3.68%, significantly higher than the 2.04% in September. In fact, one year ago, the yield on similar bonds was 0.59%.

Looking ahead to next week

As it appears that Portugal will have to accept a bailout package sooner or later, negative news from the euro zone will likely hurt markets next week. If the experiences of Greece and Ireland are any indication, these bailout processes tend to drag on for a while, hurting stock markets along the way. Investors will also be wondering if Spain will be next in line to be bailed out.

The US is also not without concern. While recent US economic data have been positive, causing most analysts have have bullish forecasts for US equities in 2011, municipal bonds are a concern. The ever-growing deficit at the State and Municipal level could lead to defaults of hundreds of billions of dollars, as Meredith Whitney warned 3 weeks ago.

Tuesday, January 4, 2011

US markets rise on manufacturing data

US markets rose yesterday, as investors were encouraged by strong manufacturing data from the US. The S&P 500 rose 14.22 or 1.13% to 1,271.86, while the Dow gained 93.16 or 0.8% to 11,670.67.

Last week, US markets were little changed during the holiday season.  The Dow was virtually unchanged, while the S&P 500 rose 0.1%. For December, the S&P 500 gained 6.5%, while the Dow rose 5.2%.

Plenty of concerns for investors in 2011

Investors have plenty to be worried about, especially for the early part of 2011. According to Investors Intelligence, bullish sentiment was at 58.8% on Dec. 22, the highest level since 2007. This bullishness makes a short-term pullback very likely.

US housing is another area of concern. Last week, the S&P/Case-Shiller Index was shown to have fallen 1% in October. It fell 0.2% more than expected, and was the 5th consecutive monthly fall. Thus, Nouriel Roubini warned last week that the US housing market is now in a double-dip recession.

Euro zone worries also persist. Euro zone nations have to auction about 10% of the 2011 government bonds in January. Investors’ reception to these bonds, and the yield at which they are auctioned, will determine the markets’ direction.

In addition, there is a large possibility that Portugal will follow in Ireland’s footsteps, and become the next country to be bailed out. Portugal has been downgraded by several credit agencies in the past few months, similar to Ireland’s situation before its bailout.

China will also continue to raise interest rates in 2011, in order to slow down its 5.1% inflation rate. With most analysts expecting 3 to 4 interest rate hikes in 2011, commodity prices including oil and copper will take a hit.

Outlook for January

With markets clearly in overbought territory, and bad news likely to emerge from the euro zone or US, I expect a 7% to 15% fall for North American markets in the first quarter of 2011. In fact, this correction could occur as early as January, during the second half of the month.