Sunday, April 24, 2011

US markets rise on strong earnings

US markets rose on a shortened Easter long weekend, on better-than-expected earnings from companies such as Apple. On Friday, the S&P 500 rose 7.02 points or 0.53% to 1,337.38. The Dow gained 52.45 points or 0.42% to 12,505.99. For the week, the S&P 500 and the Dow both gained 1.3%. 

US debt at centre of attention

On Monday, S&P put US government debt on negative outlook. That sparked a fall in the markets, and heavy media attention on the US debt situation. However, there are likely few short-term effects, though the US debt situation is a significant long-term problem.

Weak initial jobless claims

The markets faced a 2nd consecutive weak of worst-than-expected initial jobless claims data. The US Labor Department announced a fall in claims by 13,000, resulting in 403,000 claims. However, this was higher than the 392,000 that economists expected. 

Gold and silver soar

Gold broke above the $1,500 mark this weak, on the US debt outlook and the continuing debt crisis in the euro zone. On Thursday, US gold futures rose $4.30/ounce to settle at $1,503.8. On Friday, spot gold hit a record of 1,512.5 at one point. Meanwhile, silver reached $46.69/ounce, for a weekly rise of 8.4%.

Looking ahead to next week

All eyes will be on US Federal Reserve Chairman Ben Bernanke, as he appears at a press conference on Wednesday. Investors will be looking for whether loose monetary policy will continue in 2011 and 2012 after QE2 expires at the end of June. In addition, they will be looking to see whether a QE3 will be implemented.

Ben Bernanke, regarded as a dove, will likely maintain a loose monetary policy for the rest of 2011. However, with an economy and a stock market that are far stronger than in August 2010, it is unlikely that a QE3 will be announced. Thus, markets will have to come to terms with the end of QE2, which could start a sell-off, since QE2 was a big reason for the 25%+ rally in the markets since August.

In addition, the US will announce 1st quarter GDP on Wednesday. Economists expect a weak showing of 1.8%, far lower than the 3.1% in the 4th quarter.

Friday, April 22, 2011

PlayBook Sales Stronger Than Reported

The BlackBerry PlayBook launched on Tuesday.  Many news reports focused on the short lineups for the PlayBook (sometimes about 2 people) and compared those to the long lineups that greeted the iPad2.  Many commentators then drew the conclusion that sales were weak.  However, comparing sales of the PlayBook to the iPad2 based on lineups alone is inaccurate, based on 2 reasons.

First, the PlayBook took pre-orders online for weeks prior to April 19.  This is something that Apple did not do for the iPad2.  Customers who already pre-ordered the PlayBook online would not line up in front of stores before they open.

Second, the PlayBook is available at far more locations that the iPad2 was.  The PlayBook is sold by retailers such as Best Buy, Staples, Sears, Office Depot and Chapters/Indigo.  Thus, the lineups were shortened because customers have more locations to go to.  For the iPad2, customers had to go to a select few Apple stores, making the lineups appear longer.

Thus, first-day sales were much stronger than what many reported.  For example, Barron's Tiernan Ray reported that one of the Best Buy locations he visited in Manhattan was sold out of the PlayBook.  Meanwhile, the WSJ reported that on Broadway in NYC, a Staples store sold out of all its PlayBooks a few hours after opening.  It also reported that in Toronto, a Sears store, hardly a retailer known for creating buzz, managed to have a lineup of 5 people when the store opened at 7am.

In fact, Jefferies and Co analyst Peter Misek reported that about 45,000 PlayBooks were sold on the first day, including about 25,000 pre-orders.  Meanwhile, RBC analyst Mike Abramsky estimated first-day sales of 50,000 including pre-orders.


With RIMM shares closing at US$53.77 on Thursday, the shares are trading at 7.78 times forward earnings.  That is far lower than peers such as Apple, the money-losing Motorola and the struggling Nokia.  The shares are pricing in a complete failure for the PlayBook, when the device's first-day sales surpassed both the GalaxyTab and the Xoom.

As native email and calendar apps become available (Co-CEO Jim Balsille said 60 days within launch), the 3 4G versions and the Java and Android app players become available in the summer, sales of the PlayBook will increase significantly in the months ahead.  Investors should keep in mind that RIM managed to sell 50,000 PlayBooks on the 1st day, without launching an advertising campaign.  Such a campaign would increase sales further.   

I continue to expect RIM to easily get 10% of the tablet market share this year, which equates to about 5.48 million PlayBooks.  RIM has now entered into the fast-growing tablet market, which is expected to reach 100 million tablets in 2012.  I expect RIM to take about 20% of market share in 2012, which equates to about 20 million PlayBooks sold.  At an ASP (average selling price) of US$599, this would add $11.98 billion in revenue for RIM. 

Sunday, April 17, 2011

US markets fell this week on weak earnings

US markets rose on Friday despite worries about weak bank earnings. The S&P 500 gained 5.16 points or 0.39% to 1,319.68. The Dow rose 56.68 points or 0.46% to 12,341.83. Markets were faced with weaker-than-expected earnings from Alcoa and Google earlier in the week. For the week, the S&P 500 fell 0.6%, while the Dow lost 0.3%.

Disappointing initial jobless claims

On Thursday, US initial jobless claims for the previous week were reported to have risen 27,000, to 412,000. This was larger than the 380,000 that economists expected.

Euro zone troubles continue

Bad news from the euro zone debt crisis is now a regular occurrence. Moody's downgraded Ireland's rating this week to just above junk bond status.

China reports strong inflation

On Friday, China reported March CPI of 5.4%, higher than the 5.2% that markets expected. As a result, mining shares fell, as markets anticipated further tightening measures by the Chinese government.

Gold shines

As a result of the continuing crisis in the euro zone, and strong inflation in China, gold reached another record high of US$1,486/ounce on Friday.

Looking ahead to next week

With the combination of weak earnings, a continuing euro zone crisis, more tightening measures in China and an unresolved disaster in Japan, investors can expect markets to head lower next week.

Bailout talks are still ongoing for Portugal, so a deal has not been reached. Today, the True Finns party, which is opposed to euro zone bailouts, made strong gains in the Finnish election. This will likely add to negative sentiment on Monday. Investors had been expecting an improving inflation picture in China. Thus, March's CPI of 5.4% will hurt commodities and commodity stocks, as more tightening measures cool demand.

Thursday, April 14, 2011

6 Reasons Why the PlayBook Will Be A Massive Success

The BlackBerry PlayBook is launching in 5 days, and RIM's share price is not pricing in sales of many devices.  Most observers have grouped the PlayBook together with Android tablets such as GalaxyTab and Xoom, and are claiming that sales will be weak.  For example, the Xoom reportedly only sold 100,000 units since February.  However, the PlayBook has significant advantages over Android tablets and the even the iPad 2.  The following are 6 reasons why it will be a massive success.

1) Price

The PlayBook will be the first iPad/iPad2 competitor that can match the device's base price of $499.  Both the Samsung Galaxy Tab and Motorola Xoom were launched with prices higher than $499.  For example, the Xoom's 3G version costs $799, while the Wi-Fi version costs $599.  The fact that Android tablets have been priced higher than the iPad/iPad 2 is a main reason why Apple has 80% of the market share.  Thus, the PlayBook's $499 price tag will allow it to sell much better than the Android tablets. 

2) Performance

The PlayBook has been shown many times to run a video game (Quake for example), HD video and a photo application at the same time.  The demanding applications all run at the same time with no decrease in speed.  This performance and multi-tasking ability is simply superior to the iPad2 and Android Honeycomb tablets.

The PlayBook also has 5 MP and 3 MP cameras, while the iPad2 has a VGA (0.7 MP) and an undisclosed one (likely a 3MP).  The PlayBook can also record 1080p video, while the iPad 2 can only record 720p.

The PlayBook also has many other unique performance features.  For example, a user can stream a HD video to a TV using its HDMI output, while he/she does other tasks on the PlayBook, such as browse the web.  In addition, the PlayBook can connect to a blue-tooth mouse and keyboard. 

3) Installed base of 60 million BlackBerry users

RIM can sell the PlayBook to its installed base of 60 million users, which is another reason why it will sell much better than Android tablets.  In addition, the PlayBook has the security features that corporations accept.  There is significant pent-up demand from enterprise users that have been waiting to adopt the PlayBook.  Thus, initial shipments will be very strong.  As Co-CEO Jim Balsille said during the recent earnings conference call, large corporations have each ordered tens of thousands of PlayBooks.

4) Apps and developers

RIM is offering the widest options for developers compared to Apple and Android.  Developers can create an app for the PlayBook in 5 different ways: Adobe Air, Native SDK, Flash, Java and WebWorks (HTML5, CSS3 and Java).  In addition, RIM will offer 2 app players that allow traditional BlackBerry Java apps and Android 2.3 apps to run on the PlayBook.

There are currently already 3,000 PlayBook apps in App World.  In addition, the PlayBook will be able to run 25,000 BlackBerry apps in App World and over 200,000 Android apps.  The concern of some observers that the PlayBook lacks apps is clearly not true.

5) 4G

3 4G versions of the PlayBook will be launched this summer (LTE, HSPA+ and Wi-Max).  This will be a significant advantage over the iPad2 and Android tablets, since the former and latter currently are 3G. 

6) Portability

The PlayBook's 7'' screen gives it an advantage over the iPad2.  A major complaint about the iPad2 is that its 9.7'' size makes it difficult to carry outside of the house.  Thus, the PlayBook's 7'' size makes it more portable than its main competitor.  In addition, the PlayBook's size differentiates it from the iPad/iPad2, appealing to users looking for a more portable tablet.


Thus, the PlayBook will sell far more units than Android tablets.  Its powerful and multi-tasking OS gives it significant advantages over the iPad2 and Android tablets.  Analysts expect RIM to sell 1 to 8 million PlayBooks in calendar 2011.  With Gartner expecting 54.8 million tablets sold worldwide this year, RIM should be able to easily take 10% of market share, meaning  at least 5.48 million PlayBooks will be sold.

As RIM launches app players for Android and BlackBerry Java apps and 3 4G versions, sales of the device should ramp significantly in the summer.  Thus, I expect the PlayBook to take up to 20% of market share, equaling 10.96 million PlayBooks sold this year.

RIMM shares closed at US$53.92 today.  With consensus FY 2012 EPS at $6.90, the shares are priced at a forward P/E of 7.81.  This a clear bargain compared to RIM's historical valuation, and its competitors' current multiples.  Apple, for example, is currently trading at about 12 times forward P/E.

Sunday, April 10, 2011

US markets fall on high oil prices

US markets fell on Friday on high oil prices. The S&P 500 fell 5.36 points or 0.40% to 1,328.15. Meanwhile, the Dow lost 29.59 points or 0.24% to 12,379.90. 

Brent crude rose to $126/barrel on Friday, its highest level in 32 months, as unrest in the Middle East and Libya combined with the effects of a weak US dollar. For the week, the S&P 500 lost 0.3%, while the Dow rose 0.03%.

Portugal finally seeks bailout

On Wednesday, Portugal's care-taker government requested a bailout, after the yield on the country's 5-year bonds rose to 10%. It is expected Portugal will need $80 billion euros.

The ECB raised its interest rate by 0.25%, to 1.25%. Some economists are concerned that the rate hike will make it even more difficult for weaker nations like Greece, Ireland and Portugal to finance their debt.

Gold and silver shine

In addition to oil, gold and silver also performed well this week. Gold hit another record high on Friday, reaching $1,474.9/ounce, while silver reached a 31-year high of $40.46/ounce.

Looking ahead to next week

Markets will be taking direction from the start of earnings season on Monday. Better-than-expected earnings and forecast from major corporations could send the market higher, while the opposite will likely result in a pull-back. High oil prices will also weigh on US markets. Brent crude at its current price of $126/barrel is at a level that will weaken US economic growth.

Sunday, April 3, 2011

US markets rise on employment data

US markets rose on Friday on a stronger than expected jobs report. The S&P 500 gained 6.58 points or 0.5% to 1,332.41. The Dow rose 56.99 points or 0.46% to close at 12,376.72. Both indices are near their June 2008 levels. For the week, the S&P 500 rose 1.4%, while the Dow added 1.3%.

On Friday, the US Labor Department reported that 216,000 non-farm jobs were added in March, higher than the 190,000 economists expected. In addition, the unemployment rate fell from 8.9% to 8.8% in March. It has fallen 1% since hitting 9.8% in November 2010.

The improving employment boosted oil prices. On Friday, Brent crude futures rose $1.34 to close at $118, while WTI crude gained $1.22 to $107.94.

US housing still weak

The US housing market is still extremely weak. A report on Tuesday showed that house prices fell for a 7th month in a row in January.

Multiple downgrades hit euro zone

The euro zone faced a long list of bad news this week. On Monday, Portugal's 10-year government bonds broke the 8% barrier to yield 8.17%, another record high. On Tuesday, S&P downgraded Portugal to BBB-/A-3 from BBB/A-2. S&P also downgraded Greece on the same day, from a BB+ to BB-. The agency stated that Greece will need more money on top of the €110-billion it received in its bailout last year.

On Thursday, Ireland's central bank stated that the country's banks will need a further €24-billion. On Friday, Fitch downgraded Portugal to a BBB-, despite a successful bond sale.

Looking ahead to next week

Investors will be listening closely to Federal Reserve Chairman Ben Bernanke on Monday. Whether or not QE2 is fully executed until the end of June, and whether QE3 will occur are significant factors for the markets. The S&P 500 has risen 27.2% since Bernanke hinted at the start of QE2 on August 27. Thus, speculation that QE2 would end prematurely, or that QE3 will not occur can push markets down significantly. Meanwhile, if QE3 is implemented after June, that would continue that trend in markets that has been occurring since August.

Troubles in the euro zone are not decreasing in number. In fact, the problems have been increasing in recent weeks, in a situation that is quite similar to what happened at exactly the same time in 2010. While US markets have been extremely resilient in the face of euro zone troubles, that may not continue going forward.