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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