Thursday 27 January 2011

Some Thoughts on the Fed From Fellow Traders

Fed, Bernanke, Obama, Geither are the worst scum bags alive, and will go down in US history 50 yrs from now when we'r 3rd world

No..They are crooks. Look at 06-07 when gas, housing everything was soaring..Fed..no inflation. Rinse and repeat.

Wednesday 26 January 2011

Recovery ? The Jobless Recovery

Yahoo -  Chief executive Carol Bartz last night said the company would let a further 1% of its 14,000 staff go, just weeks after announcing 4% of cuts.

Chief Executive Officer Ursula Burns is also reducing costs, including 5000 job cuts announced last year to save the company about $140 million.

Disney has announced more job cuts as they make their strategic move away from developing console games.


With some top state leaders warning that Texas’ dire fiscal situation will lead to the loss of several thousand state jobs, House budget writers will release their first draft budget today — and big job cuts may be just the beginning. Lt. Gov. David Dewhurst went a step further last week and put a number to the cuts, announcing that 8,000 state jobs could be eliminated.

American Express fell 2.5 percent after announcing job cuts.

Tuesday 25 January 2011

Buy the Dip ?

Very true with the current money printing machine going into overdrive.


Printing Money May Help America

The quantitative easing (printing money) has effectively been used to devalue the dollar, not quite sure if has achieved it yet, but it will given the amount of debt that the US is sitting on.  This could potentially back fire on Bernanke.

Im not entirely sure what the net value of food or fuel imports is into the US.  But although US goods will be cheaper to the rest of the world, the cost of importing food items and fuel into the States could rise significantly.


The impact of this could be a reduction in fat people across America, which will certainly help the health care costs.

The other impact could be the reduction in America's disposable household income.  This could have significant issues for the American economy in the medium term.   

Update on Foot Locker

I posted some analysis on Foot Locker earlier.  Granted my timing was out a little.  However the share price is now $18.04.  My shorts started around $18.34 with full position at $19.00.  I'm still in a small loss on this trade and will now exit as it has come down from the highs at $19.77.   

Hopefully my timing on Columbia sports where here will do better as I think this is at its top of its range. 

Columbia Sportswear Company (COLM)

Results are out 28th January 2010 - after markets close.

PE Ratio is around 28.  This is high compared to say Nike which has a PE ratio of 19.  Market capitalisation stands at around $2bn

Last quarter COLM fell significantly after results.   Estimates are around $436m for the current quarter with earnings of 0.64c.  This would bring the current year earnings to around 2.14 or a PE of 28 based on current share price.  Next years earnings are expected to grow to 2.64 !.   Thats a 23% growth in earnings (50c).  Revenues are expected to grow from $1.49bn to $1.59bn around $100m.  Such a small increase in revenues is hardly representative of the PE attached to this company.

These numbers dont really add up as gross profit margins are around 42%.  So adding $100m to revenue would result in $42m in gross income.   It would require $17m profit to the bottom line after tax in order to get the 50c increase in the EPS.    This would imply no SG&A increases in the next year. Highly unlikely.

Given margin pressure, the cost of transport, raw materials, it is unlikely that the margins will stay the same next year.  Also the increasing move towards the Internet and vast reduction of independent sportswear retailers will add margin pressure.   Dealing with larger companies always means margin pressure.

The austerity measures in Europe have hardly started to kick in which will also impact gross margins for Columbia and its independent retailers.  Particularly with the recent sales tax increases which will make goods seem even more expensive.

Given the last earnings release Columbia has outperformed the market and peers.
Even if the results are good the upside is limited as this company is hardly a $LULU.


Im shorting into earnings at around $61.


Cramer 23-December 2010 "Cramer said Columbia is still an exciting story, but after the stock's recent run up, and the disappointing earnings from Nike, he'd only be a buyer of Columbia on a pullback."

Sunday 23 January 2011

Euro Going to take a pasting ?

EUR/USD closed on Friday 21st January 2011 at 1.3621 or thereabouts.

Over the weekend it appears that the Irish government has collapsed.

The promises on future spending may be reversed ?

Not good for the Euro

Saturday 22 January 2011

Shorting Netflix



I have a lot of respect for Whitney Tilson and the transparency in his seeking alpha article on Netflix. It was also great to see Netflix response to this. I agree with Whitney on the points that he has raised, but it would appear that he may have mistimed this. Probably as much as the LULU shorts have mis-timed this short.

Im not going to repeat Whitney's article, you can read it here. You can also see the response from Netflix here.

There are a few key reasons I'm looking to short pre earnings

  1. Google and Apple reporting great earnings got bashed in the market
  2. Netflix will find it difficult for international expansion and on this fact alone the PE cannot be justified.
  3. Apple and Google have hoards of cash and a loyal customer base. I doubt they will stand by and watch this potential market being taken over by a small player.

My only concern here would be a potential buyout by one of the cash rich player. The relationships that Netflix has created has significant value to a bigger player. But I'm not sure this is valued at $9bn. It would be cheaper for the acquirer to write a cheque of $1bn to each of the film studio than to acquire Netflix.

In order to ensure management of this trade, the exposure is going to be split as follow's




Max Exposure


Shares
1000

210.79


Exit
200.75
9.56
200,754.23

191.19
9.10
191,194.50

182.09

182,090.00

172.99
-9.10
172,985.50

164.34
-8.65
164,336.23

156.12
-8.22
156,119.41

148.31


Exit



Maximum Loss – Short Positions
20.00%

200
182.09
36,418
30.00%

300
191.19
57,358
30.00%

300
200.75
60,226


Average
192.50
154,003
Exit

800
210.79
168,632
Maximum Loss

14,629



Maximum Profit – Short Positions
20.00%

200
182.09
36,418
30.00%

300
172.99
51,896
30.00%

300
164.34
49,301
20.00%

200
156.12
31,224


Average
168.88
168,838
Exit

1000
148.31
148,313
Maximum Profit

20,525


Wednesday 19 January 2011

Shorting Nile

Again this overvalued company has hit $62.80. Sales of $300m, profit of $20m, market cap of $900m numbers dont make sense.

If your short, you may be able to help bring this share price down. How ? Type "Diamond on line" into a search engine and click on their sponsored link !

Tuesday 18 January 2011

Western Digital Corporation

WESTERN DIGITAL – EARNINGS PREVIEW

OVERVIEW OF WDC.

  • Design, develop, manufacture and sell hard drives.

  • Design and develop solid state drives

  • November 2009 - entered the traditional enterprise market with WD S25, which is a 2.5-inch, SAS interface hard drive (cloud computing)

  • Develop and manufacture hard drives for the desktop and mobile PC, enterprise, CE and external hard drive market

  • Western Digital inherently bad reputation, product failures. However, they are cheaper than other drives and certainly have more drives available in more retail stores. The negative reviews could be a result of market penetration i.e. more of their products are out in the market.

  • Business Development Manager for Western Digital in Australia, Damien Hodge said that his company was currently selling millions of WD hard drives to cloud computing providers such as Google – 26/11/2010

  • In 2010, 64% of hard drive net revenue was derived from non-desktop markets, including notebook computers, CE products, enterprise applications, and WD-branded product sales, as compared to 62% in 2009

  • For 2010 and 2008, no single customer accounted for 10%, or more, of the Company’s net revenue. For 2009, sales to Dell Inc. accounted for 10% of the Company’s net revenue.



FINANCIAL

  • Low PE ratio of 6.05

  • Short % of Float (as of Dec 31, 2010) 2.80% - very low short interest.


WDC : Sales by Region

2010

2009

2008

Growth


$m

$m

$m

08/10

United States

1,889

1,492

1,949

97%

Asia

5,239

3,639

3,343

157%

Europe, Middle East and Africa

2,260

2,008

2,344

96%

Other

462

314

438

105%

Total

9,850

7,453

8,074

122%


Given the growth from 2008 to 2010, particularly sales in Asia, the low PE certainly does not align with high sales growth.


VALUATION

EBITDA for 2010 is around $2,035m. Market capitalisation is around $7,680m. Cash flow from operating operating activities was $1,942. The balance sheet has very little debt.


Current assets less total liabilities stands at around $2,101. This represents 27% of the share price. This values the revenue of $9,850m at $5,738m. Or put it another way the company is valued at around 2x EBITDA.


OPINION

I started off analysing the financials of this company. However I soon came to the conclusion that the financials are not what really matters for this company’s valuation, but the probability that the products that WDC produce will be the will be a 'windows phone' of the future. i.e. something that no one buys and is completely useless.

The hard drive makers have been bashed largely due to the growing coverage of cloud computing. The problem is that the wall street analysts sitting in New York offices with 4G networks have not tried a mobile broad band connection in developing nations such as the UK, China, India.

In the UK for example we have areas that still do not have mobile access, let alone a 4G network to download large excel files whilst on the move. Hotels charge £6.00 an hour to access the internet. Not ideal if you have all your critical documents sitting on a Google server farm. Impossible and expensive to work in the absence of a machine without a hard drive. And using public wi-fi channels ? Completely insecure as far as I am concerned. Apply this reasoning across the rest of the developing nations and it is apparent that hard drives are not going to disappear. Just looking at the sales figures in Asia clearly demonstrates that the demand for WDC products is certainly not abating.

Cloud computing is great in offices with good connectivity and countries with fast mobile connections, however it will take some years for the rest of the world to have such high speed connections which will eliminate the need for hard drives. Not to mention the significant investment required.

Other items that the analyst have failed to take note of is that the size of media files is growing faster than the increase in the available speed on mobile networks. So with the exception of music files, the excel spreadsheets, photo, HD media are also bigger.

Mobile operators are also moving away from unlimited mobile broadband access, to a pay per use. There is very little point in having all your home movies in a cloud network when you get wacked with a $1 bill each time you access them.

Mobile monopolies still exist across a lot of Europe. Further the European Commission has been meddling in the pricing of roaming and data charges, forcing roaming price caps by mobile operators. The impact of this is that where travelling Europeans were subsiding unlimited access for local non travelling users, this is no longer the case. The outcome is that all users are now subject to data caps with fees for exceeding the cap.


About Me

I try and work a broadly market neutral strategy and based purely on fundamentals and my gut feel.