Quantitative Easing Explained

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

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

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 !

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.

RIMM and Trading Positions

Yesterday, via my twitter account I mentioned that I had taken 4 positions below, all for post market earnings trade.

Ticker	Security Name	Position	$
RIMM	Research In Motion	Long	30,000
SCS	Steelcase	Short	30,000
ANC	Accenture	Short	30,000
ORCL	Oracle	Long	30,000

RIMM is not a street favourite. In fact it nearly always gets hit at earnings. However a lot of businesses continue to use Blackberry and those that can't afford an iphone choose Blackberry as the second option, and has decent encryption.

RIMM' results were impressive. The current PE of 11.39 is far too low given the growth in sales and cash flow this company is generating. Q4 earnings per share projections are between $1.74 and $1.80. This brings EPS to $6.32 for the year. The share price is $59.24 giving a PE of 9.33. Thats even lower than Nokia's (NOK)

There is an expectation that its market share will erode much like Nokia's, but management are much more on proactive than Nokias management, who were complacent.

RIMMs valuation is around $31bn. In the last 6 months it has generated $2bn of cash from operating activities. Thats say $4bn a year. Giving a Market Cap / Cash Ratio of around 7.75

Compare that to say YHOO valuation of $21.5bn, annual cash flow of $1bn provides for a ratio around 21.

The street sometimes forgets that the 2bn people in the BRIC countries cant all afford iphones. 3G Networks outside of the US are in general poor. In UK the for example, outside of London 3G connection is slow or not available, similar to other third world and developing countries.

Both the Android and iphone require extensive bandwidth even for accessing email, where as the blackberry does not. There is no point having an iphone and an one line mail account if your access to 3g is limited.

It will be some years before the rest of the world will catch up with decent 3G connections which would make the iphone or android phones appealing to use.

Adobe

This is one of the reasons why I wish adobe would just disappear. Whether it is my Linux machine or my Windows machine, Adobe does not behave !