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Google’s Smooth Sailing in First Quarter Acquiring Motorola Mobility

2012-07-20T11:06:00.002-07:00

Google’s first quarter as a hardware company, as well as a search engine, was a good one. Stand alone revenue for the company was up 21% with cumulative revenues, including its revenues from Motorola Mobility, up 35% to $12.2 billion year over year, and up 15% quarter over quarter. The revenues from Motorola were simply $1.3 billion for the quarter.

Although the earnings call did not give much guidance on its future in hardware sales, the Motorola Razr sold very well. As reported by Reuters, “Investors have a wide range of questions about Google's expansion into the hardware business, where margins are low and competition with the likes of Apple Inc and Samsung Electronics is fierce.” There are also questions if Google will design a hig-end mobile phone that can rival Apple’s iPhone.

The Chief Business Officer highlighted YouTube’s broadcasting of the London Summer Olympics which should provide a big bump in viewership. Quoted from the earnings call, “Thousands of partners are making six figures [through YouTube].”

The core business of Google is search advertising which has been undergoing pressures of lower cost per clicks which translates into lower margins for the company. Quoted from the Reuters article, “The cost per click for Google's online search ads continued to decline in the second quarter, falling 16 percent year-on-year. But some analysts highlighted a quarter-on-quarter 1 percent gain in second quarter CPCs.”

Integration of Google applications was also highlighted. The so-called “knowledge graph” shows a cluster of information and related topics that aggregate from a search term.

Also noteworthy things include the all-new “jelly bean” operating software from google which is reaching critical mass. What’s more, Google Play has exceeded its twentieth million download.

Investors were very well pleased with Google’s quarterly results pitching the stock higher by just over 2% in regular hour trading, and an additional 2.72% to $609.20 a share in after-hours. Investment research from Morningstar gives Google’s stock 4 out of 5 stars, citing the challenges to succeed in its acquisition of Motorola Mobility. Their search advertising dominance leaves researchers with conviction that it will persist.

Microsoft has banner quarter despite recording negative earnings

2012-07-20T11:05:00.004-07:00

Microsoft posted its first quarter of a net loss in its 26-year existence. A $6.2 billion charge from the pricey acquisition of aQuantive, an online ad agency made their quarterly earnings a net loss of $0.06. Analysts had been forecasting quarterly earnings of $0.62. The Hollywood Reporter writes, “Thanks to a massive $6.2 billion charge announced a couple of weeks ago, Microsoft on Thursday recorded its first quarterly loss in its 26-year history as a public company.”

Apart from their blighted acquisition, Microsoft performed well with above 20% growth in operating cash flow. In the earnings call, Microsoft’s CFO emphasized their core strength as a search engine and portal. They also mentioned customer service is at an all time high.

Microsoft’s major search engine is Bing, a meteoric second to Google’s dominance in the search market. Their products also performed very well, namely the Xbox become more of a household commodity, getting more usage with the advent of movie rentals and the like on its versatile gaming console.

When looking at the financial performance of Q4 apart from the spotty charge for the acquisition, it is clear Microsoft had a banner quarter with record revenues, operating cash flow and earnings per share. Investors rallied on the skewed news, shrugging off the aberration of its first negative earnings per share in company history.

Operating income was up 12% at $6.9 billion for the quarter. Cash flow from operations grew a significant 29% of $7.7 billion. It goes to show smart investors are more concerned with operating income and cash flow from operations. In addition, investors may feel the acquisition was still a good decision, despite it being cost prohibitive. Granted, Microsoft is strategizing itself for a gain in search advertising and advertising revenues.

Some of the brightest spots in their quarterly results include the following: Lync software growth of 45%; Windows enabled phones up 50% quarter over quarter; and 115 billion minutes on Skype, up more than 50%.

‘Dark Knight Rises’ Presale Breaks Record

2012-07-20T11:05:00.001-07:00

With 60,000 IMAX tickets to see the Batman trilogy at AMC theaters, it’s not hard to see why box office projections are spiking beyond $480 million. The “Dark Knight Rises” is the third and final installment to the trilogy which has brought life to complex characters in Batman.

At $40 a ticket, the pre-sale comes to $2.4 million, the marathon viewing starts at 6 p.m. to prequel the opening night on Friday. As reported by the Los Angeles Business Journal, “The Kansas City-based movie theater operator [AMC] said the sales shattered the previous record for its movie marathon events — 30,000 for the Ultimate Marvel Marathon in May, before the release of ‘The Avengers’.”

The story is driven by the lies that end the “Dark Knight”, where Batman is perceived as a street thug when he is really the city’s protector, and the duplicitous Harvey Dent is seen as a crime fighting hero. Director Christopher Nolan embodies his characters with complexities that motivate them to heroism. Instead of flat characters that are taken for granted in the movie, Nolan gives them a three-dimensional aspect that makes the story lively. Plot development is also one of Nolan’s strong suits.

“Dark Knight Rises” also plays on the dark themes of its prequel with a finale that is quite bleak. Quoted from the L.A. Times, “‘The Dark Knight Rises’ might be the bleakest, most despairing superhero film ever made. It uses a wholly terrifying villain to emphasize the physical vulnerability of a hero we sometimes forget is no more than human.”

An hour of the movie is shot on IMAX film cameras giving an extra rich cinematic quality. Even regular theaters will experience more depth thanks to cameras used.

The cast from the previous film are back, which is one of the main reasons it has garnered so much momentum as far as anticipation is concerned. Although fans are distraught about how it will end, it’s still a movie that will be seen countless times.

You can see the trailer here on YouTube. Make sure to buy your tickets as soon as you can, if you want to see it sometime soon.

Home Sales in California on the Mend in June

2012-07-18T14:41:00.004-07:00

The National Association of Realtors recorded higher home prices in June year-over-year. Although prices dipped since May, they are 30.7% greater than the bottom experienced in February 2009.

In Los Angeles, the median home price in June was just above $300,000 at $301,300, an increase of 4.7% year-over-year and 11.5% from the previous month, according to the California Association of Realtors. Orange County is still fetching premium prices with its median home value at $534,680, a commanding lead in all of the southland.

Interest rate continues to roll lower to deeper rock bottoms. According to the report, 30-year fixed mortgages averaged 3.68% for the period recorded. “Interest rates continued their downward trend in June, with 30-year fixed-mortgage interest rates averaging 3.68 percent, down from 3.80 percent in May and 4.51 percent in June 2011, according to Freddie Mac. Adjustable-mortgage interest rates averaged 2.76 percent in June, up from 2.74 percent in May but lower than the 3-percent average rate reported in June 2011.”

The amount of time a home is on the market has improved a lot too. The latest figure is 3.5 months for unsold inventory to clear versus 5.1 months last year. According to the report, “The index indicates the number of months needed to sell the supply of homes on the market at the current sales rate. A 7-month supply is considered normal.” What this means is prices should continue to firm up. More people are able to sell their house and there’s more likelihood that, on average, people will place higher bids for their home purchase.

The national economy had a spat of good news on the housing front as well. U.S. housing starts were up for the month of June, with 760,000 new constructions of rentals and home properties. That’s 2% higher than what forecasts had called for—745,000 new starts. The New York Times states that this batch is the most since four years, making a solid case for a slow recovery.

U.S. Bank being sued by Los Angeles over unkempt properties

2012-07-18T14:41:00.002-07:00

U.S. Bank is gaining notoriety in L.A., being recognized as a slumlord that is not taking care of properties they oversee as trustee. Out of the more than 30,000 properties that overturned to foreclosure in the three years spanning from 2007 to 2010, U.S. Bank gained title on 1,500 properties. The Wall Street Journal details, “U.S. Bank acquired titles to more than 1,500 properties in Los Angeles through foreclosure during the past four years, according to the city attorney's office. From January 2007 to September 2010, 36,752 housing properties were foreclosed upon in the city of Los Angeles, according to the Los Angeles Housing Department.”

Now the city is seeking restitution and wants to levy penalties against U.S. Bank, a company that has inappropriately evicted tenants out of properties, has not maintained these properties and does not take any responsibility or feel they share liability for these foreclosed properties. According to Bloomberg, “The city [L.A.] accused the bank of violating California’s unfair competition law and the Los Angeles municipal code. It seeks $2,500 a day for each violation.”

What’s interesting about this case is how the city of Los Angeles is opening up the definition of trustee; since U.S. Bank is overseer of the mortgages as a trustee to mortgage-backed securities, they do not believe they share in any liability of the physical property. However, they are capable of managing and evicting tenants from the property.

The problem with this entire system is the shuffling that occurs between banks. For example, once someone opens up a mortgage loan for a new home purchase they will most likely have to deal with three or more different loan servicers throughout the life of that mortgage because of the amount of turnover that occurs between banks.

As reported in the Wall Street Journal article, “Mr. Mitau said the city provided the bank with a list of 100 properties a few months ago, but more than half of those properties had been sold to other trusts. Only about 40 of the properties still belong to trusts managed by U.S. Bank, officials there said.” The city of Los Angeles won’t stand for irresponsible banks who think they can sell away their liability and not keep up with their business.

TiVo buying TRA for $20 million

2012-07-18T14:40:00.005-07:00

TiVo, developer of the DVR, will buy TRA for $20 million. TRA is a TV research firm that tracks ads and sales of audiences.

As an example, audiences of MTV are tracked if they buy beauty products or other products for young adults. TRA is able to tally up the effectiveness of an ad campaign to bring the biggest bang for the buck for advertisers. As reported by the New York Times, “TRA acquires this data by collecting information from 1.5 million set-top cable boxes and matching the viewers (anonymously) with information gleaned from ‘loyalty cards’ presented at supermarkets, as well as with other measurements, like car-registration information.” This precision in analytics gives marketers an extra valuable tool in creating and tracking advertising campaigns.

So far, TRA has major clients, like Mars candy, Kraft’s Oscar Mayer and CBS. As reported in the New York Times article, “TRA has signed numerous clients in its five years of existence, including 27 cable and broadcast networks and 45 different advertising brands.”

The chief research officer of CBS lauded TRA for its effectiveness in tracking sales from viewers; CBS has been using their service since the launch of the company. The article writes, “CBS, an early client, has been especially supportive. That network’s chief research officer, David F. Poltrack, praised the acquisition Monday, citing the effectiveness of TRA data in demonstrating increased accountability in television advertising.”

As great as TRA’s service may be, they still will face pressures with privacy concerns. After all, in order to track sales from their viewers they have to use things like internet browsing cookies that people are force-fed in a way. Recently, browsing cookies have been an opt-out feature to a user’s internet experience, they aren’t just granted like before.

More and more, great internet and digital ad companies are pushing their software products in an age of social media without really giving thought to any liabilities; such as, personal security of information and privacy. These features are paramount to the robust success of digital and television advertising.

Economic Data Is Being Released Under Tighter Security

2012-07-18T14:40:00.003-07:00

With the advent of so-called “high-speed trading”, disseminating economic data has gone from analog to highly sophisticated. The millisecond it’s released, traders around the world act upon it; depending on how fast they receive the data could mean millions of dollars, for those who are heavily involved in news trading. Some even have trading models that are tied directly to the flow of information. So the U.S. has tightened its security as to who has access to the valuable information before it is made public. The New York Times reports, “The efforts stem from the newfound importance of high-speed trading, which began to grow significantly in the middle of the last decade and is now a central part of some hedge funds’ investment strategies. By gaining information seconds or minutes before others, high-speed traders — sometimes known as high-frequency or algorithmic traders — can use the computerized nature of modern finance to make quick profits or, if a bet goes wrong, take large losses.”

The Labor Department, for instance, suspects that there are people working inside their “lockup” room to feed the interests of high-speed traders or fund companies, rankling the balanced flow of information. As reported in the New York Times article, “The ‘root cause’ for the review, the team noted, was the possibility of traders or their agents working inside the lockup.”They cite, in 2008 Reuters reported two inflation reports a few seconds too early which made the government suspicious.

It has reached a level of even tampering with the first amendment. Because the interests of few media companies are financial only—as opposed to journalistic—the government has to review and screen what they are writing in order to determine their credentials. As reported in the article, “This proposal threatens the First Amendment,’ Mr. Moss said at the oversight hearing, adding that it would give the government ‘access to a reporters’ thoughts, drafts or notes as a condition for covering the news.”

This has led to a government overhaul of how they release their information, with a lockup room that disseminates reports on a button using a highly sophisticated computer system. You can only imagine what a few seconds can do to tip the scale of the markets, but apparently it can make a big difference.

Insider trading scandal, a rat is better off than the wolves

2012-07-18T14:40:00.001-07:00

Normally, the streets are mean. They say that nothing good comes of being a rat—someone who tips off the competition or regulators of illicit conduct. But on Wall Street the pan gets fried in different ways; a rat is better off.

Insider trading witness, Anil Kumar, was quoted as an ‘extraordinary cooperator’ with the authorities who made a case against one of his longtime friends, Raj Rajaratnam, and his mentor, Rajat Gupta. While they will boil in a hot prison cell, Kumar is free on bail, living in sunny California. Gupta and Rajaratnam are facing stiff punishment, potentially a combined sentence of 25 years in prison, as a precedent for those who think insider trading is still a game. Kumar, on the other hand, might only receive probation and a light prison sentence; he was a perfect rat to a trial that boiled Raj and Rajat’s rabbit. Reuters reports,“In the letter, prosecutors said Kumar was essential in helping the government improve its case and convict Rajaratnam and Gupta, ‘two of the most important securities fraud trials in history.”

On the streets, people wonder how someone who was a lifelong friend of 25 years can turn on his own and that, in turn, leads to suspicion as to the veracity of his testimony. In the white-collar world, it’s a different story, they praise his cooperation and accept his testimony if it strengthens their case.

Kumar’s cooperation undermined Rajaratnam and Gupta who coldly did not cooperate, that mentality cost them more than 10 years in prison. The San Francisco Chronicle writes, “In the world of Rajaratnam and his co-conspirators, cooperation was sadly viewed as a fundamental breach of trust to one another, and cooperators were viewed by many Galleon employees and other members of Rajaratnam’s criminal schemes as ‘ratting out’ a trusted friend,” Brodsky and Tarlowe said.”

They must not have known that one person ratting out the bunch could have undermined them completely. When making a deal with federal authorities, the sentencing can be minimized dramatically, like in the case of Anil Kumar. In other words, it’s bound to happen, to be a wolf after the slaughter does not pay off, the rat is much better off.

Warren Buffet Loves Wells Fargo, but He Made a Dangerous Bet

2012-07-18T14:39:00.005-07:00

The oracle of Omaha—Warren Buffet— went on Bloomberg TV Friday morning preaching to the choir again. This time he has reason to be upbeat, a reason to praise his investment in Wells Fargo. Recall, Buffet made some heavy bets on the banking industry a few years ago when the financial system was gyrating out of control. That was a gamble, and one perhaps he had to make. Since that time Treasury bonds have effectively yielded zero, if not negative. It was time for ole’ Warren to make a wager that would put him back in the grandstanding of great investors. What better bet than Wells Fargo, what better time than now?

Since 2009, Wells Fargo’s stock has catapulted from a bottom of around $9 a share to a sturdy price above $30 a share. The reason Warren Buffet bought Wells Fargo, and continued to add shares, is pretty simple; he understands their business model, and he knows how sturdy of a company they are. The San Francisco Business Times cites Buffet, “Buffett was gushing over Wells Fargo on Friday. ‘I like Wells better than anything by far,’ Buffett said. ‘We bought Wells this year. We've bought Wells month after month, well not every month, for a lot of years. ‘I like loading up on the one I like best,’ he said.

A lot of his portfolio is heavily invested in banking and finance; he is the full owner of Geico auto insurance. He buys these businesses because he understands them. Known by everyone in the investment community as a guru, Warren Buffet stated very overtly in his annual investment letter that financial derivatives were a ticking time bomb just waiting to annihilate the financial markets; sure enough that’s exactly what happened. He also mentioned how government bonds would yield near percent and provide negative returns on a real yield basis; sure enough that’s exactly what happened, as well.

Buffet is a masterful risk taker and now is a great time for praise, but there must have been a time during the last 36 months that he scratched his head and mindlessly tinkered with his model train wondering what on earth would become of his investment mote that he so preciously accumulated with Berkshire Hathaway throughout the years. As quoted from the movie Wall Street when Budd Fox’s prudent colleague enlightens him in a emotional evoking scene, “Man looks in the abyss, there's nothing staring back at him. At that moment, man finds his character. And that is what keeps him out of the abyss.” Wells Fargo has kept Warren Buffet out of the abyss.

San Bernardino bankruptcy turning to eminent domain

2012-07-18T14:39:00.003-07:00

Anytime you hear the words eminent domain, you either run for the hills or hold on for dear life. Eminent domain gives the right-of-way to any endeavor deemed for public use by allowing that public use to supersede previous land and home ownership. It walks a fine line of what government can and can’t do.

Now bankrupt San Bernardino is flirting with the idea of applying eminent domain to shore up—and cherry pick—mortgages that are “underwater”. It’s a horrendous idea with good intentions, and you know where a road paved with good intentions could lead. The Wall Street Journal opines, “The housing bust has produced some terrible ideas, but now comes what may be the worst: A California county and two cities hit hard by foreclosures are thinking of using eminent domain to seize mortgages from private investors.”

Those proposing this convoluted idea are Mortgage Resource Partners (MRP), a San Francisco venture capitalist firm with strong ties to California politicians. Note, former California treasurer and now financial reform bigwig, Phil Angelides, was working at MRP before leaving to keep the focus away from MRP’s political exploits.

With nearly half of all homes in foreclosure and an unemployment rate tipping the scale at 12%, San Bernardino County is in a world of trouble. Having to declare Chapter 9 bankruptcy just recently, it wasn’t long ago that San Bernardino was the darling of a real estate bonanza. The New York Times writes, “A decade ago, Fontana and other cities here in the Inland Empire — the vast suburban sprawl east of Los Angeles — were just beginning to boom, with new subdivisions opening seemingly every weekend. Now, San Bernardino County, the largest county in the country, has cities with some of the nation’s highest foreclosure rates.”

Real estate investors with no idea of California’s topography or economy had to do no more than venture out east which meant most investors would buy up in San Bernardino County. It’s the biggest county in the U.S.

Now that the tables have turned, the county is desperate to salvage its local economy. This type of eminent domain is flirting with disaster. And at any rate, it should be put to a vote before this kind of government intervention is allowed to disrupt people’s ability live out the course of their personal business.

'Total Recall' at Comic Con: A remake with mass appeal

2012-07-18T14:39:00.001-07:00

The all new "Total Recall", starring Jessica Biel and Colin Farrell borrows the title from a previous Arnold Schwarzenegger movie, but that's about it. The movie is a visceral rendition of a short story by Philip K. Dick titled "We Can Remember It For You Wholesale".

Jessica Biel opened up at comic-con in San Diego, saying it was really more of a love story, something that wasn't incorporated in the previous movie. Even though she acknowledged the movie is a remake of the previous thriller, she did not mention that "Total Recall" is a remake in more ways than one.

A 1999 Canadian film named "Existenz", starring Jude Law, is the unexpected analogue to the much more appealing "Total Recall" set to debut August 3. Essentially, it's a story about video gamers who take their gaming experience to another level when they venture into an alluring virtual reality. When the provocations of the game lead to unexpected twists and turns, the lust of two gamers takes on a lurid fantasy that evokes the sublime in their experiencing of reality in the game, even providing the antithesis of an existential life, at times.

The movie focuses in and out of an entire gaming experience providing a mise en abyme--a movie device--just like “Inception” did famously with its architecture of dream space. "Existenz" masterfully unveils that which is perceived to be real with the ethereal facets of a virtual reality game that comes hauntingly close to one's own personage. After losing all notions of reality, the couple's love interest is tested in surreal ways as they traverse role-playing scenarios.

This version of the movie is expecting a major box office success with an opening month of $116.65 million, according to Hollywood Stock Exchange. Movie buffs were bidding as high as $130 million. Comic-con will no doubt help with anticipation for box office success. The Hollywood Reporter cites Jessica Biel illustrating the movie's ultra appeal to not only the fantasy, but also the real emotional love story that it is, "It definitely is an action-thriller film, but to me, it’s an action-drama love story,” Biel said in an interview Friday in San Diego. “We really wanted to tie this movie down to the ground in an emotional way, so you could go away feeling everything, not just excited by what it looks like.”

Wells Fargo Posts 10th Quarter of Consecutive Growth

2012-07-18T14:38:00.002-07:00

California bank, Wells Fargo, posted its 10^th consecutive quarter of positive earnings growth. Earnings reported were $0.82 per share up 17%, and up 9% from last quarter.

In their earnings conference call, executives cited solid growth in deposits and mortgage purchases. They also pointed out to an increase in re-financing volume with 6.2 million customers originating mortgages or re-financing at record low rates.

There’s a real sign of confidence by the executives; with a strong balance sheet, they will be looking to continue gainful acquisitions. In 2011 Wells Fargo was able to buy a book of loans from Bank of Ireland and Allied Irish Bank. In the beginning of this year they were also able to acquire a book of loans from BNP Paribas North America in the energy lending business.

Most of the conference call was looking back with forward-looking prospects not looking bad. However, the mortgage industry is a cruel mistress.

A major class-action lawsuit found Wells Fargo complicit in discriminatory practices against ethnic minorities, charging minorities higher rates based on race alone. In addition to the $175 million settlement they had to pay, the bank will also be closing its relationship with mortgage brokers who were aggressively originating loans for Wells Fargo.

For those people who are in the process of refinancing through Wells, Reuters reports the following, “If you've already filed your application with a mortgage broker, your loan should go through as planned. Wells said it would stop taking new broker applications on Friday, July 13. Mortgages already in the pipeline are expected to go through.” Their severing from mortgage brokers will ensure that non-kosher practices will not occur, yet it will slow down their growth as well.

Their core businesses performed well in the quarter, which are well understood by their executive team. Non-interest bearing portfolio; such as, trading and equity portfolio gains were down, while their net interest income was performing well.

Markets reacted favorably to the news with Wells Fargo’s stock going up more than 3% in the day’s trading session. Coupled with earnings from J.P. Morgan Chase, the Dow Jones 30 Index climbed up 1.62%.

Commodities Super-Cycle Near Its End

2012-05-24T15:20:00.003-07:00

The commodities super-cycle has been a major bonanza for a lot of people, especially for economies rich in natural resources. These cycles happen ever so often; and when they last, they typically last for a long time. We’ve been in one for 13 years since 1999 and it’s been a gold rush ever since, but according to technical experts we are near the end of this bullish cycle.

All good things must come to an end; in this case 2013 may just be the end of the commodities super-cycle. Of course on a fundamental note it could continue, considering exogenous factors such as China’s growth and other supply constraints. But already major mining corporations are scaling back their capital expenditures on mining exploration due to the sharp correction experienced in precious metals.

As reported by the Wall Street Journal, “Last week BHP Billiton, the world's largest diversified miner by market value, said it will adjust its $80 billion, five-year capital-expenditure program while taking into account its cash-flow generation expectations.” A recent Yahoo! Finance article also confirms the trend for China’s slowing growth rate. In it they cite Credit Suisse analysts predicting 7-8% growth over the coming decade. That’s still well above the average for the developed western world, which will most likely be no more than 2-3% growth over the coming decade.

So far the overall commodities index tracked by UBS is up a breathtaking 78% since 1999, the beginning of the super-cycle. However, we could be very close to end of this cycle.

When commodities go up it usually cuts into corporate profits and causes massive price inflation. The only reason we haven’t experienced this is due to the special circumstances of business and finance in an economy on steroids. A lot of off-balance sheet items and quixotic accounting makes net income a very fuzzy number to follow. What is apparent is the food and gas inflation. That’s the inflation we have been feeling the most, a lot of it is due to this commodities super-cycle. When the price of corn, wheat and other staple commodities goes up, eventually the price of food using those components goes up as well to keep up its profit margins. If anything the end of this commodities boom will be a major relief to the everyday layman.

Euro Pricing In More Drama, Less About the Drachma

2012-05-24T15:20:00.000-07:00

‘Grexit’, ‘Acropalypse’, ‘Geuro’, whatever silly name has been added to our lexicon still doesn’t describe what is really lurking in Europe. The fate of the European Union rests in the hands of those strong diplomats who still are winning against the rest of Europe.

France was reluctant to join the European Union and adopt the Euro due to national pride, if that sentiment becomes contagious—which it is among countries who feel they give up more than they gain—the fate of the EU will be a lot grimmer.

The Wall Street Journal notes the price of the Euro, which is staggeringly below a key level near 1.2575, is the direct result of market participants pricing in an inevitable exit by Greece from the Euro. Essentially Greek government printing presses are ready to re-circulate the Drachma, one of the oldest currencies in the world.

Yet the way the Euro is tanking, it most likely is pricing exits from other countries, including the PIIGS nations. Portugal, Ireland, Italy and Spain have all fallen short due to bad bonds and nearly all countries have the same problem that France has, which is an unwillingness to compromise itself for the rest of Europe. What this means is they may not want to fight to stay in the EU. If they feel they can heal their wounds and become stronger and more independent in the near future they will opt to stay out of the EU.

If the Euro can not muster up enough international cohesion like there is the United States, the entire European Union could fall by the wayside. Would the EU open itself up to the possibility of annexing countries that would gladly open their arms to the opportunity of joining the EU but for the most part have been denied?

For example, would champions of a beleaguered EU annex Turkey, a country that believes its sentiments are in line with that of modern Europe? Turkey can only be considered indo-European at best, annexing them would clearly be a compromise or else their acceptance would have been with open arms by now. Turkey would be able to aid the EU economically and militarily, yet they are the gateway to the Middle East. That implies that just about any country could become a candidate for the EU so long as they have a strong enough economy.

Europe Hammering Out a Deal: Is the Euro in Trouble?

2011-10-31T15:36:00.000-07:00

Europe is facing a staggering debt crisis much like what was experienced in the U.S. just a couple years ago. The problem with systemic crises that involve debt is they linger for years. Some speculate that the EU could be facing a multi-trillion dollar problem. Currently, they are uncertain on how to save ailing countries like Greece with a 1 trillion euro bailout fund known as the EFSF.

France and Germany have been in talks to lead Europe into a safe recovery landing. They are split on how to handle the problem though. France's Sarkozy would like to turn the EFSF bailout fund into a participating Euro zone bank enabling it to sop up printed money from the European Central Bank. Germany is opposed to this idea. Another suggestion was the creation of bond insurance for sovereign debt that is ready to default. Yet, many would say that insurance is only beneficial when there is not a concentration of bad debt.

So far Germany and France are calling for a 9 percent capitalization of banks and a 60 percent Greek write-down or "haircut," according to Reuters. These are steeper figures than before with 6 percent capital ratios and only a 20 percent Greek debt write-down.

This could spell disaster for the value of the euro, which is trading near $1.41 -- a very rich price considering the amount of trouble Europe is in. At that price, markets seem very complacent, or perhaps hopeful that a European bailout will fix everything like it did in the U.S. Yet, the numbers are becoming more and more drastic, and the problem seems to be more and more pervasive.

If France is under pressure of a credit downgrade, how are they supposed to be part of the solution? What's more, the U.K. wants nothing to do with any bailout. And according to a Reuters statistic, a 9 percent capital ratio, 60 percent write-down -- all else remaining equal -- there will be a bank shortfall of €257.4 billion, more than twice the projection given by the stress tests out of Europe. That equates to 67 banks failing without any intervention.

When banks fail, a lot of their assets unwind, which results in major imbalances in currency markets. Expect the euro to come back down to face reality, and even plummet with currency volatility spiking up.

Pair Trade Update; Buying NASDAQ, Selling S&P 500

2011-10-15T13:46:00.000-07:00

In July of this year there was a good opportunity to put on a critical pair trade or spread between the NASDAQ and the S&P 500. The trade simply called for buying the NASDAQ index and selling the S&P 500. However you chose to do it was up to you and your portfolio capacity.

The results so far have been very consistent with only 5 losing days out of 73 trading days. Currently, the trade would have returned 3.58% from July 1, 2011. That doesn't seem like a lot, but it is and the results were very consistent.

Looking at the chart below it looks like the best time to make the trade again if you haven't already is when the total return since July 1 goes below 2.5%. Typically, all else remaining equal, this is a good trade to put on when the market has reached a perceived bottom and due to the recent rally we have not reached a perceived bottom but should in due time. That's because the NASDAQ moves with a faster momentum and volatility than the S&P 500 so when times are good the NASDAQ is really good, but when times are bad it's also very bad

Notice on the chart below that the peak of the trade was at September 23, 2011 with a cumulative gain of 3.88% during that time bounced off a critical level and went up a little afterward. Also notice on the trough formed on August 19, 2011 with a cumulative gain of -0.84% the market touched off the same level and bounced up again from that critical point. So for the spread trade the return will peak and trough during very volatile times in the market.

Important News

2011-10-09T12:21:00.000-07:00

Trade Agreement With South Korea

Posted: October 3, 2011

The Key of "IC" in the ‘”DOFPIC” Mantra of Trading

2011-07-21T13:38:00.000-07:00

The DOFPIC mantra of trading will make one successful in any form of deal-making—but especially trading. Most people know that successful trading requires discipline and other virtues such as patience but where does most of their knowledge or empowerment come from? Most of the time people find value and build virtue from outside sources as opposed from within. This is because most of the concentration or focus is centered on the logic of the trade or the quantitative side of things. "DOFPIC" is not meant to disregard that but rather balance that and also recognizing that knowledge of the truth or virtue is not necessarily what is the main thing. The main thing is that virtue is not affected by knowledge. In other words knowing this won’t necessarily change your virtue but will very much enrich your understanding of trading discipline and maintaining consistency in managing success. Do you know why? It doesn’t matter. That’s because the article is about the "IC" part of "DOFPIC". Assuming that you know about control in trading you know that the idea is not necessarily to prove a scientific fact or truth but rather to explore further to become a more sophisticated trader or business person. "DOFPIC" is a mantra that will help a trader remember and implement control and manage their trading as well as balance emotions with quantitative goals.

The key of IC in DOFPIC is impacted either externally or internally, either from outside sources or from within. The “I” and the “C” stand for independence and confidence. If you are truly independent then the confidence will come from within, this renews a cycle of the DOFPIC method, there’s a reason that DOFPIC begins with "DOFP" and ends with "IC". The whole process of this trading mentality and separating the logic from the virtue is part of human behavior that’s why "DOFPIC" becomes a mantra. You can repeat it to yourself even if you don’t know what it means; remember, knowledge is not going to affect your powerful virtue. Yet the world of trading is filtered by knowledge and information, that’s why the key of "IC" is to remain independent and if not you’ll know so and be able to find a source of power. After all, the beginning of power is recognition of its source.

If You Believe In the Luck of the Irish…

2011-07-20T14:00:00.000-07:00

You may want to start considering investing in Ireland. Depending on your investment profile this may be the grand slam home run that your portfolio will need in the coming years.

The reason it may be a grand slam home run is because the Irish Stock Exchange (ISEQ) is deeply underappreciated. Granted, the country went through what was considered to be “the most expensive financial crisis in world history” and the country is experiencing pandemic liquidity problems alongside the other PIIGS nations which include Greece. Yet the semi-good news from Greece should be a hint that the market has bottomed for the PIIGS.

Looking at the facts, the central bank of Ireland had to bailout the “Big 4” major banks of Ireland which include the Bank of Ireland. At the beginning of February, 2009 the Bank of Ireland ingested €3.5B in capital to maintain day-to-day operations alongside the other 3 major Irish banks. Now, the central bank of Ireland has commissioned a potential €70B in capital to the ailing banks.

Taking it into perspective, their crisis is ongoing; whereas in the U.S. people typically agree that there has been a recovery since 2010. Recall the U.S. bank bailout of major banks that were “too big to fail”.

Citigroup had famously hit the tank breaking the barrier of a penny stock just like Bank of Ireland has done. Citigroup had increased five fold and garnered a market value equivalent to the amount of capital injected into it from the bailout, after an infusion of capital from the Federal Reserve. Markets like capital injections!

In the second week of February, 2009 after the central Bank of Ireland had received €3.5B do you want to guess what happened to the stock? It went up five fold. In fact, Bank of Ireland’s market value went up 29 times from trough to peak! This trough was the ultimate low that the company had experienced since its noble inception of 1783!

Of course you haven’t missed out on this once in a lifetime opportunity, if you think like a billionaire investing in Bank of Ireland would be a lifelong investment. There’s another reason you haven’t missed out though because the price has fallen to the ultimate low again of £0.12 as quoted on the London Stock Exchange.

And this time the central bank is potentially injecting 10 times what it did in February 2011 under the agreement that the “Big 4” shrink their balance sheets by the amount of capital procured; €70B. Speculatively speaking, investing in the Bank of Ireland is sheer gold especially when considering the stellar price recovery of distressed U.S. financial stocks.

Ireland’s situation is different given the austerity precept that pervades the industry now, and there may be a pledge for bank nationalization which would effectively be a government buyout of the company. The government has made a deal where they may own up to 70% of the bank. However, it wouldn’t be all too surprising to see the Bank of Ireland trading at 10 or even 20 times what it’s at now in the coming years. All emotions and speculation aside, this is a once in a lifetime opportunity to buy a stodgy bank for pennies on the dollar. Also, investing in Ireland is a very good idea.

UPDATE:

Bank of Ireland passes EU stress test with flying colors! They have posted a tier-1 capital ratio of over 8% which means they are well enough cushioned for adverse scenarios and would remain solvent. Currently, Bank of Ireland and Allied Irish Bank are awaiting EU clearance for more aid and they will have to remit a restructuring plan to the EU by the end of July.

Market Hinting a Bull-Flattening Cycle

2011-07-13T22:21:00.000-07:00

The economy has recovered and just recently has been putting on the brakes, it's time to expect a bull flattening cycle in the bond markets. It's not only a secular thing that happens when the economy is in a slump it's mechanically going to happen based on the actions of the central bank.

One way to understand bull-flattening is to take the point of view of a bank who is no longer able to borrow and short-term rates and lend at longer term rates. Typically, banks are able to profit in normal bond bull markets this way, by lending at low rates and lending at higher rates. However, we are not in a typical scenario so the bond market is showing a atypical steepened scenario with the short-term rates near zero and the 30 year bond above 4%. That's very steep considering the projection for economic growth is moderate at best.

Mechanically, the central bank has implied that quantitative easing programs QE1 and QE2 have artificially steepened the yield curve.

Estimates based on a number of recent studies as well as Federal Reserve analyses suggest that, all else being equal, the second round of asset purchases probably lowered longer-term interest rates approximately 10 to 30 basis points.³ Our analysis further indicates that a reduction in longer-term interest rates of this magnitude would be roughly equivalent in terms of its effect on the economy to a 40 to 120 basis point reduction in the federal funds rate.

The last quote was pulled from the central bank testimony by chairman Ben Bernanke. Esentially, it implies that mechanically the quantitative easing has been lowering rates on an even scale. More of the long-term treasuries have been less effected than the short-term treasuries. With that said the unwinding of these programs should continue to flatten the yield coinciding an already secular move towards a bull-flattening cycle.

A Pair Trade With NASDAQ

2011-07-01T15:20:00.000-07:00

Looking at the hard facts as well as by smelling the sweet and sour aroma of money being made, technology companies seem to be poised to gain in this economic environment.

Let’s assume a null scenario of the U.S. economy and make exogenous unpredictable events constant so that they do not effect our perception of the null scenario. Under our simplified economic precept we see:

A beginning of a new economic cycle
Aftermath of a debt crisis
Inflationary pressures
Distressed dollar

We are technically undergoing a brand new economic cycle one that most likely will not be like the past three or four cycles. Experts in capital markets and the economy predict that the U.S. will experience what the Japanese have experiences for the past decade or there’s the possibility that we experience a Western Europe economic cycle. Most likely it will be a mix of the two depending on our level of productivity. Essentially, this is a top-down thesis of entrenchment that has been mentioned will be mirrored in the markets all else remaining equal.

There are also inflationary pressures which on balance have brought up the tide for technology companies via Google, Facebook, Apple, Sun Mic, Linked In, etc. What this means is there most likely will be a follow through of price appreciation assuming that this money from the lifted tide is recycled. And tech. companies have quite a desire for investments and capital markets!

Additionally, this fresh new economic cycle is coming off the heels of a pandemic debt crisis this is ongoing. Typically debt related recessions have lasting effects and so the wounds linger. Companies with a lot of debt and debt-related problems will only perform well during times of economic relief and stimulus. Simply put, a company with little to no debt has less risk and more ability to gain during duress. NASDAQ companies are ones with little to no debt on their balance sheets. That means that the NASDAQ will be better positioned to appreciate versus the S&P 500 which is more debt-laden.

Why not just buy the NASDAQ?

Even though NASDAQ tech. companies are positioned better and should do well they still hold risk. That risk includes liquidity risk and market risk. With that said, the pair trade ameliorates the risk profile of your investment because the short side negates the liquidity and market risk while still positioning for a gain.

All things remaining equal, the NASDAQ index is more volatile than the S&P 500 which means it would be best to put the trade on during perceived market bottoms. Although no one can predict the markets it’s a great way to measure into the investment because the trade does very well from the bottom going back up. Since we are bouncing off a perceived market bottom this trade is advisable now.

Portfolio Positioning; What to Do

2011-06-25T13:52:00.000-07:00

You may want to position your portfolios or at least re-balance. Markets go up, markets go down. When the market is net flat, or indifferent it should make you worry. Then you should change your view of investments. So far this year stocks' best rallies were timed rallies.

As of the end of the second week in June, stocks have given up all their gains for the year for the second time. In other words, if you invested in stocks in the beginning of the year and held on you wouldn't have made anything and further risked getting taken if there were to be an ensuing sell-off.

There shouldn't be a ruthless correction but investors should be prepared to take advantage of opportunities as well as reposition for the Summer months. Summer is usually a testy time for markets with no real direction or advancement.

Looking at investments like a puzzle is one way to understand portfolio positioning. The S&P 500 year-to-date has returned 0.4% with a risk factor of 21.66% (standard deviation). Inflation-indexed bonds on the other hand have returned 5.36% year-to-date with a risk factor of only 5%. Granted this is just a snapshot of the current situation, it still shows how deficient stocks have been.

Doing the math, investors shouldn't invest more than 30% in risky stocks given the current situation. This is based on portfolio optimization given two assets, one risk-free and one risky: inflation-indexed bonds and stocks in this case.

Understand that stocks have been resilient despite known weaknesses. Stocks have also proven to be relatively strong during rallies but the markets are approaching a decision day that is kind of mind-blowing. At the end of this month QE2 will expire leaving the Fed little leeway to buoy markets as it has been doing. What's more, the debt load has reached its limit and without government action the U.S. may default on its inability to pay bonds.

All of this is already understood in the markets however there will be no other option than for there to be a major move. Finally, the Fed has been known to throw curve balls and surprise the markets pleasantly during these ultimatums.

What this means for the investor is that he or she should position the portfolio to expect the inevitable; which is rising interest rates and falling stock prices. The investor should also give slack for the possibility (with a hand-written expected probability) of a surprise event.

The recommendation based on the math is to position the portfolio with 30% stock funds, 70% inflation-indexed bonds, with a hand-written probability of a surprise event being 0-10%. My personal hand-written probability is more like 50% of a surprise event which would make my stock allocation go to 45% and the bond allocation 55%. If you think the chances of a surprise event are 75%, the stock allocation goes to 53% and the bond allocation goes to 47%. If you wish to position the portfolio expecting a surprise as opposed to the inevitable, then your stock allocation should be 60% with a bond allocation of 40%.

Furthermore, if you really want to position yourself without bearing 100% risk you need to consider going long and short to neutralize your risk and expose yourself in a timely fashion. Consider shorting the S&P 500 while simultaneously going long the cubes NASDAQ. Be sure that both sides of the spread trade are equal. You can make one side larger than the other depending on your bias at any given time.

Excerpt

2011-06-08T17:00:00.000-07:00

INT.BOARDROOM-MORNING

SEAN is on the phone with JAF&JIBER.

SEAN

(into phone)

There’s another suitor.

J&J (V.O.)

(over phone, filtered)

What...? Who?

SEAN

(into phone)

P.B. and Associates

J&J (V.O.)

(over phone, filtered)

(stern)

Tell ‘em you don’t want to deal with them.

SEAN

(into phone)

Look, the board of directors loves playing monopoly.

J&J (V.O.)

(over phone, filtered)

What about us?

SEAN

(into phone)

They don’t think you’re the one. I mean I like you, that’s why I’m calling you.

J&J(V.O.)

(over phone, filtered)

What’s the offer?

SEAN

(into phone)

Does it matter?

J&J (V.O.)

(over phone, filtered)

Of course it does. For us it does.

SEAN

(into phone)

It's $112 billion.

8.) Schwab buys OptionsXpress for $1B

2011-04-23T16:05:00.000-07:00

Schwab to Buy OptionsXpress for $1B The very next day OptionsXpress went up 16%. How much would the deal have cost if Schwab bought OptionsXpress the next day?

a.)The same

b.)Not enough information

c.)$1.16 billion

d.)$0.84 billion

Email your answer to optquote@gmail.com or tweet your answer to @philippianist.

7.) Math question

2011-04-23T16:00:00.000-07:00

The market for MBS is $4.6 trillion and the U.S. government owns roughly 3.2% which is $X. How much bigger is the rest of the market compared to the U.S. government’s holdings?

a.)96.8% larger

b.)196.8% larger

c.) 30.25 times larger

d.) Not enough information.

Related article: Upcoming Treasury Sales of MBS