Monday, April 30, 2007
Sunday, April 29, 2007
The anatomy of Stagflation and its victim US Dollar. CS
With latest report about anemic GDP growth in 1st quoter 2007 of just 1.3% annualised, we should carefully examine the situation of US economy and stock market health. Stagflation is a word you should know about at the moment. It is defined as: " Condition of slow economic growth and relatively high unemployment - a time of stagnation - accompanied by a rise in prices, or inflation. Stagflation occurs when the economy isn't growing but prices are, which is not a good situation for a country to be in. This happened to a great extent during the 1970s, when world oil prices rose dramatically, fueling sharp inflation in developed countries. For these countries, including the U.S., stagnation increased the inflationary effects." Should I remind you the price of gold in the end of seventies early eighties? Stagnation is becoming apparent with growth below 2%: if you subtract inflation, Real Output is already negative, inverted yield curve has been showing it for months signaling recession. The only way out of recession and to prevent slowing economy out of spiralling into deflation, which has put Japan on hold from nineties, is printing press which has taken many exotic forms now, but they are all the same in one: increasing amount of credit available to consumers and other market participants. Easy credit on domestic scale allowed people to consume without normal boundaries of financial health, liars' loans made it available to become homeowners to those who can never afford it (and should not for their own good). New artificial demand has put pressure on house prices and we had first bubble in housing which is bursting right now. People made their home ATM machines and supported economy by taking equity out of housing "perceived" value to cover real cash outflow - interest payments on credit cards. Everybody became property tycoons. Least prepared people has taken most possible leverage. Go and try to borrow against your gold mining stock portfolio, what discount you will receive if anyone will grant you a loan, but with housing you could get it without any down payment and with interest payment only or even negative amortisation loan. But the most devastating I believe will be financial bubble bursting in the derivatives market. Money creation by FED became multiplied without any control by derivative market in which you can get economic exposure for a fraction of a real cost of asset. In this way using the same capital you can actually take risk on more positions, "academically" it is believed that it will reduce risk, spreading it among market participants. But first it will create "artificial" demand for assets and will drive their prices up. And second risk will be "spreaded" to those who are least prepared. This flood of liquidity chasing all assets classes created bubbles all across US economy, which became financial in its nature and GM was making more money in different financial services then by making cars. But now when liquidity is drying up in form of tightening credit supply bubbles start bursting and consumer becomes squeezed without any more easy credit available: two thirds of economy is without engine for growth now. So in the best case scenario growth will be anemic and we have stagnation. But interestingly enough it will not mean automatically that inflation will come down. The trick is that USA is a net importer of oil and other commodities and is competing for supply on the world markets. Commodities are priced in USD and foreigners are ready to pay more in USD with their own currency rising in order to secure the supply. So USA effectively importing inflation back home with rising oil and other commodities prices which are underlining for all other prices. The problem here is that USA has huge budget and foreign account trade deficit. In order to finance deficit USA is selling IOU - Treasuries and will find buyers only if interest will be attractive. You have to keep "perceived" value of dollar high if you would like to play this game. How long foreigners will be accepting effectively IOU for their oil and commodities? US Dollar is reserve currency of choice and nothing else. You need to tighten credit supply and rise rates in order to protect value of your currency, but your hands are tight: economy is melting and waiting for cut - more money supply. What will be the choice - another war? Economy will not handle it, keep it on hold and we have our scenario: economy is stagnating without stimulus, housing market in painful down slope for years, markets are flat (best dream) accounting for inflation and eroding value in real terms accounted in gold, milk or egg prices. Inflation is rising: you are chasing reluctant foreigners to buy your IOU to finance deficit but they are demanding more and more discount. USD is falling against other currencies and all real assets: foreigners start to diversify from "reserve" currency further eroding its value. US Dollar becomes chosen victim because the only way to pay less on your debts in real terms is to inflate them out and repay in depreciated currency. How can you preserve your wealth? Look for real value: growing population, rising emerging markets creating industrial infrastructure and demanding commodities for its growth, rising new powers and their wealth which they will protect from falling dollar. Commodity hunger will bring spotlight for companies like Tenke mining and Lundin mining which have secured huge deposits of basic metals like copper and zinc with demand for years to come. Falling US Dollar will ignite investment interest to companies leveraged to price of Gold and Silver like Tanzanian Royalty Exploration and Silver Wheaton. It is important to mention that these markets are relatively small and even fraction of money coming out of general market will lift sector in the next bull leg up from its consolidation phase. Sector is very volatile and you need to apply all proper due diligence and asset allocation rules, but until you can buy companies with trustworthy management with copper at 10 cents, gold at 50 dollars and silver at 1 dollar in the ground pay day will be worth the risk.
Weekend lazy: educate yourself - "sharpen the saw"
All these news should not be depressing if you are taking proper steps in your financial planing, it is only food for thinking: you are making your own life. Do not keep your eyes "Wide Shut" thou.
Financial sense broadcast:
Worst Economy Shape in years and "The Best Stock Market"? Something is wrong in this new concept: it could be you and your money:
China overtakes USA in trade with Japan - selfexplanatory:
Bubble mentality:
Friday, April 27, 2007
GDP 1st Q 2007 is 1.3% annualised USA is in Recession
Everything below 2.0% is actually a recession, if you subtract even official inflation number you will be in Negative Real output growth. Recession will be recognised only after it happen as usually, massaging the numbers is a least of Evil which is happening with the Great Country. USD from here is a very bleak story, it will not crashed but "orderly decline" is inevitable - you can not create wealth out of thin air: it is different to the pieces of paper you are making from it (or electronic records). Bernanke's helicopters are here right above your house.
Wednesday, April 25, 2007
Monday, April 23, 2007
Google Earnings: EPS is falling and Growth is slowing
Mass media and Google would like you to belive that everything is just going fine, growth is strong and valuation of a Search Engine is justified at the market cap of 152 billion dollars. After quick play with Google's own numbers you will be woundering why is Eric Schmidt is "... ecstatic about our financial results this past quarter" particularly if "...I would like to remind everybody as I have each year at this time, that we are about to enter our seasonally slower summer growth period, and make sure you factor that in when thinking about how our business will grow." So what is so "ecstatic"? Maybe EPS at 3.18 which is below EPS of 3.29 in Q4 2006. It is decline in EPS of 3% and Google is facing its seasonally slowest quaters ahead. I found it rather disturbing that company with bubble valuation of Price/Sales=12.6, Price/Book=8.2, Price/Earnings=43.2 and Market cap to free cash flow ratio of 83 (!) has slowing revenue growth rate -20% Y/Y, Google's own sites have slowing growth rate-22% Y/Y and its network web sites revenue growth is falling even faster - 24% Y/Y. It is still one trick pony with licencing and other revenue at just one percent of total revenue and even at this low level rate of growth is slowing Q/Q. Portion of Google own sites is rising in total revenue and Networks share is falling with TAC rising. It is reflecting rising competition and distribution deals which are eating margins. George Reyes at the conference call sad: "The answer is that we're doing a lot more deals and the deals are, in fact, carrying a disproportionate amount of TAC. So, at the end of the day and I think I suggested that in my earlier comments, TAC as a percentage of revenue is likely to increase given the deals that we're doing these days." Net income falls in Q1 2007 to 1,002,162 from 1,030,716 in Q4 2006 ('000USD) showing declining net Income margin from 32% to 27%. Sales per head are stagnating at low end in 2006 range at 299.4 ('000USD) All this analyses is based on GAAP figures presented by Google and accounting for all relating expenses including stock based compensation as it should be done according to Warren Buffet which is admired by Google founders. Regarding the latest corporate development Mark Mahaney - Citigroup asked: "... Secondly, a broader question just on display advertising. Larry and Sergey, when you started search, you clearly had something different in mind, something more targeted than the normal advertising that was out there. What generally changed in your thinking that made you think either that the display advertising market was big enough or that you had a targetable solution that was good enough to make you want to make the moves you made, like buy DoubleClick?" Sergey Brin replied "...Advertisers, in many cases, don't have all the metrics information they need to decide which ads to run where. So we have seen good success with that, and we think we can expand that more to broader kinds of media, not just static images and what not. Of course, with this intent to acquire DoubleClick, we think we can make more advertisers much more efficient." With so flexible motto privacy advocats will be alarmed. Deal in general seams to be based on "overreaction" to threat of losing DoubleClick to competitors which resulted in a price tag of 3.1 billion cash offer from Google and I would like to run a few parallels. It is estimated that Double click had roughly 150 million in revenue last year as reported by Wall Street Journal. So Google is paying 20.7 time sales of the company. Google itself is valued at the moment as Price/Sales=12.6, Yahoo! P/S=5.7, MSFT P/S=6.0, so Google is paying premium of 64% for DoubleClick above its own exaggerated valuation which is 121% higher then nearest competitor. By making payment of 3.1 billion dollars and buying company with 150 million dollars in revenue Google will lose interest income in the amount of 161.2 million dollars per year assuming investing in money market funds at 5.2% p.a. Most importantly Google is spending almost 30% of available at the year end 11.2 billion dollars. With flat free cash flow (1.678 billion dollars in 2006 Vs 1.621 billion dollars in 2005, operational cash flow actually decreased by 9% in Q4 2006 from Q3 to 0.911 billion dollars) and still pending lawsuit of 1.0 billion dollars there is not so much money left to fight competition war against Yahoo!, Microsoft and Old Media Guys. With effect of "law of big numbers" already shown in recent decline in EPS, slowing growth rate will become apparent even to most devoted Google followers, inability of "technological" company to create any new products and monetise already made investment in YouTube should ring alarm bells for any investor.
Thursday, April 19, 2007
Silver Wheaton is a pure play against falling USD
"Silver Wheaton Corp.'s US$485-million cash purchase of 25% of the life-of-mine silver production from Goldcorp's Penasquito project in Mexico is getting the thumbs-up from analysts."
With new deal SLW has secured supply of Silver at 3.9 USD and it is financed only with debt in USD! If you are a believer in falling USD and rising Silver this is the place where a lot of money will come: company is "pure" silver play - all its revenue is coming from silver sales, it is profitable from the day one. SLW Stock is followed by major investment banks, its market cap can accommodate big institutional investors and hedge funds. Its supply base is diversified between different producers and different countries. Technical picture is pointing to upside break out from its consolidation pattern. Acting like a "Silver bank" company's unique business model allows to secure silver supply "deposits" at lower rate and sell it later at the market rates. Now with this purchase very important step is made and all new silver supply is secured by cash payment without any share dilution. With fixed supply silver prices in the range from 3.9 to 4.0 USD and market price flirting with 14.0 USD, Silver Wheaton becomes leverage play on rising silver prices and its earnings will rise with every uptick in silver prices.
"Merrill Lynch analyst Michael Jalonen, who calls Penasquito a "world class asset" with proven and probable reserves of 9.98 million ounces of gold, 575 million ounces of silver and 3.62 million tonnes of zinc, rates Silver Wheaton a "buy." He has a US$13.50 price target on the stock (SLW/TSX), which represents upside of 3% from yesterday's close of $13.10.
Tony Lesiak at UBS is more optimistic with a US$14.50 price target. "The deal provides significant growth for Silver Wheaton and financial flexibility for Goldcorp," he said in a note to clients.
Blackmont Capital analyst Richard Gray, who said the transaction was highly anticipated, sees Silver Wheaton shares hitting $16, 22% over yesterday's close.
RBC Capital Markets analyst Michael Curran raised his target price by US$1 to US$17.
"We believe Silver Wheaton shares have been held back as investors anticipated a medium- to-large equity financing requirement to fund a Penasquito transaction," he said in a note to clients, adding that this overhang could now vanish."
Wednesday, April 18, 2007
Google Never say NEVER
Do you remember all that hype about Vonage? Is it the future of Google? Once it will lose momentum, more law suits will follow and "enormous" cash pile will be very small "Mini's" airbag on a freight train hitting the wall.
"The Internet phone service provider Vonage Holdings, which a federal court found had infringed on three patents owned by Verizon Communications, said its legal woes could lead to bankruptcy, according to a regulatory filing."
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