Tuesday, June 5, 2012

Making money on the internet

Brian Wieser on Bloomberg Surveillance on May 30th talks about the idea that in traditional TV and radio media, it's the publishers that have the informational advantage--they know what the ad spots are worth and the  advertisers do not.  On the internet, the situation is reversed.  The publisher doesn't know as much as the advertising buyer does about the user after they click away from the publisher's website.  In other words, it's not as simple as more time spent on Facebook equals more ad revenue.

Monday, June 4, 2012

More on the U.S. Consumer

Follow-up to Monday's post on the U.S. Consumer... Retail sales (RRSFS) have held up in period where:

  • Housing price (SPCS20RSA) decreases have stopped accelerating to the downside
  • Jobless claims (IC4WSA) have been coming down towards more "normal" levels
  • Oil price (DCOILWTICO) increases have decelerated and actually gone negative
  • Interest rates (GS10) have moved lower from already low levels

Note: everything in the chart expressed as Y/Y% change.

Friday, June 1, 2012

Solutions for Europe

First, my definition of the problem: the common currency without (truly) common fiscal, monetary, political, and cultural systems means everyone is effectively borrowing in a foreign currency.

Now, two suggested solutions:
  1. Form a true union like the U.S. (although, not necessarily that structure, but you know what I mean).
    This is the obvious answer that solves many of the issues that were pointed out even at the inception of the EU and Euro.  Unfortunately it's very unlikely to occur, as the EU members are unlikely to give up their sovereignty.
  2. Germany leaves the Euro.  This is the less obvious answer.  Germany, more than others, can bear the transitional pains of a currency shock (appreciation in their case) and banking losses on loans denominated in Euros.  The scenario of Greece leaving would be calamitous not only for Greece (currency depreciation in their case... assuming anyone would accept Drachmas), but also for a host of weaker-than-Germany nations that have lent to them.  

Update: so it turns out Ambrose Evans-Pritchard already thought of my "less obvious answer" like two years ago.  Goes to show you that anything and everything you can imagine is already on the internet.
This is the only break-up scenario that makes much sense. A German exit would allow Club Med to uphold contracts in euros and devalue with least havoc to internal debt markets. The German bloc would enjoy a windfall gain. The D-Mark II would be stronger. Borrowing costs would fall. The North-South gap in competitiveness could be bridged with less disruption for both sides.

Thursday, May 31, 2012

SocGen's Grice: Quality Income Index

More support for buying quality dividend paying stocks...

From BusinessInsider:

The gist of it is just like it sounds: investing in quality companies that pay out sustainable dividends tend to generate the highest returns over the long run.

Wednesday, May 30, 2012

Really??? Or: the internet is made of cats

From the WSJ Blog:
Facebook is more than a company bet. It is “an option on the World.”
The best question for FB is how to value it,” Needham writes. “Our point of view is that FB should be valued based on revenue potential from total minutes spent on FB times its powerful margin expansion engine.”
My humble take: the internet is made of cats, not friends. Also, dogs.

Tuesday, May 29, 2012

Buying VIG: Vanguard Dividend Appreciation ETF

In keeping with some past thoughts on dividend stocks I have been buying VIG.  If rates are destined to stay low for some time then I think there's going to be greater interest in searching for yield in quality dividend payers.  This is not an original idea, and expert interviews at some media outlets would give you the impression that everyone and their dog is in this trade, but retail investors still seem to be shunning stocks and buying bonds.  It is difficult to see how investors can meet their future liabilities (children's college, mortgage, retirement income, etc) in bond funds with negative real yields going out 10 years and cash paying near zero percent.

Monday, May 28, 2012

The U.S. Consumer

Is it safe to invest in the U.S. consumer?  Some investors must think so.  From Feb 23, 2012 to May 25, 2012, XLY has outperformed SPY by 4.23% (price returns)--that's for less than three months.  Over the same period, OIL was down 16.8%.  Lower gasoline costs and the housing situation no longer accelerating to the downside could explain why retail sales have been reasonably resilient considering everything that's going on with de-leveraging, high unemployment, and daily doom and gloom coming from global factors.

So what do you think, is it safe?

Sunday, May 27, 2012

Kotok on the Beveridge Curve

David Kotok at Cumberland Advisors writes about the Beveridge Curve on May 4, 2012 and graphs job vacancy vs the U6 from Dec'00-Feb'12.  He notes that the curve moves from the top left to the bottom right.  Conclusions: higher levels of unemployment is structural (and remember, gains have been due to lower participation), inflation and interest rates will stay low, and profits will stay high.

Saturday, March 17, 2012

The advantage of the large cap quality stock

Businessweek (and others) published a piece on the Coca-Cola bond offering that spoke to (1) the pace and size of debt being issued recently; and (2) strong investor interest resulting in extremely low absolute and relative yields.  The FT sums it up:
"Investors wrestling with a low yield environment are opting for the safety of owning company debt backed by solid balance sheets. That explains why companies such as McDonalds, IBM, Walt Disney and Procter & Gamble have sold paper at record low yields this year."
Large cap quality stocks (defined loosely as profitable, modestly leveraged, dividend paying large multi-nationals) are in a position to borrow very cheaply relative to the Treasury and LIBOR yield curves, and very cheaply on an absolute basis. 

As an example, Microsoft's 4% Feb 2021 bond has a yield of 2.39% which is only 10bps above the benchmark 10 yr US Treasury (source: TRACE).  To compare the absolute level against something, a quick number to grab is the EBITDA/EnterpriseValue of about 12.72% (source for all data is Yahoo! Finance unless otherwise stated).  

The obvious advantages of  raising debt is the cash to invest in efficiencies, growth, other companies, and their own stock.  Furthermore, these are not bad stocks to own right now in a variety of scenarios.  For example... 
  • If we continue to see an environment of slow, but positive, U.S. growth in a zero-to-low rate environment due to continued uncertainty about  jobs, housing, the Euopean debt crisis, and political brinksmanship: then we continue to enjoy a healthy dividend (2.4% in the Microsoft example) and benefit from any stock buybacks.
  • If conditions result in another recession: then we continue to enjoy the dividend (assuming it is not the end of the world... again) and some relative downside protection vs other more growthy stocks and more volatile risk assets.
  • If economic conditions improve: then we may expect to enjoy not only stock buybacks but dividend hikes as earnings grow--and companies will have stockpiled cheap cash to deploy for that growth.
What are your thoughts on these stocks?

Disclosure: long position in Microsoft

Monday, February 13, 2012

Understanding labour statistics

A wonderful summary of the differences between the two key sources of labour statistics at the Worthwhile Canadian Initiative.  U.S. and Canadian approaches are discussed.

Saturday, February 11, 2012

More on labour participation rates

I recently listened to a guest on Bloomberg Surveillance with Tom Keene and Ken Prewitt discussing how the drop in U.S. participation is nothing to be alarmed about because it is a function of baby boomer demographics.  Since the market is getting tougher and they are thinking about retirement anyway, they may have less attachment to the labour force. I looked at the Canadian data to see if this idea holds here.  The answer is no.  While overall participation rates have been dropping since the great recession, they have been on a steady up-trend for ages 55 and over.  Ten year chart below:


Thursday, February 9, 2012

Yellow Media Cuts Dividend on Preferreds

Announced today with their Q4 earnings. Risk of a pre-packaged bankruptcy (or something along those lines) that wipes out the existing common and preferred shareholders seems more likely.  Doh.

Monday, February 6, 2012

One Year in a TFSA

Jan 19, 2011: Contribute $5,000 to TFSA account.

Jan 21, 2011: Buy 245 shares of iShares DEX Long Term Bond ETF, XLB, at $20.06.  Rationale: lots of negative headlines, it's the end of the world, yields are going to fall.

May 26, 2011: Sold 245 shares of XLB at $20.70, 5.0% total return.  Rationale:  yields have dropped 26bps (measured by Bank of Canada V39056), they probably won't go up, but probably can't go any lower.  Outcome: very very very wrong.  Yields dropped another 99bps to the end of the year with XLB posting a 15.6% total return.

June 2011: Bought 250 shares of iShares DEX HYBrid Bond ETF, XHB, at average price of $20.37.  Rationale: if yields are not going down anymore, perhaps this will put pressure on credit spreads.  Outcome: wrong again.  XHB was up less than 1% from the beginning of June to the end of the year despite the fall in Government yields and having a duration of over 6 yrs as spreads widened.

Aug 8, 2011: Sold 250 shares of XHB at $20.65, 2.6% total return.

Aug 8, 2011: Bought 950 shares of SilverBirch Energy, SBE, at $5.50.  Rationale: This was a spin-out from UTS after the take over by Total. Possibly sold for non-economic reasons (i.e. just didn't fit into their strategy for buying UTS). Significant ownership and board representation by West Face Capital and The Children's Investment Fund (presumably they know what they're doing?).  This is an oil sands exploration company, seems to go along with the idea of exposing yourself to positive surprises (see The Black Swan).  Outcome: finally right.  Teck Resources makes bid for SilverBirch to develop the 50% of two projects that they do not already own.

Jan 10, 2012: Sold 950 shares of SBE at $9.65, 75.5% return.

Saturday, February 4, 2012

Good news, bad news: employment situation

Good News

Since its recession lows, the average work week has been increasing. Why is this important?  By a rough calculation, every 0.1 hrs equates to an annualized income of about $2B for the economy (0.1 hr/wk x 17mm workers x 23.5 $/hr x 52 wk/yr).

Bad News

While the unemployment rate has been trending downwards, the participation rate has been going down as well.  It looks like most of the improvement in this key headline rate has been from people dropping out of the workforce.  (The idea for this chart comes from a Brad DeLong chart).

How do you think consumers are feeling about their jobs?

Monday, January 9, 2012

Yellow Media Inc. Preferred Shares

There's a funny thing happening in Yellow Media's securities.  Others have spotted this idea too and commented elsewhere but here it is for those who have not focused on this (after losing over 97% of its value in 2011 this penny-stock may not be on people's radars anymore).

Two key events are likely to happen in March 2012:
  1. Yellow will pay a quarterly dividend on its preferreds ($0.265625 on the series 1).
  2. Yellow will convert the preferreds into common (at a ratio of 25/2 common shares per series 1 preferred share).

At Friday's closing prices, this means that holders of series 1 preferred shares will get a $0.95 profit, or 43%. Link to spreadsheet.

The stock is priced how it is due to concerns about the viability of the business.  Yellow took on a mountain on debt during its life as a high flying income trust and continued to pay-out too much cash even after converting to a corporation (the dividend was discontinued in 2011).  Investors are concerned about management's ability to complete the transformation from a telephone book maker to an internet/e-media services company.

Can they survive?  If its lenders continue to support the business, there seems to be enough cashflow to continue servicing its debt:
  • The company made $166mm of EBITDA (51.3% margin) in the three months ending September 30, 2011.
  • (LTM EBITDA)/(Interest) was 6.1X, and (net debt)/(LTM EBITDA) was 2.5X. 
From a value perspective, let's assume book value per share is a good starting place.  Let's further assume that 100% of intangible assets will need to be written off and 10% of goodwill (they already wrote down $2.9B in Q3 2011).  That takes book value down to about $0.27.  If you believe all that, it is still about a 66% profit.  Link to spreadsheet.

What do you think of this opportunity?

Disclosures: I am looking at this opportunity and may buy series 1 preferred shares before the ex-dividend date.
UPDATE (1/31/2012): long position in preferred shares.