Send Message
View as an RSS Feed
  • As Bond Yields Continue To Drop, Investors Should Start Looking Elsewhere  [View article]
    Sigh. If I could time the markets with your obvious success, I'd be a trader, and if I were a trader who knew how to time the markets, I'd be retired. And so would you. This article was about investing, not trading. And for whatever I may think of Buffett as an investor, his views on uninvested capital are strongly tied to his company's position as a highly leveraged financial entity and are dangerously wrong for individuals.
    Oct 22, 2012. 12:08 PM | 1 Like Like |Link to Comment
  • As Bond Yields Continue To Drop, Investors Should Start Looking Elsewhere  [View article]
    Cash is not an investment. It pays nothing, just like gold, silver, and a lot of other things that are not investments. Unlike most of them, however, cash offers its owners a guaranteed loss. The only worse asset is a lottery ticket, and at least that offers its owner some hope.
    Oct 21, 2012. 09:29 PM | 2 Likes Like |Link to Comment
  • Microsoft (MSFT): FQ1 EPS of $0.53 misses by $0.03. Revenue of $16.01B (-8% Y/Y) misses by $410M. FY13 operating expense guidance of $30.3B-$30.9B re-affirmed. Shares -1% AH. (PR[View news story]
    Microsoft is completely irrelevant in the two major growth areas these days: cloud/data centre and mobile/tablets. Its share of both markets is in the low single digits. The desktop PC is the new buggy whip and demand for obsolete technology with a cheaper replacement can evaporate far faster than most people realise.

    The company really has no hope in the cloud space because Windows is a poor fit there technically and its hefty licensing costs don't play well in a cutthroat market. Azure is not considered relevant and no other significant player has a Windows-based cloud. Many don't even bother to offer Windows guests and for those who do it's a miniscule share of their sales. With those handicaps, it's understandable that Microsoft are not really focusing there right now.

    So that leaves mobile, and the only plausible scenario in which Microsoft remains relevant is that the Surface gets them back in the game somehow as a strong #3. Consumer demand is fickle and it's not clear to me that any of Microsoft's mobile offerings is going to be viewed as compelling. When you're as far behind as they are, it's not enough to be just competitive, and everything I've seen suggests that Surface and Windows Phone 8 are at best just competitive. Throw in the lack of app ecosystem and it's easy to imagine these going nowhere.

    The next-best hope is that corporate desktop demand picks up again. I don't see those hopes being worth $28 a share. The way the market is valuing Microsoft is based on the business model of taxing consumer and corporate desktop PC purchases, which were predictable because it was simply assumed that everyone needed PCs and would replace them on a regular basis. But demand for that product is going away, the business model doesn't work in cloud, and there are established tax collectors in mobile already. Valuing Microsoft correctly requires figuring out what its future business model will be and where demand will come from. Valuations based on the old defunct business model will prove wildly inaccurate.

    Currently Microsoft yields 3.2%. I would argue that it should yield 10%, like Pitney Bowes, another established near-monopoly player in a rapidly declining market with no clear path into any growing or even stable business. That would value MSFT at $9.20, reflecting the uncertainty of the company's future revenue sources and the speculative nature of the stock. Other analogues would be newspapers, which are farther along the obsolescence curve and have already seen earnings crumble; most of the newspaper companies that are left today are successfully transitioning to other types of media products or diversifying into other markets entirely. Those are the kinds of changes Microsoft will have to make to be the Washington Post and not the Rocky Mountain News. Such a large-scale upheaval and its attendant risks justify a much lower valuation than the market is currently offering.
    Oct 19, 2012. 09:50 AM | 1 Like Like |Link to Comment
  • Microsoft (MSFT): FQ1 EPS of $0.53 misses by $0.03. Revenue of $16.01B (-8% Y/Y) misses by $410M. FY13 operating expense guidance of $30.3B-$30.9B re-affirmed. Shares -1% AH. (PR[View news story]
    These numbers are far worse than IBM or GOOG yet the reaction is muted. Windows 8 will be a complete disaster and the consumer PC market will be gone entirely in 5 years. Why would anyone want this?
    Oct 19, 2012. 12:12 AM | Likes Like |Link to Comment
  • With much of the investing public presently focused on the doom and gloom aspects of the fiscal cliff, little attention is being paid to the upside if the situation actually gets resolved. BofA Merrill Lynch has a name for what will come, calling it the "Great Rotation" — a move out of bonds and into stocks triggered in part by a resolution of the crisis at some point in 2013.  [View news story]
    Anyone who imagines a future rotation out of bonds has already missed the boat. Over the last 3 years, IEF is down 15% (coupons down 38%). In that same time, SPY has fallen about 15% as well (dividends down 28%). The quiet story is that investors have resoundingly rejected the dollar and are furiously selling off dollar-denominated assets. This has been happening for years; it is neither nascent nor speculative. Bond prices would be much lower still if not for large-scale noneconomic purchases by what are essentially the issuers with fabricated money.

    There's been a rotation, all right, and it's worked like this. The central bankers have printed trillions of fresh dollars and used them to purchase bonds, driving up their nominal (but not real) prices. Economic actors have dumped their bonds and instead chosen to own mostly gold. Stocks have not enjoyed the same sort of direct official support, but their less rapidly declining dividends have allowed them to hold their own relative to bonds just the same. So the true meaning of the rotation is clear, then: rational investors, having rejected the dollar and government debt, have moved the capital they never intended to place at risk out of bonds, where they realised that it was now very much at risk, and into gold where it is not. There is no confidence in the decaying political and financial regime, and without confidence there is little appetite for stocks or other investment. We are reduced to waiting for this tired regime to implode, at which point it will be time to load up on equities and invest in a new America. But no one can say when that moment will arrive.

    That's the tale of the tape. The rotation out of bonds has largely run its course already; most of them are now held by noneconomic actors who will not sell them in any case. Stocks hold promise that will someday be unlocked by regime change. You will lose less money owning stocks than bonds at this point, but unless that dramatic moment of change arrives fairly soon, at best you will pay too much for too little. Gold and wait is where we are, with modest investment in dividend-paying stocks if you feel like rolling the dice on the now-overwhelming political risks that dominate the economic landscape. It's a sad, dull place with no profits to be had and little to do but hope for a better tomorrow.
    Oct 13, 2012. 01:46 AM | 2 Likes Like |Link to Comment
  • This Popular Government-Backed Income Investment Is Worthless  [View article]
    It would be acceptable for something used as a hedge to be an imperfect one, but in this case the asset's sole purpose is to provide a real return. It doesn't hedge some other position for real-money investors; it just is. And even if one believes that the CPI accurately reflects the cost of living, this particular asset guarantees a negative real return, and that's before you've paid the taxes you'll owe on the CPI component. TIPS are, in fact, worthless as an investment to individuals. They're not worthless assets, but there's no set of personal circumstances that would make them an appropriate investment given today's conditions.

    The only entities for whom TIPS make sense, like any other Treasury security, are those with access to interest-free dollar loans. For them, it makes sense to borrow dollars to hold higher-yielding dollar assets. The dollar-denominated debt hedges out the dollar depreciation of the notes or bonds, leaving only the spread, which in this case is CPI - 75bp. Institutions may also use them to hedge swaps or other contractual arrangements that are linked to the CPI, recovering the 75bp of negative yield through fees. And of course they also have plenty of ways to pass on or eliminate the tax liability on the CPI portion of the security. None of these conditions applies to the real investor, however.
    Oct 12, 2012. 02:04 PM | 1 Like Like |Link to Comment
  • One Billion Zynga Reasons To Continue Shorting Facebook  [View article]
    While I can't speak for Noreika, there are two reasons I don't short; both are related to market risk:

    1. Fundamentally, the only way to make money from a short position is for the market price to decline. That makes shorting a trading activity (trading is an operating business that profits by predicting changes in market price), not an investment activity (investing is the act of purchasing assets for the income they generate). The company's businesses can collapse, its dividends shrunk, eliminated, or never paid in the first place, its managers act foolishly, and more, but if the market price doesn't decline, you can't make money. In a long position, you can and often do make money regardless of the market's opinion of the stock.

    2. Short positions are inherently leveraged positions. A trader can be forced out of a leveraged position if the market moves against him, and as a result can lose money even if his thesis later proves correct. For the same reason, I do not buy stocks on margin. As an unleveraged real-money investor, no one can force me to sell the stocks I own no matter what the market price does.

    I agree with everything you are saying about Facebook, and have been saying similar things for a couple of years now. I have little doubt that this company is in fact the next MySpace. Unfortunately there is really no way to gain inverse exposure to the company's business outcomes, only to its market price. While buying puts eliminates some of the drawbacks of leverage that shorting entails, it still requires the market to recognise a failing business in order to show a profit. Having watched the market for the past 15 years, I have absolutely no confidence in the market to price stocks rationally and have no interest in betting my hard-earned money on it doing so. While it's easier to identify hopeless businesses than those that will thrive over the long haul, it's much less risky to keep the market out of my returns by limiting myself to long positions in dividend-paying stocks. Maybe someday this will change, but history suggests it probably won't.
    Oct 8, 2012. 11:13 AM | 8 Likes Like |Link to Comment
  • Buy These Winners Of Windows 8: Part 2  [View article]
    Well, maybe. If there's no (dividend) growth, it will take you 25 years to get your nominal investment back. In real terms, even ignoring taxes as you (in some ways) can in a retirement account, you never will; forget the CPI, the cost of living is going up a lot faster than 4% each year. Unless you really believe Dell is going to experience growth and pass that growth on to you as a common shareholder, a 4% dividend is no reason to own it, especially if as in this case there is a significant risk that the business will collapse entirely before you get your investment back in dividends. Dividends are everything and cheap stocks are great, but if they're backed by a bad business, forget it. I'm not sure Dell's business will be even half its current size in 10 years, much less 25. There's a price to be placed on that risk and I'm not entirely sure what it is, but I do know 4% isn't even close. Maybe 12%? I don't know. Good luck to you, though. I'm afraid you're going to need it.
    Oct 7, 2012. 01:10 AM | Likes Like |Link to Comment
  • Betting Against Zynga's Extreme Failure  [View article]
    The problem with tangible-value calculations here is that Pincus has absolute control of the company. He cannot be forced out, there are no activist investors on the scene to force divestitures or a sale of the company, and it's painfully obvious that he's not planning to change anything. Taken together, all of that means that those assets will be long gone by the time anything changes.

    ZNGA is at this point nothing more or less than a call option on a resurgence of Internet poker. The problem is, if and when that happens, it will be the big boys leading the charge, and I haven't seen anything in Zynga's execution, brand, or technology (such as it is) that would lead me to think the big boys will want them as a partner. Pincus is hardly the kind of guy a casino boss wants to do business with, and after the Full Tilt debacle I suspect the leaders are going to want a partner a little more staid than a tiny young company known for cutesy Facebook games and a business model centered on selling virtual goods. As crazy as it may sound, I'd be looking more at someone like Yahoo! or Amazon to lead that charge. Both companies have aggressive leaders, plenty of technical expertise, knowledge of the consumer space, and especially in Amazon's case a willingness to stretch the envelope with new businesses. And Bezos can definitely speak the language. In fact, the more I think about a partnership like that, the sillier the idea of Zynga finding its renaissance in Online Poker 2.0 seems.
    Oct 5, 2012. 07:01 PM | Likes Like |Link to Comment
  • Buy These Winners Of Windows 8: Part 2  [View article]
    The Windows 8 launch is what will finally kill off the PC. They'll "launch" it and no one will buy it. As weeks turn to months they'll go into full-on panic mode. But individuals will look at Windows 8, which they don't want, and ask why they should buy a PC and pay the Microsoft tax as well when they could pay less for a tablet instead. Most will shrug their shoulders upon learning that they can no longer get the previous more usable versions of Windows and buy from Apple or Samsung instead. Meanwhile corporate customers will handily reject Windows 8 as well, staying with previous releases while evaluating "strategic IT initiatives", which will be code for "getting away from Windows". A few years from now the "PC market" will consist primarily of small and medium enterprises who missed the boat.

    While tablets are not really suitable replacements for PCs, the fact that Windows 8 is garbage will be the encouragement the industry needs to flesh out product lines while individuals defer new PC purchases. By the time Microsoft finally backtracks on the disastrous choices they've made, most of those deferred PC purchases will be canceled altogether in favour of better options that became available in the meantime.

    So the big winners from Windows 8 are Apple, Google, Samsung, Amazon, and a handful of other companies betting big on the iOS and Android ecosystems. It remains to be seen which will do the most to help people use tablets for things they've historically used PCs for; those companies will be the biggest winners here. The biggest losers will be Microsoft and the consumer-grade PC vendors; vendors like Dell (servers, storage) and HP (services, software) that target enterprises and have businesses beyond the PC will suffer less, especially since the server business should pick up as more computing moves from fat clients to data centres in support of thinner client devices like mobile phones and tablets. The main beneficiaries of that trend, however, will be low-cost OEMs and ODMs like SMCI, Quanta, and Huawei, as smaller companies who traditionally bought from Dell or HP eliminate data centres in favour of IaaS providers who mainly look to lower cost manufacturers. Other potential winners include consulting firms like Accenture who should see plenty of work transforming medium to large enterprise IT shops from PCs and Windows to a variety of new technologies including all of those I've just described as well as PC replacement technologies for workstation-type tasks that still require local compute. Expect companies like Red Hat to pick up a lot of that business on the software side.

    Surely none of this is a surprise to anyone, though, right? It's not like this hasn't already been happening for a year or two now. The giant thud that Windows 8 will make as it augurs in from 50,000 feet will only accelerate the trends that are well under way.
    Oct 5, 2012. 03:44 PM | Likes Like |Link to Comment
  • The 3 Scariest Government Charts  [View article]
    Where do you think the money comes from when these securities are "redeemed"? Out of current funds, which means one of three things: taxes must be increased to satisfy the obligation, other services must be reduced, or borrowings must increase. Since there is no such thing as a YoY federal spending cut, and payroll taxes have actually been reduced rather than increased, it should be obvious that such redemptions do in fact increase the deficit.

    As for what should have been in the lock box, there are dozens of good examples around the world. It's called a sovereign wealth fund, and countries that are serious about providing future pension payments all invest their current windfalls. They do not create new securities backed by nonexistent future incremental tax revenue and pretend that they are investments. Even if the scam seemed attractive, such securities would be very poor investments as they will almost always yield less even in notional terms than any other available investment. And since they are not even real investments, they actually yield only the true return on federal spending (i.e., the government analogue to a corporation's IRROIC), which is likely negative. As yet another example of this, private corporations are not permitted to fund their pension plans with claims on the corporation's future revenues. Instead, they are required to supply cash that is then invested in assets that will generate current and future income, which in turn is used to pay obligations of the plan. The plan's managers are responsible for ensuring that the plan's assets match its future liabilities based on actuarial assumptions.

    That is the strategy that all legitimate pension programmes, including SWFs, employ. Social Security is the odd man out, because unlike the others it is not a legitimate pension programme. It is a pyramid scheme with a twist: leverage. The special securities in question are simply claims on new pyramid levels that are purported to exist in the future. Because pyramid schemes pay returns that are not generated by investment, and usually exceed the returns that one could obtain in any case, they invariably need to enroll new participants at a rate greater than the growth rates of both population and output. Therefore any pyramid scheme will eventually exhaust its supply of new participants and find itself unable to pay its promised returns. There is nothing about Social Security that makes it any different. The claims on future enrollees will grow until it becomes obvious to all that they represent a rate of incoming cash that cannot possibly ever exist, at which point it will no longer be possible to continue the scheme. This leverage allows the game to continue longer than it otherwise would have, but it does not allow it to continue indefinitely, and things that cannot continue indefinitely will eventually stop.
    Oct 5, 2012. 12:17 PM | 2 Likes Like |Link to Comment
  • More on the Annaly (NLYdowngrade: Morgan's move is part of a larger theme of preferring hybrid mREITs (those buying non-agency MBS) to agency mREITs. The hybrids should benefit from higher non-agency yields and an improving housing market. Upgraded: Invesco (IVR). Downgraded (other than NLY): American Capital (AGNC) and MFA Financial. Everyone's piling into non-agency paper.  [View news story]
    If only we could make some sort of collateralised debt obligation or something out of all these crap non-agency mortgages, to make them safer. We could structure them so that they're rated AAA and then anyone could buy them. That would be ideal since everyone needs to chase yield but not everyone can buy risky assets.
    Oct 4, 2012. 01:27 PM | 4 Likes Like |Link to Comment
  • The 3 Scariest Government Charts  [View article]
    Yes, tuck, that's correct. I don't know exactly what will happen, and did not claim to. There is no telling how many people will die in a multi-faction civil war or how brutal a technocratic police state could be given the advanced technology available today in the West. It's entirely possible that the Syrian or Russian outcomes could be much worse than their archetypes; after all, it can always get worse. Making things better is hard but making things worse is easy. I was simply pointing out that a scenario limited to economic damage, with a lengthy depression followed by fiscal responsibility and an eventual slow recovery driven by declining debt levels in the context of a stable currency, punctuated by occasional riots by the moochers and their sympathisers -- also known as the Greek Scenario -- is the best imaginable outcome and really more of a hopeful fantasy than a realistic expectation.
    Oct 4, 2012. 01:05 AM | 1 Like Like |Link to Comment
  • The 3 Scariest Government Charts  [View article]
    Come on man, don't be rude. Puff, puff, pass.
    Oct 4, 2012. 12:58 AM | 2 Likes Like |Link to Comment
  • The 3 Scariest Government Charts  [View article]
    There is no such thing as bankruptcy for sovereigns. Get your terminology straight at least. Sovereigns, including US states and the federal Treasury, simply default. At that point, unlike a bankruptcy proceeding, there is a messy resolution process in which politics, ego, money, and power collide. Anything can happen, and many things have when this has occurred in the past, ranging from settlements negotiated by third parties (see "Brady bonds") to war. It couldn't be more different from bankruptcy.
    Oct 4, 2012. 12:57 AM | 5 Likes Like |Link to Comment