Category Archives: investing

Tesla Motors: Customer Irrationality

When something irrational happens, most try to find a logical reason to explain matters. Sometimes, the reasonable course of action is to simply attribute nonsensical behavior to nonsensical-ness, as Stifel does today on TSLA.

…the reality is, these issues simply do not matter with respect to Tesla’s stock. Tesla sentiment is like a freight train… Tesla has captivated a global audience, some of whom have lost interest in distinguishing horsepower ratings among the dozens of $100k-plus luxury vehicles, others that would have never considered spending six-figures on anything but a house.

Customer sentiment != investor sentiment. When your world is the one of investment, momentum’s physics don’t quite work the way we expect.

 

Microsoft + Nokia

Microsoft has entered into an agreement to purchase Nokia’s devices and services business. Let that sink in for a little bit.

 

 

 

 

Okay, so every tech behemoth seems to have their own vertically integrated software and hardware stack these days, so why not us, right? With all of the ongoing talk of a shift towards devices and services as a company, at Microsoft, the acquisition of Nokia’s business makes sense, comes with a very reasonable price tag (unfortunately, for my Nokia holdings I’m very sad to say), and integrates together what are already two very linked teams. There will no doubt be countless calls of conspiracy, with Stephen Elop rejoining Microsoft, albeit now as part of a devices group, as opposed to the Office team he used to run. I, for one, am very excited about these developments.

There were also a few interesting nuggets of information in the Strategic Rationale, which accompanied the acquisition announcement.

  • As a licensor of the Windows Phone software, Microsoft’s gross margins on each Nokia smartphone is <$10
  • As a manufacturer of Windows Phones, Microsoft’s gross margins would be >$40
  • Operating income breakeven arrives at ~50 million smartphones. Last quarter Nokia sold 7.4 million Windows Phones, up from 5.6 million the previous quarter. Could breakeven come in FY15?
  • The acquisition becomes accretive to earnings only in FY2016. Based on the non-GAAP FY2015 estimate of $0.00 impact, my guess is, as above, we expect to sell ~50 million phones.
  • We expect 1.7 billion smartphones to be sold by 2018 – we also expect to claim 15% of that market
  • That is expected to translate in $45 billion in revenue, or approximately $176 ASP. Nokia’s most recent quarter’s Lumia ASP was $207.
  • Even with 15% market share, the smartphone business will be a very lucrative business
  • Microsoft combines its patent portfolio and deals with those Nokia has signed with competitive ecosystem OEMs into a heck of a licensing powerhouse and protective fortress

More thoughts as things develop.

Silly Money – A Satirical Overview of the Financial Crisis

I was introduced to the comedy of Rory Bremner, a British comedian, this past week at a WIREX talk. In a four-part series, entitled Silly Money, he along with ‘The Two Johns’ take a satirical look at the financial crisis.

The videos are available on Google Video and I’ve linked the search for your enjoyment. Not only are they witty, they also convey some insight to the global financial crisis in a way that can be understood by all.

Dow Jones Feb. 20, 2009 – Near Capitulation

For a few days in the middle of the last week, it looked like the Dow Jones Industrial Average was going to hold on at the retest of its November lows around 7500. Then on Friday, the fears of the nationalization of Citigroup and/or Bank of America pushed the Dow to an 11 year low quite emphatically. By the end of the day, the White House had come out to support the private banking sector, and although stocks rallied (BAC went from -30%+ midday to only -3.5% by the close) we’re still sitting at a new low.

Dow Jones, week of Feb. 13, 09

Around 1:30pm on Friday, I thought this was going to be it. I was looking for capitulation, and when the stampede of investors were jamming the doorway out of both Citi and Bank of America, it looked pretty much like the final capitulation. Stocks were in freefall.

I recently made my RRSP contributions for the 2008 fiscal year and haven’t made the leap into equities yet. There’s something to be said for long term investing, but when the Dow is at a (near) 11 year low, doesn’t that make you sit up and rethink that plan?

The stock markets are supposed to be a leading indicator to the health of the economy, about 4 to 6 months out. With that in mind, the predictions of a second half economic recovery are looking shakier than ever. Over the course of a year, that ‘recovery’ has been pushed out from late ’08 to 1H 09 to 2H ’09. Now I’m reading comments on the ‘recovery in 2010’. Wow.

Unprecendented

One the biggest pieces of business news today was the continuing fall of Citigroup shares, and at their current levels below $5, you’d have to trace the charts back to 1993 to find a similar low. Despite continued reassurances of liquidity, shareholders aren’t listening and are dumping the stock en masse. Volume was well over 700 million today. Failure isn’t much of a danger – the American government/central bank would never allow such a crippling event to occur; however the face of banking will be seriously changed even if a full government bailout were to occur.

Furthermore, I found the advertisement below the Citigroup chart at Yahoo! Finance to be quite shocking.

Citigroup Stock - November 20, 2008

Yes. That’s General Motors advertising its bailout plan.

What has the world come to?

Why Is the Canadian Dollar Down?

Okay, perhaps this topic isn’t timed terribly well, on a day when the loonie jumped nearly 4 cents versus the U.S. dollar, but the overall trend for the Canadian dollar since the start of the recent financial crisis has been down, and in a big way. I’ve had many questions on the topic, which all pretty much boil down to this: if the American economy is doing so poorly, the Federal Reserve is lowering rates down to near-zero, and the government is borrowing money like it grows on trees, how come the greenback is still doing so well against most world currencies? It’s a 3-reason answer.

  1. The Canadian dollar is now a petro-currency. Canada’s exports consist mainly of resources, and more specifically, oil. With the slowing global economy, oil prices have fallen dramatically, dragging down the Canadian dollar along with it. Canada’s ‘fortunes’ are linked to the prices of the various resources we export. Although our financial system has weathered the brunt of the storm, other countries will experience slower growth, which means less oil consumed and slower consumption of base metals, hampering our economy nonetheless.
  2. Supply. Although the U.S. Federal Reserve has been pumping money into the banking system to lubricate the gears, many banks are hoarding money, not willing to lend. Of course this defeats the point of the money inflows to the market, but despite the talk of hundreds upon hundreds of billions of dollars, not much of it is seeing light outside the banks.
  3. Demand. Despite everything that’s happened in the United States, the greenback is still the choice currency during flights to safety. It is one of the global currencies that almost any business can be done with. In times of uncertainty, the U.S. dollar is the fallback for many people.

So despite a weakening U.S. economy, low interest rates, and a large money supply, its dollar still remains the de facto standard for world trade. Whether this financial crisis ends up being a turning point for that fact remains to be seen.

Another Black Monday

Although I’d rather see the market go the other way, the crash of the North American stock markets today was a sight to behold. Following (eerily) in the footsteps of several previous Black Mondays (1929, 1987), perhaps Monday, September 29, 2008 will go down in history as the beginning of a serious global financial crisis, after the United States House voted down the proposed $700 billion bail out package. With the 777.68 point fall, the Dow Jones had broke its single day point loss record. Here are a few other market finishes at a glance.

  • Dow Jones -777.68 to 10365.45
  • NASDAQ -199.61 to 1983.73
  • S&P 500 -106.62 to 1106.39
  • TSX -840.93 to 11285.07
  • FTSE 100 -269.70 to 4818.77
  • CAC-40 -209.90 to 3953.48
  • DAX -256.42 to 5807.08

Today’s Activity – Bank Run

If there was any point drilled home by Larry Smith in my ECON102 class, it would be that the entire basis of the  financial system is, in effect, imaginary; for example, the worth of money or the perception that we can always get our deposits from a bank. In fact money only has worth in that everyone accepts it as a certain value (usually enforced by the federal reserve banks. That’s where the statement on your $20 bill that goes something along the lines of ‘this note is legal tender’ comes from. We’re ‘forced‘ to accept cash as a form of payment! Furthermore, banks certainly do not hold in their vaults enough money for everyone to withdraw their deposits at once. But that’s not the point. If everyone regularly withdrew all their money at the same time, there’d be little need for banks. You could simply stash your cash under your mattress.

See it all boils down to the reserve ratio (ratio of legal notes held at a bank versus transaction deposits). No bank has a 1.0 reserve ratio. That means it’s impossible for everyone to withdraw their deposits at the same time. In reality, reserve ratios for banks in many developed countries is very low, typically in the low to mid single digit percentages. And so enter the danger of a ‘run’ on a bank.

When the masses sense impending danger at a bank, they typically rush to their nearest branch and attempt to withdraw a lot of money. This has been especially prevalent in recent months, as even large financial institutions have shown they’re not immune to the effects of the credit crisis. Washington Mutual, the latest banking failure in the United States, had around $16 billion of deposits withdrawn, or nearly 10% of all deposits! Capital is the lifeblood of the banks and when liquidity is squeezed by mass withdrawals, it’s pretty much the end of the story.

But you might also be able to see the paradox in the system. It’s a huge feedback system. A bank gets into a tight spot due to a financial crisis, but perhaps one it could work its way through. All of a sudden, customers hear of the problem and make a run on the bank, withdrawing deposits. Then, what was possibly a manageable problem turns into a nightmare as all capital dries up at the bank, making it unable to do business. It’s what happened at Northern Rock, Washington Mutual, and as word comes out of Europe, what will possibly happen at Fortis, a major bank in the Benelux countries and one of the largest financial institutions in the world. Because the financial system is based on trust and a belief, fear can in effect destroy it.

That’s why some form of a rescue package for these banks is so important. The trust of the Americans in their financial system is teetering. A further deterioration in the financial system there will have catastrophic effects on the entire world.

RIM Disappoints, Or Does It?

It looks like even Research in Motion is being dragged down into the abyss of the financial meltdown (oh, did I mention Washington Mutual is the latest to go under?). Earnings for the Q2’09 were released earlier this evening and with the lowered margins and earnings forecast, the stock got a 20% haircut, down to $78.60US in after hours trading. I’ll point out why I think the sell-off was way overdone and why I think it’s a good time to buy.

First off, the big worry is the headline 47% gross margin forecast for the next quarter, which is a pretty big drop from the 51.3% last year and 50.7% in the most recent quarter. I’ll be blunt. Up to this point, and to and extent even now, it’s been easy sales and money for Research in Motion. In the business crowd that has been RIM’s core market for many years, there simply isn’t another option. There are certainly a few iPhones here and there amongst business users, but now more than ever I see the prevalence of the BlackBerry as I take my morning walk to work. There’s no comparison. It’s almost as if every decently dressed person is holding a BlackBerry.

With 3G devices becoming more prevalent, RIM will certainly face higher component prices. In addition, with the touchscreen Storm/Thunder looming, there are other more expensive components adding to the overall cost. But RIM still has pricing power. Many predicted that the Bold would come in at a lower price than usual to compete against the iPhone 3G, but it didn’t. Yet they still sell out at Rogers. The push towards the consumer market has meant lower average sale prices, but that’s with the result of vastly higher sales numbers. As stated in the earnings report, top line growth is expected to be even better than analysts expect, $2.95B to $3.1B for the next quarter, versus consensus of $2.9B. Sales aren’t the problem.

That’s why I found it hilarious that Jim Goldman wrote something of a self-confirmation article, entitled ‘Apple IS the Issue at RIM‘, regarding RIM’s earnings report. The premise of the article is that the nearly $380 million in sales and marketing expenses combined with the weak earnings forecast shows that RIM is struggling to compete against the iPhone. He also goes on to state that the $380 million figure was ‘an enormous figure no one was counting on‘. Wrong. RIM has clearly been putting more efforts into targeting the BlackBerry at non-business users. This past quarter, RIM launched the multimillion dollar ‘Life on BlackBerry‘ campaign, and for the first time, I’ve been seeing BlackBerry commercials on TV. Given that the sales and marketing expense for the first quarter was already at nearly $330 million, I don’t think $380 million was such a shock to most, well, except Mr. Goldman it would seem. RIM is expanding its brand outside of business. Surprisingly, many classmates I’ve talked to actually want a BlackBerry more than an iPhone. That’s saying a heck of a lot. The visibility is working.

I’m happy to see RIM increase its marketing efforts and expenses, as long as its growing sales at a proportionate rate, which it is. Margins will no doubt will be pressured by lower ASPs to the precise market they’re targeting, but sales growth is very resilient, even in light of the current economic troubles. At under $80, we’re talking about a sub-20 P/E, rapid-growth company. It looks like speculators pushing the stock rather than fundamentals, and I believe one Warren Buffet has made a killing investing in irrationally beat down companies.

Lehman – Bankruptcy, Merrill – Acquired

The U.S. financial crisis is no longer a crumbling cookie. It’s been smooshed by a sledgehammer. Shortly after all parties walked away from a takeover bid for Lehman Brothers, apparently forcing it into bankruptcy, Merrill Lynch, the world’s largest brokerage, was pressured into a takeover by Bank of America, who has already consumed a victim of the recent financial meltdown, Countrywide Financial.

Although I’ve been following the news on a daily basis, I don’t think I’m alone when I say I really didn’t see the situation getting this dire this quickly for the investment houses. And for all we know, this could be just the tip of the iceberg. Washington Mutual and American International have both been hard hit and are under pressure by investors. (AIG will reportedly announce asset sales tomorrow to bolster liquidity.) Of the 5 major U.S. investment houses, it’s starting to look like only Goldman Sachs and Morgan Stanley will be able to ride this crisis out.

My sympathies to the massive job losses that are sure to come at both Lehman and Merrill.