Archive for October 2012

Halloween: Ed’s Daily Portfolio Summary   Leave a comment

In spite of the inauspicious start for my Disney (DIS) acquisition, I had a good day, easily beating the indexes, mostly due to Silver Wheaton (SLW):

DIS: -1.49 to $49.12 (-2.94%, -2.94% overall)–bought at $50.61
LINE: 0.28 to $42.12 (0.67%, 6.61% overall)–bought at $39.51
NNVC: -0.01 to $0.59 (-1.67%, -1.67% overall)–bought at $0.60
PGX: 0.04 to $14.84 (0.27%, -0.34% overall)–bought at $14.89
SAND: 0.30 to $14.04 (2.18%, 11.61% overall)–bought at $12.58
SLW: 1.24 to $40.50 (3.16%, 31.71% overall)–bought at $30.75
SPXU: 0.11 to $40.49 (0.27%, -0.39% overall)–bought at $40.65
WFC: -0.28 to $33.69 (-0.82%, -3.22% overall)–bought at $34.81
YHOO: 0.04 to $16.83 (0.24%, 10.94% overall)–bought at $15.17

OVERALL: +0.56%

(hat tip to tvsmacktalk.com for the picture)

Posted October 31, 2012 by edmcgon in Market Analysis, Open Thread, Portfolio

Buy Walt Disney Co. (DIS)   Leave a comment

Per my daily notes, I added a small position in Walt Disney Co. (DIS) at $50.61 this morning. This is a long-term play for me.

Posted October 31, 2012 by edmcgon in Portfolio Moves

Daytraders Corner   5 comments

I feel like I haven’t done this in ages. But this also means that any predictions based on prior levels or technicals become much more questionable. Who knows what the markets will do after having unplanned closures for 2 days? Not to mention it is the last day of the month.

My only advice: Don’t assume that where the markets go in the first hour is indicative of where they will be at the end of today.

The S&P 500 levels to watch today:

UPSIDE: 1415 (May’s high), 1417 (October 26th’s high), 1420-1421 (October 24th’s high and October 25th’s high), 1422 (April’s high), 1425 (October 12th’s low), 1427 (October 15th’s low), 1430-1433 range (4 data points, including the 10 day moving average), 1434 (50 day moving average), 1437-1443 (10 data points, including the 20 day moving average), 1447-1465 (12 data points), 1470 (October 5th’s high), 1473 (top of the Bollinger Bands), and 1474 (September’s high).
LAST CLOSE: 1411.
DOWNSIDE: 1407 (October 23rd’s low and October 24th’s low), 1405 (October 25th’s low and the bottom of the Bollinger Bands), 1403 (October 26th’s low), 1400 (P&F support level), 1391 (July’s high), 1380 (P&F bearish target), and 1377 (200 day moving average).

Posted October 31, 2012 by edmcgon in Daytrading, Market Analysis

Happy Halloween! Ed’s Daily Notes for October 31st   Leave a comment

The U.S. markets decided to give us a treat today, and they will be open!

Bloomberg: Disney $4 Billion ‘Star Wars’ Deal Spotlights Content Bet

Do I even have to say this makes Disney a long-term buy?

Walt Disney Co. (DIS) agreed to buy George Lucas’s Lucasfilm Ltd. for $4.05 billion, pressing Chief Executive Officer Robert Iger’s $15 billion bet on creative franchises by adding “Star Wars” and “Indiana Jones.”

Lucas, 68, the sole owner, will get half in cash and the rest in stock, making him a major investor in the film, theme park and TV company, according to a statement yesterday from Burbank, California-based Disney. The first of a new trilogy of “Star Wars” films will be released in 2015, Disney said.

The deal furthers Iger’s pursuit of marquee content in an era marked by technology changes, such as $8-a-month video streaming and free game downloads, that disrupted Hollywood’s traditional revenue sources. Iger, who paid a combined $11.2 billion for Pixar and Marvel, said memorable characters will be valuable no matter what medium they appear in.

“Technology has proved more friend than foe to great storytelling,” Iger said in an interview. “It allows us to distribute in ways we never thought would have been imaginable.”

Disney paid $7 billion for animation studio Pixar in 2006 and bought Marvel Entertainment in 2009 for $4.2 billion, adding the creators of “Toy Story,” and “The Avengers” to the company’s library.

The Lucas acquisition brings the “Star Wars” pictures, which have generated $4.54 billion in worldwide ticket sales — second only to Warner Bros.’ “Harry Potter,” according to Box Office Mojo. The “Indiana Jones” films have collected $1.95 billion.

Note that those numbers are ONLY ticket sales. That doesn’t count licensing, merchandising, and every other form of revenue stream imaginable, and maybe some future ones we haven’t imagined yet.

In the next 10 years, this means we can expect Disney to be able to pump out a summer blockbuster movie every year, between their Marvel Comics, Star Wars, and possibly Indiana Jones properties.

On top of this, today will provide a unique opportunity to fans of the Star Wars series: It will be the first time they will actually be able to invest in it. Think of it almost like an IPO, except we know exactly what we are getting.

Do I even need to mention that Disney’s financials are pristine? Although Disney doesn’t report earnings until November 8th, the numbers from their quarter ending June 30th: Free cash flow of $3.3 billion, cash of $4.4 billion (although this is likely to drop), 35% debt/equity, revenue of $42 billion, and operating margin of 21% with a profit margin of 13% and ROE of 14%. From a valuation perspective, they are a little pricey, although these numbers don’t have the Lucasfilm acquisition’s impact considered: trailing P/E of 16, forward P/E of 14, and the all important PEG of 1.32. Considering growth figures tend to err on the conservative side, and considering those evaluations were before the Lucasfilm acquisition, that makes the PEG, in my opinion, much too high.

If you are planning to buy some Disney stock today, I would suggest making it only a small position. There will be a huge run-up in the price today, so expect to add to your position later after the initial excitement wears off. However, as a long-term play, Disney has already shown that it knows how to get the most from it’s content (i.e. The Avengers raked in over $1.5 billion in box office receipts, not to mention it was an incredibly fun movie). This undoubtedly encouraged George Lucas to sell the franchise to Disney, and may serve to encourage other content creators in the future.

Bloomberg: Korea Best in Asia on Investor Confidence in Economy

Maybe it is just me, but I find South Korea to be the most compelling story among the emerging markets or developed markets:

Since the 1997-1998 slump, South Korea has ridden economic crises better than most advanced economies. The stock market has risen fivefold, led by Samsung Electronics Co. (005930), which now makes almost a quarter of the world’s mobile phones, and Hyundai Motor Co. (005380) and its affiliate Kia Motors Corp. (000270) are the most profitable of the six biggest global automakers. With growth this year set to beat Asia’s other wealthy nations, the three biggest credit rating companies upgraded South Korea’s debt, citing the ability to weather shocks better than its peers.

“It’s this expensive lesson we learned that made us prepare so well for the next crisis,” said Kwon Dae Young, who was in charge of injecting foreign capital into banks at the finance ministry in 1997. “Korean companies now have much healthier balance sheets and the government is backed up well with a solid amount of foreign exchange reserves.”

With Japanese exporters hampered by a strong yen, Europe encumbered by debt, and U.S. unemployment hovering near 8 percent, South Korea’s resilience offers a bright spot in the developed world. The International Monetary Fund forecasts Asia’s fourth-largest economy will grow 2.7 percent this year, compared with 2.2 percent in Japan, 1.8 percent in Hong Kong and 2.1 percent in Singapore.

“I think South Korea will probably grow by around 4.8 percent over the next decade, which means it will continue to see its GDP per capita rise notably and relative to other developed countries, especially Japan and European countries,” said Jim O’Neill, chairman of Goldman Sachs Asset Management.

Gross national income per capita was $20,870 last year, compared with Japan’s $45,180 and Hong Kong’s $35,160, according to World Bank data.

South Korea’s resilience has given it the status of a safe haven in the bond market, where investors held 88.3 trillion won of local currency debt at the end of last month, double the amount in 2009, data from the nation’s financial regulator show.

South Korea’s won has appreciated 5.7 percent this year to 1,090.70 per dollar as of today’s close in Seoul, the third-best performer among Asia’s 11 most-used currencies. The won will strengthen another 1 percent by the end of the third quarter of 2013, according to the median estimate in a Bloomberg News survey.

The currency is “structurally undervalued” said Eric Stein, a Boston-based portfolio manager at Eaton Vance Management, which oversees $198 billion. “It will slowly but surely continue to appreciate.”

Standard & Poor’s, Moody’s Investors Service and Fitch Ratings boosted South Korea’s rating between late August and September, with all three citing strong fiscal fundamentals and room to respond to external shocks. The Bank of Korea has $322 billion of foreign exchange reserves, the world’s seventh largest, compared with a low of $20.4 billion at the end of 1997.

While opposition lawmakers have called for more public spending, the government on Sept. 25 released a budget proposal for 2013 that would reduce the fiscal deficit to 0.3 percent of gross domestic product, the smallest in six years.

Of course, even Korea has it’s potential flaws, chief among them:

South Korea also has one of the world’s fastest aging societies, with a working-age population that will begin to contract by 2016, curbing growth by as much as 1.7 percentage points to 2.5 percent by 2050, according to a Royal Bank of Scotland Group Plc report.

Still, if you can have South Korea in your long-term portfolio, I would recommend it, at least for the next few years.

Bloomberg: Euro Chiefs Set to Grant Greece Extension Amid Squabbles

Euro-area finance chiefs may cut Greece some slack in meeting its bailout targets even as they split on whether the country needs another debt writedown and Greek politicians squabble over further austerity measures.

With Greece facing an unprecedented sixth year of recession, fellow euro-area governments are preparing to allow Prime Minister Antonis Samaras’s government “a somewhat flatter adjustment path” in achieving its deficit-reduction goal, said Thomas Wieser, head of the group that prepares meetings of euro- area finance ministers.

The target of a primary surplus of 4.5 percent of gross domestic product “should in theory soon be reached, but in view of the slump in the economy we see that now as being only very, very difficult to achieve,” Wieser said today in an interview with German radio station Deutschlandradio Kultur. “We’ve not taken any decisions, but it could be that it’s postponed by one or two years.”

European policy makers are again seeking ways to keep Greece in the euro and avert an exit that former Deutsche Bank Chief Executive Officer Josef Ackermann said on Oct. 29 would cost “several hundred billion” euros. Finance ministers are due to hold a conference call at 12:30 p.m. Brussels time and may release a statement afterwards.

No extra funds from the member states would be required, since “it can be financed within the existing programs,” Wieser said. A debt writedown, or haircut, wasn’t discussed by deputies yesterday, he said.

All I can say about the entire Greek mess is: Why? Why is Europe letting Greece do this to them? And at what point will they realize that Greece is milking the EU for every euro they can get? Greece’s economy will never be fixed as long as the EU continues to play the role of dysfunctional enabler.

Bloomberg: Spain Narrows Central Government Budget Deficit to 4.39%

This is some good news for Spain, and Europe:

Spain’s central government budget deficit narrowed in September as a sales-tax increase buoyed government revenue, boosting Prime Minister Mariano Rajoy’s campaign to resist asking for a sovereign bailout.

The central government’s deficit was 4.39 percent of gross domestic product in the nine months through September, compared with 4.77 percent in the eight months through August. Value- added tax receipts surged 11.9 percent in September from a year earlier as an increase came into effect, Deputy Budget Minister Marta Fernandez Curras told reporters in Madrid late yesterday.

Whether Spain can maintain that level of tax revenues in a recessionary economy remains to be seen.

Financial Times: China raises stakes over disputed islands

While I still believe that Japan and China will come to a diplomatic solution over the disputed Senkaku Islands, it will be dangerous until they do:

China has started making concerted efforts to chase Japanese ships out of waters surrounding the disputed Senkaku islands in the East China Sea, ratcheting up tensions between Asia’s two largest economies.

The Chinese State Oceanic Administration – which enforces the nation’s maritime interests – said four of its ships on Tuesday tried to expel Japanese vessels out of waters where they were operating “illegally”.

…Japan’s coastguard said Chinese surveillance ships approached waters it controls close to 9am displaying a warning that read: “You are in waters administered by the People’s Republic of China. You are already breaching the law. Move away immediately.”

Japan’s coastguard said it responded by warning the Chinese ships not to enter Japanese waters. It said that four Chinese ships entered the waters it claims but then left. A Chinese ship had previously sent out such a warning in September, the JCG said.

Posted October 31, 2012 by edmcgon in Economy, Market Analysis, News

Quote of the day   4 comments

From my daughter, when I suggested she use ketchup instead of fake blood for her Halloween costume:
“How am I supposed to walk up to a house, dressed like a murderer, and smelling like a hot dog?”

Posted October 30, 2012 by edmcgon in Humor

Dividends   17 comments

You folks had a good conversation about dividend stocks going yesterday. I thought I would put in my 2 cents here.

First, here is a list of things to consider with any dividend stock or etf:

1. The history. Does the stock/etf have a history of increasing dividends? If you buy 100 shares of a stock with a 5% dividend yield, and they double the dividend amount in 5 years, you are then collecting a 10% yield, regardless of what the stock price does.

2. Reinvest the dividends? I have heard varying arguments on this one, and I lean towards reinvestment, since it allows you to take advantage of compounding interest (being able to collect interest on top of the interest you have already collected).

3. Is the dividend safe? If a dividend isn’t safe, then it is only a “nice to have” feature with a stock or etf. The key thing to watch is the dividend payout ratio: If it is over 50%, your safety factor decreases. #1 above is an important balance to this. For example, take McDonald’s (MCD). Their payout ratio is 53%, but they also have over 20 years of dividend increases. And does anyone think Mickey D’s is going out of business any time soon? They may have the safest 3.6% yield around.

In another example, real estate investment trusts (REIT) are required by law to distribute at least 90% of their income to their investors. That means their payout ratio will be over 90% most of the time. But that means you have to look at other factors with a REIT. Like McDonald’s, you can look at a REIT’s dividend history to get a good idea. Unlike McDonald’s, you may have to do a bit more digging into the REIT’s portfolio to determine it’s safety.

On the other hand, if you have a company with a low dividend payout, and a stable business model, and some history of increasing payouts, like Cisco Systems (CSCO), it could be a good play.

4. Stability. A dividend doesn’t do you any good if the company paying it goes belly up tomorrow. Just like buying any stock, whether for value or growth, you still have to do your homework on the company itself.

5. Stocks or etfs. A well-diversified portfolio of dividend-paying stocks can be better than an etf. On the other hand, even with diversification, if you own 10 stocks equally balanced in your portfolio, and one goes bankrupt, say goodbye to 10% of your portfolio. However, on the third hand (I will need an octopus for this demonstration), etf’s can fail too. While an etf can provide diversification in one neat package, from a risk standpoint, neither a stock nor an etf is foolproof, and neither should be considered absolutely safe just because of being a stock or etf.

Another thing to remember: With etf’s, you are buying a portfolio of stocks. Know your portfolio, especially if it is unbalanced (i.e. one company’s stock makes up most of the holdings, or one sector/industry is overweighted in the holdings). For example, PFF and PGX (see preferred stocks below) are both overweighted in financials.

Finally, etf’s don’t usually pay consistent dividends like individual stocks do, nor do they tend to grow their dividends. If you are looking for a steady dividend stream, etf’s are not for you.

6. Preferred stocks. Frequently, a company’s preferred stock will pay a better dividend than their common stock. If you are planning to go this route, keep in mind that preferred stocks tend to have much lower trading volume than their common stock cousins. Expect to hold the preferred stock for a long time. Also, preferred stocks don’t usually allow you to reinvest your dividends, so compounding your interest is out of the question. You can get past this problem with etf’s, such as PFF or PGX, which will allow reinvesting of dividends.

Looking at the dividend stocks in my own portfolio:

1. Linn Energy (LINE): This is a good one for any portfolio. Although their 3rd quarter earnings disappointed, they still have a more-than-respectable 6.9% dividend yield with a slightly high 59% pyaout. But they have also raised their dividend 5 times in the last 5 years, plus they hedge oil and gas prices more than most in their industry, so their stock price isn’t as susceptible to price spikes.

2. PowerShares Preferred (PGX): For broad financial exposure, this is one of the best etf’s. Because it is invested in preferred shares, it also has low volatility (0.3% in the past month), which is great for protecting your principal. Unfortunately, as preferred shares have gone up in value over the past few years, dividend yield has dropped on preferred share etf’s (including PFF).

3. Silver Wheaton (SLW): It is difficult for me to look at SLW and call it safe. On the other hand, their business model is so perfect, it is hard for me to not recommend it. They have raised their dividend twice since they introduced it last year, and their payout ratio is still only 19%. Although their dividend yield is only 1%, SLW is a great way to add precious metal exposure with a dividend. However, if your portfolio is conservative, I would suggest keeping only a small amount of SLW in it.

4. Wells Fargo (WFC): Arguably, Wells is one of the safest of the too-big-to-fail banks. That could be why Warren Buffett owns it, and keeps buying more. Or it could be that it is a great play on QE3, considering Wells has over a 30% market share in mortgage originations. Or maybe it is the 2.6% dividend with only a 25% payout. Whatever the case, Wells is a blue chip with a great future.

Now it is your turn. Let me hear about your favorite dividend stocks, and why?

Posted October 30, 2012 by edmcgon in Stocks, Strategy

Closed again: Ed’s Daily Notes for October 30th   23 comments

Another day, another open thread…

Bloomberg: U.S. Stock Trading Shut for Second Day, Joining Bonds

For the first time in more than a century, weather has stopped U.S. equity trading for two straight days as Hurricane Sandy swept across New York City. NYSE Euronext (NYX) will this morning test a back-up plan in case its headquarters or trading floor are unable to open tomorrow.

Stock trading was canceled for a second day, joining bond markets, as 90-mile-per-hour winds and surging seas paralyzed America’s financial capital. The first shutdown for consecutive days due to weather since 1888 was announced by NYSE Euronext after consultations with other exchanges. The Securities Industry and Financial Markets Association earlier recommended a full market close in dollar-denominated fixed-income securities after they shut at noon New York time yesterday.

Now for the good news:

Exchanges are planning to reopen Oct. 31, weather permitting, according to statements from NYSE Euronext and Nasdaq OMX Group Inc. (NDAQ) The last comparable closure of the New York Stock Exchange was on March 12 and 13, 1888, when a blizzard dumped 21 inches of snow on New York, according to the company’s website.

Bloomberg: Spanish Contraction Continues, Austerity Spurs Inflation

One expected effect, one not expected:

Spain’s economy contracted for a fifth quarter, undermining efforts to plug the budget deficit that’s pushing the nation closer to a bailout, while austerity measures kept inflation at a 17-month high.

Gross domestic product declined 0.3 percent in the three months through September, compared with 0.4 percent the prior quarter, the National Statistics Institute said today. That compared with the Bank of Spain’s estimate on Oct. 23 of a 0.4 percent contraction. Consumer prices, rose 3.5 percent from a year earlier, Madrid-based INE said.

The prolongation of Spain’s five-year slump, which is prompting record loan defaults at the nation’s banks and job cuts at companies including Gamesa SA (GAM), adds to pressure on Prime Minister Mariano Rajoy as he resists requesting international aid. While the tax hikes he’s implementing as part of his austerity program are depressing consumption, they are also spurring inflation, which threatens to add 3 billion euros ($3.9 billion) to the country’s pension bill.

The tax increases and the austerity certainly explain the economy contracting. But the inflation? Actually, the VAT tax increases could account for some of the inflation, and possibly all of it.

Yet more proof that raising taxes and cutting government spending at the same time is a sure way to kill your economy…

Posted October 30, 2012 by edmcgon in Blog stuff, Economy, News, Open Thread