Ed’s Daily Notes for June 28th   Leave a comment

the_end

The end of the month, anyway…

CNBC: BlackBerry Posts Unexpected Loss, Light Sales

My condolences to you BlackBerry fans out there:

BlackBerry delivered quarterly earnings and revenue that missed analysts’ expectations on Friday.

…The company posted a first-quarter loss, excluding items, of 13 cents per share, compared with a quarterly loss of 37 cents a share in the year-earlier period.

Revenue increased to $3.1 billion from $2.81 billion a year ago.

Wall Street had forecast the company would report a profit, excluding items, of 6 cents a share on $3.36 billion in revenue, according to a consensus estimate from Thomson Reuters.

Smartphone shipments in the first quarter were up 13 percent to 6.8 million from the previous quarter, the company said.

On the bright side, BlackBerry did improve over the previous year. But missing Wall Street’s conservative estimates is a stock-killer, especially when they were expecting a profit and the company had a loss. Expect a brutal summer for this stock.

For those of you considering this a long-term hold, there are 2 aspects to this story.

First, BBRY needed to show it could turn a profit, almost regardless of sales. If you are going to be a niche player in an industry, that is fine as long as you can be a profitable niche player. Otherwise, you are just whistling past the bankruptcy court…

Second, BBRY’s stock is still cheaper than book value. That makes it an attractive takeover target for any company looking to get into the smartphone industry, or possibly for a whale to come along and break it up. I will have to look at the new financials closer, but if BBRY drops to 50% of book value, I may have to buy some. I am adding it to my watch list for now.

Bloomberg: Fed Officials Intensify Effort to Curb Surge in Interest Rates

Federal Reserve officials intensified efforts to curb a growth-threatening rise in long-term interest rates, seeking to clarify comments by Chairman Ben S. Bernanke that triggered turmoil in global financial markets.

William C. Dudley, president of the Federal Reserve Bank of New York, said yesterday any decision to reduce the pace of asset purchases wouldn’t represent a withdrawal of stimulus, and that an increase in the Fed’s benchmark interest rate is “very likely to be a long way off.” He said bond purchases could be prolonged if economic performance fails to meet the Fed’s forecasts.

Concerns the Fed may curtail accommodation helped push the yield on the 10-year Treasury note as high as 2.61 percent this week from as low as 1.63 percent in May. The remarks by Dudley, who also serves as vice chairman of the policy-setting Federal Open Market Committee, along with Fed Governor Jerome Powell and Atlanta Fed President Dennis Lockhart sought to damp expectations that an increase in the benchmark interest rate will come sooner than previously forecast.

Watching the Fed this week has been almost as much fun as watching a married man who said something innocently wrong to his wife, and she went ballistic. Somewhere, there is a Treasury note with a box of chocolates and a dozen roses…

Business Week: Four Reasons Mexico Is Becoming a Global Manufacturing Power

Should you invest in Mexico? Here are 4 reasons to do it:

1. Manufacturing wages, adjusted for Mexico’s superior worker productivity, are likely to be 30 percent lower than in China by 2015…
2. Mexico has more free-trade agreements than any other country…
3. Mexican manufacturing has a significant advantage in energy costs…
4. Industry clusters, especially in autos and appliances, are growing…

I see the first two reasons as the main ones in Mexico’s favor on a go-forward basis. Energy costs can change tomorrow, although Mexico is still a major oil producer. And the industry clusters are more of a symptom of existing growth, with no guaranty of future growth.

Now for some reasons from me not to invest in Mexico:

1. High crime. The article mentions Mexico’s crime rate, but this is still a significant concern.
2. Culture. Actually, culture is a double-edged sword in Mexico. On the one hand, the workers defer to authority, which is good for controlling an operation there. On the other hand, that deference is nearly total, to the point where many workers will do nothing more than they are told to do, even if common sense would tell them otherwise. From my perspective as a computer geek, I can appreciate this mentality from Mexicans (computers are the same way), but most business people will get frustrated by it. One of the catch phrases in the business world today is “inclusive meritocracy”, and it is difficult to advance that ideal in Mexico.

However, I think it is still possible to have a successful operation in Mexico, as long as you treat it like a computer: You need good leadership there (like a computer operating system), and you need to keep in mind that it will only do exactly what you tell it to do, and that includes everything from manufacturing to accounting. Don’t assume anything.

All that said, I expect companies will eventually figure this out, even if they have to put aside some of their “developed world” preconceived notions. The biggest problem will remain the high crime, but companies will overlook this to be able to produce products cheaply.

If you are going to invest in Mexico, there is the iShares MSCI Mexico (EWW) etf for broad exposure. For more specific plays, there is Carlos Slim’s America Movil (AMX), which is also the largest holding of EWW. Other companies in Mexico (I am not recommending them, just mentioning them): Fomento Econ (FMX), Coca-Cola FEMSA S.A.B de C.V. (KOF), Grupo Financiero Santander S.A.B. de C.V. (BSMX), Grupo Televisa, S.A.B. (TV), CEMEX, S.A.B. de C.V. (CX), Grupo Aeroportuario del Sureste, SAB de CV (ASR), Grupo Aeroportuario del Pacifico S.A.B. de CV (PAC), Gruma S.A.B. de CV (GMK), Grupo Simec S.A.B. de C.V. (SIM), Industrias Bachoco S.A.B. de C.V. (IBA), and Grupo Aeroportuario del Centro Norte, S.A.B. de C.V. (OMAB).

Fox News: Lawmakers fail to reach student loan deal before July 4 break

College is about to get more expensive:

Interest rates on student loans are set to double on Monday after lawmakers failed to find a bipartisan solution to keep the federally subsidized borrowing costs down.

The Senate adjourned Thursday night for the July 4 recess without approving a student loan rate package.

With the current, 3.4 percent interest rate on Stafford loans — the most popular funding for college students – set to expire on July 1, a host of 11th-hour fixes all failed to generate support from both sides of the aisle. Without new legislation — either to extend the cap, set a new one or find another way to peg the loans – the cap rises to 6.8 percent. Congress could always forge a solution in the following days, even lowering rates retroactively.

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Posted June 28, 2013 by edmcgon in Federal Reserve, Market Analysis, News, Politics, Stocks

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