Saturday, October 31, 2009

Halloween, Stock Market Acting Psycho

I hope you celebrated and enjoyed today. The Stock Market is certainly acting like it's Halloween. Why is it acting like it is psycho where it goes down even with good news? Normally when this happens some large issue looms in the darkness.

Earning season is in full swing and most companies are reporting better than anticipated earnings and projecting that revenue and earnings will continue to increase as the economy is improving. Almost all companies are upbeat about the future. How did the Stock Market celebrate this good news, mostly by going down, very strange.

On Thursday, the GDP growth for July through September was 3.5%, better than anticipated and the Stock Market rose 2%. On Friday, other economic data is issued that is in-line with expectation and the Stock Market dropped 2.5%. Lots of experts gave their justification for this psychotic behavior, none made sense to me. The only thing that makes sense to me is fear in the overall business environment associated with uncertainty with health care legislation. I am not sure how effective the proposed 1900 page legislation will be but the lack of clarity makes investors nervous.

What does a smart investor do when things get unclear, stay with the plan. Perhaps you saw the news that the average 401(k) account balance has recovered and returned to the level of 2007. The joke of the 401(k) being a 201(k) is no longer true. How did this happen? Investors stayed with the plan, kept buying when things went down, aka on sale, and made lemonade from a lemon.

My guidance during the last few weeks has been that the Stock Market has a floor and that the rate of recovery would be more normal going forward. We are entering the next phase in the business cycle and companies are announcing plans to hire people. The news in the local paper suggests that the unemployment rate will be coming down sooner than later. While the Stock Market may decline further, it will be NOTHING like what we have already gone through, so relax. The Stock Market will recover in the long term and a higher high should be reached in a couple of years.

Bottom Line: Stay with the plan and relax. Keep investing using a business cycle strategy and avoid the noise and you will be rewarded in the long run.

I mentioned WWEE and investing in it. The data from companies in this segment showed this trend is alive and well, wireless traffic continues to grow around the world. Also a recent FCC ruling on Net Neutrality, probably the most significant unreported news this year, that keeps special interest barriers from internet growth will keep this trend alive and well.

Sunday, October 25, 2009

US Dollar and Investing

This is the last in the series on the US Dollar and it covers the topic of how to invest to make money as the US Dollar changes. One of the easiest way to invest is in US companies that produce commodities. Commodities are invested using exchanges throughout the world and the price tends to move in unison to prevent arbitrage. Arbitrage is where a commodity is bought on one exchange and sold on another exchange due to exchange differences. As commodity prices change on an exchange the profit made by a US company changes.

In general, as the value of the US Dollar drops global commodity prices rise, including in the US. Vice versa, as the value of the US Dollar rises global commodity prices drop, including in the US. A point to remember is that commodity prices on occasion move by speculation such as the change in oil last year from $140 to $40 per barrel. An example is the oil trader that supposedly earned a $100 million bonus by trading oil futures last year.

The value of the US Dollar has no impact from a currency valuation perspective on a US manufacturer. As US Dollar prices drop and commodity prices increase the US producers have a lot of leverage to make a profit. In an investing class, I found out that a 15% drop in revenue can easily drop profit 40% or a 2.5 times leverage. Likewise, this same 2.5 times leverage exists as revenues increase.

If you want to pursue this idea, you need to invest in US companies. Two of the best companies to use are Exxon Mobil for Oil and Freeport McMoran for Copper. This is for traders not for long term investors.

Have a great week and count your blessings. This is the Pastor Appreciation Month so make sure you tell your Pastor how important they are to you. Let me know how I can help you.

Sunday, October 18, 2009

US Dollar

Earnings season is in full swing and so far about 3 out of 4 companies are reporting higher than anticipated earnings, this should reduce downward pressure on stock market prices. The current investing direction will be maintained as financial results are consistent with this segment of a business cycle. While the stock market has had a tremendous rise during the past 7 months, the pace of rise will most likely slow consistent with a return to a more normal investing climate. At the end is a short segment on Nebraska Cornhusker Football trivia.

This newsletter continues on the topic of currency investing in particular the impact of a changing US Dollar. The value of the US Dollar is important for foreign trade and earnings from foreign sales. Unfortunately, the value of the US Dollar has no impact on trading with China as the Chinese government currently has a monetary policy of a constant valuation of the Yuan RMB to the US Dollar of about 6.8 to 1.

Who wins and who loses as the US Dollar rises and falls? As the US Dollar rises and falls the value of US made products sold internationally change and the value of internationally made products sold in the USA change. Companies that manufacture in the USA and sell internationally like a weak dollar because they get higher income. If you travel internationally, you want a strong dollar because your spending power is higher. Just like 2 sides exist on a coin, every plus has a minus when considering currency valuation. It is important to remember that a sale is made in the local currency and then converted.

To better understand this, 2 scenarios will be used, a strong US Dollar, 1 US Dollar equal to 1 Euro, and a weak US Dollar, 2 US Dollar equal to 1 Euro. To illustrate the impact on a domestic manufactuer, if a company sells a widget for $10 the cost in Europe is 10 Euro in scenario 1 and 5 Euro in scenario 2. With scenario 2, if a local company in Europe sells this same widget for 8 Euro then the US company can sell it for less such as 7 Euro, can undercut the domestic producer, gain market share, and get paid $14 making 40% more revenue. Kind of sounds like what has been happened to the USA by the Chinese. US manufactuers like weak dollars and international manufacturers like a strong dollar. You can see how this works in reverse for a strong dollar.

For a tourist traveling to Europe, a strong dollar is good. Upon arrival, you convert your US Dollar to Euros and in scenario 1 you get 100 Euro while in scenario 2 you get 50 Euro. Since the transaction is made in Euros the product costs you essentiall twice as much with scenario 2. For tourist to the US, a weak dollar is good for just the same reason where a person gets more of the local currency during conversion.

The talk about we must have a strong US Dollar is good for some and bad for other. A reason for this statement is because of a model that a strong dollar reduces the cost of an imported product and drives down prices with the idea that it keeps inflation low. From a manufacturing job perspective, making more stuff in our country is a good thing creating jobs so quite franky I like in a weaker US Dollar. My perspective says it is better to pay a little more and employ more people getting a money multiplier in the economy than to lose jobs and pay less money. Then again it is all a matter of your perspective.

Saturday, October 10, 2009

WWEE Update and US Dollar Part 1

Last week's newsletter was on the Worldwide Wireless E-Commerce Explosion, WWEE, and that you need to participate in it. This week the Wall Street Journal had a short article that paints the picture for this country, USA. The title of the article was FCC Looks to Add to Airwaves for Wireless, perhaps you saw it. Below are some points from the article:

1) FCC looking for more ways to make more airwaves available for next-generation wireless networks, underscoring the expanding need sparked by the growing use of iPhones and similar devices.

2) Lack of airwaves available for so-called 4G networks “a looming crisis” that threaten American productivity.

3) Reallocate airwaves for wireless Internet services and speed up paperwork so new networks could be built faster.

4) FCC has approved a 3 fold increase in available spectrum in recent years but projections for data traffic show a 30 fold increase in demand, a 10 to 1 gap.

In this highly technological country we had a 30 fold increase in recent years. This means that Internet and E-Commerce is doubling each year and at a faster rate than the FCC is adding capacity. If you do the math and this doubles each year for the next 5 years, a 30 fold increases to a 960 fold increase, let's round to 1,000 fold increase. Wouldn't you call this an explosion?

A hot financial topic in the newspaper is the strength of the US Dollar. This newsletter will give an overview of the subject and the rest of the story will come next week. Newspapers are talking about how the US Dollar is falling and we want a strong US Dollar. Actually, it all depends on your perspective.

Another class of investment or trading is in currencies. Lots of people buy and sell a currency like the US Dollar, Euro, or Yen. Currency traders have a 24 hour a day, 5 days a week, job because currencies are traded around the globe on exchanges and an exchange is always open somewhere during the work week.

The best measure of the US Dollar strength is the US Dollar index that currently at about 77. This index is a composite index of all world currencies showing the relative value of the US Dollar. This year the US Dollar index has been as high as about 89 to the current low of about 77. To give a broader picture, during the last 10 years the US Dollar index has been as high as about 112 and as low as about 70. A lower number means a weaker US Dollar. It is important to state US Dollar because the term Dollar is also used by some other countries like Australia.

A widely published ratio is the US Dollar to the Euro which is currently about 1.47 US Dollar to 1 Euro or 0.68 Euro to the US Dollar. Earlier in the year the ratio was about 1.3 US Dollar to 1 Euro or 0.77 Euro to the US Dollar. Since the US Dollar has changed from about 0.77 Euro to 0.68 Euro it has weakened and why the newspaper prints about a weakening US Dollar.

Why does the US Dollar go up or down? The economic law of supply and demand rules supreme once again. As more US Dollars are printed relative to other currencies the over-supply lowers the value. When we have a US budget deficit we print money weakening the value. When we had a Federal budget surplus in the late Clinton Administration and the early Bush II administration the US Dollar index rose and was over 100. As we had a Federal budget deficit during the rest of this decade the US Dollar index declined and has been below 100. As our budget deficits grow and we print more money the value of the US Dollar is going to weaken regardless of what is printed in the newspaper.

Saturday, October 3, 2009

Worldwide Wireless E-Commerce Explosion

Two weeks ago, the newsletter covered the topic of investing in major market moves. One of the biggest is the Worldwide Wireless E-Commerce Explosion, WWEE. Because of this I have been buying stock in CommScope, CTV. So what is this major market move and why am I talking about CTV?

Governments and companies around the world have stated they are investing in Wireless infrastructure on the magnitude of about $100 billion with a time horizon of 5-10 years. For example, China has announced a $40 billion Wireless investment while India has announced a $30 billion Wireless investment. Most if not all of the emerging and developing countries in the world are actively pursuing Wireless infrastructure. Why now, why Wireless and why CTV?

Why now is easy because of the access to the internet by virtually every mobile device like a laptop computer, cell phone, Blackberry and because lots of business is done on the internet. E-Commerce is huge and growing fast. My wife will tell you that at one point I was addicted to internet access on my cell phone, a point that I still deny. On the internet anyone can do countless things from voice, video, texting, pay bills, banking, you get the picture. Because of evolution of these devices you can do it now and it will only get easier in the future.

A developing country can grow economically by giving more citizens, aka customers, access. It is believed that in 5 years developing countries that have about 1 phone for every 10 people will move to 1 phone for every 2 people. That is a lot of phones and a lot of E-Commerce.

Moore's law of semiconductors states that a computer chip will be half the size, have twice the capabilility, and be half the cost about every 2 years. What this means is that in the future, a Blackberry will have the same capability as your current laptop.

Why Wireless is easy because in a developing country, that does not have infrastructure, Wireless is the most cost effective communication method instead of burying cable everywhere. Wireless speeds have been increasing and this trend will continue. Wireless entails lots of fiber and coaxial cable backhaul systems.

Why CTV is a little more difficult to explain. I am very picky and will not directly invest in a company without US roots which limits my choices, I want to invest in company that has few competitors, and the company must have good financial ratios. Let's look at the components of a Wireless E-Commerce system in China. The largest network equipment provider is Huawei, a Chinese company that ate the lunch of competitors like Alcatel, Lucent, Nortel, and Ericcson, so I am not interested. The largest internet provider in China is Baidu and it is ahead of Google which means that I am not interested. Their is lots of competition for hand held devices and lots of makers of laptop computers which leaves me out. The Wireless antenna, cable, tower, and system makers are the last piece of the puzzle and this area meets my criteria.

The Andrew Corpration was the leader and largest Wireless equipment maker in the world until early 2008 when they were acquired by CommScope. So now CommScope is the leader and largest Wireless equipment maker in the world and is growing and hiring in this area. The reason Andrew was acquired was because they had great growth and great products with a very poor management team which meant they had little profit and a relatively low stock price. CommScope has an excellent management team and knows how to make money. If you look at the 2nd Quarter financial statement for CommScope you will notice the Andrew division now has profitability in line with the rest of the other divisions and the financial ratios are very good. Also the acquisition was done with a relatively few additional shares issued which will give accelerated future earnings growth.

The bottom line is WWEE is here and investing in it is a good idea. I selected CTV as my investment choice. This also means that the economies of developing and emerging countries will grow faster than more established countries like the US and Europe.