Tuesday, October 25, 2011

Chinese growth, the future of India et al.

China has shown some impressive growth numbers and has passed US this year as the biggest economy in the world. One key elements of China's impressive growth has been undervalued currency which has subsidized exports, investments and together with rising salaries consumption as well. Just look at the chart below (click to enlarge).

The growth components of the developed world is usually dominated by personal consumption which adds up to 80-90% of GDP growth. What happens if the salaries of Chinese workers have risen to a level that makes it financially reasonable to move your factories to India, Indonesia or Vietnam for example? What happens if there is no undervalued currency (due to pressure from inflation or other countries), no massive investments to export sector hence reducing pressure to raise wages as well (reducing consumption)?

One thing is for sure - this trend is good for India and other poor Asian and African countries. This might also be good for Western countries since more people in the world get richer creating jobs in Western countries as well. What kind of changes this means to China is uncertain.

Wednesday, October 19, 2011

Nassim Taleb (author of Black Swan) on Occupy Wall Street

I have thought about writing on Occupy Wall Street movement for a while but haven't found a good illustration for my point. Occupy Wall Street is a movement which I think has a good foundation of actually changing something and this is because it affects us all. As Nassim Taleb puts it - banking bonuses are like an additional tax for regular people which increases inequality. The main problem with Occupy Wall Street though is the lack of clear and common message. Here's one of my favorite authors Nassim Taleb on Occupy Wall Street (13 minutes but worth to watch).

Apple underreports, slowing growth?

Apple misses by $0.22, misses on revs; guides Q1 EPS, revs above consensus (422.24 +2.25)

AAPLReports Q4 (Sep) earnings of $7.05 per share, $0.22 worse than the Capital IQ Consensus Estimate of $7.27; revenues rose 39.0% year/year to $28.27 bln vs the $29.28 bln consensus, 63% of rev from outside U.S. Co issues upside guidance for Q1, sees EPS of $9.30 vs. $8.97 Capital IQ Consensus Estimate; sees Q1 revs of $37.0 bln vs. $36.64 bln Capital IQ Consensus Estimate. Q4 gross margins of 40.3% vs Street est of 39.9% and 38.0% guidance; 17.07 mln iPhones sold in Q4 vs Street est of ~21 mln; 11.12 mln iPhones sold in Q4 vs Street est of ~12 mln; reports 4.89 mln Macs sold in Q4 vs Street est of ~4.5 mln. "Customer response to iPhone 4S has been fantastic, we have strong momentum going into the holiday season, and we remain really enthusiastic about our product pipeline."

Here's an update of products sold

As can be seen the sale of iPhones has decreased significantly from over 20 million units to 17. Now thinking back this shouldn't be a surprise since Apple reported record sales of its newest model iPhone 4S - they sold 4 million iPhones within one weekend (in October). Customers were probably waiting for the newest model. Just see for yourself how sales of iPads and Macs have increased. Now I can only imagine what the fourth quarter will be for Apple since Christmas is coming. The company themselves gave a guidance of $9.3 EPS vs $8.97 consensus.

The stock price should see some support on 398-400 area since psychologically it is an important level and it is also the area of Fibonacci 61,8 level (if you're fan of TA). Stronger support level should be in the 380-s so if we fall through 400 don't expect any serious resistance until that level.

Monday, October 17, 2011

US debt by presidents

While the chart below presents the share of US debt accumulated by different presidents during their time of governance it is a well-known fact that debt is much more difficult to not accumulate during a recession.

Obama has been in the White House during a recovery from a deep recession while George W. Bush has lead a recession free country most of his time in the White House (recession began in 2007). Maybe it runs in the family since George H.W. Bush didn't encounter a major recession as well?

Then again the debt of US might have more to do with major wars that the US has held. War on terrorism began in 2001 after 9/11 and has cost more than 3 trillion to date (as is been estimated by various sources). At the same time there were no major extremely expensive wars  held during the eighties or the nineties. At least their costs don't reach to anywhere near of the Vietnamese war or the invasion of Iraq and Afghanistan during the previous decade.

All in all the presidents that the US citizens can be "grateful" for their massive debt load involve most importantly the Bush family and Ronald Reagan. What do you think?

Source: Spiegel via a blog

Friday, October 14, 2011

Apple play into earnings?

Apple reports their earnings after the market closes on Tuesday. Current share price is at $419. Let's take a quick look into their performance during the last year. EPS in last four quarters have been growing steadily:Q3/11: 7,79 (consensus 5,84)
Q2/11: 6,4
Q1/11: 6,43
Q4/10: 4,64

Consensus estimate for current earnings is $7,21 a share which is a 55% improvement compared with EPS a year ago. With this consensus estimate Apple has a one quarter forward looking P/E of 15 and a trailing P/E of 16. Apple themselves estimate a $25 billion revenue for previous quarter with $5.50 EPS but don't be misled by that. They have done that for the past year and it's dangerous to take this guidance seriously (if you're planning to short).

I am fairly positive that Apple is going to deliver results that are above estimates. iPhone and iPad sales have not slowed down (see graph below).

iPhone is the product with the biggest profit margin as well as far as can be understood from their previous Q-10 filing. During the previous quarter Apple launched their new OS - Lion as well as some improvements on Macs. Looking at the news flow in the previous quarter I'm fairly certain that we will see Apple topping the estimates. By how much and how the markets will react this is the question.

From a technical point of view I would be surprised if Apple didn't reach a new high in at least somewhere around the 430 area before the earnings.

All in all I will probably take a position and hold at least until the earnings.

Thursday, October 13, 2011

Google beats by $0.95, beats on revs

From Briefing.com
Reports Q3 (Sep) earnings of $9.72 per share, excluding non-recurring items, $0.95 better than the Capital IQ Consensus Estimate of $8.77; net rev (subtracting traffic acquisition costs -- TAC) rose 37% YoY to $7.51 bln vs. the $7.21 bln consensus; gross revs rose 33.4% year/year to $9.72 bln vs the $9.45 bln consensus. Aggregate paid clicks, which include clicks related to ads served on Google sites and the sites of our AdSense partners, increased ~28% over the third quarter of 2010 and increased ~13% over the second quarter of 2011. Average cost-per-click, which includes clicks related to ads served on Google sites and the sites of our AdSense partners, increased ~5% over the third quarter of 2010 and decreased ~5% over the second quarter of 2011. Operating expenses, other than cost of revenues, were $3.28 billion in 3Q11, or 34% of revenues, compared to $2.19 billion in the third quarter of 2010, or 30% of revenues. As of Sept 30, 2011, cash, cash equivalents, and short-term marketable securities were $42.6 bln. On a worldwide basis, Google employed 31,353 full-time employees as of September 30, 2011, up from 28,768 full-time employees as of June 30, 2011. Google+ is now open to everyone and we just passed the 40 mln user mark.
Sold my position afterhours, nice 10% profit overall.

Update on Google

Google is about to report earnings today as I wrote couple of posts earlier. Google has had a nice run into the earnings. In October 4th the stock price made an intra day low of 483. Yesterday it made an intra day high of about 553. That's a 14% return within 6 trading days. At the same time Nasdaq index has ran from 2302 to 2585 if you consider intra-day highs and lows. That's an impressive 12% return. So Google has outperformed the market, but just slightly. The reason for rising is not optimism for Google but optimism in general. This market is definitely becoming overextended and we will see a correction which might just be beginning today. It might have already begun yesterday, we will see. How it influences Google's shares after the earnings will be released is hard to tell. What we can tell however is that during the last year every time that market was overpriced (beginning of year) expectations were very high and shares were down after earnings. Same goes for opposite. After the correction in late spring expectations were lower and better than expected results sparked a rally.

Anyway short interest in GOOG has gone down all this time which mean that betting on stock price decline has decreased. That's good news. (Source. Dataexplorers)

Option data shows that put to call ratio has been constantly between 0,5-0,8 in recent weeks. This means that investors are betting on rising share price. There might be some heavy option action today as well so this needs to be looked at.

And in the end something for technical analysis fans. Google's share price has stayed in a range of 480-550 for quite a while now. If we were in a down trend then subsequent falls would make significantly lower lows after the initial fall. Staying in a quite narrow range might indicate that we are actually in an uptrend and we might be in the end of the correction. This kind of correction would usually end with a nice spike upwards.

Once again, I'm staying long into earnings. Now all Google has to do is deliver. 

Wednesday, October 12, 2011

Slovakia votes against EFSF

Slovakian government has fallen after unsuccessful vote for EFSF. Temporary government will take place and EFSF will be approved probably during the week. This won't probably spare stock markets from falling. But still, not the first time that domestic politics is more important than international politics. Unfortunately.

Tuesday, October 11, 2011

Trading idea #1 - Google earnings

Google will release their Q3 earnings this Thursday after the market closes. Even though the market may be due for a correction this week I expect Google to carry some strength all the way to the earnings. While the last two months has been largely dominated by macro data, we are heading into the earnings season and we will definitely see some companies that are performing well even at these times, Google amongst them.

First some insight into how Google has performed during earlier earnings releases. Before the last earnings announcement on July 14th the stock was standing still before the announcement and closed up only $2 at about $529 after a two-day standstill. After beating the estimates the stock opened at $597.5 the next day. In April's earnings announcement the stock was down 8% after ER and in the beginning of the year it also went into earnings with a steady 2% rise the earlier week and was up about 3% after earnings report.

It is expected that Google will report an EPS of $8.76 compared with $7.64 a year ago. This means a 14% growth YoY. Revenue is expected to be at 9.4 billion USD. (Briefing.com consensus). Google reported an EPS of $8.74 in the previous quarter, $7.83 was expected. So it shouldn't be a surprise if Google beats estimates, especially considering that there hasn't been any major signs that Google or online advertising revenues are slowing down. In Google's case it should actually be vice versa - Google+ was introduced recently and so far it has gained a lot of users. The share of smartphones using Android platform is growing, the same goes for tablets.

I will hold some shares into earnings since I haven't seen any too negative signs that might indicate that Google is slowing down. Something that Gartner has said, I guess. In the end it all comes down to the question whether the recent economic slowdown has slowed down Google or not. If Google can surprise positively we can expect a nice rally and some support for technology companies as well. Negative surprise might lead to a quick correction. Interesting week.

Monday, October 10, 2011

Domestic battles of Slovakia threatening euro

Slovakia is the last member of the eurozone to agree to expanding the powers of EFSF (European Financial Stability Facility). Slovakia's prime minister Iveta Radicova (left on the picture) is finding it hard to reach an agreement with her coalition partners who oppose EFSF. Richard Sulik (right on the picture), leader of Slovakia’s libertarian Freedom and Solidarity (SaS) party last week agreed to supporting the EFSF only if Slovakia would not participate in ESM (future substitute of EFSF) and only if Slovakia would have a veto of how the funds would be used in EFSF. The prime minister refused the offer.

Slovaks have publicly opposed helping heavy borrowers and those who don't follow eurozone rules. Let's see how Slovaks themselves manage in that area.

Slovakia has been running a huge budget deficit for the last two years (-8% in 2009 and -7,9% in 2010 - Eurostat). Maastricht criteria require it to be under 3% of GDP. In former years Slovakia has done well in that area. Slovakia plans to run a 4,9% deficit this year and has a budget drafted for 2012 which foresees a 3,8% deficit.

Slovakia doesn't have as much debt as the problematic countries in the eurozone do. It had a debt burden of 41% of GDP in 2010 which is bound to increase in current and next year.

Slovakia isn't the best performing country in the euro area. Yet it is possible that it will be the only one not supporting the EFSF legislation. And it is not because Slovakia has a lesson to teach to rest of the Europe about how to balance the budget but it's because Slovakia has power-hungry politicians not willing to do the right thing.

Pursuit Dynamics - company ready to take off

Pursuit Dynamics (PDX) is a British company developing innovative atomisation and reactor technologies. The technology is in the early stages of commercialization and the company expects to be cash-flow neutral by the end of the current year. Before I share some thoughts on the share price and its movement I will post a good overview of the technology the company is developing. The original text was posted on HERE.


Imagine its 1920 and you have just invented and patented the electric motor.

All around you are industries and devices run by steam engines and internal combustion engines water power and so on - you know and they know that electric motors will do the job so much better. So off you go on the monumental task of getting them to change - you know they will but it wont be overnight - and where do you start.

Of course PDX do not make electric motors but

Now imagine its 2005 and you have discovered a new way of heating liquids. And at the same time and in the same way a new way of mixing liquids. Both are several factors more efficient than the methods currently used by numerous industries. And you also discover that using the same system you can cover surfaces with a liquid much more efficiently and with far less liquid than any other method.

Now imagine that amazingly the system that does all this has no moving parts.

So off you go on the monumental task of getting them to change - you know they will but it wont be overnight - and where do you start.

That is the task facing PDX.


The tech itself is simple and easy to understand

Using a gas and a liquid sent simultaneously through a patented "reactor" the pdx system divides liquids into smaller particles or drops than any other known method - up to 100 times smaller.

1. HEATING: The more you divide a given volume of liquid into separate drops the more surface area you expose. The more surface area you expose the more efficiently you can heat the liquid. Remember we have 100 times more surface area exposed than the nearest competitor. So to heat a liquid you pass it through the pdx reactor together with superheated steam as the gas. Much more of the heat is transferred from the steam to the liquid than by any other method. Including the effort of heating the steam it is about twice as efficient as any other method of heating liquids - so you save half the cost.

The reverse is true too. In the case of fire fighting the heat is transferred into the finely divided liquid to cool the fire. Again it is much more efficient than any other method.

2. MIXING: To use the PDX to mix liquids [or sludges or creams] you pass the different liquids through single or multiple pdx reactors into the same vessel. The pdx causes the liquids to move at supersonic speeds and the tiny drops swirl about inside the vessel and mix and settle as the mixed item. Using superheated steam as the gas element the liquids can be heated at the same time as they are mixed. Compare that to heating a vessel externally while mixing paddles turn the brew round to mix it. That is why people pay £400,000 for a pdx food mixer.

Food is not the only industry where efficient mixing and heating is important. Processes such as ethanol production and extracting gas from waste products, brewing and making household creams such as toothpaste and hand creams rely heavily on mixing and heating processes. PDX can do them more efficiently and so at less cost. Where heating and mixing processes are used to extract products PDX is able to extract more from a given quantity than any other method. Such as extracting sugar from corn to make ethanol.

3. COVERING SURFACES: Because the drops produced are so fine, the mixture coming out of the PDX reactor acts like a gas. But it is really a liquid in tiny drops. Because it comes out of the reactor so fast and so turbulently it covers every surface in an enclosed space, such as a hospital ward, no matter how small the surface and whatever its orientation. Under chairs and shelves, into crevices and inaccessible places the droplets go and cover the surface. Hence PDX can be used in decontamination, both medical and nuclear. It is more efficient and effective than any other method , evenly covering surfaces while using far far less chemicals than other systems. The surface covering can be made to be so fine that the surface does not appear to be wet and needs no after cleaning
Eventually painting and coating applications will also use this feature.

4. SPECIAL APPLICATIONS: Because the droplets are so small [almost down to one hundredth of the width of a human hair] they do other interesting things as well but these are more technical and specific [starch swelling, pharma applications, easier desalination of water etc]

All this is achieved at relatively low pressures of less than 3 bar. There is no need for expensive high pressure pipes, lines, containment vessels etc. The gas element of the system can be steam, air, nitrogen whatever depending on the application. The "mist" coming from the reactor reaches supersonic speed and is propelled a long distance in fire fighting, decontamination and similar applications.

And the system has no moving parts.



What is the "reactor"

Imagine two oval pipes one inside the other with a fine gap between them - the shape of the end of the pipes is such that the fine opening is angled towards the centre

The liquid is sent through the fine gap between the pipes and the gas comes down the middle pipe - the very thin sheet of liquid is directed into the gas flow by the shape of the opening - the thin of sheet of liquid is hit by the gas and it fragments into the tiny droplets

The exact angles, speed, size of the openings, pressures and so on are critical

That essentially is it - simple - cheap and easy to make - patented - and incredibly effective.


All of this is comprehensively protected by more than 60 different patents.

Check the company's website to see how how these features are being applied

The PDX system is not as some have claimed just too good to be true.
Too many large and famous companies and organisations are using it , trying it, forming joint ventures with PDX and so on. They include P and G, Pepsi, SAB Miller, Premier Foods, Kaercher, National Nuclear Laboratories, Heineken , Marquis Ethanol and many others.

And too many very serious people, scientists and executives who are leaders in their fields, have joined the company.


Pursuit Dynamics is listed in London Stock Exchange under a ticker PDX. Bloomberg. Its share price has gone all the way up to 700 pence in the end of last year and has come down all the way to 180 pence where it is today. The move in the share price in the end of the last year was initiated by company's statement that they have begun testing PDX's technology together with Procter & Gamble. These tests are still ongoing today and should reach some sort of commercial agreement in near future. The share price has come down significantly since its highs last year. The reason for falling has been Simon Cawkwell's (stock market commentator and investor known as Evil Knievil) statement that he will start shorting PDX's shares since the company is massively overvalued. He initially set a target price of near 1 pound compared to 7 that the price was back then. As can be seen the price came quickly down to 4 pounds a share and it stayed in that region for a while. The next major cause for the fall was Evil Knievil's comment again regarding one of the first commercial customers of PDX, Pacific Ethanol. EK said that Pacific Ethanol will go bankrupt and so will PDX. This was obviously an overstatement but since EK is given credit for his thoughts the share price went down over 20% that day. Pacific Ethanol is about to report profit in November, at least corn and ethanol prices point that way.

So currently PDX's shares are about 180 pence. This gives PDX a market cap of 130 million GBP. They would have to make around 10 million GBP a year to justify this market cap if they were a company with stable cash flow and non-existant growth. The story is different here. The company is currently in trial or commercial phases in many global markets like water treatment, bioenergy, brewing and food production, fire suppression, nuclear contamination etc. Check their website for further information.

In addition to a good growth story the company already posesses a strong position in ethanol production market in the US. Their outlook for their technology usage is 2 billion gallons of ethanol next year. With 2-4 cents a gallon (their first level solution) for PDX this makes a hefty 40-80 million USD a year. Some of the companies using PDX's technology are already moving to different production modes earning PDX from 4 to 8 cents a gallon. Let it be clearly stated here once more. These are only revenues from their corn ethanol line of activity. With their yearly 10 million GBP cost package the company will probably make a nice profit next year and the valuation of the company should be not less than 500 million GBP. Once an ethanol company has purchased PDX's technology they will pay a license fee as long as they produce ethanol. The royalties from their business can only grow.

We will get a more clear outlook in November when the company announces their results for period April-September. It is expected that they will report revenues in the range of 1,5 million GBP. Major brokers and institutional investors have set target prices from 7 to 20 pounds.

Disclaimer: I am a shareholder of the company and will remain so until the potential of the company will be recognized by the market and its technology gets fully commercialized and appreciated.

Monday, October 3, 2011

Anecdotal composition of ECB's executive board

Mario Draghi, caricature
In case you haven't been extremely interested in the ECB (European Central Bank) you probably don't know too much about the members of the executive board. You might have heard that the current president of the ECB Jean-Claude Trichet, the Frenchman, will hand his duties over to Mario Draghi, the Italian, in November. You might have also heard of Jürgen Stark, the German, who's leaving the ECB for personal reasons even though it is thought (with a high level of probability) that he strongly opposes current market interventions by the ECB. Anyway, what you probably don't know or haven't looked at is the national composition of the ECB starting this November. Here are the 6 members of the executive board:
- Mario Draghi, Italian
- Vítor Constâncio, Portuguese
- Lorenzo Bini Smaghi, Italian
- José Manuel González-Páramo, Spaniard
- Jürgen Stark, German (has resigned and will leave by the end of 2011)
- Peter Praet, Belgium

Notice some familiar pattern here with some troublesome countries? I'm not suggesting that the ECB might be too South European here even though 5/6 of the ECB's executive board is from countries with laissez faire approach to public finances. All the members of the ECB's executive board have been approved by all eurozone members. It is a bit anecdotal though since you would be looking for countries like Germany, Finland and Netherlands to be the guardians of the euro.