Tuesday, November 22, 2011

Apple play into earnings

The markets have been very volatile recently. Apple reported lower than expected earnings last month even though they beat their own estimates. The problem with expectations is that when the market expects Apple to overshoot all estimates then the market just expects more. It was a matter of time until Apple reported lower than estimated.

The problem here is not Apple. Even though Apple reported lower earnings than expected (by the market), if you go behind the numbers you will see that the biggest failure for Apple was lower than expected iPhone sales. Since Apple introduced iPhone 4S in the beginning of November one major possibility could be that since this was expected, people were delaying their purchases. Supporting evidence can be found in pre-order data for the newest iPhone. Apple is unable to fulfill all the demand out there.

There have been rumors that Apple has cut iPhone production but my guess is that this is purely manipulation to get the price down even more. Before reporting Apple's shares made an intra-day high of $426 a share and the shares are currently trading at $374 a share which is a 13% drop from its highs.

Apple will be reporting their earnings in January 2012. I'm not a fan of estimates myself but if Apple can deliver their guidance for Q4 this year which is $9.30 per share then I think we will see at least $440 a share either before or after the earnings. I'm definitely going to play Apple into earnings and I'm looking for a price to enter. We might have already seen the bottom. As much as we dislike it, it depends a lot on dysfunctional politics of the US and Europe.

Why is banking more healthy than smoking?

Australia has introduced a law requiring all cigarette packages to look alike (see below). Main argument behind this is avoiding branding of cigarettes so smoking wouldn't look cool anymore for example. Theoretically this would mean that cigarettes as a product would be only consumed based upon its characteristics and the psychological value of consuming the product would not be defined to a customer. Will this reduce smoking? Only time will tell. What is interesting here is that this is one of the precedents of modern time where regulator has forbidden marketing in such a concrete way.

It is not possible to compare smoking with banking but no one would argue that both have had a major negative effect on modern society. While smoking is the direct cause of many deadly diseases, risk taking in banking sector (or in finance more generally) has caused millions of people to lower their living standards in recent years mainly starting with the crash of Lehman Brothers. The direct effect of both is difficult to assess although smoking has received much more attention in this area.

What is the point of all this? I would argue that banking similarly to production of cigarettes as a potentially well-being-threatening area of business is a commodity which should be handled like an utility rather than as profit seeking entity. If banks were to be stripped of their possibilities to (1) take massive risks in order to maximize profits, (2) make people believe that they too can enjoy the life of a millionaire once they fill their loan application and (3) regulate the way that bonuses are paid in finance sector then maybe we would have a system where banking is a utility. This would mean that banking would be a low-margin business with concrete rules for all participants - we would lose the value proposition similarly to what Australia is doing with smoking. This would mean that banks fulfill certain tasks given to them by governments. The interest paid on loans and deposits would be regulated by governments together with other aspects of banks activity.

Maybe then we would find solutions for avoiding the next Lehman Brothers crash, find some cure for inequality inspiring the Occupy Wall Street movement and solve the moral dilemma of the need of saving the banks. While this would definitely kill innovation in finance you could ask whether we need innovation in order to offer products for those that aren't able to get these themselves?

Wednesday, November 16, 2011

Crackdown on Occupy Wall Street (OWS)

Authorities of US (18 cities involved) and Switzerland have begun clearing the camps of OWS campers. There is a legal framework pending with the same aim in other cities like London. The main argument behind this action is to keep "occupied" places clean, safe and publicly accessible. According to officials it is not forbidden to hold an organized event or protest in a public area, it is a different thing though to start building a settlement in an area that might sometimes be privately held.

What ever the reasoning is the taste of this all is not good. While officials might be right in their reasoning it is clear that we will hear a lot of arguments regarding Wall Street's involvement in clearing the camps. First reaction however has been somewhat neutral and several leading groups of the movement have said they will take some time off and reorganize their movement.

The movement needs a common message now more than ever. While it has been a movement against capitalism and/or financial corporations and/or .... there hasn't been too many suggestions about concrete steps needed to be taken or concrete changes to be made. While it was the time spent together in the parks that kept a lot of people going a clear idea and some specific proposals could be a game changer here. Statements like "we are the 99%" are just not enough. Every person has the right to speak, right to vote and the right to participate in politics. If this is not good enough then what is?

Tuesday, November 15, 2011

Stock market manipulation by hedge funds

Even though I'm not at all a fan of Jim Cramer I liked this video where he explains some tools available for hedge funds to manipulate stock markets. Efficient market hypothesis anyone?

Monday, November 14, 2011

Week ahead

The markets will be mainly driven by economic data and eurozone crisis this week. We have preliminary numbers for German and French GDP (gross domestic product a ka economic growth) tomorrow morning (7 am and 6.30 am respectively (GMT)). I will not be holding any overnight trading positions since the data will hardly surprise positively but might just meet expectations. We have also numbers for UK CPI (consumer price index a.k.a consumer inflation) and EU GDP coming out later in the day. 

On Wednesday data for US CPI and industrial production will be published. I am expecting this to support the markets since US data has not been bad recently. 

Finally on Friday data about German PPI (producer price index a.k.a business inflation) will be published on Friday morning. 

Some interesting names reporting this week include Wal-Mart Stores, Dangdang (Chinese Amazon), Tyco International, Youku.com (Youtube of China), SABMiller and Salesforce.com. These are some of the names I will be watching for a possible trade. 

Tuesday, November 8, 2011

Call it "the political lag" if you wish

Greek prime minister George Papandreou has finally resigned after guiding Greece through multiple bail-out packages and adopting various reforms. When Mr. Papandreou started as prime minister in October 2009 the crisis in Greece was escalating. It was then announced that Greece had constantly underreported their finances and Greece's situation is far worse than bad. Greece's budget deficit was over 12% of GDP at that time.

After multiple confidence votes Mr. Papandreou has raised taxes, cut costs, let public workers go, introduced multiple reforms like the one aimed at reducing tax evasion - everything you would expect from a prime minister handling the biggest crisis in country's modern history. Yet his popularity has suffered greatly. According to recent polls over 70% of the people are not satisfied with Mr. Papandreou's handling of the crisis. Again, something you would expect after tough austerity measures that leaves no one untouched.

My sympathy lies with Mr. Papandreou. It's much easier to be a populist politician lowering taxes and raising salaries. The people love you.. After all that's what the Greeks and Romans did in ancient times when the emperor was becoming unpopular - held celebrations and gladiator fights. Mr. Papandreou is the victim of those earlier governments that were overspending and doing little to carry out reforms. From here the term "political lag" as well.

I have argued this before that current democratic system tends to reward those politicians that are not obeying the rules (being populist). The outcome of one's faults are handled by future governments. That's why I find it important to introduce so called governing in accordance with the rules. The principle is simple - the government is allowed to govern until it obeys the rules.

For example if Greece were to enter into its legislation that their budget deficit could not surpass 3% of GDP as eurozone rules require then the government that is unable to obey this limit would step down and new government would be elected or the power would automatically be handed over to opposition. After all the elected government is responsible for their promises during elections as much as they are responsible in obeying the rules agreed before them.

Friday, November 4, 2011

Groupon IPO

Today is the day when Groupon shares will start trading under the ticker GRPN. Demand for shares of new promising companies has been huge and almost all better-known IPOs have seen a significant price pop in the opening of trading. Yet the price pop has attracted lots of sellers and short sellers especially in the case of companies like GRPN or LinkedIn where expectations for profit are usually ahead of the curve causing volatile share price action.

Still I am hoping to get some trading action with Groupon shares. I am expecting the price of GRPN shares to pop in the open since very few GRPN shares are floated (only around 5% of total shares) and institutions are looking for exposure to hot fast growing IT firms like Facebook, Groupon or Zynga. My strategy is to buy into the opening strength and sell when buying pressure slows.

Tuesday, November 1, 2011

Greek referendum - necessary but risky

Greece announced yesterday that it will hold a referendum regarding the latest bail-out package among its citizens together with a vote of confidence in the parliament. The question asked from the Greeks is whether they want to adopt the latest aid package or not. It is a "yes" or "no" question which makes it a dangerous one. But first I will outline the core of latest bail-out package to Greece:

  • 50% write-down of Greek bonds (meaning that current holders of Greek debt will suffer a 50% loss)
  • 130 billion euros 
  • further austerity measures and reforms including selling of Greek assets, sacking of numerous public workers, raising taxes etc
All this should reduce Greece's debt burden to 120% by 2015. Greece should return to growth from 2013 (its economy will contract about 5,5% this year). 

The announcement was shocking because reforms carried out in Greece are not popular, yet they are important in order to get support from IMF and EU. The reasoning here is that solvent EU members want Greece and other historical big spenders to behave according to rules and promote economic growth. By supporting Greece and other PIIGS (Portugal, Ireland, Italy, Greece, Spain) the EU can push these countries to carry out painful reforms. 

Now Greece has put the latest package to referendum. While it is good for democracy it may not be good for Europe. Recent polls show that majority of Greeks think that bail-outs are bad or probably bad to Greece. This is because there are no people in Greece that aren't in some way affected by reforms and austerity measures. 

"No" in the referendum held would mean that the government would step down and new elections would be held. This would theoretically cause the IMF and EU withhold their support money causing Greece to be unable to pay out salaries for months possibly. Even though I am fairly positive that even then some agreement with EU and IMF would be reached, it will cause panic and market tumble wiping trillions off bank accounts. Would Greece leave the euro then? How would Greece deal with all this euro-nominated debt if their currency would depreciate 50% for example? What would be the effect on Greek economy? Just look at Icelandic example for that matter!

"Yes" in a referendum would be the best outcome of all since the people of Greece would show their support to change what current Greek austerity measures are all about. This would make it easier for the government to carry out reforms and would win the total support of the parliament as well. Let's hope that Greek prime minister Papandreou knows what he is doing.