31 December, 2007

Happy New Year from the WC Power Tech Fund

Best wished to everyone in the New Year

Happy 2008!

2007 Ends with a Bearish Tone, Dow loses 100 points

The Dow ends the year down 101 points, and while the average is in positive return territory for the year (about 6.5%) the latter part of the year has become increasing volatile and negative. The credit crisis dominated the market headlines over the last few months and Big Finance has endured billions upon billions of losses in their asset valuations.

These bad bets have cost the big banks plenty as the hit list is broad and plentiful. Since Mid Year highs, there have been nothing but bad news from the Financial sector. (Apart from consistent blowout quarters at Goldman Sachs (GS))

  • Citigroup (C) is down 48%
  • Bank Of America (BAC) down 24%
  • Wachovia (WB) down 34%
  • Merrill Lynch (MER) down 46%
  • JPMorgan Chase (JPM) down 19%
  • Morgan Stanley (MS) down 31%
  • Lehman Brothers (LEH) down 24%
  • Bear Stearns (BSC) down 38%
  • Goldman Sachs down 14%
These numbers are staggering and many analysts are painting an even bleaker picture for the Financials in 2008. While I think there's the potential for big rebound gains into the 2nd half of the year for these companies my major worry is that once Dividends start getting cut, more investors will flee to other safe havens. The rumors of Citigroup needing to cut its dividend by 40% certainly have hurt the stock over the past couple of weeks.

There will be opportunities in 2008 for the Investor, as I feel the recession fears are overblown and selling based on those fears is overdone. The selling was done consistently throughout the past couple months, timed with the Federal Reserve Interest rate moves.

2007 will go down as the year of the iPhone from Apple (AAPL), and the popular mobile phone gadget has helped the technology company to another breakout year by more that doubling since the device's unveiling. Look for Apple to extend its reach with iPhone in the coming months (Europe, Asia etc.). Technology and Oil were the leaders for better parts of the year in 2007 and this will likely continue going into 2008. I believe there is tremendous commodity and trader pressure to get and keep oil above the $100 mark. Should this happen it will continue to put pressure on the consumer and big ticket spending (Homes, Cars) will soften still, putting further pressure on the overall market and North American economy.

Luckily though, all metrics the market has gotten lately have pointed to a stable and growing US economy, and consumers seem to be taking high gas prices in stride. All signs point to a strong Christmas season, led broadly by Technology (Gaming & gadgets), and with this the chip makers should see continued strong demand, specifically Intel (INTC).

It's the first end of year trading session for the WC Power Tech Fund Blog and I'd like to thank all the readers throughout the first few months here.

27 December, 2007

Apple shares pass $200, A new Record

Apple (AAPL), is also enjoying a strong holiday as iPods are as popular as ever and the Mac computers continue to well outpace the computer industry in terms of growth, and that's without even mentioning the other "hottest gadget of the year" iPhone. Apple in fact is one of the main culprits of Amazon's (AMZN) sales success as Mac computers and iPod line ups flock the electronics best sellers lists.

Whispers about sales are starting to trickle in pegging iPhone sales around 5Million units for the year, well above of most analysts 3-4Million estimates. Thanks in part to initial success with European launches and the $200 price cut that the device saw earlier in the fall. Considering that Apple's goals were to sell 10Million units by the end of next year it appears the company, for all intensive purposes, is well on its way. And its only the beginning as the device is officially on sale in only 4 countries. Once confirmed news of iPhone deals in China, Japan and the rest of Europe hits, the early sales goals will, in retrospect seem completely low-balled.

Apple's forgotten, and not so well selling device, AppleTV seems to be in the spotlight again as analysts expect an upgrade to the unit as well as the content available for it with iTunes. Apple's famous MacWorld Expo is just on the horizon and it is this event that usually brings with it product introductions, company metrics and newly minted partnerships. The hope is that Apple will bring aboard more movie studios to iTunes and perhaps expand the sales model to also include rentals. Reports coming in suggest that Fox is the first to sign on for the "rental" model and that this will be announced at the Expo. This feature should give the AppleTV some new life and perhaps force an upgrade, including the long wanted HD content in iTunes. Having Rentals and HD Video in the iTunes store come MacWorld would be 2 very big steps in the right direction to not only Apple but the entertainment giants as well.

Digital Rentals are a market that hasn't taken off yet, with many players attempting to make it work but no one dominating. Microsoft, through Xbox is trying, Amazon is trying, NetFlix and Blockbuster were trying too. The verdict, nothing really works well and each platform simply isn't wide enough. But iTunes, with its Billions of downloaded songs, and 100 million downloaded videos may just be that massive machine to get the ball rolling. Much as the demise of the CD caught the music industry off guard the last year or 2, I see a similar fate coming to DVD, with everything going digital. It doesn't help that the next gen HD disc format is in a war that is dividing consumers and studios either. So, should I get a Blu Ray player? An HD DVD player? a combo player just in case?

Too many questions, no real answer, or could there be? 120Million iPods have been sold, iTunes is seemingly on the majority on computers already, HD rentals would take off on this platform within 12-18 months pushing next gen disc formats aside as Digital content truly becomes King, Broadband expansion will make downloads quicker and that hurdle of "downloading time" will be a thing of the past.

When this rental announcement becomes official, more power to the Studios who stepped up, and didn't try to strong arm the one dominant player in the online Music and Movie sales business.

So is there still upside to the Apple story? Yes, but time frames have to be adjusted now. Forward P/E sits in the low 30s and the company is nearing it's marquee event, and its undoubtedly strongest quarterly report in history. So what's that mean for the investor? It means estimates are still too low and price targets will still continue to climb. Remember current Apple estimates only include 10-12Million iPhone sales by the end of 2008, no real clear idea of the revenue sharing model that will become a monthly cash cow for the company, and absolutely no AppleTV income, as the product hasn't sold well yet. Yes iPod growth is slowing, to only about 20% year over year, but Macs are surging to more than make up for that P/E ratio softening.

Bottom line, Apple at $200 is still a very interesting long term story, dips are great opportunities to accumulate, and this one will likely beat the market once again, by this time next year.

Disclosure: Author is long AAPL

Amazon's Strongest Holiday Ever, Company on fire, Stock still Pricey

A couple high profile Technology names have been making waves over the last couple of days. Amazon (AMZN) and Apple Inc. (AAPL) have both been in the news for the better, with the former seeing record retail sales, and the latter hitting record highs. Christmas has been very good for web-retailer Amazon, as it came out saying that it in fact had its biggest and strongest sales season ever.

For a company that's been an Internet giant for more than 10 years, it definitely seems like Amazon has hit a new stride and is once again riding an optimistic wave. The numbers though are just staggering, but more on that in a second. Yes more and more shoppers are comfortable online, yes there's more product available online than ever, yes Internet penetration is rolling out further worldwide, but still, Amazon's surge in shopping can majorly be credited to its own internal innovations, and with that the simplest form of advertising, word of mouth.

The busiest day this year saw more than 5.4Million items being bought. Highlighted specifically by strong demand for Nintendo's popular Wii game console, the refreshed line of Apple's iPods and Mac computers, GPS systems and HDTVs. Comparing to last year, this was about a 35% increase! Now yes this is a "peak" numeric, but I think it is safe to say that Amazon's on the retail uptrend, rather than just simply enjoying seasonal consumer increases. Even the company's own Kindle e-book reader is reportedly selling well in its early stages. It is news like this that will really boost the company back to its triple digit share price highs, as the retail business is very low margin while the electronics game is something else entirely.

A $40Billion market cap based on a triple digit P/E ratio is still too rich for my liking but the strongest companies have a knack for slowly molding from inflated P/Es and before you know it they even seem cheap. To say that Amazon is growing again would be a tragic understatement, the company is better than its ever been, now if only they can judge that Wall Street expectations game as well as ever, shareholders can rejoice alongside with staff.

Disclosure: Author does not own AMZN

18 December, 2007

WC Power Tech Fund takes week long Christmas Break

Merry Christmas and Happy Investing to everyone.

See you in one week.


14 December, 2007

Markets continue Bearish Tone post Fed, Recession fears creep in again

The week of the last Federal Reserve decision of the calendar year ends on another bearish note. Markets continued to pile up losses after the Fed's 25 basis point rate cut. Major indices in the US fell about 1.3%.

For the week the Dow Jones is down 285 Points, or 2.1%, but from the pre-Fed peak the major average is down over 400 points ending the week at 13340. The catalyst today was the American Inflation Report. Consumer Inflation in November rose by its highest total in over 2 years, led of course by every ones favourite commodity: Energy! Gasoline Prices were the major source in the increase in inflation, which caused today's market sell-off.

The CPI (Consumer Price Index), which is the main measure of inflation rose 0.8%, and even the core inflation number, which does not include energy, rose 0.3%. Traders were spooked by this as the Fed is treading a fine line between doing what's right for the economy and the crumbling credit markets and balancing the inflationary effects of lower interest rates. The dreaded "Recession" word came up again as fear of higher inflation data will lead to a pause in Interest Rate Cuts by the Federal Reserve in the future. When Traders talk Recession, growth stocks are the hardest hit, as the logical thinking is, growth is driven by positive country-wide economics.

The hardest hit sector today was consumer based.
More Logical trader thinking;
Recession fear = Folks Spending less money!
Especially on big ticket items so the big Automakers saw selling. Toyota (TM), Daimler (DAI), Nissan (NSANY), Honda (HMC) all were off more than 2.5%.

Although, most of America is probable concerned with what's gonna happen to "The Rocket" Roger Clemens, after being named in detail in the substantial baseball steroid investigation.

11 December, 2007

Expected Fed .25% Rate Cut Sinks Market on Dec 11

Well, the expected happened. The Federal Reserve cut interest rates by a quarter percent to 4.25%. That was the news the market was looking for, however in the run up to this announcement there was talk of perhaps a 50 basis point cut to stem the tide of recession talk going into next year.

That, however, did not happen and traders sold off in numbers.
Dow Chart

The severe drop just as the announcement came out is truly indicative of trader mentality today. I believe the drop off was overdone. Dow Jones, Nasdaq and S&P were all off about 2.5% today. Canadian markets, portrayed by the TSX Composite Index fared a little better, only dropping 1.5%. The market still has a chance to rally into the New Year on the backing of a relatively strong US economy, and this "expectations blip" or "sell the news" moment, or whatever you want to call it will be just that, a blip. Valuations and Fundamentals are as important as ever during heavy sell-offs so you, as an investor know exactly what is truly On Sale.

10 December, 2007

Markets head higher Monday, ahead of Fed Rate Meeting

The last Federal Reserve decision of this calendar year comes tomorrow, Tuesday Dec 11, and the markets produced another bullish day ahead of the expected rate cut. Investors have priced in a 25 basis point cut already and the Fed has signalled that is exactly what it will deliver. The Dow was up over 100 points to lead the major indices higher.

More bad news on the financial front as UBS (UBS) said it will write-down more than $10Billion in sub-prime exposure. A hefty number that would've had shares tumbling if it wasn't for the news that the company is getting an over $11Billion cash infusion for outside investors, mainly the government of Singapore and Middle East investors. When a government is investing, you know its for the long term!

Washington Mutual (WM), while up 4% in the regular session, fell almost 9% after hours on news of another write-down of over $1.5Billion. This coupled with the news that the company is cutting over 2600 jobs, cutting its dividend, and discontinuing business in sub-prime dealt the big after hours blow.

On a slightly better note in sub-prime, battered NovaStar Financial (NFI), which recently received a waiver from Wachovia Bank, basically giving the company more time to come up with cash, before it would have to face bankruptcy, was up big today. Now NovaStar's stock has been a complete mess virtually all year, yet the daily fluctuations here have momentum traders jumping. NFI has moved between 2 and 4 dollars regularly over the course of the last 2 weeks and today's 25% move to the upside seems more like the rule than the exception. It has come from a low of $1.12 to almost $4 within the last month, so: Potential turnaround play? This is far from it but hope remains that in the long run NovaStar could bring itself out of its current doldrums. At this point it is still a stock that I would stay away from.

Disclosure: Author holds no position in the above mentioned stocks

05 December, 2007

Rally Wednesday for the Markets, Genentech sell-off on Avastin news Sparks Opportunity

Markets were propped up today as economic data came in on the positive end of the spectrum. Employment numbers showed that 189,000 jobs were added, thus giving hope that consumer spending will be stronger than forecast this holiday season. All major US indices were up about 1.5%, with the Nasdaq leading the charge. The Dow gained almost 200 points to end the session close to the 13,500 mark.

Technology, Energy and the Financials were strong in this rally day. Positive sentiment on consumer spending clearly is associated with gadget buying for Christmas and that propped up stocks of Apple (AAPL), Dell (DELL), Seagate Tech (STX), Intel (INTC) and Google (GOOG).

Suffering a setback was bio-tech power Genentech (DNA) as the FDA rejected the use of its oncology drug Avastin. Shares of the company were halted with a loss of 9% already registered. The drug in question was to be used in combination to treat certain forms of breast cancer but the FDA panel voted against approval of the drug for this purpose. Avastin currently bring Genentech sales of approximately $600Million in the first 9 months of the year as it is also being used to treat forms of lung cancer. The approval of the drug for other types of cancer treatment is seen as a major positive for the bio-tech and as such this setback has caused this temporary dip.

Goldman Sachs came out in support of Genentech after the news, as the major Investment Bank said that even without Avastin's approval they saw Genentech being able to sustain 20% Earnings/share growth going forward, and they held out the possibility that given further trials and more data the FDA could still in fact approve the drug for further cancer treatments.

At this valuation I think the selling as a bit overdone and Genentech looks attractive in the mid 60s. While DNA is a bit on the expensive side compared to its peers like Amgen (AMGN) or Teva Pharma (TEVA) the best in breed deserve a slight premium. Avastin's use is continuing to grow in lung cancer use as results for the first 9 months of the year are up 37% year over year.

Investors should take note when the brightest companies are on sale and this is definitely a sale. Genentech is the drug maker on own at these discounted levels. I believe it could be back in the $70-75 range soon but I agree that even without Avastin's approval for Breast Cancer enough growth should be present to propel the stock to its $93/share analyst target within 12 months. A hefty 35% all in premium opportunity on the upside and if Genentech would fall to be valued with its peers at a 20 P/E the downside is $66/share based on estimated earnings of $3.30 next year.

The chance is here and now for this steal!

Disclosure: Author does not own DNA

03 December, 2007

Markets Stumble out of the gate in December, Automaker sales Struggle

The month of giving and receiving started on a bumpy note for North American Markets as major indices were all lower. Nasdaq was the biggest loser on the day with an almost 1% drop, compared with the Dow, S&P and Canadian TSX, all losing between 0.3 and 0.6%. Today's selling was in part due to lackluster Automotive sales numbers.

General Motors (GM) reported a decline of 11% in sales numbers, while its major competitors Ford (F) and Toyota (TM) reported flat month-over-month sales. The only increases were seen in Honda (HMC) and Nissan (NSANY). It is clear that high oil prices are skewing buying towards smaller and more fuel-economic vehicles and that's putting a hefty dent in truck sales for the American brands. Punctuated by GM's 15% drop in Truck Sales.

The big story that is oil keeps rumbling around in the head of the average consumer and it is most evident in consumer spending on cars. In fact demand for smaller cars, more efficient cars, and even hybrids is remaining strong, according to Toyota. Seemingly though, what hope do big time car makers have in the United States? Their consumer is witnessing a de-valuation in home equity, gas prices that make it more than $50 to fill a tank, and a currency that worldwide is eroding faster than the Dolphins chances of winning a game this NFL season.

Truth be told, its a tough time for the car makers, and the executives are well aware of the difficulty. The trick will be, which company can provide the most incentives and the most practical products going forward into next year. From my view owning the automakers is a tough call right now but I like the path of Toyota and Honda, as those companies seem to follow consumer trends better and more nimbly than their American counterparts.

Disclosure: Author does not own any of the companies mentioned above