28 January, 2009

Fed Keeps Rate near Nil, Markets in the Green

Markets rebounded today in anticipation of the Federal Reserve decision on Interest Rates. The benchmark rate was set in a range of 0% to 0.25% so there wasn't any further down it could go. It's not like the Fed will pay people to take money, will they?

Anticipation of the Fed was going toe-to-toe with headlines of President Obama urging swift action on a huge stimulus package for Americans to get a slowly degrading job market and teetering economy back on a track towards growth. Some of the key statements in the Fed decision were made regarding recovery and overall improvement to the liquidity of credit markets, which still after all these months have yet to really take off. As businesses cut more jobs, cut expectations and cut spending into 2009, the Fed expects a gradual recovery to start sometime in the latter part of the year.

The Fed also clarified that the expanding weakness in the overall economy would keep rates at these low levels for some time if little to no improvement was seen. While rates can't go any lower than 0% the Fed is expanding its arsenal of tools to provide a lift to the macroeconomics plaguing the United States. The Fed has raised its limits on how much banks can borrow directly from the Fed and it has been involved in the purchase of commercial paper from numerous corporations in order to apply liquidity in areas that desperately need it.

All these tools seem to be making a difference at least in the marketplace, if not yet economically. The Dow's green days have certainly outnumbered the red of late as buyers are starting to not only appreciate company valuations but also see a plan that will eventually lead to recovery being formulated by the Nation's new Government.

Only one truly giant hurdle remains! Turning this plan into reality, and that is by no means a trivial effort.

22 January, 2009

Google and Apple bring back Tech Leadership Clout

With e-ink around the country still fresh from Apple's (AAPL) very strong results, the fact remains the old school ink business is dying, it was Google (GOOG) ready to take the Market stage. Technology Sector leadership has remained vacant during the economic turbulence World Markets have taken but as two of Jim Cramer's once famous 4 Horsemen of Tech, these companies were ready to stake their claims not only to leadership but in-turn "recession-proof-ability".

Bearish attitudes towards consumer spending, global economics and market sentiment led analysts far astray when it comes to the growth engines that Apple and Google continue to be. Apple beat analyst estimates by a whopping $0.40/share ($1.78 vs. $1.38) and as Google's numbers cross the wire the non-GAAP measures had outdone analysts by $0.15/share ($5.10 vs $4.95). Much has been written on the web about yesterday's Apple results already but a recap of the WC Power Tech Fund Apple earnings preview can be found here. (Link)

As for Internet giant Google, the mood was more somber coming into this quarter in light of reports of slowness in advertising and that Google had let go 100 recruiters and shut down several products and services. But with $5.7Billion in total revenue and $4.22 Net Revenue (beating expectations by $100Million) the train is still very much on the rails.

The search advertising leader continues to grow with 18% year over year Revenue growth and 3% quarter over quarter growth. Most of this growth can be attributed to the growth in paid clicks which saw 18% year over year growth and 10% quarter over quarter growth. Much has been talked about this quarter that Google was introducing several money-making initiatives and shuttering money-losing ones. Google was experimenting by showing more paid ads per search, brought more ads to video-site YouTube, and showed ads on Google Finance, Google News and Image Search for the first time. These initiatives went around the blogosphere and came back again with two general sides to the thesis. Clearly split between the Bear and the Bull.

  1. Google is looking to blow away Wall Street and show everyone who rules Internet Advertising
  2. Google is really struggling and needs everything it can to meet numbers
With the highest Revenue quarter in its history Google clearly didn't have its mind on struggling to meet expectations. A company that praises long-term growth and doesn't provide guidance to Wall Street would seem far fetched to really be under the gun as described in point 2. With Google expanding its reach across in Internet in nearly all geographic areas and adding to its cash horde quarter after quarter it is much easier to be bullish from here on out, despite the uncertainty over macro-economics.

With a 2nd business model out there somewhere, Google is sharpening its focus on Search and Ads, Mobile and the Enterprise. With AdWords and AdSense, the Android mobile Operating System and Google Apps Premier being pushed harder, management thinks large scale growth is still very viable from several Revenue Streams.

One of the biggest areas of improvement for Google was prudence in Capital Expenditures, which is significantly down from quarters past. After years of free-wheelin' spending on infrastructure, given the downturn it certainly pleased Wall Street to see Google be more mature with its spending. Estimates have pegged Google's technological advantage over competitors as great as 2-3 times. The fat years of data center spending have given Google incredible scalability in its infrastructure and allows it to afford quarters of prudence when it comes to spending. Which can't hurt when it comes to the bottom line in trying times.

One of the biggest advantages and leadership qualities Apple and Google have in this space is the ability to generate cash. With Apple having added another $3.5Billion to its cash horde and Google generating Free Cash Flow of $1.75Billion this quarter, the war chest of these Horsemen stand at $28Billion and nearly $16Billion respectively. In an economic downturn the ability to be nimble and invest strategically is an extrodinary benefit, that Investors likely will not see for some time. However long term growth and continued success are a direct result of investment. Google's cash horde has certainly been more active with buys of YouTube and DoubleClick.

Apple and Google have shown an ability to invest strategically, with Google making the bigger direct splash in the acquisition space, but both companies, while inexplicity linked in the mindshare of Investors have once again jumped to the forefront of the Technology sector with very strong business results in a climate other companies have described as catastrophic. It is the firms commenting on strength of business and not weakness of environment where I want to be invested.

Disclosure: Author owns AAPL, GOOG

20 January, 2009

Obama starts Presidency with Wall Street at -5%

One of the most anticipated events in recent history, the inauguration of Barack Obama as President of the United States, came and went with a press spectacle and a crowd upwards of 2Million people keen on having a historic story to tell.

To Wall Street, it seemed as if another day has passed and another set of recessionary problems have been unearthed.  With Financial companies in the most dire of straights, the American Markets were dragged most by the banking sector with losses of 10% as a whole.  The general trading trend was negative today with the Dow closing at its lowest point since late November.

When all was said and done, Markets tumbled about 5%, not a good start for Obama and the message of recovery, change and hope that he preaches.  The man has to be given time, officially now granted the title POTUS,  to spearhead change in Washington and lead a faltering economy back into world limelight, into renewed optimism and tax-bracket independent prosperity.

History will remember this day forever, Wall St should choose to forget it.

15 January, 2009

...And now starring Tim Cook as Steve Jobs plus a look at Apple's Quarter

In a memo that spread throughout the press like wildfire, Steve Jobs, CEO of Apple (AAPL) announced that he'd be stepping away from day to day duties to focus on his health issues. The iconic CEO cited further complications in this treatment to fix a protein irregularity along with the fact that persistent rumors about his health becoming a distraction to Apple's current management team.

The media back-and-forth had gotten so bad and become such a distraction that it forced Apple and Steve to release a letter to the "Apple Community" describing briefly about his personal health issues in an effort to reassure Investors that the company was not only in good have but had Jobs for the foreseeable future. That future got murky very quickly in after hours trading with Apple shares falling 5% on the news of Steve taking a 6 month leave of absence.

And the media back-and-forth continues, as several pundits are calling Apple out for not being open enough in disclosing the true nature and severity of the health issues Steve was facing. While Apple's corporate line of a "constantly evolving" situation with Jobs will hold under most scrutiny it will not come as a shock to anyone if the lawsuits start piling higher at the desks of Apple's counsel. As share prices have eroded in the last 12 months and with Apple sitting at $80/share the $190s seem like a distant memory, and while much of decline is attributable to general market and economic factors the haze of doubt over Steve Jobs, his health, and his ability to continue on as CEO, contributed a meaningful part of the sell-off.

The memo from Jobs concludes with the friendly "see you all this summer" send off yet many outlets are skeptical of his return at all. Apple it seems has been prepared for a transition for some time. Over the course of the last year, several Apple product events have had Steve share the stage with others in an effort to showcase the brilliant team Apple has surrounded Jobs with. This was most notable at this year's MacWorld conference in which Marketing guy Phil Schiller took the stage for the keynote speech. Taking the company reins during the 6 month term will be Tim Cook, who's very familiar with all aspects of the company due not only to his Operations experience but the fact that he took over as CEO when Jobs had surgery in 2004.

Apple's product standing among consumers is the highest it has ever been with 4 major lines of business becoming part of every day lexicon (iTunes, iPod, iPhone, Macs). And with analysts trimming estimates and cutting price targets left and right something seems to be amiss. Economic stresses have weighed heavily on Apple as its upscale products tend to carry higher price points as compared with other companies. But here's the kicker, analysts expect higher unit sales than last year for the company in virtually every business category yet expect Apple to earn significantly less per share.

The company guidance from last quarter was no real help as a range of just over $1 to the $1.30s was alarmingly low for the Street. While current consensus stands in the $1.40s-$1.50s that is still off the holiday season of 2007 in which Apple posted $1.76/share in earnings and $9.6Billion in Revenue with a higher than anticipated gross margin of over 34%.

For the current frame analysts expect Apple Revenue on average at $9.85Billion and a gross margin in the 31-32% range slightly above Apple's own forecasts.

Last Year sales:
-> 2.3Million Macs - $3.5Billion in Revenue
-> 22.1Million iPods - $4Billion in Revenue
-> 2.3Million iPhones - $240Million in Revenue (Rest Deferred)
-> Music Sales - $800Million in Revenue
-> Other Hardware - $380Million in Revenue
-> Software Sales - $630Million in Revenue

All of the above translated into $9.6Billion in Revenue for the quarter with gross margins of 34.7% and income of $1.58Billion for a net profit margin of 16.5%.

Estimate Ranges for this year from analysts include:
-> 2.5-2.8Million Macs, led by the refreshed line of MacBook models
-> 18-21Million iPods, likely with a higher average selling price due to the popularity of iPod Touch
-> 4-5.5Million iPhones, down quarter over quarter due to the previous quarter 3G launch and the in-store activation policy for which gift cards were issued instead of iPhones.
-> The growth in iTunes digital music sales continues to be strong and the AppStore has become another line of business for the company with over 500Million Applications for iPhone and iPod Touch already downloaded.
-> Other hardware and software sales will likely be lower but in similar ranges, with any declines to be made up by the growth in iTunes and the AppStore.

So some quick accounting for Christmas 2008 for Apple:
-> The Mac business with 2.6Million units (0% quarter over quarter growth) at a similar $1500 average selling price translates into $3.9Billion in Revenue
-> The iPod business with 19.5M units at a higher average selling price near $190 translates into $3.7Billion in Revenue
-> The iPhone business selling 5Million this quarter and with 18Million units deferred at an average selling price of $400 becomes $900Million in revenue
-> The iTunes store, AppStore along with AppleTV etc becomes close to $1Billion in Revenue
-> Other hardware and software could fall to $800Million

Total Revenue estimates for Apple on this end come out to $10.3Billion and with a 2% gross margin drop the income calculation would be close to $1.6Billion in profits and per share earnings in the mid $1.70s. Year over year flat profit growth given Apple's product momentum paints a somewhat conservative picture to some, however given the current economic environment it still bodes very well given current analyst expectations. With analysts citing slowing demand and a weak economy the numbers just don't seem to add up for a Christmas quarter with Apple earnings in the $1.40s, however even in very pessimistic scenarios a drop of $0.30/share in earnings from the above estimate still beats current expectations.

While all Apple faithful wish Steve a speedy recovery and all the best during his treatment, the company is indeed in good hands and can still outperform the competition in the months to come. With Tim Cook at the reigns now the company has seemingly played its transition team cards and can move Steve Jobs into more of an oversight role with Tim behind the day to day reigns upon his return. The fact that Apple has such a competent and capable management team has always been overshadowed by the charisma of Jobs but perhaps in his absence the continued quality of Apple products will shine through and others behind Jobs will get the credit they rightfully deserve.

Update: January 16, 2009 Apple announced 500Million Application have been downloaded from the AppStore.

Disclosure: Author owns AAPL

13 January, 2009

Dow slide continues in 5th straight session of losses

For a fifth consecutive day the Dow Jones Industrials posted negative returns leading their slide from the 9000 point mark early last week. The 600 point slide during the sell-off was caused by continued US economic concern, the weakening of the domestic job picture and the sustained struggles of banks and automakers.

News makers and headliners over the past week have been significantly negative as company quarterly losses and job cuts continue to rule the front pages. Alcoa (AA), one of the main culprits of the bearish trading tone, reporting a loss far wider than analysts expected along with a 35% decline in revenues. Whether in North America or across the world the story seems the same as Sony (SNE), the electronics giant is rumored to be looking at steep job cuts amidst a rumored loss of $1.1Billion for the year, a first in the history of the company.

Citigroup (C), a bank with its well-known fair share of troubles, has confirmed talks with Morgan Stanley (MS) to combine investment banking units. The troublesome news here for Citi is that just months ago the executive branch was adamant about not wanting to sell its brokerage unit Smith Barney. The supposed deal would net Citi group anywhere from $2.5Billion to $3Billion in gains and give Morgan Stanley 51% control over the combined brokerage partnership. It doesn't help either that estimates for the bank's quarterly loss have risen to as high as $10Billion and renewed talks of another capital infusion from the Federal Government will likely be needed.

On a counter-note, left for dead and unprofitable smart phone maker Palm (PALM) was the star of the show at the Consumer Electronics Show in Las Vegas, reviving hopes that the company can turn the corner as it announced a new platform and phone to Apple-like fanfare. The Palm Pre will be available later this year, sports an intuitive interface and sleek design, and has set web bloggers ablaze with its style and functionality. Traders have taken note as well, sending Palm shares almost 100% higher since the device was first revealed.

Disclosure: Author owns C

08 January, 2009

Microsoft's Search Strategy: Mo' Money Less Problems

With the Consumer Electronics Show having more of the media's attention than in recent years it was an opportune time for Microsoft (MSFT) to make the kind of splash during their annual speech the company needs. Granted part of the reason of the shifted media was Apple's (AAPL) MacWorld keynote speech, valiantly presented by stand-in Phil Schiller, focused on Apple software updates and lacked the ominous flair that "El Jobso" exudes or the shiny new toys gadget-connoisseurs have come to expect.

While Apple CEO Steve Jobs took a backseat this January it presented Microsoft head Steve Ballmer with a chance to speak at CES and present Microsoft's vision for not only renewed hope on its Operating System and Mobile front, where it's losing share to Apple, but also in Search, where it heavily trails juggernaut Google (GOOG).

While Microsoft has long tried to make inroads into Search, the company's approach has been the Biggie Smalls to Google's Puffy: "Mo' Money Mo' Problems". Year after year of throwing Billions of dollars at the cause hasn't resulted in any significant traction for Microsoft and in fact latest metrics show continued search share erosion. October-November data from comScore puts Google growing from 63.1% to 63.5% while Microsoft remains in 3rd place behind Yahoo (YHOO) falling from 8.5% to 8.3%. With the December holiday season on deck and the increase in search queries to boot it only stands to reason that Google continued to heavily outpace its two rivals.

Someone at Microsoft has been thinking about the late Notorious B.I.G., and finally the company has decided to try to turn the popular song around in its favour. The new strategy involves outbidding Google at every turn in order to put Live Search in front of as many "default" consumers as possible. It's a well known industry practice that companies pay hardware makers to have their products and services installed on default machines. Computers from Dell, Sony and HP all come with software from a variety of vendors beyond the standard Windows operating system, and recently this system has extended beyond hardware into web services as Google is in a deal with Mozilla (the makers of Firefox) to be the default search engine for the popular web browser. Microsoft hopes that by having many more default eyes on Live they can retain a high proportion of those users and turn them into searchers and ad-clickers. In essence: Mo' Money Less Problems.

Microsoft announced a couple of these partnerships during their CES presentation. The first with Dell, to have Windows Live essentials software pre-installed on all computers, which includes various software components including a browser toolbar and default search. The second with Verizon, and this may end up being the bigger of the two, to make Live Search the default search engine on Verizon phones. Microsoft clearly gave Verizon much better terms than Google as both companies were reported to be in the running for this deal. The 5 year exclusive partnership will see Microsoft search be put front and center to customers of now America's largest wireless carrier by subscribers.

Google of course now has its own Andriod operating system for Mobile devices and will look to that for growth, it also is the default search engine on Apple's incredibly popular iPhone and has its own Mobile Search application in the App Store. With an increasing number of web users becoming acclimatized to "google-ing", it will be difficult to say with certainty how many default users Microsoft can expect to keep for these partnerships. And you can certainly expect Google to be front and center in providing users with ways to have Google Search be installed alongside Microsoft's default offering or to replace it altogether. Either way shareholders of Microsoft need some sort of spark from the company, and with Windows 7 getting good press thus far, the Xbox successes and now the possibility of gains in Mobile and Desktop search the company may be finally ready to turn the corner.

Disclosure: Author owns AAPL, GOOG

05 January, 2009

Bad News Bears economy continues to crush Automakers

Customer pessimism continues unabated in the United States leaving big ticket item sales near lows not seen in half a century.  For Automakers, this combined with the lack of credit for leases, means car sales are still plummeting. Detroit's problems have been well documented of late but even Japan's best saw US sales slump dramatically in December.

General Motors (GM) sales were down 31% in the last month of 2008, which pegged US sales over the year at a 49 year low. The American recession and consumer unsettling fears were the main culprits of blame, however with the company needed Federal bailout funds, it can't be stated that all is right with the biggest name in Michigan.

Ford (F) sales were almost a mirror image of its American brethren, down 32% in December, which netted total sales volume at a 47 year low.  Chrysler for all intensive purposes fared even worse according to analysts, who estimated 48% declines in December for the privately held American Automotive firm.

The United States car sales picture wasn't just bleak for domestic brands. Japan's best, Toyota (TM) and Honda (HMC) suffered sales drops 37% and 35% respectively in December.  At this point in the American economic cycle the consumer isn't discriminating, he's simply not setting foot into any dealership.  

This sales slump has taken a substantial bite out of the market capitalization of all automakers. 
GM, despite today's +4% day, sits down 58% over 3 months. Market Cap: $2.3Billion
F, up almost 5% today, down 36% over 3 months. Market Cap: $6.1Billion
TM, down 16% over 3 months. Market Cap: $103Billion
HMC, down 20% over 3 months. Market Cap: $38.7Billion

Despite the fact that the Japanese car companies have market caps that dwarf their American counterparts the sales slumps pose a potential opportunity. Amazingly, I think this bodes well for the American automakers, assuming of course all 3 get enough aid to keep afloat into any economic recovery.  The sentiment remains that Japan's best cars are still far more attractive to consumers on value for money and fuel economy but with car sales slumping across the board, it gives the struggling domestic makers more time to design, build and market attractive products in their local markets. Those consumers who today and tomorrow will not be buying the latest Honda Accord or Toyota Camry could potentially be swayed in 6 months time by a flashy, small, affordable and efficient Ford of Chevy vehicle.

All this still leaves one big if, can these companies build that attractive vehicle and turn around market sentiment? Recent history has shown the answer to be an emphatic no.  But, with recent government lifelines, the hope exists for a Detroit resurgence in 2009 and beyond.

Disclosure: Author holds no position in above mentioned companies

02 January, 2009

Happy New Year 2009

The year that was will be remembered for the downfall of economics as much as anything else. 2008 was the year of highs, Barack Obama's historic election victory in the United States, and many lows, the erosion of $30Trillion of market value from various investments worldwide.

Traders, Investors et al will be hoping for a more positive tone to 2009.

Happy New Year from WC Power Tech Fund Investment Blog