Wednesday, November 30, 2011
While I have not seen consensus, the last forcast I have is for a 3.2% increase in global GDP (World Bank website). that would mean that we should expect a growth of $2.02B in GDP globally. Excluding Japan, Eurozone, and the United States, the rest of the world has a combined GDP of $30.79T. Assuming a very aggressive 5% growth rate for these areas (note that I have not excluded Canada, U.K. from the list, which are among the top ten largest economies in the world), the emerging markets should provide $1.54T of the growth. From the remaining three economic zones, we should therefore presume that we will see $0.5T of growth. If the Eurozone continues to falter, investment will be pushed to one of China, Japan or the United States, I would anticipate. Let's look at a scenario where the Eurozone simply stagnates and produces a GDP growth rate of 0% (I believe they will be in recession next year).
In China, we are in a scenario, where the country is importing inflation as a result of pegging its currency. Therefore, labour and commodity prices are rising for the same finished products. This is then sold out to Europe and the United States (predominantly), where in many cases the prices remain fairly stagnant (due to the economic situation of high unemployment). The scenario lowers margins for many companies, so it would be safe to say that China may not experience supernormalized returns from its current 9-11% GDP growth rates. So this really leaves the future investment to the US and Japan. With Japan facing a rebuilding and an already aging population, it would be safe to also suggest Japan will not experience more than a couple of tenths of a percent of growth in the coming years. This leaves us with the United States. I would presume that much of the European slack would come from the United States, due to its similarity in industrial output, primary economic drivers, and labour force. This projection, even with many of its flaws, would mean the US would grow 3.2%, far higher than the new OECD expectation of 2%. With government cutting back on investments, this would mean more than 100% of the growth would come from the United States. This would bolster growth, and improve financial metrics of US public companies.
Just my thoughts. I may be wrong, but I'll still bet on the U.S. over Europe.
Monday, March 14, 2011
Please donate to a charity that can help the recovery efforts, like the Red Cross (I have linked to the Canadian and American sites), Doctors Without Borders (U.S.) or Medicins Sans Frontieres (Canada), or UNICEF.
After such a devastating few days in Japan, the news continues to shock the world. While I may sound presumptive, it does appear that the latest explosion in reactor #2 and the fire in reactor #4 of the Fukushima Daiichi Nuclear Power Station have allowed large amounts of radioactive material to be released into the air, and the containment structure may now be breached. The government is now speaking of radiation that is harmful to humans, and that anyone within a 30km radius from the power station should stay indoors. Unfortunately, the odds appear to be very slim that disaster can be fully averted. The futures worldwide have reacted as a result.
The issues in Japan are unprecendented, in terms of the natural disaster and the chaos that may ensue. At this time, the best position of any investor is to look for Mr. Market's most irrational moves, and build positions in strong companies.
And please donate!
Thursday, March 10, 2011
As per many sources, tomorrow is expected to be a "Day of Rage" in Saudi Arabia, with protests expected in the Eastern region.
Wednesday, March 9, 2011
Tuesday, March 8, 2011
Netflix, Inc. is a subscription based service, providing access to thousands of movies and television shows on demand to over 20 million subscribers. Recently, the most vocal short-seller, Whitney Tilson of T2 Partners closed his short position. I believe that Tilson was right in shorting Netflix, and when Tilson closed his short position, it actually sparked the recent peak for Netflix (as all major analysts and investors in NFLX were then buyers of the stock).
Why is NFLX so successful?
Netflix was first successful in filling the vacuum left by Blockbuster’s bankruptcy. Blockbuster’s bankruptcy fragmented the movie rental business, allowing another company to step in, and take further market share. While Netflix was the market disrupter that proved to be the catalyst for Blockbuster’s demise, it was also the temporary beneficiary of Blockbuster’s losses. Innovativeness allowed NFLX to move with consumer demands, especially when it moved to the streaming subscription service from its mail-order DVD rental service. I believe that both the market gains from Blockbuster’s bankruptcy and Netflix’s innovativeness will only be temporary gains for the company. Eventually content-owners will try to capture much of the supernormal returns (charging more for content, or in the form of competition, as the Warner Brothers/Facebook deal shows), and further third party competition (like Amazon and GoogleTV) will reduce earnings to more normal levels. Competition is only starting to heat up, and access to the lucrative European markets is already threatened by other early entrants, which could restrict profitability in the region.
Regardless of all my theses above, let’s consider what could happen if NFLX were to achieve 50% market share in the United States, based on current market conditions. Currently, there are 83.3m broadband subscriptions in the
I have assumed that the OPEX run rate would have to stay at the current 25% rate, as Netflix would have to continue to be aggressive in its marketing of the service in the face of higher competition, as well as in continuously trying to be the first-entrant to new technologies. At 25%, OPEX is expected to be $1b/annually, which results in an annual net operating income of $400m.
If I apply P/E of 20 to the net operating income (I applied an aggressive P/E to match with the typical technology stock, as well as allow for errors in other assumptions), I arrive at a market capitalization of about $8.0b. The current market capitalization is over 20% higher than this aggressive figure! I realize that expansion internationally is possible, but this would not necessarily lead to $8 monthly subscription costs in other countries, and content costs would increase as foreign language films and institutions would need to be added to the company’s library.
Based on the above findings, and the recent parabolic move in Netflix (from $180 to $245 in about 15 trading days), I believe that short sellers can still be rewarded in shorting NFLX here, even after its move below $200 today.
I am currently short NFLX. These statements are for entertainment purposes only, and should not be construed as investment advice. Please contact your investment advisor before acting on any information.