Monday, March 14, 2011

Radiation Leak adds further pressure to Nikkei: Nikkei 225 Futures down 14.5% at Midday Break

Before I begin this post, I would like to convey my feelings on the recent destructive earthquake and tsunami in Japan. The tragedy in Japan has been heartbreaking, and my thoughts and prayers go out to the Japanese people. I hope that all nations and capable people will do whatever they can do to help the people that have been affected.

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

Unrest in Saudi Arabia sparking Oil rally, further Volatility

According to the Associated Press, Saudi police have fired on protestors in the Eastern part of the country. If this is true, and becomes escalated, this could spark a huge rally in oil and petro-currencies, and further declines in the world markets. Any disruption of oil supplies from Saudi Arabia would result in a complete imbalance in demand vs. supply of the commodity, and could push oil significantly higher than any disruption caused by Libya, Algeria or any of the other Arab country, where unrest persists.

As per many sources, tomorrow is expected to be a "Day of Rage" in Saudi Arabia, with protests expected in the Eastern region.

Overnight Developments - March 10, 2011

Some information that may affect the market:

2. China reports a $7.3b trade deficit, its highest in 7 years.

3. Spain downgraded by Moody's, outlook negative.

Of course, everyone is awaiting today's jobless report, at 8:30 am ET.

Wednesday, March 9, 2011

Forbes list of World's Billionaires released, shows that it pays to be Slim.

2010 appears to have been a banner year for Carlos Slim. The world's richest man increased his net worth $20b to a cool $74b, $18b more than Bill Gates, the world's number two. Overall, there are now 1,210 billionaires worth over $4.5 trillion.

Other interesting tidbits:

Mark Zuckerberg is no longer the World's youngest billionaire. His Harvard roommate, Dustin Moskowitz, 9 days his junior and the third employee to Facebook, is now a billionaire, thanks to Facebook's valuation increasing 238% in 2010 (to $50b). The valuation has subsequently increased another 30% since, to $65b. On another note, Eduardo Saverin, former best friend of Mark Zuckerberg, is now worth $1.6b, based on his 5% stake in Facebook (reportedly brought down to 2% through share sales), and Sean Parker is also now worth $1.6b.

The list includes 30 hedge fund managers, 54 investment managers, and 1 drug trafficker, Joaquin Guzman Loera ("El Chapo"), of Mexico.

Moscow, with 79 billionaires, is home to the most billionaires, followed by New York City at 58.

108 of the 214 new billionaires came from the BRIC countries (Brazil, Russia, India and China).

According to Forbes, there are 24 Canadian billionaires, including newcomers Frank Stronach (Magna) and Chip Wilson (lululemon).

Tuesday, March 8, 2011

Why I am Short Netflix, Inc. (Nasdaq:NFLX)


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.

Aggressive Valuations

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 United States (Source: OECD,,3343,en_2649_34225_38690102_1_1_1_1,00.html), with intentions to increase this to 100m households with broadband access by 2020. If we assume an aggressive 50% subscription rate, at the current $7.99/month subscription rate, we arrive at $4b in annual revenue. The historical expected gross margin rate appears to be around 35%, resulting in $1.4b in annual gross margins.

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.