Where Are We in the Unemployment Trend? – Historical Perspective

February 13, 2010 Leave a comment

“This time it’s different…”

Very often, the people who utter those words end up feeling quite stupid and having less money in their brokerage/IRA accounts than before. Usually it is because that when you go along with conventional wisdom and group think, you wind up in a very crowded trade with little room left to run. Today however, the conventional wisdom is that this time it’s not different and that we will proceed to have a strong jobless recovery. The jobless recovery phenomena may have worked in past recessions but A.) There are only so many times you can have a “jobless recovery” before it’s not an actual recovery as evidenced by the continued drop in real productivity and income per capita and B.) This is by no means a normal recession.

Take a look at the chart below, I hope it offers some valuable perspective and context (note that the data doesn’t even include numbers from 2008 and 2009) . This time, things may very well be different…

-MJB

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Google looking to revamp another industry? (GOOG, AAPL, T, CMCSA, MSFT, ADBE, TWX, SNE, VIA, CBS)

February 10, 2010 Leave a comment

MarketWatch is reporting that Google will be testing a new direct-to-home fiber-optic internet connection service that will reach speeds of up to 1 gigabit per second.  The company is currently looking for interested communities, and hopes to test their new system with up to 500,000 people.

This service has the potential to be a game changer.  Google is interested in much faster internet connections because of their belief in “cloud-computing,” where very little information is stored on a user’s local machine because the actual computing is done by a remote server.  They have pushed this technology into the mainstream with services like Docs, Picasa photo editing, Calendar, and hope to take the technology further with the Chrome OS.

The current issue concerns the speed of the user’s connection to these services.  Even with the fastest available connection speeds, which in my area is 50 mbps, these services are not as fast as a desktop client due to latency.  Picasa only offers minimal photo editing due to bandwidth limitations, and video manipulation is impossible.  Thus, desktop programs like Photoshop, Office, iPhoto and iMovie are still necessarily stored on a local machine.

Google knows that companies like Apple (AAPL), Microsoft (MSFT) and Adobe (ADBE) are too entrenched on the desktops of consumers, so they are not trying to fight the battle there.  Instead they are staying on the relatively uninhabited world of web-based applications.  And they are winning, chiefly because they are a high-profile company and that no one else does free, ad-supported products quite as well as Google.

If this service from Google becomes widely available, and at a reasonable cost (admittedly a big ask), it would destroy the business models of many companies.  Software providers like Apple, Microsoft and Adobe would find themselves competing against a free, cloud-based product that acts in the same way that their desktop software does but available anywhere.  Content providers like Time Warner (TWX), Sony (SNE),  Viacom (VIA), CBS (CBS) etc be selling their media via streaming services, as people move their entertainment libraries off their shelves and hard drives and onto remote servers.  And current internet providers like Comcast (CMCSA), AT&T (T) and Verizon (VZ) will be competing against a service which runs at 10x their current maximum bandwidth.  That is why this could very well be a game changing moment for Google.

-AH

Disclosure: Long GOOG, MSFT, T and the market in general.  No positions in any other stocks mentioned.

What is going on in Japan? (HMC, TM, F, GM)

February 9, 2010 Leave a comment

Toyota Prius Crash Test

The Wall Street Journal is reporting that today Honda (HMC) is widening its 2008 airbag recall to include over 826,000 Honda and Acura vehicles.  The vehicles affected are model years 2001-2002, and cross the broad spectrum of vehicles sold by the company.  Add this to the well publicised woes that are currently plaguing Toyota (TM), and one could easily ask the question: What has happened to legendary Japanese reliability?

In the eyes of the general public, the main selling point for both these manufacturers is their reliability.  Ask a Honda or Toyota owner about how long they expect their vehicle to remain on the road, and most likely their answer will run in the hundreds of thousands of miles. High profile recalls, especially involving a critical part of the car, can damage a carmakers reputation for years.  Ask any of the American automakers.  Just from looking at this timeline (from Time magazine), one can see that in the last decade the Big Three Detroiters accounted for 5 of 7 large recalls.  Their reputation for reliability took a hammering during this time, and their sales suffered greatly.  It would not be a stretch to say that this was one of the main reasons for the recently abysmal performance of Ford, GM, and Chrysler.

However, the Japanese recalls present a fantastic opportunity for these three companies to realign themselves with the idea of a quality product.  They have already been making massive strides.  GM brand Cadillac came third in the JD Power Initial Quality Study for 2009, Ford was 9th and Chrysler was 10th.  All companies handsomely beat the market average.  And from crisis comes opportunity. Chrysler has created offers and discounts for people who trade in Toyota vehicles.

So as an investor, is this “crisis” actionable? Long term Toyota shareholders should be furious at the company’s management. Their response to the recall was lackluster at best, damaging at worst, and the stock has lost about 23% of its value.  The drop seems to have stabilized as “knife-catchers” try to time the bottom, but more pain could be ahead during the Senate hearings.  Honda’s stock has held up well during the Toyotapocalypse, but the valuation is a bit high and this new news could set off a round of fear-induced selling.  Since Ford (F) is the only tradable component of the (Not-So) Big Three, we shall discuss them, and I think they present an interesting opportunity.  Certainly there is a lot of optimism built into the stock, but it holds a lower PE than Honda and Ford is absolutely the strongest of the Americans.

-AH

Disclosure: Long HMC, Proud owner of several (non-recalled!) Hondas, Long the market.

Chart View of the Germany and Greece Debt Bailout Rumor

February 9, 2010 Leave a comment

Pretty funny chart courtesy of ZeroHedge showing today’s price action on the ‘news’ of a rumor that Germany was going to bail Greece out of their sovereign debt problems.

The interesting thing to note here is that it would appear the market is still pricing in a decent probability of some form of assistance coming in, possibly from another country.

-MJB

Should you participate in a Tesla IPO? (GM, HMC, F, TM)

February 3, 2010 1 comment

Tesla Model S Sedan and Roadster

On Friday last week, high-end automaker Tesla announced that is was planning a $100 million IPO.  This will probably be one of the most anticipated IPOs of the year, as Tesla is the highest profile electric automaker, an industry that is already struggling to live up to expectations of rampant growth and mass acceptance. The question remains, should investors be interested in the growth potential, or should they run and hide from this highly speculative stock?

A lot has been sprung on investors with the release of the company’s S-1 as filed with the SEC to declare the intent to issue shares.  In August of last year, the company announced that it was profitable for the month of July, however it has yet to maintain profitability for a year or even a quarter.  The company is highly dependent on the continual stream of government incentives and the full drawdown of the DOE’s $465 million loan offer.  While President Obama has made alternative energy a top priority, nothing from the government should be taken for granted at this point with all the noise being made about deficit reductions.

The company’s flagship product, the Roadster, is slated to be discontinued in 2011 and a replacement will not be available until 2013.  And investors should be careful as small companies without infinite resources have a habit of missing deadlines.  The same caution should be applied to the forthcoming Model S sedan, on which it appears the company is pinning all its hopes.  The sedan, which few outside the company have driven, is expected to arrive in 2012 and would cost under $50,000 with a tax credit of $7,500.  This debut cannot be compared to the Volt, a ~$40,000 series hybrid sedan due next year, as the success (or failure) General Motors is not dependent on one car.

Bottom line is that, as with most IPOs, Tesla Motors’ stock will not be for the weak.  As we get closer to the (as yet unannounced) time when Tesla will actually sell the shares, we will get an indication of pricing and total IPO size, but right now this one feels a bit too risky for my blood.

Should investors crave exposure to companies heavily involved in moving the internal combustion engine into the 21st century, Honda (HMC), Ford (F) and Toyota (TM) spring to mind.  Honda has always been a champion of small, powerful and highly efficient naturally aspirated engines, and were the first automaker to sell a hydrogen powered car to the public (the Clarity).  Ford is championing their Ecoboost engines, which use turbochargers to gain class leading MPG while delivering great performance.  It may behoove investors to avoid Toyota until they work out their issues with this recall, however they are the leader in hybrid technology and have highly skilled engineering teams at their disposal.

-AH

Disclosure: Long HMC, no position in any other stocks mentioned

Consequences of the Generational Earnings Gap: Baby Boomers to Boomlet Bust

February 3, 2010 Leave a comment

I’m sure that everyone has heard the rumblings lately about how youths today under the age of 30 will be first generation that is likely to not continue the American dream of living a more successful life than their parents. I don’t usually give this much more thought other than “globalization is a bitch, huh?” but I realized that this will affect fundamental levels of supply and demand for equities in over the next 20 years as baby boomers begin to draw down their retirement savings (liquidating them).

In the past, the growth in the standard of living of successive generations has been sufficient to maintain the upward movement of stock prices because each generation has been bigger and made more money on average. Both of those supportive factors are now acting as headwinds we face slowing population growth, decreasing average income and lower lifetime earnings potential for the younger generation that is beginning their careers in the midst of the worst economic crisis since the Great Depression.

Put simply, the children of the baby boomers cannot afford to buy out their parents at current prices.

Disclosure: Net Long the market

A Future Berkshire Hathaway? (BRK.A, BRK.B, SNS)

February 1, 2010 Leave a comment

The Peridot Capitalist blog notes an interesting find in a recent blog article, concerning the Steak N Shake (SNS) company which appears to be modeling its strategy after a young Berkshire Hathaway (BRK.A, BRK.B).

Certainly, after so many years of success Warren Buffet has had any number of imitators, most of whom cannot succeed because they do not possess the investment acumen of the Oracle of Omaha.  It is too early to tell whether this operator of casual dining restaurants run by a young and ambitious hedge fund manager can replicate the success.  Certainly, the CEO Sardar Biglari, has begun in the right direction, after reverse-splitting the stock 1-for-20 and aggressively (but ultimately unsuccessfully) pursuing the purchase of an investment company.

The results of this new tactic seem to be paying off, as noted in the blog post the company’s financials have improved dramatically and the stock has recently doubled.  However the stock appears to be overvalued for what amounts to an experimental and unproven direction for the company.  This may be an interesting stock to watch, to see if anyone else can replicate the famed Buffet strategy.

-AH

Disclosure: No positions in any stocks mentioned