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Creating Expert Advisors Using Expert Advisor Visual Wizard

By Total Trader | Published: 17 January 2012
91 views

Expert Advisor Visual Wizard for MetaTrader 5 provides a highly intuitive graphical environment with a comprehensive set of predefined trading blocks that let you design Expert Advisors in minutes. No coding, programming or MQL5 knowledge is required.

The click, drag and drop approach of Expert Advisor Visual Wizard allows you to create visual representations of forex trading strategies and signals as you would with pencil and paper. These trading diagrams are analyzed automatically by Molanis’ MQL5 code generator that transforms them into ready to use Expert Advisors. The interactive graphical environment simplifies the design process and eliminates the need to write MQL5 code.

With Expert Advisor Visual Wizard you only need to follow a 3 step process:

Fig. 1. Using  Expert Advisor Visual Wizard

Source: www.mql5.com

Posted in Forex Trading, General, Market Reports | Tagged Expert Advisor Visual Wizard, Expert Advisors, Forex Trading, MetaTrader 5, Molanis', MQL5, MQL5 Wizard, strategies | Comments closed

Baltic Dry Index Collapses

By Total Trader | Published: 17 January 2012
62 views

We haven’t heard much about the Baltic Dry Index (BDI) recently, but since peaking in mid-October, it has absolutely collapsed.  From Investopedia.com, the BDI “measures changes in the cost to transport raw materials such as metals, grains and fossil fuels by sea.  The Baltic Exchange directly contacts shipping brokers to assess price levels for a given route, product to transport and time to delivery.”

As shown below, the Baltic Dry Index has fallen 43% in the last month alone and 49% over the last three months.

Subscribe to Bespoke Premium and gain access to our 2012 outlook piece — The Bespoke Report — when it is released this Friday.

Source: www.bespokeinvest.com

Posted in General, Market Reports, Total Trader Tips, Trade Ideas | Tagged Baltic Dry Index, Bdi, CFD Trading, Collapse, grains, Investopedia, Metals, shipping broker, The Baltic Exchange, transport | Comments closed

An Introduction to Crowdfunding [Infographic]

By Total Trader | Published: 29 December 2011
94 views

An Introduction to Crowdfunding [Infographic]

Driven in part by the explosion of vibrant social-networking media, the crowdfunding sensation now stretches to the far reaches of the globe. Fostering creativity, philanthropy, and growth, crowdfunding sites have fundamental social and economic impact, and are altering the allocation of capital.

This great new infographic — commissioned by the crowdfunding site PleaseFund.Us in collaboration with Crowdsourcing.org — provides insights into crowdfunding including:

  • Its definition
  • Trends
  • Geographic prevalence
  • Number and location of crowdfunding sites
  • Launch dates
  • Types of crowdfunding models and the evolution of funding ideologies
  • Stimuli and triggers
  • Success stories
  • Crowdfunding and social media
  •  An Introduction to Crowdfunding

Source: www.crowdsourcing.org

Posted in General, Market Reports, Trade Ideas | Tagged capital, Crowdfunding, geographic prevalence, ideologies, Infographic, social media, trends | Comments closed

Brazilian economy overtakes UK’s, says CEBR

By Total Trader | Published: 28 December 2011
117 views
Charcoal-producing plant in Paragominas, northern state of Para, Brazil

Brazil has overtaken the UK as the world’s sixth largest economy, an economic research group has said.

The Centre for Economics and Business Research (CEBR) said its latest World Economic League Table showed Asian countries moving up and European countries falling back.

The CEBR also predicted that the UK economy would overtake France by 2016.

It also said the eurozone economy would shrink 0.6% in 2012 “if the euro problem is solved”, or 2% if it is not.

CEBR chief executive Douglas McWilliams told BBC Radio 4′s Today programme that Brazil overtaking the UK was part of a growing trend.

“I think it’s part of the big economic change, where not only are we seeing a shift from the west to the east, but we’re also seeing that countries that produce vital commodities – food and energy and things like that – are doing very well and they’re gradually climbing up the economic league table,” he said.

Brazilian economy

  • GDP: $2.52tn (£1.6tn); CEBR estimate for 2011
  • Main exports: manufactured goods, iron ore, coffee, oranges and other agricultural produce
  • Exports in 2010 totalled $201.9bn*
  • Imports in 2010 of $181.6bn*
  • Its main export partners are China, the US and Argentina*
  • Government forecasts growth of 3.5% in 2011, compared with 7.5% in 2010

*Source: Brazilian Ministry of Development, Industry and Export

A report based on International Monetary Fund data published earlier this year also said the Brazilian economy would overtake the UK in 2011.

Brazil has a population of about 200 million, more than three times the population of the UK.

Brazil’s economy grew by 7.5% last year, but the government has cut its growth forecast for 2011 to 3.5% after the economy ground to a halt in the third quarter, with analysts blaming the country’s high interest rates and the worsening situation in the eurozone.

And although Brazil currently sells more to China than it imports, Brazilian manufacturers have complained that their industries are being affected by cheap mass-produced goods from the Asian giant.

The CEBR also said that Russia moved up one spot in its league table to ninth in 2011, and predicted that it would rise to fourth spot by 2020.

It predicted that India, the world’s 10th biggest economy in 2011, would become the fifth largest by 2020.

And it said European countries would drop down the table, with Germany falling from fourth in 2011 to seventh in 2020, the UK from seventh to eighth, and France from fifth to ninth.

CEBR World Economic League Table

Rank 2011 2020 (forecast)
1 US US
2 China China
3 Japan Japan
4 Germany Russia
5 France India
6 Brazil Brazil
7 UK Germany
8 Italy UK
9 Russia France
10 India Italy
Posted in General, Market Reports, Trade Ideas | Tagged Brazil, CEBR, European countries, France, Germany, UK, World Economic League | Comments closed

How Goldman Sachs sees 2012

By Total Trader | Published: 28 December 2011
171 views

Influential US investment bank says the year ahead will be a journey from ‘despair to hope’

Petrol dripping from a pump

Goldman Sachs expects the oil price to rise next year, but not to the $150-per-barrel level it forecast before the collapse of Lehman Brothers in 2008. Photograph: Bernadett Szabo/REUTERS

Wall Street investment bank Goldman Sachs, which is also one of the world’s biggest commodity trading firms, has issued its predictions for 2012 as markets brace themselves for a new year slump.

Goldman’s clients – which range from vast businesses to governments and wealthy individuals – are being advised to prepare for a rollercoaster ride in the first half of the year, but that a gradual recovery should take hold from the summer.

Investors tend to hang on the bank’s words because its views are regarded as among the most influential in global financial markets. Goldman is predicting the FTSE 100 will plunge in the first three months of 2012, before recovering 1100 points (23%) by the end of the year to hit 5800. The bank’s 2012 Europe forecast, entitled Despair into Hope, hedges its bets about what lies in store during the new year, but the central message is one of cautious optimism.

Goldman expects the Footsie to hit a low of 4700 before staging a gradual recovery in the second half of the year – but all bets are off if the euro falls apart.The bank says: “Our economic forecasts assume some resolution to the eurozone debt crisis in the next few months. But the chances of a more chaotic outcome, in particular a break-up of the euro, although still small, have grown.”

Goldman’s economists expect eurozone GDP to contract by 0.8% in 2012, with a short-lived recession in Germany and France, and a longer and much deeper one in the peripheral eurozone countries. “But if a political breakthrough is not achieved before the refunding cycle picks up in earnest in mid-January, the probability of [the European economy] spiralling out of control towards a break-up would substantially increase,” it said.

The bank is predicting a rally in equities in 2012, with the trigger likely to be a better resolution of eurozone problems – one that could involve “an agreement between Germany and France on how to [manage] the debt burden”.

The main European indices, including the Footsie, should rise 10% from current levels, implying a sharp rebound as the markets make the transition “from despair to hope”.

But the timing of this rebound, however, is very difficult to predict because it is likely to be partly dependent on policy developments and political decisions which could accelerate or delay a recovery. “Overall, though, a volatile market, with little overall change, what we describe as ‘fat and flat,’ would be our central view for the year as a whole, but with things getting worse before they get better,” Goldman said. So what else is in store for 2012?

Oil: In May 2008 Goldman forecast that the oil price would climb to $200 a barrel. It got to $150, but the price fell back sharply after Lehman Brothers folded in 2008. After starting 2011 at $95 a barrel, Goldman now forecasts an average Brent crude oil price of $120 (up 15% on the current price) – rising to $130 in 2013.

Shares: Miner BHP Billiton and Rolls-Royce are among firms on the bank’s “conviction buy” list. Goldman is also backing the following sectors for growth: oil and gas, healthcare, telecoms, personal care and household goods. It is less keen on financials, construction and materials, financial services, industrials, retail, travel and leisure.

UK inflation: Inflationary pressures should ease this year as lower commodity prices take the heat off the consumer. Expect a decline from 4.5% in 2011 to 2.7% in 2012 and 1.9% in 2013.

Unemployment: Youth unemployment is at a record 22%. The overall UK unemployment rate is forecast to rise to 8.5% from 8% in 2011.

UK GDP: Economic growth in Britain in the third quarter of the year – an anaemic 0.5% – was driven entirely by manufacturers rebuilding their stocks of goods and government spending, underlining fears of a looming recession. Goldman says GDP growth will fall from 0.9% in 2011 to 0.7% in 2012.

Gold: The gold price should continue to climb in 2012, given the current low level of US real interest rates, with the price forecast to hit $1,940 from today’s $1,607. Gold began 2011 at $1,412.

Copper: Copper, which is used in industries ranging from energy to construction, slumped in value this year, as companies shrank their order books. Goldman says copper for delivery in three months, currently trading at $7,810 a tonne, should rally to $9,500 in the latter half of 2012. It started the year at around $10,000.

Coffee: Prices have fallen in recent months in response to the European debt crisis. As a result, Goldman’s six- and 12-month forecasts are for 200 cents per pound and 175 cents per pound respectively. In 2011, coffee traded at over 260 cents per pound.

US stocks: The bank named 10 consumer companies with considerable potential, including Coca-Cola, Nike, General Mills, McDonald’s, Dick’s Sporting Goods and Comcast.

Technology: Here the recommendations include Apple, Oracle and EMC, as well as some smaller unknowns such as Synchronoss Technologies. Goldman recommends a 20% portfolio weighting to technology, by far the largest of any sector.

Avoid: European banks, which collectively plan to reduce their balance sheets by around €1tn and have approximately €750bn of debt to refinance in 2012. US-based banks could benefit by seizing market share with Citigroup, JP Morgan and State Street among the best positioned.

Source: www.guardian.co.uk

Posted in General, Market Reports, Total Trader Tips, Trade Ideas | Tagged Coffee, construction, Copper, Energy, Eurozone, Ftse, Gdp, Global Financial Market, Goldman Sachs, investment bank, Lehman Brothers, Oil, Shares, technology, Trading, UK GDP, UK inflation, Unemployment, US stocks, Wall Street | Comments closed

Is Ray Dalio The Steve Jobs Of Investing?

By Total Trader | Published: 28 December 2011
113 views

BUSINESS as usual ends at the gates of Ray Dalio’s Bridgewater Associates. Inside the $125 billion hedge fund’s Westport, Connecticut-based headquarters, radically different behavior at an individual and corporate level rarely ceases to astonish. Cameras rest in every cranny; almost all meetings are recorded. Meetings are nasty, brutish, and long. One individual casts a long shadow over every decision, large or small. The question of the day is—always—What Would Ray Do?

This question is now asked outside Westport as well. Dalio has willed into existence an asset manager that has changed the industry, radically altering the way assets are managed for the world’s most sophisticated institutional investors. From client service to asset allocation to economic research to client communication to returning capital, Bridgewater has set a new bar. It is a safe bet to assume that the asset managers that dominate the institutional scene going forward are going to resemble Bridgewater more than the behemoth asset-gatherers that have reigned since the passage of the Employee Retirement Income Security Act—ERISA—almost four decades ago.

It is all too reminiscent of another company on the opposite end of America—Apple. We now have an overabundance of analysis on the impact that Apple and its recently departed prime mover Steve Jobs had on the industries they touched. To most, he was an innovator. To others, a prophet. To others still, he was but a driven and secretive executive intent on shielding his firm from outside eyes and willing to crush anyone who threatened Apple’s secrets.

The similarities are profound. From management style to product development to their founder’s legacies, Apple and Bridgewater mirror each other. Thus, it must be asked: Is Ray Dalio—philosopher, market savant, outdoorsman, and billionaire—the Steve Jobs of investing?

MORE THAN BILL GATES or Mark Zuckerberg, Jobs sits at the zenith of the Silicon Valley creation myth: A drug-experimenting college dropout starts a company in his parents’ garage with a tech-savvy, but financially ignorant, friend. They create not just a product, but a market that no one saw coming. They outgrow the garage, and each other. The college dropout becomes rich, famous, and obdurate, high on his own myth.

But what makes the Jobs’ arc so complete is what happened after the myth. Before he was 30, he had been pushed out of the company he cofounded. Smarting from his fall, he started another computer company—NeXT—whose failure was as profound as Apple’s early success had been phenomenal. Failure begat opportunity, however, and Jobs pumped his considerable wealth and talent into a small animation studio called Pixar. A Toy Story later, he was again altering the foundation of a technology-based industry. Meanwhile, Apple was floundering: Called home, Jobs would return to Apple, create the iMac, the iPod, the iTunes store, and the iPhone. In the process, he had taken the Silicon Valley myth to another level: that of the redeemer, the iconoclast who could do no wrong.

Source: www.valuewalk.com
Posted in General, Market Reports, Stock Trading, Total Trader Tips, Trade Ideas | Tagged Apple, Bridgewater, Hedge Fund, iMac, Investment, iphone, Ipod, iTunes, Mark Zuckerberg, PIxar, Ray Dalio, Steve Jobs, Westport | Comments closed

Value.able: Billabong

By Total Trader | Published: 28 December 2011
78 views

Roger Montgomery runs through the numbers behind Billabong’s spectacular 40% sell-off this week. Read Roger’s article at www.eurekareport.com.au.

Source: blog.rogermontgomery.com

 

Posted in General, Market Reports, Total Trader Tips, Trade Ideas | Tagged billabong, eureka report, Roger Montgomery, Value.able | Comments closed

Brent – WTI Drops to Lowest Levels Since January

By Total Trader | Published: 28 December 2011
81 views

While largely out of the headlines in recent weeks, the continued collapse in the Brent-WTI spread could be one of the biggest stories of the last three months.  If it wasn’t for the $20+ drop in the spread between Brent North Sea and WTI crude oil prices, US consumers would likely be staring at $5 per gallon gas.  If that was the case, rather than being a lone bright spot in the global economic landscape, the US economy would be in the same boat as everyone else.

Back in September, the Brent-WTI spread was widening out to record highs and if someone told you then that by the end of the year it would be right back near levels it was at when the year started, you would have laughed.  However, with just three full trading days left in the year, the Brent-WTI spread is now at its lowest level since January 20th!

Subscribe to Bespoke Premium and gain access to our 2012 outlook piece — The Bespoke Report — when it is released in January.

Source: www.bespokeinvest.com

Posted in General, Market Reports, Total Trader Tips, Trade Ideas | Tagged Brent, Brent WTI, consumers, Crude Oil, Trading, US, US economy, Wti | Comments closed

The Dow Adjusted for Inflation

By Total Trader | Published: 28 December 2011
88 views

Here’s the Dow divided by the Consumer Price Index over the last century. Of course, this doesn’t include dividends. Still, it’s interesting to see that in real terms, the market’s capital gain hasn’t been terribly much.

While the Dow is still well below its inflation-adjusted high from 12 years ago, that’s not unprecedented. There have been other times when the Dow has wallowed for decades at a real loss.

Of course we don’t know this yet, but it will be interesting to see if that March 2009 low turns out to be a generational low.

Source: www.crossingwallstreet.com

 


Posted in General, Market Reports, Total Trader Tips, Trade Ideas | Tagged capital gain, Consumer Price Index, Dividends, Dow, Inflation, US recessions | Comments closed

Markets want to stay quiet until 2012. Will they be allowed to?

By Total Trader | Published: 28 December 2011
88 views
With yesterday’s US House of Representatives move to temporarily extend the key payroll tax cut and other measures, the odds are rising that we ease quietly into the New Year, even if volatility may return quickly in January.
US House clears way for tax cut extension
The obstreperous US House of Representatives Republicans decided late yesterday that there was no further political capital to gain in continuing their objection to the Senate’s plan to extend the payroll tax cut that would have otherwise expired next week. It’s a mere two-month extension, however, so we can expect a fresh round of negotiations and legislative sausage-making already in the first weeks of the New Year. The two month extension includes the actually far more controversial extended unemployment benefits program and whether doctors will see Medicare payment for certain procedures cut by 27%. Those latter two issues will be critical for political jockeying ahead of the November 2 election.
Challenging Spanish budget deficit math
An entry over at MISH’s blog discusses the challenging Spanish deficit math, quoting original Spanish news sources. With core budget items supposedly off limits, it appears the Spanish government will need to pare some EUR 40 billion in spending from the remaining EUR 90 billion in budget expenditures to meet target if it is unwilling to raise taxes. The entry also discusses the possibility of hidden Spanish deficits and whether they might stay hidden in order to avoid further pressure on sovereign yields. Normally, one would expect a new government to immediately uncover as many mistakes from the previous regime as it can in order to avoid any of the blame for those mistakes.  Other  points of interest as PM Rajoy officially took office on Tuesday include his promises to force banks to admit the full extent of their real estate losses and whether employers and unions can agree to massive new reforms aimed at increasing job market flexibility or whether the government will be forced to step in.
US Data
The US data was rather weak today, including an ugly core capital goods orders number for November, though the October data was revised +0.9% higher. The Personal Spending and Income data was anaemic as well, so nothing to celebrate into the US session unless we get a blowout New Home Sales number. I wouldn’t care to venture a guess about today’s number other than to say that probability for an upside surprise is higher than usual as the NAHB survey has been moving stronger in recent months and has proven a leading indicator on housing related data in the past.
Looking ahead
Hardly any clever words to add here in terms of the immediate outlook – it appears that things are fairly quiet so far and the temporary extension of the US legislation sharply reduces the odds of significant volatility and may allow us to ease quietly into next year before possible fireworks return the following week. Next week, we have mostly second-tier data from the US, though there is an Italian debt auction on Thursday that may represent an event risk hurdle ahead of the New Year’s festivities of the following weekend.
Have a wonderful Christmas. I will return next Tuesday with a comment or two – but hopefully most of you won’t be around to read it and are away from the markets and enjoying a holiday and resting up for what will likely be a dramatic 2012.
By the way – an entertaining antidote to the entire exercise of prognosticating about the coming year can be found in Caroline Baum’s latest column Here’s Hoping for More Lousy Forecasts in 2012 in which she makes fund of many of the calls for 2011. Considering widespread pessimism about the coming year, let’s hope she’s right.
Economic Data Highlights
  • UK Nov. BBA Loans for House Purchase out at 34,738 vs. 35,400 expected and 35,196 in Oct.
  • UK Oct. Index of Services out at -0.7% MoM vs. -0.1% expected
  • US Nov. Durable Goods Orders out at +3.8% MoM and +0.3% ex Transportation vs. +2.2%/+0.4% expected, respectively
  • Canada Oct. GDP out at 0.0% MoM and +2.7% YoY vs. +0.1%/+2.7% expected, respectively and vs. +3.0% YoY in Sep.
  • US Nov. Capital Goods Orders Non-defense, ex-Aircraft out at -1.2% MoM vs. +1.0% expected
  • US Nov. Personal Income out at +0.1% MoM vs. +0.2% expected
  • US Nov. Personal Spending out at +0.1% MoM vs. +0.3% expected
  • US Nov. PCE Deflator out at +2.5% YoY vs. +2.7% expected and 2.7% in Oct.
  • US Nov. PCE Core out at +0.1% MoM and +1.7% YoY as expected and vs. +1.7% YoY in Oct.
Upcoming Economic Calendar Highlights (all times GMT)
  • US Nov. New Home Sales (1500)
  • UK Dec. Hometrack Housing Survey (Mon 0001)
  • Japan Nov. Corporate Service Price Index (Mon 2350)
  • Japan Dec. Small Business Confidence (Tue 0500)
Source: www.tradingfloor.com
Posted in General, Market Reports, Total Trader Tips, Trade Ideas | Tagged Budget Deficit, capital goods, Caroline Baum, Economic Data, EUR, Gdp, markets, payroll tax cut, personal income, Spain, tax cut, US, US data | Comments closed

Are investors giving up?

By Total Trader | Published: 23 December 2011
91 views

We have talked here at the blog about hypothecation, re-hypotecation and hyper-hypothecation, about credit default swaps about a Chinese property bubble bursting, about lower iron ore prices, slower economic growth, increased savings and declining rates of credit expansion and a European sovereign default.  Always the value investor, we are on the look out for anything that can impact the values of companies and those things that might offer the prospect of picking up a few bargains.

If your portfolio still has some rubbish in it, then being able to identify it is a key part of preparing for cheaper prices if they eventuate.

I recently wrote a column for the ASX and pondered the possibility of a climactic event coinciding with a complete throwing in of the towel by equity investors who are simply fed up with poor medium term returns and increased volatility recently.

The ASX200 hasn’t generated a positive capital return since 2005 but quality companies have.  The ASX200 contains stocks that are rubbish so it is no wonder that an index based on that rubbish has gone nowhere.  Step 1 then is to clean up the portfolio and step 2 is to be ready for quality bargains when they arise.

This is just one of many scenarios and frameworks I am operating with and I wonder what would transpire if the poor returns or the recent heightened volatility continues for a little longer?  Will investors simply throw in the towel, leave equities and believe all those advisors offering their own brand of ’safe’, ’secure’ and stable investments?  On the one hand, I hope so.  It would mean certain bargains.

Here’s the Column:

As global sharemarkets decline, remain volatile and produce poor historical returns compared to other asset classes, it will be easy to be swayed by the latest investment trend – to move out of shares. I believe the trend away from shares will gather pace soon as more and more “experts” use the rear-view mirror to demonstrate why sharemarket investors would have been better off somewhere else.

In 1974 US investors had just endured the worst two-year market decline since the early 1930s, the economy entered its second recessionary year and inflation hit 11 per cent as a result of an oil embargo, which drove crude oil prices to record levels. Interest rates on mortgages were in double digits, unemployment was rising, consumer confidence did not exist and many forecasters were talking of a depression.

By August 1979, US magazine BusinessWeek ran a cover story entitled ‘The Death of Equities’ and its experts concluded shares were no longer a good long-term investment.

The article stated: “At least 7 million shareholders have defected from the stockmarket since 1970, leaving equities more than ever the province of giant institutional investors. And now the institutions have been given the go-ahead to shift more of their money from stocks – and bonds – into other investments.”

But be warned. The time to get interested in share investing and make good returns is precisely when everyone else isn’t.

Your own once or twice-in-a-lifetime opportunity may not be that far away and Labor’s promised tax cut on interest earnings may sway even more to give up shares and put their money in a bank, providing the opportunity to obtain even cheaper share prices.

If prices do fall further – and they could – you will need to be ready and will need some cash. The very best returns are made shortly after a capitulation.  Cleaning up your portfolio becomes crucial and this article looks at how to do that.

Rule one: Don’t lose money

The key to slowly and successfully building wealth in the sharemarket is to avoid losing money permanently. Sure, good companies will see their shares swing but the poor companies see the downswings more frequently.

Therefore, the easiest way to avoid losing money is to avoid buying weak companies or expensive shares. One of the simplest ways I have avoided losing money this year in The Montgomery [Private] Fund has been to steer clear of low-quality businesses that have announced big writedowns.

These are easy to spot using Skaffold.

Not-so-goodwill

I have often seen companies make large and expensive acquisitions that are followed by writedowns a couple of years later. Writedowns are an admission by the company that they paid too much for an asset.

When Foster’s purchased the Southcorp wine business in 2005 for $3.1 billion, or $4.17 per share, my own valuation of Southcorp was less than a quarter of that amount. Then in 2008 Foster’s wrote down its investment by about $480 million, and then again by another $700 million in January 2009 and a final $1.3 billion in 2010.

When too much is paid for an acquisition, equity goes up but profits do not and you can see that too much was paid because that ratio I have worked so hard to make popular, return on equity (ROE), is low.

These low rates of return are often less than you can get in a bank account, and bank accounts have much lower risk. Over time, if the resultant low rates of return do not improve, it suggests the price the company paid for the acquisition was well and truly on the enthusiastic side and the business’s equity valuation should now be questioned. If return on equity does not improve meaningfully, a large writedown could be in the offing. This will result in losses if you are a shareholder, and you have also paid too much.

Just remember one of the equations I like to share:
Capital raised + acquisition + low rate of return on equity = writedown.

When return on equity is very low it suggests the business’s assets are overvalued on the balance sheet. That, in turn, suggests the company has not amortised, written down or depreciated its assets fast enough, which in turn means the historical profits reported by the company could have been overstated.

Scoring bad companies: B4, B5, C4 and below…

These sorts of companies tend to have very low-quality scores and often appear down at the poor end of the market – the left side of the screen shot in Figure 1 below.

Figure 1. The sharemarket in aerial view (Source; Skaffold.com)

Each sphere in Figure 1. represents a listed Australian company and there are more than 2000 of them. The diagram is taken from Skaffold. Their position on the screen can change daily as the price, intrinsic value and quality changes. The best quality companies and those with positive estimated margins of safety (the difference between the company’s intrinsic value and its share price) appear as spheres at the top right.

Companies that are poor quality (I call them B4, C4 and C5 companies, for example) are found on the left of the screen and if they have an estimated negative margin of safety, they are estimated to be expensive and will be located towards the bottom of the screen.

Highlighted with blue rings in Figure 1 are eight of the companies that announced this year’s biggest writedowns. Notice they tend to be at the lower left of the Australian sharemarket, according to my analysis.

If your portfolio contains shares that are red spheres and on the lower left, you could also be at risk because these companies tend to have low-quality ratings and are also possibly very expensive compared to their intrinsic value.

As is clear from Figure 1, this year’s biggest writedown culprits were all already located in the area to avoid.

The impact of owning such a business outright would be horrendous. Table 1 below reveals the size and details of these writedowns and as you can see, collectively the losses to shareholders amount to $4.6 billion.

Table 1. Predictable losses?

Warren Buffett once said that if you were not prepared to own the whole business for 10 years, you should not own a piece of it for 10 minutes.

Clearly you would not want to own businesses that pay too much for acquisitions and subsequently write down those assets. If you are not willing to own the whole business, don’t own the shares. Although in the short run the market is a voting machine and share prices can rise and fall based on popularity, in the long run the market is a weighing machine and share prices will reflect the performance of the business. Time is not the friend of a poor company, and companies Skaffold rates C4 or C5 are best avoided if you want the best chance of avoiding permanent losses.

Look at Figure 2 below. Those big writedown companies not only performed poorly but so did their shares. These companies (shown collectively as an index in the blue line below) produced bigger losses for investors than the poorly performing indices of which they are part. And that’s just over one year.

Figure 2. The biggest writedowns compared to the market

Take a look at the companies in your portfolio. Do they have large amounts of accounting goodwill on their balance sheet as a portion of their equity? Have they issued lots of shares to make acquisitions and are they producing low and single-digit returns on equity? If the answer to all these questions is yes, you may have a C5 company.

Cleaning up your portfolio not only lowers its risk but will produce cash that may just prove handy in coming months.

Source: blog.rogermontgomery.com

 

Posted in Forex Trading, General, Market Reports, Total Trader Tips, Trade Ideas | Tagged ASX, Economic Growth, Investors, Iron Ore, sharemarkets, Skaffold, Volatility | Comments closed

Cochlear update

By Total Trader | Published: 23 December 2011
109 views

Aside from fears of reputational damage, one of the big concerns surrounding Cochlear’s recall earlier this year, was how long it would take to return to market.  As you know we purchased shares after the announcement that it had recalled its Nucleus CI500 cochlear implant much to the chagrin of some investors who follow our musings here at the Insights blog.

In NSW every child receives a hearing test within two days of birth.  Those identified as having profound hearing loss are often assisted by Cochlear.  And thats just NSW.  Cochlear sells its devices in 100 countries.  Once implanted changing devices is not easy.  Changing brands may be even harder.  Audiologists and speech pathologists are involved and the devices are finetuned to ensure the device suits the individual.

As Matthew pointed out here on the blog a few days ago:  “A family member [of Matthews’s] is a key member of a large Australian charity that does a lot of work with children that are deaf and many get the implants. All the equipment they use to “map” or finetune the device after implanting is specific to that company. For example the only brand they have is Cochlear. Recently they had a child from the US that they began to support that had a different brand implanted – they had to change many things to be able to help them. When thinking about market share with these devices I think it is important to know that the decision isn’t solely with the surgeon or specialist, because all of the support people have to change too. I don’t think market share will change quickly or by very much because of these barriers.”

Analysts at Macquarie recently surveyed 389 US-based Audiologists. Despite the product recall, Cochlear is still the world leader in CI devices and retains 60% market share selling into 100 countries.  The broker also believes the market is growing at 12 per cent per year.

Many of you know we purchased shares in Cochlear after the September recall (see below), confident this was a temporary issue being treated as permanent by a perennially short-term-focused market.

That now appears to be the case as today’s announcement, posted on the ASX platform by the company reveals; 20122011_COH CI500 impant update

The company previously covered the subject in its AGM presentation here: http://www.cochlear.com/files/assets/corporate/pdf/agm_presentation_18102011.pdf

Analysts were subsequently concerned that 1500 units are going to have to be removed through surgery and another 2800 units have been pulled from shelves. They also worry that an inventory shortfall across the entire market will lead to market share losses from insufficient inventory as well as damage to reputation.

Today’s announcement reveals any small market share loss (we estimate five percent and some analysts suggest between five and ten per cent overall) will be now stemmed by the timely identification of the manufacturing issue that resulted in the failure of 1.9% of devices and their subsequent recall.

Cochlear has ramped up production and its early intervention has enhanced its reputation rather than damaged it as evidenced by several surveys with clinicians.  In fact, 93% of doctors surveyed by Macquarie felt that Cochlear handled the recall well, while only 8% believe the company’s reputation has been tarnished.

Ultimately the company’s intrinsic value is determined by its profit and we expect there will be an impact on profit of some import.  Cochlear has already created a provision of $130-$150 million and an after tax cash cost of $20 to $30 million.  Given the news flow that will now transpire, one expects these costs may be treated by analysts as a ‘one-off’ and investors may have to wait for another temporary setback before being able to buy shares cheaply again…

For those of you interested in following our thoughts back in September 14 (COH $51.30), I wrote the following :

“Imagine spending years waiting patiently for the opportunity to buy that rare coin, vintage bottle of wine or celebrated painting, only to be outbid when it finally comes up for auction.

Sometime later the opportunity presents itself again and you are outbid once more, this time by much more. Successive auctions only take the price further out of your reach – if only you acted sooner!

Then one day you stumble across that very thing you desire being offered for sale by someone who appears to have no interest in its long-term value, for a price you regard as a fraction of its real worth.

Would you buy it?

That is the situation I find myself in today as the Cochlear share price plunges another 14% to $51.30, or about 40% since its April 2011 high of $85.

As Cochlear’s technicians work to isolate the problem with the Nucleus 5 range, the company will dust off the Nucleus Freedom range, which it has marketed successfully for many years against products such rivals as Advanced Bionics and Med-El.

Overnight one of those rivals received FDA approval to sell its product (which was itself recalled in November last year) into the US market. This turn of events is not unusual for the industry … but it is unusual for Cochlear and that’s why the news this week came as such a blow. Cochlear is one of the highest-quality companies trading on the ASX today. The company that almost never puts a foot wrong appears to have tripped itself up and investors are spooked.

The financial impacts of these events (and there will be an impact) have yet to be quantified so until they are why don’t we look at how the company has performed in the past and see if we can’t learn something about it in the interim.

Over the past decade, Cochlear has increased profits every year with the exception of 2004. Net profit was just $40 million in 2002 and last week the company reported profits of $180 million for 2011.

Operating cash flow over the same period has risen from less than a $1 million (an exception for 2002) to more than $201 million, allowing debt to decline to just $63 million from nearly $200 million in 2009. Net gearing is now minus 1.86%.

Those impressive economics have resulted in an intrinsic value that has risen by nearly 18% each year since 2004. If your job as a long-term investor is to find companies with bright prospects for intrinsic value appreciation – believing that in the long run prices follow values – then it quite possible that Cochlear is being served up on a plate.

The recently reported net profit figure of $180.1 million for 2011 was up 16% and in line with consensus analyst estimates, although this occurred despite sales of $809.6 million exceeding analysts’ estimates. It seems the analysts did not expect the EBIT and NPAT margins that were reported. These were flat, which given a very strong Australian dollar, suggests impressive efficiency gains in the operations.

If only that blasted “Australian peso” would go down and stay down!

Back on August 19, 2009, I wrote: “Fully franked dividends have risen every year for the past decade, growing by almost 500% (or 22% pa) since 2000. These are not numbers to be sneezed at; the company has produced an impressive and stable return on equity since 2004 of about 47% with very modest debt. Clearly this is a company worth some significant premium to its equity.”

Nothing changed really for 2011. A final dividend of $1.20 per share was 70% franked and up 14%.

Importantly, it seems Cochlear’s market is growing. Unit sales volumes were up 17% for the year and, given in the first half they were up 20%, it suggests the second half were up 14%. Double digit growth was reported in sales volumes for all major regions and Asia was the most impressive, rising more than 30% to the point where it makes up 16% of total revenues.

This really is impressive stuff. Just two years ago the company reported unit sales growth of only 2%, to 18,553 units, and many analysts were blaming slow China sales. Nobody expected the company to ever repeat its 2007 and 2008 volume growth of 24% and 14% respectively, and certainly not off a higher base.

Growth has always been viewed as is limited by the high cost of the devices and the reliance on insurance and healthcare schemes to subsidise the costs and those of surgery to implant to them.

According to the World Health Organization however, almost 280 million people suffer from moderate to profound hearing loss and an ageing population means this figure will rise. Cochlear is one of a handful of companies that actively contributes to improving the quality of life of its clients.

When great companies stumble, the impact can be exaggerated by the reaction of shareholders who never believed it could happen. Then comes a wave of selling amid doubts that the company will ever regain its mantle.

But strong market share and strong cash flow, high returns on equity and low debt, are rarely offered at bargain prices so I picked up some Cochlear stock yesterday for the Montgomery [Private] Fund. It is likely that I will to add to this position over the coming days and weeks when the full financial impact of the recall is known.

I must confess I didn’t bet the farm on this particular investment because the financial impact of the recall – and there will be one – remains unclear; when that changes it will impact my intrinsic value estimate (UBS has revised its forecast net profit for 2012 by 10.5% to $179.5 million).

Whatever the impact, it will be temporary, even though it won’t necessarily preclude lower prices from this point. During the GFC, Cochlear shares fell from $78 to $44. No company is immune to lower share prices and I don’t know when or in what order they will transpire.

What I do know is that in 2021 we aren’t likely to be thinking about this recall, just as nobody now talks about the Wembley Stadium delays that dogged Multiplex back in 2006. Mercifully, investors’ memories tend to be short.

Recalls, competition, marketing gaffes and wayward salary packages are all part of the cut and thrust of business and if lower prices ensue for Cochlear shares, it will be important to determine whether the recall will inflict permanent scars. My guess is that it will not.”

Source: blog.rogermontgomery.com

Posted in General, Market Reports, Total Trader Tips, Trade Ideas | Tagged ASX, ASX platform, Australia, Cochlear, Dividend, intrinsic value, Macquarie, US, World Health Organization | Comments closed

No Fear

By Total Trader | Published: 23 December 2011
74 views

The VIX volatility index is down once again today, even as the market trades lower.  Last week when the market was tumbling, the VIX also declined (partly due to seasonal factors), which is unusual, especially given the concerns that seem to abound regarding Europe.  As shown below, the VIX is now at its lowest level since early August after breaking below its October lows a few days ago.  In October when the VIX made its lows, the market was surging.  The market has done anything but surge over the past week and a half.  Are traders ignoring the world’s problems, or are they indicating that things aren’t as bad as they seem?

Subscribe to Bespoke Premium today, and for a limited time receive a free copy of Collapse! – The Commemorative Game of the Financial Crisis.

Source: www.bespokeinvest.com

Posted in General, Market Reports, Total Trader Tips, Trade Ideas | Tagged Europe, market trade, S&P 500, Traders, Vix, Volatility Index | Comments closed

No respite for the Aussie consumer

By Total Trader | Published: 23 December 2011
57 views

Evident all through this year has been a much more circumspect consumer down under. This is not remotely surprising – the international backdrop has become much more uncertain, especially in Europe and now Asia as well, and the unemployment rate has been edging higher.

However, it is the historically over-leveraged balance sheet of the household sector and the declining value of financial assets held that is really weighing like an anchor on spending behaviour. It turns out that household liabilities relative to GDP in Australia are higher than in both the US and the UK. Relative to assets, household liabilities are up near 25%, almost double where they were twenty years ago. House prices are very expensive relative to both income and rents and, as such, are well above fair value. So it is little wonder that consumers have been saving a lot more out of current income, such that the saving ratio is now above 10%.

With both overseas and domestic demand under threat, the Aussie economy is likely to hobble along again in 2012. As a result, we can expect further rate cuts from the RBA which has already lowered the cash rate twice since the start of November. This is not a great scenario for the currency, which has been one of the star performers since the global financial crisis of 2008.

Source: www.fxpro.com

Posted in Forex Trading, General, Market Reports, Total Trader Tips, Trade Ideas | Tagged Aussie consumer, Consumer Spending, Currency, domestic demand, Europe, Gdp, Global Financial Crisis, House Prices, household sector, income, rent, Unemployment | Comments closed

Asia Focus: Aussie economy robust while Japan’s struggle persists

By Total Trader | Published: 23 December 2011
98 views

In this Asia Focus Video Andrew Robinson, Correspondent for Saxo Capital Markets in Singapore analyses the stance of central banks in Australia and Japan regarding their economies.

At the December 6 Reserve Bank of Australia meeting interest rates were cut for the second consecutive month. In the minutes published this week it can now be concluded that the cut was primarily due to the slowdown in Europe and the uncertainties this creates for many economies including the distant Australian. For now the Australian economy is performing at trend though and investments are continuing, mainly in the mining sector. The minutes however were somewhat dovish leading to an interpretation that more cuts might just be on the way sometime in the New Year, says Andrew. The wait though will probably be quite long as the next RBA meeting is not until February 7. A lot can happen to the European situation and China before then so it’s really a wait and see what the macro data has to offer approach, adds Andrew.

In terms of the Bank of Japan’s meeting ahead of Christmas the focus will be on more efforts to weaken the yen and comments to that effect, particularly after the so-called “war chest” for intervention has been increased by 30 trn yen, adds Andrew. Trade data for November out this week is also of interest with the deficit seen widening largely due to the continued decline in shipments to China. Any positive effect for Japanese exporters from further yen intervention is seen as only temporary though as the global slowdown continues, he says.

Watch video here.

Source: www.tradingfloor.com

Posted in Forex Trading, General, Market Reports, Stock Trading, Trade Ideas | Tagged Andrew Robinson, Aussie economy, China, Europe, Interest Rates, Japan, mining, RBA, Saxo Capital Market, Yen | Comments closed

Are Chinese stocks in for a serious plunge?

By Total Trader | Published: 20 December 2011
79 views

Stock returns in 2011 have been nothing to write home about and especially European and Chinese investors have felt the pain as their respective stock markets are down 23.6 and 21.0 percent year-to-date in local currencies.

Chinese stocks fell another 0.3 per cent overnight after being down 2.6 percent in the first half session. The Shanghai Composite Index is now very close to levels seen when we all thought the Western banking system would collapse (see chart below).


Source: Bloomberg

Now the questions to be asked are:

  1. Are European sovereigns defaulting and taking the Euro down the drain?
  2. Is China’s property market and export-driven economy crashing?

Well Greece defaulted in our view and more countries are likely to go down that road as well. Whether it will break up the Euro is another story. In the meantime we believe EU leaders will adopt a new EU treaty providing a more flexible mandate for the European Central Bank to “help/monetise” on the debt burden. As we wrote last Friday, Europe’s stock market valuation is moving into a territory where most ought to be aggressive buyers for the long term.

China is a strange animal. It is like when scientists find new species; we find them colourful and exciting but we do not know much about them. The same goes for China. Data about exports and inbound containers in the U.S. and Europe clearly shows that exports out of China have slowed down. Other data also shows that property prices in China are coming down in all segments except for the expensive high-end market. Given China’s economic composition these factors are for sure a terrible cocktail.

Given the recent decline in Chinese stocks and with data pointing to an economic slowdown it sure looks like more pain could persist. But with the Shanghai Composite Index trading at 11.7x P/E it is getting more temping to have some Chinese exposure.

Source: www.tradingfloor.com

Posted in Forex Trading, General, Market Reports, Total Trader Tips, Trade Ideas | Tagged Chinese investors, Chinese Stocks, Currencies, Europe, Shangai Composite Index, Stock Markets | Comments closed

Gold speculators cut longs by 11 percent

By Total Trader | Published: 20 December 2011
81 views

Hedge funds and large investors continue to scale back exposure to commodities as the global demand outlook for raw materials suffers amid worries about slowing activity. Last week they reduced their combined net long exposure to 24 US commodities through futures and options by 5 percent to 746,000 lots, the lowest level in 31 months. In nominal terms this represented a 9 billion dollar reduction in exposure to 68 billion dollars on a combination of position reduction and prices falling.

The hardest hit sector was in metals with investors reducing their long exposure to gold by 11 percent, the lowest since October 18, as the price continued to slide. The other metals were relatively unchanged with silver actually seeing a small increase in long positions from what was already a low level.

Speculators in natural gas, who have been net short since August 2, reduced their positions across the four Henry Hub NG varieties by nearly a third on speculation that the steep drop in prices during the past six month may be close to finding some support especially after having seen three weeks with higher than expected withdrawals from underground storage. Crude oil investors stubbornly held onto long positions just ahead of the 7 percent sell-off that followed after the compilation of the data in this report.

The grain sector saw a small pick-up in speculative longs following several weeks of reductions. Investors in soybeans doubled their long positions but short positions in meal and oil keeps the complex in a net short position.

The softs sector continues to be out of favour with the positions across the sector seeing a 22 percent reduction with cocoa investors increasing their net short positions by one quarter.
Speculative positions in Gold

Speculative positions across sectors

Nominal exposure across sectors

 

Source: www.tradingfloor.com

Posted in Futures Trading, General, Market Reports, Total Trader Tips, Trade Ideas | Tagged Crude Oil, Energy, Futures, Global Demand, Gold, Hedge Funds, Investors, Metals, Natural Gas, Options, outlook, US commodities | Comments closed

Jeff Gundlach’s Latest Brilliant Presentation On Markets, The Economy And Society

By Total Trader | Published: 19 December 2011
81 views

Bond manager Jeffrey Gundlach of the DoubleLine Funds is out with his latest monthly presentation going over the economy, the state of the market, and society.

This time the title is “To Have and Have Not,” as he spends a fair amount of time on one of the hottest issues of the day.

He always likes to pepper his presentations with interesting images, and this time he uses this picture of Bonnie Parker (of Bonnie & Clyde fame) to make a couple of points: One is that we’re seeing Great Depression-like levels of inequality these days; and two, he reminds us that Bonnie and Clyde were heroes in their day, and that it’s likely, in his view, that social unrest will only increase.

Anyway, as always, his presentation is packed with thought provoking charts.

Click here to see the presentation
Source: www.businessinsider.com
Posted in General, Market Reports, Total Trader Tips, Trade Ideas | Tagged Bonnie Parker, DoubleLine Funds, Economy, Great Depression, Jeff Gundlach, society | Comments closed

What’s Up With Gold?

By Total Trader | Published: 19 December 2011
99 views

Source: www.martinarmstrong.org

Posted in General, Market Reports, Total Trader Tips, Trade Ideas | Tagged bullish reversal, commodities trade, Currency, Futures, Gold | Comments closed

Not so High at JB Hi-Fi?

By Total Trader | Published: 19 December 2011
132 views

You will have noticed that since November 16 every post here at the Blog has been a cautionary one.  You have not seen me post a ‘here’s possible good value’ story.  There is a little method in that, even though we might be unduly conservative.  But here goes again…

Many of you have heard me discuss JB Hi-Fi and its preferred status among retailers – I believe if JBH is doing it tough everyone else is doing it even tougher.  But we sold JBH from our holdings at $15.50 recently and I thought the story of why (ahead of a downgrade as it turns out) would be a good insight into the way we think.  Hopefully other investors can gain some insight into the process and fill in the 1) ‘bright prospects’ part of the equation that also requires 2) extraordinary businesses and 3) discounts to intrinsic value.

Starting way back in February 2010 we commented on the impending retirement of JBH’s Richard Uechtritz (now looking as well-timed as other prominent CEO departures, such as the Moss departure from Macquarie and I am sure you can list a few more – go right ahead) and the maturing outlook for the business itself.

“If JB Hi-Fi could re-employ all of its profits at the returns of about 45% it is generating now, its value would be over $38. That’s a pipe dream. The company is generating cash faster than it can ask its employees and contractors and landlords to employ the funds to open new stores. And because the profits also produce taxes and associated franking credits that have no value for the company, shareholders are being handed back the funds, which is a disappointment. However, as chairman Patrick Elliott implied when I spoke with him on radio this week, this is a function of growth and the limited size of the Australian population.

It happens eventually to all retailers and it will happen to JB Hi-Fi in the next five to seven years. The best you can hope for is that once the stores have saturated the market, directors stick to their knitting, and the company continues to generate high returns but pays out all of those earnings out as a dividend (becoming like a bond) rather than make some grand attempt to buy something offshore or diversify too far away from their core expertise (often at the behest of some institutional shareholder) and blow up the returns.

The result of not employing as much retained earnings at 45% is that the intrinsic value declines. It is still going up but not as much.”

In August here at the blog we wrote:

“The big story however is that Terry Smart will need to start looking beyond this organic growth to other strategies if JB Hi-Fi is to avoid developing the profile of another mature Australian retail business like Harvey Norman.”

and

“JB Hi-Fi needs to establish new and emerging business models to try and counter the shift away from physical music unit sales.”

and

“Having said that, the current sales environment is probably not representative of the future. Share market investors generally use the rear view mirror when assessing the future. I have previously discussed the “economics of enough”, which David Bussau from Opportunity International introduced me to many years ago. As it applies to consumers generally, they will get sick of trying to keep up with the latest technology, be happy with their TVs and replace everything less often – opting instead to ‘experience’ travel, food, adventure and other cultures. That of course doesn’t mean JB can’t grow its share-of-wallet. In the face of declining retail sales volume growth over the last five to ten years and deflation, JB is proving it is already the market leader.”

and

“JB Hi-Fi’s quality score dropped from A1 to A3 and interestingly, this was only partly due to the increase in debt. (We really need to know whether it was just timing issues and new stores that contributed to the jump in inventory).”

In addition to these comments I wrote more recently:

“The release of the iPhone 4S seemed to underwhelm technology reviewers when launched and a portion of the population do take their purchasing cues from such quarters.

The 4S is apparently an evolution in the iPhone series, rather than a revolution, and as such, fewer users of the most recent release – the iPhone 4 – will upgrade. Instead, it is likely that they will wait until the iPhone 5 is released next year (owners of the previous model the iPhone 3GS, however, should be coming off their two-year contracts about now and are expected to upgrade). We’ll come back to that shortly.

The iPhone doesn’t contribute anything like a majority profit to JB Hi-Fi’s bottom line. This is because margins on Apple products are slim. But the iPhone does generate foot traffic and phone upgraders also buy protective covers and other accessories on which JB Hi-Fi makes much more significant margins.

So why do we care so much about the iPhone?

It’s because when JB Hi-Fi announced its full-year results the company forecast more than $3 billion in sales and management cited growth from computing, telco, and accessories. They said:

“While we anticipate the market to remain challenging, our diversified product portfolio, particularly the categories of computers, telco and accessories, from which we expect strong growth, will assist JB Hi-Fi in delivering another year of solid sales and earnings in FY12. Assuming trading conditions are comparable with FY11, we expect sales in FY12 to be circa $3.2b, an 8% increase on prior year.”

It’s the lower “telco and accessories” sales that are expected to stem from the iPhone 4S underwhelming so-called early adopters and its most ardent fans that may put pressure on that sales forecast.”

Indeed the only thing that was going for JB Hi-Fi was its discount to intrinsic value.  Many investors believe that a stock I mention is below intrinsic value is a “darling’ of mine.  It isn’t.   A company must meet all of our criteria and it will only be held for as long as it does.  Those of you using Skaffold will however have seen JBH was trading only at a discount to one of the intrinsic value estimates – the intrinsic value based on analyst forecasts – but not the more conservative Skaffold Line valuation estimate of $13.16. See Figure 1.

Figure 1.

Both valuations are now likely to decline further in coming days -even the more conservative $13.16 valuation SKaffold has been displaying – and the downgrade may also be reflected in pressure on the company’s cash flow which Skaffold members would have already seen in the 2011 results and which prompted some of the above comments.  (See Figure 2. and note the negative funding gap line (international patents pending))

Figure 2. Showing declining operation cash flow and a growing Funding Gap (patents pending).

JB Hi-Fi was 5 per cent of our portfolio however we sold all of our position at $15.50 recently.  Our reasoning was simple;  Given present circumstances and expectations for retailing (having spoken to many retailers recently) many retailers JB Hi-Fi would have to revise their earlier outlook statements and this would produce lower future valuations.  At the same time analyst forecasts are typically optimistic in the first half of the financial year (this year being no exception to that rule) and we should therefore be demanding much larger discounts and JBH was not offering that margin of safety.  We also commented to our peers in conversations over the phone and in person that the deflation story – as explained by Gerry Harvey who noted selling plasma TVs for $399 this year means he has to sell three times the volume as last year to make the same money – would put pressure on profits because people already had enough plasma TVs.  Finally we also believed that ANZ’s profit growth being dominated by bad debt provisioning writedowns meant that credit growth was non-existant.  When you take away growth in credit card purchases – thats got to hurt discretionary retailers.

On November 7 we wrote to our Montgomery [Private] Fund investors thus:

“We aren’t so arrogant to presume we know what will happen next. We have taken earnings expectations for 2012 and beyond (expectations that are typically optimistic in the first half of a financial year) and reduced them to where we believe they could safely be regarded as conservative. The resultant estimations for intrinsic values … are significantly lower and suggest we should require larger margins of safety before committing your funds to many companies…I expect in coming months we may not be as aggressive in purchasing and you might even find our cash levels increase. It’s always preferable to protect capital because we can come back to reinvest at any time. Recovering from losses is much more challenging and demoralising for you.”

A prominent media commentator and broker however wrote on December 6

“Our No.1 discretionary retail recommendation remains JB Hi-Fi (JBH). We all know 21% of JBH’s register is currently shorted, a massive short position usually reserved for financial impaired or structurally stuffed stocks. JBH is neither, and that is why we continue to be aggressively recommending buying the stock which generates 25% of its annual profit in December. JBH is trading on 11.2x bottom of the cycle earnings. Nowadays, the P/E’s of cyclical stocks compress with their earnings, meaning that both P/E and E bottom concurrently.”

So, JBH still has long term prospects that surpass many of its peers and I believe it still has a competitive advantage.  And if all those short sellers cover their position, the stock could rally.  That however would be speculating.  On the flip side, changes to accounting reporting standards will give it a lot more liabilities – contingent liabilities such as operating leases will need to come onto the balance sheet.  Also, the medium outlook, which includes deflation continuing, will put pressure on JB to sell more volume at precisely the time everyone may just have enough stuff.  Finally, the market may now finally catch up to the maturity story we described way back in 2010.  Of course consumers will return at some point and spending and credit growth will recover, but given the current weakness and fear among consumers the idea of requiring very, very large discounts to the more conservative estimates of intrinsic value dominates our thinking.

As always be sure to do your own research and seek and take personal professional advice.

Source: blog.rogermontgomery.com

Posted in General, Market Reports, Stock Trading, Total Trader Tips, Trade Ideas | Tagged Australian retail business, Dividend, Earnings, Harvey Norman, intrinsic value, Investors, iphone, Iphone4s, JB Hi-Fi, JBH, Macquarie, portfolio, share market, Skaffold, telco | Comments closed
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