• Volume I, Issue 8

LGR Financial Newsletter

Volume I, Issue 8 (Released On April 01, 2014)

Hello all! I have moved my newsletter to blog format via Tumblr.com for easier access, and my upcoming articles will be posted here. I would appreciate hearing feedback about whether or not you like the new format for the newsletter. Thank you!

Markets saw a lot more volatility at the beginning of the week, especially in the tech-based NASDAQ Composite index, but overall the week ended on a much quieter note with all of the major indexes rising on Friday to recoup some of their losses from earlier in the week.

On the docket for this Issue: a Market Summary, my Portfolio Update, a Market Update (focusing only on the biggest news stories), and a write-up on the NASDAQ. The major write-up this week will be short in terms of content because a lot of information is covered in the “general market update” section. A lot of the news discussed below is tech-based, so I’m sure many of you will find it interesting. Additionally, a lot of the things I mention this week serve as follow-ups to things I have talked about in past Issues of my newsletter.

As always, I appreciate all feedback and recommendations for topics.


Market Summary:

(MARCH 21 – MARCH 28)

Last week two out of three major indexes dropped with the NASDAQ Composite moving by far the most and posting a loss of 2.83% for the week, the S&P 500 lost 0.48% for the week, and the Dow Jones Industrial Average actually ending the week in the green with a gain of 0.12%. All three indexes would have ended in the red if Friday trading hadn’t saved them; the S&P 500, the DJIA, and the NASDAQ gained 0.46%, 0.36%, and 0.11% respectively on Friday. Volume across all three indexes on Friday was the lowest trading volume of any day during the week, and seeing as the lowest volume day of the week happened on one of the few days that the indexes as a whole were up (all three indexes were down 3 days and up 2 days this week), the small rally on Friday seemed a bit half-hearted.


Portfolio Update:

(MARCH 21 – MARCH 28)

This week was not a good week for my portfolio. The value of my simulated stock portfolio declined 1.10% this week; when compared to a decline of 0.48% in the S&P 500 index, the benchmark I use to gauge my performance, this week did not go well at all. Most of my losses were sustained in the Basic Materials sector as precious metal prices continued to fall. Whole Foods Market (NASDAQ GS: WFM) was also one of my worst performers, declining 7.07%, which really is a shame considering that I was up in the position before this week. Currently my position is only down 1.52%, which isn’t a big loss, and I believe that Whole Foods will recover moving forward.

My top performers this week were the basic metal mining company, Companhia Vale do Rio Doce (NYSE: VALE), and BP Amoco PLC (NYSE: BP), which increased 4.91% and 4.00% respectively. It is rather strange to have some of my worst performers and best performers of the week be in the same sector (VALE is also a member of the Basic Materials sector just like the precious metal mining companies I own), but I have always considered precious metal companies to be in a league – and thus a sector – of their own. I am definitely bullish on BP as well moving forward.


Market Update:

(MARCH 21 – MARCH 28)

Major Events - Federal Reserve Reports on Banks

A notable follow-up report from last week: on March 20th the Fed released the results of its most recent “stress test.” The Comprehensive Capital Analysis and Review (CCAR), commonly known as the Fed’s stress test, is an annual exercise performed by the Fed “to ensure that financial institutions have robust capital planning processes and adequate capital” (Federalreserve.com, link #3).

The test was implemented in 2009, and its objective is to determine how banks would weather a financial collapse similar to the 2007-09 crisis. The results of the test showed “that 29 out of 30 major banks met the minimum hurdle” (Reuters.com, link #4).The only bank to fail outright was Zions Bancorp, which failed to stay above the five percent requirement for top-tier capital (Reuters.com, link #4). Then, this past Thursday, the Fed rejected the capital plans of Citigroup, HSBC North America Holdings, RBS Citizens Financial Group and Santander Holdings USA

"because of flaws in their oversight practices or what the Fed calls ‘qualitative concerns.’” See:http://www.usatoday.com/story/money/business/2014/03/26/fed-stress-tests/6922129/

I would not be recommending Citigroup soon, and I plan to avoid banking with Zions Bancorp in the future!

News Stories - Streaming TV – Everyone into the Pool!

Here’s something you all might have heard of: apparently Apple is thinking of getting into TV… wait that isn’t exactly new news… Apple, Inc. has been driving speculation about entering the TV industry in the major way for quite some time now. It likely started when Apple founder Steve Jobs told biographer Walter Isaacson three years ago that he “finally cracked” a way to revamp the television (WSJ, link #1). But the best Apple television product so far has been Apple TV, which offers users “access to iTunes movies on the larger screen of a television as well as streaming video from Netflix, Hulu and other online services” (WSJ, link #1). Early this past week, news surfaced that Apple is discussing a partnership with Comcast Corp. for a streaming-television service that would use an Apple set-top box and

“get special treatment on Comcast’s cables to ensure it bypasses congestion on the Web” (WSJ, link #1).

From what I have read, Apple doesn’t seem to be offering Comcast very good terms in the deal, which would require Comcast to make major sacrifices including

“significant investments in network equipment and other back-office technology” (WSJ, link #1).

News about the deal continued to break throughout the week, so it is difficult to pinpoint Apple investors’ reaction to the news, but overall Apple ended up 0.75% for the week (quite impressive considering that the NASDAQ was down 2.83% this past week, and Apple has the largest market cap of any stock traded on the NASDAQ Composite). In my view service providers like Comcast will benefit the most from such partnerships in the long term, even if they have to pay more in the short term to get the service running, because Apple will help them capture market share they can later protect, regardless of Apple’s ultimate success. Comcast obviously is less leveraged in the long term, while Apple (and other content providers) take on more risk because they must continue to develop products attractive to consumers.

Separately, Apple received another boost this week when Microsoft Corp announced on Thursday that Word, Excel, and PowerPoint apps will now be offered for the iPad, which is notable because these apps “had been conspicuously absent throughout the Steve Ballmer years” (Businessweek.com, link #2). The announcement came in the first public speech Satya Nadella has made since he took the reins of Microsoft as the new CEO, only fifty-two days ago. The news also bodes well for Microsoft because “by making the iPad app part of its wider software package, Microsoft avoids splitting revenue with Apple (AAPL), which takes a cut of the money that developers make through its App Store” (Businessweek.com, link #2). Microsoft was also up for the week, increasing 0.35%, and this week’s gain follows its 6.25% gain last week.

Meanwhile, also diving into the streaming pool is Amazon, which announced this week that it is considering an advertising-supported streaming television and music-video service. (This new idea would be a departure from its strategy of linking video to its $99-a-year Prime subscription service.) “The proposed service could launch in the coming months and feature original and licensed content; for example, Amazon has held talks with the creators of ‘Betas,’ a series about a Silicon Valley startup that Amazon co-produced last year. Amazon also plans to offer free music videos with advertising to people visiting its retail website. A search for Bruce Springsteen CDs, for example, might yield an option to watch the ‘Born in the U.S.A.’ video” (WSJ, link #13). Amazon (NASDAQ GS: AMZN) was down 6.19% this week, but it is unclear how much of that decline was can be attributed to this news, which came out later in the week as AMZN’s decline in share price started to decelerate (the stock price kept falling but at a slower rate). One thing is clear; AMZN is swimming into dangerous waters when it says it is thinking about entering the video streaming business, because there are already quite a few companies with video streaming services. However, AMZN has been a shark in the past so I see no reason why the company can’t be a shark in this particular pool too.

Other Tech Companies In The News:

Never one to leave the fight with Apple to Amazon, Google is taking on Apple with a wristwatch. On Tuesday (March 18th) Google unveiled “Android Wear,” a version of Google’s Android operating system software tailored for wearable computers including smartwatches. Google is seeking to employ Android (a breakaway hit as an operating system for smartphones) to preempt Apple in wearable computers; Google entered the smartphone and tablet markets after Apple, and has been trying to catch up ever since. “Consumers should expect to see Android-powered smartwatches before Apple can get into the mix” (Blogs.nytimes.com, link #14). Google also will have a first claim on developing relationships with app builders that should help its smartwatch become popular, and capture a large portion of market share before Apple has a chance to enter the market. Apple has had its smartwatch under development for a while, “according to people briefed on the project,” and it is not clear when it will be released (Blogs.nytimes.com, link #14). Right now, life is simple for Google: “[just] try to get in front of whatever Apple is going to do,’ said Tero Kuittinen, a telecom analyst for the mobile diagnostics firm Alekstra” (Blogs.nytimes.com, link #14). Google, Inc. (NASDAQ GS: GOOG) was down 5.32% this week, but was up 1.6% on the day (March 18th) when the above announcement was made. I think this is a HUGE development, what could very easily be a game changer in promoting wearable computers, and it demonstrates that Google is taking the initiative before Apple has a chance to do so (Blogs.nytimes.com, link #14).

On Monday, March 24th, Box Inc. informed investors that the company “plans to raise up to $250 million in an initial public offering” (WSJ, link #5). I really like the things I’ve heard about the company and its business model, however, the news that the company might be doing an IPO simply in order to “ward off intensifying competition in the online storage market” (WSJ, link #5) isn’t exactly very enticing. Should investors be worried that the company isn’t profitable? My answer: no, do not worry, provided the company can make itself stand out from all the other profitless Silicon Valley startups. Does Box Inc. meet the standards I set for investing in profitless companies? I am writing about this topic for a class – please ask if interested.

I definitely hope that the IPO for Box Inc. doesn’t go as badly as King Digital’s recent IPO. You may recall me mentioning the fact that King Digital, the maker of the popular game, “Candy Crush,” would be doing an IPO this week. Well, on March 26th, the company did indeed do its IPO and it was a complete flop. King Digital’s stock price (NYSE: KING) had the worst performance, on the day of its IPO, of any company so far in 2014. The company’s initial offering was at $22.50 a share, and the stock closed on March 26th at $19.00 for a loss of 15.55% (Crushed!). The company ended the week, after having only been traded publicly for three days, down a total of 19.64% (Double crushed!). Put another way, the company’s market cap at the end of the week was $5.73 billion; if KING valued itself initially at $22.50 a share, or $7.13 billion in market cap, the company essentially lost $1.4 billion of its worth in only three trading days. Many investors are skeptical about the company’s prospects moving forward, calling the company a one hit wonder, but I am not so sure. “Necessity breeds innovation,” and fear has rekindled the motivation typically lost when a software company’s founders hit it big through an IPO. I think KING will produce a new popular game. (And for what it’s worth, financial media has described King Digital’s IPO as “Candy Crush got crushed” or “Candy Crush goes sour,” so my satirical observations are hardly original!)

Meanwhile, social media favorite, Twitter, Inc. (NYSE: TWTR), plans to break into the music streaming industry (are we seeing a trend?). “Twitter met with Beats Music in San Francisco this week, proposing a partnership that would promote subscriptions to the music-streaming service” (WSJ, link #8). Additionally, Twitter is “also looking to partner with music-sharing site SoundCloud for the new strategy” (WSJ, link #8). Likewise, Twitter is engaging in talks with Vevo LLC to make “bite-sized music videos” available to Twitter users (WSJ, link #8). On Thursday, Twitter announced it is teaming up with Billboard to create charts tracking real-time conversations about music happening on Twitter. “The charts will trace the most buzzed about tracks and those shared by artists in real-time and over longer periods” (WSJ, link #8). Twitter was down 7.11% this week on relatively high volume, but most of that decline happened before this new broke so it would appear that investors liked the music streaming idea after all.

Facebook still looks desperate to stay relevant, in my opinion. The company just made its second blockbuster acquisition of the year, agreeing Tuesday [March 25th] to acquire Oculus VR Inc., “a 20-month-old maker of virtual-reality goggles, for $2 billion in cash and stock” (WSJ, link #10). Many are not quite sure how Facebook plans to profit from the purchase, but Mark Zuckerburg definitely seems confident in the future return from the recent acquisition. Although “Oculus’s headset, called Rift, today is a visual device for playing videogames,” Zukerburg stated that “‘We’re going to make Oculus a platform for many other experiences’” (WSJ, link #10). What could those “experiences” be? Well, Zukerburg provided a few examples: “enjoying a courtside seat at a game, studying in a classroom of students and teachers all over the world or consulting with a doctor face-to-face” (WSJ, link #10). Although I definitely think that virtual reality will play a big part of our future, I am not so sure that future is as close at hand as Zukerburg does. I agree with the skepticism expressed in the WSJ article, which noted that to date, consumers have “largely shunned fancy headgear that offers improved visuals, for videogames and for technologies like 3-D television,” and “virtual-reality technology has long been criticized for triggering motion sickness in users, a challenge that Oculus has said it is working to solve” (WSJ, link #10). In the short term, it appears Facebook is fighting to stay relevant in an industry that is constantly changing, and the company is even diluting its stock price to do so. Shares of Facebook, Inc. (NASDAQ GS: FB) declined 10.75% this week, declining 6.95% the day after Facebook announced its acquisition of Oculus for $2 billion. This decline definitely contributed to the decline in the NASDAQ Composite this week.

Stock Recommendations - “Constitutionally Protected” Stocks Look Attractive

Moving on to other industries: Smith & Wesson Holding Corporation (NASDAQ GS: SWHC), a company that wants investors to believe its future is secured by the Second Amendment, continues to do well. I own shares in SWHC in my simulated stock portfolio, putting off a “conscientious investor” discussion for the future (I do not own it in my real portfolio), and it’s proven dependable. This past week it increased 3.47%. Part of that increase was no doubt attributed to news announced on March 24th that SWHC, through a wholly owned subsidiary, will purchase Tri Town Precision Plastics, Inc. (‘TTPP’), a provider of custom injection molding services, rapid prototyping, and tooling, and a key polymer supplier to SWHC (Yahoo Finance, link #9). This key vertical integration purchase, which is expected to close around May 5, should improve SWHC’s bottom-line performance and increase the company’s gross margins and earnings (Yahoo Finance, link #9). Full disclosure, I also own shares of the other major publicly traded gun manufacturer, Sturm Ruger & Co., Inc (NYSE: RGR), and earlier this year I did a pitch on the gun industry and described why RGR was a better buy than SWHC. I still believe RGR is the stronger stock strength long-term, but SWHC’s move this week reflects its effort to remain competitive and goes a long way towards closing the gap between the two companies in my eyes.

Interesting News - Startups That Venture Capital Firms Value At $1 Billion Or More

Finally, for those interested in venture opportunities, I thought you might enjoy the chart found by following THIS LINK, which shows companies that are part of “The Billion-Dollar Startup Club” (WSJ, link #6). I found the graph in a WSJ article describing how “The Journal and Dow Jones VentureSource are tracking companies that are valued at $1 billion or more by venture-capital firms” (WSJ, link #6). The entire phenomenon is interesting to track over a long period of time, considering the fact that “The club is becoming less exclusive as venture capitalists funnel large sums of capital in the best startups. Today there are more than 30 such companies in the U.S., Europe and China” (WSJ, link #6).
Macroeconomic News:

Onto macroeconomic news. Ireland is improving, or at least the European Central Bank (ECB) seems to think so. On March 24th, the ECB’s President, Mario Draghi, said that “‘considerable progress’ has been made in mending Ireland’s banks but more needs to be done to ensure the stability of the country’s financial system” (WSJ, link #7). Draghi believes that Ireland, to ensure its financial stability, is in the process of “completing the restructure of damaged banks, dealing with ‘the still very large stock’ of soured loans and ‘ensuring the viability of all nationalized banks,’ ” (WSJ, link #7). The European Union (EU) includes a vast number of “member states,” and is only as strong as its weakest link. Although Ireland is probably not the weakest member state (how can it be, when Spain is thrown in the mix?), helping improve Ireland’s banking system will definitely help to ensure the country’s long-term growth and thus its contribution to the growth of the EU as a whole.

Russia, however, looks bleak. The World Bank recently released a report saying that they believe that Russia’s “economy could contract by 1.8% in 2014” if the “Crimea crisis worsens” (WSJ, link #11). This entire situation, and the WSJ article I reference, could be summed up ironically as “Investors Join The Fight To Impose Sanctions On Russia,” because the contraction in Russia’s economy would undoubtedly lead to a “a huge surge in capital flight” (WSJ, link #11). Russia is basically denying that there even is a problem and “a top Russian official” countered the World Bank’s statement on Wednesday, March 26th, by saying that “the government began developing a backup plan to minimize the economic impact of sanctions even before the crisis began, but said the details of the strategy remain confidential” (WSJ, link #11). I’m not quite so sure such a statement has any credibility, and in reality I’m guessing that Russia may have underestimated the lengths to which the rest of the world would go to punish them for trying (and succeeding) to annex Crimea. The Russian official, First Deputy Prime Minister Igor Shuvalov, “conceded that even without further official sanctions, Russia could find itself effectively frozen out of Western investment and capital markets.” Even so, he said Russia won’t ‘slam the door’ on its traditional export markets in Europe as a result of the crisis” (WSJ, link #11). It is rather obvious that Russia won’t do any “door-slamming” because its trade surplus would evaporate. Russia had a trade surplus of $17,630 Million in February of 2014, and forecasts indicate that Russia’s trade surplus is expected to decline moving forward as the country becomes less able to export goods as a result of all the sanctions being imposed on it by foreign countries (Tradingeconomics.com, link #12).

The graphics below demonstrate how sanctions imposed on Russia have already impacted the country’s economy, and will continue to do so moving forward.


NASDAQ Write-up:

My Market Update includes plenty on tech stocks, so a discussion of the NASDAQ can be brief. The NASDAQ received a lot of media attention this week, as can be expected after such poor performance, and I included the weekly performance of all the stocks traded on the NASDAQ that I wrote about in the news section of this Issue to help you all get a sense of the weekly performance of some of largest companies traded on the NASDAQ Global Select Market Composite (NASDAQ GS).

As previously mentioned, the NASDAQ Composite declined 2.83%, or 121.03 points, to close at 4155.76 this week. The NASDAQ 100 Index, an index that “includes 100 of the largest domestic and international non-financial securities listed on The Nasdaq Stock Market based on market capitalization” (Nasdaq.com, link #15), also declined this week, albeit by a smaller (but still significant) 2.23%. A lot of the media attention that the NASDAQ received this week was centered on the belief that the NASDAQ is in the process of “rolling over” into a decline, and that technology stocks are doomed. However, I do not believe that to be the case for several reasons:

First, the NASDAQ will follow the other indexes. Many of those same financial media/talking heads are bullish on the market as a whole, and I haven’t been hearing anything from them about how the S&P 500 or DJIA are “rolling over;” they seem to only be saying that the NASDAQ is heading south. In the short term, one of the three major indexes could move in a different direction, but history shows us that in the long term the three move together. It is unreasonable to be bearish on one major index and bullish on the other two in the long-term.

Second, worries about the NASDAQ Composite as an index really involve worries about several of its key stocks. The NASDAQ Composite is often considered to be a good guide for how technology stocks as a whole are doing, and technology stocks are driven by short term news and speculation. However, investors should stop looking at the performance of the NASDAQ Composite as an indication of how technology stocks as a whole are doing, and instead look at the performance of the NASDAQ Composite as an indication of how a few technology stocks are doing. The NASDAQ Composite is dominated by a few select companies (the largest companies in the NADAQ Composite by market cap), and on any given day the performance of those companies can have a severe impact on the performance of the NASDAQ Composite, not the other way around. The ticker symbols of the 10 largest companies traded on the NASDAQ Composite, ranked from highest to lowest in terms of market cap (therefore also by weighting because the NASDAQ is a market-capitalization-weighted index), are: AAPL, GOOG, MSFT, AMZN, FB, QCOM, CMCSA, INTC, CSCO, and GILD. Those companies collectively make up a huge proportion of the NASDAQ Composite (the combined weight of those 10 stocks in the NASDAQ Composite was 49.84% as of 12/31/2013 => Numbers and weighting percentages are from Nasdaq.com) and which direction they move in, and by how much they move in that direction, has an extremely large impact on the performance of the NASDAQ Composite. The average return for those 10 stocks this past week was -1.99%, and the average return for the five largest companies in the NASDAQ Composite this past week was -4.11%, which compares to the NASDAQ Composite’s return of -2.83%. When you crunch those numbers it is easy to see how the performance of only a few companies could impact the performance of an index thatcontains over 3,000 different securities. Many of those top 10 largest companies had news stories that broke this past week, which affected their stock prices, and if those companies perform better in the next few weeks (and have more positive news) then it makes sense to believe that the NASDAQ would stop “rolling over.”

Finally, this is less a problem than it appears. The talk about how far the NASDAQ has fallen is exaggerated. The financial media will often report numbers that are meant to impress viewers, and although those numbers are correct (or they should be anyway) they might not give the most accurate view of what’s going on. For example, talking heads could say that the NASDAQ has declined 4.94% in only four weeks, but that is only true when you take the highest price that the NASDAQ ever reached in the past four weeks and use it to calculate how much the index has fallen from that point to where it closed on Friday. It is actually quite difficult to say that the NASDAQ is rolling over, and that other indexes aren’t, when you look at all three major indexes’ returns so far this year. When using Yahoo Finance to calculate percentage returns, I found that the NASDAQ composite has actually outperformed the DJIA year-to-date with a return of -0.50% vs. -1.53%, and has only barely underperformed the S&P 500 year-to-date with a with a return of -0.50% vs. 0.50%. In fact, if the NASDAQ Composite had only declined as much as the S&P 500 this past week, which declined 0.48%, it would actually be leading the other two major indexes with a year-to-date return of 1.85%. Additionally, when looking at the chart below, it is easy to see that the NASDAQ Composite has actually significantly outperformed the other two major indexes over the past seven years.


With all that being said, can we truly know whether the NASDAQ is “rolling over”? In reality, it’s too early to tell. Anyone (including me!) who says that they know for certain what direction an index is going to move in is just trying to take you for a fool or is a fool themselves!

If you have any questions about this Issue of my Financial Newsletter please fill out the form below. I also appreciate receiving any comments you might have about what you just read, and I encourage you to send me ideas for topics that you would like to see me write about in the future. Thank you for reading!

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