TWTR, FB, LNKD all down this week

Well, it's exciting times in the tech sector. (more on that later) Of course the most pertinent for us is the social networks and specifically Twitter which dropped 25% from over $52 to $38; missing revenue and lower outlook has a way of doing that to a growth stock.

In fact, all 3 publicly traded socials, FB, LNKD, and TWTR took a haircut this week, due to bad revenue numbers. (I actually managed to sell FB at $84 before the drop but that was just dumb luck than any skill or insight).

They are all having trouble monetizing (read advertising) effectively on all the eyeballs hanging on their web and mobile sites. This is a good opportunity for my company Sysomos which helps them with social advertising, but they are stupidly stubborn in reaching out and working with 3rd party indies (like us); instead trying to do everything in-house.

I think we're at an inflection point in the social industry. It's been a "land grab" mentality thus far, trying to attract as many users to their networks at all costs, but now that they have all saturated their user base, they need to get smart and serious about monetizing.

So in the short term, there is some headwinds/negative sentiment in the market so these stocks will be under pressure. If you can't stand the heat, I suggest we cut our losses. If I have to give a range, I think Twitter may drop into the low $30s but in the longer term it goes over $100 in the next 3 years.

The only problem with selling right now is I don't know where to deploy this cash.

Catching the Oil Drop(s)

We've had some email discussions about the slide in oil prices and whether we're close to the bottom so I thought I would post it here for well.... posterity!

Oil has bounced from the mid $40s to just under $50 as I write after falling from $110 last year.

The question is when will the supply/demand start to turnover.  The swing producer over the last few years has been shale and tight oil plays in North America i.e. fracking.   There just isn't a lot of spare capacity elsewhere.  They have added northwards of 8 mil b/d of production.  They are also vastly uneconomic at current prices as the rig counts will show.  Below is the most recent count from Baker-Hughes and currently we are down 45%.  Production should follow this rig count down soon.

So does this signal the bottom?  Apparently oil storage capacity in N. America is close to full so we may see some more volatility in the oil price as any excess crude that cannot be stored will be sold on the market.  

Current slow global economic growth not withstanding, the world is still addicted to oil so as the supply/demand starts to tighten, the bottom is within sight.

I'm calling a bottom here in the mid $40s with more volatility until the summer.  Looking to enter some good Cdn energy stocks this summer.  As I think about it I'm going to stay away from US energy at least US$ denominated energy as the Cdn dollar should rally along with the price of oil.

Long oil.   Soon.

LULU again??

LULU has been my favorite stock to trade, due to it's volatility and general upward trend (which masks some mistakes). I sold out 2 weeks ago at $80 after doubling the investment, and now the stock is trading down around mid 60's due to the departure of CEO Day. So I've been thinking of jumping back in for my personal portfolio, not the club's.

I'm consulting with my associates since I'm really torn. They recently released really good earnings and outlook, so the discount is really just due to the uncertainty/surprise of the CEO's departure. though it's not discussed much in media, I suspect Day did not have such a great relation with the founder Chip Wilson from the start. If that's the case, I think Lulu still has legs with int'l expansion and such.

Again, I see Lulu as more than just a retailer, but a play on women's vanity and body insecurities. Trying to monetize on basic human emotions and aspirations seems more reliable to me than trying to follow the economic cycle. So should I jump back in??

US Election & Prediction Markets

How the heck is everyone?!!?

I've been busy with our first born Sasha; just adding a pic here for posterity.
As the other members know, politics and financial economics are a couple of my favorite topics; so the US presidential elections are always a fun time for me. There are way too many polls, state polls, and aggregate "poll of polls" to figure out who's going to win (and how to make money off this prediction), so I rely on efficient markets and the self serving greed of human nature to get the most accurate info; namely Intrade Prediction Markets!
Although most national polls are suggesting a dead heat or even slight Romney lead, the US electoral college is a winner take all system in each state so it turns out Obama has a better breakdown of votes in the key "battleground states". So according to link above, the efficient prediction markets today are predicting a 63% likelihood of Obama winning. Just to be clear, the prediction is just that he will get to 270+ electoral college votes, and not take 63% of the popular vote.
Interesting thing is, when you look at the battle ground states (at this link), there's only four states which are "in play". Let's arbitrarily say anything above 65% is a given to the leading candidate. (electoral college votes in parenthesis).
Ohio (18 votes) is leaning 62% to Obama
New Hampshire (4 votes) is leaning 58% to Obama
Virginia (13 votes) is leaning 57% to Romney
Colorado (9 votes) is leaning 51% to Romney

Without the above states, Obama is at 259 EC votes and Romney is at 235 votes. Romney needs Ohio, VA and one of NH or CO. Obama can conceivably win without Ohio by taking NH and CO to get to 272 EC votes. That would be a really exciting election night if Obama loses Ohio, wins NH, with the CO election results coming in late at Mountain time. Obama wants to avoid that nail-biter scenario, so they really want Ohio and the 18 votes. In fact, I read the ground game is so intense in Ohio, it's come down to two counties and several suburbs in those counties to try to get out those votes.
As it currently stands, if we play the odds, as we always do in the markets, it looks like a Obama win and we stick with the status quo. If somehow, over the next week Romney manages to make gains in Ohio, looks for the markets to adjust accordingly. I'm thinking certain sectors like Healthcare, Defence, Energy and maybe even Financials might uptick based on the perception of a less regulatory environment.
OK, baby is crying so that's my thoughts for now.

The Question is...

Is this club still alive? :)
Actually, my real question is this:
If we assume Canada is in the midst of the Dutch Disease, where our strong currency will deter all other industries, what is our best investment strategy?

Hedging Strategy (response)

Ah, something I can answer definitively :)
If we assume your portfolio of risky assets is on an efficient frontier, then the tangential line to the left of the "market" point indicates how much cash you have on hand (opportunity cost). The line extending to the right indicates leverage.

Now the key question is, if you buy those bonds, do you believe you will be headed closer to the Market portfolio or below? We know you are above, so this is bit of a subjective question. If you are buying enough bonds to be at or above the Market weight, then leverage is good. If you are below, then you may be at a suboptimal point where you are taking on more risk for the proportional return.
Hope that helps!

(note, I wanted to get the picture in and could not do it in comments)

Hedging Strategy

The increasing volatility had me thinking about strategies to minimize my risk. Better late than never I say! Borrowing to invest is nothing new, although I have never followed through on this strategy. Interest expense is fully deductible at your marginal tax rate for investments that produce income, dividends, or the potential to produce dividends.

I've often thought about leveraging a basket of blue chip dividend paying stocks but the risk involved has alway made me shy of this approach. I have used inverse ETFs in the past to hedge parts of my portfolio but this is not easy nor efficient. The pros use leverage as well as out of the money puts to hedge tail risk.

What I'm thinking about is using leverage to buy a Cdn bond ETF. Bonds are uncorrelated with most of the stocks in my portfolio. There is the flight to safety aspect of bonds as well as the general rise in bond prices with deflationary expectations. I think a Cdn bond ETF is as safe as it comes.

I do own a bond ETF XLB but not nearly enough to hedge my long equity position. I have some cash but also not enough to hedge my portfolio. Holding more cash is potentially opportunity cost so what to do?

I have a line of credit with 4% interest rate and XLB currently yields 4%.
In this case the tax deduction on the 4% expense more or less cancels the tax paid on income of 4%, so there isn't any positive carry. In this case cash has a better carry but just marginally. What I'm betting on is that in any market downturn, bonds will rally beacuse of the two reasons - flight to safety and recessionary interest rate environment.

The risk is in an inflationary environment or as in the case of Greece and Italy - a crisis of liquidity and insolvency. I think Canada is okay on both counts. Despite my hard money bias I have to admit that with all the QE, there has been little inflation.

So where are the holes in this argument?