Tuesday, November 1, 2011

Is Google Headed to $800?: GOOG

In the technology sector, even the best companies can stumble. Shares of Apple (Nasdaq: AAPL) recently took a hit from subpar quarterly results, largely due to a hiccup in iPhone sales ahead of the launch of a an upgraded phone. Mighty Amazon.com (Nasdaq: AMZN) saw a commensurate beatdown after spending more money than Wall Street would've liked. Yet the third musketeer of this group, Google (Nasdaq: GOOG), saw no need for excuses. Third quarter sales of $97 billion came in a hefty $300 million ahead of forecasts. And the search giant earned $9.72 a share -- roughly $1 a share more than analysts had been expecting -- for the second straight quarter. Shares have risen nearly 20% since the beginning of the month.

But with the stock trading near $600, it could have more room to move. Many analysts have price targets between $650 and $700, and analysts at UBS have a street-high $800 price target. Let's take a look at why they're so bullish.

Up, up, and away...
For UBS' Brian Pitz and Brian Fitzgerald, Google remains a robust growth story. They note that third-quarter sales growth of 33% (on a year-over-year basis) marks the fourth straight quarter of accelerating growth. Better still, growth isn't being fueled just by core search-based revenue, but instead from Google's heavy bets on mobile advertising and display ads.

In fact, Google's Mobile division is growing at a 150% clip and now represents $2.5 billion in revenue on an annualized basis. Google's Android now powers 45% of all smartphones, with 190 million phones in circulation worldwide. "We see Android growing gangbusters, and we don't see anything that's going to stop that," CEO Larry Page said during a conference call with analysts. The numbers don't lie: on average, 350,000 new Android phones were sold every day in the first quarter of 2011. In the third quarter, this figure hit 750,000.

So you can understand why Google went out and bought Motorola Mobility earlier this year. Having better control of the entire mobile ecosystem will enable Google to capitalize on every mobile strategy it chooses to pursue, regardless of whether other handset vendors provide support. (In fact, a feature-rich Motorola phone would likely compel rivals to offer all of the comparable features.)

Google's Display division, which has doubled in size from a year ago, has become a key platform for advertisers. The unit, which now works with ever-bigger clients such as Disney (NYSE: DIS), snagged $600 million worth of new business in the past six months alone.

Perhaps one of the least discussed merits of Google's growth relates to international expansion. In the most recent quarter, international search revenue grew at a 47% year-over-year pace, twice the rate seen in the United States. The company is making notable headway in Japan, Australia, Brazil and India.

Throwing spaghetti to the wall
The real charm of this business is that management shows no hesitation to keep launching new initiatives to extend its reach into new categories. Not all of them work out. Some, such as Google Buzz (a Twitter-like product) and Google Labs (an R&D-oriented division) have recently been shuttered. Meanwhile, other nascent projects may eventually grow to be a significant revenue driver. Google+, an effort aimed at the Facebook audience, already has more than 40 million registered users. This chart, which can be found on the tech blog of Familylink.com founder Paul Allen, shows how quickly the service has gained traction.

UBS' analysts have run the numbers and figure the stock is just too cheap at 10 times projected 2012 profits (when Google's $40 billion in net cash is excluded). To arrive at their $800 price target, which is roughly 33% above current levels, they use a discounted cash flow model. They calculate the net present value of future cash flow at $223 billion, add in the current $40 billion in cash, apply a 12% weighted cost of capital and assume a 3.5% long-term cash flow growth rate.

Risks to Consider: Google's impressive momentum derives largely from the company's ability to remain two steps ahead of the rest of the field. Yet in the technology industry, smaller, more nimble players sometimes make the boldest breakthroughs. (Hello Twitter? Hello Facebook?) Google will never derive the long-term cumulative cash flow UBS anticipates if new business models emerge that steal some thunder in terms of search, mobile advertising and other hot categories.

Analysts at Merrill Lynch, who have a $720 price target, still wonder if the Motorola deal will weigh on the stock : "We think there will be continued uncertainty on what Google will do with the hardware business and how the acquisition will impact Google's valuation multiple."

Action to Take --> Balanced against those risks is Google's ability to simply replicate what works elsewhere on the web. Google+ is shaping up to be a formidable rival to Facebook, and you can count on management to closely monitor other emerging industry trends upon which to capitalize.

Other analysts who follow Google don't hold the same level of ardor for the stock, with price targets generally ranging from $640 to $750, yet all appear to agree that Google's recent quarterly momentum is likely to extend into the all-important holiday season. This looks like a nice short-term trade opportunity, though if shares move up to and past the $700 mark as the holiday season approaches, profit-taking may prove wise, despite UBS' even loftier price target.

Real Estate Prices Down 35% Since Peak… But It’s Not Over

Remember when leading real estate analysts forecasted a housing recovery and return to housing market growth? Or when the government promised that the $8000 home tax credit would stop the decline? Or when monetary experts recommended printing more dollars in the form of stimulus to stabilize prices?

All of it was for naught:

The besieged housing market has even further to fall before home prices really hit rock bottom.

According to Fiserv (FISV – News), a financial analytics company, home values are expected to fall another 3.6% by next June, pushing them to a new low of 35% below the peak reached in early 2006 and marking a triple dip in prices.

Several factors will be working against the housing market in the upcoming months, including an increase in foreclosure activity and sustained high unemployment, explained David Stiff, Fiserv’s chief economist.

Should home values meet Fiserv’s expectations, it would make it the third (and lowest) trough for home prices since the housing bubble burst.

Source: CNN Money

Foreclosures and unemployment are the elephants in the room when it comes to housing. If there are not enough jobs being created to offset those being laid off and new people entering the workforce, then people find it increasingly difficult to make their monthly mortgage payments. Couple that with an already saturated foreclosure market with a shadow inventory of millions of homes sitting unoccupied and you have the makings of a serious housing decline.

But the experts continue to predict a return to housing prosperity starting next summer:

Even after the housing market begins its comeback in mid-2012, the recovery is predicted to be modest at best. Nationwide, Fiserv is projecting that home prices will climb just 2.4% between June 2012 and June 2013.

Just like they did in 2008, 2009, and 2010:

Housing Markets Will Roar Back in 2009
The nation’s foreclosure hemorrhage has finally slowed and 2009 should see a significant decline in foreclosures as buyers return, pushing home prices up and fueling a real estate recovery. (link)

U.S. Housing Recovery Delayed to 2010
“My prediction is we’ll probably recover on a seasonal basis. It’s generally accepted that the homebuilding industry is off the mat and on the road to recovery.” (link)

Home prices should bottom out in 2011
Most experts expect home prices to bottom out in 2011. That should be welcome news for home buyers looking to take advantage of the lowest possible prices and sellers who have endured three years of steep declines in property values. (link)

For an example of how severe these types of cyclical downturns can be, consider the massive declines experienced in real estate prices in the United States during the Great Depression:

During the 1920s prices reached their highest level in the third quarter of 1929 before falling by 67 percent at the end of 1932 and hovering around that value for most of the Great Depression.

Source: Social Science Research Network

As we’ve opined from the beginning of the housing crisis, we need look only at Japan for a modern day example to see how far we can fall and how long this can take:

It’s hard to imagine the average price of a home losing 40% – 60% of its value during the course of this real estate bust. For those who say its impossible, we point you to the Japanese real estate decline of the 1990′s, which saw Japan’s property values lose more than 70% from top to bottom, and the Japanese have yet to recover.

Developers, both residential and commercial, can build all they want, but if nobody is buying or renting, then it really doesn’t mean much. In the coming years, we expect to see hundreds of residential developments sitting without residents and continued commercial vacancies.

Real estate is not bouncing back any time soon – perhaps for a decade or more.

Don’t fall into the trap of expecting recovery because expert analysts and Realtors say prices are stabilizing or headed back up.

We remain in the middle of the worst economic and financial crisis in the history of our nation. While there may be isolated pockets of sporadic growth on a month-over-month basis, the long-term trend is one of sustained decline. A 50% to 75% price collapse from peak to trough is not out of the question – though it may be outside the realm of possibility for many.

Author: Mac Slavo

Silver Price: Silver Tsunami From India

To understand the potential of the silver price moon-shotting as the “investment of the decade,” according to Sprott Asset Management’s Eric Sprott, investors must wrap their minds around India’s tsunami demand for the metal in the coming years, which is expected to soar as the country’s 1.1 billion consumers rapidly rise in global per capita purchasing power parity (PPP).
When the talk of Indian gold jewelry demand arises, the gold tonnage imported to India is typically cited. And it’s breathtaking, with a lot of that gold slated for India’s spiritual season, called Deepavali, or ‘Festival of Lights,’ which begins in mid-October and ends in mid-November.

The World Gold Council anticipates India to import 1,000 tons of gold by 2012, or maybe even this year, as yearly imports to the second-most populated nation of the world expected to reach the equivalent of Switzerland’s total gold reserves.

“Demand for jewelry was the biggest contributor to gold demand, accounting for 54 percent of the total,” bullion expert Frank Holmes wrote in a February piece for MineWeb.com. “That’s a 17 percent rise despite gold prices jumping 26 percent in many currencies.”

Holmes continued, “India led the world in gold jewelry demand with more than 745 tons. China was a distant second at just under 400 tons and the U.S. third at 128 tons. While the pace of consumption has slowed in several countries, gold consumption for jewelry remains at elevated levels around the world.”

But what about silver?

As India proceeds to Vasubaras, the first day of Deepavali celebrations in the state of Maharashtra, traders and business people consider this day an auspicious one “for making important purchases, especially metals, including kitchenware and precious metals like silver and gold,” according to Wiki. As the demand for gold rises in India, silver demand rises as well.

Another factor which could drive higher India imports of silver is the high cost of gold. Malaysian news outlet, The Star, reported that the rally in the gold price has created a problem of affordability among many Indians. Many Indians have always struggled financially to purchase the sacred metal for religious ceremonies, with some families spending their entire life’s savings on the wedding of their young bride. But gold has increasingly become more prohibitive to many families in India as the rally enters its 11th straight year of higher prices.

But, as in any ‘commodity’, the market adapts with a little bit of substitution along the way—with producers using a little less gold and a little more silver to output the final product.

“By using innovative techniques, we can flatten 22-carat gold and then stuff it with an alloy that is a mix of copper and silver to give the ornament weight,” says Amit Prakash a Delhi-based jeweler.

How much silver will be involved in this substitution? It’s difficult to estimate; no statistics are available. But a small number multiplied by a massive number equals a big number.

However, the biggest factor slated to take the demand for silver in India to new heights comes in the way of silver’s investment qualities as a hedge against monetary inflation and resulting rising consumer prices. Inflation is standard fare of Indian life.

Though gold serves two purposes in India, one of tradition and the other monetary, it’s silver that may play an ever-increasing role in as a hedge against the ravages of inflation. While gold reaches unaffordable prices to India’s low per capita PPP of $3,500 (2010 CIA Factbook; US per capita PPP is $47,200), silver’s much lower price per ounce will become increasingly more attractive, not just in India, but everywhere.

“Rapid inflation is eroding the earnings of the common man. One has to understand how the import of gold has reached $9 billion for a month, while the yearly average is around $22 billion,” Sudhir Chakraborty, bullion analyst at Standard Chartered Bank, told Mineweb in June.

Though Chakraborty doesn’t mention silver, Google has some interesting statistics regarding the interest in the white metal in India.

The graph, below, courtesy of Google Trends, reveals that the number of web surfers interested in the search term ‘silver price’ has risen sharply since the CFTC announcement in 2010 regarding the JP Morgan/HSBC manipulation scheme, with people from the cities of Pune, Bangalore, Calcutta, Mumbai, Chennai and New Delhi (English widely spoken in the former British colony) topping the list, leaving the US and other developed nations in the dust. Not New York City, London or Chicago, but Denver, tops the list of US cities next in line after India’s six!

“This is what makes today’s gold market different from the 1970s,” said Frank Holmes. “Back then, today’s emerging market powerhouses, such as China and India, had no global economic impact. Now, these countries aren’t just at the forefront of the gold market, they are global leaders in economic growth.”

Is the S&P Headed for a Double Dip?

Discussing his perspective on patterns occuring in the market, with Walter Zimmermann, United-ICAP chief technical analyst.

Shrinking VIX Macro Cycles

Staring at the VIX from the 30,000 foot level, it looks much different than it does from the trenches of daily trading. In the monthly chart below, one can see that from 1990 through 2008, the VIX moved in fairly regular ‘VIX macro cycles’ of 2-4 years in duration, with relatively gentle trends and transition points.

Seen in terms of monthly bars, the financial crisis of 2008 changed the nature of those VIX cycles, with the result that in the last three years the VIX cycles have been short and steep. Unlike the VIX movements through 2008, the more recent VIX movements seem to defy a traditional directional label, so for now at least I have attached a provisional label of “volatility chop” to characterize the VIX movements since the April 2010 low of VIX 15.23. Note that this low coincides with the euro zone approval of $40 billion in bailout funds to Greece. In many respects, the volatility of the last 1 ½ years can be seen as a slow escalation of the European sovereign debt crisis and the evolution of investor opinion regarding the magnitude of the risk and the ability of the euro zone to get ahead of the problem.

Volatility has indeed been qualitatively different since the 2008 financial crisis. You can see the differences on a daily, weekly and monthly basis. Even more interesting for the academician and perhaps problematic for the trader is that distinguishing between volatility regimes is more difficult now that it was for the first decade and a half of the life of the VIX – at least from 30,000 feet.

3 "Sweet Spot" Gold Miners Best Bought & Held : ABX, AUQ, BRD, GDX, GLD, MFN

To say that gold and gold mining stocks have been tricky to trade in 2011, would be an understatement. When gold prices soared from $1505 per ounce to $1860 between July and August, above and beyond the already-hot pace at the time, most everyone on the sidelines finally started to pile in.

Of course, the timing of those entries ended up being impeccably bad, as gold wound up hitting lows around $1650 per ounce, a month later, an 11% tumble after the 23% run up; it's doled out a partial recovery, in the meantime.

While the volatile swings have led to sheer misery for a lot of folks who have decided to start dabbling with the likes of the SPDR Gold Trust (NYSE:GLD) and the Market Vectors Gold Miners ETF (NYSE:GDX), that pain has also offered a valuable lesson for traders and investors of all experience levels. That is, even when you're talking about gold stocks, the wisest course of action is to find a quality name, buy it, and leave it alone; let time do the work for you, to score the big gain.

It can be easier said than done, when you're talking about the most precious of all metals. However, it is doable and it's equally possible to sleep at night, while doing so. The trick is to find the names that aren't so popular, or heavily-watched, that the trade is crowded, like Barrick Gold Corporation (NYSE:ABX) may be, yet aren't so small and unproductive that they may not be around a year from now.

With that as the backdrop, here are three mid-sized gold names that are solid opportunities, but stocks you're not going to have to fight or overpay for.

MineFinders Corp. Ltd. (AMEX:MFN)
At a market cap of $1.2 billion, MineFinders Corp. is in that proverbial sweet spot where few are familiar with it, but it's solid enough to stay afloat through turbulence. More than anything though, MFN is attractive because it's profitably producing gold.

One of the key criticisms of MineFinders is that it's a one-trick pony; that it only has one mine, its Dolores site in Northern Mexico. It's not an unfair worry, but it's also not the whole story. Two other sites are currently being developed: La Bolsa and La Virginia. Given its long-term success with just Dolores, investors can have faith that the other two will bear commensurate fruit, and do so for a few years.

Brigus Gold Corp. (AMEX:BRD)
Brigus Gold Corp. is tiny, at only $273 million, and worse, it's not profitable, so it definitely falls on the speculative side of the spectrum, even by gold-mining stock standards. It is producing, though, and ramping that production up. What makes this name so curious is that it's actually danced with profitability in recent quarters, not that a miner has to be profitable for the stock to go higher. Tacking on the potential of the Goldfields development project in northern Saskatchewan, which could be worth a total of $300 million to Brigus, may well get it over that hump.

AuRico Gold Inc. (NYSE:AUQ)
This Toronto-based gold miner has also focused its development in Mexico, though the recent acquisition of Northgate Minerals gives the miner five operating mines and one more very close to reaching production, by the end of Q1, 2012. The immediate impact that the acquisition will have on the books is still unclear, as AuRico was profitable, but bought a marginally unprofitable company. Based on its consistent profitability, odds are strong that AuRico Gold will be able to cultivate profits from Northgate's assets.

The Bottom Line
While it might be tempting to buy and sell as prices rise, some stocks benefit more from a little patience. Gold has the ability for a great payoff, if you can get in at a decent price and hang in, to watch it climb.

Bloomberg Business Week - 31 October 2011

Each issue of BusinessWeek features in-depth perspectives on the financial markets, industries, trends, technology and people guiding the economy. Draw upon Business Week's timely incisive analysis to help you make better decisions about your career, your business, and your personal investments.

download it here

James Turk - Silver Formation Projects Spike to $60 - $75 Level

After the explosive upside activity in the gold and silver markets last week, today King World News interviewed James Turk out of Spain to get his take on where the metals are headed from here. When asked about the action in gold and silver, Turk responded, “I like today’s action very much, Eric. Given that gold rose over $100 last week, some correction was expected. The important point, though, is that gold quickly bounced off support at $1,700. I’m encouraged by that action. We may test the $1,700 level one or two times more before heading higher.” (more)

George Soros: I Give The Europe Debt Deal Between One Day And Three Months

George Soros has said that he thinks the Eurozone deal will only last a short time, from one day to three months.

Veteran investor George Soros has attacked the lack of leadership at the top of the eurozone and said that the new Brussels “deal” to solve the debt crisis will only last between “one day and three months”.

Soros makes a number of telling points. The first being that for all the talk of the “50% haircuts” the actual level of Greek debt is only being cut by 20%. This is because it is only private sector holders of the Greek debt that are being asked to take the haircut. Given that so much of the debt is held by public sector organisations, the total cut in the debt level simply isn’t sufficient to deal with the problem.

Yes, as Soros says, the markets have bounced upon the announcement of the deal but this is because almost any deal, news of any deal, would be better than the vacuum and bumbling that preceded it. However, Greece is still insolvent and increased austerity simply isn’t going to make it solvent again.

The crisis simply is not solved.

He makes another intriguing point as well: the deal does not trigger CDS payments. But for some banks the CDS payment would be better than taking a 50% haircut. So it will be in those banks’ interests to not tender their debt for the haircut but to hold out and wait for a credit event. And the more banks that hold out the more likely a credit event becomes…..

Another way of putting this is that the Fat Lady hasn’t sung so it’s not over yet.

Bonds Beat Stocks Over Past 30 Years, First Time That's Happened Since Civil War

If we need any evidence the past thirty years, especially the past twelve or so, have been horrid for investors, this Bloomberg article notes that (government) bond returns have actually beaten stock returns over thirty years. Ouch. They say stocks win out in the 'long run' but for the average person's life span, you don't want to go out forty years to get a superior return. Obviously this is very atypical - it's the first time it has happened since the Civil War time frame!

To be fair, yields were very high on government bonds in the early 80s/late 70s as Paul Volcker was fighting off inflation so the starting point for prices was quite low in a relative sense (prices low, yields high), but it's still an amazing statistic.

Just more evidence we should never stop QE'ing - QE for 30 years and more artificial returns will make us all mad money!

  • The biggest bond gains in almost a decade have pushed returns on Treasuries above stocks over the past 30 years, the first time that’s happened since before the Civil War.
  • Fixed-income investments advanced 6.25 percent this year, almost triple the 2.18 percent rise in the Standard & Poor’s 500 Index through last week, according to Bank of America Merrill Lynch indexes. Debt markets are on track to return 7.63 percent this year, the most since 2002, the data show. Long-term government bonds have gained 11.5 percent a year on average over the past three decades, beating the 10.8 percent increase in the S&P 500, said Jim Bianco, president of Bianco Research in Chicago.
  • The combination of a core U.S. inflation rate that has averaged 1.5 percent this year, the Federal Reserve’s decision to keep its target interest rate for overnight loans between banks near zero through 2013, slower economic growth and the highest savings rate since the global credit crisis have made bonds the best assets to own this year. Not only have bonds knocked stocks from their perch as the dominant long-term investment, their returns proved everyone from Bill Gross to Meredith Whitney and Nassim Nicholas Taleb wrong.
  • The generation-long outperformance of bonds over stocks has been the biggest investment theme that everyone has just gotten plain wrong,” Bianco said in an Oct. 26 telephone interview. “It’s such an ingrained idea in everyone’s head that such low yields should be shunned in favor of stocks, that no one wants to disrupt the idea, never mind the fact that it has been off.”
  • Stocks had risen more than bonds over every 30-year period from 1861, according to Jeremy Siegel, a finance professor at the University of Pennsylvania’s Wharton School in Philadelphia, until the period ending in Sept 30. The last time was in 1861, leading into the Civil War, when the U.S was moving from farm to factory, according to Siegel, author of the 1994 book “Stocks for the Long Run,” in a telephone interview Oct. 25.
  • U.S. government debt is up 7.23 percent this year, according to Bank of America Merrill Lynch’s U.S Master Treasury index. Municipal securities have returned 8.17 percent, corporate notes have gained 6.24 percent and mortgage bonds have risen 5.11 percent. The S&P GSCI index of 24 commodities has returned 0.25 percent.

Trader: The MF Global Bankruptcy ‘Decimated’ The Floor Of The CME Today

There was a lot of confusion this morning about what kind of impact the bankruptcy of futures dealer MF Global would have on trading operations.

One place the impact was felt big: The floor of the Chicago Mercantile Exchange.

We caught up by phone with Eric "The Wolfman" Wilkinson, the independent floor trader who many know because he stands near Rick Santelli on CNBC.

He explained to us what happened.

The gist: MF Global is the clearing firm for a huge chunk of the traders on the floor of the exchange. That means, essentially, that they guarantee that all trades get paid out, a role that the Chicago Board of Trade used to play directly, but which was outsourced to third parties as part of the CBOT’s move towards being publicly held. Importantly, MF is/was the clearing firm for many sub-firms, which means that many traders ultimately were having their trades cleared through MF Global, even if they didn’t know it.

ANYONE who somehow has their trades cleared through them was unable to trade today, and that means that any trader who had open positions is just sitting there watching the market move, while they find a new firm.

Theoretically this shouldn’t take too long, in some cases traders could be back up and running tomorrow if the paperwork of going to a new firm can be done fast enough.

Bottom line though: The screwup that caused the big disruption was not necessarily the collapse of MF Global itself, but the fact that many firms that dealt with MF Global assumed that everything would be fine, like it would have been when the CBOT was a partnership.