Monday, October 14, 2013

If Buffett Liked Tech, Here's What He'd Buy: CSCO, MSFT, AMBA

Warren Buffett used to define a "margin of safety" as a company that was trading close to - or even below - "breakup value."

Of course, that metric doesn't work as well today - especially in the parts of the tech sector that we like to focus on: You just aren't going to find many high-growth companies trading at bargain-basement levels.

But with U.S. firms sitting on a record $1.7 trillion in cash, you can find some name-brand tech firms whose cash reserves can cover a decent portion of their share price - creating a nice "margin of safety" as we move into the fall. (Good timing, considering everything that's happening - or not happening - in D.C. right now.)

I like to refer to these as "Cash is King" tech stocks. (more)

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A Look at Year-to-Date Asset Class Performance

Let us look at the performance of various asset classes from the year to date perspective.
Let us look at equities first. US equities have outperformed GEM equities by a wide margin. S&P 500 was up almost 20% recently while GEMs are about 3% down for the year. Eurozone equities have done quite well too, up about 18% year to date.  Within the bond sector, Treasuries have grossly under-performed, down about 12% year to date. Corporate bonds have fared better, remaining down by about 4% while Junk Bonds have outperformed by posting a positive return YTD.

Moving along towards commodities, and we can see that precious metals disappointed this year. Gold (and Silver not shown here) are under-performing all other assets and at one point almost 30% down YTD. Base metals have not faired much better, down 16% while Agriculture has also disappointed with a negative return of 12% this calendar year. Energy is the only commodity sector to give positive returns, with a gain of 9% this year.
A simple summary shows that developed market equities have done tremendously well this year, while metals have grossly under-performed all other asset classes.

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Baker Hughes Incorporated (NYSE: BHI)

Baker Hughes Incorporated supplies oilfield services, products, technology, and systems to the oil and natural gas industry worldwide. It offers drilling and evaluation products and services, including drill bits for performance drilling, hole enlargement, and coring; conventional and rotary steerable systems used to drill wells; measurement-while-drilling and logging-while-drilling systems to perform reservoir navigation services; drilling optimization services; tools for coil tubing drilling and wellbore re-entry systems; coring drilling systems; surface logging; emulsion and water-based drilling fluids systems; and reservoir drill-in fluids, as well as fluids environmental services. The company's drilling and evaluation products and services also comprise wire line services, such as tools for open hole and cased hole well logging to gather data to perform petro physical and geophysical analysis; reservoir evaluation coring; casing perforation; fluid characterization; production logging; well integrity testing; pipe recovery; and seismic and micro seismic services.
To review Baker's stock, please take a look at the 1-year chart of BHI (Baker Hughes Incorporated) below with my added notations:
1-year chart of BHI (Baker Hughes Incorporated) Notice the rising wedge I have outlined on the chart of BHI. A rising wedge price pattern is essentially a type of triangle formation in which the stock (BHI) has formed an up trending resistance line (red) and an up-trending support level (green). These two trend lines converging on one another combine to form a rising wedge, which is usually a terminal pattern. Confirmation of this pattern would occur if the stock broke the up-trending support.

The Tale of the Tape: BHI has created a rising wedge pattern, which should lead to a break lower. A short trade could be entered on a break out of the bottom of the wedge, which currently sits near $47.50. If a trader believes the stock has higher prices in it's future, a long play could be made at that support with a stop placed below that level.
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U.S. Risks Joining 1933 Germany in Pantheon of Deadbeat Defaults

Reneging on its debt obligations would make the U.S. the first major Western government to default since Nazi Germany 80 years ago.
Germany unilaterally ceased payments on long-term borrowings on May 6, 1933, three months after Adolf Hitler was installed as Chancellor. The default helped cement Hitler’s power base following years of political instability as the Weimar Republic struggled with its crushing debts.
“These are generally catastrophic economic events,” said Professor Eugene N. White, an economics historian at Rutgers University in New Brunswick, New Jersey. “There is no happy ending.”
The debt reparations piled onto Germany, which in 1913 was the world’s third-biggest economy, sparked the hyperinflation, borrowings and political deadlock that brought the Nazis to power, and the default. It shows how excessive debt has capricious results, such as the civil war and despotism that ravaged Florence after England’s Edward III refused to pay his obligations from the city-state’s banks in 1339, and the Revolution of 1789 that followed the French Crown’s defaults in 1770 and 1788. (more)

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US Weekly Economic Calendar

time (et) report period Actual CONSENSUS
Columbus Day
None scheduled
8:30 am Empire state index Oct. 6.6 6.3
8:30 am Consumer price index Sept. DELAYED 0.2% 0.1%
8:30 am Core CPI Sept. DELAYED 0.2% 0.1%
10 am Home builders' index Oct. 57 58
2 pm  Beige Book
Treasury expects to run out of borrowing authority
8:30 am Weekly jobless claims 10/12
333,000 374,000
8:30 am Housing starts (likely delayed) Sept. 910,000 891,000
8:30 am Building permits (likely delayed) Sept. 925,000 926,000
9:15 am Industrial production Sept. DELAYED 0.5% 0.4%
9:15 am Capacity utilization Sept. DELAYED 78.1% 77.8%
10 am Philly Fed Oct. 13.0 22.3
10 am Leading indictors (likely delayed) Sept. -- 0.7%
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