Trades: March 28, 2008

Market was down again today. Made two quick trades, closed out some of my position on STP, and picked up a small position on RIMM. The RIMM position probably should have been done yesterday, but this is just a small gamble for next week's earnings.

This will test my theory on RIMM next week. I would guess that RIMM will stay around the $110 to $120 range until Wednesday. I may add more to the RIMM position if the prices drops below the purchase price today.

Still holding onto Visa and Apple, but keeping an eye on both. Especially Visa, since it seems to be stalled at the moment.

Surfing with Crackberries

If you owned Research in Motion (RIMM) over the last twelve months, you probably made a killing. The company has done incredibly well over the last 12 months, rising from split adjusted price of 45.89 to today’s closing price of $112.15, a gain of 244%.

But more money could’ve been had over the last twelve months, through the ups and downs of the stock. A trader could have done very well by selling after earnings, and then buying on dips such as what we had in the last three months. From November until today, there has been five successive dips in the stock price, and each followed by an a move up on the stock.

Overall, RIM is a great company. Sure, they’ve had their problem including service outage that was broadcasted nationwide, but the coverage is indicative of just how dependent businesses are on Blackberries. RIM gets its revenue from the devices they sell, as well as a flat subscriber fee for each customer it has through wireless providers such as Verizon and AT&T. So, the more corporate accounts and users RIM has, the more money they make.

They are so dominant in terms of the business of smart phones that the next closest player is Apple with the iPhone, and the iPhone is more oriented toward consumers right now. Although Steve Jobs may be trying to change this, he is a long way from being able to compete with RIM directly.

So, with RIM earnings coming out next Wednesday, I think the play should be to get into the stock before the report. Given RIM has raised that subscriber addition forecast for the quarter, the only question is how good the forward looking statement will be. Unless the recession significantly affects business and that is reflected in the forward looking statement, RIM should do very well after their earnings come out, making it a prime candidate for good short term gain.

Trades: March 27, 2008

Market is down today, and it took down most of my portfolio too. I closed out the position on Vale (Rio), and overall, made a little money on Vale, but there seems to be more opportunities there if the stocks go down further. Fundamentally Vale is in a good position because the world still needs raw materials.

Apple (Aapl) broke its recovery streak, and so need to keep an eye there. I’m running a loss with Apple, but may be I should take the loss right now, and then think about buying back Apple if it drops further. The current quarter for Apple is likely to be good, but it depends on the forward looking statement as well.

Genetech (DNA) is a long term hold, which means I bought it too high, I should’ve bought it at the mid 60s really. But with its pipeline of drugs, this will be a good stock in the long run.

Visa (V) is still a hold for the moment, but I think if it drops below $61, then it’s a sell and wait to see if there is another entry point later on.

Airlines

Airlines stocks has recently taken a pounding thanks to higher oil prices, continued competition for market share and the perception of a slowing economy. In fact most of these stocks are down near their 52 week low, having just bounced off of these levels recently. The legacy carriers (Amercian Airlines, United, Delta, Continental, Northwest, US Airways) aren’t the only ones getting hurt, the regional airlines are also getting squeezed, Aloha airlines just declared Chapter 11 last week due to heavy competition for inter-island travel in Hawaii.

So, what are the airlines doing to halt this decline in fortunes? There are a few things that airlines can do to hold on to their profit levels:

1. Raise fares, the last round of increase in prices initiated by United seem to be holding so far, everyone else is following suit.
2. Mergers, this would allow airlines can reduce overheads and get more structural efficiency, the most prominent of late being Delta and Northwest, although that merger has been nixed by the pilot union.
3. Restructuring, if merger is not an option, then restructuring becomes the next likely option, this is something Delta is exploring in the wake of failed merger talked with Northwest.
4. Cut back capacity on domestic flight and increase international travel. The advantage there is that international travel is more profitable in comparison to the domestic market and the market still has significant room to grow.
5. Remove older and less efficient aircraft from service. This reduces the operational cost of running an airline.

But each of these options can be risky. For example, raise prices too much, and cost conscious travelers cut back. This is also true for businesses that are mindful of increasing costs. Mergers typically do not work well, one prime example is the merger of US Airways and America West, after three years, the two companies still hasn’t fully integrated their operations. Restructuring could cause unions to launch into strikes which can cripple operations. Fare hikes aren’t always sustainable as airlines love to compete for market share, which often means that price hikes are likely to devolve into price wars.

So, what does this all mean for the stocks of these carriers? It means that the stocks are highly volatile and extremely dependent on the price of oil. The play in airline is highly risky, but a good short term could be to buy airline stock on the day when oil prices has risen near its peak ($110), and selling as oil drops (below $100). This should make some quick money, but requires a lot of attention on a minute by minute basis. Out of the group listed above, United (UAL) is probably a good candidate, aside from the stock’s inverse relationship to the price of oil, this is the most likely merger prospect of the entire group given how much its CEO has focused on the subject.

Remember, trading in these stocks are not for the faint of heart. The airline business in the US with the exception of Southwest have never been profitable, so, don't count on the earning reports to give a boost to the stock, and never keep airline stock for the long term.

Trades: March 24, 2008

Good day for the market, too bad my stocks are only starting to recover from a miserable January and horrendous February. Bought in a bit more Visa, but dumped some RIO, commodities seem a little risky right now, so any action has to be short term trades.

Visa IPO

Visa’s IPO last week was the largest ever. At $44 a share, anyone who got into the IPO got a bargain. But today, the stock retreated on what looks like a lot of profit taking on a very up day for the market. But oddly enough, so did Master Card (MA), its closest competitor. So what to make of this?

First, both Visa and Master Card derives their revenue by charging a small transaction fee to the merchant every time a cardholder makes a purchase. While they don’t actually issue the credit cards, the credit card companies act as the gatekeeper for all the electronic transactions between the merchant and the customer. So, basically put, every time you use your credit card, the credit card companies takes a small chunk, you don’t see it in the purchase price because the merchant is effectively selling his product as a small discount. While each chunk by themselves only amount to a few percent, when you have literally billions of transactions each day, it adds up to a lot of money.

Upside, Visa has a lot more room to grow in Asia, and with online shopping where just about everyone uses credit cards, Visa can derive a lot of revenue that way. Best of all, unlike banks, Visa isn’t actually loaning any money to the consumers, so there is no risk of exposure to bad loans, the banks take that risk. All of this is good news.

Downside, according to the IPO disclosure, Visa’s five largest customers account for 20% of their revenue, this could potentially become a big disaster if one of these big customers decide to stop doing business with them. There are substantial legal risks involved as well, currently, there are numerous litigations involving retailers, who are complaining about the amount of money Visa is charging the merchants. The biggest flag is that $3 Billion of the IPO proceeds is set aside for eventual settlements on these legal proceedings.

So, what does all this mean? In the short term, Visa might be in for a bumpy ride, as traders take profits from their IPO allocations. But in the long run, given the dominant market position Visa has, the only way Visa can make less money is if their biggest customers decide to stop doing business with them (unlikely given the brand power), or if the government limits the amount of fee that Visa can charge (unlikely unless the government is taken over by communists).

In the Beginning

Once upon a time, I was actually an engineer of some type. But along the way, I somehow decided that business was far more interesting. All these interesting case studies that are a combination of logic, psychology, and gut feel. I was already interested in stocks, but until I actually started getting more interested how business actually worked, I never understood the relations between stocks and business very well.

So, my key focus here will be

1) My thoughts on investment, and the type of investments.
2) My thoughts on finance and business items that I find interesting.

Then hopefully along the way, I'll learn something... and not forget it.