Newest Investment Strategy

Down with clothes!!

No, that doesn't mean you can take off your clothes.
I'm not condemning clothes, rather I'm condemning the stores that sell clothes(ie. Abercrombie and Fitch, Aeropostale, American Eagle, and Nordstorm).

Abercrombie and Fitch has been on several investors' hit-lists because of the:
1. outrageous statements CEO Mike Jeffries made
2. stores' more revealing set of clothing that targets pre-teenagers
3. physical stores themselves (dark, loud music, too much cologne, and half naked, unrealistically skinny models)
4. and intentional lack of clothing for women above size 10

The above have given Abercrombie and Fitch a very negative look in the public eye. If the public doesn't positively think about a brand, they're not going to buy its products because it makes them look bad for supporting a negatively viewed company.

As you can see in the above chart, A&F lost half its market value in less than a few months.

March Madness & England

Hi Everyone, 

Although the term March Madness was coined to refer to the intense basketball season this month, I feel it perfectly describes my hectic schedule this month.

For the first week of March, I worked on Princeton High School's PowerSchool Android App during all of my free time, and (finally) published it to the Google Play Store (link)

Princeton High School had its Spring Break over the past two weeks and I was fortunate enough to spend that time with my family vacationing in London and Paris. During those two weeks, I decided to unwind completely so that I could relax more and absorb the European culture. I didn't bring my laptop and only went on my phone/the Internet once every other night to read the news. London and Paris are both amazing cities and I hope I can study abroad or live in one of them during college.

Now that I'm back, I thought I would get back to posting short posts.

The British Pound is still going strong against the USD and the Euro is recovering. Britain's economy is forecasted to pass both France's and Germany's economy by 2030. Britain's service sector, comprising over 75% of its GDP, and its tourism industry, with London ranking as the 3rd most visited city in the world, are both expected to grow within the upcoming years.

The British Government's economic austerity plan, which aims to cut government debt by reducing government spending, is finally working. An austere economic plan is one that reduces the number of services and goods provided by the government in the hope that private corporations will expand to cover that reduced number of goods and services. Having consistently been one of the slowest growing economies in Europe over the past post-depression years, England's economy is finally growing by roughly 2.5%, and is expected to continue growing in that range for the next few years. It's not only the British government's austere economic plan that is contributing to Britain's growth; it's also Britain's quantitive easing program. Although an austere plan involves reducing government spending, the Bank of England has decided it is best to spend (the saved money?) on a Euro 375 billion bond-buy-back aggressive quantitive easing program to keep interest rates low. The Bank of England's Quantitive Easing Program is similar to the US's Federal Reserve QE Program in that they both involve the country's central bank purchasing large amounts of bonds monthly to keep interest rates low and make bond purchases unattractive to investors, who should then (hopefully) invest in stocks and companies. Unlike the US's Federal Reserve, the Bank of England stated that they will continue the aggressive QE program to keep interest rates near 0.5% well into 2015, while the Federal Reserve has already begun decreasing the amount of bonds it is buying back. Both the Bank of England and the Federal Reserve's QE Programs are working; both economies are growing positively in the 2% range, consumer confidence is increasing, manufacturing & construction sectors are growing, and unemployment is decreasing.

Although I haven't gotten into FX/Currency Trading yet, I would go long on the British pound. I would also invest in companies trading on the London Stock Exchange. Britain's economy started off the recovery process slow, but I can only imagine that it will begin to pick up, especially as the Bank of England announced they would continue purchasing hundreds of billions in bonds to reduce the interest rate. In terms of historical precedence, most recently/currently with the US, quantitive easing programs that aim to reduce interest rates in order to increase investments in companies through the stock exchange, has only helped that country's economy to grow and their stock market indices to rise.

Switching Blogs --> dsouzarc.wordpress.com

Hi Everyone,

I switched over to a WordPress blog a couple months ago because I liked WordPress's themes, layouts, designs, and overall blogger/user experience more then Google Blogger's themes, layouts, and UI.

I apologize for letting you know so late.

My new WordPress blog is dsouzarc.wordpress.com

I hope to see you all there!

Ryan D.

Post-Exam Economic Analysis

Hi Everyone, Sorry for my delay in posting. I had to deal with midterms last week. I've also been busy working on a PowerSchool app that I plan to publish next week.

On January 6th, I wrote a post analyzing Starbucks. I was correct in that Starbucks failed to beat most of Wall Street's estimates and its stock took a dive to $68, about 12.5% below the price which I sold it at and 18% lower than its all time high. It's at $70.57 today, which is more than $12 below its high. I made a good call in saying that it's time to sell SBUX.

Starbucks wasn't the only company to not beat earnings. In fact, the entire economy seemed to have sunk a bit over the past couple of weeks. The DJIA dropped 200 hundred points in a single trading session and the S&P 500 posting one of its biggest 2-day slides in the past year. Economists have blamed disappointing manufacturing data from China and US earnings.

On top of that, unusual weather patterns have been negatively effecting the globe. Extreme storms pounding America have caused entire regions of the country to shut down for days. Not only is that causing tens of millions of Americans to be unable to go to work, but also millions of businesses to shut down and billions of dollars to not be spent. Outside of America, Brazil has been hit hard with a draught estimated to cause nearly 30% of its coffee crops to die. If Brazil, the world's largest exporter of coffee beans, loses nearly a third of its export, coffee bean prices around the world will rise, negatively affecting consumer spending.

Emerging Markets: I found this interesting observation Paul Krugman published a couple of weeks ago about emerging markets. He described that most economists were debating if we faced secular stagnation. Secular stagnation is a situation in which the amount people want to save exceeds the volume of investments worth making. If we are facing secular stagnation, investors disappointed by low returns would pour money into emerging markets, which is what most investors are doing now. Krugman believes this would boost the economy for a while, but investors would eventually realize that it was an ill-conceived investment and the money would dry up. This entire process would involve bubbles followed by recessions, not an encouraging thought as it looks like the emerging market's current bubble looks like it's going to pop.

That's all I have right now. I'll try to write a bit more over the upcoming days/weeks.

2014 Predictions

I ended off last year saying that I predicted a stock market crash followed by a short economic recession at the beginning of 2014. So far, I was kind of right.

The year began with the Federal Reserve announcing that it would begin tapering off it's Quantitative Easing Program from $85 billion in monthly US Treasuries/Bonds purchases to $65 billion, as previously predicted. The first three trading sessions (days) of the New Year were red, with the DJI losing hundreds, as also previously predicted. Now, in the middle of January, the stock market is still going down because a lot of companies are missing Earning's estimates, also previously predicted. Citi bank missed earnings and bank mammoths JP Morgan and Goldman Sachs announced bleak futures.

Let's analyze this note written by Goldman Equity Strategist David Kostin

The current valuation of the S&P 500 is lofty by almost any measure, both for the aggregate market as well as the median stock: (1) The P/E ratio; (2) the current P/E expansion cycle; (3) EV/Sales; (4) EV/EBITDA; (5) Free Cash Flow yield; (6) Price/Book as well as the ROE and P/B relationship; and compared with the levels of (6) inflation; (7) nominal 10-year Treasury yields; and (8) real interest rates. Furthermore, the cyclically-adjusted P/E ratio suggests the S&P 500 is currently 30% overvalued in terms of (9) Operating EPS and (10) about 45% overvalued using As Reported earnings.

Reflecting on our recent client visits and conversations, the biggest surprise is how many investors expect the forward P/E multiple to expand to 17x or 18x. For some reason, many market participants believe the P/E multiple has a long-term average of 15x and therefore expansion to 17-18x seems reasonable. But the common perception is wrong. The forward P/E ratio for the S&P 500 during the past 5-year, 10-year, and 35- year periods has averaged 13.2x, 14.1x, and 13.0x, respectively. At 15.9x, the current aggregate forward P/E multiple is high by historical standards.

Most investors are surprised to learn that since 1976 the S&P 500 P/E multiple has only exceeded 17x during the 1997-2000 Tech Bubble and a brief four-month period in 2003-04. Other than those two episodes, the US stock market has never traded at a P/E of 17x or above

P/E: Price to Earnings Ratio --> Share Price / Earnings Per Share. In the context of this note, Kostin is saying that many investors are expecting P/E ratios to grow to 17 - 18 X the current Earnings Per Share, which is very large considering that the ratio for the S&P 500 during the past 5, 10, and 15 year periods has never averaged higher then 14.5%. In fact, the long--term average is supposed to be of 15%. 

Bottom line: Kostin believes that investors have over estimated the growth of the share price which makes them believe the P/E ratio will be 17 - 18X the EPS instead of the current 14X. 

This chart depicts that the P/E ratios have only been this high in the great recession. 

The Current P/E Expansion Cycle Kostin mentions is the economic cycle the P/E goes through during one business cycle (expands then contracts). 

Like this Bear Market Valuation chart from Sitka Pacific Management shows, we should be expecting earnings valuations to contract. The chart shows the average 10 year P/E decline (approximately a cycle, in blue) with the current 10 year P/E decline in red. 

EV/Sales: Enterprise Value to Sales --> Ratio that compares the total value of the company (includes debt and cash) divided by the amount in annual sales. Essentially the total value of the company that is made for every $1 of the company's revenue.

EV/EBITDA: Enterprise Value to Earnings before Interest, Taxes, Depreciation, and Amortization. Another indicator of the value of the company. 

SBUX (Starbucks) Analysis

Hi All,

Happy New Year! One of my New Year's resolutions was to update/post to this blog more often. Lately, I've been busy with many different things. I started a program competition team in my school, so those practices have been taking up a lot of my time. I'm also working on another Android app, which is actually a secret, and my deadline for publishing is the second week of January. Lastly, my friend and I are working on an app/idea for the Verizon App Innovative Challenge.
Outside of programming, I finished my Eagle Scout Project, and now have to do the write up.

Another one of my other New Year's resolutions was to read an investing book every quarter,  starting off with Benjamin Graham's Intelligent Investor.
In the realm of business, I've become addicted to SeekingAlpha, and am reading 20+ articles a day (a lot, considering some are very long). I still read Business Insider, WSJ, the Economist, and Financial Times.

Starbucks

Disclaimer: I used to own shares in SBUX and do not plan on buying more shares within 72 hours of this article. I'm also a Starbucks Gold Member and am currently writing this at Starbucks.

Starbucks was one of the first companies I ever invested in, and it is currently the stock I have made the most profit from. We have a Starbucks in Princeton, and I love it; I visit it twice a month for hours at a time. The atmosphere is great for work, there's an abundant source of caffeine, and I get to interact with Princeton University students.
I actually bought the stock about a year and a half ago after I saw how the store was perpetually filled with people, and how it had solid financials that indicated constant growth. I bought seven shares at $45.
I sold it at the end of last month when it reached a height of $80 (November). During the year and a half of investment, Howard Schultz, CEO of Starbucks, expanded the number of stores both domestically and internationally, increased revenue by $1.6 billion, increased profit by $1.1 billion, and decreased Operating Income/Losses by $1.6 billion.

That's when I decided to sell the stock. At first I was reluctant; it is an investor's nature to want to hold onto something that is constantly giving them profit. But after two months of a stagnant price, it appeared Starbucks was at a Resistance Level. 

In this crude drawing of Starbuck's stock prices for the past 12 months, I try to identify six different things. 

1. The first is a support level at $53 from Jan 13th 2013 to March 13th 2013. 
2. I then draw a best fit linear line (in green) which touches the lows from March 13th 2013 to November 20th 2013. As depicted, the price did not drop below that line during the time. I drew that line to try to lineate or find the best fit line for the stock growth.
3. There are two blue best fit lines that each show Starbuck's high prices for six months. 
4. The black line from September 15th to the present depicts a possible support level at $77. 
5. The shorter red line from September 20th to November 15th portrays a resistance level at $82.
6. I also drew a line on the chart at the bottom of the page which serves as a basis for volume comparison over time. From Jan 13th to November 13th, the average volume is above that line at 4.8 million. Since then, the stock's volume went above 4.8 million was when the stock price dropped, which shows investors aren't lining up to buy like they were from Jan to November.

Primarily shown by the green best fit line is how Starbucks stock price should be at least $10 higher (~12.50%) then it is right now. From a chartist/technical view point, this stock has slowed down in growth, as its stock price is below the lowest point it should be based upon a best fit line that outlines the lowest prices for the stock.
The two blue best fit lines for Starbuck's high points show that Starbucks stock price should be $15 higher then it currently is.

EDIT: The above chart was taken in mid December of 2013. Today is Jan 6th and SBUX is still at $75 range, which shows how it is underperforming.

December Earning's Report: 

Revenue: Increased 13% to $3.8 billion
EPS: Increased 37% to $0.63 per share
Growth: Global store sales grew by 7% with 5% increase in traffic (8% growth in Americas and Asia Pacific)
Stores: 558 new stores this quarter

Fiscal Year 2013 Highlights
Net Revenues: Increased 12% to $14.9 billion
Operating Income: Increased 23% to $2.5 billion
EPS: Increased 26% to $2.26 per share
Stores: Opened 1701 new stores, total of 19,767 stores globally

I didn't just throw all those numbers out there to show that I can do research; I put them out there to show Starbuck's unsustainable growth levels. For Starbuck's to beat estimated revenue growth of 13%, it would need to earn $4.294 billion in the next Fiscal Year. That's 4 X more then Buffalo Wild Wing (BWLD), Papa John's (PZZA), Dominoes Pizza (DPZ), and Chipoltle (CMG) earn in revenue per year.

Aside from unsustainable growth levels, Starbuck's stock price is also becoming very expensive. Investors buy stocks in hope that the company grows and then other investors buy stocks, increasing the price. But, the more expensive the stock is, the lower the number of shares an investor can buy. And with high share prices comes smaller percentage increases which detracts/de-incentivizes investors.

Bottom Line: Starbucks has grown phenomenally over the past few quarters, but it has reached a point where it will no longer be able to sustain it's growth and will miss earning's estimates. 

What I See For Christmas

Hi Everyone,

Sorry for the delay in posting. I had spent three to four hours writing this post two weeks ago, but I accidentally deleted it from Blogger. I'm rewriting it from memory as there is no trace of the post; it's not in Google Cache or accessible through recent links. I now vow to always export my work to my solid state drive.
I had a programming competition last Saturday, so all my free time went to training. I'm also debating about making a Computer Science blog where I'd post my solutions to online programming problems. My code will be better commented and more readable then the other solutions posted online.

Bear Case: 

In my original post, I had described a red and black Christmas this year, and I wasn't foreshadowing my Christmas presents (I haven't been that naughty). I was talking about companies' earnings reports. I had come to that dismal conclusion from observing interest rate trends, unemployment rate numbers, reading reports about the FOMC, and trying to predict the role the Federal Government shut down would have on consumer spending.

Interest Rates: Federal Reserve Chairman Ben Bernanke enacted the agressive Quantitive Easing program a couple years ago to encourage consumer and business spending. Bernanke's plan called for the US Federal Reserve's purchase of $85 billion in US Bonds and Treasuries per month in order to keep interest rates low. Low interest rates encourage consumers to borrow to spend money and invest in businesses, and allows businesses to take loans to hire more workers and invest in other businesses. The interest rates, currently between 0% and 0.25%, have caused consumer and business spending to be at all time highs.
Consumers are spending more causing companies to get more revenue, and beat analyst opinions in their earnings estimates. This has caused stock prices to reach all time highs; beating estimates shows the company is profitable. As soon as the QE program declines/ends, the interest rates go up, spending comes down, and earnings go down with it. In a recent blog post, I also mentioned that Investor Credit/Margin trading (borrowing money to invest in stocks) was at an all time high.

The low interest rates have caused consumers to spend more money, causing businesses to post increases in revenue. The attractiveness of business growth invited consumers to invest money in a company through the stock market. As more people continue to invest, stock market prices increase. People realize the stock market is profitable, and borrow money so they can invest in the expensive stocks, jumping on the profit bandwagon. 

When interest rates increase, it becomes more expensive for consumers to borrow money to invest in stocks. This will cause them to sell of their investments, so that the increased interest rate doesn't kill their profits. Selling stocks will decrease stock prices, and cause other investors to sell their stocks.

The chart above shows that large investor debt/credit foreshadows a stock market crash. Borrowing (red) increases when stock prices (blue) increase. When the market begins to go down, borrowers rush to sell their holdings, as shown by the positive credit (green) that occurs right after a stock market crash.

Dismal Earnings Season: The US Federal Government shut down for 16 days in the beginning of October because a new budget for the October 2013 - October 2014 Fiscal Year had not been passed by Congress. The  2 Million + Federal Government employees went without pay and the Federal Government went for two weeks without spending any money (except for essentials like Food Stamps). In total, this was expected to cause the GDP to decrease by 0.7%. I also expected consumers to save their money in anticipation of the Government going over the National Debt Ceiling. With a government that spends $60 billion daily and only collects $30 billion daily, it is no surprise that we're reaching the new debt ceiling that Congress raised two years ago. If the US hits the debt ceiling, it will default on some of its payments ($30 billion to spend daily), either interest/yields on bonds, or government programs like Social Security and Benefits. Defaulting on the bond yields would cause the US debt rating to be increased, and cause investors to lose trust in its bonds. In the future, this the US would need to increase its bond yields in order to remain attractive to investors. 

I was expecting businesses and consumers to decrease their spending (Consumer Confidence Index decreased to 71 from 85 last month), causing a dismal earnings season as company revenue would decline.

I was also expecting businesses and consumers to begin saving their money for a future debt ceiling and government furlough/budget crisis that will arise early next year when the federal government begins to get close to the new debt ceiling.

Stock Market Overvalued: The increase in stock prices for the past four years can only be attributed to an increase in spending because of artificially low interest rates, not actual economic growth. 

This chart of the Price to Earnings Ratio show stocks have are expensive relative to 10 year average earnings. The ratio, popularized by Robert Shiller, is about 24, which is much higher then the long-term average of 16. Looking at it's history, this index is at it's highest during recessions. The 1929 high is the same time as the stock market crash that caused the Great Depression. The highs in 1966 were caused by the Cold War/Vietnam fear, in which spending crashed because of fear of getting nuked. The 2000 high was preceded by the stock market crash, and was also high in 2008. 

This chart created by the New York Stock Exchange compares the NYSE Margin Debt (money borrowed to pay for stocks) and the S&P 500 Growth shows that the gap is largest right before a recession. Right now, it's at a 150% difference, around the same difference as it was in October of 2007, two months before the stock market crash.

Simple addition shows that 48% of companies have reported actual sales below  estimated cells, which is lower then the average over the past four years (59% beat estimations). 

Earnings growth percentages are at high rates, and can not be sustained for that long. Once the growth begins to slow down, investors begin selling because the company is becoming less profitable.