South Florida Hedge Fund Managers

Company Overview: Owens-Illinois, Inc., through its subsidiaries, manufactures and sells glass containers primarily in Europe, North America, South America, and the Asia Pacific. It produces glass containers for beer, ready-to-drink low alcohol refreshers, spirits, wine, food, tea, juice, and pharmaceuticals. The company also produces glass containers for soft drinks and other non-alcoholic beverages. Owens-Illinois sells its products directly, as well as through distributors to brewers, wine vintners, distillers, and food producers.

Prognosis: The company reported earnings after the bell Wednesday and missed estimates by a few pennies. This miss was caused by slow growth in its North American market. Emerging market sales were robust. The stock dropped almost ten percent on Thursday and its stock is down roughly 30% over the last three months on concerns for European sales given their recent troubles and on earnings estimates that have come down over worries about the Euro as well as slow North American growth.

Valuation: OI is now selling for approximately 8.5 times this year’s consensus earnings and 7.5 times next year’s projected earnings. It is selling at less than .7 times revenue and generates substantial cash flow.

Catalysts: There are several factors that we believe should provide support for a higher stock price in the near and medium term:
1. The Euro has stabilized and European growth seems to be doing better than the worst case scenarios
2. Should benefit by the long term growth in emerging markets
3. Cost saving potential still exist in integrating its European operations and implementing global procurement policies
4. Asbestos claims should continue to fall in the future as the average age of claimants rise

Recommendation(s): Given its low valuation, improving earnings and strong cash flow; we feel stock is currently undervalued. In our opinion, the stock should be trading at a more reasonable rate of approximately 11-12 times next year’s projected earnings of around $3.70. Our target Price is $41-$45, up from the current price of $26.75.

Great piece in the NY Times business section today on how large hedge funds are getting the vast majority of new funds, even if smaller funds consistently outperform large funds on a performance basis.

http://www.breakingviews.com/2010/07/29/hedge%20funds.aspx?sg=nytimes

New Device Around the Corner (Scotia Capital) Event  

We believe RIM's new touchscreen BlackBerry 9800 will be released in the
very near future. 

Implications
New device set to deliver compelling browsing experience: The main knock
against BlackBerries has been their poor browsing experience. With the new
BlackBerry browser we believe RIM will not only close the gap with
competitors but perhaps even leap ahead. 

Should act as catalyst for adoption and share price: We expect the new
device to have a noticeably positive impact on BlackBerry adoption not only
amongst consumers but also potentially with the Enterprise market 

BB6 Cometh.Perhaps (Morgan Stanley) Sooner than We Expectedeth 

AT&T and RIM plan Aug 3 event, possible BB6 launch( BAC/MER)

The following was excerpted from an article that appeared on SeekingAlpha.com for their “One Stock” feature on Tuesday, July 27th.

1) If you could only hold one stock position in your portfolio (long or short), what would it be? If I only had one stock to hold through end of year it would be to have a short position in Salesforce (CRM).

2) Tell us more about the company behind the stock. Salesforce.com (CRM), inc. provides customer and collaboration relationship management (CRM) services to businesses and industries worldwide. The company also offers a technology platform for customers and developers to build and run business applications. Its salesforce CRM services enable customers and subscribers to systematically record, store, analyze, share, and act upon business data and to enable businesses manage customer accounts, track sales leads, evaluate marketing campaigns, and provide post-sales service. The company markets sales force automation features of its application services under Sales Cloud brand name; and customer service and support automation features under the Service Cloud brand name.

3) How does your choice reflect your (or your fund’s) investment approach? Tell us more about your approach and goals. We run a boutique long/short hedge fund based in Miami. We employ a top down contrarian strategy. Our longs consist primarily of stocks selling at low end of their historical valuation based on their five year average of Price/Earnings, Price/Sales, and Price/Cash Flow, have strong management, some visible catalysts, and that occupy sectors that have underperformed the market in the previous six to twelve months. Our shorts consists of stocks that come from sectors have been market leaders for the last six to twelve months, appear to vastly overvalued when compared to their historical valuation metrics, have heavy insider selling and/or seem to driven by their “story” rather than their true business prospects. Our goal as a fund is provide superior returns in flat, choppy, or bear markets while reducing overall portfolio volatility. We employ option strategies to capture additional premiums and/or hedge positions.

4) Can you talk about the industry/sector? How much is your selection based on the company’s industry, as opposed to a pure bottom-up pick? The information technology sector is in a good position in our view as it operates in a space that is primarily driven by the corporate sector. Corporate balance sheets currently have one of their strongest cash positions in history, and companies are focusing on productivity growth given the uncertainty of sustained economic growth, an increasing amount of new regulation, and unknowns around the future course of taxes and labor costs. That being said, we still believe from a bottom up perspective CRM is vastly overvalued for a variety of reasons.

5) Describe the company’s competitive environment. How is this company positioned with regard to competitors? The company is the undisputed market leader in the customer relationship management software space. However, given the growth of Cloud Computing and the 80% gross margins available in this space it can count on deep pocketed competitors(Oracle, Microsoft, SAP etc…) offering compelling alternatives at some point in the future. I am also not impressed with the product itself. I spent eight years at a technical director of software development at a Fortune 100 company. None of my contacts from my previous career that have deployed the main CRM software are impressed with its ease of use, technical architecture or overall performance. The most common feedback I have received on the software is that is adequate, but a somewhat “clunky” tool.

6) How does the stock’s valuation compare to its competitors? Probably the closest comparison in cloud computing is VM Ware (VMW), which I think is very overvalued itself but looks like an absolute steal when stacked up against CRM (From Yahoo Finance)
CRM VMW
PEG 3.12 2.48
Trailing P/E 162 155
Forward P/E 66 46
Projected 2010 Revenue Growth 20% 37%
Price to Sales 9 14

7) Describe current sentiment on the stock. Does your view differ from the consensus?
The sentiment on the stock could not be more positive. The stock has more than doubled in last year and more than quadrupled since its recent low in late 2008. It is the S in Jim Cramer’s CANDIES which he hypes on a weekly basis. Every week there is another big story or a hundred on the wondrous growth of “Cloud Computing”. Saleforces’ CEO is being profiled in Fortune and other magazines on a regular basis. Sentiment has not been this positive on a tech stock since the Internet Boom of the late 90s.
Does the company’s management play a role in your selection? If so, how?
Yes, management does play an important part of our evaluation. First, they are selling stock incessantly. CRM is consistently on the Barron’s weekly top 20 companies with heavy insider selling. They also lost a key executive to Hewlett Packard recently. Finally, the CEO is famously prone to hyperbole in interviews and events. One recent interview spent quite a bit of time talking about his Zen like management philosophy, swimming with dolphins and how he works one week a month out of his house in Hawaii. Personally, I like the CEOs for my long picks to be from the old school; nondescript, blunt and totally focused on running the business.

9) What catalysts, near-term or long-term, could move the stock significantly?
1) Any quarterly earnings or revenue number that just meet or miss estimates would seriously crater the stock immediately.
2) Tepid guidance during an earnings conference call.
3) Any market pullback will result in a significant selloff of high beta stocks like CRM.
4) The pending increase in the capital gains tax rate in 2011 could facilitate selling towards the later part of year given the large run up in stock over last eighteen months.
5) The “Cloud Computing” story will stop driving the stock incessantly upward as investors focus on several red flags including:
A. Significant, consistent, and sustained insider selling
B. Operating cash flow that has grown just over 30% during the last two completed fiscal years during which time net income has grown over 400%
C. GAAP earnings of only 13 cents/share in last reporting quarter
D. Consensus earnings estimates for this year and for 2011 have come down over last ninety days

10) What could go wrong with your pick? As Keynes famously once said “The market can stay irrational longer than you can stay solvent”. Momentum stocks almost always run up much farther than they should. Given that, I am going to protect the short position initiated at close of day Friday at price of $99.77 with one Jan 11 125 call for $3 for every 100 shares shorted.

Posted July 20, 2010 |  Richard Robb

The SEC couldn’t catch Bernie Madoff, and the combined resources of BP and the U.S. government needed three months to plug the Gulf oil leak. So it should come as no surprise that financial regulators frequently get it wrong when they try to figure out how much capital that complex, modern banks require. As “Risk Lies in the Risk-Based Capital Approach of Basel III” [American Banker, July 15] observes, several banks that appeared to be best capitalized under the Basel rules were the first to be bailed out.

The article is surely correct to question whether refinements to Basel II can be relied on to prevent another crisis. Any set of fixed rules for measuring capital adequacy will fail to capture a great deal of risk, and rules will never match bankers’ ingenuity for engaging in regulatory arbitrage. Basel II, which has been adopted in most developed countries other than the U.S., improves on Basel I by plugging loopholes, but its very complexity makes the whole enterprise harder for managers, shareholders, creditors, rating agencies, regulators and politicians to follow.

Considering the limitations of mechanical rules, the article’s advice that “effective capital rules would have to [make sure] … risk isn’t pawned off on entities outside the system” seems backward. Transferring credit risk to insurance companies, hedge funds and anyone else who wants it will free the banking system as a whole from dependence on shaky formulas that no one fully trusts.

The article’s main example considers Bank A that buys a corporate bond, then buys credit protection from Bank B, which in turn buys credit protection from an insurance company. Bank A’s capital charge is reduced by 80% under Basel I while Bank B’s capital charge is minuscule. The total capital the two banks together have to hold is a fraction of the amount required if Bank A simply held the bond. (The calculation for Bank B in the article mixes the Basel I and Basel II calculations and would not apply to any particular bank. However, in either regime, it is true that Bank B would not have to hold much capital against a matched pair of credit default swaps assuming it buys the protection from a highly rated counterparty.)

Should we be troubled by this outcome? The insurance company at the end of the chain bears the ultimate credit risk. Assuming Bank B prudently manages its counterparty relationship with the insurance company, the banking system no longer needs to worry about the bond issuer’s credit. As a result, the two banks should have to hold less capital to support their exposure to the bond.

Let’s make this example more realistic to show how “pawning off” can create value for all the participants in the chain. Bank B doesn’t add anything to the analysis, so assume Bank A directly faces the nonbank credit protection seller. Make the credit protection seller a hedge fund. Since the bank would have no particular reason to buy a bond as in the original example, assume instead that the borrower is a long-term client of Bank A seeking a term loan in excess of its existing credit lines.

Then the bank can buy credit protection from the hedge fund on the amount of the loan above the existing credit line. The client gets the loan it wants, the bank makes a profit from intermediating and keeps its customer satisfied, and the hedge fund earns a credit spread if it bets correctly and loses otherwise.

Admittedly, the hedge fund is unregulated, but so what? What better place to put credit risk than in a large number of independent funds, backed by wealthy individuals and institutional investors whose profits and losses are of concern only to themselves and not to the public? The hedge fund would usually post cash collateral to the bank to guarantee its own performance. The amount of capital the bank has to hold against the loan is proportionately reduced — this is fair, as the bank has reduced credit exposure to the counterparty by purchasing credit protection.

Most important, this approach works whether or not regulators know the right model for estimating the loan’s probability of default, loss given default or correlation of default to the business cycle. If the borrower defaults, a sovereign wealth fund that backs the hedge fund might grow slightly less wealthy. The bank soldiers on unharmed. Using nonbank investors to absorb credit exposure can start to pose systemic risk once the hedge funds grow “too big to fail.” That is far from a concern now and one the SEC can easily control.

Finally, it is worth pointing out that the Basel II rules are not quite as foolish as the article makes them out to be. It is simply not true that, “As is currently standard, government debt would be considered riskless.” Under Basel II’s Standardized Approach, sovereign risk weights depend on the issuer’s credit rating. Triple-B-rated sovereign debt, for example, attracts a 50% risk weight and double-B-plus is weighted 100%. Under Basel II’s Internal Ratings Based Approach, banks must compute the sovereign default probability and hold appropriate capital as with any other asset.

As the article points out, Basel residential mortgages have a risk weight of 35% under Basel II (at least under the Standardized Approach); on the surface, mortgage lending may appear unworthy of favorable treatment given its role in the crisis. However, this weight applies only to mortgages originated in “accordance with strict prudential criteria,” and nothing in recent experience outside the U.S. suggests that 35% is too low. A risk weight of 35% and capital ratio of 10% implies that 3.5% of capital is held to back a home mortgage loan. Assuming 100 basis points of spread over the cost of funding and a five-year average life, this amount of capital will cushion a 1.7% annual loss rate. Even in the U.K. in 2009, the increase in cumulative losses in Moody’s U.K. Prime Index was only 6 basis points.

Richard Robb is the chief executive of Christofferson, Robb & Co., an investment management firm, and professor of professional practice at Columbia University’s School of International and Public Affairs

Google Is The Barbarian At The Gate!

Recently we switched our email platform to Google Premier Apps. We still have Microsoft Outlook Exchange & Research In Motion’s Blackberry Enterprise Server. Without going into too many specifics on what we actually did, I must say that Google is going to put significant pressure on Microsoft’s Office Suite & maybe Research In Motion’s Blackberry Enterprise Server in the future.

The exact day this is going to happen, I am not sure of but I can tell you it is probably sooner than even I think. I must admit that cloud computing and remote storage of data is a nice compliment for people that have large quantities of emails, documents, photos, videos, contacts & more. Take my company for instance, I have roughly 50,000 emails and it takes my computer about an hour to search through those emails to find what I am looking for.

With the power of Google’s search capabilities and cloud computing I can find what I am looking for through my Blackberry Storm in seconds by combining the technologies to get RIMM’s push and Google’s cloud technology. That is a leap over what Microsoft and Research In Motion have been offering. The sticking point comes when I try to have the same level of security that I have with RIMM & MSFT. Google has figured out how to offer this service via outsourcing their algorithms but at this point it is very expensive and cost prohibitive for most small and medium sized businesses.

For now having to upload data to Google’s Servers and use cloud computing does not offer the right combination for control over your company’s data and IT security. If RIMM is going to stay competitive in the business market they need to get moving fast and find a way to incorporate cloud computing as an option within their current IT infrastructure. Maybe if they did this, they would be admitting defeat.

Google is a nice long at these levels and they are going to provide location services to Smartphones beyond the Android suite of hardware. RIMM needs to start teaming up with Google because I see a complimentary relationship between the two devices. They are also going to provide an Office Suite using online hosted programs and cloud computing. Google is offering a significant amount of productivity products and advertising while you are working on their web based word processors. 

The whole China problem and difficult economy have provide an opportunity to pick up a $600.00 stock at a discount.  Buy Google here and you can not go wrong.  It may go lower in the short-term but you will be okay if you dollar cost average in.  Google is going to provide significant competition to both Apple & Research In Motion.

While it has been rumored that RIMM is a take over candidate for Microsoft, I think that Microsoft is in a really bad situation with regards to Smartphones and desktop software.  My advice to Microsoft is save money and give investors cash dividends like a true value company they are.  Do not short RIMM go long Apple and go long Google for a good play on Smartphones. 

If you would like to add or correct what I am saying, please make you comments below and remember, South Florida Hedge Fund Managers – Think Local & Invest Global!

Company Overview: Chicago Bridge & Iron Company N.V. (CB&I) provides engineering, procurement, and construction (EPC) solutions, as well as process technologies for the energy infrastructure projects. It primarily focuses on projects related to oil and gas companies. CB&I operates in approximately 70 countries worldwide, principally in the United States, the Netherlands, Canada, the United Kingdom, the Pacific Rim, South America, and the Middle East. The company was founded in 1889 and is based in The Hague, the Netherlands.

Prognosis: The stock is selling in the middle of its 52 week range but is down 2/3’s from its high of early 2008. Consensus earnings for the quarter, the year, and 2011 have slowly been creeping up in the last ninety days. It has beat earnings estimates three of the last four quarters.

Valuation: CBI is selling for approximately 11 times this year’s consensus earnings and 9.5 times next year’s projected earnings. It is selling at .5 times revenue and less than 7 times cash flow. It also has approximately $2/share of net cash on the balance sheet.

Catalysts: There are several factors that we believe should provide support for a higher stock price in the near and medium term:

1. Restructuring efforts should continue to improve cost structure
2. 50% of its earnings come from more stable sources that traditional construction and engineering
3. Trading at discount to peers and has rising backlog
4. Play on the increasing investment needed for Energy Infrastructure
5. Well diversified and placed well to take advantage of improving worldwide growth outlook. 75% of 7.2 Billion backlog at end of 2009 was outside of United States

Recommendation(s): Given its improving fundamentals, low valuation and strong cash flow; we feel that the company is currently undervalued. In our opinion, the stock should be trading at a more reasonable rate of approximately 12-13 times next year’s projected earnings of around $2.21. Our target Price is $24-$27, up from the current price of $20.89.

Zivko Bajevski

UCITS funds accounted for assets of $52.3 Billion, according to a report by Eurekahedge from earlier this year. With an increased interest and demand for UCITS products by investors, many established managers such as Brevan Howard, Cheyne Capital, MAN, have already launched heir own UCITS funds.

UCITS (Undertakings for Collective Investment in Transferable Securities) is the European harmonized regulator-friendly fund products which can be sold on a cross border basis within the EU based on its authorization one member state. They also enjoy a high level of recognition across Asia and Latin America.

What’s in it for the investor?

Liquidity. UCITS funds are required to be liquid which in practice means they must be able to meet redemption requirements on at least bi-monthly basis. In order to meet the liquidity requirement, the underlying investments in UCITS funds must also be liquid. In practice this is achieved by investing only in the eligible assets (transferable securities, money market instruments, financial derivative instruments, open-ended collective investment schemes, financial indices), and following the “5/10/40” diversification rule. Redemptions can be limited to 10% of the NAV of the fund for monthly liquidity or 20% for bi-monthly liquidity.

Risk Framework. UCITS funds are viewed as having a very comprehensive risk-control framework. There are detailed investment and borrowing limits to ensure that investment and counterparty risk is well diversified. All funds must draft a “Risk management Process” statement which sets out the types of derivatives that the fund will use, the risks associated with the derivatives and how those risks are managed and controlled.
UCITS also require a comprehensive governance framework which includes independent directors, quarterly board meetings and conducting officers responsible for the management of the fund. The funds must have a custodian, administrator and an independent auditor. The assets held on behalf of the UCITS are separated from the assets of the custodian which means there is no counterparty risk to the custodian.. All parties to the fund, including the investment manager and promoter, must be approved by the home regulator and both the fund itself and the parties to the fund are a subject to an ongoing supervision by the regulator. Funds must also publish a prospectus which contains detailed risk warnings.

What’s in it for the fund manager?

Increased distribution. Due to the increased transparency and regulation, UCITS funds have been able to attract a variety of investors globally. From the investor’s perspective, the required due diligence on a UCITS fund is less than for an unregulated fund and the information on the fund is more publicly available and easier for investors to find.

Examples of Distribution Opportunities for UCITS not available to unregulated funds:

 Retail distribution,
 Pensions and institutional investors. Although most pension plans and large institutional investors can allocate investment to unregulated funds, normally they are limited to a certain percentage of AUM (ex. 10%). For UCITS funds there is no imitation to how much a pension plan or insurance company can invest into.
 Wealth Management platforms. Many of the wealth management and private banking platforms require that a fund be registered (in EU especially).
 Funds of Funds. A number of UCITS Funds of Funds have been established recently. Firms such as Credit Suisse, Natixis, Haircourt Investment Consulting, Permal, are just several of the many UCITS HFOF launched in the last few months.

The following are excerpts from Simplified Asset Management’s second quarter investor letter:

Quarterly Q & A

Q: What is your take on current market valuations?
A: Based on forward P/E ratios, the market looks quite compelling at current levels. Unfortunately, we don’t think current earnings estimates are likely to be realized given the weakening trajectory of global economic growth. Instead, earnings estimates are likely to spend the second half of the year being steadily revised downward. Credit markets are also likely to play a larger role in determining fair value until the situations in Europe, the housing market, and commercial real estate improve.
Q: Where do you think there is value in the market given your take on valuations?
A: Despite our concerns about the domestic economy and credit markets, we see pockets of promising value within the equity market. We are sticking to those equities with pristine balance sheets, rock solid business models, reasonable valuations, and solid dividend yields. Johnson and Johnson, AT&T, and Microsoft all fit this profile and are examples of companies that we initiated positions in during the quarter. Given the array of risks facing equity investors in today’s markets, an orientation towards high quality firms is likely warranted.
Q: What are you monitoring as far as potential macro-level risks in the last half of the year?
A: There continues to be a wide range of potential problems that we are keeping an eye on across the global macro-economy. The obvious one given what took place in the second quarter is the unfolding sovereign debt crisis and associated austerity measures in Europe. We are also concerned about the likelihood of slowing global growth, the evolving challenges inherent in structurally imbalanced State budgets, the lack of credit availability (particularly for small businesses), risks of recession in China, and anemic job growth in the U.S. and across Europe.
Q: Let’s start with Europe. What concerns you there?
A: Obviously Greece’s recent sovereign debt crisis brought sovereign debt risks to the forefront of investors’ minds during the second quarter. Banks and governments, especially those in France and Germany, are highly invested in the sovereign debt of other European countries (See Chart 1). Given the inter-dependent nature of this type of debt structure, the probability of wide-spread contagion is quite high if sovereign debt defaults occur. The resulting “domino-effect” would likely have broadly negative implications for the financial system across Europe, and, as a result, could be a significant risk to global growth as a whole.
Second, we’re concerned that the austerity measures that European governments are rapidly undertaking in Greece, Spain, Italy, etc…. have the potential to significantly reduce European growth levels in the near and medium term, even though these changes are the right thing to do over the long term. This is especially true for areas like pension reform and reductions of public sector employment. Spending cuts in these areas are likely to force many European countries into a “double-dip” recession and will have negative consequences for countries that export heavily to Europe, including the United States and China.
Finally, we are very much concerned that Spain could be the next domino to fall in the evolving sovereign debt story, perhaps as early as the end of this summer. Spain is struggling with 20%+ unemployment and an unsold housing inventory that is six times greater per capita than our substantial housing crisis in the United States. The recently enacted austerity measures are likely to further weaken already anemic growth, leading to another economic contraction within the next twelve months, and quite possibly toppling the current government. Given this scenario, it is not difficult to envision that Spain will have to go hat in hand to the European Central Bank (ECB) and greater European community for assistance sooner rather than later. Spain’s Credit Default Swap rates, the technical indicator most commonly used to gauge country-specific default risk, continue to rise, indicating that the probability of this event occurring is also rising.

Chart 1 – The Interdependent structure of European Sovereign Debt:

Q: Let’s move on to your next concern. What are your worries about global growth levels?
A: In May, it became apparent that growth in the global economy was beginning to decelerate. From the obvious challenges to growth associated with European austerity measures and fallout from the sovereign debt crisis, to China’s policy-based restrictions on real-estate associated lending, poor U.S. retail sales in May, as well as continued anemic job growth throughout the developed world; global growth is slowing from the first half of 2010. Two of the leading growth indicators we are watching closely are the Economic Cycle Research Institute’s (ECRI) weekly Index growth report and the Baltic Dry Index. The ECRI (See chart 2) has seen a marked contraction over the last few months and now stands at -7.7%. Historically, readings at this level are strong indicators that recession is fast approaching.

Economic Indicators are turning down

The other index that we are monitoring and are very concerned about is the Baltic Exchange Dry Index (BDI) report which has dropped over 40% over the past 6-8 weeks (See chart 3). This index measures shipping rates for shipping dry goods — primarily dry bulk commodities demand from developing nations. Given this substantial drop in activity, we are worried that the demand from China that has been such a strong driver of global growth in recent years may be substantially waning.
Given these forward-looking indicators, we are hoping that worldwide growth moderates, but does not dip back into recession in the second half of 2010. If the global economy is able to avoid outright recession, we think that markets are fairly valued at current levels. If, however, global growth slips into negative territory, markets are likely to experience another material and painful move to the downside.

Baltic Dry Index

Q: Okay, let’s move onto the challenges faced by the States in balancing their budgets.
A: Actually this is a major concern for us. It is an area we spent quite a bit of time exploring in our last quarterly Q&A. In recent weeks, most states were mandated to submit budgets for their next fiscal year (which begins for most on July 1st). As discussed in the previous quarterly report, the drastic measures required to balance state budgets will result in tax increases, reductions in services, furloughs, and wide-ranging job losses in the state government sector. As of the end of June, best estimates quantify expected resulting job losses in the several hundred thousand range. When combined with job losses associated with the completion of the 2010 census, which employed approximately 600,000 temporary workers, it is clear that we face severe headwinds for job growth for the rest of the year. Given the continued weakness of state tax receipts, additional mandates included in the Federal stimulus programs, and the lack of structural change within most state budgets (i.e. addressing state employee pension and healthcare costs), this will likely be the first of many rounds of spending cuts and tax increases from the states.

Q: Let’s move on to China. What is your main concern other than the potential impact on trade of a slowdown in global growth?
A: We are primarily concerned about the scale of their property bubble and its likely impact to their growth projections as well as any impacts to the soundness of their banking system. A large portion of their enormous stimulus program found its way into the property market, both commercial and residential. There are cities where office vacancy rates exceed 40% and yet skyscrapers are still being built. The residential market might be worse. Year over year gains have been averaging double digits for several years and in a number of cities the average price of a condo is over 25 times the average resident’s median income. Imagine Chicago, if the average price of a condo was over 1.3mm. In response to the dangers associated with a runaway real-estate bubble, the Chinese government has introduced a series of measures targeted at curbing real estate related speculation and lending, though they may already be too late given the rate and duration of recent growth. As most of the developed world can attest to, property-related bubbles have severe consequences for economic growth, consumer confidence, and the stability of the domestic and international banking system. The implications for China could be particularly intense, as most Chinese banks have yet to develop mature credit risk analysis/management capabilities, therefore making it extremely difficult to quantify the potential risks associated with a downturn in an asset class as large as consumer and commercial property. Similar to the United States, a material correction in Chinese real estate values will have wide ranging implications for their federal and state budgets, as nearly 1/3 of all government revenues come from land sales.
Q: Transitioning to domestic issues, how is the lack of credit availability impacting the economy?
A: Two ways. From a consumer side, the reduction of credit (see below) and the need to shore up consumer balance sheets has impacted consumer spending. It is likely that consumer spending would be down even more, if the impact of “strategic defaults” in residential housing (aka, “Jingle Mail”) was included. On the small business side, the lack of credit availability is negatively impacting the ability of small businesses to expand and hire. Lack of access to credit has consistently been cited as the first or second most significant concern for small businesses in surveys for over a year now (lack of sales being the other significant concern). Unfortunately, given the major banks need to strengthen their balance sheets, the cost/restriction of credit incorporated into recently passed and proposed legislation, and lack of administration focus on addressing lending to the small business community, we see little hope of this improving in the near future.

U.S. Consumer Credit Growth

Q: The last concern you listed was related to domestic job growth. Would you like to expand on that?
A: Sure. Job growth at this point in the recovery has been disappointing by any measurement. Historically, anytime you have a sharp and sustained contraction in economic growth like we experienced in late 2008/early 2009, it is almost always followed by a corresponding large upturn in economic growth thereafter. A perfect example is the recovery following the 1980-82 recession, where realized quarterly growth rates ranged from 7%-9% for 4-5 quarters. The recent bounce back from this recession has been lackluster to say the least. Over the last three quarters we have averaged ~ 3% growth and it appears that growth in the second half will likely struggle to match even these modest levels.
There are many reasons for this. This recession was triggered by a credit crisis, which typically takes longer to recover from than one induced by inflation or excess inventory buildup. In addition, the policy responses so far have failed to achieve their objectives and have in a number of cases have had the opposite of their intended effects. In fact, the uncertainty created by recent and proposed legislation has had a direct (and negative) impact on private sector job growth. In addition, small businesses have been negatively impacted by the lack of availability of credit; which we have done a poor job of addressing so far. The situation with the State budgets also does not help matters. Finally, consumer deleveraging is likely to remain a challenge to growth for a sustained period of time as consumers rebuild their balance sheets. This will have a direct impact on consumer spending and job growth. All in all, this “jobless recovery” will likely be with us for quite some time with broad implications for consumer spending, job growth, and the overall economy.

U.S. Job Growth

Q: Sounds like you have a long list of major “Watch-Outs” right now. Do you see any positives for the market right now?
A: There are a few. As previously discussed, we think that current market valuations are reasonable and even compelling if earnings estimates hold up for the rest of this year and into 2011. We are also impressed that countries have not slipped into the type of wide-ranging protectionism that often follows an economic downturn of this magnitude. Longer term, the development of China, India, Brazil, and even Africa are going to be positive for worldwide economic growth, trade, and global stability. We also think that government expansion will likely wane after the mid-term elections later this year. Gridlock is usually positive for markets, and a major political course correction in November is likely. As a result, we are hopeful that such a change would lead to a more thoughtful focus on the economy and job creation, as well as making meaningful progress on reducing current deficit levels.
On a personal note, being based in Miami, having Lebron James, Dwayne Wade, and Chris Bosh on the same team should make for an extremely interesting kickoff to the basketball season this fall…

Thanks.

Bonds up on purchases / stocks up on hopes

A large inflow into money market funds in early July prompted the media to declare that investors are flocking to safety, as if a big switch has taken place. But this ignores the much bigger trend: investors have pulled more than $1 Trillion from money market funds in just over a year. This money is going into bonds. Meanwhile, investors have taken money out of U.S. stock mutual fund and ETFs, raising the question of where the real support for stocks can come from.

We all tend to emphasize recent events over those that took place at earlier times. For an extreme case of this common human bias, look no further than the reaction over news that inflows into money market funds in the first week of July were at their highest level in 18 months.

The Financial Times title of the story was “Big inflows into money market funds as double-dip fears rise” and it went on to say that this took place “amid fears that a double-dip recession… could send financial markets tumbling.” It also suggested that “investors are worried about the risk of another slide in share prices” prompted by a long list of other concerns, and quotes a banker who describes that the move into money markets is all “about capital preservation.”

All this might give the impression that investors have been flocking to money market funds in search of safety. This would not be accurate: much to the contrary, investors have taken more than $1Tn from money market funds since the beginning of 2009. The inflow reported for early July barely made a dent on the relentless exodus from cash-proxy funds that offer yields barely different than zero.

As monetary policy drove short-term interest rates to negligible levels, investors made a massive shift toward longer maturities and into higher-yielding bonds and bond funds, thus keeping U.S. interest rates at stunningly low levels.

Cumulative flows into Mutual Funds and ETFs, 2009-2010 ($mm)

Source: Investment Company Institute, Path Financial LLC

Remarkably, investors also took money out of US equity mutual funds and equity ETFs even as stocks had one of their best 12-month periods in history. There was some inflow into funds that invest in non-US stocks, but bond funds got virtually all the money that fled from money market funds.

The impact of this wall of money into bonds has been undeniable: interest rates for longer-term debt fell to exceedingly low levels, even in the face of mounting fiscal concerns that would have otherwise sent interest rates soaring.

The mystery is why, with so little money going into equities, they managed to stage such a strong rally. The Federal Reserve Flow of Funds tables do not show any significant change of ownership of corporate equities that could explain this. Demand seems to have been consistently distributed and little changed among different ownership categories throughout 2009 and 2010. Unlike bonds, where demand was crucial to lift prices, equities seem to have gone up only on expectations.

The question for the investment manager now is whether this state of affairs is sustainable. The answer seems to be yes.

Money is unlikely to flow back into money market funds unless the Fed tightens rates, but this is highly improbable since signs of inflation are nowhere to be found. Investors could run away from bonds if people start to think that the US will have trouble repaying its debt, but this seems also unlikely in the near future. For the time being, it seems, the money river will continue to flow into bonds.

Foreign holders – owners of about half of all US Treasury debt – are unlikely to dump it as long as the US dollar remains strong, especially against the euro. There seems to be little reason to see a change of sentiment there, as the austerity pledge that Europeans just made is unlikely to create much internal growth. Large domestic investors in US Treasuries – households and local and state governments – don’t seem ready to reduce holdings either, as long as foreigners don’t bail out and the Fed doesn’t change its policy.

Everything suggests that the breakdown of asset demand will not change much in the next few months. Investors don’t seem to find any compelling reasons to stop buying bonds – or to commit much money to stocks, leaving them to rise on hopes alone.

Snapdragon had over 15 new designs launched in the quarter and Qualcomm with its integrated Snapdragon solution is benefiting from the strength in Android with over 40 commercially launched Android devices. Snapdragon is currently available in high-end smartphones including HTC’s Incredible and EVO, Sony Ericsson’s Xperia X10 and Lenovo’s LePhone with tablets on the horizon.

The mix shift drove leverage in the model resulting in improved operating margin within QCT to ~24% from 22% in the prior quarter. Improved smartphone mix drove an increase in device ASPs to $186 vs. consensus of $180-$183. We do expect regions, mix, and competition to impact the moving parts on ASPs.

My target is $50 for this stock as long as there is no broad based market sell off. We caution investors to buy protection before earnings because we expect earning vol and do not want to hold this stock through earnings. It will be safe for a while but the movement to 4th Generation is already a heavy weight on revenue and the company can only cut expenses so much.

ARM is the world’s leading semiconductor IP company

-600 processor licenses sold to more than 200 companies

-Royalties received on all ARM-based chips

-Over 15 billion ARM based chips shipped to date

-Gaining market share in long-term secular growth markets

-ARM revenues typically grow faster than overall semiconductor industry revenues

-Q2 Conference call begins on Tuesday, July 27, 2010 at 4:30 AM EST

-Q2 Results will be released July 27, 2010 at 2:30 AM EST

Up Coming Events that May Provide Buying Volume

-28 Jul 2010-29 Jul 2010 London Roadshow with RBS – with management

-30 Jul 2010 Edinburgh Roadshow with Investec – with management

-02 Aug 2010-03 Aug 2010 New York Roadshow with UBS – with management

R&D is very costly and the innovation differences are incremental.  ARM Holdings allows companies to pool their R&D expenses to develop the most cutting edge technology for mobile computing.  You can view them as the QCOM of the next generation wireless.  For a great presentation on ARM Holdings, I refer you to their online presentation and ask you to consider the explosive growth in wireless computing as you go through the presentation.

ARM Holdings Presentation

It is a bit hard to understand at first.  I been through the presentation a bunch of time and only now consider myself to have a slight grasp on what they are doing and how they are doing it.  I still need to talk to and do more research on the technology side of their business but I must admit that I like what I see.  If you understand the competitiveness of their technologies, please contact me via email, this site or via my phone listed on the site.  I would like to get a better understanding of how secure their position is and what the threat to their business is from a technology perspective?

Intel is supposed to be behind the curve with regards to mobile computing technologies and because they represent such a large percentage of the market for traditional devices, there is speculation that ARM Holdings could be a take over candidate of INTC.

Couple of things to think about and analyze.  Is the semi-conductor business able to grow while GDP around the world is under pressure on the macro front?  How divergent can semi-conductors be given the fact that the sector usually tracks the broad market closely?  Which royalty based businesses have the 4th generation wireless licenses? Does ARM Holdings have superior technology?  Does their business model offer a true strategic advantage over competition?  Does their technology offer a true strategic advantage over competition?  Will slowing growth in older devices hurt the company more than the gains they are getting from the explosive growth?

This is the beginning of a giant wave of investing that will be done in the mobile computing revolution. Here is the first of many companies that I will be discussing in detail.  Your comments are always welcome. South Florida Hedge Fund Managers – Think Local & Invest Global!

* Q3 proforma shr $0.57 vs analyst view $0.54

* Q3 rev $2.71 bln vs Wall St view $2.63 bln

* Sees Q4 EPS $0.55 to $0.59

* Qualcomm shares rise 3.4 pct after hours (Adds analyst quote, guidance; updates share price)

*Year over year revenue falls but less than WallStreet Expected because of chip sales.

The chips that are running Google Android based phone predominantly use QCOM chips.  They have known about this opportunity for a long time and have created some very amazing chips to go into these Smartphones. The monster chips that educated consumers want today are called Snapdragon. The weak results from CDMA maturity are being offset by the semiconductor business and great consumer demand for expensive Smartphones.

Make no mistake, if you were a fly on the wall inside of QCOM, they would much rather have a strong position on the software side of their business than the semiconductor side of their business.  If there is a company that is sophisticated enough to make it happen it is QCOM.

With the earnings today, it is not surprising that QCOM beat expectations on the back of semiconductors.  One needs to be cautious over the next four quarters during earnings season because there is a possibility of a big miss and the stock could get slammed.  I see it safe to be long QCOM right now and hedge pre-earnings against a major miss.  I predict an upside  into the $50 range if the market doesn’t fall off a cliff on a macro perspective.

Couple of things to think about and analyze. Do you think the semi-conductor business will be able to offset the CDMA business? How stable are the earnings from semiconductors and if you think those earnings are not as stable as the royalties from CMDA, then one should factor in multiple compression. What semi-conductor business is comparable to Qualcomm? What multiple is the right multiple to be used as a good measuring stick to draw insight and information from? Will Qualcomm win usage of their patents in the US for 4th generation wireless? How about usage of their patents in Europe and Asia?

I like the company but see significant risk of revenue replacement and earnings stability going forward.  I do not own QCOM but may buy some.

If you have tried to buy a Smartphone at Sprint, AT&T or Verizon you will find a number of phones sold out and on back order.  The iPhone 4.0 aapl, the Evo htc (2498) Taiwan Stock Exchange, the DroidX mot & the Incredible htc (2498) Taiwan Stock Exchange are all sold out and on a significant back order.  When thinking about how to position your investment portfolio along these lines, you must think about who is making the hardware, who is making the components, who is selling the devices, who is selling the software, who is selling mobile services & who is selling the voice and data contracts?

I will make a point to write on this topic as much as I can.  I would like to encourage you to post your comments and come back to check out the give & take generated.  I will do my best each day  to write something about these questions and make a recommendation.

QCOM is an amazing company that is making a major transition and facing headwinds because CDMA is at the end of the product life cycle. QCOM has enjoyed the royalties of being a legal monopoly. The stability of their earnings is changing and how they address that change will determine the next 50% return in the stock (up or down).

QCOM has been a major benefactor of Code Division Multiple Access (CDMA) technology. A big portfolio of patents belong to Qualcomm and they have been receiving royalties based upon patented enabling inventions making it possible to apply code division multiple access (CDMA) technology to commercial cellular wireless networks.

Qualcomm extremely valuable patent portfolio includes patents that are essential, and others that are commercially useful, to all commercial wireless standards based upon CDMA and OFDMA-based systems and standards currently under development. This is where the road gets a little twisted. Everyone wants to be the next Qaulcomm, so there is big competition. Every country wants to have a tech company like QCOM based in their country. The fight is on to get people to use their patents.

For many years, QCOM has enjoyed very high profit margins and secure income streams but that maybe nearing the end. Many CDMA operators are supplementing their networks with OFDMA technologies, such as LTE, to deliver advanced mobile applications. This is causing stress to Qualcomm and a stress that QCOM has been well aware of and trying to diversify out of for years. With migration to the new network, Qualcomm has to compete again and win the manufacturers & wireless carriers over to their patents / technology. One big thing QCOM has going for it is the fact that wireless carriers can not switch the whole world over to the new network over night and at once. There will be phones operating on 3G CDMA and 4G CDMA standards depending on where you are in the country and if the upgrade has been done or not. If a phone uses 3G CDMA, QCOM will collect a royalty for that even if the carriers decides to go with another technology for the 4th generation network.

The company is going to allow the usage of both of their technologies for the same price, as long as the carriers use their portfolio of patents for the next generation 4G LTE / OFDMA. QCOM being no stranger to negotiating is in position to collect royalties based on the upgraded network. There is risk here and there is competition causing compression of margins but we should start to see a significant number of announcements soon and the clarity with return to the income streams for at least 5-7 years.

Most companies that are behind the crest of change are killed and end up in company heaven. One of the companies that QCOM bought back in 2005 was developing LTE based technology.  QCOM has tried a bunch of strategies over the past 15 years and has settled on manufacturing semi-conductors for mobile phones & developing emerging markets for CDMA technology in places like China as a strategy to replace the earnings from CDMA.

Send Large Files Christmas Gifts

The semi-conductor business is nothing like the CDMA business but I think QCOM will be able to leverage their relationships & eventually become a powerhouse in the semi-conductor business. The challenge for QCOM is if the semi-conductor business will eventually be big enough and profitable enough to offset some of the pressure on margins in from competitive pressure Their revenue and business valuations have benefited from liberal accounting adjustments recently. Will the growth in the semiconductor business be substantial enough to offset the declines in the CDMA royalties?

They have known about this challenge for a long time and have created some very amazing chips to go into these Smartphones. The monster chips that educated consumers want today are called Snapdragon. The weak results out are being offset by the semiconductor business and great consumer demand for expensive chips.  Make no mistake, if you were a fly on the wall inside of QCOM, they would much rather have a strong position on the software side of their business than the semiconductor side of their business.  If there is a company that is sophisticated enough to make it happen it is QCOM.  With the earnings today, it is not surprising that QCOM beat expectations on the back of semiconductors.  One needs to be cautious over the next four quarters during earnings season because there is a possibility of a big miss and the stock could get slammed.  I see it safe to be long QCOM right now and predict an upside  into the $50 range is the market doesn’t fall off a cliff on a macro perspective.

Couple of things to think about and analyze. Do you think the semi-conductor business will be able to offset the CDMA business? How stable are the earnings from semiconductors and if you think those earnings are not as stable as the royalties from CMDA, then one should factor in multiple compression. What semi-conductor business is comparable to Qualcomm? What multiple is the right multiple to be used as a good measuring stick to draw insight and information from? Will Qualcomm win usage of their patents in the US for 4th generation wireless? How about usage of their patents in Europe and Asia?

By the way QCOM is one of the first stocks that I ever bought and did analysis on over 10 years ago. I do not own any QCOM now but will buy slowly into weakness. They have a superior chip that is winning recognition in the Smartphone War and I am long the Smartphones Revolution Big Picture.

A possible play could be to go long 4th generation LTE & OFDMA patent holders that are competitors of Qualcomm. There are a few and these companies are high flying right now. One is based in the UK and has a good shot in Europe to be the dominate force.

Qualcomm, Inc. (NASDAQ: QCOM: 35.88, -0.89), one of the global leaders in digital wireless communications market, is scheduled to report Q3-2010 quarter results on Wednesday, July 21, 2010. In the last four quarters ending March 2010, the company’s reported eps exceeded the market’s consensus estimates by margins in the range of 3.05% and 23.31%.

For more specifics regarding QCOM – Qualcomm’s earnings, IStock Analysts has a nice write up.  They are pretty bullish the stock.  Lets share notes and execution of profitable ways to play this.

Your comments are always welcome. South Florida Hedge Fund Managers – Think Local & Invest Global!

Company Profile: The Kroger Co., together with its subsidiaries, operates as a retailer in the United States. The company also manufactures and processes food for sale in its supermarkets. It operates supermarkets in various formats. The company’s combination food and drug stores (combo stores) that operate as food stores consist of natural food and organic sections, pharmacies, general merchandise, pet centers, and perishables, such as fresh seafood and organic produce. The Kroger Co.’s multi-department stores sell general merchandise items comprising apparel, home fashion and furnishings, electronics, automotive products, toys, and fine jewelry. The company’s marketplace stores offer full-service grocery and pharmacy departments, as well as general merchandise area that includes outdoor living products, electronics, home goods, and toys. Its price impact warehouse stores offer grocery, health, and beauty care items.

Prognosis: The stock is down approximately 20% from the high it hit in the fall of 2009. It is currently at the lower end of a pretty tight 52 week range
Valuation: KR is selling for approximately 11.5 times this year’s consensus earnings and 10 times next year’s projected earnings. It also sports a dividend yield of just under 2% and is the lower range of valuation on a 5yr average based on P/E, Price to Sales, and Price to Book. It is a defensive play in an uncertain and slowing economy.

Catalysts: There are several factors that we believe should provide support for a higher stock price in the near and medium term:
1. A new 500mm share repurchase plan was recently announced
2. Grocer has industry leading sale growth and we believe the market is overly concerned with competition from Walmart, which should dissipate over time
3. Company is low price food retailer and should continue to gain market share with price reductions and improved service levels
4. Company should benefit as consumers start to trade up a bit to higher margin goods, even in a slow growth economy.

Recommendation(s): This low beta stock is a decent play as economic growth decelerates. Given its current valuation and the earnings growth expected to take place over the next 12 to 18 months; our target Price is $23-$25 or 11-12 times next year’s expected earnings of $1.96, up from the current price of $20.10. Not a sexy pick, but one that will allow you to sleep at night.

By Michael Corcelli

Being involved in the markets today requires thick skin and offers no free rides to even the most seasoned professionals.  Today, I spent time with a SUPER bearish hedge fund manager, who will remain anonymous.  He really has one of the most pessimistic outlooks for our collective financial future that I heard.  While many that know me and have read my investment analysis understand that I share a negative sentiment but I am not nearly as bearish as he is.  I do not think I am capable of being that bearish but feel like a bear inside of bull clothing.

While I am positioned long in our portfolio right now, I am defensively postured.  I am long stocks that will add alpha on the way up and have limited downside risk in the event of a macro pullback. I have not hedged out the macro risk and like many others I am exposed to a black swan event.  Even though I think that I have the big picture right, with regards to a couple of macro trends happening today, the bigger macro picture is a bit alarming and being with this manager today, I can not help but question my underlying beliefs.  Do I have it right or am I right with regards to the explosive demand but wrong in regards to the black swan event?  I can not help but cite a part of a book that I read a while back called Methods of a Wall Street Master by Trader Vic.  While I hate people that follow gurus, especially a self proclaimed guru, I find a lot of value in his book.

He discusses that after the 87 Crash, he and many of the people involved at that time thought the world was over and as he points out, the markets managed to avoid the technical collapse that should have followed if you view markets from a purely technical perspective.  The book is a good read but I think what he frames in this part of the book is important for all investors to seriously consider.  When placing a short bet against a company or an index, you are basically placing a bet against capitalism, government spending, population growth, the enlightenment of third world demand, and a highly liquid financial system.

Let me explain the 3 things that I think drive asset prices.  The first is monetary policy provided by central banks and as we know today, central banks are providing an unprecedented amount of liquidity.  The second thing that drives asset prices is fiscal policy and as we see governments spending like drunken sailors, we understand that they are practicing loose fiscal policies to promote growth.  The third thing that drives asset prices are worldwide consumption and production growth.  China and India are waking up and providing a decoupling that has a very real and significant impact on worldwide Global Domestic Product.

While viewing financial markets from a purely technical perspective can be rewarding too many investors, I think that technical analysis sometimes misses the forest for the tress.  I try to incorporate a variety of factors when forecasting financial markets and I believe in and use technical analysis to manage risk.  I find trusting in capitalism and human behavior is very important when you find yourself at the point when Robert Frost’s poem, “The Road Less Traveled” provides the best insight into your choices.  For those of you that have never read the poem, here it is.

Two roads diverged in a yellow wood,
And sorry I could not travel both
And be one traveler, long I stood
And looked down one as far as I could
To where it bent in the undergrowth;

Then took the other, as just as fair,
And having perhaps the better claim
Because it was grassy and wanted wear,
Though as for that the passing there
Had worn them really about the same,

And both that morning equally lay
In leaves no step had trodden black.
Oh, I marked the first for another day!
Yet knowing how way leads on to way
I doubted if I should ever come back.

I shall be telling this with a sigh
Somewhere ages and ages hence:
Two roads diverged in a wood, and I,
I took the one less traveled by,
And that has made all the difference.

This is a very relevant time in financial markets and world affairs.  I argue that the world is at the point of two roads diverged in a wood.  It has been argued that Robert Frost does not make the distinction between positive and negative outcomes in his choice of words when describing the end results.  In financial markets there are three distinctive outcomes: make money, preserve money or lose money.  These outcomes are very easily measured in the world we live in.

According to Linda Sue Grimes,” it is important to be careful with the time frame. When the speaker says he will be reporting sometime in the future how his road choice turned out, he clearly states that he cannot assign meaning to “sigh” and “difference” yet, because he cannot know how his choice will affect his future, until after he has lived it.”

What I get out of my experience in financial markets while reading the poem and reflecting on my perspective is three things.

1.  The future is impossible to predict and that makes risk management even more important.

2.  The path I take is more important than the end result.

3.  Being a contrarian is not always the best choice, so take the path that leads to the greatest happiness.

Your comments, questions, insights and concerns are welcomed and encouraged.  Am I too much of a cowboy taking on risk during these uncertain times or is it prudent to take risk at these levels?

Google reported earnings after the bell on Thursday. The company disappointed Wall Street with numbers of $6.45 a share versus the $6.51 consensus estimates. The main cause of the earnings miss was that Google had the audacity to add almost 1200 highly skill professionals to its workforce. Even though revenue posted a better than expected numbers of $6.82 Billion for the quarter, the stock sold off heavily in pre-market action and got progressively worse along with the general equity selloff. It ended down seven percent in Friday’s market rout.

Despite the earning’s miss, there were several positives in Google’s second quarter earnings report. Paid clicks were up 15% from the previous year. Revenue growth was also up 24% year over year. In addition, the company had several positive developments outside of its core internet search business. Customers are activating 160,000 Android mobile devices a day, up from 65,000 last quarter. Although this does not add anything to revenue in the short term, it does assist Google’s effort to expand its leadership in search to the mobile market. The company was also able to negotiate a face saving way to remain in China as the Chinese government renewed their license. If nothing else, this will get this very public spat off the front pages and allow its company management to focus on more important items.
I believe the market overreacted to this earning’s announcement and the selloff might present a buying opportunity for intrepid investors. Google is a remarkably strong company that is building on its core strengths while expanding its reach into other related areas. First and foremost, despite the more than 25% retrenchment in its stock price this year; Google remains the undisputed leader in worldwide search. In the latest May Comscore rankings, Google had a 64.3% market share of all searches done worldwide. Its dominance in this arena allows it collect more than 2.5 times more revenue per unique visitor than its closest competitor, Yahoo. Internet search makes up close to 97% of Google’s revenue and the migration of advertising from traditional channels to online is still in its early stages. In addition, 53% of Google’s revenues come from overseas which provides a good buffer should the U.S. Economy slow down in the second half of the year.

Google is aggressively pursuing a strategy to be the leader in the fast growing mobile search market. The recent purchase of Admob and the rollout of Android are two critical parts of this effort. The mobile search market is expected to grow from 9% of all searches this year to 15-20% of all searches by 2012. Google’s leading position in internet search and its early strategic investments in video, map, mobile and click to call search technology make it the odds on favorite to be the market leader in mobile search; which will eventually provide a very important source of revenue to the company outside its core internet search offerings.

The company is also making progress outside of search. Its purchase of YouTube for $1.65 billion in stock in late 2006 is paying dividends. YouTube now has 145 million unique viewers and Susquehanna analyst Marianne Wolk estimates Google sold $500 million of YouTube ads in 2009 and expects it to surpass $1 billon by 2011. Although there was some disappointment that Google did not say YouTube was profitable yet as was hoped for during this latest earnings call, the company is building a market leader among Video websites. YouTube’s market share of 43.1% is almost 13 times more than its closest competitor, Hulu. In addition, its Google Maps now ranks as the top U.S. travel website and Chrome is now a solid and growing number three among web browsers.

Google’s valuation looks quite compelling at its recent price of around $460. Stripping out the net $95/share in cash, Google is selling at approximately 13 times the roughly $28/share it is projected to earn this year. Given its valuation and revenue growth this year of over 20% and projected revenue and earnings growth next year of over 15%; this stock could easily appeal to both growth and value investors. It does not take a computer algorithm to figure out that Google is worth a very hard look at these levels as a long term investment.

The Fight of the Century looks like it is never going to happen, according to Dana White, Founder and President of UFC. He is taking advantage of the disappointment to point out some very real problems inherent in the boxing industry. These fighters have a lot at stake and they have a lot of red tape to make the mega bout happen. When did fighters care so much about money and so little about the fans that allow them to be champions?

These guys should act more like Lebron James and less like they have been acting. Lebron and Udonis Haslem took a pay cut to play in Miami . These guys are setting aside pride and ego to win. If Manny or Floyd wanted to give their fans what the fans wanted then they should borrow some courage from the Lion in “The Wizard of Oz” and tell their handlers to move their asses and make the fight happen.

Unfortunately, we live in a society where fear is easily cloaked behind the pursuit of money.   These guys do not want to answer the question that the world is asking.  Who is the better fighter?  So they are hiding behind money issues.  When did money become more important than loyalty.  Ask Steve Jobs. He recently launched the iPad with a hidden slot for a camera. Early adopters are being punished for their loyalty as Jobs piece meals the device to his most loyal followers who want the latest features with every new product launch. Some say life isn’t fair.  Being a major fight fan and one time fighter myself, tonight I feel like Apple loyalists.  These two great fighters are denying me what I want in place of a supporting buzz that brings each of their teams even more money while I foolishly turn the TV on to watch them beat up watered down competition.

At the end of the day, if these fighters do not get into the ring to fight it out, the best thing that could happen to these two great champions is they lose their next fights and the real champions emerge. Imagine how many people will be looking for jobs if that happens. We almost seen it happen in the Mosley vs Mayweather fight when Shane landed a crushing right hand over the top early in the fight.

Tonight (well, tomorrow morning, technically) at 3am EDT, toprank.com will allow fans the world over to listen in on a conference call where we’ll find out if Floyd Mayweather Jr. and Manny Pacquiao have come to terms for a November 13 mega-fight.  See you in the morning fight fans!

Company Overview: Gilead Sciences, Inc., a biopharmaceutical company, engages in the discovery, development, and commercialization of therapeutics for the treatment of life threatening diseases worldwide. Its products include Truvada, Atripla, Viread, and Emtriva for the treatment of human immunodeficiency virus infection in adults; Hepsera, an oral formulation for the treatment of chronic hepatitis B; AmBisome, a amphotericin B liposome injection to treat serious invasive fungal infections; Letairis, an endothelin receptor antagonist for the treatment of pulmonary arterial hypertension; Ranexa that is used for the treatment of chronic angina; Vistide, an antiviral medication that targets cytomegalovirus retinitis in patients with AIDS; and Cayston, an inhaled antibiotic used as a treatment to enhance respiratory systems. The company’s products also comprise Tamiflu, an oral antiviral for the treatment and prevention of influenza A and B; Macugen, an intravitreal injection for the treatment of neovascular age-related macular degeneration; and Lexiscan, an injection used as a pharmacologic stress agent in radionuclide myocardial perfusion imaging.

Prognosis: The stock is trading near its 52 week low and is off over 30% from its late February high. The stock has fallen due to concerns on the expiration of its core HIV drugs later in the decade and the fallout from U.S. Healthcare reform. We believe the reaction has been overdone and the stock at this level offers compelling value.

Valuation: GILD is selling for approximately 9 times this year’s consensus earnings and only 8 times next year’s projected earnings. It is selling at the low end of its five year range based on Price/Earnings, Price/Book Value, and Price/Cash Flow. It has a solid balance sheet with no net debt

Catalysts: There are several factors that we believe should provide support for a higher stock price in the near and medium term:
1. Mid stage HIV pipeline drug data is positive which bodes well for next generation therapies for HIV
2. Growth in revenue outside of core HIV market with recent purchases including Myogen and partnerships including the one with Roche on Tamiflu
3. Company should continue to acquire growth assets outsides it core HIV franchise
4. New stock repurchase plan initiated in January
5. Given attractive stable of drugs and the need for the major pharma companies to acquire pipeline, possible takeover target especially given drop in stock price and reasonable valuations
6. The environment for drug companies should improve markedly after the mid-term elections

Recommendation(s): Given its growth prospects, low valuations, and reasonable expectations that it can extend its HIV franchise into the next generation of drugs, GILD is undervalued. In our opinion, the stock should be trading at a more reasonable rate of approximately 13-14 times this year’s projected earnings of around $3.60. Our target Price is $47-$51, up from the current price of $33.50.