Patriot Coal Bankruptcy: A Sign of the Times for the Energy Sector

Last Monday, Patriot Coal (PCX) filed for Chapter 11 bankruptcy protection and marks the first ship to go down in the declining coal industry. This bankruptcy and the current rock-bottom valuation on the US coal stocks as a whole (ACI, ANR, WLT, BTU, ect.) are a sign of the shifting sands in the energy sector as natural gas rises in importance and developing begin to rely less on energy imports.

 

“The coal industry is undergoing a major transformation and Patriot’s existing capital structure prevents it from making the necessary adjustments to achieve long-term success,” Irl F. Engelhardt, Patriot’s chairman and chief executive, said in a statement. “Our objective is to use the reorganization process to address important issues in an orderly way and make the company stronger and more competitive.”

 

Patriot may have secured some $802 million in restructuring financing, but it may just be delaying the inevitable as the coal experiencing is experiencing both a cyclical and structural decline.

 

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The current decline is cyclical because of waning global energy demand and the unusually warm winter which built up excessive energy inventories. More importantly, the decline in structural because the new threat from the shale gas boom in the US and power companies retooling to be able to handle both coal and gas for electricity generation.

 

Furthermore, international demand for US coal imports is declining as well due to many new coal mines springing up in Indonesia, Australia, and Mongolia. Not only are those mines flooding the demand coming out of India and China, but demand is also coming up flat. Steel production (the other major use for coal) is flat as China’s sky scraper building spreed is not what it used to be, and new efforts to put up nuclear (Fukushima be damned) , solar, and other forms of energy do not speak well for future coal demand growth.

 

The icing on the cake is that none of the Coal companies really saw this coming and prepared for this much cannibalization. With the exception of maybe Peabody (BTU) who has been aggressively buying Asian coal assets and Console Energy (CNX) who have been diversifying into the LNG business, the typical US domestic players (Arch Coal, Alpha Natural Resources, Walter Energy, ect.) have been expanding and freely spending in the US market. Arch and Alpha are both guilty of big coal acquisitions in the last 2 years which puts further strains on their cap structures.

 

Of course for every bear case, there is a bull case. Despite coal falling as a percentage of global electricity production, it will maintain its role as a staple energy source for decades to come and should generate at least a quarter of global power consumption (unless more innovations in alternatives change that path).

Rapid population growth in developing continents should continue to spur the need for more energy production. In the developed markets, we should also see greater electricity consumption per capita as more electronics are used and as society switches away from crude oil to use the much more efficient electricity grid.

Finally, the fact that coal companies are going out of business should tighten up supply for the coal companies that can ride out the storm. However, the coal companies that will do the best are the ones that follow the BHP model in that they start heavily diversifying both geographically and in materials. I  do think some of the coal stocks are a bit over sold while other have room to fall.

As I alluded earlier, this is not just about coal. Cheap coal has implications for the whole sector and will likely be a drag on the viability of Nat Gas and solar. One thing we can probably rely on is cheap electricity for some time to come. The utility companies have been fueled by low interest rates and low input costs now for several years. As monopolies get broken up, prices could see meaningful easing or at least stay relatively constant. From an investment perspective I will keep an eye out for companies in industries with high electricity input costs and strong growth profiles.

If you are interested in learning more about the coal space and some of the trends playing out, I have attached a power point I presented to colleagues and will be posting a detailed financial breakdown of the  more capital constrained coal companies on my finance and investing blog sometime tomorrow.

Global Stock Markets: Long Hope, Short Reality

This is a big week for markets in terms of economic data. Yesterday we had a data dump of mammoth proportions and the data wasn’t very promising.

A glance, we saw Australian, Korean, Spanish, Italian, French, German, UK, and Brazilian Purchasing Managers Index (PMI) all print sub-50 (contractionary) numbers. US PMI fell to 52.5 and Chinese PMI fell to 50.2 (lowest in three years. In addition, Eurozone unemployment rose to a record 11.1%, Brazilian consumer default rates spiked higher, and the US Institute for Supply Management survey (ISM) came in at a contractionary 48.7 (another three year low).

Ok, you get it. The data was bad yesterday, but markets still rallied?

Markets rallied for two reasons:

1) Bad data was expected (but maybe not this bad and all around the world at once).

2) Investors are buying in hopes of global central bank easing measures.

I don’t know about you, but these “hope” rallies don’t fill me with the warm feeling that the four-letter word denotes. I would much rather see “reality” rallies based on hard statistics. You see the problem with these central bank fueled hope rallies is that they are inherently irrational.

Yes, I understand that markets are forward looking and are priced for what we can expect at least 1 year from now, but I also understand short-term market psychology. As soon as the ECB cuts rates and China lowers lending standards, then what are we left with to hope for? A really poor earnings season that will splash a tidal wave of artic fresh water in investor’s faces.

So what is reality?

European rates at 1% and will probably be slashed to zero or near zero. This leaves the developed economies with zero rates across the board and very little flexibility for central banks in the west to stimulate without political coordination.

Asia has notably slowed across the board as our global factories have little end market demand to produce for. There will likely be some more Asian stimulus to look forward to, but it will be focused on Asian market consumption oriented growth as they look to cut dependence on the US and European economies.

The North America seems to be the only major economic region that is not contracting, but it is not booming either. If the rest of the global economy doesn’t get its act together soon, we will likely start contracting as well.

So what is a lowly investor to do?

I am keeping copious amounts of cash and sitting out this “hope” rally. While there is some interesting activity going on right now in health care, I would like to see global politics and central banks play their cards a little more before putting my cash to work.

There are some bright spots in the global economy. We are seeing a revolution in the tech industry which has changed the nature and location of computing. We are also seeing a tech revolution in the oil and gas industry. The best part about technological revolutions is that they will happen despite what the Institute for Supply Management survey says and are thus somewhat uncorrelated to macroeconomics.

In summation, invest in game changing innovative companies, invest in what is consistent (i.e. low beta plays, dividends), and where uncertain keep your cash close. Don’t follow the crowd into “hope” rallies. Stay sober with reality and you just might find some very attractive valuations after the hope rallies fade and reality drives assets prices back down.

How To Follow The Markets Like A Pro – For Free!

So you are fascinated by the market and maybe even interested in trading. Great, but access to information doesn’t come cheap and can be a real differentiator. After all, how can you possibly get an edge on what is going on if you don’t even have a fraction of the information at your disposal that market professionals have without paying a pretty penny.

Ten or Fifteen years ago it would have been nearly impossible to come even close to replicating what big firms have access to when it comes to data and information. These days, you still can’t there but you can get three quarters there in terms of what the fundamental managers are looking at.

News

There are many great free news sources such as NYT, Bloomberg, or blogs.
Unless you are reading the entire news paper cover to cover everyday, a subscription to a the WSJ, Financial Times, Barrons, ect. is a waste of money.

Many people already know the trick to getting free access to the Wall Street Journal, but few realize that you can use the same trick on other news sites. The “trick” is to google the article titles and click the link through google as opposed to navigating to articles through wsj.com, for example. This trick in fact works on many subscribed content sites including: WSJ, Barrons, the FT, and the economist. And between those four sites (of my choice) I get almost all of my finance and economics news.

There are a couple of nuances to using this trick. One thing to note is that you cannot be logged in to an account on any of the sites for the trick to work. Basically the newspapers let you get around their gated content because they think you are a potential customer. If they know that you are already familiar with their publication, then you will need to be a paid subscriber.

Also, for each site (except the economist to my knowledge), there is a daily quota on the number of articles you can read each day by googling the titles. For example, the WSJ is 5, FT is 5, and Barrons is 2. However, once you reach your limit you can simply open a new browser or computer (for example switching from chrome to firefox) because your quota is tallied separately on different browsers and computers even if you are on the same IP address.

Many publications such as the WSJ also have features available to people with free accounts (that you do not have to be logged into to receive). For example, you can receive news alerts in your email inbox, newsletters, and even end of data reports on financial figures such as the top 50 most active stocks.

Is this stealing? Well, if you believe in arbitrage then presumably no. However, to some people (like the publishing industry), this is definitely a form of stealing. You are essentially taking advantage of paid benefits and a technicality in marketing policies. If you are a no-income student then you could probably justify free riding to get a taste of what’s going on. But, if you can afford 1-2 media subscriptions, then you might as well support your publications of choice as opposed to letting the subscribers subsidize your free-riding.

Finally, I would say that if you trading intra-day, then it might be worth shelling out the 30-60$ a month for a premium newswire subscription such as flyonthewall (recommended) or Reuters. However, if you investing for the medium to long term, the mainstream publications and news alerts should be enough.

Market Commentary

One of the benefits of working for a large firm, is that you have many talented professionals with years of experience and advanced degrees who write internal market commentary on a regular basis.

Well, if you know where to look, you can also get access to many great sources of market commentary. Your free commentary will be delayed from the in house stuff by days or a week, but it will be just as rich in content.

For starters, I would recommend signing up for 1-2 morning market newsletters from major publications. For example, WSJ has the “Morning Market Beat” (freely available) providing a daily snapshot of the markets at 5am and a quick summary of what you can expect to look forward to in terms of headlines and economic data. There are many blogs and other publications which offer this. A favorite of mine is Seeking Alpha’s Wallstreet Breakfast. And of course, our own Eddie famously posts his weekly Bonus Bannas here on WSO.

The next place you should look is the blogosphere and twitter. Wallstreet may have their quants, but you have your professors. There are countless economics and finance professors who have financial market or economics related blogs. My recommendation would be to put yourself on the email list (or RSS feed) of every blog that you stumble across that has an “insightful post” and it might lead to a fruitful readership.

Seek out the email lists of the big money mangers and hedgefunds. Often, the big funds will put out very insightful commentary or letters which highlight key insights that are playing out. My absolute favorite is the PIMCO market insights; Gross is hilarious and there are many other smart people writing articles on there. Another good place to look is Hedge Fund Letters .

As a note of caution. I would focus on “market commentary” as opposed to “investment advice”. I am a strong believer in not taking investment advice from anyone ( see my seven rules for traders). When people provide “investment advice” in writing or on TV, they are generally “talking their book” or promoting investments that they have a vested interest in. It is ok to read investment pitches or equity research if you are not an impressionable investor; I even post pitches from time to time. When you do read pitches though, focus on analysis techniques or broader insights as opposed to security specific advice. Long story short, do your own research.

Finally, a great source of market commentary are podcasts. Approach podcasts the same way you would approach newsletters. Many of the big publishers have decent podcasts as well as a handful of blogs. My favorite podcast is the Bloomberg Serveilance podcast with Tom Keene – it is commercial free and takes the highlights of his popular morning radio show.

Research

For fundamental research, the pro’s have access to institutional equity research reports which can be excellent primers for understanding a security or industry (but often poor documents alone for actually making investment decisions).

While some brokerage accounts also offer selected equity research reports, there are many alternatives. For a starter, you can just search google or popular sites for basic research on companies or industries. WSO has many great threads with industry primers or examples of equity research. Barrons.com also has some equity research reports, and everyone reading this now knows how to access those.

Consulting firms, government agencies (such as EIA, DOL), and non-profit organizations (IMF, universities), often publicly publish influential and well-researched publications that are industry or technology specific. If you are closely following the energy industry, it would be useful to have the EIA on your RSS feed for their production reports. For the consulting/accounting firm reports, just google the name of the firm and the industry you are looking for (i.e. “Deloitte Utilities”). There is a lot you can find by just searching for it.

Fundamentals

Once you have already identified a handful of companies that you want to research closely you can also find some great stuff by just searching such as analyst presentations, earnings transcripts, financial reports (on SEC website). Company websites are obviously a key resource.

Websites like google finance, yahoo finance, ycharts, finviz, seeking alpha, are all great places to find charting tools, a summary of financial ratios, and comparable companies. I will break down some specifics to look for on each site.

Google finance is a great place for really quick charting. Their homepage has a really clean summary of the markets and shows which companies and news articles are trending. The domestic trends page might be worth taking a look and is fairly unique. I am not really a fan of their other resources, I mainly just go to google finance if I want a really quick snapshot on the market or a company because the pages load quickly.

Yahoo finance has a lot of great tools on the front end and also a decent api for financial headlines and stock prices that can be fed into an excel macro. I prefer Yahoo’s api to Google’s, but I haven’t used either since I started using my broker’s api for plugging into my models. I like yahoo the best for snapshots on company fundamentals and quick stats on equity options. If you are not logged into a brokerage account and want to see a company’s stats, I usually go to either finviz or yahoo key statistics. Yahoo also has a great tool for insider buying. One drawback I have noticed is that yahoo finance tends to lag data releases by at least a week. Also, given the turmoil at the company itself, I doubt the platform will ever be upgraded as it has pretty much remained the same over the last few years.

YCharts is the best tool for charting. You can graph out multiple company statistics and economic time series on a single coordinate plane. It is very user friendly and has better economic charting than some of my paid platforms. There is a lot more than initially meets the eye on their service and requires a lot of playing around to really figure out how to maximize their awesome charting capabilities. This is a great resource for visually finding correlations and drivers of companies and fundamentals. If you are into statistical arbitrage, this is an interesting place to dig around and compare indexes vs economic numbers vs company fundamentals charted out over time (this is the kind of stuff the pro’s have been able to do on their Bloomberg terminals for years). A truly game changing innovation for the average investor!

Finviz is another treasure trove for budget market observers. I have their futures page set as my home page. In my opinion, the stock screening tool is the real gem of the site. You can filter by 61 parameters on fundamental and technical stock filters. Some of the filters, such as insider buying, institutional buying, MACD, candle stick pattern, are truly leveling the playing field for individual traders who are sophisticated but lack resources. Again, this site requires a lot of playing with and has a few features that I didn’t cover that are worth checking out.

Finally, seeking alpha is a great place for qualitative information. The site revolves around its twitter like market currents which are also on my homepage. This is a quick and efficient way of checking out the headlines or recent economic releases. I currently use seekingalpha as my stock email alert service of choice because it is really easy to set up paper portfolios with email alerts. The email alerts are a nice blend of headlines, twitter sentiment, and company events (such as earnings and management quotes). The other three sites listed above also have email alert features. As I mentioned, I like their Wallstreet Breakfast newsletter and also receive a daily email with all of the earnings transcripts that have been released in the prior day. There are some other interesting newsletters and blogs on the site; however, the site has its fair share of slick brokers promoting stocks.

Two other great places to check on economic events: bloomberg economic calendar, CME economic calendar.

Those are the four main sites I use outside of my own models and brokerage platform. However, I will give an honorable mention to trading view for its unique social charting platform. There are many other really cool sites for charting and investing fundamentals research. One further area that I don’t use and may be worth looking into is mobile phone apps.

The key take away is that while there is no one free platform that can mimic a bloomberg terminal, there are an increasing number of free services that cover key features. If you put 4-5 of the free services together combined with a good sense for how to find things online, I would argue that you would be able to cover a vast majority of the ground that fundamental managers do with your research. The bigger issue is manpower.


Clearly, there are a lot of great resources that anyone can take advantage of for free. Again, please comment below if you have any useful tools or suggestions.

In part two I will cover free resources for financial modeling, trading, and more.

Seven Indispensable Rules For Traders

As a trader, one of the things I like to do is take notes on trading observations, both trade specific and trader specific. I was flipping through some of my notes and wanted to share some of the rules I have followed which generally apply to all traders.

• Develop your own philosophy and guiding principles
• Never trade on other’s advice
• Define your trades before entering them and constantly reiterate your reasons
• Keep a record of your market observations
• Do not be afraid of taking risks (or losses)
• Make a risk control plan and follow it
• Accept failure and persevere

 

Develop your own philosophy and guiding principles

There is no single path for succeeding in the markets. I am a firm believer that anyone can be a profitable trader if they work hard enough. It is important to know yourself and find a suitable strategy for your personality. Develop your own philosophy and guiding principles in an approach that is comfortable to you. Master your approach by methodologically improving it over time.

The key thing to note is that you need a plan and a direction. As many before me said, “trading is not a hobby, hobbies cost money”. If you are really serious about trading in the markets, make a business plan. Treat your endeavor as an enterprise and work at it until it generates the IRR goals that you set. Once you met your goals, set higher goals.

 

Never trade on other’s advice

I can not stress the importance of doing your own research. If you do not put in the time to truly understand the securities that you are trading and the reasons for your trades, then you will certainly miss important factors.

Some may note this bullet as “Never trade solely on other’s advice”, but I really mean never trade on other’s advice at all. If you hear advice from a professional source and its not inside information, then you can be sure that either the optimum risk-reward relationship has already passed or that they are lying to you about something. If you read or hear about an investment opportunity in publicly traded securities in the media, its old news and probably not a good trade.

If you hear advice on something that is not published and looks like it has not come to fruition yet, then you should do a great deal of research but still be cautious because the investment likely doesn’t conform to your style and because you did not originally identify the entry opportunity, it is likely that you will not be able to identify the exit opportunity as well.

 

Define your trades before entering them and constantly reiterate your reasons

One of the biggest mistakes people make is that they spend too much time trying to discover a great entry strategy and not enough time on when to exit. Make an argument or stock pitch for everything you plan on trading. Know why you are making the bet, what can go wrong, and where your outlook tells you a security can go. Make entry and exit points based on this research. When you do your research, focus on the divers of the stock (i.e. the catalysts) and embed those drivers into your argument for making a trade.

After you have done your research and executed a trade, let the market decide if you are right. Remember, the market is not biased, and if the market tells you that you are wrong by going against you, you should not be stubborn. If the trade has not hit its exit or entry point, constantly reiterate your reasons for the trade on a daily or weekly basis. Do the same drivers or catalysts still hold true, or put in other words, are you still in the trade for the same reason that you entered it for?

It should be noted that sometimes entry or exit points are not hit. If you are investing in “deep value” stocks for example, a stock might not move out of a tight range for weeks or months. These could be considered value traps and may require specific types of events to occur for their unrealized value to be recognized. In those cases, it may also be helpful to define a time constraint on your trades as well.

 

Keep a record of your market observations

Trading is a lifelong process of learning and gaining experience. Times change and so do trading environments. Although patterns do repeat, it can be hard to remember how you perceived different environments at the time that they were occurring. Keeping notes (personally or in blog form) can be an effective way of recalling past environments and situations.

Another important way to take notes to is analyze your past trades. Looking back at your past trades, you can analyze your mistakes and find ways to improve your decision making. If you take detailed notes and really ingrain what happened, how you reacted, and what good or bad decisions you made, you will be better equip to handle similar market situations in the future.

 

Do not be afraid of taking risks (or losses)

Do not confuse risk control with fear of risk. Understanding risk-reward scenarios is an essential trait for a trader. Despite all of the conventional wisdom about being conservative with your money, it doesn’t directly apply to trading. If you have proper risk controls, have done your homework, and have great conviction behind an idea, then you have an obligation to make a trade despite the sentiment of others. The key thing to remember again is having proper risk control.

Sometimes too much market experience will shy people away from taking risks. The key to not becoming scared after taking losses is to fall back on your convictions. Identify and execute on your high conviction strategies (over 60% probability situations) and remember to eliminate the emotion from the trade.

There is also a great deal of conventional wisdom surrounding the importance for diversification. While diversification is an essential tool for managing portfolios over longer periods of time, there is also the risk of being over diversified and eliminating the possibility of generate alpha. Do not fall for the trap of over diversification. Use common sense when taking risks. There is never a need to make all or nothing portfolio bets.

 

Make a risk control plan and follow it

Most traders are only right 50 to 60 percent of the time. What really makes traders profitable is knowing how quickly admit when you are wrong and eliminate risk. For most people, knowing when you are wrong comes with experience trading. Regardless of your experience level, you should develop a plan for minimizing risk that is ingrained into your strategy. Some examples of the things you can plan:

• Define the degree of diversification in your portfolio
• Define the use of leverage
• Define your bands of exposure
• Define the usage of hedging, shorting, or options
• Set limits on position size
• Set points that you are willing to take a profit or loss

That is just a taste of some of the rules you can set, but it is just as important to follow the rules that you set. Never fall victim to making emotional decisions. If a trade hit a point where you defined taking a loss, then take the loss without thinking about it. Carefully set your rules and follow them without doubt. This is how you preserve your capital from excessive losses.

 


Accept failure and preserve

Although you may know someone who was successful from the start, countless other traders who faced early failures have gone on to achieve unbelievable success. Accepting failure is about understanding that nothing in life or trading comes easy. It takes patience and perseverance to develop a system that works for you. One of the ironic things about trading is that many people get into it because they view it as a way to make easy money; however, once people learn the amount of work that it takes to research ideas and the degree of discipline it takes to successfully execute on ideas, they quickly shy away.

If you want to be a successful trader or really be successful at anything you need to learn humility. You need to develop the patience to learn and develop. And you need to develop the courage to follow your ambitions.

If you have anymore rules that you define your trades by, please let me know in the comments!

Why I Am Long Baidu

Last week after the Chinese central bank (PBOC) announced a 25 basis point rate cut, I gained enough conviction to take a long position on Baidu which has sold off greatly along with most other Chinese equity flotations this year.

The PBOC move made me believe that Chinese policy makers may engineer a bottom in their equity markets through a wave of easing. I decided to go shopping for the higher quality Chinese names which are on sale, BIDU being amongst the first that I am adding.

Baidu

Despite the global economic slow down and Chinese deceleration of growth (from 9-11% to 6-8%, some trends will continue and the growth of the Chinese Internet is one of them. It is projected that for the next 15 years, an average of 20 million rural Chinese will migrate to urban areas per year. Surely, many of these migrants will gain better access to the Internet through web cafes or computer ownership.

On top of the demographic fundamentals, BIDU has strong business fundamentals considering that Google which in 2010 controlled 30% of the Chinese search market has closed shop in China. In that time, BIDU’s search market share has risen from 67% to 77% and is still rising as Google maintains approximately 18% of the Chinese search which will continue to erode as they have discontinued the mainland servers. BIDU has been given the keys to a monopoly which has allowed it to easy on the marketing and improve its profit margin.

In addition to search, BIDU has made efforts to expand its business by rolling out a mobile platform in a JV with Dell to launch a mobile phone. It has also refocused its new business initiatives on adding services outside of search such as page personalization and a TV ad agency for online video. BIDU is not necessarily strong in any particular business outside of search. It would certainly be a challenge for BIDU to expand into other ventures that could post margins anywhere near what it earns on its search monopoly. For the medium term, there is still room for BIDU to grow its search business as Google continues to exit the market. BIDU also has over 2 billion in cash which it could use to fund new initiatives. There is a chance that BIDU could make a value destroying acquisition in the future or venture into unprofitable ventures such as online video. An example of this can be found in fellow Chinese online company SINA which eroded its margins after it began unprofitable gaming and online video websites.

From a financial fundamentals standpoint, BIDU has a rock solid balance sheet with very little debt and a cash horde of 2 billion dollars. As mentioned, this gives the company a lot of flexibility. BIDU has also shown strong performance on delivering earnings. This year it posted EPS of 3.35, up 88% from last year, and analysts expect BIDU to deliver over 6 EPS using conservative estimates. Sales have also increased (but not as strongly as earnings) by 76% over the last 5 years and 75% Q/Q.

From a management perspective, BIDU’s Robin Li serves as the CEO and was one of two founders in the year 2000. Li has proven to be a brutally efficient leader who clearly understands the industry well. While Li cashed out of most of his BIDU holdings, his management team have put up solid return metrics including:
− Return on Assets: 39%
− Return on Equity: 55%
− Return on Investment: 50%
− Gross Margin: 74%
− Operating Margin: 52%
− Profit Margin: 45%

Although BIDU doesn’t really have any direct comparable companies, I will take a look on how it is valued vs SOHU and SINA which are two other stocks in the same space that have historically been correlated.

The take aways from the comparable table is that the Chinese Internet space is highly dispersed. BIDU is unlike any of its closest competitors if you could say it really has any. It is a behemoth by any standards and profitable in a huge way.

The icing on the cake is that despite continuing to grow and improve margins, the stock is historically cheap at 35 P/E and 18 forward P/E. The stock is 30% off of its 52 week high as the global growth fears and China growth fears brought down most of the Chinese tech stocks. Now that the PBOC has started to show signs of easing, this may in fact be a great buying opportunity for a high quality stock that was trading at a P/E of 65 just a year ago. Of course, earnings have increased dramatically since the stock was trading at those levels. I expect the stock to continue to trade at multiples in the 30 range; however, it is currently priced at 18 forward earnings.

I bought BIDU in the low 120’s and my 6 month target is 160. And that is why I am long BIDU.

Summary:
− BIDU has a monopoly over the Chinese search market which has strong growth fundamentals which are uncorrelated to macro economic growth concerns.
− BIDU has a fortress balance sheet with very little debt, loads of cash, and few operational concerns from a management perspective.
− BIDU has delivered consistent growth and performance on nearly every metric (ROE, ROA, ROI, Sales growth, EPS growth) and is trading at historically cheap levels with a forward P/E of 18.
Risks:
− Some kind of social unrest in China leads to a political crack down which effectively takes down web traffic.
− Another governance issue with Chinese stocks such as fraud leads investors to more heavily discount high flying names like BIDU.
− Other social networks in China take search traffic away from BIDU.
− BIDU ventures into costly areas outside of search such as social media or on-line video which dilute earnings.

The Smart Phone Wars: Enter Facebook

Tech analysts have pontificated on the possibility of a Facebook phone for years and it seems that their wildest wet dreams (or nightmares) may finally be coming true.

The New York Times reported that Facebook has been hiring former Apple engineers who worked on the iPhone and iPad to help build a Facebook phone.

However, it remains to be seen if a software company can ultimately succeed in the hardware business. After all, Microsoft and Google have made several efforts with mixed successes into hardware and of course Apple comes from the hardware world.

And sure, Facebook’s social network is a triumph of design and function, but would you buy the Facebook phone? And what makes Facebook so hurried to build a hardware platform at all – shouldn’t they concentrate on developing their core ad business first?

After reading the NYT article, it immediately made sense to me why Facebook wanted to raise so much money in its IPO. Sure, greed and liquidity were probably higher priorities, but the Zuck has ambitions to compete directly with all of the major tech heavyweights as it increasingly expands its platform.

It seems that Zuckerberg has grown very nervous at the thought that Facebook could just merely go down as an application on other companies’ platforms as opposed to being a platform within itself. What’s more is that he sees the opportunity closing to get a foothold in the phone market before Apple and Google consolidate it.

Facebook joins the mobile hardware arms race just as Google is completes its acquisition of Motorola and Apple gets ready to roll out its next product line of phones, pads, and TVs. This is all setting up to make mobile the great brand war of our time… or has the victor already been decided before the major battles could be fought?

In the current age of App stores and anal retentive music/movie library organization, consumers who have utilized their phones to their fullest potential have invested a great deal of time and money personalizing and organizing. Given the purposeful incompatibility between phone brands (mostly because Apple insists on imposing authoritative digital rights management on all of their media and software), it is not easy to switch phone brands. Think of the person who went through three generations of the iPhone and bought over 50 paid apps that become useless if they buy the new Android.

On the other hand, the social network which Facebook has created is arguably even stickier than the apps on your phone; the time last I checked you can’t buy friends on Facebook. Facebook plans to make its social network ubiquitous to the extent that everything you do on your computer or mobile device (chat, email, web search, shop, consume media) would be done through their platform. They basically want to re-rout 80% of the Internet and sell ads with goofy pictures of your friends on them all along the way.

I am very skeptical that Facebook will become the Internet’s one-stop-shop mostly because I believe that product focused sites like Ebay or Netflix will always have a huge competitive advantage in any given space. To me, Facebook’s ambition of being the next Internet conglomerate put it in the same category as Google and Yahoo where it tries to do too many things at one time and often fails where it loses focus. Facebook may very well have the next great smart phone, emailing service, or commerce platform. But will it have all those things? Definitely not.

Whenever the Facebook phone does come to market, I expect it will be little more than a novel distraction. Unless Facebook takes itself off competing platforms, the phone is unlikely to differentiate itself enough. The phone would most likely have a limited appeal to kids and college students who want to feed their fish and pick their tomatoes in class.

Grandpa And Grandma Are Taking Our Jobs

Back on the topic of what the composition of the labor force says about our society, the New York Times recently put out this graphic breaking down the labor force by age and gender over the past 6 years.

The graphic shows that from 2006 to 2012 all demographics 65 and older are working in greater numbers while everyone 65 and younger are working in fewer numbers (except for women aged 60-64). Clearly financial repression and investment volatility has had its toll on our elder class.

But what does this say about our society?

Many questions come to mind when examining the table. I wonder what the median income for workers over 65 is and what percentage of those workers simply love their jobs and how many would rather be retired but can’t afford it.

What is clear is that the level of ‘discouraged’ workers is probably much higher than most would have guessed considering the low labor participation rate and how many baby boomers were scheduled to retire but couldn’t.

Another interesting thought is that the current generation of young professionals as a whole is probably in the worst position due to their diminished professional opportunities. Will the discouraged youth ever be able to catch-up from our slow career start later?

I know that the ROI on college degrees is debatable, but if you have been laid off from your manufacturing job for over a year, what are your options? In my opinion the attack on college degrees that are not skill oriented is well founded (e.g. film studies), but surely taking on debt to earn a degree in a well-positioned field such as computer science or accounting should pay off in the long term. After all, what better choice does our unemployed youth have?

Some would say that these levels of discouragement and delayed retirement have exposed cracks in our society and capitalism broadly. And of course, inevitable entitlement reform will only exasperate the situation for the elderly and impoverished. There is a need for reform, but I doubt the reform that comes through Washington will do anything but kick the can down the road.

All this spells out is more tough times ahead for generation y and beyond. Not only are younger professionals getting shafted by today’s weak economy, but they will also front the bill for this mess in 30 years via higher taxes when they will be the ones getting ready to retire. Giving up your US citizenship and jumping ship to Singapore might not be a bad idea after all.

We are not kicking a can down the road anymore. We are rolling a snowball down a mountain.