Illegal Insider Trading

Wire tapes... SEC... FBI...Whistle blowing?... Arrest... Plead guilty?... And what not?... Bottom line is Illegal Insider Trading- A tagline which we have been hearing about for past 2-3 years. Why does it happen on the first place? And if that happens, why does it come to public after years? I guess it is a part of a vicious cycle. And this does not mean I favor some/rare insider trading. It must not happen at all to preserve the integrity of financial markets which drive the globe in all ways.

When economy is booming, everyone tries make more money to save their jobs and their company position. No one bothers to investigate why he or she or they are making insane amount of money. But when everything cools down and if that cooling down turns in to a recession or freezing of liquidity, authorities wonder why these have happened. And they start investigation, they find culprits. All get warned. Temporary freeze in insider trading. And again, when economy picks up, competition to make money and to chase big traders/ banks begins ("Chasing Goldman Sachs" book depicts how traders/ hedge funds want to make money so badly that they forget ethics... Why? Just to combat the competition. If trading platform of ABC bank makes this much, why can't we do that?).

This must stop or extra efforts must be provided to prevent it. Whole world runs on financial markets. If it does not save its integrity, everything becomes vulnerable to shatter.

Flying and Soaring Watson Pharmaceuticals

I estimated and you beat it. That is what Watson Pharmaceuticals (NYSE: WPI) has done to me! WPI has always been my favorite healthcare pick alongside Novo Nordisk for a year. Strong fundamentals, eye-catching financials, robust pipeline and stupendous expansion- this is what WPI stands for to me. Today Watson released their 2Q 2012 earnings and they beat all estimates. Whether you give credit to generic Lipitor(r) or to generic Lovenox(r) or any of the above qualities I mentioned, Watson has been delivering.

Watson is one of the biggest and fastest growing generics manufacturing company in the world. As per above figure, its global brands business complements its rapidly expanding global generics and anda distribution businesses. 2Q 2012 results do not reflect the effects of recently passed Healthcare Reform Bill which provides rosy outlook for generics. Moreover, it does not reflect the recent acquisition of Actavis. If WPI gains the expected synergy from Actavis acquisition during 4Q 2012, it will prepare WPI to set 2012 annual revenues to beat the street estimates.

When I ran the valuation model few months ago, I got the price target of approximately $73. And WPI is above that right now. It was and it is a "strong buy" to me.

Business Cycle Transparency

Developed economies are more transparent than emerging economies are. We all have heard about this, haven't we? If that is the fact, then I need to make myself work harder to believe it.

After the great recession hit the world in the year 2008, I could never understand clearly in what phase of the business cycle the US was and has been. Is it early upswing or late upswing or is it slowdown? Only thing I am sure about is that it is certainly neither initial recovery nor recession (please correct me if I am wrong). Recent healthy economic growth and relatively low inflation in the US suggests that we are in early upswing. There are no restrictive policies in the place as of now and that does not put us in the late upswing phase. But nervous investors have begun to think that equities are volatile and stock market is near its all-time peak in the 2007. Isn't that favoring late upswing? It is dilemma to me since I am not an economist! Capital market expectations are always critical to judge after prolonged recessions and a depression. If we observe emerging economies, they are believed to bounce back from shocks faster than developed nations do. This was true even after the great recession. For example, India is clearly in late upswing phase where it is feeling tremendous inflationary pressure. Equity markets in India have shown considerable volatility. Monetary policies have become restrictive and short rates are rising to curb boom mentality. India is showing business cycle transparency which I want to observe here in the US. But I may be asking too much from $14 trillion economy. Perhaps that transparency has partly been offset by the great recession.

As I heard and expected, Apple has delivered finally...

$40, $50, $60, $70, $80, $90, $100 billion and counting. This is how the world's most valuable company has increased its cash over the last 3 years. Whenever companies sit on huge cash piles, there are always 2 possibilities. First, companies become conservative, especially post-recession years, in capital investments and hiring, and reports plethora of cash to combat another economic stress. Second, companies face controversial times from the investors. We strongly believe that Apple falls in to second choice.

When do companies pay dividends and when do they repurchase shares? Simple answers and simple signals. When a company believes that there are no more opportunities to invest money, acquire assets or there is a shrinking room for current above average growth, they pay dividends to reward investors. And when a company believes that their equity is undervalued, they repurchase some shares in the market. I have not performed any equity fundamentals on $AAPL and this is why I cannot say if its equity market value is undervalued or overvalued. But I can somehow convince myself that there is some decrease in growth is forecast by the management after a dream post-recession run and paying dividends is the best way to keep investors tagged along.

As I heard and expected over the last few months, Apple has finally announced to pay dividends and $10 billion worth of share repurchase today. Though its dividend yield is less than its peers, it is going to be interesting new chapter for Apple, being considered mature in the market.

Circuit City, you are not alone- said Best Buy

It was Forbes magazine's "Company of the Year 2004" and then it made in to the Fortune's List of Most Admired Companies in 2006. It survived the financial catastrophe after 2007 unlike its rival Circuit City, but seemingly it does not want to leave its pal- Circuit City alone.

Consumer spending has been above the levels businesses saw in 2008-2009. As per reliable sources, Black Friday and Cyber Monday sales of the year 2011 were up by 26% as compared to the year 2010. These all favor the prosperity of the retailers like Best Buy. But that is not the fact. Financial statements and stock performance of Best Buy deliver the different and dubious story.

Source: Yahoo! Finance

Best Buy is losing their support in the equity markets."Going out of the business" is a probability after 2-3 years and no one is able to put that out of the question. But why only Best Buy? My only explicable answer is:  "the fierce competition" from diversified retailers who have many other things to offer unlike Best Buy. Free shipping, heavy discounts and extended season of the deals cause only one thing and that is shrinking Best Buy's margins. I have no specific thing in my mind which Best Buy can do to come out of this misery, but if they are not able to do anything revolutionary, those shrinking margins will eventually burn all cash.

Few days ago, I read an article on Amazon, which was considered to be "Online store of Best Buy". I could not deny with that, could you? Because that sums up everything here...

Cash is "The King"

What is the difference between the great recession started in 2007-2008 and the global crisis we are currently facing? It is a 4 letter simple word. CASH- no matter what currency it is.

If I focus on the US, the biggest economy in the world, all big banks and corporations are sitting on the huge piles of cash. This was not the case 4 years ago. Most of them were cash stricken. After Apple Inc, the most valued company on this planet, released its 2011 Q2 results, it showed over $70 billions of cash & cash equivalents which is more than the GDP of many countries. Lessons learned perfectly- that's what we can say! Now the question is if these mammoth companies have enormous amount of cash, then why are we on the verge of another worldwide crisis? It is because everyone is too skeptical about economy, political unrest and discomfort in European economies. No one wants to spend their cash based on weak outlooks. If there is no cash circulating in the markets, then how can one make money and drive economy along?

In the course of company's life cycle, if management thinks there is no more growth ahead, then they distribute  excess cash as dividends to reward investors or buy back their own shares. Recently, share buy back has been a spree which is a good sign since companies buy back their "cheap" shares in anticipation of increase in share value. But many companies are issuing cheaper bonds to raise cash and use that cash to buy back their shares. Isn't it unusual? Why would they not use abundant cash they have and end up paying interest payments to bond holders? We have connected the dots here. No one wants to use "cash" they have. Everyone has figured out that cash is the only way to get their company out of the potential financial mess. And once again, it has been proved that cash is the only king you want to save till the end.

Netflix confuses subscribers with a canny idea...

Price hikes. They are riding on the ECON 101 rule of growth and competitiveness in an industry. From my perspective, I was ok with paying half dozen bucks more a month after I heard the news couple of months ago. I think the money I pay for the service and access to the huge library I get is worth. But I am not on the same page with many of the 23 million domestic subscribers. We all do not need to be...

Reed Hastings, CEO of Netflix, sent an apology email to all domestic subscribers for the current pricing disappointment the company has given to their subscribers. The email also contains a brief on the company's plan to separate their streaming (Netflix) and DVD rental unit (will be named as Qwikster). Why? Why would they do such thing when everyone is still coping with the mess company has recently created? And I can imagine a canny idea behind this.

Internet access is ubiquitous. YouTube, Amazon Instant Streaming, Dish Network's acquisition of Blockbuster library and many more to come to share a pie of video streaming business. Growth is going to be good for next few years. Decline phase is not in sight. While the reverse is the destiny for DVD business which has sluggish growth forecasts and is going to be nearly unseen in next 10-15 years. In simple language, if weak outlook for DVD business persists, then Netflix (streaming only) is a better place to get handsome ROI than Netflix (Current: streaming + DVD).

"Wall Street to Netflix: Try Again". I read that on Twitter. After Hastings's public apology, share price tumbled further. So, a tweet justifies a stock market reaction to this event. But now I do not think alike. This seems like a smart move to me rather than pleasing the investors on day-to-day basis. Growth is not immortal. The more you extend your maturity phase, the longer you survive. And Netflix may have learned that already.