$50 Billion Dollars in Cash: A shareholders worst nightmare

19-Jan-2011 | kate | Investment Ideas Investment Tools New Announcements Stocks Technology The Wise Investor Uncategorized US Markets

Apple has 50 billion dollar in cash sitting on their books, which is expected to grow to 70 billion dollars by the end of the year and investors aren’t happy about it. The company has been hoarding cash, which to Apple Investors without Steve Jobs around is like taking a “11% cash advance and putting the advance in .75% savings account”.

But what should Apple do with all this cash?

Apple has a couple options such as a issuing a dividend, share buy backs and look for potential suitors to acquire.

If Apple choose to issue a dividend, the would be able to pay a 4% and still grow their cash pile by over $10 billion dollars this year alone. The problem with announcing a dividend is that Apple would be admitting that they currently do not have any positive NPV projects for the company to invest in. Dividend and growth companies do not typically go hand in hand and the dividend would be admitting that they no longer have any positive NPV projects for the cash to be used for.  Now some investors might be having a flashback to a couple years back when Microsoft announced their first dividend and the company changed from a growth company to a mature company and hasn’t had any break through technology in recent memory.

A share buy back program on the other hand, could use up the cash on the balance sheet preventing the new CEO from misusing the cash in negative NPV projects. Another benefit of share buy back programs are that they are usually only agreed upon by the board and managers when there is consensus that the share price is undervalued and has the potential to increase the share price. If the share buy back conveys no information, the share price will just continue on its normal path. Bernstein Research calculated that Apple could buy back $20 billion in shares and grow their cash pile by $10 billion dollars.

Finally, Apple could look at an acquisition target like Netflix. Netflix streams digital and physical movies at a tune of 5 million rentals a day, even split between physical discs and streaming.  Apple rents 475,000 TV shows and movies a day for about $60 million in rentals and $50 million in purchases, a far cry from Net Flix who makes $550 million in rentals per quarter! According to an analyst, Net Flix could be acquired for 12 billion, which would leave Apple with plenty of money for a share buy back.  But would Apple be able to integrate Net Flix in with their existing culture and would their business model based on subscriptions fit in with Apple’s technological drive?

Needless to say, investors were happy to have Steve Jobs hold on to their cash, but with a new man at the reins investors aren’t too sure what projects Apple will take on with the billions of dollars sitting on the books. Too much cash allows for pet projects and venturing into  new territories which are usually not for the best. Investors are anxious to find out what Apple’s next step will be and so am I.

This blog has been prepared by the Retire First Team. The blog expresses the opinions of the writers and not necessarily those of Retire First Ltd. Statistic and factual data are from sources Retire First believes to be reliable but their accuracy can not be guaranteed. This blog is furnished on the basis and understanding that Retire First is under no liability whatsoever in respect thereof. It is for informational purposes only and is not be construed as an offer or solicitation for the sale or purchase of securities. Retire First Ltd. And its officers, directors, employees and their family may from time to time invest in the securities discussed in this blog. This blog is intended for individuals where Retire First Ltd is registered as a dealer in securities.

Retire First is a member of the Canadian Investors Protection Fund.

Commission, trailing commissions, management fees and expense all may be associated with mutual funds. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. A recommendation of any of the mentioned investments would only be made after a personal review of individual portfolio. Third Party research has been used in formulating the writer's opinions.

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PPN’s: What Does a Guaranteed Principal Actually Cost You?

02-Nov-2009 | kate | Investment Ideas Investment Tools Market Strategies The Wise Investor

I really enjoy meeting new clients and helping them navigate through the world of finance, which is why I thoroughly enjoy meeting new clients. Each client brings with them interesting questions and last week, I met with a couple that was particularly interested in principal protected notes (PPN).The client had been hearing about them from another advisor in town who they have been working with, and was wondering about our opinion  here at Retire First.

The selling point of PPN is that they are guaranteed to return your principal investment after a certain number of years, additionally there is also the possibility that you can make a better return through their exposure to the market. PPN investing philosophy is complex, using options and derivatives that are lost on the average investor. So why would investors want to participate in something they don’t understand? Its hard to say no to the idea of no risk, all the reward that PPN are built on.

It may sound too good to be true, and it is. First of all when PPN guarantees are paid back after the note matures years down the road, the principal is actually worth less, since the PPN guarantee does not adjust for inflation, eroding the principal purchasing power. Additionally, there are fees involved. Big fees. Typically, PPN fee’s fall into the range of 3-5%! These fees require equate to large account gains that are necessary to even recoup before they broke even, significantly limiting your upside potential.

Worse yet, your friends who were flaunting their PPN, during the market down turn last year got another surprise, when their PPN went into protection mode. As many PPN holders found out, protection mode meant that investors will get their principal back, and nothing more, when the notes mature years from now, even if their notes follow the market rebound. That principal of course, will have less buying power because of inflation. That 1year 1.35% GIC rate is sounding pretty good right now, isn’t it?

So what does the investor who likes the sounds of the PPN, still wants market upside but hates the high fees, to do? You can build your own PPN, by following the simple concept below, illustrating how to build a PPN with fictional portfolio of $1000.

One: Find a government strip bond that is maturing at the same time as the PPN that you are currently looking at. Strip bonds pay no interest; instead they sell at a discount to their face value, which the investor receives at maturity. For simplicity sakes, let’s assume that the strip bond can be bought for $900, and will maturity in 10 year at $1000.

Two: After buying the bond we have a $100, remaining from our $1000 we planned to invest. Take the one hundred dollars and invest it in the market in an ETF or an Index fund.

You have now created your own PPN, whose worst case scenario is that every single company in your ETF goes bankrupt and you lose your one hundred dollars, but you will still get $1000 back from your government strip bond. That is of course, assuming that the government will not default.  Instead, you could be collecting dividends from your ETF and market gains over the next 10 years, and paying fewer fees than your PPN buddies.

This blog has been prepared by the Retire First Team. The blog expresses the opinions of the writers and not necessarily those of Retire First Ltd. Statistic and factual data are from sources Retire First believes to be reliable but their accuracy can not be guaranteed. This blog is furnished on the basis and understanding that Retire First is under no liability whatsoever in respect thereof. It is for informational purposes only and is not be construed as an offer or solicitation for the sale or purchase of securities. Retire First Ltd. And its officers, directors, employees and their family may from time to time invest in the securities discussed in this blog. This blog is intended for individuals where Retire First Ltd is registered as a dealer in securities.

Retire First is a member of the Canadian Investors Protection Fund.

Commission, trailing commissions, management fees and expense all may be associated with mutual funds. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. A recommendation of any of the mentioned investments would only be made after a personal review of individual portfolio. Third Party research has been used in formulating the writer's opinions.

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The Weekend Effect

09-Oct-2009 | kate | Investment Tools Market Strategies Market Theories The Wise Investor

The weekend effect is a noted stock market phenomenon that results in significantly lower prices on Monday than those of Friday, the previous trading day. According to the Federal Reserve, that prior to 1987 there was a significant negative return over the weekend which returned in 1998 and prevails today, but why?

Well some people might joke that it is probably caused by traders taking an extra long weekend on Fridays; there are some debated theories that try to explain the effect such as the timing of news releases, fading optimism and short selling.

A study done by J Clay Singleton, John R Wingender Jr for the Journal of Business and Economics found that information that there is a strong occurrence of  bad new being release after trading hours on Friday, over the weekend and early Mondays’ (vs other days of the week)  that is so strongly negative it results in negative return for the company/market.  They found that the increase occurrence of bad news release from Friday afternoon into Monday is a factor that influences the Weekend effect and believe that economic and physiological beliefs influence the Weekend Effect.

Related to new releases, the theory of fading optimism plays a part in the Weekend Effect. Now for those seriously interested in economics, they will instantly be debating this theory, since we have the theory of efficient market, as well. Efficient markets, should in theory, have prices that reflect the availability of all information and should only move when new information emerges, ie not all bad news will be concentrated on Mondays. However, since there is a heavily selling of shares on Monday, this theory believes the market is not timely in receiving the news. This idea is consistent with the view that weekends are when individuals give most thought to their investments. They read in newspapers that the market has fallen on Friday, press releases and economic updates. As a result they call their brokers and sell their shares first thing on Monday. The authors of the study that reached this conclusion cure for the Weekend Effect was to make weekend business journals carry a warning: “Never sell shares before lunch on Monday: when you get back to the office, things may look totally different.”

In 2003 researchers Chen and Singal proposed that short selling may explain a significant part of the weekend effect. They believed that “the inability to trade over the weekend tends to make many short sellers close their speculative positions at the end of the week and reopen them at the beginning of the following week leading to the weekend effect, where the stock prices rise on Fridays as short sellers cover their positions and fall on Mondays as short sellers re-establish new short positions”. What Chan and Singal discover was a positive association between short shares and the stocks weekend effect, but the association was not strong enough to conclude for the entire phenomenon.  Chan and Singal concluded their paper with the notion that the weekend effect persists as an unexplained anomaly.

Finally and interesting theory regarding the Weekend effect studies the cash flow of the individual investor. It suggests that liquidity selling by individual investors may be the reason. If individual’s trade for liquidity and liquidity is cyclical, individuals’ liquidity trading pattern might by cyclical, too. Given that a lot of employees are paid on Friday, they tend to buy on pay day. Interestingly, the researchers found that individuals often have bills near the middle of the week, resulting in the liquidity needs of individuals to intensify on Mondays.

Well no one has been able to prove the exact cause of the weekend effect their are some interesting theories that help to explain some of the variation in the returns on Mondays compared to other weekdays. Keep in mind that while the weekend effect has been proven to exist, it does not occur every Friday and Monday, and should not be your only trading strategy. For example it has been shown that a market experience a down turn pose a strong weekend effect than bull markets as identified by Jaffe et al., 1989.

This blog has been prepared by the Retire First Team. The blog expresses the opinions of the writers and not necessarily those of Retire First Ltd. Statistic and factual data are from sources Retire First believes to be reliable but their accuracy can not be guaranteed. This blog is furnished on the basis and understanding that Retire First is under no liability whatsoever in respect thereof. It is for informational purposes only and is not be construed as an offer or solicitation for the sale or purchase of securities. Retire First Ltd. And its officers, directors, employees and their family may from time to time invest in the securities discussed in this blog. This blog is intended for individuals where Retire First Ltd is registered as a dealer in securities.

Retire First is a member of the Canadian Investors Protection Fund.

Commission, trailing commissions, management fees and expense all may be associated with mutual funds. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. A recommendation of any of the mentioned investments would only be made after a personal review of individual portfolio. Third Party research has been used in formulating the writer's opinions.

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