Stock of the Day - January 17, 2009

Verizon Communications, Inc. (VZ)

It’s hard to find bad things to say about Verizon (VZ), the enormous telecommunications company. Ever since GTE and Bell Atlantic merged in 2000 to form the behemoth service provider, VZ has constantly expanded its business. Verizon is the biggest service provider in the U.S., outpacing both AT&T (T) and Sprint Nextel (S). The company last trade today at $29.96.  Its stock price has done relatively well in the past year, as it has beaten the S&P 500 by around 12% over the past 52 weeks.

There is no doubt that Verizon has continued to expand every aspect of its business. They’ve stamped an exclamation point on this expansion today by completing their purchase of Alltel Wireless today. VZ paid $5.9 billion for the acquisition and netted 12.9 million customers from the smaller service provider. This deal brought Verizon to a new total of 83.7 million customers.

In addition to the Alltel deal, VZ has recently drawn contracts with NASA and the U.S. Department of Defense. These deals may be worth over $1.2 billion. On top of all this, it is even possible for some of the money from Obama’s stimulus package to find its way to the telecommunications company for the purpose of improving internal infrastructure systems. All of this adds up to a simple conclusion: Verizon has some solid business locked in for the upcoming year.

Verizon’s main competitors are Sprint and AT&T, but Sprint has been lagging behind the other two giants. VZ and AT&T have had some healthy competition lately, especially since the release of the iPhone.  If you’re a Verizon customer you definitely know that you can’t get one of the popular gadgets for your service, and if AT&T is your provider you might be smirking while reading this on your iPhone. Luckily, VZ has the new BlackBerry Storm to compete with Apple’s (AAPL) touch screen phone. I personally am not a huge fan of the Storm, but its sales numbers show that the new phone is stopping VZ customers from changing providers to AT&T.

Last, but definitely not least, is the incredible dividend yield that VZ offers. VZ’s dividend payout is $1.84 per share, which means that it is providing a very legitimate 6% yield. A high yield is very desirable in economically harsh times, as it guarantees you will make some money from your investment. To help your understanding of dividends, check out the Trillionaire Term of the Day from January 8^th.

So, now we have to ask ourselves if it’s worth buying or selling some VZ stock. The main question you should ask yourself about VZ stock is: Will the telecommunications company manage to resist the recession that we’ve found ourselves in? Some analysts have predicted that the cellular market is peaking in volume and that people will be cutting their landlines to cut costs. I disagree. My logic tells me that people will still be carrying cell phones with them and will still need their wireless plans. Most people won’t cut their landlines, and with all of the deals Verizon has been landing lately, they don’t need to worry about an oversaturated market. I personally believe that VZ will stand firm against macroeconomic conditions. If you agree with me, you’re probably in the right mindset to buy the stock.

 

-Matt Schwartz

College Trillionaire

Trillionaire Term of the Day - January 16, 2009

Price to Book Ratio 

A Price to Book (P/B) Ratio is a great way to measure the underlying value of a company.  The ratio compares the stock price to the book value per share.  To find book value, simply look on a company’s balance sheet and it is the total assets minus the total liabilities.  Thus, book value per share is the book value divided by the total number of shares available to the public (yahoo finance does the calculations of the ratio for you…don’t worry). So, the P/B ratio is:

Share Price

---

Book Value Per Share

How can we use the P/B ratio to help us become better investors and make some money? You must first understand that this measurement looks at the value the market places on the book value of a company.  So, investors look for companies with low P/B ratios, as a low ratio indicates that the stock price is relatively cheap compared to the book value per share.  If two stocks were trading at the same price, the one with a lower P/B ratio would be the one that had more assets on its balance sheet (higher denominator).  To many investors, this low P/B ratio shows that the company they are looking at has more intrinsic value than another company, as the low P/B ratio indicates that the company has more assets under its name.

Let’s do a simple example.  If company A and B are trading at $10 and company A has a book value per share of $5 and company B has a book value per share of $10, what would be more intriguing for value investors looking for company’s with low P/B ratios?  In this example, company A has a P/B ratio of 2, while company B has a P/B ratio of 1.  Thus, company B seems to have a more appealing stock price, as both of them are trading at $10, but company B has a much higher book value per share (thus, it has a lower P/B ratio). 

Let’s check out a real world example.  Exxon Mobil (XOM) is currently trading at $78.10 and has a book value per share of 24.63, translating into a P/B ratio of 3.11.  XOM’s competitor, Chevron (CVX) is currently trading at $71.74 and has a book value per share of 42.80, translating into a P/B ratio of 1.65.  So, if an investor was strictly buying on P/B ratios, CVX would seem like a much better buy than XOM, due to CVX’s much smaller P/B ratio. 

But, P/B should not be the only thing that you check before investing in a company.  You must take into account a bunch of other ratios and factors before deciding to invest.  P/B ratios serve as a great initial screen, though, to find companies that might potentially be undervalued.  

Niki Pezeshki

College Trillionaire

Market Recap - January 16, 2009

The market edged up on Friday, as the Dow Jones gained 68.73 (.84%) and the S&P 500 also rose 6.38 (.76%). 

Trading was erratic, though, as investors were concerned about the health of the banking industry.  Citigroup (C) released its miserable 4^th quarter results, as it announced an $8.29 billion loss.  Bank of America (BAC) also lost $2.39 billion last quarter. 

The stock market is now just a big tug-of-war game in which horrible news tries to push the market down while hope that the economy will soon stabilize pushes the market up. 

This past week, the horrible news beat out the optimism, as the S&P 500 closed the week down 4.5% from last Friday’s close.

Next week will be very interesting again, as we can expect depressing quarterly earning reports to compete against the hype that will stem from Obama’s inauguration and more talk about bailouts from the federal government.  Who will win the tug-of-war next week? Only time will tell.

Until next week,

 

Niki Pezeshki

College Trillionaire

 

Stock of the Day - January 15, 2009

Activision Blizzard, Inc. (ATVI)

Activision Blizzard (ATVI) is one my favorite stocks for 2009! The company, which publishes online and console games, has a great product portfolio under its name.  It boasts popular titles such as Guitar Hero, Call of Duty, Tony Hawk, StarCraft, Diablo, Warcraft, and World of Warcraft.  I am not a big gamer, but even I know that these game titles are some of the best and most popular names in the video game market. 

There are many factors that I believe will help Activision’s stock price to steadily rise, so I will list them and go into detail in order to show you why I love this stock so much.

1)    The video game industry is as strong as ever, and it continues to grow.  According to the most recent statistics, sales of game software in the U.S. jumped 15% in December 2008, easily beating analyst expectations of 9-10%.  GameStop, one of the largest video game retailers, said that its same-store sales during the 2008 holiday season also rose 10%.  This is an unbelievably promising number when considering how weak the economy has been and how poor retailers in other industries fared during the 2008 holiday season.  These numbers show me that the video game industry is recession-proof, and that people are addicted to their video games!  Recently, Activision CEO Mike Griffith proclaimed, “video games are poised to eclipse all other forms of entertainment in the decade ahead.”  According to Griffith, between 2003 and 2007, movie ticket sales and hours of television watched fell by 6%, and music sales slumped 12%.  Over that same period, the video game business has grown by 40 percent!

2)    Activision sells some of the best products in the video game industry, and it is planning on coming out with new games in the near future that will also be extremely popular.  Activision’s three most popular games today are Call of Duty (33 million copies sold), Guitar Hero (25 million copies sold), and World of Warcraft (11 million subscribers).  “Call of Duty: World at War” was the second best-selling game for the month of December, behind “Wii Play”, as it sold 1.33 million units on Xbox 360 and 533,000 units for PS3.  I fully expect all three of these games to continue being extremely popular and addicting for a long time, and I would buy Activision stock strictly based on the success of these three games.  But, the product lineup for 2009 is what makes me so optimistic about this company’s potential.  At some point this year, Activision is planning on releasing the second World of Warcraft Expansion Pack.  With 11 million current subscribers and addicted gamers waiting for an upgrade, it is safe to say that a high percentage of these current subscribers will buy the expansion pack.  StarCraft 2 is also set to be released in 2009.  I cannot say much about StarCraft from personal experience, but the original StarCraft was the best selling real-time strategy game of all time. From talks that I have had with my gamer friends and from doing some additional research, it sure sounds like this sequel also has the potential to be one of the most popular games ever! Throw in the fact that Activision is also planning to release a new Star Fox game and Diablo 3 in 2009, and it is clear to see why I believe this company has so much growth potential. 

3)    As for Activision’s stock price, it is currently trading at $9.35, and it is over 50% lower than its 52-week high of $19.28.  I do not believe that this drop in price is justified, and I think that the stock price was pulled down due to the poor individual performances of its two biggest competitors, Take Two Interactive (TTWO) and Electronic Arts (ERTS).  Many investors took the problems with TTWO and ERTS as an indication of larger problems within the video game industry, but it seems clear to me that the video game industry is fine and that the internal problems with Activision’s competitors should be seen as an opportunity for Activision to take over more market share in its industry.  Activision is the perfect example of a stock that has unjustly been beaten down by Wall Street, and when investors eventually realize this, its stock price will reach higher and more reasonable levels. 

Think about how many friends you have who are hooked on Call of Duty, World of Warcraft, or Guitar Hero. According to one statistic, the average World of Warcraft player spends 11 hours a week playing the unbelievably addicting game.  I have heard nothing but good things about Activision games from my friends and from video game critics.  If you love playing Activision’s games, why not make some money while playing them by buying some of the company’s shares? 

I just recently bought some Activision shares, and I highly suggest that you do the same.  Activision is one of my favorite stocks for 2009, and I am extremely enthusiastic about this company! It is not often that I promote a stock this much, but this is one of those rare gems that I cannot get enough of.

Let’s make some money together,

 

Niki Pezeshki

College Trillionaire

Market Recap - January 15, 2009

The bulls made a late rally in today’s stock market to keep most investors from having another poor day in the markets. The Dow Jones slid 200 points within the first few hours of trading, and the index even dipped below the crucial 8,000 level at one point. The steep decline was caused by a lack of investor confidence in financials, especially with Citigroup (C) and Bank of America (BAC). But, every sector other than financials and telecommunications ended up higher on the day, and they led the late-day rally that brought the Dow up 12 points (.15%).

BAC’s shares dropped a significant $1.88 (-18%) to $8.32 today, as it became apparent this morning that BAC does not have enough working capital when news broke out that the government may provide them with another multibillion-dollar aid package. Despite the help, investors remain scared because of other examples of government handouts that have not worked. Case in point: Citigroup.

Citigroup lost 15.5% today and ended at $3.83. The troubled financial company received a government bailout of $45 billion back in November of 2008. Despite the large bailout and significant layoffs and cutbacks, Citigroup seems to be teetering on the edge of survival. Analysts and investors are anticipating dismal 4^th quarter results, which would be the fourth-straight quarterly loss for the company.

The market made a comeback later in the day, though, as it got a lot of help from the federal government.  First, investors began to feel better about financial companies, as they became more optimistic that the government will start to hand out the leftover $350 billion from the original TARP bailout to ailing banks.  The Democrats in the House of Representatives also unveiled their plans for an $825 billion economic recovery bill late in the day.  This bill, which is meant to infuse life into our weakening economy, will provide many citizens with tax cuts, hand out huge sums of money for local schools, create tons of special infrastructure projects that will create many new jobs, and also give money to state Medicare systems. 

It will be interesting to see if this newfound confidence in the federal government and its ability to save our economy will translate into stock market gains in the next couple of days and weeks. 

Until tomorrow,

 

-Matt Schwartz

College Trillionaire

Stock of the Day - January 14, 2009

Since its inception in 1925, Caterpillar (CAT) has been a staple of American construction. The machinery manufacturer also does business internationally.

CAT, like most other companies in the industrial goods and construction sectors, moves cyclically with the market. The rising and falling of CAT’s stock prices nearly matches the expansions and contractions of the Dow Jones curve. Over the past 5 years, however, CAT’s price increases have been much greater than its falls, and the stock peaked at nearly $86 dollars. The sell-off we saw in late 2008 left the stock at a low of $31.95, a price level not seen since 2004.

The stock has made a light rebound since hitting that low, and the latest trade was made at $39.35. The company did well in the first two quarters of 2008, generating more revenue than in the years before. But the last two quarters of 2008 were weak, with a quarterly earnings growth of -6.4%. This decline in growth was due to the recession, as not many companies and families were constructing new buildings and homes.  As a result, CAT’s services were not in high demand for the second half of 2008.

A huge factor that must be considered when analyzing CAT’s stock is Obama’s announcement of a stimulus package. He has most recently announced that his plan proposes to “rebuild crumbling roads, bridges, and schools.” He hopes to create 3 million jobs and the package is projected to cost upward of $750 billion, but some experts estimate that the package will cost as much as $1 trillion. It is safe to assume that this package will have a profound effect on the industrial machinery market, and Caterpillar’s sales will increase as a result.

For this reason, I believe that CAT is a company that you trade, not invest.  Once Obama enters into office and talks of the stimulus package begin to heat up, I think that the prices will continue to escalate until the bill for the package is officially announced. I would sell the stock a few weeks after the bill is passed. This is because after the bill passes the company will soon peak in sales and I would expect investors to peak in their interest of the company. Once the government demand for Caterpillar and the hype about the stimulus package has been inputted into the stock price, there will be very little demand left because of the continuing recession.

Obama’s stimulus package will have a large initial effect on the market and it would be foolish not to take advantage of the short-term gains. But remember: Once that catalyst hits, you have to get out.

 

-Matt Schwartz

College Trillionaire

Market Recap - January 14, 2009

What a horrible day for the stock market!  Every index was deep in the red today, as the Dow Jones fell 248.42 (-2.94%) and the S&P 500 dropped 29.17 (-3.35%). 

Stocks fell as investors have started to realize that getting out of this recession is going to take a lot longer than we once thought, and things might actually get a lot worse before they get better.  The catalyst for the huge drop-off in the market was the horrible retail numbers that were released by the government today.  The government report said that retail sales dropped 2.7% in December, more than double the 1.2% expected decline by many analysts.  The decline in sales can be attributed to rising unemployment, drops in home prices, and tougher credit standards.

At the end of 2008, when the market was starting to show positive signs of life, many people thought we were done with the high volatility and had gotten past the extreme lows that we saw in November.  But, after multiple days of consistent sell-offs, there is renewed fear that the recession is not close to being over and that we have no clue when the end will be. 

The Federal Reserve is beginning to show some concern for the health of the economy as well, as Fed Chairman Ben Bernanke said today that more capital injections might be needed to spur more lending and to stabilize the financial markets. 

The biggest news after the market closed came from Steve Jobs, the CEO of Apple.  Jobs, who has been battling health problems for a while now, said that he is taking medical leave until June! This is terrible news for Apple’s stock price, as Jobs is so connected to Apple’s identity. Without him in charge, investors will certainly not be as confident that good things will happen at Apple. I wrote about how disastrous this would be for Apple in my Stock of the Day article a few days ago, and it is definitely looking grim for Apple now.  In after-hours trading, the stock plunged 7 percent, and you can expect the stock to plunge even deeper tomorrow.

Wearing my seatbelt,

 

Niki Pezeshki

College Trillionaire

Trillionaire Term of the Day - January 14, 2009

Bid and Ask Prices

Understanding bid and ask prices is crucial in order to understand why and how stocks move up and down in price. Buying a stock is very much like buying a product from a flea market in which prices can be negotiated based on supply and demand. In the stock market, the buyer of a stock states what price they will pay for the stock – this is the bid price. The seller also has a price – the ask price. Thus, because the seller wants to sell his stock for a higher price and the buyer wants to buy his stock for a lower price, the ask price is always a little higher than the bid price. When a buyer wants to purchase a stock, he must pay the ask price because that is the price in which the seller is willing to sell it for. At the same time, the seller will sell the stock for the bid price, because that is the price in which the buyer is willing to buy it for.

So, if there are more sellers than buyers, the bid prices (the lower one) will be the one in higher demand, thus sending the stock price lower. If there are more buyers than sellers, the ask price (the higher one) is in higher demand, and thus the stock price will increase. You might be wondering who gets the difference between what the seller sells for and what the buyer buys for. The difference, or the spread between the bid and ask price, goes to the broker who makes the deal go through between the buyer and seller. Today, the spread is usually just a cent for most trades, but before online brokers, the spread usually was around 25 cents.


This is a pretty confusing, but extremely important concept for young investors to understand. So, I have provided you guys with some other references to look at so you can really get a grasp of how important this topic is and how it works. If you have any more questions, don’t hesitate to e-mail me at collegetrillionaires@gmail.com, and I will do my best to explain it to you personally.

http://www.usatoday.com/money/perfi/columnist/krantz/2006-08-25-bid-ask_x.htm
http://www.youngmoney.com/investing/sharebuilder/goals/031021_08
http://en.wikipedia.org/wiki/Bid_and_ask


-Niki Pezeshki
College Trillionaire

Stock of the Day - January 13, 2009

Petroleo Brasileiro (PBR)

Petroleo Brasileiro (PBR), commonly known as Petrobras, is a Brazilian company that engages in the exploration, exploitation, and production of oil. Petrobras is Brazil’s main oil supplier, and the Brazilian Government holds a 49% stake in the company. At the end of 2007, Petrobras controlled 98.4% of Brazil’s refining capacity.

Like any oil company, Petrobras’ stock price is extremely cyclical. That means that when the economy is doing well and oil is in high demand, Petrobras’ stock does very well. In times of recession, when oil is in low demand, Petrobras’ stock falters. This fact explains why Petrobras is currently trading in the mid-20’s while the 52-week high was $77.61.

Although the stock has been crushed recently, I see this stock rebounding very well once the world economy starts to show signs of life. Petrobras is actually one of my favorite stocks for 2009, as I believe it has unlimited potential when oil prices begin to shoot back up sometime later this year.

The first factor that makes Petrobras so intriguing is the fact that it has a monopoly on the oil industry in Brazil. Brazil, along with China and India, is an emerging market with a ton of potential. The fact that Petrobras has a monopoly on all of the oil and gas used in such a high-growth Brazilian economy gives the company unlimited potential. Imagine how profitable a company like Exxon-Mobil would be if it was the only oil producer and refiner in America. Without any competition, Petrobras will continue shine in Brazil.

Not only is Petrobras attractive because it has a monopoly in one of the fastest growing economies in the world, but it is also attractive because it continues to find huge oil reserves off the coast of Brazil. Just last year, the oil company discovered one of the largest offshore oil fields on earth off the coast of Rio de Janeiro.

The company is also growing its business operations to other countries, as it exported a record-high of 620,000 barrels per day in December. 63% of these exports went to the United States and 21% went to Europe. This growth during one of the world’s worst recessions proves to me that Petrobras is poised to break many more records once demand for oil begins to make a comeback.

Another reason I love Petrobras is because it has potential both for the short-term (under a year) and the long-term (over a year). For the short-term, the company has taken very good care of its debt and will steer clear of financial trouble throughout the rest of the recession. In addition, the fact that the Brazilian government and economy has such a vested interest in seeing Petrobras be successful, the oil company always has a lifeline to protect it. Another reason that Petrobras is so attractive in the short-term is because sooner or later the economy will rebound and oil prices will start rising again to over $40-$50 per barrel. Once this happens, a company like Petrobras that has so much potential will see its stock price bounce back extremely quickly.

So, now that it is clear that Petrobras is safe and is full of potential in the short-term, we must look to the long term. The fact that Petrobras is sitting on so much excess oil and is continuing to find giant offshore reserves on a regular basis shows that this company has unlimited growth potential and will become a world power in the oil industry before many people expect. With its great management and proven track record of success, I am confident that the company will use the excess oil from these reserves to make huge profits in the future.

I absolutely love Petrobras, and I have been eyeing this stock for months. I regret hesitating and not buying the stock when it was around $18, as it is now at $25.39. I will definitely buy this stock one day, but I feel like it still might be a little too early to purchase stock in an oil company during these volatile times. If it goes back down to the $22’s or low $23’s, I highly suggest you buy this stock. Petrobras has unlimited potential, and within 5-10 years, it could possibly be vying for the title as one of the top oil companies in the world.

Niki Pezeshki
-College Trillionaire

Trillionaire Term of the Day - January 13, 2009

Capital Gains Tax

When there is a way to make money, there is also a way for the government to tax you. This idea carries over into your gains from investing. The Capital Gains Tax (CGT) taxes the money you make when you sell a capital asset for a price higher than what you bought it at. Examples of capital assets include: stocks, bonds, precious metals, and property.

The CGT only taxes your realized net gains for the year. Basically, you take your realized gains and subtract your realized losses, and you are taxed on what remains. By “realized gains/losses”, I am trying to imply that you are only taxed on stocks that you sell. Your investments can continue to increase in your portfolio, but you won’t be taxed until you choose to sell them.

Let me create an example to help illustrate this. You buy 200 shares of Company A at $10 a share in January 2009. You buy 100 shares of Company B at $10 a share in January 2009. By November 2009, Company A’s shares have risen to $20 dollars and you sell all of them. This sale of capital assets gives you a realized gain of $2000 [(200 X $20) – (200 X $10)]. By November 2009, Company B’s shares are worth $5 and you sell all of them. This sale gives you a realized loss of $500 [(100 X $10) – (100 X $5)]. Your tax won’t be calculated until the end of the year. Your realized net gain (the amount that will be taxed) for this hypothetical scenario would be $1500 ($2000 - $500). If the CGT at the time was 15%, then you would be taxed $225 ($1500 X .15) and be left with $1275.

The Capital Gains Tax varies from year to year in percentage, but it is always based on your income tax bracket. The percentage of the tax also depends on whether your gains come from Short-term investments or Long-term investments. Short-term investments are investments that last a year or less (between the date of buying and selling). These investments are simply taxed at the same percentage of your income tax bracket. Long-term investments are held at least a year (between buying and selling) and are taxed at a lower rate than Short-term investments. As of right now, the Long-term investment CGT is at 15% for the top 4 income tax brackets and 0% for the bottom 2 income tax bracket. These rates came into effect in 2003 and will last until 2010 because of George Bush’s Tax Reconciliation Act.

While it may be dissatisfying to know that you will be losing a portion of your gains from investing, you should never let the CGT discourage you from making a move in the markets. You will be taxed less money on your capital gains than you will be taxed on the income that you create from your job. So, keep investing!

-Matt Schwartz
College Trillionaire

Market Recap - January 13, 2009

It was another lame day on Wall Street today, as the Dow Jones fell for the 5th straight time. The Dow dropped 25.41 points (-.3%), the S&P 500 rose only 1.49 points (.2%), and the Nasdaq gained 7.67 points (.5%). As you can tell from the puny percentage gains/losses of the major indexes, nothing too crazy happened.

Investors are still anxiously waiting for the 4th quarter earnings of most companies to come out in the upcoming days and weeks. Due to the uncertainty of exactly how bad the earnings of most companies will be, most investors are being very cautious and are hesitating to make bold moves in the market.

The big news after the market closed had to do with Citigroup and Morgan Stanley, two giant financial institutions. Citigroup agreed to sell 51% of its stake in its successful retail brokerage business, Smith Barney, to Morgan Stanley in an effort to build up cash and avoid more financial problems. This move by Citigroup shows how desperate the beaten-down bank has become to shore up its financial situation, as Smith Barney was one of the only positive things happening for the company.

Until Tomorrow,

Niki Pezeshki
College Trillionaire

Trillionaire Term of the Day - January 12, 2009

Return on Equity (ROE)

Return on Equity is a widely used financial indicator that is usually expressed as a percentage. It can be found by dividing Net income by Shareholder’s Equity:

                                                            Net Income

                                                -------------------------------

                                                    Shareholder’s Equity

The net income used for this equation is calculated before declaring common stock dividends. Shareholder’s Equity can be found by simply taking Total Assets – Total Liabilities.

Return on Equity is used to determine how effectively a company uses their equity to create income. On a basic level, the higher percentage ROE is, the more effective the company is at creating profit.

ROE can be a great tool for comparing two companies that are in the same sector. All other factors aside, if company A has an ROE of 10% and company B has an ROE of 20%, then company B appears to be the more profitable company.

Let’s take a real world example with a previous “stock of the day”, Yahoo! (YHOO).  Yahoo has a return on equity of  8.94%. Its biggest competitor, Google (GOOG), has a ROE of 20.82%. Using these numbers, it’s pretty easy to see that Google generates income more effectively than Yahoo!.

It is important for you to note here that I used two stocks that are in the same sector. Return on Equity statistics are almost worthless if you’re comparing two companies that do completely different things. Tech stocks like Google and Yahoo! have much lower capital requirements than, say, an auto manufacture like GM or Ford. The lower capital requirements for tech stocks create higher Return on Equity. So, make sure you are comparing companies in the same sector when using ROE to conduct research!

When properly handled, ROE can be a powerful tool in your arsenal for investing.

 

-Matt Schwartz

College Trillionaire

Market Recap - January 12, 2009

The Dow Jones fell for the fourth straight day on Monday as the index fell 125.21 points (-1.46%).  The Nasdaq also fell 32.80 points (-2.09%).  Commonly known to be an economic indicator, oil fell 8 percent to a new low for 2009.  This extended sell-off in the market combined with the drop in oil prices shows that investors are not too optimistic about the state of the economy, and that they believe demand for oil will continue to decrease. 

Alcoa (AA), an aluminum company, was the first company to come out with its 4^th quarter earnings.  The company, which released its quarterly earnings soon after the markets closed, announced that it lost $1.19 billion during the 4^th quarter due to plummeting aluminum demand in the U.S. and across the world. 

Obama also asked for the remaining $350 billion of the bailout funds to go to homeowners and small businesses.  This announcement of Obama’s plans led financial stocks to decline as well on Monday, as it seems like they no longer have the safety net of government bailout money to back them up if they go bankrupt or get into other kinds of financial trouble. 

Investors are still bracing for the rest of  4^th quarter company earnings to come out in the upcoming days and weeks.  It could, and probably will, get much uglier on Wall Street before things start to look up.  Companies have constantly warned that they have been hit hard by the recession, and the market will react negatively to their 4^th quarter earnings if they truly are as bad, or worse, as most companies are claiming them to be.

I am staying out for the time being, but I am keeping my eyes out for any signs of good news. 

Stay updated,

 

Niki Pezeshki

College Trillionaire

Stock of the Day - January 12, 2009

MGM Mirage

If you know me personally you know that I’m obsessed with playing poker and hitting casinos. There is hardly anything good to say about MGM Mirage (MGM), and this is why it hurts me so much to write an article about the ailing company. I’ve compiled a list of all the negative factors that have and will be affecting the company. I’m going to try to get this all out at once to take away the sting, and then I’ll break each factor down.

1)    The plunge in stock price

2)    General macroeconomic downturn

3)    Poor timing of the CitiCenter project

4)    Declining quarterly income

5)    Entrance of a new CEO, James Murren

That’s it for the basic summary, now for the grim analysis:

1)    Looking at the one-year graph of MGM’s stock price is like looking at a cliff. The stock had a high of $75.08 and a low of $8.00 and is currently trading at $12.40. The significance of this drop would be hard to understate. Anytime a stock price gets crushed that hard, there is usually a good reason for the free fall, and it is just a matter of finding out what is wrong.

2)    Las Vegas as a whole has taken a huge hit as a result of the credit crisis and general macroeconomic downturn that our country is seeing. Nevada has seen a 14.8% drop in gaming revenue and the Las Vegas Strip has seen a 16.1% fall in revenue. A drop in revenue from the Strip equates to a fall for MGM (MGM currently owns and runs 10 casinos on the Strip). In a time when people are concerned about whether or not they will have a home in upcoming months, most consumers won’t be inclined to gamble. It’s simply a choice between sustenance and entertainment. The economic slump has helped MGM in a small way: lower gas prices may encourage weekend warriors to make the trip to Vegas, but that is where the advantages of a poor economy end for the ailing casinos.

3)    A year ago, the sickening tone of this article would have been incredibly surprising. This is because Gaming and Vegas spending were at all time highs. Companies like MGM and Las Vegas Sands Corp (LVS) were steadily rising in price and the vast majority of investors didn’t see a sharp decline coming. MGM capitalized on the good times by building CitiCenter, a $9.2 billion complex of high-end resort-casinos, residences, and retail centers. The place actually looks incredible (check it out at citycenter.com), and it is supposed to open in 2009. In an incredibly cruel turn of fate, the economy turned bearish at the peak of CitiCenter’s hype. MGM was dealt a severe blow by unlucky timing. Recent news about CitiCenter has shown us just how brutal the economy has treated the company. Last week, MGM announced that they will be postponing the opening of one of their luxury hotels and canceling a luxury condominium completely. MGM is making the cuts in an effort to save $800 million. The fact that they’re doing this despite having already invested a lot of money in capital for CitiCenter shows just how dire the situation is.

4)    If you take a look at MGM’s income statement you’ll see that the company is following an incredibly poor trend. The company lost nearly half of its Income between the 2^nd and 3^rd quarters of 2008 (going from $113,101,000 to $62,278,000). There is no doubt that the company’s revenue and income will be even worse for the 4^th quarter of 2008.

5)    Finally, the kicker. MGM made the transition from its old CEO to new COO, James Murren, in December. I’m not saying that Murren will be bad for the company; In fact, he could completely turn MGM around. But it’s very hard to judge how good, or bad, a new leader will be for a company in a short amount of time. I prefer to wait and see how a new CEO acts before buying stock in a company. Also, the fact that MGM’s old CEO, Terry Lanni, had reason to leave gives me significant doubts about the company.

If you’re thinking about buying stock in MGM Mirage, the odds are stacked against you. And I’m not talking about a 51% to 49% split in Blackjack… your risk of losing is much more significant. Granted, the company is founded on a solid base and I believe that Las Vegas will be around forever, so I don’t think they’re headed towards bankruptcy. MGM will have the resiliency to survive in the long run and I’m sure that they will even thrive when the economy turns around. But the fact is the company will not be looking good and casino stock prices will continue to plunge until we get out of the recession, and nobody knows when that will be.

-Matt Schwartz

College Trillionaire

Sector Report - January 2009

U.S. Auto Industry

The U.S. automobile industry, comprised of General Motors, Chrysler, and Ford, is in shambles.  U.S. auto sales for the month of November reached monthly lows not seen since 1983, and with the economy set to get worse in 2009, things are looking more bleak than ever for the big three U.S. car companies. 

Sales in November fell 31.5% for Ford compared to the previous year, and November sales fell even further for GM, as the company sold 41.3% less cars than they did just last year. 

What has caused this precipitous drop in sales for the once mighty U.S. automobile companies, commonly referred to as the “Big Three”? The easiest answer that comes to mind is the state of the economy.  The automobile industry is an extremely cyclical industry, as car companies’ successes are very correlated with the overall health of the economy.  When the economy is doing poorly, less people buy cars, and as a result sales numbers drop.   But there are more factors than the poor economy that have led the Big Three to be on the verge of bankruptcy.

First, they have been too slow to adapt to market trends and consumer demands.  When oil prices were low in the late 90’s and early 2000’s, the Big Three, with their massive SUVs, were making an absolute killing.  Ford F-150s, Chevy Suburbans, and Cadillac Escalades were being purchased at extremely high rates by consumers who had money to spend and didn’t have to worry about the high price of gas.  But, as gas prices began to increase, the big three did not adapt quickly enough with more fuel-efficient cars that cash-crunched consumers were looking for.  Instead, foreign companies such as Toyota and Honda began gaining market share in the U.S. with their more fuel-efficient and reliable cars that seemed like smarter buys compared to the gas-guzzling U.S.-made cars.  For example, Toyota Prius sales soared 69% in 2007, and for the first time, Americans bought more Toyota Prius’ than Ford Explorers, the top-selling SUV for more than a decade. 

Another factor that has caused the Big Three to face increasing pressures to survive is the horrible contracts that they have signed with the United Auto Workers (UAW) over the years.  The UAW, which is a high-priced, unionized workforce, has been a burden for the Big Three for so long, and it is one of their biggest competitive disadvantages.  The first problem that the UAW creates for the Big Three is a huge wage gap between the U.S. auto companies and their foreign rivals that manufacture cars in the U.S.  It costs more than $73 per hour on average to employ a UAW member, while it costs foreign car makers like Toyota and Honda an average of around $44 dollars per hour.  This $29 wage gap between what the Big Three pay their employees and what their foreign competitors pay theirs is huge, especially when considering how many workers the Big Three employ and when considering the fact that the Big Three are already less profitable than their foreign competitors in the first place.  Other problems that the UAW poses for the Big Three include demands for healthcare coverage, retirement benefits, and many other concessions.  Quite possibly the biggest problem for the Big Three is that it is extremely hard for them to make any changes to the contracts, even in tough economic times, because the unions are always able to go on strike, an action that would be absolutely disastrous.

What does the future hold for the Big Three? Can they get out of this recession alive?  Many analysts and experts still have differing opinions, but everyone agrees that it will be extremely tough for them to survive.  The government has already bailed out the Big Three with a clause that will force them to become profitable by March 2009.  Just last week, the government also provided $6 billion to GMAC, General Motors’ financing unit.  This was huge for GM, as they can now provide better financing options to potential customers who might not have enough money to buy cars anytime soon. 

Personally, I think it is ridiculous for the government to expect that the Big Three will become profitable by March.  I believe the government must continue to bail out the car companies, as a bankruptcy for any one of them would be disastrous for the economy.  But, the action to improve the Big Three must take into account that their struggles are more than just cyclical.  There are underlying issues that must be fixed for any of the Big Three to be able to compete with companies such as Toyota and Honda in the future.  They must fix their contracts with the UAW to make operating their business more viable.  They also must focus on making cars that consumers are looking for, such as more fuel-efficient cars.  If the Big Three do not make fundamental changes to their business models, and they do not close the gap between themselves and their foreign competitors, they have no chance of survival in the long-term.

Niki Pezeshki

College Trillionaire