Daily Archives: May 3, 2018

Technology

Big Tech Is Still King of Earnings

The current U.S. corporate earnings season is the best seen since the third quarter of 2010. With just over half of the S&P 500 companies having reported, the largest U.S. companies are on course to post earnings per share growth of 23.2% from a year ago, according to FactSet

But apparently, the best growth in seven years isn’t good enough for Wall Street which is feeling a bit ‘biblical’ these days. Right out of the story of Joseph in Genesis, Wall Street is worried that these seven years of ‘plenty’ will be followed by seven years of relative ‘famine’.

Despite spectacular gains in revenues and earnings, some companies’ stocks have barely budged or even dropped. The worry is that rising borrowing costs (interest rates going to 4% or 5% and beyond) and inflation mean that a turn in the business cycle is close. These worries were intensified when Caterpillar (NYSE: CAT) said rising input costs may mean that the first quarter would be the “high watermark for the year.”

As it usually does, I believe Wall Street is over-reacting. Yes, a recession is coming… eventually. But I believe it will not arrive until late 2020 or even 2021 and it will be caused, as usual, by a misstep by the Federal Reserve.

But it’s just too soon to get out of stocks now. If you do, you will miss a lot of upside that still remains, especially in the large cap technology stocks, such as ‘old tech’ stalwarts Intel (Nasdaq: INTC) and Microsoft (Nasdaq: MSFT) as well as the new tech titan Amazon.com (Nasdaq: AMZN).

Intel Moves Beyond PCs

Its first quarter showed all the doubters that Intel’s long-running efforts to carve out a future in the post-PC era is moving along nicely. Revenues from its newer endeavors in markets including autonomous vehicles and artificial intelligence (AI) were about even with revenues from its PC chips for the first time ever!

Thanks to the surprising boost from these markets, Intel reported revenues were about $1 billion ahead of Wall Street estimates. This outperformance was largely due to a 24% jump in revenues from the data center division, which has quickly grown to become the second pillar of Intel’s business behind its PC-related business. Demand from customers in this sector had driven growth, with “a significant bias for high-performance compute” leading to a shift in chip sales towards more powerful chips and therefore higher average selling prices.

Further expected expansion in these newer markets for Intel allowed its management to raise its revenue forecast for the rest of the year by 4%. And it confirmed that CEO Brian Krzanich made the right moves when he acquired Altera (its products are used in AI) for $16.7 billion and Mobileye (driverless vehicle technology) for $15.3 billion.

I expect Intel to continue “to step on the gas” with even further investments into faster growing markets away from PCs. Its stock, already at a 17-year high, will also continue to accelerate.

Microsoft’s Best Growth in a Decade

Another company that has broken away from its PC past with a bang is Microsoft. The company looks to be on track to record its best annual growth for more than a decade. This follows a revenue boost from its cloud business in the latest quarter and a bullish forecast for the final quarter of its fiscal year.

Microsoft reported revenues of $26.8 billion, boosted by growth of 17% in both its intelligent cloud division and its productivity and business processes group. That was $1 billion ahead of Wall Street’s expectations. Earnings per share rose by 36% to 95 cents, compared with expectations of 85 cents.

Microsoft’s management forecast revenues of as much as $29.5 billion in its current quarter, which is roughly $1.5 billion above most analysts’ estimates. Hitting that target, which is likely, would represent growth of more than 20% for the year to June.

Underpinning Microsoft’s move into becoming a growth company is its move into the cloud. In the latest quarter, the company showed a 58% jump in revenues from its commercial cloud operations — its Office 365 productivity service, Azure cloud platform and Dynamics 365 cloud applications. They a accounted for 22% of overall sales in the quarter at $6 billion. Azure continued its explosive growth, with revenues growing by 93% from a year earlier. This firmly cements Microsoft’s place as the second-largest public cloud computing platform after Amazon Web Services (AWS).

Revenue from the company’s overall commercial cloud business soared by 58% in the quarter. That was nearly 10 percentage points faster than the pace of growth from number one AWS. Microsoft’s CEO Satya Nadella says the growth in cloud services is just starting:

“We’re still in the early innings of the cloud transition.” Nadella also predicted that further growth in the cloud would lead to a jump in “lower-margin services first [and] higher margin services over time”.

Under Nadella’s leadership, Microsoft is once again a growth company. I don’t see that changing any time soon.

Amazon Blows Away Wall Street

That brings me to the aforementioned Amazon, which completely blew away all of Wall Street estimates by posting earnings that were more than twice as good as had been expected – $3.36 a share versus $1.27.

Revenues for the first quarter jumped 43% to $51 billion. Amazon’s net income more than doubled to $1.6 billion, due largely to what it called “very strong customer demand” in its cloud computing services business and a darn good performance in its online advertising business. Its AWS business grew by 49% to $5.4 billion and now makes up about 11% of its total sales and almost 75% of its operating income, at $1.4 billion.

And talk about positive forward guidance… in its outlook, Amazon said operating income might triple in the current quarter. It gave a guidance range of $1.1 billion to $1.9 billion, up from $628 million in the second quarter of last year, with net sales growing as much as 42% to between $51 billion and $54 billion. That sort of growth is almost unheard of in a company the size of Amazon.

Add in the $3.1 billion that Amazon Prime (with 100 million subscribers) and services like Amazon Music Unlimited brought in and you have an almost unstoppable juggernaut.

This growth is the main reason why Amazon is the top challenger to Apple (Nasdaq: AAPL) in the race to a $1 trillion valuation. A race where one company is still sprinting and another company seems to have dropped the innovation ‘baton’.

The bottom line for you is that even if you are worried about growth or inflation, stick with the companies like these three that have idiosyncratic growth. And that can raise prices like Amazon, which is raising the price for its Prime membership by $20, from $99 to $119 a year, adding billions of dollars to its revenues to the bottom line.

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Source: Investors Alley

Cryptocurrency

How to Protect Your Retirement Funds Using Foreign Currencies

Can an average investor use foreign currencies as a hedge against the rapid decline of the purchasing power of the US dollar?

Last week, friend Chuck Butler and Idiscussed WHY investors should use currencies as an inflation hedge. This week we discuss HOW even small investors can do so from the comfort of their own home.

The discussion continues…

DENNIS: One final tidbit about foreign accounts before we move on.

Some pundits believe that having money in several countries is the ultimate diversification – out of reach of the US government.

Despite the fact that foreign money managers with US clients must go through an extensive process to comply with SEC regulations, many readers, particularly small investors, are understandably not comfortable with the idea.

When investing in foreign stocks you can make/lose money in different ways.

For example, Parkland Fuel is traded on the Canadian exchange. 25% Canadian tax is taken out of their monthly dividends. I’ve given up trying to figure out how to get the taxes back. Readers should look at their NET return before buying an investment.

Additionally, the stock may rise or fall, and so does the Canadian dollar.

Look at each element independently. Your profit/loss on the stock comes when you sell it; whereas your profit/loss on the currency comes when you move to a different currency.

Do your homework. Deciding what foreign companies to buy, what currencies to use, and the timing of buying and selling is what international traders deal with daily.

If you pick the right stock – and the right currency – you can do very well. Don’t be shy about asking for help.

Let’s look at other alternatives. There are several Exchange Traded Funds (ETF) that allow you to invest in foreign currency.

Chuck, can you explain how these ETF’s work?

CHUCK: Currency ETF’s are just like their brothers on the U.S. stock side. The ETF represents the currency it says it does. For example, FXA is for the Aussie dollar ETF, and FXE is for the euro ETF, etc.

I’ve never been a real fan of currency ETF’s because you would have to jump through fire hoops to get the currency out of the ETF delivered to your foreign bank account. When you sell, the currency is converted back to dollars and put in your brokerage account.

As we discussed, diversification is an added layer of safety. If an investor wants to go the ETF route, again I’d recommend they diversify among several.

DENNIS: You mention the funds are only redeemable in dollars. When would an investor want to have their account credited in foreign currency as opposed to US dollars?

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CHUCK: Anytime you sell a currency ETF you are converting back to dollars. You’re not only creating a taxable event, you’re also incurring conversion fees.

Here’s a couple of examples where you may not want to do that.

I used to run a foreign currency trading desk. We had people all over the world use our currency deposit accounts to hold euros, while their BMW or Mercedes was being built. They would go to Europe, pick up the vehicle, pay for it in local currency and drive it through Europe. You can’t do that with an ETF, you would end up paying fees to convert out of, and then back in to Euros.

Using your Parkland Fuel example. If an investor had a Canadian dollar ETF and wanted to buy a Canadian stock for better yield, they would have to sell the ETF – pay taxes on any currency gains – then pay fees to convert to US dollars and then back to Canadian dollars.

If they held Canadian dollars in a Canadian denominated savings or brokerage account, they would just buy the stock on the Canadian exchange, avoiding the taxable event and double conversion fees.

DENNIS: EverBank, your former employer, offers Certificates of Deposit (CD) denominated in foreign currency. Can you explain how they worked, and how they differ from the other options we discussed?

CHUCK: Ahh yes… my former employer… In June the EverBank name will be no more. Last year they were purchased by TIAA and soon the name will be changed to TIAA Savings Bank.

There are many differences, so here we go!

EverBank World Markets offers CD’s denominated in the foreign currency of an investor’s choice (about 25 currencies).

When the CD is opened your dollars will be converted to the foreign currency and put on the bank’s books denominated in the foreign currency you selected. The account is FDIC insured. FDIC insures the deposit in case of failure by the bank, it does NOT cover currency fluctuations.

There’s a conversion fee (less than 1%) when you open the CD, and another when you decide to close it. The CD’s are automatically rolled over with no conversion fee at maturity until you tell the bank to close out the CD.

Since there is no conversion on rollover, the holder maintains their original cost basis in the currency. If the currency gains in value VS the dollar, the holder of the CD can close out the CD and convert the principal and interest back to dollars, with a gain that would be used to offset the loss of purchasing power of a weaker dollar.

They also offer several baskets of currencies, allowing an investor, to diversify for added protection.

Unlike a US dollar CD, where you are encouraged to tie up your money for years, many investors ladder EverBank CDs with three-month maturities so one matures each month, which makes their funds fairly liquid.

You can also have a savings account, which most people use to hold currencies for short periods of time, waiting for the right time to convert, or for whatever they have bought from a foreign business, or a house to be ready to purchase, or a deposit on a vacation rental, etc. The savings accounts were created in 1988 by a man named Frank Trotter.

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DENNIS: Investing and holding foreign currencies is not as complicated as it sounds. Let me try to break things down into simple steps and you can tell me if I am accurate.

  • Step 1 – Decide if you want more inflation protection by diversifying into foreign currencies.
  • Step 2 – Decide what currencies you want to own.
  • Step 3 – How much do you want to invest? Consider fees of the various options as they could become a factor.
  • Step 4 – What are your risk priorities? Are you comfortable just holding currency, or do you want to invest in stocks or bonds that may provide yield and appreciation?
  • Step 5 – Where do you want to invest? Are you comfortable going offshore, or do you want to stay in the US?
  • Step 6 – Do your homework! You have many options:

– offshore account
– international account with US broker
– mutual funds
– exchange traded funds
– FDIC insured CDs like EverBank

I’m confident if you talk to a US broker, an ETF salesperson, EverBank or an offshore money manager they would be very persuasive about why their alternative is best for you.

Do your homework; make your own determination. You may find that diversifying among the options works best.

And most of all:

  • Step 7 – don’t get discouraged! Remember the goal. If you feel the dollar is falling in value, you must protect the buying power of your life savings. Investing in foreign currencies is like a bicycle helmet – you don’t need it until you crash! Then you’re doggone glad you have it.

Chuck, did I miss anything?

CHUCK: Dennis, you did a great job of taking all the mumbo jumbo and putting it in precise words for your readers!

A couple more points before I finish…

Currencies are an excellent way to diversify your investment portfolio. IF the dollar continues its decline that began last year, you’ll be able to offset the loss of purchasing power, which I’ve always considered to be a “tax”. I hate to see baby boomers and retirees lose purchasing power of their life savings!

I don’t believe that anyone should go “all-in” with currencies or Gold/Silver. Use them as a diversifying tool for your investment portfolio protection.

I told my audiences… You buy fire insurance and hope you never need it right? You buy health insurance with hopes that you never need it, and flood insurance, etc. Diversifying one’s investment portfolio is insurance against a falling dollar.

Unlike an insurance premium, there is no expiration date on foreign currencies, they will always hold some value.

DENNIS: Chuck, thank you so much for your time. I get a lot of email from readers who say good things….

CHUCK: It’s always a pleasure Dennis, thanks for inviting me.

Dennis again. Regular readers know I’m doggone concerned about inflation destroying the purchasing power of our nest egg. As Chuck said, “It’s a hidden tax”; and I don’t want to pay it.

Gold isn’t the only option. For investors, big and small, buying and holding foreign currencies has never been easier.

Jo and I have been invested in foreign currencies for almost a decade. The Fed is targeting 2% inflation using the bogus accounting, so it could easily be much worse. While currencies rise and fall with the market, we’re not going back to “all in” with dollars. It’s much too risky!

Buffett just went all-in on THIS new asset. Will you?
Buffett could see this new asset run 2,524% in 2018. And he's not the only one... Mark Cuban says "it's the most exciting thing I've ever seen." Mark Zuckerberg threw down $19 billion to get a piece... Bill Gates wagered $26 billion trying to control it...
What is it?
It's not gold, crypto or any mainstream investment. But these mega-billionaires have bet the farm it's about to be the most valuable asset on Earth. Wall Street and the financial media have no clue what's about to happen...And if you act fast, you could earn as much as 2,524% before the year is up.
Click here to find out what it is.

Source: Investors Alley