Thursday, 22 November 2012

If it's too good to be true . . . you know the rest . . .

I found a really troubling website today. I followed a link to "eToro" that promised to let me buy Apple stock for as low as 50 dollars. Now this was interesting given Apple trades at around 560. So I followed it and discovered that eToro is basically selling you tracker shares. So say you want to buy Apple but only have 50 dollars, no problem, you get an eToro certificate saying you bought (say) 9% of one share. Clearly nothing wrong with the concept, unless of course you ask the question: "If you only have 50 dollars to invest, should you be buying Apple or any shares at all?" Of course what would happen to your 0.09 of an Apple share if eToro went out of business? Think Rehypothecation maybe?

On to more factual things that have come my way in the last day or two. Lot's of div yield stocks are trading like bonds now days. It reminds me slightly of the way Japanese utilities used to trade before the Tsunami changed everything. Basically as bonds rallied the pseudo bonds rallied and ground zero for that is HK where condo prices reached new psf highs. I remember the mania for REITs that started in the 90's. One particular example was the LINK REIT (HK:823). I went to an investor tour while working for the lead underwriter to kill time in HK while waiting to get back to London after one of those team bonding things you do at investment banks. LINK basically grouped a lot of mid to low level shopping assets together with the promise of improvement via steady renovation. The most obvious example in those days was just putting a second set of toilet facilities in an 8 floor high shopping mall. Simple idea, but it worked, as did changing car park configuration and cinema locations within complexes. This year the stock is up 45%, because it yields 3.3%. That's good and div has been growing at 10% . . .  can that be sustained? Consider this: An investment baker tells me that the average annual rent per square foot at Causeway Bay is USD 2,630, making it the most expensive retail area in the world, which means that a 2000sqft noodle shop has to (according to him) sell 1400 bowls at current prices to pay one days rent. You better be the best noodle man on the strip or you'll be in trouble . . .  and so to will be LINK.

Yield is always a two edged sword, often when times are bad and interest rates are going down people use yield to shield themselves from the volatility of the stock market. During the current run up in markets the fad has continued and is in fact backed strongly by the cost cutting efforts of major corporations who are no sitting on record amounts of cash. Companies such as Apple look great because of their cash stock piles and their new propensity to pay dividends. But an expensive stock is an expensive stock and dividend yield rarely compensates you 100% for the capital loss risk. Returning to retail stocks for a second; did you know that the S&P Retail index now trades on 21x earnings? Consumer sentiment is at a 5 year high, as measured by the Reuters/University of Michigan’s consumer sentiment index (84.9 in October, up from 82.6 in September). So the bet is that retail spending grows fast enough that 21x earnings today is a lot less in a years time. If you're bull on retail you're also betting that the US fiscal cliff is avoided sooner rather than later because if those tax incentives for the vast majority (as embodied by the 2% payroll tax cut that might disappear) expire, than the black friday sales might have to last until the end of January. Be warned there is a lot of things similar about selling noodles in HK and T-shirts in NYC . . . . if revenue hits a wall then watch out below.

I'm going to be riding in the country west of Sydney this weekend. The weather looks a bit patchy, but I'll load up the bike gear in case I get a patch of blue. I won't try and ride on the main motorway arteries as I did last time because I doubt my nerves will take it. I'll also be charging up the front and rear lights so I can max them out at 70 lumens to give cars a chance to see me.

Happy thanksgiving to my American friends.


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