03 Jun 2012, Posted by Prem Malik in MALIK'S CORNER, No Comments.

Facebook, Europe, JP Morgan, Gold, Oil, Real Estate & Interest Rates….my views


 

It is a beautiful summer evening and what is better than a dose of Malik’s Corner. Here are some topics raised by clients over the past few months and my thoughts.

 Facebook launched their much hyped IPO at $38. It is currently trading at around $31. An 18% drop in under a week. There are many experts with different views on the price of this stock. In what I read, it is expensive when compared to the underlying financials of the firm. As one of the Financial Posts columnists writes, Facebook is priced at 107 times annual earnings, which is more expensive than every single member of the S&P index by sales other than two companies. Make your own call.  Would I buy it? I do not think so. There is uncertainty about the revenue stream and until that proven, we cannot value the stock properly. Currently the value is all hype by the bankers underwriting the stock. Personally, I like stocks with proven earnings and with dividend streams. They do not make as much as the tech darlings of the world but you do not lose your shirt either. I still believe Facebook has awesome goodwill in its name. Now they have to prove their earnings potential.

 Europe: Not sure how this will be resolved and it is not happening any time soon. Reduced earnings and increased taxes are not a recipe of happiness. The problem is that any new event in Europe results in stock markets gyrations around the world. Europe is not over and for that reason the volatility in the markets will continue. Over time, money will leave Europe for safer havens. There is a flood of money leaving Greece, Spain etc. The more this continues it will affect the stronger Euro economies such as Germany and France. Interesting times ahead for the Euro and related countries.

 JP Morgan :  I am not sure how JP Morgan sales executives can talk to their institutional clients when they have just lost 2 billion by an incorrect hedge. As one of the financial papers wrote….a hedge reduces risk not lose 2 billion dollars. Reason I point this out in my note is that diversification is becoming more and more critical in an overall portfolio. I am more concerned about the drop in the stock price. An individual stock making up a large percentage of an overall portfolio increases risk dramatically. Sell and buy an equivalent ETF in the same basket. It diversifies risk. Impact of the mistake will be more supervision by the regulators and as one of my clients put it….the job prospects for a senior compliance officer are looking very good in the US.

 Gold, Oil and Commodities :  The TSX is down 5% YTD and key reason is that it’s commodity rich portfolio is out of favor. Slowdown in China and the other developing markets, the correction in Europe, is having a negative impact on the TSX overall and specifically in the commodity stocks. Some are down 50% and this has hurt some portfolios. The rebound will be equally aggressive and we have seen it in the past couple of years. Most Canadian dominant portfolios are exposed to gold, oil and commodities and it is no surprise that they are down. As my client’s portfolios are diversified, the drop is not that severe but there is a drop.

 Real estate and the condo market:  Average home prices are 12 times disposable income in Canada. That is way ahead of what it used to be but is it a bubble. Not sure about this one…..a number of different events are impacting the real estate prices and in no order they are low interest rates, increased flow of new immigrants looking for accommodation, both rental or purchase. The volatile stock market is driving money out of stocks and into real estate. My two cents: if you are looking at your real estate portfolio and are worried….you own too much. Pare down and pay off debt or build your equity portfolio up with cheap stocks. Yields on dividend paying stocks are at record highs and as an example, bank stocks are paying in the 4 to 5% bracket.

 If you do not own real estate right now and feel the urge to jump in…make sure the decision is a long term one and not one to buy and sell. You do not want to buy at today’s prices and sell when a 20% sale is on. Long term the purchase will prove itself as for any long term asset.

 Interest rates: Over time they should rise. However, any increase in interest rates will have an impact of slowing down a slow economy and will hamper the growth south of the border. Therefore, the pundits are calling for a very slow increase in interest rates. I would still recommend the paying down of credit card debt and mortgage debt. As these are not tax deductible, you have to earn double the interest rate to pay the loan.  Better to pay down such debt and then borrow the funds back to invest when the markets settle down a bit.  Makes for a more intelligent investment using borrowed money.

 Look out for more frequent Malik’s Corners over the next couple of months. Please feel to share them with friends and family. They will appreciate reading it as much as I will.

 Enjoy the summer, be safe, and diversify!

Prem

Disclaimer

The information contained herein are obtained from sources believed to be reliable, however, its accuracy or completeness is not guaranteed and Queensbury Securities assumes no responsibility or liability. Neither the information nor any opinion expressed constitutes a solicitation by us of the purchase or sale of any securities or commodities. These comments and opinions are not necessarily the opinions of Queensbury Securities Inc. Securities mentioned may not suit all types of investors. Before making any investment decision, contact your investment advisor to discuss your investment needs.

 

 

 


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