Sunday, July 03, 2011

NETFLIX - Is a Short

It's time to analyze the position of Netflix NFLX in the broader market. This stock keeps advancing and it's red hot for portfolio managers. The revenue is solid $718,553,000 and the EBITDA looks good at $224,993,000 with a P/E ratio of 82.5. On June 3rd, I wrote that it's still too early to short this stock because it has too much momentum, but for those who've already made their money, it's time to start building an exit strategy. Why did I say this?
The FCC gave data service providers the ability to start charging customers based on their data usage. A user and data customer might have to really start thinking long and hard about watching that cute kittens youtube video if it's going to put them over their data plan. Though cable and internet service providers like Comcast haven't set forth in claiming these profits yet, they soon will, and streaming HD movies from content providers like Netflix through a Comcast hub will drive up the gigs used faster than almost any other use through the web. Depending on the allotted gigs or terabytes a cable company gives each customer, they may only be able to stream a handful of movies before added costs kick in. This will drive the consumer's cost up significantly when they look at their bill for Netflix in conjunction with the bill from Comcast. This was my thought back in March when AT&T was the first to launch a data cap of 125 gigs per month of data usage.
Comcast, like AT&T, Time Warner, RCN and other data/internet providers, already has a deal with content providers like HBO, Showtime, Encore etc... If you are part of the XFinity package you can stream videos on your computer as well as the television. There are no added costs to download or stream content in this manner so far. HBO also launched it's own application which allows your smartphone to manage and view content including movies and TV series. A customer can take all of those programs out of their Netflix queue right now. You can watch everything through the current season's episodes on your HDTV where as Netflix has dated content.
I was asked if I see Comcast making deals with studios to provide streaming content through their network, and before the NBC merger, I would have said no, but since I've considered the move as a foray into the field of content and an excellent acquisition of television news broadcasting services. I believe they'll continue to let their OnDemand services grow and as that option becomes more popular, they will modify their contracts with subscription channels like HBO and Showtime to a more advantageous position.
Finally, and most importantly, this year Netflix will hit the cap on the number of users who can access titles from various studios (like Disney, Sony, Columbia & Dreamworks). Their contracts stipulate that when Netflix subscribers list hit a certain number, the contract will be renegotiated and those titles will not be available until a new agreement is reached. An interruption in services for any prolonged period of time as a new contract is drawn up will send customers looking for alternatives. Netflix will be search to make up the lost revenue by increasing the cost for their customers. I'm not certain, but I believe they'll make consumers choose between two paths, either paying more, or limiting service. If they limit service to snail mail delivery, or charge extra for online streaming services. Either way, they will disenfranchise their customer base. I believe they will lose customers and their growth will be slowed.
I expect more downside pressure from this point (Update July 18, 2011). As the headlines change in an uncertain global economic market where a jobless recovery appears to become more of a reality, I believe you will eventually see the downgrade of Netflix. In a world controlled by ETFs and indexes, a buying opportunity will arise in corporations like Comcast which will be brought down in the ETFs along with Netflix.

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Wednesday, March 30, 2011

Madison, Wisconsin, Is America's Best College Sports Town

No one really needed to tell me this. As a student I've watched my Badgers consistently make it to the NCAA Tournament thanks to the coaching of Bo Ryan. I am a huge fan of Barry Alvarez! As a freshman in '93, our Badgers won the Rose Bowl. On Wisconsin! In the '97 season, they won the Rose Bowl. Two years later... Ron Dayne & Rose Bowl.
Mtv recently had a poll of students asking them which the best college sports town was? After we just went to the Rose Bowl and took down Ohio State University at which point Scott Van Pelt felt compelled to say wonderfully:

There is a fire that gets lit inside you as a Badger and you want to excel. You make the best of it. You work the best you can. You cheer the best you can. You play the best you can. And with a little bit of luck and a little bit of pluck, you get moments of pure joy and anything you imagine can happen! Then everyone jumps around like bright shooting stars, just like Ken Kesey wrote.


Wednesday, October 13, 2010

The Validity of Commoditizations

Debt is in dispute. Who owes on the loan is not the issue, but for the debtor the real question is who owns the loans. The uncertainty in the market stems from the the origination process of the loan to the commoditization of it on the market. Along the way the paperwork for the loan under British and US property laws should follow. However, because they commoditized the debt, they no longer "own" the house. The valid papers must be signed by the correct individual. However, these commodities were bundled and put on the open market and traded, split, and traded again. Tracing the ownership of a single property is obscured by the volume of trades in the system.

In many times prior to the mortgage crisis, there were lenders offering NINJA (No Income No Job or Assets) loans. Often times these lenders had less than adequate paperwork to justify that the borrower had income to justify the loan. We return to the issue of predatory practices, but it appears that there is a disparity on both sides of the coin. In some instances the originator made mistakes and in others the assignment (borrower) failed to produce all of the correct documentation to support the loan or failed to produce the income during the recession. In some cases, the paperwork doesn't exist at all and or nor does the corporation that originated the loans. In these cases, those debt holding institutions are manufacturing paperwork which is controversial because it may not reflect the statutes, statements or beliefs of the original loan.

The banks know this, but due to nonpayment they proceed with foreclosure. Standard contract and property law states that the party must fulfill their obligations to meeting payments for the debt. In the case where the borrower can not, they must at least remove themselves from the property. This is necessary for the market to have a value. How do you price a commodity that should be for sale, but the defaulted borrower won't leave because you don't have the original paperwork with the terms and conditions? Right now the market has come to a halt over this.
It is clear that the housing market will either continue to go down or hold with inflation. The only way to recover from this set back is to fairly price the market and that requires investor confidence. There are buyers on the sidelines waiting to come in, but the trouble is there is no confidence that this will be corrected.

I believe there needs to be an independent monitor and a standardized set of rules that govern how home and business loans are documented and executed, especially when it comes to foreclosing on commoditized loans. It needs to be set up immediately and go to work to arbitrate these foreclosures as soon as possible.

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Friday, October 01, 2010

The Economic Outlook Is Changing

I expect the recovery of the stock market will happen in this order:

Certain key factors have changed investor outlook in the past three weeks. "Quantitative Easing" is another way of saying "creating inflation" and when that happens people begin to devalue currencies. The US Dollar fell over 11% in the last month. As a result, investors are forced to move their money from the sidelines. Prior to the current rally investors were getting into bonds. The returns on those bonds will not outpace inflation, so dollars spent there may be worth less than dollars that can build equity.
It currently appears that a dollar on the sideline will be worth less tomorrow than today and this will be a trend that will continue. Commodities, like gold, palladium and silver are at an all time high due in part to inflation fears tied to the government's inability to restrict spending or limiting the printing of new currency.
Copper has increased in value by 11% though world economic growth is expected to be relatively flat.
What this is telling us is that commodities and equities are more valuable than cash.
If a rally is to occur, it can not happen with out the financials. Technology will boom as companies will take advantage of cheaper goods. Durable goods orders should improve at the same time.
The government announced it's plans to sell off it's common shares of Citigroup and AIG. If you're looking for a bounce in the next week... I'd start with Citigroup C. Let's see how we do. I predict a 8% rise next week and a major bull rally.


Thursday, June 17, 2010

Deepwater Horizon - Future Implications

What does the future hold for the Gulf of Mexico and the Northern Atlantic? British Petroleum has doomed most of the Gulf of Mexico and their inhabitants with the Deepwater Horizon blow-out. Regardless of the current efforts there is no end in site to the escalating damages. Hayward, CEO of BP, said under oath today in the hearings on Capital Hill that the disaster was preventable and they are often working "like a laser" for safety on their rigs. As the pundits talk about what is to happen, let's realize the true fingers of this catastrophe - environmental, economic, health, and potentially devastating secondary storm systems. Here's the picture of the Gulf from June 12th. The scope of this disaster has not yet been felt by the inhabitants and most of the oil is hidden in vast plumes under the surface, so let's think through what will happen going forward!
First we're going to see wildlife turn up on the shores. There's an explosion in the body counts of dead pelicans, flamingos, dolphins, porpoises, other fish and wildlife. Yesterday a 25 foot sperm whale was reported dead on the shores of Pascagoula, Mississippi. Currently, 449 sea turtles reported dead. 45 dolphins reported dead. Both professional fishermen and Game fishermen have left the waters completely and the industry is at a standstill.
The businesses that thrive on vacationers and tourists are done for the high season and those that would come have been canceling their reservations in droves. The professionals need to conserve their resources and break lease and find non-polluted clearer waters if they choose to continue in their current occupations. For many involved in real estate already hard struck by the recent recession, this will be the final blow. They will no longer be able to sell their properties and the value of them will not come back.
For the states along the Gulf Coast, the tax revenue brought in by sales will be down considerably. Let's take a close look at Florida. This map is the Florida population density map from the 2000 US census. It is outdated and does not reflect the housing boom that ended in 2008.
The areas of Central West, and South West Florida have more that 5000 people per square mile. At an average of a $40,000 per person per paycheck, this will affect $60,000,000 in tax revenue per square mile in the densely populated regions. Regardless of the impact on the local economy, the situation is soon to spread.

I do believe it will affect Louisiana, Alabama and Mississippi heavily, but Florida the most. The water currents are regular in the Gulf. In this map from the University of Miami, CIMAS & NOPP you will see an accurate vector direction of the current. This is a clear indication that the oil flow will eventually coat the Florida Keys, and oil will wash up on shore in Miami, Key Largo, Fort Lauderdale, and Palm Beach. There is indisputable evidence that the current will draw oil (carcinogenic) to the shores of North Carolina. The health risks of ground water contamination and dispersion within the food chain have been seen in other areas of the world. The result is a spike in the increase in cancer among residents of the affected regions. A majority of the oil is still hidden in vast underwater plumes that will churn up during storm season. For more on the health implications of petroleum please read the CDC's report from 1999 on total petroleum hydrocarbons
In our next map we see the current temperatures of the Gulf of Mexico. As one would expect from the current flow, the water is warmer where the current pools. Soon to be recognized will be the surface temperature increases due to the oil pollutants.
A current report from the NOAA National Data Buoy Center shows that buoy station 42040 MOBILE SOUTH 64 nm South of Dauphin Island, AL is reporting a temperature 1 meter below the surface at 97°F. The surface temperature most likely is in excess of 100°F where as the air temperature is only 86.5 °F. According to a 2008 study in Nature magazine, when the Atlantic warms one degree in the dead of summer, the overall hurricane activity jumps by half. The affected region is posting a 13 degree surface water temperature change from last year. If a big storm or hurricane was to hit the region, the waters will fuel the strength of it and will churn up the deep sea plumes of oil. This will allow a greater area around the flow to stay warmer for longer.
The surface oil will dissipate eventually. We might get lucky and a majority of the oil will sink to the bottom, but that's only partial luck. The food chain will ultimately be affected and recommendations for consuming food from the region must be taken with a touch of salt/oil. Most of the wildlife depend on consumption of smaller organisms that live closer to the floor of the Gulf. These effects are unknown, but a long term and long range study must be conducted in the coming years to understand this better.

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Sunday, May 23, 2010

Why Delta Air Lines Can't Be Trusted DAL

I was going to blog about the accident history of Delta and their disaster history while siting as a source, but I'm actually upset about how they handled my baggage. I was returning home after a long trip and was hoping to get home in time to accomplish something today, but after waiting at the baggage carousel a little too long I realized they mishandled the bag they charged me an extra $25 to check.
So I asked them what happened to my luggage. They told me it didn't make the plane when I transferred in Cincinnati. "So it's in Cincinnati?" They said "Yes. It is in Cincinnati and it will be here at 3:30pm." The baggage claims person gave me a reference number and said that the bag would be delivered to me tonight.
So I proceeded to head home.
I waited patiently until well into the afternoon, and made a call. The representative from Delta was informative. She told me that she did not know where my bag was. After asking for someone else to speak to she told me that it was in Detroit. Then she told me it was put on the wrong plane to begin with and went to Detroit and never was in Ohio. She said it would be picked up at 7pm by a baggage handling company. I asked which one and if I could pick it up directly and she said she didn't know and that she couldn't give me any other information.
The third representative told me they just handed the bag off to a company called Global Airline Resource Center and it would be delivered to me before 10pm. I asked if we can confirm this information and she dismissed my question with a "Thank you for calling delta and have a nice day."
So I called GARC and went to their website. It is full of dead links and bad scripting. So I call the 877 number and go through the voice prompts waiting for customer support. An hour later, I gave up. I am earnestly trying to find out who's got my bag. I call a manager number listed on the page and I am promptly told that they do not handle bags in Chicago. They are not located in Chicago and they do not work with any company that is in Chicago.
So I ask him to double check because I don't expect that Delta would lie. He says that he's worked for the company for a really long time and they never worked in the area. It is now 9pm. I call Delta again.
After a lengthy wait, I get "Tilemia" who claims to be a floor manager for Delta and would like to help me. I tell her I've been given wrong information a couple of times and I need to know who has my bag and when it will arrive. I want it back ASAP. She tells me that if they don't deliver it by 10pm it won't come until the morning. I tell her that I've been waiting 9 hours already and she says it doesn't count for deliver until Delta hands the bag off... so I ask who has it. She tells me the same thing "Global Airline Resource Center" so I tell her she is wrong and that I spoke to the manager there and we could have a nice conversation, just the three of us, if she'd like. She doesn't answer. Now I'm getting pissed because I know that she knows that I know she's giving canned answers. She tells me that that is the company and they do work in Chicago and they do have branches all over. I ask her to verify the information. Within 5 seconds she says she has... and now she's getting salty with me. I tell her I need to have the package delivered tonight, no matter what time. Can she make this happen? Yes, she should, but she gives me a huge amount of gruff about it... talks over me when I am asking the questions and when I ask for spelling or phone numbers tells me I'm talking over her and she will not have that... I'm sorry, I thought I was the customer that's been wronged and have been talked over and told incorrect things all day and charged for it taboot.
She checks again and now she tells me that it's a company called "Global Delivery Express." I write the name "Global Delivery Express" in quotes because she refuses to validate who the company is. A google search comes up a scam-fraud-alert (I have Internet... and I'm checking this company out while we speak). I tell her I need more information about this company because I'm going to call them when we're done, mainly because I don't believe Tilemia or the agents I'm speaking to at this point because they are just treating me like shit.
So, I'm going to write corporate about my experience about my lost baggage and how their team has added insult to injury and it's not worth the money when this is the norm, and not the exception to the rule (especially when I have to pay for the baggage and that defeats the cheaper fare in the first place). However, the biggest loss for me today was the loss of time that I spent trying to track down my luggage.
They loosely keep track and barely measure their own performance or that of the subsidiaries they sell their routes to especially in light of their +538% above average accident rate!

UPDATE 12:12AM - Luggage Delivered... Guess who had my missing suitcase? Was it a) GARC b) Global Delivery Express c) both or d) neither.

IT WAS D) NEITHER! THE NAME OF THE COMPANY WAS DUNN RITE! I was justified in asking the spelling of the name of the company that was in possession of my suitcase as much as the true information of who had it!

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Thursday, May 13, 2010


I suppose I've been pushing myself to do more. This winter was not my favorite, but what I did wind up doing is going to the gym... I would go a little more often and stay a little longer as the winter progressed with I found myself coming around to the same word over and over again... endurance. This is a word that I want to come to mind when people think about what it is I can do and how I do it.
I had a question in my mind about how to do this... where to start... What will be my first steps when I get off of this elliptical machine? "Let's stay on a little longer and lets increase the difficulty a little more. Then let's switch to a different apparatus and do a little more..." Before I knew it the winter thaw had come and taken away the bitter cold, ice and slush and left in it's wake lots of pavement for my feet to press. I found the Lake Shore Path both cluttered an unorganized. Dodging oncoming traffic, dog leashes, cyclists, children, vendors and walkers in the run lanes can be taxing... but every weekend there's a fun run somewhere.
I started my quest with a 6k for the "Run For Water" sponsored by DOW Chemical... the irony is that DOW has about as much corporate responsibility for a clean environment as BP apparently does for a healthy Gulf environment... but I digress, I ran the race for me and because my friend Jackie was working on the stage where they had Collective Soul play and I kinda like them in a nostalgic mid-90s kind of way. Time ~26min.
Suffice it to say I ran these and didn't slow down... in fact, I sprinted the last 1K. I'm not the fastest and I didn't place... and yes, I did get passed by a woman pushing two kids in a stroller and a guy who ran with his dog... and a man twice my age (though for the record he runs marathons worldwide) during the Run for Water, but I wasn't racing against them. I was racing against me.
The second race I ran was the Wrigleyville Run 5K which went a lot better except I woke up at 7:50am for a 8am start... It's kind of lucky I live close, but by the time I got there it was 8:07am and I still hadn't stretched out and I ran a couple of Ks... I haven't mapped it yet, but I started at the back of the pack and finished somewhere in the middle ~23 min.
This year's times are ok, and I'm only getting better at this!
So here I am staring a half marathon in the face on Sunday. This will be my longest run to date. I feel like my foot and shoulder are good enough to go! It is NOT a question of IF, but when will I cross the finish line. What time am I shooting for? And after I cross the finish line... what race am I off to next?