Intel

Intel's results are great. I have been bullish on Intel for a long time for the following reasons:
1. Computers are becoming necessities, not discretion items anymore. Most families have two or three computers.
2. Emerging market are catching up quickly. Most households in China have computers.
3. The data and videos on Internet have exploded. More servers are needed.
4. Intel is enjoying almost monopoly status which keeps its profit margin very high.

Will the good results from Intel spread to HWP or Dell? Not necessary. The reason is simple. The competitions in PC manufacturing are fierce and margins are low. One worrying sign is semiconductor companies in Taiwan are slowing down.

My target on Intel is $24. However, I will sell around 23.5.

summary for July 13, 2010

Intel has reported very good earnings. I will discusse more on intel tomorrow.

Closing value
Portfolio 1 (U$):113118, up 3%
Portfolio 2 (C$): 82,738, up 3.3%.

prepare to take profit

Just as I wrote a week and half ago that there were some positives in the market when S&P was down to 1000. Today, I would like to remind people that all the worries are still there. Chines property market is cooling down, government stimulus is running out, and inventory restoration is almost done. I do not believe that S&P should trade over 1120. If INTC's results are good today, I will take profits tomorrow.

Anything changed?

The market went down 5% two weeks ago and up 5% last week. Did anything changed during last two weeks? not really. Basically, the market is trading around by traders and they are very comfortable with a range of 1000-1100 for S&P 500.

I believe the tight credit market is good for large blue chip companies because the barriers for new entries have been set up unreasonably high. Especially high tech companies. I already owned INTC and interested to purchase some CSCO around $21. The commodity companies, especially base metal companies are in trouble in short term because of the fiscal tightening. I am neutral on energy companies.

The improvement in loan quality probably bodes well for commercial and retail banking but not very positive for investment banking. I like Bank of America around $14 and CITI.

fair value for S&P500

You have heard some experts saying the sky is falling down and S&P 500 is going to crash to 500 while others suggested that current valuation is the best in a generation. What is the fair value for S&P 500?

Given risk-free 10-year bond is around 3%, the required return for S&P should be around 7-10%. (most single A and BBB bonds are trading around 5-7, stock is riskier than bonds so it requires a higher return). A P/E between 10-14 will be justified for a required return of 7-10%. If I take the consensus earning estimates for 2010, which is 80 and discount it by 10% because of the unfounded pension liabilities (most pension plan assume a 8% return which is way off base over last 10 years), a fair value of 720-1080 is derived. Consider how accommodating the Fed and other central banks have been, the market is probably biased at the high end (900-1080).

Is RIM doomed?

Research in motion is in trouble. the stock is down over 50% from its high. I have been bearish on RIMM for a long long time. My rational was and continues to be that a mature high tech company does not deserve a premium valuation because competitions would come. Surely it did. (Same thing can be said for Amazon, priceline.com and even Apple). However, at price around U$50, RIMM is probably fair valued. There are some advantages in Blackberry. 1. It uses much less bandwidth than IPhone or Google phones. Everyone is complaining about AT&T but I see this is a Apple problem. The highway is limited and you cannot put bigger and bigger trucks onto it. 2. Privacy. RIMM has the best security among all smart phones. I do not see corporations and governments to switch to IPhone any time soon. It may become an attractive target for Microsoft or Nokia.

vacation

I have been on vacation over last few days. The market is weak. I still expect the market will trade in a range 1000-1100 for S&P 500 and 10500-11800 for TSX. There are some risks that the market may break down lower. I have been bearish for a while. But today I would like to write some positives:
1. Interest rates will stay low for longer than expected.
2. energy and commodity prices are stable or lower. It is good for cost control.
3. Labour has no leverage to demand higher wages, except in China
4. No capital for new businesses which is good for established ones.
5. Governments around world start to be serious about deficits control, which is a long term positive.