“Underemployment rose to 19.0% in December from 17.2% at the end of November” – Gallup headline.

And things are getting better?

With the New Year approaching, ‘start saving now’ should be your motto. A real, defined, dedicated savings plan should be a higher priority than it usually is. Most people save only what they don’t spend. Their spending dominates their monthly checkbook transactions. How many times do you write a check to your savings account during each month? With many banks providing integrated checking and saving accounts, work paychecks are typically received into the account, with the bank transferring excess funds to the savings account. Then the individual starts to write checks, paying expenses. This continues until another paycheck is received, when the cycle begins anew. For many people, their savings simply grow or decline without a real plan.

With the start of the New Year, change your habits and start saving now. If you need the constant reminder of a third party to help you actually sit down and do it, consider working with a Florida financial planner. The most important thing is that you actually start to save. Savings forms the basis of your Capital. Capital and Investment Income is what you live off of when you reach retirement. Make savings a priority. The result will be that you avoid needless spending.

Once you have a savings plan in place, then you need an investment strategy. Depending on the amount of your savings, the time you have to work on your own investment strategy, or your investment knowledge, you may feel comfortable handling things yourself. Again, working with a third party can be beneficial. At this point what you are looking for is a Florida investment advisor. Sometimes a financial planner is also an investment advisor, but they really are two separate functions and it’s acceptable to deal with two different people.

When choosing an investment advisor, you should examine their intellect, education, experience, judgment, honesty, integrity and character. You need a high degree of trust in this person. Not only will they have access to your accumulated savings, but they are also responsible of generating your investment income. Some people feel better doing all this by themselves. In our experience as financial planners and investment advisors, we’ve met very few individuals who were properly educated and experienced in all aspects. Most individuals are quite capable of dealing with a substantial part of their finances’ and it is this false sense of security that leads them into areas where they shouldn’t go. Know your situation thoroughly and then use an outside advisor to fill in the gaps.

Compound Interest is the most powerful force in economics. Take advantage of it by starting a savings plan and then investing wisely. The New Year is a great time to start.

Thanksgiving is a time of family.  At Alpha Investment, we wish you and your family a joyous holiday.

Thanksgiving is also a long weekend and the weekend where most individuals review their finances.  With that in mind, we offer the following thoughts.

Savings

Unfortunately, most people save whatever they don’t spend.  Their spending is a higher priority than their savings.  If you don’t have a prescribed savings plan, start one.  These days, there are many different accounts in which to accrue savings.  Think about which is right for you.  Create a plan where your savings is an expense item in your budget.

Children

If your children have yet to reach college, think about how you will pay for it.  There are many college savings accounts available, as well as pre-paid plans.

Ask your children about their savings plan.  Children learn about money at a very early age.  If they are still living at home, teach them about the value of savings.  If they have moved out and begun working, ask them how much they are saving.  Ask them if they are taking full advantage of any retirement plan offered by their employer.  If they are working hard and yet having trouble saving, start a matching plan with them. Or instead of spending money on a gift this year, give them a gift that grows through compound interest.  Make their contributions for them, or plan to next year.

Extended Family

We are all Sons and Daughters, Mothers and Fathers, Brothers and Sisters, Aunts and Uncles.  During this long weekend, reach out to your extended family.  Ask them not just about their life, but their finances too.  Find out how their job or business is going.  Ask them how they are dealing with the current economy.

Investments

The following are questions that only you can answer:

What is your investment strategy?  It’s hard to be successful if you don’t have one.

What are your investments exactly?  A mutual fund is not an answer.  What does the fund own?

Why are you invested in them?  Is your initial rationale still valid?

Does each investment idea stand alone?  Don’t let the quest for diversification lead to you to bad ideas.

What is the true value of your investments?  Many people think this is their account balance, but it’s not.  Your account balance shows the current price of your investments, not their value.  Try to ignore the price of the investment and think instead about its value.

Estate

Review your will, living trust, durable power of attorney and health care power of attorney.  Talk with your spouse, your children and even your extended family about your decisions.  Don’t leave them with any surprises.

Fiduciary

Is your current advisor a fiduciary or a broker/dealer?  A fiduciary is legally required to act in your best interest.  A broker/dealer is not.  Investment firms can decide to setup their business as a fiduciary or a as a broker/dealer.  This means that by choosing to setup as a broker/dealer, they chose to not be legally responsible for any of the advice they give you.  Why would you ever hand over your money to someone who made that cognizant choice?

Give Thanks

We are all blessed in our own ways.  Reach out to a friend, or a neighbor, during this season.  Give a gift to yourself by helping someone else.

Happy Thanksgiving!!!

We’re big believers in having industry contacts to track the units and pricing of a company’s products.  That said the best numerical financial analysis is always simple math.

Let’s look at what CSCO’s numbers indicate to their supply-chain, primarily the semiconductor space.

In July, Cisco had Product COGS of $3,309 million.  Inventories grew by $77 million.  Purchases were $3,386 million (3309+77).  In October, Cisco had Product COGS of $3,249 million and inventories grew by $196 million, resulting in purchases of $3,445 million.  This was a sequential increase of 1.7% from July.

Based on Cisco’s guidance of $10.2 billion in total revs, down from the $10.75 billion just reported, sequential revenues should drop 5%.  While gross margins are expected to slightly change, it seems fair to expect CSCO’s Product COGS to also decline 5%.  With this assumption, Product COGS should be $3,086 million in the January quarter.  Cisco admitted to building inventory due to a planned shutdown, so it seems natural to expect this to reverse by the end of January.  If Cisco’s inventory ends January at the same ratio of inventory-to-product cogs that existed in July, Cisco’s ending January inventory should be $1,234 million.

These assumptions imply net purchases from Cisco of $2,797 million during the January quarter.  Compared to net purchases in October, which were $3,445 million, this is a decline of 18.8% sequentially.

Seagate has effectively put themselves up for sale, presumably to a private equity buyer.  However, last night Western Digital may have just ended all deal talks.

WDC guided to an earnings range of $.50 – $.60 for the next quarter, down from expectations of $.93.  The point isn’t that earnings are now under pressure or that there is excess supply and will be for several quarters, or that Seagate doesn’t have 60% market share of the enterprise market.  All of those are true.

No, the real issue is the balance sheet of Western Digital.  Western Digital has $2.4 Billion in Net Cash.  Net PP&E at WDC is $2.245 Billion.  Western Digital has the financial capacity to increase their operating capacity by 100%.  WDC calculates their overall market share as 30%+.  As of July 2, 2010, Seagate had Net Cash of $456 million.  A private equity deal of Seagate, at the rumored valuation of $7.5 Billion or so, would end up having a net cost of about $7 Billion to the PE buyers.  At an assumed mix of 65% Debt and 35% Equity capital structure, Seagate would have $4.55 Billion of Debt on a Net PP&E base of $2.263 Billion.

The Net PP&E of WDC and STX are quite similar and yet their capital structures, after a STX deal, would be completely different.  No PE buyer should ever buy into a capital intensive industry with competitors who have large amounts of excess capital.  The fact that the industry is currently over-supplied only shows how easy it would be for WDC to step on the gas and cripple a debt-laden STX.

If STX gets bought, short the bonds and go long WDC.  Until then, this is an industry with excess operating and financial capacity.

As always, please contact us before making any investment.

Last night, Apple reported sales of 4.19 million iPads.  This was below street expectations of 4.5 – 5.0 million units.  Apple claimed that they were supply constrained, which eased throughout the quarter and was in balance in September.

Based on our industry contacts, we believe the current run rate of iPad production volumes are 2 million units a month, with a desire to further increase production to 3 million units per month.

Last week, both Intel and AMD reported and it’s obvious they struggled to meet their pre-announcements.  The problem is that while the companies may have thought they had fully absorbed the disruptive effect of the iPad on their netbook and notebook business, they now know that is not the case.  At a shipment rate of 2 million units per month, Apple will ship at least 6 million iPads this December quarter.  Incrementally, that’s an additional 1.8 million units.  Considering that they supply chain is still trying to ramp to an eventual level of 3 million units per month, it is quite possible that Apple ships 7 million iPads.  This would be an incremental 2.8 million units.

On Intel’s conference call, they mention that the industry was building 1 million PCs a day, or 90 million per quarter.  The combined guidance of Intel and AMD was for about 3% sequential revenue growth in Q4.  Was this guidance given with the knowledge of 1.8 – 2.8 million incremental iPads to be sold?  Or did they assume that they had absorbed most of the incremental iPad hit?

Tonight Western Digital reports; with Seagate tomorrow night.  Now that they know the extent of the iPad hit in Q3, as well as the coming hit in Q4, will their guidance stand up to expectations?

It seems to us Q4 will again be a stretch for Intel, AMD and the rest of the PC chain.  And this time they won’t be able to stuff the channel again.

As always, please contact us directly before making any investment.

Last night, Intel reported slightly above it’s previously lowered guidance.

We believe the following analysis won’t be in the Street’s reports tomorrow.  As such:

Intel sequential growth in actual $:

Revs:           11.102 vs. 10.765 B
Rev Growth:     .337 B

Acc Rec:     2.911 vs. 2.430 B
AR Growth:    .481 B

Acc Rec Days in June: 20 Days

Acc Rec Days of Incremental Sales in Sept Qtr:  128 Days

In a 90 day quarter.

Up from 20 Days in June.

Based on Intel’s report and our industry contacts, we believe Intel utilized some of their unofficial “Sales Reserves” in the Sept Qtr.

Intel is still cheap, though current business is a little soft.  Unless the Street focuses on Receivable growth in the quarter, some of our shorts could drift higher until they report next week.  Our short ideas didn’t start the June Qtr with 20 days of Receivables.  They don’t have this luxury.

As always, please contact us for specifics.

Previously I’ve discussed the concept of Price vs. Value and have used the “Envelope” as an example of this. I’ve also talked about the Short Rebate. Those articles form the basis for “The Four Prices of Every Stock”. When investing the most important data point to know is of course, Value. Once you know Value, how do you then determine what Price you’ll pay to receive it? Knowing, understanding and pre-determining the “Four Prices” will give the thoughtful investor a substantial edge over others.

The First Price is known as the Long Buy Price. This is the current price you’d pay for an expected future value using a relatively high discount rate. The relatively high discount rate rewards you for risk by creating the lowest price in the Four Price structure. Most investors understand this concept as it is the centerpiece of the Buy-Low Sell-High strategy employed by almost all. This is their attempt to Buy Low.

The Second Price is the Long Sell Price. This is the price where if an investor had previously bought a security at the Buy Long Price, he would be inclined to sell his position in. This price is calculated using a lower discount rate than the First Price. This lower discount rate generates a higher present value price of the future expected value. Often this discount rate is based off a medium to long duration fixed income asset, with a risk premium attached. The goal of this price is to present the investor with a cross-over point where his investment becomes reduced as his preference becomes cash or a cash-equivalent asset. This is the second step of the Buy-Low Sell-High price. Most investors concentrate their analysis on the Buy-Low price and do not adequately focus on the proper sale price. The thoughtful investor can again gain advantage by having a clear analysis of the Sell Long Price.

The Third Price is the Short Buy Price. This is the price where an investor who had established a short sale would be inclined to close out his position. This price is calculated using the same expected future value as in the first two prices, but is discounted using the Short Rebate. Since the Short Rebate is typically less than the prevailing short-term rates, it is almost always a lower interest rate than the medium-to-long term interest rate used in the Second Price. Additionally, as a discounted present value of the expected future value; the Short Buy price is still below the expected future price, as are the first two prices.

The Fourth Price is the Short Sell Price. This is a price greater than the expected future value of the security without any discounting. The amount this price exceeds the future value depends on a variety of risk factors, as well as the prevailing discount rates. Since a Short Sale has the most inherent risk to an investor, the Short Sell Price is typically well above the expected future value to a degree not seen even in its diametrically opposed counterpart, the Buy Long Price.

When investing, the thoughtful investor seeks not only to determine Value, but also the Four Prices structure. Too often investors, which only think in the Buy-Low Sell-High paradigm, never even attempt to discern the Third and Fourth Price of the security. They lack the discipline of finding, researching and investing in securities on the basis of the Third and Fourth price. This causes their First and Second Price views to be incomplete. The investor that discerns all Four Prices has a much better appreciation of the various risk and return potentials at each price. An investor that understands all Four Prices may make a significantly larger purchase investment in a security trading at the First Price due to his understanding of the assumptions behind all Four Prices and the relative outcome gap between them. It is this preparation in analysis and approach that allows the fully thoughtful investor to make better risk vs. return investments, even if his actual investments are only executed at First and Second Prices.

Building on the example used in the Short Rebate article, assume that instead of a Short Rebate of 3.1%, the actual Short Rebate was 1.5%. Discounting a $15 future value security over ten years at 1.5%, would yield a present value of $12.92. This is a 17% higher value than the $11.05 value calculated with a 3.1% discount rate. When compared to the Long Sell Price of $10 that was calculated using a 4.1% discount rate, the Short Buy Price is now 29% higher than the Long Sell price. Previously, the Short Buy Price was only 10% higher than the Long Sell Price. Small differences in discount rates at low levels of discount rates can produce large changes in discounted values. If the Short Rebate moves from 3.1% to 1.5%, it is not only the short selling investor that needs to take notice. Investors from the Buy-Low Sell-High crowd should also realize that the potential opportunity on the short side of the investment has diminished significantly. This should cause them to confidently allocate more of their investment capital to securities that are at the Long Buy Price. From observation, few do.

There are five important inputs to executing every successful investment. They are to first determine Value and then to construct the Long Buy Price, the Long Sell Price, the Short Buy Price and finally the Short Sell Price. After the proper framework has been established, execution risk for the thoughtful investor diminishes significantly.

The Short Rebate. What is it? Why would it ever be considered important? As most know, when a stock, or security, is purchased, cash is deducted from the account and the security is received. When the security is then sold, the security is deducted from the account and cash is received. When a stock, or other security, is sold short the above transactions happen in opposite order. Cash is received and the security is deducted from the account. However, as most will observe, the account started with cash and no security. So how is the security deducted from the account when the account never owned it? Simply, the account is now liable for the security. To offset this new liability, the account receives cash as an asset. The asset and liability created equal one another, thus creating no effect on the equity balance. So now there is an account with lots of cash and a liability. The initial cash deposit generates interest income. The cash generated from the short sale also generates interest income, but in a lesser amount. This lower interest rate is called the Short Rebate.

Why is this lower interest rate important? Finance is all about discounted net present values. A future value is discounted back to the present by a discount rate. The higher the discount rate, the lower the present value in relation to the future value. A lower discount rate causes a higher present value. The interest rate on the cash generated by a short sale is lower than cash owned by the investor. Normally an investor owns a stock because he believes that the future value will be in excess of the present value. In his analysis, he would discount that future expected value to a present value of today. The actual value would depend on the discount rate used. Here’s an example. In the future, the investor believes that a stock is worth $15 in ten years. At a discount rate of 4.1%, that same stock is worth $10 today. This means that if you bought the stock today for $10 and held it for ten years, you would receive an annual compounded return of 4.1%. If cash currently pays a 4.1% interest rate, then there would be no real economic difference in having cash in the bank or owning the stock. Both would accrue at a 4.1% return annually.

Where the short rebate matters is in its lower discount rate. If you short a stock and receive cash, but it only accrues interest at a 3.1% rate, your analysis as to your purchase price will be influenced by this lower discount rate. To continue the example above, if you discount a stock that has an expected future value of $15 in ten years into today’s value at a discount rate of 3.1%, you get a present value of $11.05. This signifies the buy price from the perspective of the short seller. This purchase price is higher than the price an investor would pay for the same security with the same expected price in the same time frame. The only difference is the lower discount rate. So what is the purchase price of a short seller? It’s the price a short seller would execute a buy order. In a short sale, first the stock is sold and then it is bought. The order of the normal buy-low and sell-high strategy is simply reversed.

What is important to remember is that the Short Rebate generates a higher buy price for a short seller than a typical investor. This will be explained further in our article titled, “The Four Prices of Every Stock”.

INTC lowered guidance last week.  Instead of a strong seasonal increase, INTC is looking at a slightly up quarter.  That said, Intel’s trailing Free Cash Flow of $10.2 Billion isn’t in danger of being cut.  And INTC is spending over half of its net cash, first on MFE and now Infineon’s baseband business.

AAPL iPad and iPhone 4 are still on fire.  It is believed that iPad sales are cannibalizing netbooks and low-end laptops in the consumer segment, and hence the new tempered guidance at INTC, HPQ and Dell in the consumer segment.

Sony remarked that LCD TVs in the U.S. “dropped off a cliff in late June and July”.

Corporate spending looks fine, even picking up as corporate earnings have recovered, and slashed cap ex budgets are being increased.

Interest rates have dropped and mortgage refinancings have increased while existing home sales plummeted with the expiration of tax credits.

We are in the world of low multiples.  Equity allocations are still obviously too low given valuations.  So the marginal buyer of stocks is now Corporate America.

Our Tech Longs are either a mix of consumer and corporate, or mostly corporate (INTC, HPQ, MSFT, CAJ, IBM, ORCL, CSCO), with the exception of QCOM, which is a global consumer play.

As always, contact us directly for further details and whether these investments are right for you.