Slow Shopping Season? I Think Not.

By David Docekal, Editor The Hypercapitalist

@DavidDocekal

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Some analysts are saying that it is going to be a slow holiday shopping season. My gut says “No!”. The numbers coming out this morning regarding Home Depot and Best Buy are pointing towards a long term recovery. Now those that know me know that I am not an optimist by any definition of the word. This time, for once, I am! Companies like Home Depot and Lowes point to a better housing market. The housing market is the key to long term recovery. Whenever you have a store that sells building materials and housewares beginning to do well, you’ve might have yourself a recovery.

The companies are going to be betting a lot on housing in the upcoming year. I think it will pay off for them. Even people who already own houses are going to be in a position to improve their existing property. New kitchens, new decks, a fresh coat of paint. After all that hard work, it’s time to treat yourself to a brand new TV at Best Buy!

These companies are going to be applying the 62nd Rule of Acquisition: The riskier the road, the greater the profit.

The song “We’re in the money” will be playing quite a bit in 2014. Trust me.

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Is Puerto Rico the next Detroit? (CNN Money)

By Maureen Farrell   @CNNMoneyInvest

puerto rican bonds

Interest rates in Puerto Rico have soared since the summer as investors grow more worried about whether the U.S. territory can repay its debt. But hedge funds smell an opportunity.

NEW YORK (CNNMoney)

Puerto Rico has been called the next Detroit and the next Greece. It’s buried in debt and possibly teetering on the edge of bankruptcy.

But that isn’t scaring away hedge funds. So-called vulture investors that buy the bonds of troubled companies (and municipalities) have been scrambling to purchase as much of Puerto Rico’s roughly $70 billion in outstanding debt as possible over the past several months. Their interest comes following a huge plunge in Puerto Rico’s bond prices over the summer.

 

“There’s so much Puerto Rican debt out there. When the prices became really low, the situation suddenly became interesting,” said a manager at a distressed hedge fund who declined to be named.

The price of Puerto Rico’s debt plummeted nearly 40% in just a few months. That pushed interest rates on Puerto Rico bonds up to nearly 10% from 5%. (Bond prices and rates move in opposite directions.)

Related: The hottest, riskiest muni bonds around

Analysts at Citigroup said Puerto Rico’s debt was one of the most actively traded types of municipal debt in August and September, and hedge funds were thought to be the biggest buyers.

Why did Puerto Rico’s bonds fall so dramatically? Concerns that the Federal Reserve would soon cut back on its massive bond buying program caused a broad-based slump in the bond market earlier this summer.

Even though the Fed has yet to taper its asset purchases, Detroit’s bankruptcy filing in July spooked investors further. Puerto Rico, which already was struggling with a stagnant economy, was widely viewed by municipal bond investors as another problem about to explode.

Once prices dropped to a certain level, the sell-off intensified because many U.S. mutual funds that invest in tax-free municipal debt had a high concentration of Puerto Rico’s debt and were forced to sell to avoid massive losses.

Roughly 80% of Puerto Rico’s $70 billion in debt is held in these muni bond funds, and Morningstar estimates that 180 mutual funds have 5% or more of their portfolio concentrated in Puerto Rico’s debt. Among the major holders: nine tax-free funds operated by Franklin Mutual; six of Oppenheimer’s funds and funds operated by Nuveen, Putnam, and Dreyfus.

Vultures smelled opportunity: But several hedge fund managers thought that Puerto Rico wouldn’t default on its debt in the short-term, and the bonds were oversold. Many hedge fund managers, including the one quoted in this story, tried unsuccessfully to buy up Detroit’s debt earlier this summer.

Because the stock market has been doing so well and most municipalities are not in dire fiscal straits, distressed debt hedge funds have struggled to find good investment opportunities. Puerto Rico suddenly looked like a place with big profit potential.

Why there isn’t a bond bubble

The price of Puerto Rico bonds have since rebounded a bit and yields have drifted back to 8.5%.

What’s next for Puerto Rico: Hedge funds and longer-term investors have sharply divergent opinions on what will happen to the price of Puerto Rico’s bonds.

Most analysts believe Puerto Rico has enough financing to make it through mid-2014 without tapping the public markets again. Hedge funds are betting that Puerto Rico can survive longer than that, but how long is the question.

Puerto Rico has been stuck in a recession since 2006. The situation seems to be getting worse. Between 2012 and 2013, Puerto Rico’s economy contracted roughly 6%. The unemployment rate tops 13%.

Related: State finances are looking good

Ratings agency Fitch noted in March that even though Puerto Rico has been cutting costs and taking other steps to cure its fiscal problems, its economy continues to shrink, making the problems worse. It’s similar to the challenges Europe faced when many European nations were emphasizing austerity over economic stimulus.

Puerto Rico’s pensions have been underfunded, and the government has been operating through a budget deficit.

Investors are waiting to see whether Puerto Rico’s government can radically reform its pensions and balance its budget. Fitch is skeptical. It downgraded Puerto Rico’s debt in March 2013 to BBB negative, a level just above investment grade. S&P also downgraded Puerto Rico’s debt in March to near-junk levels.

“Right now Puerto Rico really needs a plausible economic development scenario,” said Matt Fabian, a managing director at Municipal Market Advisors.

Should things get worse quickly for Puerto Rico few investors expect the United States government to offer aid to Puerto Rico. The thought is if the U.S. didn’t bail out Detroit, why would it rescue one of its territories? That would be bad news for the citizens of Puerto Rico and longer-term muni bond investors.

Still, it may not take much for the hedge funds that bought Puerto Rico’s bonds at distressed prices to make a profit. To top of page

First Published: October 31, 2013: 4:55 AM ET

Netflix Shares Jump as Earnings Quadruple

Roger Yu, USA TODAY 6:07 p.m. EDT October 21, 2013

Netflix, the video streaming service provider, said Monday that its net income more than quadrupled as its membership topped 40 million worldwide.

Its net income rose 315% to $31.8 million for the quarter that ended Sept. 30. Earnings per share of 52 cents beat analysts’ average estimate of 49 cents.

Revenue rose 22% to $1.1 billion

Shares jumped almost 10% in after-hours trading. Netflix rose $21.49, or 6.4%, to close regular trading at $354.99.

As more cable TV customers cancel their subscriptions, Netflix has enlarged its library of titles by funding and producing original programs. Its shows, particularly, Orange is the New Black and House of Cards, have been well-received by critics and viewers. The strategy and the accompanying social-media buzz have helped redefine Netflix as more than just another streaming service provider.

Michael Pachter, an equity analyst Wedbush Securities, noted that the stock’s surging price indicates investors seem unconcerned about the gap between net income and cash flow. The gap, which totaled $85 million for the first nine months of 2013, stems from Netflix’s heavy investment in producing original content, he says.

“That suggests to me that their earnings growth will be a lot less dramatic than the share price suggests,” Pachter said.

Including customers who canceled its service, Netflix added 1.3 million new U.S. customers during the quarter, an 11% jump from a year ago, bringing the domestic membership total to 31 million.

“While our original series get most of the headlines, a bigger percentage of overall Netflix viewing is generated by our exclusive complete season-after series,” wrote Netflix CEO Reed Hastings in a letter to shareholders.

During the quarter, Netflix released the just-ended seasons of some popular TV shows, including The New Girl, The Walking Dead, Scandal, Breaking Bad, Revolution and Pretty Little Liars.

With more customers signing up for the streaming service in the Nordic nations, the Netherlands and Latin America, Netflix’s net additions of international members rose by 1.4 million. “We plan to launch in new markets next year,” Hastings wrote. “Our success this year in increasing international net additions to nearly the level of our domestic net additions shows substantial momentum.”

Despite other big names in video streaming, including Amazon and Apple, Netflix views its primary competition as HBO. Netflix plans to double its investment in original content next year.

This quarter, Netflix will launch its first animated original series with DreamWorks Animation, and the partnership will continue next year with several other series.

Meanwhile, Orange is the New Black will end the year as its most watched original series ever, and House of Cards became the first TV series to win a major prime-time Emmy without ever airing on a broadcast network or cable channel, Hastings said.

While Netflix is often seen as a direct substitute for cable TV, the company could be eyeing opportunities in the pay-TV business. In the U.K., Netflix partnered with Virgin Media to offer Netflix as an option in the cable company’s set-top box.

“We are open to more of these integrations with cable set-tops around the world,” Hastings wrote. “But given the fragmented technology footprints, we think it will be many years before cable set-top boxes match Internet set-top boxes for Netflix streaming volume.”

Saving Detroit: The Privatized Solution (Part 3: Shareholders)

By David Docekal, Editor, The Hypercapitalist

@DavidDocekal

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I briefly mentioned this in a comment on my last Detroit post but I still wanted to go more in-depth on the subject of shareholders for the City of Detroit.

Residents, I believe, would take more pride and feel more accountable if they had direct ownership in their city. One could argue that this is true with government as it is now but people don’t see government as an investment. They see it as an expense. Holding stock in a corporation, however, is like owning property. It goes up and down in value (hopefully you make a profit) and if you need to sell it, you can sell it. By holding a piece of paper that says you own equity in Detroit would be something that empowers you to be involved.

Residents would automatically get a set amount of shares for free when the city becomes private. These shares would not be allowed to be sold for a minimum of two years. This is to help maintain the stability of the investment pool. The free shares are given out in order to gain buy-in for the program and to release the burden of buying shares for residents who may not be able to afford them. This enables them to vote in city elections. Only shareholding residents may vote for the board of directors.

The return on investment would come in the form of shares of stock to investors in the city corporation. The shares would be valued by a marketplace set up specifically for the buying and selling of stock in the city. The value of course is worth the demand. Citizens of the city would automatically get a certain number of shares without having to purchase upon their first tax return (to prove residency) living in the city. That gives them the ability to be vested in their hometown without having to suffer a possible burden of purchasing shares. It would otherwise be like owning any other stock in a company. It would have the chance to increase in value and be sold as needed.

Additional shares can be purchased anytime. However, they would be designated “non-voting” until proof of residency is provided. Then they would be converted to voting stock.

The investment account could be managed online, on the phone, through your regular broker or at an office for the Department of Shareholder Affairs. This would accommodate low income stockholders who may not have access to the internet or even a phone.
Residents would be able to buy voting shares in the company. The annual voting would elect a board of directors that would in turn hire a CEO and vice presidents to manage the city day-to-day. Executives would receive sizable but not outlandish bonuses based on the city’s performance for that fiscal year.

Outside investors (or non-residents) can buy shares in the Detroit Corporation but they would be non-voting. This would minimize the risk of outsiders deciding city management but would afford the opportunity for the rest of the world to put their faith and support into Detroit. Non-voting shares are also given to any corporation regardless of residency. Voting shares are designated for resident individuals only.

This would all be backed up by the “I Own Detroit” ad campaign featuring everyday residents along with celebrity residents, like Eminem, sharing their pride in ownership and pride in their hometown.
The point is to promote pride, faith and commitment in the city. And above all: accountability.

Taxes would still be a factor. Property and Income Taxes would be used strictly for infrastructure, payroll and other day-to-day city services. Investment capital would be used for capital projects such as beautification, stadiums, parks, etc.
Other revenue would be from sales tax that could be partly allocated to a special fund for low-interest loans for qualified locally-owned small businesses provided by the company’s banking subsidiary. Other money would be donated to registered, accredited food pantries within city limits.

The corporation would take possession of all current city services including emergency services, schools, libraries, infrastructure, etc. Each department with a dedicated vice president appointed by the CEO.

Review: Five Guys Burgers & Fries (When they say fries, there are no lies)

By David Docekal, Editor The Hypercapitalist

@DavidDocekal

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I had the opportunity to eat at Five Guys for the first time in my life and I have to say it was enjoyable. The restaurant was clean and managed well. This is on top of the food (which was prepared quickly) was very good. Of course, my body slightly revolted at the addition of grease to its system but that’s me. It was worth it. The burger was fresh and prepared to order with exactly what I asked. The portion sizes are good and not business-killing. (Big portions tend to hurt business in the long run).

When they say fries: get ready. They are tasty but there are a lot of them. Expect a “Regular” to be an extra large in reality. Plus, make sure to eat them quickly as cold is not a friend of the french fry.

I went to the restaurant at about 11:30 in the morning so I can’t say how busy this particular location gets but I imagine it gets packed during the lunchtime rush. Get there early!

Price: Burger and fries for one person: $5.00-$7.00 Roughly

Kid friendly: They have index cards and crayons available to occupy the little ones.

I almost forgot: Complimentary Peanuts!

If you are looking for a greasy burger joint, this is the place. Not to be frequented by the health conscious but occasional visit.

3 1/2 out of 5 stars