4/25 Kelly Letter Topics
Weekly market review
SEC GS politics
Fin reform toothless
Money always talks
Greece still sinking
Japan's sliding credit
AAPL > MSFT
Grant on fin reform
Who will buy JGBs?
Of snow and stocks
Much has changed; good investing has not
The Neatest Little Guide to Stock Market Investing, 2010 Edition
I'm still watching Japan for a good entry point, and am interested in Mizuho Financial (MFG) and ProFunds UltraJapan (UJPIX).
Like the Federal Reserve and other central banks, the Bank of Japan injected liquidity into the financial system during the credit scare. That stayed its rate-raising hand for the time being, but it will probably begin raising interest rates again later this year. That will benefit Mizuho, which reported an earnings shortfall of 50% at the end of July. The stock's down to less than $13 with a forward P/E of 12, a price-to-sales of 0.01, and a 22% profit margin. That price-to-sales is suspect, probably due to missing data, but regardless of the specific measurement the stock is cheap.
The supposed unwinding of the yen carry trade was blown out of proportion again, in my view. For all the bluster about the yen strengthening in a shocking manner against the dollar, it got down to just 113.11 from -- what do you think? By the coverage and cries of meltdown, you'd think 150 or 180.
It dropped to 113 from 124, a 9% strengthening that's already working itself back to the 120 level. The yen last Friday was 115.77, only 7% stronger than 124 -- almost exactly where it was a year ago, and no catastrophe has come from the fluctuations.
You've most likely read somewhere that the strengthening yen will kill Japan's "export economy" by reducing earnings of Japan-made goods sold elsewhere, like the U.S. Based on that, what percentage of Japan's economy do you think comes from export profits? At least half, you'd think. Maybe more.
Nope. Only 15%.
Thus, a quick rundown of the facts shows us that the crashing yen has reduced 15% of Japan's economy by 7%. That's a 1% hit overall, not much of a disaster.
Aren't you glad you read this site instead of all the other junk out there? If the world ended as often as it was predicted to do so, I never would have made it to junior high school and neither would you.
The general environment in Japan is good for stocks. The economy has done well for the past five years, with earnings coming in consistently higher than forecasted. That momentum is slowing a bit, but the environment for well-managed companies is better than before because there's more money available for doing business with them.
Factors for putting money to work in Japan are lining up.
Last month, eBay pulled its ads from Google for one week when Google threw a Google Checkout party at the same time eBay held its eBay Live conference. It seemed that Google was trying to siphon off some of the attention being focused on PayPal, eBay's online payment service. eBay later said that during the week it ran no ads on Google, it suffered a 0% loss in traffic on its site.
That was an eye opener not only to eBay, but also to the rest of the online ad industry. A full 99% of Google's revenue is from advertising. Everything else Google -- Documents, Gears, Gmail, Earth, YouTube, and so on -- is for show. Remember this the next time you read a gushing report saying that Google's YouTube now commands 60% of the online video market in the U.S. Amazing, but so what? People with nothing to do go there to watch videos...for free. The trick is that those videos are surrounded by ads. Right now, ads are the whole profit story at Google. Any vulnerability there is a major chink in Google's armor.
I pointed out to Kelly Letter subscribers a few weeks ago that I stopped advertising on Google because its keywords became too expensive and the results unimpressive.
Come to find out, it wasn't just me. Search users are six times more likely to click the first few organic results than any of the paid results. Organic results are the ones found naturally by the search engine. An eye-tracking study found that half of all users start their search by scanning the top organic results. Another study found that only 30% of search engine users click on paid listings. Yet, between October 2004 and December 2005, average keyword prices rose from $25 to $55. Yet another study found that 57% of U.S. advertisers considered their desired keywords to be "too expensive."
So far, Google has held onto its lead in search and still commands the lion's share of online advertising. But advertisers are not stupid. If getting better placement on a search engine produces better results for less money, that's where the trend will go. Then, Google's revenue source will be in trouble as advertisers discover -- as I already have -- that other search engines turn up better results than Google's.
For instance, if you haven't tried InterActiveCorp's Ask.com recently, you should. I've written about it before and it's only gotten better in the last few months. It's faster than Google, more accurate, less cluttered, and is chock full of features that will make you say "Wow!" as you click along and use it. You can even choose your own skin for the background of the engine's home page, and it expands or contracts to fit beautifully inside your browser's current size. Google looks rusty by comparison.
Bottom line: I'm happy to own in The Kelly Letter a different online search and media company over Google for the medium term. Shares in the company we own haven't moved much since we bought, and that's a good opportunity for new subscribers. Usually, newcomers complain that all our existing positions are up too much, but that's not the case with this one.
I'll keep watching Google for a better entry price because I think the company's real story is not its advertising acumen, but its unique chance to unseat Microsoft. That potential is building and I think one day we'll look back and see the advertising phase as just the first revenue stream that enabled Google to gather resources to build a viable alternative to Microsoft Office, and ultimately Windows. That's the story I want to own, but not yet, because I think Google will get cheaper from turmoil in the ad business.
SiCKO You've surely heard or read about Michael Moore's new film, SiCKO, by now. It shows that we need to take the profit out of U.S. health care. I haven't seen it yet, but I will as soon as it comes to Japan.
Longtime readers know that my mother was severely injured in a horseback riding accident last fall and spent more than three months comatose at St. Anthony Central Hospital in Denver. I flew from Japan within 48 hours of the accident to join my family at her bedside, and was in Colorado for four months straight.
My sister and I divided family responsibilities with her staying home to care for our younger siblings while I stayed near the hospital to meet with doctors, pay bills, and such. What an eye opener.
Can you guess the cost of the entire ordeal? Almost $2 million. The stack of invoices was delivered to me across the billing counter with a straight face. "OK, Mr. Kelly," the secretary said as her fingers flew across the ten-key by her side, "that comes to a total of one million nine hundred and eighty-four thousand dollars, please."
"I see," I replied. "Good thing I brought both of my check books."
Then she said, "Next time you should just say your last name is 'Enriquez' and that you're from Juarez. We have a special stamp for that. Nullifies the charges. You just walk out the door."
I just walked out the door, anyway, wondering how surreal the situation could become. When will the healthcare industry understand that nobody can afford its prices anymore? The situation is to the point that hospitals don't even expect to be paid. Hospital charges are in an entirely separate currency, "hospital dollars" instead of the "street dollars" that people use every day. Unfortunately, there's no way of exchanging one for the other. Currently, a hospital dollar is worth about 1/100 of a street dollar. Hence, what should have cost my family $20,000 ended up costing $2 million.
Apparently, SiCKO is waking a lot of people up to the idea of there being other ways to care for ourselves. Insurance companies and medical development groups need to find some way besides surreal pricing to make their profits. Michael Moore is correct that the profit motive is destroying American health care, and it's embarrassing.
Here in Japan, by contrast, the city where I live sent me a postcard thanking me for paying my taxes and offering me a complimentary physical exam. All I had to do was go to any certified health provider, present the postcard, and receive my check-up. Even as a foreigner, I received that care.
Isn't it time that America took care of its people in similar style? To hell with the lobbyists and insurance fat cats. Put the health back in health care. The current system is best described as "Wealth Care," and it's obvious whose wealth is being cared for.
Japan's Free Trains Today's common Japan question: "Is it true that foreigners can ride Japan's trains for free?"
This myth began because some dishonest foreigners do ride the trains for free. Even people who've been here a long time, know Japan well, and speak the language will sometimes feign ignorance at the train station. The Japanese station worker almost never speaks English, and is simply eager to get rid of the problem.
He asks, "Where from?" as in, "Where did you ride from?" The foreigner then says the name of a train station that's one or two stops back instead of the thirty stops and three train changes back where he actually started. The station worker charges a dollar or two for the short hop, and the foreigner exits the station with a nearly free train ride.
That's not possible on some express trains nor any bullet train because a conductor comes through the cars and checks tickets, but it's easy to do on local trains.
Sometimes, foreigners won't even bother with the ignorance game. They'll just walk through the exit gates to the sound of the alarm bells and keep walking, knowing full well that few station workers will stop a foreigner because of the language barrier.
Tomorrow: A little more on Apple, the state of Starbucks, and Power Investor software.