Once in a lifetime Opportunity!

The light bulb was invented about 130 years ago and ever since its debut, the light bulb’s design hasn’t changed, that is until NOW. 2007 will be the year of the LED, also know as solid state lighting. Light Emitting Diodes are pea sized solid chunks of semiconductor material, like the Intel Pentium processor in computers, that glow when electricity is applied. Up to now light bulbs have been glass vacuum tubes with a glowing tungsten wire inside, just the same as when Thomas Edison designed them more than a hundred years ago. LED’s are going to soon displace the old vacuum tube light bulbs; they are 100 times smaller, 10 folds more efficient, and practically last forever.

LED’s have been around for more than 50 years and they are currently in multiple electronic devices in the home, just look at the power “on” indicator on your T.V. or any other common home electronic device and you’ll probably see an LED light indicator. So why is it that they have been around for decades but haven’t replaced the conventional vacuum tube light bulb? The answer to that question is easy; until recent advances in materials engineering, LED’s were not bright enough and too expensive for general lighting applications. But now, advances in technology coupled with more efficient manufacturing methods have yielded the solid state LED feasible for general lighting applications.

The great thing about this entire story is that we are in the midst of an energy shortage and most electricity grids in the U.S. are working at overcapacity. LED’s offer a real viable solution to help ease the energy strain, because as you remember, they are more than 10 times more efficient than conventional light bulbs. This fact alone makes them less likely to be sensitive to the general economic climate, because they offer an alternative to building more nuclear or coal burning power plants. Power plants take years to build and nobody wants them in their backyard, but changing the conventional light bulbs in our homes and businesses with more efficient LED’s is a very painless option.

Our number one stock pick for this sector is Color Kinetics, CLRK, listed on the Nasdaq stock exchange. The company holds the worldwide patent rights to the technology in controlling the color output of LED’s. This is important because one of the advantages not yet mentioned in this article about LED’s over conventional light bulbs is that each lighting fixture can output close to 5 billion colors. That’s right, with a single bulb, called a “node”, the color and intensity output of the light fixture can be controlled electronically. Just like the dimmer switch control on some present lighting systems, but with far more intelligence and capabilities. That’s why LED lighting systems are called “Intelligent Solid State Lighting”; they can be programmed to do almost anything.

We are confident that CLRK has strong fundamentals, good management, and huge market opportunity. Usually these are the winning traits of a “triple digit gainer” and we therefore predict a price appreciation in the hundreds of percent in 2-5 years for this company. This company’s success lies in its patents and their ability to hold up against infringement, and they have successfully fought and won court cases against patent infringers in the past. In addition, multiple leading companies in this business segment have signed licensing agreements with CLRK already, and the revenue from these royalties should begin to show up on the bottom line in the second quarter of 2007. Unlike the manufacturers of the actual LED’s, CLRK is not levered to the outsourcing of manufacturing to China or other places because they are a “fabless” company with a business model that is based on royalties from their intellectual property. And in the 21st century, that’s the sweet spot to be in!

What Will Happen to the US Dollar?

By Arthur Mansourian

While economists and investors should stay away from listening to rumors, one rumor has many of them worried; that Iran and Venezuela may begin selling their oil in Euros and move away from the US Dollar. These two countries despise USA and its policies, and would do almost anything to harm the country. If such a move is made, it will hurt the US Dollar substantially. If this takes place, the US Dollar may decline 6-8% in a day! This may lead to a flight of investors to the Euro, which would have a serious impact on the world’s economic stage.

However, there are a few reasons why this may not happen:

1. China and Japan hold billions in US Dollar reserves and a drop in the US Dollar will consequently hurt them very badly. It will cause an economic implosion in Japan and will push their economy into a free-fall and a major recession, if not depression. This would be devastating to Japan, which is coming out of a long and dreadful economic doldrums. The impact on China would be less because their currency is pegged artificially to the US Dollar and to other currencies, however, China will still get seriously hurt in the long run. Since these two countries have good relationships with Iran, they will surely be trying to talk Iran out of switching to the Euro, and will try to influence the final decision. However, Iran has recently announced that they will be looking to use the Euro more.

2. The Euro’s increase will be so significant that it will hurt most European countries in their pocket books. Their import of oil will go through the roof and export will come to a halt. Your average German car would go up in price, which may push people to buy luxury Japanese and American cars instead. Case in point; Airbus, the European airplane manufacturer, is in big financial trouble. Among many production and manufacturing problems, its financial woes have been exasperated by the fact that while its cost is based on Euros, its sales is based on US Dollars.

3. No matter what they say and portray, OPEC has never been a unified organization and a dramatic move such as this will not work unless OPEC as a whole decides to do it. There are always a few members who may break ranks, such as Indonesia or Nigeria, and it is unlikely that Saudi Arabia will turn on the US Dollar. Although OPEC has made cuts in oil supplies recently, they have actually cut less output than they said they would.

On the other hand, other recent factors may provide ample proof that the time of the Dollar-priced oil is over:

1. In December 2005, the exchange rate for every one U.S. Dollar was 0.85 Euros. A year later, one U.S. Dollar is only worth 0.75 Euros. Furthermore, the Dollar fell all the way to a 20 month low of 1.32 against the Euro recently. This decline in the market value of the Dollar was mostly due to the fact that consumer confidence and durable-goods orders both fell more sharply than expected. Furthermore, in October, orders for capital goods (not including aircraft and defense) fell 5.1%, the first drop in six months.

2. Reports from this week show that the housing market’s tumble may have an even wider impact on the economy than originally expected by many analysts. New home sales had the first drop in three months in October, falling 3.2%. Also, the unsold stock of existing homes for sale increased to 7.4 months’ supply. For more insight on this, please read the articles posted by Darwinian.

3. There is a potentially positive side to the falling Dollar. A cheaper Dollar makes imports more costly, leading to hope that it might help reduce the US trade deficit. The US trade deficit topped US$700 billion last year and is headed higher this year, heightening pressure on Paulson to make sure key trade partners like China play fair and making Dollar depreciation a virtue if it means fewer imports. The deficit with China alone last year was more than US$200 billion.

These factors are significant in deciding whether it is likely that Iran and Venezuela may make such a move, since a falling Dollar may entice these two countries and others to sell oil in a stronger and more valuable currency – the Euro. If such countries see that the Dollar is not done falling, they may all join the herd and sell out as quickly as they can to cut their own losses.

Interestingly, Ben Bernanke still believes that the economy will enjoy a soft landing. Bernanke also said that inflation remains “uncomfortably high” this week, and that the economy will grow at its sustainable rate in about a year.

Someone is definitely going to be very wrong very soon.


Resources:

1. http://www.bruneitimes.com.bn/details.php?shape_ID=13085
2. http://www.collegian.psu.edu/archive/2006/12/12-08-06tdc/12-08-06dnews-08.asp
3. The Economist December 2nd – 8th 2006, Volume 381 Number 8506

Do I Smell Bull?

by Arthur Mansourian

Worries over slowing economic growth and inflation sent the indexes tumbling this week. The S&P 500 fell 0.3% to 1396.71. The Dow Jones fell 0.7% to 12,194.13. Both indexes had consecutive weekly losses for the first time since July. The NASDAQ dropped 1.9% and fell to 2413.21, the largest weekly loss since July.

Although the markets and investor spirits have been high for the past several months, there are many reasons why the Dow Jones and other broad indexes may lose their steam.

To begin with, the strength of the Euro and the quickly accelerating economies seen throughout Europe are beginning to outshine the U.S. economy. In America, the largest retailer Wal-Mart, saw monthly sales fall for the first time in 10 years. Caterpillar, the world's largest maker of heavy earth moving machines, released a report that showed manufacturing in the U.S. fell for the first time in more than three years.

Furthermore, light crude closed on Friday at $63.43, capping off its largest weekly rally since April. Cuts from OPEC and snowstorms all across the U.S.A. have contributed to the rise in the price of oil and it looks like it can go even higher. The civil war in Iraq and the historical trend of Democrats cutting the earnings of big businesses are also factors that effect the indexes. Last but definitely not least, the Federal Reserve is still not done eyeing inflation.

Take a look at the following chart:











After taking a dive in May, the Dow had an almost perfect double bottom on mostly heavy volume, which is generally a bullish sign. The index then rocketed up all the way to 12,409.30, the highest the index has ever been. However, compared to the earlier levels in 2006, starting in mid-September volume began to dry up for the most part and has been since. Only time will tell if this index has what it takes to stand against the factors that may erase its recent run.

Sources:

1http://www.bloomberg.com/apps/news?pid=20601103&sid=aINQEr9aeKAA&refer=news

2(Image source): http://finance.yahoo.com/q/bc?s=%5EDJI&t=1y&l=on&z=m&q=l&c=

Are Houses Fairly Priced in Today's Market?

Although one might initially think of many differing contributions to housing prices, anyone wanting to dissect the issue further would have to simplify the picture a bit and look at the two main components of housing prices; 1) the cost of the labor and materials, and 2) the cost of the land.

These two main components are the underlying drivers for changes in housing prices. Both parameters can be quantified rather easily with current market information, and we shall do an example calculation in a second. By doing these estimates for a given home in a given area, we can uncover any part of the pricing component that may be deemed “over priced”. What I mean by that, to be clear is that lets just say that the cost for labor and materials for building a house rise, this would in turn increase the sales price of a given home, because it cost more to build that home. This seems reasonable and as a component of the cost of home building, one would not be alarmed to see housing prices rise due to increase in the costs of building. However the second component of housing prices, land costs, is subject to more scrutiny. Because unlike the general market prices for labor and materials, land prices are more likely to be priced on subjective basis, such as geographical location and local demand. Therefore, one could argue that inflated levels of land value as a percentage of total price is a better way of gauging current real estate pricing conditions, “over priced” or “under priced”, than looking at just the total price alone. In order for this to idea to set in deeper, let’s do an example calculation.

I live in Orange County-California, so I’ll do an example estimate for an average home in my local market. Right now in my local market, an average 2500 square foot home would cost about $1 million. The current costs for building residential construction are about $100 per square foot (sqft). So a house that is 2500 sqft would cost about $250,000 to build, at a total price of 1 million, would implicate that the land is valued at $750,000 ($1 mil – $250k = $750k). The ratio of the price of the land to the total price of the house would be 0.75 or 75%. It might not surprise you that 75% of the price paid for a house is the price of the land, but that number with respect to historical standards is very high. The historical ratio of land value compared to total prices in my local area, the west coast, have been somewhere around 50% throughout the last two decades. Quickly we realize that in this most recent housing boom, land values have risen much faster than the costs of building. This of course is less of a problem in areas like Manhattan-New York, because building space is limited, however, in areas like mine that are 1/10^th as saturated, there is much room for price adjustment. Please look at the figure above for the land value ratios for other regions in the U.S.

In conclusion, most people buying a house never pay attention to the different components of housing prices, cost of building and land costs, it is one of the most crucial parameters to gauge in determining whether real estate prices are under valued or over valued. My estimate above shows that real estate prices on the west coast are on the over valued end of the spectrum, with significant room for correction.

Focus on Housing Sector Jobs, and NOT on Housing Prices!

Today, most people would agree that the growth in the housing market has slowed and that the decline in demand for single-family homes has already begun. Although most experts agree on the direction of the current trend, opinions begin to diverge with respect to the degree of the slowdown in the housing market (also known as the “soft” or “hard” landing scenario). There are many factors that contribute to the economic trends of housing, but there is one important force that cannot be ignored, the health of the U.S. job market. This is very crucial because no matter what the price of a house is or how creative you can be in financing it, you must have a job to pay for it.
So, let us examine the effects of the housing market slowdown on the employment environment and the general economy. In the most recent published data, housing starts, or the number of permits issued for new unit construction, have fallen from a high of roughly 2.5 million in early 2006, to about 1.5 million today (see figure above) , a decline in permits of approximately 1 million. This decline in permits issued could be looked at as a good sign for real estate owners, since fewer houses being built means tighter supply and higher prices. However, let’s remember that we are not interested in the prices of homes currently; instead, we are interested in the impact of the building slowdown on the job market.
In order to link the decline in permits for new housing starts to its impact on employment, all we need to look at is one number that is issued by the National Association of Home Builders. It states that, for every new single family home that is built in a given year, 2.5 new jobs will be created in the economy, specifically in the construction industry. Remembering that permits for new unit construction have fallen by approximately 1 million for the current year, we can deduce that about 2.5 million jobs (-1 mil new permits X 2.5 jobs per new unit permit) will be at risk of being lost in the near future.
The reason the unemployment index does not yet show signs of these impending job losses is because it is a lagging indicator. It takes an average of 9 months to build a house, thus signs of rising unemployment due to a building slump would show up months after the decline in new building permits, in my estimation 1-2 years for the full cycle.
To further grasp the degree of impact to the general economy, we can look at the Clinton administration of the 1990’s, where 9 million total new jobs were created in 8 years. In the recent Bush administration, 5 million new jobs were created in the most current economic expansion. Therefore, the loss of 2.5 million jobs, 30-50% of new jobs created in a decade, would be large enough to put a hefty dent in the economy.
In addition, it has been noted that almost half the new jobs created in this decade have been in the construction sector (50% x 5 million = 2.5 million), which correlates well with the 2.5 million number we estimated earlier. These two separate estimates that yield very similar results point to a “hard” landing scenario. With 145 million American hard at work, job loses on the scale of my estimates is sufficient to cause drastic changes in the unemployment rate. Right now unemployment is at 4.5%, but with these impending jobs loses in the housing related sectors, unemployment could easily reach 6-7%, uneployment levels not seen since 1970's. The impact of my estimates does not take into account all those households who have used their home equity as a “second job” or additional source of income, the unknown factor that can only serve to worsen the impact of the housing correction!

Source of Figure: U.S. Census Bureau
http://www.census.gov/briefrm/esbr/www/esbr020.html

The Sun Sets Over Europe

By Arthur Mansourian

With America’s issues in the Middle East, Medicare, and social security, Europe has picked up the ball and is running towards the end zone. A report of the world’s most competitive economies placed Switzerland, Finland, Sweden, and Denmark at the top 4 (in that respective order), while Singapore, United States, Japan, Germany, Netherlands, and the United Kingdom rounded up the top 10 economies. [i]

Augusto Lopez-Claros, Chief Economist and Director of Global Competitiveness Network said, "The top rankings of Switzerland and the Nordic countries show that good institutions and competent macroeconomic management, coupled with world-class educational attainment and a focus on technology and innovation, are a successful strategy for boosting competitiveness in an increasingly complex global economy." [ii]

Sweden and Switzerland both made enormous jumps in their rankings, with Sweden making the largest jump from all top 10 economies. Sweden moved up from seventh best to third best. Switzerland was tied with Japan in 2nd place, with both economies moving up three rankings. Conversely, the largest tumble in the top 10 economies was seen by United States, which fell from number one all the way to number six. This is ample proof of why Europe looks vibrant, while the United States is losing its luster.

Also, in a crucial time where North Korea is testing nuclear weapons, Iran is refusing to stop their uranium enrichment program, and Iraq is nearing the brink of civil war, many can find safety and reassurance in Switzerland, a neutral country that does not participate in geopolitical conflicts. One example is seen after the September 11 attacks, in which the dollar fell 10% against the Swiss franc. Furthermore, as stated by Roger Nusbaum, a Realmoney.com contributor, “One aspect of neutrality, and perhaps maturity, is that the economy is very steady: It's characterized by slow growth (annual growth has ranged between -1% and 2.5% for the last five years), low unemployment (close to 4% for several years), and low inflation (CPI growth has not exceeded 2% in more than 10 years)." [iii]


Resources:
[i]
http://www.reliableplant.com/article.asp?pagetitle=U.S.%20drops%20to%206th%20on%20list%20of%20most%20competitive%20economies&articleid=2760
[ii]
http://www.weforum.org/en/initiatives/gcp/Global%20Competitiveness%20Report/index.htm
[iii]
http://www.thestreet.com/_yahoo/etf/etftuesday/10264854.html?cm_ven=YAHOO&cm_cat=FREE&cm_ite=NA

The Beginning of MG Advisors!

"we aim to deliver solid gains to your doorstep, regardless of market conditions..."

Mission:

This blog will attempt to address issues not commonly discussed in the evening news or daily newspapers. As two professionals that are involved in the financial markets on a daily basis, we understand that the average investor does not have a few hours a day to spend on reading various news around the world in order to be able to filter and evaluate its content value. We hope to assist you in your financial planning and decision making, by providing you with the information that the "smart money" is currently contemplating. We aim to make our blog clear and easy to understand, because we believe that our efforts in delivering powerful non-biased information is only valuable, if you are able to understand and use it.


Current Authors:
V. Ghazarian - "Darvinian"
A. Mansourian