Clear Indexes Ideas

What Is Missing From Apple’s (AAPL) Guidance?

It is a shame that the market chooses to ignore mango earnings and revenue and move the stock only based on BS guidance. Let's look at some facts.

The native version of MS Office for Apple creates a whole new set of converts for the sleek elegance of the Mac. Ads are already running in traditional Apple territory such as the Daily Show.

True, many businesses will not go out and purchase a whole new slew of Macs tossing their PCs. However, professionals who bring their work home, small business owners and business students can overcome one of the few last objections and jump on the Mac bandwagon.

The ubiquitous iPod is now available in more sizes and colors than Magnolia cup cakes. The iPhone is now tracking with estimates. Both of these devices bring soft sales of downloads and revenue shares of phone service. These sources of reoccurring revenue are crucial to understanding the firm’s growth. It is the razor and blade game done to perfection.

Last are  sales outside the US which are growing nicely. Plus go to any Apple store on the east coast, the language spoken is not geek and certainly not English. It is the tongues spoken by the people who have made the  US their shopping destination of choice. That is defined as anyone whose native currency is Euros.

Add it up. Under promise and over deliver. How many quarters will it take for the street to catch on to the game?

Mr. Corn is long Apple (AAPL) and Microsoft (MSFT).

The Google Mindset in China

I have had some reservations about long term investing in China. Some of this is due to the many one child families and the predominance of boys. With all of those boys and fewer girls around, I have some reservations concerning the overall social climate. Apparently it has had no effect so far. Google (GOOG) is helping to prove that I am wrong, at least short term.

Reuters Nick Macfie and Roger Crabb reported this week some interesting results.

The names of three banks and the word "stocks" beat "sex" to become four of the most Googled words in China last year, according to a Google China list seen on Thursday.

China Merchants Bank, Industrial and Commercial Bank of China and China Construction Bank ranked second, third and sixth, according to a list supplied by Google China on its website (www.google.cn).

"On the Chinese mainland, it was money and technology that took the honors last year," the China Daily said, pointing out that "sex" was the most popular keyword for Google users in some other countries.

Fourth on the list was "stock," not surprising with Shanghai shares having risen 97 percent last year. At number 1 was "QQ," a Chinese instant message service and a brand of car.

China's Central Bank, the Ministry of Finance and Banking Regulatory Commission ranked first, third and fifth in the "Most Popular Departments" list, the Web site said.

Then again, China keeps a tight rein on Internet content, perhaps one reason why "sex" did not score number one.

Mr. Corn is CEO of Clear Asset Management. Google is a holding in the clear large Cap Growth and Large Cap Core portfolios. He owns the stock directly through his participation in both portfolios.

All Aboard: Coach Inc. (COH)

A constituent, not just for the holiday season in the Claymore/Robb Report Global Luxury Index ETF (ROB) is the New York based company, Coach Inc. (COH). It also is a holding the Clear Large Cap Growth portfolio so it is well followed at Clear. Its signature leather designs and upscale marketing of accessories and gifts are world renown.

Founded in 1941, Coach began as a family-run workshop in a Manhattan loft. Inspired by a baseball glove, and after refining it to be softer and stronger, the infamous glove-tanned Coach handbag was created. Since then, there have been innovations in leather finishes, new grains and colors, and modern materials, but each collection embodies the same principles of classic design and American style. Coach has translated its appeal for products and gift items for both men and women seamlessly from continent to continent.

So many people this year will say "on my list; and make no mistake that my list is from Coach includes" handbags; cosmetic cases, belts, wallets, card cases, jackets, sweaters, gloves, hats and scarves; business cases and computer bags, and don't forget pet accessories. The company also offers luggage and travel kits, jewelry and fragrances, footwear and watches.

Coach sells its products through direct-to-consumer channels, including its own retail stores and factory stores, its online store and catalogs. Products are also sold through indirect channels comprised of department store locations in the United States, internationally, freestanding retail locations and specialty retailers. As of June 30, 2007, it operates 259 retail stores and 93 factory stores in North America and 137 department store shop-in-shops, retail stores, and factory stores in Japan.

An analysis of its fundamentals reveals a firm in sound financial standing and potentially undervalued. Even though it disappointed the street with its most recent earnings report it still boasts profit margins of 38.10% which is almost triple its peer group average and on revenues of $2.76 billion. The firm has grown to a market capitalization of $12.81 billion. The company has earned a one year return on equity (ROE) of 42.28% and a Return on Assets (ROA) of 30.18%. Top line growth continued last quarter at 27.80%. To look at the stock price today compared to six months ago (down almost 30%) or a year (down around 20%) with such strong numbers, we calculate the stock is well over-punished. We believe based on its fundamentals that the market will wake up and realize that a Price to Earnings ratio of 19.13 is absurd for a company this profitable while growing this fast.

Disclosure: Mr. Corn is CEO of Clear Indexes LLC and Clear Asset Management Inc. Coach Inc. (COH). is a constituent in the Claymore/Robb Report Global Luxury Index licensed for the ETF (ROB) for which Clear Indexes LLC is a consultant. It is also a holding in the Clear Large Cap Growth portfolio. Mr. Corn owns shares of the ETF (ROB) and shares of (COH) directly through his participation in the portfolio.

They Just Keep Printing Money

It was a summer that began with high hopes as we watched the Dow Jones, NASDAQ, and S&P 500 all reaching record highs in June and the beginning of July. Then suddenly, what will go down in history as the infamous “credit crunch” of 2007 took place in mid-July. It started off with Bear Stearns (BSC) reporting their hedge funds’ exposures and subsequent losses due to high-risk subprime mortgages with leverage. Bear was forced to break the shocking news to hedge fund investors that their money was now worth a whopping 9 cents to the dollar. Unfortunately, Bear Stearns was not the only bulge bracket bank that was slaughtered by the mid-summer catastrophe that has spilled over into the fall months, with Merrill Lynch (MER) and Citigroup (C) the two most recent victims with each firm offering up their CEO as the sacrificial lamb.

With financial firms being destroyed across the board, the one investment bank that has managed to slip through this credit crisis without much damage has been Goldman Sachs (GS). Goldman has experienced the smallest write downs and the largest profit this past quarter and appears poised to perform again. While the markets have been extremely volatile over the last few months, one facet of its business that has maintained its consistency is Goldman Sachs Asset Management and its unparalleled ability to continue growing its assets under management despite taking its own bath this summer.

There were heavy losses suffered by two of its computer-driven trading hedge funds in the month of August, Global Alpha and Global Equity Opportunities. The Global Alpha fund was down 34.9% for the year to mid-September. The Global Equity Opportunities fund was down 23% in August alone and yet Goldman arranged for it to receive a $3 billion injection of its own and others' capital. But did the performance of these two funds adversely affect Goldman’s fundraising capabilities? Somehow, some way, the answer is no.

The black eye I have predicted has never come. During the summer turmoil, where Goldman lost billions for its clients, it was printing money in its proprietary trading operations, probably on the winning side of trades that were blundered by its hedge funds. Apparently neither ultra high net worth families or institutions care based on a new swift raise of capital.

Goldman has raised $4.5 billion for two new hedge funds. One of these is a credit hedge fund called Liberty Harbor that raised $2.7 billion. The other, GS Liquidity Partners, had $1.8 billion raised for it and will make investments in distressed credit. On top of these two funds which have already been fundraised for, Goldman is planning to launch yet another long/short equity fund in the next few months.

Goldman has brilliantly moved Raanan Agus from his position as head of the principal strategies group in New York to run this new fund. All three of these funds will be run by manager discretion, rather than by computer-based trading as the two underperforming funds in August were.

So what is it about Goldman that is allowing them to raise more money than even many of the winners of summer? Well, some might say it is just the fact that the name “Goldman” instills fear and greed in the hearts of ultra high net worth families and institutions. Others might point to the fact that Goldman Sachs has such a strong presence in every facet of the industry and around the globe, including former Goldman exec Duncan Niederauer who recently was made President of NYSE Euronext (NYX) after the defection of another Goldman alum John Thain over to the top spot at Merrill Lynch. Either way, the way Goldman prints money, the next time I stop at an ATM I will be sure to check to see if the legal tender it dispenses displays the inscription “In Goldman We Trust.”

Disclosure: Mr. Corn is CEO of Clear Indexes LLC. He does not hold any positions mentioned. Goldman Sachs Group Inc. (GS), Merrill Lynch (MER), Bear Stearns (BSC) and NYSE Euronext (NYX)) are constituents in the Clear Global Exchanges, Brokers and Asset Managers Index licensed for the ETF (EXB). Mr. Corn owns shares of the ETF (EXB).

E*Trade (ETFC): Liar, Liar, Pants on Fire

Let us be honest here. After scouring publicly available information, I post that E*Trade was an attractive stock with minimal subprime exposure. I was bashed as E*Trade Bank made mortgage loans. So I posted again stating that the downturn could hurt its business.

This week E*Trade has announced that a material portion of its portfolio has been down graded and more write downs are on there way. This stinks for holds of ETFC.

What really smells bad are the public disclosures, the timing of when management knew its true position and what else is hiding under the rug. The WSJ summaries the report well:

The New York discount online brokerage said its total exposure to collateralized debt obligations of asset-backed securities and second-lien securities at Sept. 30 was about $450 million, including about $50 million of "AAA" rated asset-backed collateralized debt obligations, or CDOs, that were downgraded to junk status.

In addition, the company said the "deterioration observed since September 30" will likely result in write-downs that exceed previous expectations, noting investors should no longer expect these earnings levels to be achieved.

The company said it expected the declines in fair value to result in further securities write-downs in the fourth quarter, adding it will no longer provide earnings expectations for the rest of the year.

On Oct. 17, the company reported a third-quarter net loss after writing down nearly $200 million worth of mortgage-backed securities squeezed during the summer's credit crisis.

The company, one of the biggest online brokerages, at the time also lowered 2007 guidance because of "the possibility of further credit deterioration."

E*Trade uses some $40 billion of customer cash from its bank and brokerage to make investments, including in asset-backed securities and CDOs.

Come clean. Take your write downs and move forward in an honest, transparent, long-term shareholder friendly manor. What happens to firms who lack transparency and realistic views of their use of balance sheet.

Separately, E*Trade disclosed that the Securities and Exchange Commission is conducting an informal inquiry of the company's loan and securities portfolios. The company is cooperating with the SEC inquiry, which began Oct. 17, according to disclosure in the company's third-quarter report.

I posted Saturday concerning Sarbanes Oxley, and it was the topic of my weekly note to our clients as well. The accounting standards board needs to get its oversight out of the office and onto the books of many of these financial institutions that have not come clean.

Are laws being violated? Is jail time around the corner for select executives for selective disclosures? Financial firms cannot hide behind mark to market as an excuse, sit around waiting for rating agencies to let them know when non-performing assets should be written down. It is a case of hiding behind the rules to fool the street and the company’s owners, the shareholders. What is worse is that many financial firms are still bragging about their risk management.

It is already past time to come clean. Do it now, it may already be too late to prevent this issue moving from the front page to the court room.

Innovative Google on Sale

Being the quant I am everyone expects this post to be a comparison of Google (GOOG) to overpriced stocks like Baidu.com, Inc. (BIDU) which is trading at a price to earnings ratio of 165 seems somewhat extreme compared to Google with a P/E just over 52.

I’m not heading there. It is more productive to find the details that make a firm great. An AP reporter Michael Liedtke has done just that and posted a little piece that hits me once again how GOOG finds ways of increasing its reach in incredibly new ways. Innovation from a shareholders perspective is not measured by cool gadgets that wow audiences; it is measured by sustainable revenue and the resulting profit by out maneuvering its competition. It is about building a brand that sustains its earnings multiple and by being ubiquitous. With all the press on the Google phone, I like to highlight this project. It will not launch with ads, only coupons, but you know Google isn’t in it just to stretch its brand.

Lost drivers soon will be able to Google for help at the pump. As part of a partnership, the online search leader will dispense driving directions at thousands of gasoline pumps across the United States beginning early next month.

The pumps, made by Gilbarco Veeder-Root, include an Internet connection and will display Google's mapping service in color on a small screen. Motorists will be able to scroll through several categories to find local landmarks, hotels, restaurants and hospitals selected by the gas station's owner.

After the driver selects a destination, the pump will print out directions. Eventually, Gilbarco Veeder-Root hopes to enable motorists to type in a specific address and get directions.

Unlike most of Google's services, this one won't include ads bringing the company a. But participating retailers will be able to make extra money from other merchants that offer coupons on the service.

Gilbarco Veeder-Root, a subsidiary of Danaher (DHR) is promoting the relationship on its web site, and it should. Being associated with another new form of media delivery extends its brand, capabilities and revenue possibilities.

At the time of this writing, Google is down 5.5% for the week. Does this sound like a firm you want to short, or buy and hold? This project could be another foray of ultra targeted national and local advertising that brings another definition of the word “new” as in new media.

Disclosure: Mr. Corn is CEO of Clear Asset Management Inc. Mr. Corn holds no position in Danaher (DHR). Google (GOOG) is a holding in the Clear Large Cap Growth portfolio. Mr. Corn owns shares of (GOOG) directly through his participation in the portfolio.

Why Not Raise Prices?

Apple (AAPL) may have fumbled its initial roll out of the iPhone but no such misstep has befallen Nintendo Co Ltd (NTDOY.PK) when it introduced the Wii. Pricing came down on the iPhone early on leaving some egg and rebate paperwork on the face of Apple. All may now be forgiven based on sales but the memory lingers.

Rumors of a price decrease for the Wii are not just exaggerated, they are unfounded.

NTDOY has a lot on its plate; approaching the selling / key holiday season, its launch in China along with its new interactive web-based features.

The company shipped about 3.9 million Wii units around the world in the last three months, according to its most recent earning report, bringing the total since launch to 13.2 million units. This breaks down regionally as 5.5 million in North America, 3.7 million in Japan and 4.0 million in other markets.

According to a report on CNN Money, adding to the pressure are newly announced Wii accessories which include: a floor pad for exercise and dancing, a steering wheel for driving games and a gun-shaped "zapper" for shooting.

It appears the pressure is to keep the shelves stocked not to lower prices.

The quote coming from Nintendo president Satoru Iwata says it all: "we're still focusing on how to meet booming demand, we're absolutely not considering a price cut."

Disclosure: The author has no positions in the stocks mentioned.

So What Have You Done For Me Lately? (MSFT)

Yes, Microsoft Corporation (MSFT) blew through its numbers with its fastest growth rate since the 90s. Many have stated that some key facets of their business are eroding and unsustainable. I am focusing on their attempt to become a major player in online advertising.

For several years now MSFT has been playing, but this year they have thrown their hat in the ring in a bigger way with two equity investments; online advertising seems to becoming a leading strategy.

A perfect entrance into how fabulous the Facebook deal is, right? Not so fast.

For Microsoft, the deal is a full admission of how important online advertising will someday be to its top and bottom line. Without a series of previous blunders, in fact, online ads would already be a major contributor to both its top and bottom lines. With the Facebook deal and the acquisition of aQuantive, it is time to prove to the street that MSFT can generate revenue and feed the bottom line. Show me the money!

How hard or easy should this be for MSFT?

BusinessWeek reported this week:

The arrangement gives Microsoft control over the placement of banner ads on Facebook outside the U.S., where about 60% of Facebook's 49 million active users reside. Microsoft had already reached agreements to sell U.S. banner ads for Facebook through 2011. "It signals an enormous vote of confidence from our largest advertising partner," Kevin Johnson, president of the Platforms & Services Div. at Microsoft, said during a conference call announcing the investment.

Please note Kevin Johnson’s title, not very online ad focused. Next, if it is time for lunch we know who is eating Microsoft’s, Google Inc. (GOOG).

Google already has a lock on placing ads on the top social networking site MySpace. In a transaction outlined in 2006, Google is in charge of placing search-related ads on MySpace. Google also serves as the main MySpace search engine. Among social networking sites, MySpace received 76% of U.S. traffic in the week ended Oct. 20, compared to 15% for Facebook.

In the end, the deal was more important for Microsoft because the software giant has badly lagged Google in online ad revenue. While Microsoft won the right to serve banner ads overseas, it's unclear what else the company got. Van Natta said the deal didn't include Web search, a business that could prove quite valuable.

What exactly did Microsoft gain? It coughed up $240 million in cash (keeping in mind MFST has $23.4 billion in cash hoarded away) for 1.6% of Facebook , hardly a material stake in the firm while creating a valuation for Facebook that is too obscene to print. 

MSFT also received the right to sell international remnant banner advertising. Remnant ads are just what the term implies; pieces that fell through cracks after major purchases cherry picked what they wanted. Facebook will be selling the prime space itself. Note: MGST also did not get the search rights, a key part of the business.

So what has MSFT done lately that warrants an investment after the post earnings report afterglow?

Disclosure: Mr. Corn is CEO of Clear Asset Management Inc. Mr. Corn hold no position in Microsoft Corporation (MSFT). Google (GOOG) is a holding in the Clear Large Cap Growth portfolio. Mr. Corn owns shares of (GOOG) directly through his participation in the portfolio.

A Big Week For RIMM

First opening up China and now on to another large Venue: Facebook!

Now that I have established a Facebook presence, I have come to realize how big it really is. I love how it is described as "social networking," a guess a label, however off base, makes people comfortable.

This week, Research In Motion (RIMM) launched Facebook software designed for its smartphones making it easier for users to browse Facebook. T-Mobile is the first carrier to provide the new software to its customers.

The application similar to BlackBerry e-mail, will let users receive Facebook notifications and messages automatically and scroll through them quickly. Users can also read and compose messages off-line, also similar to the email application Blackberry users are accustom.

Another feature, totally for the retail audience enables photo uploads to Facebook which is integrated with the BlackBerry's camera and photo management software.

Who knows… one day (RIMM) might add music!

Disclosure: Mr. Corn is CEO of Clear Asset Management Inc. Research In Motion (RIMM) is a holding in the Clear Large Cap Growth portfolio. Mr. Corn owns shares of (RIMM) directly through his participation in the portfolio.

What Can Move Big Pharma? Vaccines.

This is the second consecutive quarter for strong increases in income for Merck & Co. Inc. (MRK) left investors content. Reported earnings were up to 62%. Merck’s new products and restructuring efforts have outshined the $528 million reserve for Vioxx legal defense. Although its anti-cholesterol drug joint venture with Schering Plough (Vytorin and Zetia) contributed to this, it is important to note there was another factor as well - strong sales of vaccines.

Sales cervical cancer vaccine GARDASIL increased 17% from the previous quarter as the company launches the vaccine in more countries. Merck’s overall sales were up 12% to $6.1 billion of which vaccines totaled $1.2 billion. Gardasil accounted for 35% or $418 million of its vaccine sales exceeding many analysts’ expectations.

Merck earned $1.53 billion or 70 cents per share compared with $941 million or 43 cents per share last year. They have raised their earnings outlook from $3.10 to $3.14 per share.

The once sleepy vaccine market is on the rise with new markets and new disease prevention.

Disclosure: Merck & Co. Inc. (MRK) is a constituent of the Clear Global Vaccine Chain Index. Mr. Corn is CEO of Clear Indexes LLC which publishes the index which is licensed to Claymore Securities, Inc who has issued the ETF:(JNR). Mr. Corn does not own sharse in (MRK) directly and does own shares of (JNR).