7/31/2019 Qeic Monthly July

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QUEENSECONOMIC

INVESTMENTCLUB

99UniversityAve

Kingston,ON,K7L3N6

exec@qeic.ca

qeic.ca

QEICMONTHLYIssue2July2012

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QEIC FINANCIALSECTOR

AniBoyo 1

Perspective:EffectsoftheLIBORScandalonFinancialSector

Halfofvariable-rateprivatestudentloansdependupontheLIBOR.Manyvariable-ratemortgagesalsouseLIBOR.WhenbanksworkedtogethertosetLIBORtobenefittheirtradingpositionsthishurthouseholds.

SeverallargeinsurerswillneedtospendhundredsofmillionsofdollarsoverthenextfewyearstocoverthelegalcostsforpeoplecaughtupintheLIBORscandal

o Thismeansinvestmentopportunitiestoincreasegrowthandcapitalizeonemergingmarketswillbelostduetoalackofflexiblefunds.

AnewblowtobankscredibilityandaccountabilityhasemergedregardlessofwhethertheyknowinglyorunknowinglytookpartinLIBORfixing.Thiswillworsenbanksrelationshipswithcustomersofallincomeclasses.

TighterandsternerrulesimplementedduetotheLIBORscandalwillcontributetoreshapingthebankingindustry.

StockWatch:EuronetWorldwideInc:EEFT.O

Overthepastmonththestockthathascaughtmyattention,notjustforitsperformancebutforitspracticalservices,isEuronet

Worldwide.EuronetWorldwide,Inc.(Euronet)isaglobalelectronicpaymentsprovider.TheCompanyofferstransactionprocessing

anddistributionsolutionstofinancialinstitutions,retailers,serviceprovidersandindividualconsumers.Itsprimaryproductsinclude

automatedtellermachines(ATMs),point-of-sale(POS)andcardoutsourcingservices,electronicdistributionofprepaidmobile

airtimeandotherelectronicpaymentproducts,andglobalconsumermoneytransferservices.Theseserviceswillbeneededinthe

foreseeablefutureandduringthefalltermtheQEICfinancialsectorwilladdingthisstocktoourportfolio.

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QEIC FINANCIALSECTOR

AniBoyo 2

DowngradesthetrendintheFinancialSector

ReutersreportedthatratingsagencyMoody'sdowngraded15banksonthe24thofJuly.Thereasoningbehindthedowngradewasto

reflecttheriskoflossestheyfacefromvolatilecapitalmarketsactivities.

TwonotchDowngrades

MorganStanley BarclaysPLC BNPParibasSA RoyalBankofCanada Citigroup GoldmanSachsGroupInc JPMorganChase&Co. CreditAgricoleSA DeutscheBankAG. HSBCHoldingsplc,rating.

Notably,thelong-termdebtratingscutscouldincreasefundingcostsforMorganStanleyandotherbanks,andtradingpartnerswill

askformorecollateraltooffsettheriskstheyarenowfacedwith.

ThechangesareconsistentwithindicationsgivenbyMoodysearlierinthemonththattheratingswerelikelytobedropped.

Overall,thesignificanceofthesedowngradesmaybeminimalasbankshavehadasmallwindowtomodifytheirstrategies.

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QEIC ENERGYSECTOR

JordanMirwaldt 3

EnergyOutlook

ENERGY-July23,2012

TheweekofJuly23,2012promisestohaveamajorimpactontheEnergysector,especiallyinCanadaasfourmajorplayersinthe

sectorareexpectedtoreleasetheirearningsreports.SuncorEnergyInc(TSE:SU),EnCanaCorp(TSE:ECA),CenovusEnergyInc

(TSE:CVE)andCanadianOilSandsLimited(TSE:COS)aresettoreleasetheirearnings,whichcouldshapehowinvestorsperceivethestateoftheEnergysectorinCanada.

Thebiggestnewssinceourlastreporthasbeentwolargeacquisitionsandonemerger.Mergersandacquisitionswillbeafocal

pointforouranalysisintheupcomingsemesterastheyplayamajorroleinshapingthemarketcapitalizationofacompanyonthe

globalstage.OnMondayJuly23,2012,Chinastopoffshoreoilproducer,ChinaNationalOffshoreOilCorporation(NYSE:CEO),

acquiredCalgary-basedNexenInc(TSE:NXY)for$15.1billion.Itisreportedthatthiswillbeacashdeal.Thenewsofthisacquisition

causedNexenInctoopenMondaymorningat$26.55/share,whichwasa54%increasefromitspreviouscloseat$17.29/share.As

fortheacquisitionitself,CNOOCLtdistopaya61%premiumpershareonNexensJuly20,2012closingprice,bringingthetotalto

$27.50/share.Thegoalofthisacquisitionisto1)gainincreasedmarketshareintheglobalmarketand2)increasetheirsupplyof

naturalgas/oilreservesasCNOOCLtdisreportedtohaveonlynineyearsworthofreservesbasedontheircurrentdomestic

production.WithCNOOCcontinuingtoexpressinterestinNorthAmerica(recentlyacquiredOptiCanadaLtdfor$2.1billionand

16%ofMEGEnergyCorpfor$122M)itwillbeinterestingtoseehowtheyleveragetheirexpansion.Atthecurrentsharepriceof

$193.96/shareCNOOCmaybetooriskytoaddatthemoment;thisstockwillbeonourwatchlistastheacquisitionmovestoward

approvalfromtheCanadianGovernment.

ThesecondacquisitionofnotewasthatofTalismanEnergyInc(TSE:TLM),adirectcompetitorofNexenInc.OnMondayJuly23,

2012,anotherindustryleaderinChina,ChinaPetroleum&ChemicalCorporation(NYSE:SNP)acquired49%ofTalismansoil,gas,and

infrastructureassetsintheUnitedKingdom.SimilartotheincreaseinNexenIncsshareprice,TalismanEnergyIncsawa6.7%

increaseintheirsharepriceonMondaymorning.Asapoliticalconsequence,itwillbeinterestingtoseehowtheCanadian

Governmentrespondstotheever-increasingChinesepresencewithintheEnergysector.Chineseoilandgascompanieshavebeen

activelypursuingglobalopportunitiestofueltheircountrysgrowingeconomy.Inthisenvironmentofglobaleconomicuncertainty

energysecuritieshavebeentradingatlowerlevels,whichisadvantageoustoChinesecompanieswithhighlevelsofworkingcapital

whichhavealong-terminterestinenergy.

AlargemergerwasalsoannouncedearlierintheweekasNRGEnergyInc(NYSE:NRG)andGenOnEnergyInc(NYSE:GEN)areplanninga$1.7billionmerger.TheoverallgoalofthismergeristocreatethelargestcompetitivepowercompanyintheUnited

Statesandtocreatesavingsforeachcompanyestimatedat$300millionperyear.Bothcompanieshaveseenrevenuesslowover

thepastfewyearsashighnaturalgasreservesintheUnitedStateshaveledtorecordlowgasprices,andoveralllowerwholesale

powerprices.ItisexpectedthatNRGEnergyIncwillexpandtheirretailelectricitybusinessintheNortheastUSAandinTexasdueto

GenOnEnergyIncspowerplantsgivingthemthenecessaryresourcestogrowtheirbusinessatalowercost.Analystshaveraised

theirpricetargetsforbothstocks;NRGuproughly37%to$26/shareandGENuproughly20%to$3/share.Theannouncementof

themergerresultedina25.82%increaseinGenOnssharepriceandan8.14%inNRGEnergyIncsshareprice.

Althoughweareseeingexcellentresultsfromthesetwoacquisitionsandthemerger,wewillnotaddanynewstockstoour

portfolioatthemomentasitiseasytoreadtoomuchintolargesingledaygainsbyacompany.InstitutionalinvestorsandlargePE

firmscansendashocktothemarketbybiddingupsharepricesasexpectationsrise.Untilweseethegreatereconomiceffectsthat

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QEIC ENERGYSECTOR

JordanMirwaldt 4

theseChinesecompanieshave(whatwillhappentothe3,000employeesofNexenInc.?),wewillnotestimatethelongterm

benefitsoftheseacquisitions.Ibelieveitisapparentthatthesetwoacquisitionswillhavelucrativeshorttermbenefitstomany

portfolios,butfurtheranalysismustbecompletedtodeterminewhethertheseshorttermgainsimplylongtermbenefits.However,

atthistimeIbelievethesafestinvestmentwouldbeinNRGasthemergerwithGENwillimprovethecompanysincomestatement

asincreasedrevenueandalowercostofproductionwillincreasethecompanysbottomline.

AsperthelastQEICmonthly,InotedthatitwouldbebeneficialtobuySchlumbergerLtd(NYSE:SLB).Whenthelastreportwas

writtenonJune5,2012,SLBwastradingat$62.24.AsoftodayscloseonJuly23,2012,SLBistradingat$69.55whichisanincrease

of11.7%.MuchofthisincreasecanbeattributedtospeculationaroundpositiveQ2earningsandalargeincreaseinbothsalesand

profitscomparedtoQ2inF2011.Anincreaseinbothearningspershare(from$3.79to$3.99)andthepricetoearningsratio(from16.4to17.4),alongwithanincreasednumberofsharesoutstandingindicatethattheupcomingearningsreportwillrevealincreased

overallnetincome.AlthoughIamnotconfidentthatthestockwillreturntoits52weekhighof$95.53/share,IstillfavourSLBasa

potentialbackbonestocktotheenergyportfolio.

ThesetwoinitialreportshavebeenwrittenbasedonmypersonalviewsoftheEnergysector.Aswearequicklyapproachingthe

startofthesemesterIamexcitedtodiscussothermembersviewsonthissectorandthemarketasawhole.Ifthereareany

questionsorpointsofinterest,Iamalwaysavailableat9jm24@queensu.caasweattempttogrowourportfolioandenhancethe

learningcurveoftheclub.TheoverallgoalofQEICistoensurethateachmemberbenefitsasmuchaspossibleaswelearnabout

theins-and-outsofthemarket.

Thankyouverymuchforreviewingthisarticleandthereportasawhole,andIlookforwardtoworkingwithandlearningfromallof

you.

JordanMirwaldt

Executivemember-EnergySector

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QEIC TECHNOLOGY

SECTOR YangZhang 5

TechnologyOutlook

TechnologySector

InthemonthofJulythetechnologysectorexperiencedalowof-4.26%andendedthemonthwithareturnof-0.51%.Compared

bothtotheS&P500(whichroseby3.06%)andtheNASDAQ(anincreaseof4.47%),thetechsectorhasbeenperformingpoorly.We

beganthismonthbycontinuingwithFacebook,lookingintoanothercompanybasedonintangibleassets,andfinishedwithaquick

analysisofMicrosoft.

Facebook(NASDAQ:FB)

FacebookhasbeentrendingsteadilydownwardssinceourlastreportinJune,showingasteepdropfrom$26.77onJuly26thto

$23.71onthe27th.SinceitsIPOFacebookhasdroppedanastounding42.15%asoftheendofJuly.LastweekFacebookreported

results,buttherewasnomentionofgrowthorayearlyforecast.OnAugust16thFacebookemployeescanselltheircompany-

awardedsharesforthefirsttime,andjudgingbytheongoingdownwardtrendthecompanycouldpotentiallysufferahugedeluge

ofshares.Thecompanycontinuestofailtomonetizeadrevenuesfrommobileusers,yetthenumberofoverallusershascontinued

toincrease.UntilFacebookfindsawaytomakemorerevenuefromitsmobileapprevenueswilllikelycontinuetofall.Inconclusion,

wedecidedtolookatothercompaniesandperhapsreviewFacebookinSeptembertogivethestocksometimetosettleafter

August16th.

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QEIC TECHNOLOGY

SECTOR YangZhang 6

Zynga(NASDAQ:ZNGA)

ContinuinglastmonthsdecisiontoexaminecompanieswithintangibleassetsweconsideredZynga.Zyngaisacompanythat

suppliessocialgamingservicesinover175countrieswithanaverageof240millionmonthlyactiveusers.Someofitsgamescanbe

foundonFacebook(suchasFarmVille).Revenuesaregeneratedthroughsalesofvirtualgoodsandadvertising.Thisyear,itacquired

OMGPOP,agamedeveloper(famouslyknownforthemobilehitDrawSomething).However,sinceitsinitialpublicofferingZyngas

stockshavedecreased70.84%,from$10to$2.95attheendofJuly.Thisraisesthequestionofwhethersocialnetworking

companiesareabletosustaingrowthandmaintainasteadyflowofrevenue.Zyngarecentlymissedanalystssecondquarterprofit

andrevenueestimatesandblamesFacebooksnewuserinterface,claimingthatpeopleareunabletofindtheiroriginalgames.We

willkeepZyngaonourwatchlistuntilnewgamesareannounced,andwillthenre-evaluatethecompany.

Microsoft(NASDAQ:MSFT)

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QEIC TECHNOLOGY

SECTOR YangZhang 7

LastmonthwedecidedtotakealookatMicrosoft.Sincethisisalarge,stablecompany,itisgoodtohaveitasabackbonestock.

LilyandIexaminedthreetopics;thesoontobereleasedSurfacetablet,Windows8andtheirQ42012earningsreport.

BothWindows8andMicrosoftsnewtablet,theSurfaceRT,willbereleasedonOctober26th2012.SurfacewilluseWindows8and

willnotonlycompetewithApplesiPad,butwillalsocompetewithproductsmadebyMicrosoftsownOEM(originalequipmentmanufacturer)partners.ThoughMicrosoftmayexpectlesssupportfromtheirOEMpartnersasaresult,andadmitsthatcostof

revenuemayriseduetothisefforttomakealatebreakintothetabletindustry,manyfeaturesoftheupcomingtablethaveroused

excitement.SurfacewilloperateonWindows8,andnewkeyboardshavebeendesignedspecificallyforthetablet.Itisbuiltwith

ARM-basedchipstomakeefficientuseofpower.ScheduledtoappearseveralmonthsaftertheSurfaceRTsrelease,theSurface

ProwilluseIntelsi5processorandwilllikelycompetewithlaptopsandUltrabooksratherthantablets.BothversionofSurfacewill

comewithabuiltinkickstand,unlikemostothertablets,anditsscreenwillbemanufacturedbyopticalbondingtoreduceglare,

maketextclearer,andimprovecontrast.However,opticalbondingisexpensive;fewtabletsuseitandwithoutmoreinformationon

SurfaceRTandtheSurfaceProspricesandspecificationsitisdifficulttosaywhetherMicrosoftstabletwillbeasuccess.

InadditiontotheirnewtabletWindows8willappearonallnewdevices,suchasUltrabooks.Itisacompletelynewdesignwithan

interestinguserinterfacethatisbasedontheWindowsMetrodesignlanguage.Metrostyleappscanbebuiltwithavarietyof

programminglanguages(includingC++,VisualBasic,andHTML/JavaScript).Consumerscanpurchasethenewsystemstarting

October26th.Furthermore,newmiceandkeyboardsarecomingoutwithWindows8.

Microsoftreportedrevenuesof$18.06billioninitsfourthquarter,althoughhadanetlossof$492millionoverthelastthree

months.AccordingtoEngadget,itisimportanttorealizethatthatlossisduetoaone-time"goodwillimpairmentcharge"

associatedwiththecollapsedaQuantivedealthatsetRedmondback$6.2billion.ItisinterestingtonotetheEntertainmentand

DevicesdivisionofMicrosofthasgrowndramaticallyduetoSkype.IfweweretoinvestinMicrosoftwewoulddosobeforeOctober

26th,butfornowwevedecidedtoputMicrosoftonthewatchlistandfurtherdiscussitinSeptember.

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QEIC DIVERSIFIEDSECTOR

DavidAime 9

DiversifiedIndustriesSector

TheJune5-July26periodhasseentheS&Priseby4.6%.Althoughthisisapromisingsign,ithasbeenarockyclimbtosaytheleast.

Asshowninthegraphbelow,thereweremanyfluctuationsduringthisperiodandalargepartcanbeattributedtouncertaintyin

Europe.

InthiseditionofthenewslettertheDIsectorwilllookatthecompanieswepresentedinthelasteditionaswellasacoupleofnew

companiesthatweplantowatch.

PaladinLabsInc(TSE:PLB)

PaladinisacompanythatChrishashadhiseyeonforawhile.AtthetimeofourlastnewsletterPaladinwastradingat$44.94.As

ofJuly25ththesharepriceclosedat$47.10.Thatequatestoa$2.16or4.8%return.However,onJuly20

ththecompanywastrading

at$49.70sotherehasbeenasubstantialdropinthelastfewdays,butwehavenotfoundinformationaboutthisdropinshare

price.OnJuly2ndPaladinLabscompletedapartnershipdealwithLithaHealthcareGroup.Thisisviewedasastrategicpartnershipto

helptakeoveralargershareofthemarket.

TheHersheyCompany(NYSE:HSY)

Hersheywastradingat$65.93onJune6,thetimeofourlastnewsletter.Currentlytheirsharepricesitsat$70.33,a6.7%increase.

Thisisanicereturnasitis2.1%abovetheS&Poverthetimeperiod.OnJuly3rdthestockpeakedandtradedat$72.58.Sincethen

ithasleveledoffandseenaslightdecline.ThisisasignforoursectortoproceedwithcautionwithregardstoHershey.Although

thecompanypaysagooddividend(2.16%),thedownwardtrendsuggestswemayhavemissedoutonthepricegains.

GeneralMotorsCompany(NYSE:GM)

GMhascontinuedtostruggleandisnowtradingatits52weeklowof$18.80.GMannouncedtodaythattheywillcut20executivejobsinglobalproductdevelopmenttoincreasedecisionmakingtimewithinthecompany.Fromabuylow/sellhighperspectiveits

stillaninterestingstocktowatch.

ZalicusInc.(NASDAQ:ZLCS)

Zalicusisasmall-marketbiopharmaceuticalcompanythatDanhasbeenlookinginto.Whenhefirstbroughtthecompanytoour

attentionitwastradingat$0.92.Thesharepriceshotupto$1.45andnowcurrentlysitsat$1.04.Thesharepricehasbeenvery

volatilesoitlookslikeitwouldbeashort-termbuythatwewouldhavetocatchattherightpricetomaximizeourgains.OnJuly10

thecompanyannouncedthatithasinitiatedaPhase1multipleascendingdoseclinicalstudywithZ944,itsnovel,oral,T-Type

calciumchannelblocker.Thisdrughasdemonstratedpreclinicalefficacyinmultipleinflammatorypainmodels.Hopefullythisdrug

continuestoprogressthroughthetestingphasestoresultinanincreasingshareprice.

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QEIC MININGSECTOR

DmitriTchebotarev 10

MiningUpdate

SincethelastupdateinearlyJune,fourdifferentnoteworthychangeshaveoccurredintheminingsectoroverthelast2months.

1.Overalldownturn

Therehasbeenasignificantoverallslowdowninmining,toanevengreaterextentthantherestofthestockmarket.Thefollowing

graphfromBloomberg.comdemonstratestheextent.

Intheabovecharttheorange(bottom)lineistheTSXGlobalMiningIndex,thegreen(middle)istheTSXComposite,andtheyellow

(top)istheCAD-USDexchangerate.Thisdownturnhasbeencausedbyfourprimaryfactors:

CommodityPricing:Ascommoditypricesincrease,sodotherevenuesoftheminingcompanies.Ascostsstaymostlyfixed,profitsincrease.Whencommoditypricesdecrease,thereverseistrue,andminingcompanyearningsplummet.

OperatingCosts:Asoperatingcostsrise,profitsfall. ProductionQuotas:Miningrevenuesdependonthequantityofproductsold.Whenacompanyfailstoprovidethepredicted

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QEIC MININGSECTOR

DmitriTchebotarev 11

amountofproduct,itsrevenuesdecrease,andalthoughmarginalcostsmaydecreaseaswell,thefixedcostswillcutinto

profits.

CapitalExpenditures,MergersandAcquisitions: Similartooperatingcosts,thecostsofcapitalexpenditures(astheyareamortized)andmergersandacquisitionscandecreaseprofitmargins.

2.Teck

Teckhasbeenmakingnews,andnotinthegoodway.DecreasingcommoditypriceshavedriventheVancouver-basedmininggiant

topostquarterlyprofits50%lowerthanthepreviousyear-$312milliondownfrom$663million.Theirquarterlyrevenuesof$2.6

billionbeatanalystsexpectationsof$2.49billion,butwerestilllowerthanlastyearsrevenueof$2.8billion.Althoughthispast

quarterhasbeenespeciallyroughonTeck,ithasntbeenmuchbetterforotherminingcompanies.

3.Gold

Barrick,alargeplayerinthegoldproductionindustryhasfireditsCEO,AaronRegent.Regenthadtriedtoexpandintocopper

mining,adrasticmoveforacompanythatspecializesingold.ThenewlyappointedCEO,JamieSokalskyistakingthecompanyback

toitsrootsbyhaltingthedevelopmentofnewprospectsintheimmediatefuture,recognizingthecurrenteconomicconditions.

AsidefromBarrick,thisdownturnhasalsoaffectedjuniorgoldcompanieswhichrelyonventurecapitaliststofundnew

developments,dryinguptheirpoolofavailablecapital.

4.Potash

Thepotashmarketiscurrentlyataveryconflictedpointinitshistory.Ontheonehand,thedroughtthathassweptacrossthe

UnitedStatesandCanadahasincreasedthedemandforpotash,however,otherwiseexcellentmarketconditionshavebeen

somewhatdampenedbyaprice-fixinglawsuitfiledagainstpotashgiantsPotashCorp.andAgriumInc.,among5others.Analystssay

thatthislawsuitwilltakeyearstoresolve,withpenaltiesinthebillionsofdollars,causingdeclinesinvalueofmorethan10%.

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QEIC 2012-2013TEAM

12

QEICPhilosophy:

Pursueinvestmentopportunitiesbyperformingduediligenceoncompanymanagement,strategicdirection,financialstabilitytofind

companiesthatareundervaluedbythemarket

Reporteditedby:ElizabethCoo