Qeic Monthly June

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QUEEN’SECONOMIC

INVESTMENTCLUB

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Kingston,ON,K7L3N6

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QEICMONTHLYIssue1

June7th,2012



QEIC FINANCIALSECTOR

AniBoyo 1

FinancialSectorOutlook

Businessandconsumerconfidencehasnotyetbeenrestored,andmarketvolatilityandeconomicuncertaintywillcontinuetoactas

brakesonmajorinvestmentdecisions.Asaresult,banksmaycontinuetounderperformbroadermarketindices.Lookingaheadto

thenextfewmonthsthefinancialsectorfacesanumberofchallengesthatthese“macro”issueswilllikelyinfluence,eitherdirectly

orindirectly.Thesechallengesinclude:

• ManagingfalloutfromtheEuropeansovereigndebtcrisis

• Findingwaystogrowprofitsandcontaincostsinaweakeconomy

• Adaptingtoaneweraofregulatoryevolution

• Copingwithpoliticalgridlockandthe2012electioncycle

• Understandingsocialactivism

Overthenext6months(andpossiblylonger),bankswillbefacedwithcompetingprioritiesandscarceresourcesastheytryto

implementmajorchangeprogramstofundamentallyreshapethebusinessandredefinetheirtarget-operatingmodel.These

challengeshavebecomemuchharderastheanticipatedstrongeconomicrecoveryfailedtomaterialize.Asreportedoverthepast

fewmonthsbankshavealreadyannouncedmajorheadcountreductions,smallerbonuspoolsandnewefficiencyprogramsasthey

trytomoveontoamoresustainablecostbase;accordingtoErnst&Youngthetop40globalbanksalonehadannouncedstaffcuts

totalingnearly150,000byFebruary1st,2012.Forsomebanks,theonlyoptionwillbetocutspendingandpostponechangeasthe

revenuegrowthtopayforinvestmentfailstomaterialize.Theglobalbankinglandscapewillberedefined.Therewillbefewerbanks,

andthosethatremainwillbelesscomplex.Insomemarketsthisisexactlywhatregulatorsarehopingfor.

AfewofthesechallengessuchastheU.S.electionandEurosovereigndebtshouldberesolvedbytheendoftheyear,however

socialmovementsofsuchasOccupyWallStreetpersist.Socialactivismcombinedwithare-electionyearshouldseepresidential

candidatespushingformoretransparentlawsandstricterrulingonfinancialbanks.

Therefore,expectvolatilityinthemarkettopersistuntillateNovemberduetouncertaintyfrompoliticalposturingandpolitical

stalemates.However,lowinterestrateswilleventuallystimulatedemandevenastheycontinuetodepressmargins.Banksmaybe

temptedto“waitandwatch”,possiblymissingseveralgrowthopportunities,orbetemptedtoimplementablueprintforthefuture

inanindustrythatiscontinuouslyrestructuring.




AniBoyo 2

Unfriend:MorganStanleyToBeDowngraded

Moody’sisexpectedtocutMorganStanley’sratingbytwonotchesthismonth,twolevelsabovejunkstatus.Inthenextfew

months,thisweakerbondratingwillresulttohigherborrowingcostsforthebankandwillleavethematasharpdisadvantageto

theirmainrivalGoldmanSachsGroup(GS.N).MorganStanley’sproblemshavebeenamplifiedbyitshandlingoftheFacebook(FB.O

IPOwhichhasresultedinalawsuitagainstthecompany.Theplaintiffsassertthattheysufferedalossofmorethan$2.5billionsincetheinitialpublicofferingonMay7th,2012,becauseFacebook(FB)andthebanksdidnotdiscloselowerrevenueestimatesbefore

theoffering.Recently,GMdroppedadvertisinginFBservicesdueto“lowconsumerimpact”givingfurthersubstancetotheclaim

thatFBwasexperiencingapronouncedreductioninrevenuegrowth.ReportsstatethatMorganStanleyworkedwithintherulesby

claimingFBisalong-termstock;however,themarketbegstodiffer.Withaninevitabledowngradethatwillultimatelyhinderits

performanceandpresenceintheindustry,expectMorganStanleystockpricetocontinuetofallfrom$12.73toalowofatleast

$10.50,asabankwithanearjunkratingisin‘noman’sland’.




AniBoyo 3

EyeOnTheMarket:SLMCorporation

StudentLoan;TheNextAssetBubble?

SpeculatorsandevenStandard&Poor’sarewarningthatstudent-loandebtmaybecomethenextU.S.assetbubbleastuitioncosts

climbwhilehouseholdincomesstagnate.Collegesanduniversitieshavebeenstrugglingwithdecliningendowmentsandlowerstate

fundingatthesametimestudentsarefacinganinabilitytorepayloansinatougheconomy.Federalandprivatestudent-loandebtis

approaching$1trillionandsurpassedcredit-carddebtforthefirsttimein2010,accordingtoMarkKantrowitz,publisherof

FinAid.org,acollegegrantandloanwebsite.

ToanalyzethepresenceofincreasingloansweturntoSLMCorporation(NASDAQ:SLM)aholdingcompanyoperatingthroughits

varioussubsidiaries.SLM’sprimarybusinessistooriginate,service,andcollectloansitmakestostudentsand/ortheirparentsto

financethecostoftheireducation.SLMalsoprovidesservicing,loandefaultaversionanddefaultedloancollectionservicesforloans

ownedbyotherinstitutions,includingtheDepartmentofEducation(ED).ItisamongthebiggestmoversonNASDAQwithan

increaseof11.07%inthelastweekofMay,catchingtheeyeofmanyinvestorswithitsprofitability.SLMCorpisfunnelingrevenue

outofthe“real”economyintheformofstudentloanpaymentsandthendistributingittotheinvestorcrowd.ExpectSLMshare

pricestocontinuetoincreaseastheyrecentlyannouncedanincreaseintheircommondividend,aswellastheauthorizationof$400

millionforsharebuybackactivitiesinadditiontothe$500millionwhichitauthorizedinJanuary.SLMboughtback16.7million

sharesfor$268millionduringthefirstquarterof2012.SLMwillbeinQEIC’sashorttemstockwatchlistforthefallasitisare-

electionyearintheU.S.;weprojectthatthestudentbubblewillnotoccurthisyearascandidatesplacethisissueontheirpriority

list.



QEIC ENERGYSECTOR

JordanMirwaldt 4

EnergyOutlook

ThepastperformanceaswellastheoutlookintheEnergysectorhasnotbeenverypositive.AsofJune4th,2012,theS&P500isup

.03%YTDwhiletheEnergySectorisdown12.53%.OverthemonthofMayboththeS&PandtheEnergySectortrendeddownwards

withnorealoptimisminsight.

AttheendofthesemesterourportfolioconsistedofSchlumbergerLimited(NYSE:SLB),ExxonMobilCorporation(NYSE:XOM),

SuncorEnergyInc(TSE:SU)andNationalOilwellVarcoInc.(NYSE:NOV).BothSLBandNOVareconsideredpartoftheOil&Gas

Equipment&ServicesindustrywhileXOMandSUarepartoftheIntegratedOil&Gasindustry.Sincewearenotfinanciallyinvested

inthesesecurities,Ihavedecidedtowatchthemoverthelastmonth.AsofJune4ththeYTDperformanceofthese4securitiesisas

follows:

- SLB:Close:$62.21,down8.9%.Tradingclosetotheir52weeklow.

- XOM:Close:$77.83,down8.2%.

- SU:Close:$27.71,down5.7%.

- NOV:Close:$64.12,down5.7%.

ThesefoursecuritiesdemonstratethetrendoftheEnergysectorasawhole,theoverridingreasonsforwhichcanbeattributedtoa

numberoffactors.

CrudeOilsinceMarch2012:



QEIC ENERGYSECTOR

JordanMirwaldt 5

Fromthethirdquarterof2011toMarchof2012crudeoilsawa32%increasebuttherehasbeenafallinpricessincethemiddleof

March.Thiscanbeattributedtolowerdemandforoilaswellaspoliticalissues,especiallyinEurope.Oilhaslongbeenconsidered

oneofthemostoversoldcommoditiesonthemarket.AsuncertaintystillhangsovertheeurozonewiththeupcomingGreece

decision(June17),theonceoptimisticoutlookonthismarkethasbeenreplacedwithabearishstance.Manyinvestorsagreedthat

themarketswereoverextendedandtherecouldbesurprisescomethebeginningofsummerbuttheywerestillverybullishabout

oil.Oilseemedtohavesoundfundamentalreasonsforpositivegrowth,buttheseassumptionsarebeingproventobeincorrect.

Therefore,manyanalystshaveamendedtheirstancefromgoinglongonoiltogoingshortonoilasofMay.

Thepriceofoildirectlyaffectsusnotonlythroughthemarketbutaseverydayconsumers.Althoughalowercostofoilisbeneficial

forconsumers(alowertaxonusduetocorporationspassingonlowercoststous),ithasproventobeadetermenttoourEnergyportfolio.Uncertaintyloomsoverthemarketsasawholeanditisaverytrickytimetobedeterminingacomfortablerisk/return

level.

AsfortheEnergyportfoliothatIamcurrentlywatching,theonesecurityImightbuyisSLB.SchlumbergerwasastockthatIwas

interestedinsinceJanuary2012.Theyreleasedtheir20114QearningsonJanuary20th,2012andcontinuedtoshowpositive

growththatledthemtobecomeanindustryleader.Theyhavecontinuedtooutperformtheircompetitors(BakerHughesand

Haliburton)astheyhavethelargestMarketCapandgeneratethemostrevenueintheindustry.Theirtradingmultiplesarestill

leadersintheindustry(P/E-16.4,EPS-3.79)andthestockistradingatapricethatmakesitattractiveasIbelieveithasplentyof

roomtogrow.

WhenwepitchedExxonMobiltotheQEIC,wethoughtitcouldbeconsideredasthebackbonetoourportfolioduetoitbeingthe

largestpubliclytradedenergycompany.AlthoughIamstillnotwillingtopartwayswithExxon,Idon’tbelieveitisthebesttimetobuybackinasIwouldliketoseehowtheGreekdecisionplaysoutbeforewemakeadecisiononthestrategicdirectionweplanto

takefortheremainderofthesummer.AsfortheEnergySectorasawhole,Ibelieveitmaybeagoodtimetoobserveopposedto

buyingasuncertaintyinthemarketcontinues.



QEIC TECHNOLOGY

SECTOR

YangZhang 6

TechnologyOutlook

SincethebeginningofApril,thetechnologysectorasawholehasdropped11.80%,whichisjustover3%morethantheS&P500(-

8.73%).Withthisinmind,thisreportwilldiscusscritiquesofthehighlyanticipatedFacebookIPO,andtouchonafewnew

technologicaldevices(Computex2012isoccurringrightnowandfromwhatwecantell,there’salotofjuicynewgadgetsthatare

comingoutsoon!).

FACEBOOK

FacebookwasoneofthemostanticipatedIPOs,startingoutat$38,andthenjumping11%(to$41.68)initsearlytrading,butitfell

to$31.35justaweekafter.AsofJune5thitistradingat$25.869,almost32%lowerthanwhentheIPOwasissued.

Whatwentwrong?Thereareafewfactorsthatmayhavecontributedtothis:

PricedTooHigh–Originallythecompany’ssharepricerangewasbetween$28–$35,butjustbeforegoingpublic,theyincreased

therangeto$35–38,andthecompanywassetatthehighestendoftherange.TheGuardianalsonotesthat“Facebook

underwritersalreadyhadcomeundercriticismforrollingoutthestockatapricethemarketcouldnotsustain.”

TooManyShares –Investorsgenerallyaskformoresharesincasetheirdesiredamountisscaledback,buttheinvestorsgotmore

thanwhattheybargainedfor.



QEIC TECHNOLOGY

SECTOR

YangZhang 7

Timing–InearlyMay,Facebookhadwarnedthatthecompanydidnotgeneratemuchrevenuefrommobileusage,meaningthat

theyseemobileusersasapotentialobstacle.Thisnews,closetotheoffering,hadanegativeimpactonapprehensivebuyers.

GeneralMotorsalsoannouncedshortlybeforetheIPOthattheyweregoingtopulloutofFacebookbecausetheiradvertisingwas

notworking.

PrivateInformation? –AccordingtotheGuardian,“allthreebanksthatworkedontheFacebookdeal–MorganStanley,JPMorganandGoldmanSachs–willbeinvestigatedforallegedlysharingthenegativenewswithinstitutionalinvestorsbutnotthepublicat

large”.

NASDAQ –Itssystemsdelayedthestartofthetradeasit“appearedtobeoverwhelmedbythesizeofthedeal”onthedayofthe

offering.

TheAverageJoe –Itcouldbethatfortheaverageperson,thelogicalthingtodoistowaituntiltheexcitementdiesdown,then

accessthemarket.SincetheIPOhasn’tbeenissuedafullmonthyet,let’splaythewaitinggamefirst,seehowFacebookperformsin

thenextmonthandputitonourwatchinglist.

InterestingTechNews

ThisisaninterestingarticleontheRaspberryPi,a$35Linuxcomputer:http://www.engadget.com/2012/06/01/raspberry-pi-

impressions-the-35-linux-computer-and-tinker-toy/.ItisbasedonaBroadcomchip(astockwehavebeenmonitoringsincearound

March),includesanARMprocessor,andusesPythonasitsmainprogramminglanguage,withsupportforBasic,Perl,andC.It’s

basicallyalowcostcomputermainlyusedforappbuildingandforDIYprojectssuchasrobotics.

Also,wewerelookingatBlackBerrylastyearandtheyhadissueswiththeuseoftheiracronymBBM(itconflictedwithBBMCanada,

abroadcastindustrygroup),butsincetheyareindifferenttypesofbusiness,courthaveruledthatthenameRIMusesisacceptable.

Onasidenote,thereisanewstandardizationforSIMcards–40%

smaller,12.3mmby8.8mm,withthesamethicknessastheoriginal.

ThewhitechipontherightisoneofthenewSIMcards.

ASUSannouncedthenewTransformerAiO,an18.4inchdesktopthathasWindows8andAndroiddual-boot.Windows7didnot

supportARM.Itusedx86(CISCarchitecture,mainlyusedbyPC’s),

which,comparedtoAndroiddevices,hadashorterbatterylife(most

laptopsarearoundthe3hoursmark,whereasamanyAndroid

deviceshoveraroundthe8hourpoint),butithadmorecomputer

powerandgreatformultitasking.Thetwox86processorsweknow

wellareIntelandAMD.ARMusesRISCarchitecture,usuallyusedfor

Android,iPhoneandWindowsphonesanddevices,andismore

efficientintheuseofpower.SomeexamplesofARMprocessorsareTexasInstruments(OMAP),Qualcomm(Snapdragonseries),

andSamsung(Hummingbird).NowthattheTransformerAiOsupportsbothWindows8andAndroid,thismeansthatuserswho

wereunfamiliarwithAndroidhavetheoptionofaWindowsstart-upaswell.



QEIC TECHNOLOGY

SECTOR

YangZhang 8

SincealotofthesebigtechnologycompanieslikeASUSandSamsungarenotonstockmarketsthatwehaveeasyaccessto,ourplan

istobreakdownthepartsandlookateachspecificcompanythatmanufacturesthenecessarycomponents(suchasthescreen,

voicepieces,etc.).



QEIC DIVERSIFIEDSECTOR

DavidAime 9

SinceDIisn’texactlyasector,asitincludesanythingandeverythingthattheothersectorsarenotcomprisedof,theclosest

comparisonistheS&P500.AsstatedbytheotherQEICExecs,theS&Phasstruggled,seeinghugedaytodaymarketswings.Friday

June1stsawtheS&Pfallby2%,closingatitslowestsinceearlyJanuaryandendingbelowits200daymovingaverageforthefirst

timein2012.ThesemarketconditionshaveledtheDiversifiedIndustriessectortodevelopa“watch”attitudeuntilthemarket

beginstoshowsignsofanupswing.Someofthecompaniescurrentlyonourwatchlistare:

TheHersheyCompany(NYSE:HSY)

RecentlyHersheyhikeduptheirpricesby10%andconsumersbuyinghabitsdidnotchange.InelasticdemandsawHershey’sfirstquarterrevenuesexceedexpectationsandsubsequentlyresultinasharpriseinthestockprice.Thelargestchocolatemakerin

NorthAmericahasseenrevenueincreasesof4.2%onaverageoverthelast5years,butnetincomeincreaseof10.7%.Thisisdueto

costcuttingmeasuresundertakenbythecompany.Hersheypaysoutaquarterlydividendandhasabetaofonly0.26,sointimesof

extrememarketvolatilitythestockisveryattractive.AsofJune5thestockisbeingtradedat$65.93witha52weekrangeof

$69.46-$53.80.

GeneralMotorsCompany(NYSE:GM)

GMisinaveryinterestingsituationandit’sworthwatching.RecentlyGMpulledadvertisingfromFacebookandtheSuperBowl.

TheyreallocatedtheseadvertisingdollarstobecomeamajorsponsorofManchesterUnited,oneoftheworld’smostpopularsoccer

teams.AssociatingtheGMbrandwithManchesterUnitedisanefforttomakethebrandabiggerplayerontheglobalstage.A

majorcontributortothisstrategic,globalswitchwasthefactthatinMayGMsold21.3%morevehiclesinChinathaninthesamemonthayearago.ButnotallhasbeenpositivesurroundingGM.TheyrecentlyshutdownanoperatingplantinOshawa,leadingto

thousandsofunemployedpeople,andinvestorswereunhappywiththeunveilingofGM’snewpensionscheme.Itistradingat

$21.30,closertoits52weeklowof19.00thanitshighof$32.08.

PaladinLabs(TSE:PLB)

SincepharmaceuticalwasitsownsectorlastyearandnowfallsunderDiversifiedIndustrieswehavealsobeguntolookintothese

companies.PaladinLabsiscurrentlytradingat$44.94.Witha52weekrangeof$32.41-$45.88,itisveryclosetoitshigh.Thisis

somethingwewillmonitortodecideonanattractivepurchaseprice.ItsPricetoEarnings(P/E)ratiointhepasttwelvemonths

(TTM)is17.41,whichismuchlowerthanindustryaveragesinthe30-40range.Paladinalsohasareturnonequity(ROE)wellover

theindustryaverage.Returning$17.47oneachdollarofequityovertheTTM,comparedtotheindustryaverageof11.43,gives

anotherreasontokeepthiscompanyonourwatchlist.



QEIC MININGSECTOR

DmitriTchebotarev 10

IndustryOverview

Theminingindustryoverallisconsideredacyclicalindustry,wheretheprofitabilityofthecompaniescorrelatesveryhighlywith

businesscycles.Thisistruefortheminingindustryaswell,howeveritcorrelatesevenmorehighlywithUSbusinesscyclesrather

thanCanadianones,giventhelargeportionofbusinessthatisexports.Inasimilarvein,miningstocksaresensitivetotheexchange

rate,thoughnottothesamedegreeasthebusinesscycles.AweakerCanadiandollarisusuallygoodnewsforCanadianmining

stocks.

ThechartsbelowshowstwoofthebiggestminingcompaniesinCanada–PotashInc.andAgriumInc,comparedwiththeS&P500.

Thesetwocompaniesarequiterepresentativeoftheindustryasawholeoverthispastmonth.

NewsUpdate

- CamecoleavesitsjointventureinArgentinawithpartnerCalypsoUraniumCorp.Thismove,announcedMondayJune4th,

seemedtobesomewhatpopularwithinvestors,asArgentinawas,andremainsalargecountryrisk.

- P/Emultiplesarenearall-timelows,whileEPSmultiplesareneartheirhighs.Thisisindeedaninterestingtimetobeavalue

investorinterestedinCanadianminingstocks.FromtheGlobeandMailonTuesday,June5th:“Accordingtoaglobalmining

reportbyconsultancyPricewaterhouseCoopers,publishedonWednesday,theprice-to-earningsratiofellbelow10last

year,meaninginvestorsarevaluingminingsharesatlevelslowereventhanin2008,whentheglobaleconomiccrisissent

stockmarketsaroundtheworldintoatailspin.”

- Miningtechnologiesaremakinghugeadvancesandborrowingcutting-edgetechnologiesfromtheITindustry,accordingto

aspecialreportbyMicrosoftpublishedintheGlobeandMail.

- BHPBillitonLtd.hasdelayedopeningitsmineinSaskatchewanduetotheglobalslowdown,consistentwiththechart

above.



QEIC 2012-2013TEAM

11

QEICPhilosophy:

Pursueinvestmentopportunitiesbyperformingduediligenceoncompanymanagement,strategicdirection,financialstabilitytofind

companiesthatareundervaluedbythemarket

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