As we all know, the price of gold has increased drastically over the past year to reach an all-time high of $1200 per ounce. However, we have now seen a continuous three-day drop in the price of the precious metal. This can be seen through the jump in the price of puts on the gold ETF GLD. The implied volatility of 10% out-of-the-money puts with three months expiry period has become higher than the same figure for relative calls. In other words, investors are more cautious about a further increase in the price of gold, and are buying puts to hedge against an expected decline.
Further contributing to the decline of gold is the rally of the U.S. dollar. This recent run-up has been aided by Fitch’s downgrade of Greece’s debt to BBB+ with a negative outlook. As a result, investors are worried about deteriorating credit ratings in other world markets, causing a flock to the “safest” reserve currency.
The combination of these two events has and will continue to put downward pressure on gold, as well as oil and other higher-yielding currencies.
Group 8
Thursday, December 10, 2009
Salary Insanity
“The fact that they’re even in existence should be bonus enough,” says Cassie Swihart referring to the year end bonus contemplations that is fore coming at many of the major banks. The circular argument comes about from the simple fact that people are not deserving of such masses bonus. It spurs greed and the desire for individuals to forgo thoughts global economic welfare for their own riches. Obama should not place direct regulation, 'rules' on bonus amounts as this is not socialism; however, without such rules bonus amounts will never shrink and they must stay at their 'market' outrageous levels. If one bank doesn't pay, another will and top star employees will just circle around. Whatever the future brings, one thing is certain and that is that more regulation is certainly necessary to avoid history from repeating itself.
http://www.bloomberg.com/apps/news?pid=20601087&sid=aqFLia4_lsEk&pos=8
Group 5
http://www.bloomberg.com/apps/news?pid=20601087&sid=aqFLia4_lsEk&pos=8
Group 5
Wednesday, December 9, 2009
Western & Asian Car Company Alliances
Several car companies that have made it through the worst of the global recession are now looking for ways to position themselves ahead of their competition. One trend in the industry seems to be consolidation and at least three major deals have been announced recently; GM & Chinese partner SAIC, VW & the Japanese company Suzuki, and French Peugeot-Citroën & Japanese Mitsubishi. All of these moves seem to be motivated by Western car companies' desire to gain influence in emerging markets.
For example, the largest deal of the bunch is Volkswagen’s announcement on Wednesday December 9th that it has agreed to pay $2.5 billion for 19.9% of Suzuki. Suzuki has a 54% stake in Maruti Suzuki an Indian company that controls 40% of that nations highly competitive car industry. VW has been late to the game in India and is surely hoping to have more of an influence there.
Another important aspect of these partnerships is the shift in focus from large cars to small cars targeted towards poor consumers. The change in emission laws and uncertain oil prices have caused an increased demand for more compact cars. Emerging markets in countries such as India are increasing demand for smaller, more inexpensive cars. VW is hoping to learn tactics for successfully selling smaller cars from their partnership with Suzuki, one of the only two successful makers of small, inexpensive cars worldwide.
These strategies of partnering with overseas competitors might be the only lifelines left for struggling Western car companies to survive. We will have to wait and see whether it works.
The Economist Article
-Group 3
For example, the largest deal of the bunch is Volkswagen’s announcement on Wednesday December 9th that it has agreed to pay $2.5 billion for 19.9% of Suzuki. Suzuki has a 54% stake in Maruti Suzuki an Indian company that controls 40% of that nations highly competitive car industry. VW has been late to the game in India and is surely hoping to have more of an influence there.
These strategies of partnering with overseas competitors might be the only lifelines left for struggling Western car companies to survive. We will have to wait and see whether it works.
The Economist Article
-Group 3
Stimulus Plan Part Deux
With many banks repaying their borrowed TARP funds, President Obama is now pushing for a new use with those funds: a new jobs stimulus. Yesterday, the President presented his plan to the Brookings Institution, a non- profit public policy organization.
According to the Wall Street Journal, this new program will come in two parts:
“The first would top $100 billion and would extend unemployment insurance, temporary food-stamp payment increases and subsidies for health-care purchases by the unemployed. That would likely be attached to a spending bill in coming weeks. The second, a jobs bill estimated at about $70 billion, would contain many of Mr. Obama's initiatives and likely wouldn't reach his desk until early next year.”
Some of the specific programs named in the speech were $50 billion devoted to infrastructure, additional lending to small businesses by the Treasury, offering assistance to state governments, tax breaks to small business, tax rebates for individuals who make their homes more energy efficient, and completely getting rid of capital gains taxes for small business investments.
Democrats are pushing for this bill to fill in the gaps of the watered down first stimulus. In an attempt to negotiate with the Republican minority, Democrats agreed to devote only about 10 percent, or $80 billion, of the first $787 billion stimulus to infrastructure spending. This is Presidents Obama’s chance to push forward the program he wanted with the newfound money. Republicans, on the other hand, say that this new stimulus will end the same way the first one did: in failure. They propose to use the $200 billion from TARP repayments to reduce the deficit.
With only about 20% of the first stimulus spent, some are saying that the President is jumping the gun with this program. To add to this critique, Republicans and some moderate Democrats are doubtful that more government spending will stimulate the economy. But if a new bill is passed, will it do just that? Some say yes, some are doubtful, but only time will tell.
According to the Wall Street Journal, this new program will come in two parts:
“The first would top $100 billion and would extend unemployment insurance, temporary food-stamp payment increases and subsidies for health-care purchases by the unemployed. That would likely be attached to a spending bill in coming weeks. The second, a jobs bill estimated at about $70 billion, would contain many of Mr. Obama's initiatives and likely wouldn't reach his desk until early next year.”
Some of the specific programs named in the speech were $50 billion devoted to infrastructure, additional lending to small businesses by the Treasury, offering assistance to state governments, tax breaks to small business, tax rebates for individuals who make their homes more energy efficient, and completely getting rid of capital gains taxes for small business investments.
Democrats are pushing for this bill to fill in the gaps of the watered down first stimulus. In an attempt to negotiate with the Republican minority, Democrats agreed to devote only about 10 percent, or $80 billion, of the first $787 billion stimulus to infrastructure spending. This is Presidents Obama’s chance to push forward the program he wanted with the newfound money. Republicans, on the other hand, say that this new stimulus will end the same way the first one did: in failure. They propose to use the $200 billion from TARP repayments to reduce the deficit.
With only about 20% of the first stimulus spent, some are saying that the President is jumping the gun with this program. To add to this critique, Republicans and some moderate Democrats are doubtful that more government spending will stimulate the economy. But if a new bill is passed, will it do just that? Some say yes, some are doubtful, but only time will tell.
Changes in Carried Interest Tax Law
The House of Representatives today passed HR 4213. The bill contains a provision that would change the tax status of venture capital carried interest from capital gains to ordinary income, with the purpose of paying for year-end tax extensions.
The current capital gains tax structure is fundamental to the venture capital and private equity business model, and this change would be quite detrimental to the business. Mark Heesen, president of the National Venture Capital Association, said in a statement “Increasing the taxes of long term investors whose commitment to building companies and creating jobs has been proven for decades is counter productive to the one goal on which our country should be focused – economic recovery”
Unfortunately, Democrats have control of the House of Representatives, Senate, and White House. Based on statements senior Democratic political leaders have made it is likely that venture capital and private equity investors will soon be paying the ordinary income rate on carried interest instead of the capital gains rate.
Nick Deflorian
Group 2
The current capital gains tax structure is fundamental to the venture capital and private equity business model, and this change would be quite detrimental to the business. Mark Heesen, president of the National Venture Capital Association, said in a statement “Increasing the taxes of long term investors whose commitment to building companies and creating jobs has been proven for decades is counter productive to the one goal on which our country should be focused – economic recovery”
Unfortunately, Democrats have control of the House of Representatives, Senate, and White House. Based on statements senior Democratic political leaders have made it is likely that venture capital and private equity investors will soon be paying the ordinary income rate on carried interest instead of the capital gains rate.
Nick Deflorian
Group 2
Citigroup's TARP Payback
A CNBC article today explained how Citigroup plans to pay back $45 billion in TARP funds. This payback would allow Citigroup to completely exit the TARP program. Citigroup plans to issue $20 billion in new common stock shares to fund this payback. On December 9, Citigroup’s stock price dropped by 2.05%, mainly because the $20 billion in new common shares will dilute current shares, decreasing their value. According to a “Trader Talk” article on CNBC, Citigroup would “need to sell about 5.5 billion shares at $3.75 (currently 3.83), which would dilute shares by about 20%”
This presents the issue on how to capitalize on this 20% dilution. Could a short sell, put purchase, or call sale help MII profit off of this change? Or is the inherent risk in this event already factored into the current stock price?
The idea of a $20 billion stock offering has been met with much opposition. The opposition believes Citigroup can repay its TARP funds with cash, and not through a stock offering. Many insist that there must be another way to repay TARP funds with little or no harm to shareholders.
According to CNBC, the United States government owns about 33% of Citigroup’s shares. Exiting the TARP program would alleviate Citigroup from government control, but since the government is so heavily invested in Citigroup, Citigroup’s TARP exit strategy is more complicated than most other banks.
Jobs Rally dollar while sinking gold and contradicting Krugman…
Last Friday, due to the optimistic jobs report stating only 11k individuals lost employment, the dollar rallied as the value of gold plunged. Economists had predicted a loss of 125,000, but the actual job loss in November turned out to be the lowest reading since December 2007.
While the numbers provided some confidence toward an economic recovery, the rise in the dollar put significant pressure on commodity and equity markets, mitigating the euphoria created by the statistic. For example, companies such as Exxon Mobile, Alcoa, and DuPont may suffer if the dollar continues to rally in the coming weeks.
This news appears contradictory to Renown economist Paul Krugman’s remarks on December 3rd, where he stated
“I have never been fully committed to the notion that we are going to have a double dip recession, but it has been clear for a while that it is a serious possibility…a large part of the growth has been driven by the stimulus….and the rise in manufacturing production is to a large extent an inventory bounce.”
Both the decreasing jobs numbers as well as recent strength in the dollar seem to provide support for the recovery…and lessen the chances of a feared double dip recession.
Group 6
While the numbers provided some confidence toward an economic recovery, the rise in the dollar put significant pressure on commodity and equity markets, mitigating the euphoria created by the statistic. For example, companies such as Exxon Mobile, Alcoa, and DuPont may suffer if the dollar continues to rally in the coming weeks.
This news appears contradictory to Renown economist Paul Krugman’s remarks on December 3rd, where he stated
“I have never been fully committed to the notion that we are going to have a double dip recession, but it has been clear for a while that it is a serious possibility…a large part of the growth has been driven by the stimulus….and the rise in manufacturing production is to a large extent an inventory bounce.”
Both the decreasing jobs numbers as well as recent strength in the dollar seem to provide support for the recovery…and lessen the chances of a feared double dip recession.
Group 6
Thursday, December 3, 2009
A Proposed Kraft-Cadbury Combination
Next week, Kraft Foods will give an official offer document to Cadbury shareholders dealing with a $16.4 billion hostile takeover. Early this year, Kraft was rejected when they offered the same terms. Now it hopes that the original cash-and-stock offer will be enough to sway shareholders to agree.
Right now, Kraft is the biggest food company in the United States and the second-biggest worldwide (they only trail Nestle). The combination of Kraft and Cadbury would generate $50 million every year in total revenue, but would still fall behind Nestle.
The biggest problem with the deal is that the British do not want to see one more English icon be consumed by the American economic machine. The company has a strong model for growth and has had higher than expected earnings for the third quarter. They expect to grow between four and six percent during the next year.
Kraft, on the other hand, has a slow growth model. They have recently recorded lower than expected earnings, which stems from a one-time deal in 2008. To counter the British disapproval, Kraft has revised one of its original terms regarding employment. In the initial offer, Kraft wanted to transfer the food plants to Poland, whereas they now pledge to keep 500 jobs in factories across England.
Other than relying on shareholders, Cadbury can only hope that another business makes an offer. It has been speculated that chocolate giant Hershey is to make a bid, as well as Italy’s Ferrero.
The current terms are as follows: 300 pence in cash and 0.2589 new Kraft shares for each Cadbury share. This values the Cadbury at 715 pence, compared the closing share price of 800 pence.
Loeb and Banco Popular
So a couple of weeks ago an manager of an activist hedge fund manager became the majority stockholder of Banco Popular Inc. (BPOP) a publicly owned bank holding company, based in Puerto Rico. This is usually should not cause much commotion since these things are very common, but this specific hedge fund manager is something to pay attention to. Daniel Loeb, manager of Third Point, LLC is a highly skilled and well- respected investor, most popular for wreaking havoc in the board room with his letter, publicly filed to the SEC expressing his thought about the company. What you see in this letter will leave you jaw dropped (i.e. ‘Since you ascended to your current role of Chief Value Destroyer, the shares have dropped over 45 percent.’; “It was my conclusion that the company’s board is governed by a toothless crew of cronies.”) Daniel Loeb goes into companies and starts slashing heads and cashing checks. So what does this all mean for Banco Popular? This stock has been trading in the mid-$2 range this past month, yet for the past few years, it has been battered, falling from its highs of $28.83 in 2005. It was announced as one of the worst performing stock is the S&P 500 along with AIG and Citi.
So what can Dan Loeb do to help Banco Popular get out of the hole CEO Richard Carrion dug this company into? Do exactly what he has done with many of his investments (i.e. Potlatch Corp.) and embarrass the CEO of the company until he quits. After that, revalue the companies strategies and drop all hopes of expanding outside of the island. This, although may be scary for investors should be a shine of hope for the company, since this guy’s activism has made him and his investors rich. After he is done with the company and sells of all his shares, dump the stock.
Posted by Group 12
Wednesday, December 2, 2009
How High Will Gold Go?
With all the talk of bubbles, be they inflationary, mortgage based, or perhaps even in Dubai, the seemingly unstoppable ascension of gold has raised a lot of eyebrows, but few nay-sayers. According to this morning's journal gold reached a new record setting high at an intraday trading price of just over $1,200 per troy ounce. The world's largest producer of the precious metal, Barrick Gold corp. was also reported to have accelerated its strategy to remove its hedges against gold, fully exposing it to the market. With big name players like John Paulson betting on gold's rise it would seem safe to follow the herd and capitalize on the skyrocketing values of gold.
The rush to gold as a hedge against inflation and general economic instability seems well founded given the fragile state of the domestic and world economy, but one has to consider how much of the skyrocketing value of gold is built on speculation. With both the market and big name companies like Barrick saying yea gold would seem a safe bet in the short run, but if the golden tide turns there is a substantial opportunity for timely investors to ride this big wave up and down. Anyone with both the stones and the timing to bet against gold, or its over-exposed producers stands to make a fortune. Until then investors might just want to catch this gnarly wave, just watch out for when it crashes.
Joey Kryza, Group 2
The rush to gold as a hedge against inflation and general economic instability seems well founded given the fragile state of the domestic and world economy, but one has to consider how much of the skyrocketing value of gold is built on speculation. With both the market and big name companies like Barrick saying yea gold would seem a safe bet in the short run, but if the golden tide turns there is a substantial opportunity for timely investors to ride this big wave up and down. Anyone with both the stones and the timing to bet against gold, or its over-exposed producers stands to make a fortune. Until then investors might just want to catch this gnarly wave, just watch out for when it crashes.
Joey Kryza, Group 2
November Same-Store Sales Preview
On Thursday retailers are expected to report November Same-Store Sales (ZUMZ after the close today, HOTT already reported before the open)... November sales are predominantly derived from the Black Friday weekend. Although trends in traffic improved year over year, consumer spending was softer than expected... According to ICSC( International Council of Shopping Centers) /Goldman Sachs data, November comparable store sales are expected to increase 3-4% YoY, excluding Wal-Mart (but ICSC previously predicted gain of as much as 6%). Redbook data supports slightly lower figure with expected sales to be up ~2.2% YoY and up 4.8% from October, excluding Wal-Mart.
Many shoppers may be waiting for aggressive promotional activity as the Christmas holiday nears. ICSC reported that on average consumers completed 42% of their holiday shopping over the Black Friday weekend versus 48% a year ago. As a result, retailers could see further upside in December sales (although the data also leaves room for uncertainty in the overall holiday outlook)... Another notable change in activity is the increasing number of consumers turning to online shopping. According to comScore data, November online spending increased 3% vs last year, Black Friday weekend online spending increased 5% and Cyber Monday online spending also increased 5%.
Going forward, the 2009 holiday outlook still remains blurry. While optimists are hoping for the procrastinating shoppers to emerge, pessimists' concerns still reside with high unemployment and the curtain of uncertainty holding back consumers.
During the month of November, several retailers issued and/or updated guidance. The majority of retailers raised or issued guidance above consensus.
After a modest pullback in October, overall equities climbed higher during the month of November with retailers climbing alongside. The S&P Retail Index (RLX) increased 5.7% in November (following +0.8% in October, +3.6% in September, +2.8% in August) while the SPDR S&P Retail index (XRT) increased 2.4% (following -1.1% in October, +6.5% in September, +5.1% in August). For comparison the S&P 500 Index (SPX) increased 5.7% (following -2.0% in October, +3.6% in September, +3.4% in August).
The following are a few names that beat/missed expectations and the stock price reaction to the numbers... Some cos that beat October Same-Store Sales estimates include (listed according to the magnitude of the beat): Bon-Ton Stores (BONT) 3.1% vs. -4% consensus, stock gapped up 1.6% to $9.66 and closed up 14% to $10.84... American Apparel (APP) -6% vs. -12% consensus, stock gapped up 4.6% to $2.71 and closed up 1.5% to $2.63... Wet Seal (WTSLA) -1.3% vs. -7.3% consensus, stock gapped up 4.3% to $3.42 and closed up 3.4% to $3.39... Stage Stores (SSI) -0.1% vs. -4.4% consensus, stock gapped up 1.7% to $11.97 and closed up 5.2% to $12.38... Saks (SKS) 0.7% vs. -3% consensus, stock gapped up 5.9% to $5.9 and closed up 5.9% to $5.9... Some cos that missed October Same-Store Sales ests include (listed according to the magnitude of the miss): Aeropostale (ARO) 3% vs. 13.5% consensus, stock gapped -9.3% to $34.5 and closed -12% to $33.47... American Eagle (AEO) -5% vs. 1.9% consensus, stock gapped -10.2% to $16.04 and closed -11.6% to $15.79... Kohl's (KSS) 1.4% vs. 5.8% consensus, stock gapped -3.9% to $54.35 and closed -1% to $55.95... Cato (CATO) 0% vs. 4% consensus, stock gapped 1.9% to $19.99 and closed 4.4% to $20.48... Zumiez Inc (ZUMZ) -8.9% vs. -6.5% consensus, stock gapped -0.4% to $13.4 and closed -7.2% to $12.49.
Information Provided by Briefing.com
Group 6
Many shoppers may be waiting for aggressive promotional activity as the Christmas holiday nears. ICSC reported that on average consumers completed 42% of their holiday shopping over the Black Friday weekend versus 48% a year ago. As a result, retailers could see further upside in December sales (although the data also leaves room for uncertainty in the overall holiday outlook)... Another notable change in activity is the increasing number of consumers turning to online shopping. According to comScore data, November online spending increased 3% vs last year, Black Friday weekend online spending increased 5% and Cyber Monday online spending also increased 5%.
Going forward, the 2009 holiday outlook still remains blurry. While optimists are hoping for the procrastinating shoppers to emerge, pessimists' concerns still reside with high unemployment and the curtain of uncertainty holding back consumers.
During the month of November, several retailers issued and/or updated guidance. The majority of retailers raised or issued guidance above consensus.
After a modest pullback in October, overall equities climbed higher during the month of November with retailers climbing alongside. The S&P Retail Index (RLX) increased 5.7% in November (following +0.8% in October, +3.6% in September, +2.8% in August) while the SPDR S&P Retail index (XRT) increased 2.4% (following -1.1% in October, +6.5% in September, +5.1% in August). For comparison the S&P 500 Index (SPX) increased 5.7% (following -2.0% in October, +3.6% in September, +3.4% in August).
The following are a few names that beat/missed expectations and the stock price reaction to the numbers... Some cos that beat October Same-Store Sales estimates include (listed according to the magnitude of the beat): Bon-Ton Stores (BONT) 3.1% vs. -4% consensus, stock gapped up 1.6% to $9.66 and closed up 14% to $10.84... American Apparel (APP) -6% vs. -12% consensus, stock gapped up 4.6% to $2.71 and closed up 1.5% to $2.63... Wet Seal (WTSLA) -1.3% vs. -7.3% consensus, stock gapped up 4.3% to $3.42 and closed up 3.4% to $3.39... Stage Stores (SSI) -0.1% vs. -4.4% consensus, stock gapped up 1.7% to $11.97 and closed up 5.2% to $12.38... Saks (SKS) 0.7% vs. -3% consensus, stock gapped up 5.9% to $5.9 and closed up 5.9% to $5.9... Some cos that missed October Same-Store Sales ests include (listed according to the magnitude of the miss): Aeropostale (ARO) 3% vs. 13.5% consensus, stock gapped -9.3% to $34.5 and closed -12% to $33.47... American Eagle (AEO) -5% vs. 1.9% consensus, stock gapped -10.2% to $16.04 and closed -11.6% to $15.79... Kohl's (KSS) 1.4% vs. 5.8% consensus, stock gapped -3.9% to $54.35 and closed -1% to $55.95... Cato (CATO) 0% vs. 4% consensus, stock gapped 1.9% to $19.99 and closed 4.4% to $20.48... Zumiez Inc (ZUMZ) -8.9% vs. -6.5% consensus, stock gapped -0.4% to $13.4 and closed -7.2% to $12.49.
Information Provided by Briefing.com
Group 6
Early Signs from the Holiday Shopping Season
Holiday season sales will be a big sign on the health of the US economy. Analysts say that Black Friday traffic was bigger than 08.Some more positive news is the increase in ecommerce during Black Friday and Cyber Monday (the ecommerce’s version of Black Friday which takes place the Monday after Thanksgiving). Shop.org and BIGresearch say more than 96 million people shopped online on Cyber Monday, up from 85 million last year. Not only has traffic risen, but so has sales. The analyst firm Coremetrics says that online retail sales from Cyber Monday increased 16% from last year. Also ComScore shows that online retail sales (yoy) are up about 3% for Nov 1- 27, 9% for Thanksgiving Day, and 10% on Black Friday. Amazon, Wal-Mart, and Best Buy all saws online sales from Black Friday rise by at least 22%. Apple saw an increase of 39%. PayPal, the number 1 e-commerce payment service in the US rose 25% on Thanksgiving and 20% on Black Friday. These are all very bullish signs for the holiday retail season.
However, even with all these great numbers, there are some concerns. An early surge in traffic does not guarantee strong sales in the weeks to Christmas. With tight inventories, retailers may not offer the deep and broad discounts consumers are used to. Graham Jones, the VP of merchant accounts for PriceGrabber.com says that traffic is up, but consumers are opting to buy lower priced items than usual.
However, even with all these great numbers, there are some concerns. An early surge in traffic does not guarantee strong sales in the weeks to Christmas. With tight inventories, retailers may not offer the deep and broad discounts consumers are used to. Graham Jones, the VP of merchant accounts for PriceGrabber.com says that traffic is up, but consumers are opting to buy lower priced items than usual.
Sunday, November 22, 2009
Hedge Fund Assets Increase in October
Hedge-fund assets increased by $7.8 billion in October, according to Bloomberg News. This marks a sixth straight month of increases. With inflows of $10.2 billion in inflows and now around $1.45 trillion under management the hedge fund industry seems to be recovering from its disastrous 2008 year which saw around 150 funds closing shop. The industry has seen 140 new funds open up this year.
Europe and Asia (with the exception of Japan) posted the increases as foreign investors have been piling back into the hedge-funds. Europe in particular has seen close to $4 billion of increases for the past three months with around $340 billion now under management.
What might these trends indicate for the future of the industry?
For now the answer seems to be clear, investors will continue to pay for performance. With hedge funds significantly outpacing the broader markets this year it makes sense many investors are shifting their assets out of equities and into hedge funds. While the 140 new funds this year is partially due to replacing the funds that went belly-up a year ago the environment still seems considerably strong for new fund openings as the cash continues to flow in. The relatively large increases in European fund assets could also indicate a recovering European economy as well as a greater interest in hedge funds in Europe. Overall, the past six months have shown that the industry is alive and well and that as long as funds continue to outpace the markets, they can expect more inflows to come their way.
Europe and Asia (with the exception of Japan) posted the increases as foreign investors have been piling back into the hedge-funds. Europe in particular has seen close to $4 billion of increases for the past three months with around $340 billion now under management.
What might these trends indicate for the future of the industry?
For now the answer seems to be clear, investors will continue to pay for performance. With hedge funds significantly outpacing the broader markets this year it makes sense many investors are shifting their assets out of equities and into hedge funds. While the 140 new funds this year is partially due to replacing the funds that went belly-up a year ago the environment still seems considerably strong for new fund openings as the cash continues to flow in. The relatively large increases in European fund assets could also indicate a recovering European economy as well as a greater interest in hedge funds in Europe. Overall, the past six months have shown that the industry is alive and well and that as long as funds continue to outpace the markets, they can expect more inflows to come their way.
Thursday, November 19, 2009
Group 6: Warren Doubles Down
Mr.Buffet's Move-
In the third quarter, which ended September 30th, Warren Buffett nearly doubled his holdings on Wal-Mart Stores Inc. At the end of June, he held 19.9 million shares, but that number rose to 37.8 million shares by the end of the third quarter. Buffett has raised his annual earnings growth projections from 9% to 15%; which would make his purchase price cheap. Although this will be difficult, his reasons include smaller stores with lower prices, and from the anticipated growth in international markets such as China and Brazil.
In addition, Wal-Mart expects to get higher returns on Supercenters in 2010 and going forward, and in turn opened 15 new Sam’s club locations in the last fiscal year. Shares are trading approximately 23% below their all-time high in 2000, however not cheap by many standards. This brings into question Buffet’s reasons, as he is typically seen as a value investor. Given his extremely high earnings projections, it appears he must have a different idea than most of the street. WMT’s CEO, Michael Duke, said “The economy remains challenging for customers and Wal-Mart sales, but we are encouraged by increased traffic and our market share gains".
What to expect this holiday season-
This space is filled with other wholesalers like BJ's( which has a large presence of the northeast) which saw a weaker 3Q with their consumers' focus on basics. The trend of late has been saving money on staple items. The recession has worked in BJ's favor with membership growing and shoppers continuing to flock to its stores. BJ's management said they are starting to see shoppers slowly begin to buy more general merchandise, but said sales of items like electronics, tires and video games remain weak. However, the company said the coming quarter — its holiday period — will have shoppers buying more food than other items, and falling food prices will continue to be a challenge in the fourth quarter. Standard & Poor's Equity Research downgraded its opinion on shares of BJ's to "Hold" from "Buy," saying it sees pricing competition for food retailers to remain intense as food deflation weighs on them. According to these trends Wal-mart it would seem is in a very good position to benefit consumers trading down, due to the fact they offer much of the cost savingings that BJ's and Costco do, yet require no membership.
Anaylsts at Goldman have raised its price target for Costco to $61 from $57, citing “improving trends in higher end discretionary items.” Goldman also raised its full-year 2010 sales and profit estimates through 2012 for the membership warehouse operator. The analyst currently rates COST as “Neutral.”
This Holiday season will be very important for these companies and their 4Q, hoping to see the gap narrow between staple good spending over discretionary. With US Unemployment crossing double digits, this next month will certianly be interesting.
In the third quarter, which ended September 30th, Warren Buffett nearly doubled his holdings on Wal-Mart Stores Inc. At the end of June, he held 19.9 million shares, but that number rose to 37.8 million shares by the end of the third quarter. Buffett has raised his annual earnings growth projections from 9% to 15%; which would make his purchase price cheap. Although this will be difficult, his reasons include smaller stores with lower prices, and from the anticipated growth in international markets such as China and Brazil.
In addition, Wal-Mart expects to get higher returns on Supercenters in 2010 and going forward, and in turn opened 15 new Sam’s club locations in the last fiscal year. Shares are trading approximately 23% below their all-time high in 2000, however not cheap by many standards. This brings into question Buffet’s reasons, as he is typically seen as a value investor. Given his extremely high earnings projections, it appears he must have a different idea than most of the street. WMT’s CEO, Michael Duke, said “The economy remains challenging for customers and Wal-Mart sales, but we are encouraged by increased traffic and our market share gains".
What to expect this holiday season-
This space is filled with other wholesalers like BJ's( which has a large presence of the northeast) which saw a weaker 3Q with their consumers' focus on basics. The trend of late has been saving money on staple items. The recession has worked in BJ's favor with membership growing and shoppers continuing to flock to its stores. BJ's management said they are starting to see shoppers slowly begin to buy more general merchandise, but said sales of items like electronics, tires and video games remain weak. However, the company said the coming quarter — its holiday period — will have shoppers buying more food than other items, and falling food prices will continue to be a challenge in the fourth quarter. Standard & Poor's Equity Research downgraded its opinion on shares of BJ's to "Hold" from "Buy," saying it sees pricing competition for food retailers to remain intense as food deflation weighs on them. According to these trends Wal-mart it would seem is in a very good position to benefit consumers trading down, due to the fact they offer much of the cost savingings that BJ's and Costco do, yet require no membership.
Anaylsts at Goldman have raised its price target for Costco to $61 from $57, citing “improving trends in higher end discretionary items.” Goldman also raised its full-year 2010 sales and profit estimates through 2012 for the membership warehouse operator. The analyst currently rates COST as “Neutral.”
This Holiday season will be very important for these companies and their 4Q, hoping to see the gap narrow between staple good spending over discretionary. With US Unemployment crossing double digits, this next month will certianly be interesting.
Goldman
Goldman Sachs seems to be in another jam, at least in the eyes of the public. They have decided to establish a program to inject $500 million in the small business sector. This was said to be an attempt at providing capital to the small businesses that play a "vital role" in creating wealth, fostering innovation, and adding jobs. $300 million of the injection has been earmarked for community development financial institutions which then go ahead and finance small companies. The other $200 million has been tagged for education.
The public obviously has not necessarily reacted as GS hoped. This was an attempt to soften Goldman's image, they even brought in Buffett to serve on the advisory board. However, it is being looked upon as an abuse of shareholder's money and it seems as though Goldman's plan to improve its image has backfired a bit.
Article
-Group 3
The Waning Dollar
The value of the dollar continues to be a concern. However, on Monday, Bernanke reassured the Economic Club of New York that the decline in the value of the dollar is natural; thus, no further fed action is necessary. He pointed to high long-term unemployment as a major factor that will keep GDP growth and inflation low for at least a year. Other countries certainly seem to be acting on Bernake's statements, even though they continue to publicly denounce the use of the dollar as the global reserve currency. For example, possession of treasuries increased $7 billion by BRIC countries and $20.4 billion by Japan during the month of September.
The Federal reserve is actually beginning to reduce its emergency lending facilities implemented in late 2007 through early 2009. The maturity of discount window loans to banks will soon be cut from an extended period of 90 days to 28 days, because liquidity has returned to acceptable levels. The Libor-OIS spread, gauge of the bank's willingness to loan, is at 13 basis points, down from a record of 364 bps in October 2008.
While inflation seems to be at bay and liquidity has increased, many investors are still concerned with weak economic data, such as the University of Michigan Consumer Sentiment Survey of 66.0 for the current period compared with a value of 70.6 for the previous period and an unexpected fall in housing starts earlier today. Moreover, many investors have turned to gold, which reached near-record levels of $1150 per ounce earlier today, rather than the securities market, indicating a lack of confidence in the U.S. economy.
Group 5
Links:
http://online.wsj.com/article/SB10001424052748704782304574542040005455698.html
http://online.wsj.com/article/SB10001424052748704431804574541161588915066.html
http://online.wsj.com/article/SB10001424052748704431804574539160726487446.html
http://www.bloomberg.com/apps/news?pid=20601087&sid=akC02cF4YHC4&pos=2
http://www.nytimes.com/2009/11/17/business/economy/17fed.html?_r=1&ref=business
The Federal reserve is actually beginning to reduce its emergency lending facilities implemented in late 2007 through early 2009. The maturity of discount window loans to banks will soon be cut from an extended period of 90 days to 28 days, because liquidity has returned to acceptable levels. The Libor-OIS spread, gauge of the bank's willingness to loan, is at 13 basis points, down from a record of 364 bps in October 2008.
While inflation seems to be at bay and liquidity has increased, many investors are still concerned with weak economic data, such as the University of Michigan Consumer Sentiment Survey of 66.0 for the current period compared with a value of 70.6 for the previous period and an unexpected fall in housing starts earlier today. Moreover, many investors have turned to gold, which reached near-record levels of $1150 per ounce earlier today, rather than the securities market, indicating a lack of confidence in the U.S. economy.
Group 5
Links:
http://online.wsj.com/article/SB10001424052748704782304574542040005455698.html
http://online.wsj.com/article/SB10001424052748704431804574541161588915066.html
http://online.wsj.com/article/SB10001424052748704431804574539160726487446.html
http://www.bloomberg.com/apps/news?pid=20601087&sid=akC02cF4YHC4&pos=2
http://www.nytimes.com/2009/11/17/business/economy/17fed.html?_r=1&ref=business
Flashback to the '80s: Insider Trading
So the topic of choice for this week is the current buzz about the recent M&A deal between Hewlett Packard and 3Comm - two very large IT infrastructure corporations. After announcing a $2.7 billion deal for Hewlett's acquisition of 3Com, there has been a suspect and unexpected jump in behind-the-scenes options trading regarding the two firms, as the options contracts on 3Com jumped just hours before the deal was made public.
As such, there is a large SEC (Securities and Exchange Commission) investigation into the matter, and rightfully so. Many corporate officers', boardmembers', and priveleged stockholders' portfolios flourished throughout the 1980's and 1990's amid the slurry of insider trading scandals, which drew a large amount of attention to Wall Street and from then on has given it a tainted reputation. To the majority of the American people, as well as foreign investors, insider trading is just another reason not to trust in the ability of large corporations to "protect" their interests and have become the subject of many otherwise accepting, naysayers.
Recently, however, after several years of relative tranquility, the need for easy cash has arisen once again, and Wall Street (along with many other international trading institutions), has been plagued by scandal. A little over a month ago, the Galleon Group hedge fund scandal arose, shedding light on Mr. Rajaratnam's insider trading scheme that has trumped all prior incidents. From the S.E.C's point of view, this is a call to arm the troops and to get ready to buckle down for a long, drawn out war against corporate greed, especially as the down economy threatens investors' senses of security and their ability to milk legitimate profits from otherwise legal and moral sources.
As the share price of 3Com's stock rose over 5% on the day the deal was announced and the November call options skyrocketed to over SEVENTEEN TIMES the 4-week average, one must look at this situation with some dismay: Are we really reverting back to this? Is America going to repeat the atrocities that the government has sought to rectify for years? Can the world continue with this barrage of immoral action? The answer is that no one knows. One can only trust in the governing bodies which have sworn to uphold legal trade and believe in their ability to keep America's head above the waters of recession, unemployment, and corruption as they continue to rise.
http://dealbook.blogs.nytimes.com/2009/11/18/3coms-dealmaker-of-the-week/
http://dealbook.blogs.nytimes.com/2009/11/16/sec-is-said-to-examine-3com-options-trading/
Gabriel Suprise
Group 2
As such, there is a large SEC (Securities and Exchange Commission) investigation into the matter, and rightfully so. Many corporate officers', boardmembers', and priveleged stockholders' portfolios flourished throughout the 1980's and 1990's amid the slurry of insider trading scandals, which drew a large amount of attention to Wall Street and from then on has given it a tainted reputation. To the majority of the American people, as well as foreign investors, insider trading is just another reason not to trust in the ability of large corporations to "protect" their interests and have become the subject of many otherwise accepting, naysayers.
Recently, however, after several years of relative tranquility, the need for easy cash has arisen once again, and Wall Street (along with many other international trading institutions), has been plagued by scandal. A little over a month ago, the Galleon Group hedge fund scandal arose, shedding light on Mr. Rajaratnam's insider trading scheme that has trumped all prior incidents. From the S.E.C's point of view, this is a call to arm the troops and to get ready to buckle down for a long, drawn out war against corporate greed, especially as the down economy threatens investors' senses of security and their ability to milk legitimate profits from otherwise legal and moral sources.
As the share price of 3Com's stock rose over 5% on the day the deal was announced and the November call options skyrocketed to over SEVENTEEN TIMES the 4-week average, one must look at this situation with some dismay: Are we really reverting back to this? Is America going to repeat the atrocities that the government has sought to rectify for years? Can the world continue with this barrage of immoral action? The answer is that no one knows. One can only trust in the governing bodies which have sworn to uphold legal trade and believe in their ability to keep America's head above the waters of recession, unemployment, and corruption as they continue to rise.
http://dealbook.blogs.nytimes.com/2009/11/18/3coms-dealmaker-of-the-week/
http://dealbook.blogs.nytimes.com/2009/11/16/sec-is-said-to-examine-3com-options-trading/
Gabriel Suprise
Group 2
Wednesday, November 18, 2009
Is The VIX Providing Us An Accurate Forecast of Market Volatility?
The CBOE Volatility index, known by its ticker symbol, VIX, is a popular metric used to estimate the level of implied volatility for S&P 500 index options. The value derived in this asset exists through an estimation of this implied volatility over the next 30 days. When the value of the VIX is raised, this translates to a more volatile underlying market (S&P 500), and vice versa. In October and November of last year, the VIX peaked above 80, which the VIX is currently trading at 22.41. This value is nearly equivalent to pre-2008 market crash levels.
Relating to this, there is a well written article in Barron’s that claims that current implied volatility levels do not accurately reflect the fundamentals of current market conditions. (http://online.barrons.com/article/SB125846366940352017.html) I would have to agree with the author for the following reasons. Times have been cheery for investors over the last six months, and the S&P 500 alone has gained a solid 25.76% over this time period. Although economic indicators such as unemployment, consumer confidence, housing data, and GDP growth remain less than encouraging, the equity markets have in many ways over-extended itself in terms of anticipating recovery. However, the VIX itself hardly provides any pessimism through its underlying value.
One last interesting area of activity regarding the VIX can be seen through VIX options. Calls have become increasingly more expensive as of late, and trade volume of this derivative has been steadily increasing. This portrays that many traders are anticipating that volatile times lie ahead.
Relating to this, there is a well written article in Barron’s that claims that current implied volatility levels do not accurately reflect the fundamentals of current market conditions. (http://online.barrons.com/article/SB125846366940352017.html) I would have to agree with the author for the following reasons. Times have been cheery for investors over the last six months, and the S&P 500 alone has gained a solid 25.76% over this time period. Although economic indicators such as unemployment, consumer confidence, housing data, and GDP growth remain less than encouraging, the equity markets have in many ways over-extended itself in terms of anticipating recovery. However, the VIX itself hardly provides any pessimism through its underlying value.
One last interesting area of activity regarding the VIX can be seen through VIX options. Calls have become increasingly more expensive as of late, and trade volume of this derivative has been steadily increasing. This portrays that many traders are anticipating that volatile times lie ahead.
Monday, November 16, 2009
High-yield sowing the seeds of underperformance?
For the year to October 31st, the Merrill Lynch High Yield Master II index had returned a total of 51.2%. By comparison, the Russell 2000 index (a small-cap index) had returned a mere 14.1%.
Leverage World , a reputable publication on high-yield, compiles a crude benchmark of relative performance between junk bonds and small-cap equities. This index simply divides the performance of the Russell by that of the ML index starting in the year 2000. Since then, the two indices have tracked fairly closely. For the aforementioned period in 2009, the index shows a stark underperformance of the Russell 2000 by a 2.2x standard deviation. Historically, as noted by Leverage World, such a deviation of performance has not persisted for long.
According to the ICI, for first three quarters of 2009, U.S. long-term bond mutual funds have experienced net inflows of some $267 billion in comparison to U.S. long-term equity mutual fund net inflows of just $4.3 billion. Meanwhile, globally, investors have bought into a record $2.7 trillion of corporate bonds (WSJ). (Interestingly, of the new domestic issuance in the U.S., 75% has been used to refinance old debt.)
Where does this leave us? It seems that the relative outperformance of high-yield debt combined with a glut of debt issuance bodes poorly for these securities. In terms of relative performance for the foreseeable future, it seems equities are the way to go.
Group 12
Sunday, November 15, 2009
Wal-Mart Exceeds Estimates, Sees Sluggish Holiday Season
On November 12, Wal-Mart reported earnings for the third quarter ending October 31 of $3.24 billion or 84 cents a share, up 3.2% from last quarter’s results. Analysts expect earnings of approximately $1.12 per share for Wal-Mart’s fiscal year fourth quarter, while the world’s largest retailers expect $1.08 per share.
Eduardo Castro-Wright, Wal-Mart’s U.S. chief offered tempered guidance in last Thursday’s conference call, warning about customers being cautious in their holiday spending. Other prominent retailers, such as Macy’s and Kohl’s provided similar guidance, expecting sales to be slightly below analyst estimates.
While we’ve seen the equity markets skyrocket over the last six months, it doesn’t seem as if their gains are instilling any life into consumer confidence. Investors are most likely asking whether or not aggressive pricing strategies can do anything to bolster the bottom lines of these big-box stores, and if any higher-end retailers can compete.
With unemployment hovering above 10%, and real unemployment right around 18%, this holiday season should certainly be sluggish, which makes Wal-Mart, TJX Companies, and Family Dollar very enticing to investors.
http://online.wsj.com/article/BT-CO-20091112-713379.html
~Group 8
Saturday, November 14, 2009
Mutual Funds Time Market
To address the concerns of investors that mutual funds are not adaptable enough to hold their own in a down market, a number of funds have taken a more dynamic approach to portfolio allocation and have begun to time the market by shifting in between cash and regular investments on a frequent basis. The managers of these funds claim to outsmart the volatility of the market.
This strategy has worked for some funds, such as Ivy Asset Strategy, which has made 14.9% annually for the five years ended this November (about 14% above the S&P 500). For other funds, attempts to time the market have led to increased volatility. For example, the Encompass Fund used the strategy of jumping in between allocation to cash and allocation to investments. It fell 62% last year and gained 110% this year.
Additional problems with the timing the market as a mutual fund are higher transaction costs due to the increase in trading and the possibility that the fund goes to cash before a market rally.
Regardless, these types of funds add some much-needed variety to the predominately buy-and-hold mutual fund market and should be considered in a down market for investors that don’t actively manage their portfolio.
-Erik Ringo – Group 11
Friday, November 13, 2009
Hedge Fund Watch – Watching the Smart Money – Kraft Acquiring Cadbury
Background Information
Watching the smart money is very important. John Paulson, hedge fund manger specializing in risk arbitrage (betting on mergers) has doubled his stake on Cadbury and betting this deal will close. Eton Park , run by Eric Mindrich, also has a sizable investment of about 2.5%. A recent SEC filing has showed that Paulson owns about 2% by buying 14.8 million shares.
The bet came after Kraft took its $16.7 billion bid for Cadbury directly to shareholders on Monday, after the board of Cadbury, a chocolate company based in Britain, rejected the offer as too low.
Why the deal will go through
The reason this deal will go through is due to the rules of the deal. The differences between British rules and US rules are likely to bring a quicker close to the takeover battle and force Cadbury to fight this hostile offer on issues of price instead of resorting to the takeover defenses commonly employed in the United States.
The main difference between Britain and the United States in rules is that Britain requires that any bidder that have committed financing at the time of the making of its offer. Because of this, Kraft has been forced to drop its financing condition and replace it with a committed debt facility. In addition, because Britain does not allow due diligence conditions, Kraft has now dropped this condition as well (i.e deal goes a lot faster and costs less).
These regulatory differences, seem really weird, but exist for good reasons. For example, they need these rules because the US needs a special mechanism for a board to protect the corporate enterprise by adopting takeover defenses. In Britain there are substitutes for takeover defenses such as different labor laws so they don’t need one. Thus, again faster and cheaper cost of the deals.
By Group 1
Watching the smart money is very important. John Paulson, hedge fund manger specializing in risk arbitrage (betting on mergers) has doubled his stake on Cadbury and betting this deal will close. Eton Park , run by Eric Mindrich, also has a sizable investment of about 2.5%. A recent SEC filing has showed that Paulson owns about 2% by buying 14.8 million shares.
The bet came after Kraft took its $16.7 billion bid for Cadbury directly to shareholders on Monday, after the board of Cadbury, a chocolate company based in Britain, rejected the offer as too low.
Why the deal will go through
The reason this deal will go through is due to the rules of the deal. The differences between British rules and US rules are likely to bring a quicker close to the takeover battle and force Cadbury to fight this hostile offer on issues of price instead of resorting to the takeover defenses commonly employed in the United States.
The main difference between Britain and the United States in rules is that Britain requires that any bidder that have committed financing at the time of the making of its offer. Because of this, Kraft has been forced to drop its financing condition and replace it with a committed debt facility. In addition, because Britain does not allow due diligence conditions, Kraft has now dropped this condition as well (i.e deal goes a lot faster and costs less).
These regulatory differences, seem really weird, but exist for good reasons. For example, they need these rules because the US needs a special mechanism for a board to protect the corporate enterprise by adopting takeover defenses. In Britain there are substitutes for takeover defenses such as different labor laws so they don’t need one. Thus, again faster and cheaper cost of the deals.
By Group 1
Thursday, November 12, 2009
Benmosche
AIG's CEO, Benmosche is threatening to leave because his salary is being too closely regulated by the government. Benmosche has already threatened to step down as AIG's CEO multiple times, and is adding to the unstable atmosphere at AIG. If he's going to step down, he should just stop talking about it and do it. However, if Benmosche does step down, it is possible that AIG's recent recovery efforts will be disrupted. The $10.5 million pay package offered to this already wealthy individual does not seem like that bad of an offer.
He is more complaining about the salary restrictions on his employees. His salary since being finalized, is the largest compensation package approved by the Treasury department. However, he "told AIG’s board last week he may quit because caps on compensation hurt his ability to retain staff", which is more understandable. This is an interesting example of how separate and distinct the businesses and public policy makers are. Whether or not you believe Benmosche is correct in his frustration, it brings up an interesting disconnect.
He is more complaining about the salary restrictions on his employees. His salary since being finalized, is the largest compensation package approved by the Treasury department. However, he "told AIG’s board last week he may quit because caps on compensation hurt his ability to retain staff", which is more understandable. This is an interesting example of how separate and distinct the businesses and public policy makers are. Whether or not you believe Benmosche is correct in his frustration, it brings up an interesting disconnect.
-Group 3
WSJ Article
HP buys 3COM for 2.7B
On Wednesday, HP announced that it will be acquiring 3COM for 2.7B. In addition to the announcement of the deal, HP raised its guidance as well as pre-releasing earnings, beating forecasts. However, the revisions lacked significant substance, with only a comment from the CEO regarding growth in China.
This deal is also seen as a move to compete directly with Cisco, the leader in networking systems. This supports the CEO's statement on the outlook revisions, as 3COM obtains nearly half of its revenue from the Chinese Market. The trend in the industry seems to be heading toward consolidation creating companies which can provide for all technology needs in one place.
HP will pay $7.90 per share, and 3COM has already traded up to 7.67 after hours, nearly closing the spread with a 35% move. HP in effect is attempting to expand from the hardware business into more profitable service areas of business. The company plans to fold 3COM services into its existing networking equipment line.
This deal follows Dell's recent acquisition of Perot Systems Corp,as well as Xerox Corporation's takeover of Affiliated Computer Services.
Group 6
This deal is also seen as a move to compete directly with Cisco, the leader in networking systems. This supports the CEO's statement on the outlook revisions, as 3COM obtains nearly half of its revenue from the Chinese Market. The trend in the industry seems to be heading toward consolidation creating companies which can provide for all technology needs in one place.
HP will pay $7.90 per share, and 3COM has already traded up to 7.67 after hours, nearly closing the spread with a 35% move. HP in effect is attempting to expand from the hardware business into more profitable service areas of business. The company plans to fold 3COM services into its existing networking equipment line.
This deal follows Dell's recent acquisition of Perot Systems Corp,as well as Xerox Corporation's takeover of Affiliated Computer Services.
Group 6
Wednesday, November 11, 2009
2 big m&a deals this week
Northrop Grumman sells TASC unit to private equity funds KKR and General Atlantic. From a government contracting perspective this is interesting because it is the first deal that is an indication of large defense companies actually selling assets to comply with new regulation not allowing contractors to provide consulting services to the government while also trying to sell it products.
From a private equity standpoint, even though it is only a billion dollar deal it took three banks to provide the leverage. The good thing is that financial sponsors are once again starting to make large investments.Thoma Bravo sold Datatel to Hellman and Friedman for approximately $570 million yielding a 4x return. Even in this down market strategic investments from financial sponsors can continue to yield impressive returns.
Another thing to note is the sponsor to sponsor activity--generally a positive meaning that even at a relatively high valuation pe funds are willing to pay up for a quality business.
Nick Deflorian, Group 2
From a private equity standpoint, even though it is only a billion dollar deal it took three banks to provide the leverage. The good thing is that financial sponsors are once again starting to make large investments.Thoma Bravo sold Datatel to Hellman and Friedman for approximately $570 million yielding a 4x return. Even in this down market strategic investments from financial sponsors can continue to yield impressive returns.
Another thing to note is the sponsor to sponsor activity--generally a positive meaning that even at a relatively high valuation pe funds are willing to pay up for a quality business.
Nick Deflorian, Group 2
Buffet's Burlington Bet
Link:
http://online.barrons.com/article/SB125731575786627535.html
Last week, Warren Buffett made one of the biggest bets on the US economy since the start of the recession. He put up $34 billion in cash and stock to buy the remaining 78% of Burlington Northern Railroad that Berkshire Hathaway didn’t already own. It seems like Buffett is making a huge gamble on the economic state of our country, but when one looks closer, it looks like Buffett is gambling on greater foreign growth.
With an extensive web of track across the United States, Burlington Northern looks like an indicator of the US economy. With Union Pacific as the only larger railroad in America, Burlington is the biggest transporter of food products and coal (it has enough of the energizing rock to generate 10% of the nation’s electricity).
But when Burlington Northern is looked at closer, it appears to be a better indicator of the global economy. With major ports on the west coast in both the US and Mexico, the railroad can transport goods to the west to be shipped to Asia. It is also convenient in bringing imported goods from China and other eastern countries to the central and eastern American territories.
In addition to this, the current of the US must be considered. With bankruptcies, foreclosures, and credit-card defaults at record highs, consumer spending has obviously plummeted. Why is Buffett supposedly making a move on these conditions at this specific time? As he gets even older, Buffett is going to look to put his billions to work. And one of the best places to start right now is with emerging global markets.
http://online.barrons.com/article/SB125731575786627535.html
Last week, Warren Buffett made one of the biggest bets on the US economy since the start of the recession. He put up $34 billion in cash and stock to buy the remaining 78% of Burlington Northern Railroad that Berkshire Hathaway didn’t already own. It seems like Buffett is making a huge gamble on the economic state of our country, but when one looks closer, it looks like Buffett is gambling on greater foreign growth.
With an extensive web of track across the United States, Burlington Northern looks like an indicator of the US economy. With Union Pacific as the only larger railroad in America, Burlington is the biggest transporter of food products and coal (it has enough of the energizing rock to generate 10% of the nation’s electricity).
But when Burlington Northern is looked at closer, it appears to be a better indicator of the global economy. With major ports on the west coast in both the US and Mexico, the railroad can transport goods to the west to be shipped to Asia. It is also convenient in bringing imported goods from China and other eastern countries to the central and eastern American territories.
In addition to this, the current of the US must be considered. With bankruptcies, foreclosures, and credit-card defaults at record highs, consumer spending has obviously plummeted. Why is Buffett supposedly making a move on these conditions at this specific time? As he gets even older, Buffett is going to look to put his billions to work. And one of the best places to start right now is with emerging global markets.
Tuesday, November 10, 2009
Spin-Offs, Stubs and Liquidations
Below is a VERY simple and interesting look at spin-offs, stubs and liquidations, prsented by Mario Gabelli's GAMCO:
Gabelli Stubs, Spin-Offs and Liquidations
Gabelli Stubs, Spin-Offs and Liquidations
Sunday, November 8, 2009
Time to Short Gold?
Gold has recently hit new highs. It’s time to ask, “Is it time to short gold?”
Historically, gold has been a commodity that investors flock to when the dollar loses value, often during times of inflation. Gold prices have shot up since the recession due to low fed rates and the stimulus package, which flooded the market with liquidity, devaluing the US dollar.
Now that gold has hit these peaks, we must consider whether it’s time to become bearish. As Evan said in last week’s meeting, the recession is technically “over.” The DOW is back over 10,000, and consumer confidence is way up from February (it was in the 20’s then and is up around 50 now), signaling that we are in the midst of significant economic recovery.
Fed rate futures indicate that investors believe the Fed to begin raising rates in April or May, which will reduce liquidity and help to raise the value of the dollar. The dollar is also sure to increase in value with the recovery of the American economy because foreign investors will need dollars in order to invest in American companies. Finally, the Fed does not believe that inflation is a worry in the current economic climate.
These indicators seem to show that gold will not be as juicy of an investment for long. And, having just hit new highs, it has a far way down to go.
Historically, gold has been a commodity that investors flock to when the dollar loses value, often during times of inflation. Gold prices have shot up since the recession due to low fed rates and the stimulus package, which flooded the market with liquidity, devaluing the US dollar.
Now that gold has hit these peaks, we must consider whether it’s time to become bearish. As Evan said in last week’s meeting, the recession is technically “over.” The DOW is back over 10,000, and consumer confidence is way up from February (it was in the 20’s then and is up around 50 now), signaling that we are in the midst of significant economic recovery.
Fed rate futures indicate that investors believe the Fed to begin raising rates in April or May, which will reduce liquidity and help to raise the value of the dollar. The dollar is also sure to increase in value with the recovery of the American economy because foreign investors will need dollars in order to invest in American companies. Finally, the Fed does not believe that inflation is a worry in the current economic climate.
These indicators seem to show that gold will not be as juicy of an investment for long. And, having just hit new highs, it has a far way down to go.
By Alex Green
Saturday, November 7, 2009
Treasuries Prices Remain High
Treasury yields have fallen since the summer, despite a rising risk appetite and strong global capital markets. This is certainly beneficial for the U.S. since the government can borrow at relatively cheaper rates, decreasing the overall cost of the U.S. government’s fiscal agenda.
Why are treasuries holding onto their high dollar price? Most important, the Fed is not expected to raise interest rates until well into next year. While the Fed has much more control over short term rates, they can influence longer term interest rates by purchasing treasury issues along the entire yield curve. Also, financial markets are still riskier relative to 2003-2007 levels. However, the S&P is up from around 900 in July and the 10-year treasury yield is down to roughly 3.5% from a high of over 4% over the summer, which seems to break the growing risk appetite trend that had investors shifting from treasuries to corporate debt and equities earlier in the year.
Unfortunately, treasury yields can not stay low forever, especially when the government often auctions over $60 billion in one week; for example, the treasury is offering $81 billion in 3-, 10-, and 30-year issues next week. With the largest budget deficit in history, a falling dollar, and the imminent decision by the Fed to raise rates next year could mean trouble for treasury bonds. If treasury yields rise significantly next year while the government continues to borrow at record pace, the cost of our fiscal deficit will increase significantly, even if spending stays constant.
http://online.wsj.com/article/SB125743276994630887.html
http://www.marketwatch.com/story/bonds-give-up-gains-after-jobless-claims-fall-2009-11-05?siteid=rss
Group 5
Why are treasuries holding onto their high dollar price? Most important, the Fed is not expected to raise interest rates until well into next year. While the Fed has much more control over short term rates, they can influence longer term interest rates by purchasing treasury issues along the entire yield curve. Also, financial markets are still riskier relative to 2003-2007 levels. However, the S&P is up from around 900 in July and the 10-year treasury yield is down to roughly 3.5% from a high of over 4% over the summer, which seems to break the growing risk appetite trend that had investors shifting from treasuries to corporate debt and equities earlier in the year.
Unfortunately, treasury yields can not stay low forever, especially when the government often auctions over $60 billion in one week; for example, the treasury is offering $81 billion in 3-, 10-, and 30-year issues next week. With the largest budget deficit in history, a falling dollar, and the imminent decision by the Fed to raise rates next year could mean trouble for treasury bonds. If treasury yields rise significantly next year while the government continues to borrow at record pace, the cost of our fiscal deficit will increase significantly, even if spending stays constant.
http://online.wsj.com/article/SB125743276994630887.html
http://www.marketwatch.com/story/bonds-give-up-gains-after-jobless-claims-fall-2009-11-05?siteid=rss
Group 5
Wednesday, November 4, 2009
Good news for Ford?
This is Ford's first operating profit in over 4 years and was primarily brought on through higher prices and a larger market share. Ford lost $357 million in the same quarter last year. Ford now expects to be "solidly profitable" by 2011. All this good news should not muddle important issues facing the company. Massive incentive programs around the world including the US and Germany are now all but over. The company feels that even if the US does well over the next couple of years, they are very worried about Europe. Declines in sales there might more than offset gains in sales over here. The company is also in the midst of several crucial negotiations with the UAW that could prove to be a tipping point for the company. All said and done, the $1 billion dollar profit is great news but much more of that needs to come from Dearborn to consider Ford a healthy company.
Group 3
Group 3
Buffet's Buy
Warren Buffett, 79 years old, is acquiring a railroad company he expects will grow with American trade in the next few decades. As the economy starts to pick up and consumption volume increases, he believes Burlington-Northern will also build up. This bet for Buffett is an investment in a "high quality, cash generating company [that has] been left in the dust during the 'junk' stock rally". The only competition he is considering are other railroads that will have a difficult time coming into the market due to the high costs of laying down a track. Some thoughts of possible competitors will be highspeed railroads or who knows, even some kind of efficient air transportation for goods 30 years from now. And looking forward, where will Buffet be? 109 years old? He seems to be thinking about the future of his company and those he's leaving in charge. Let's hope they are just as excited about this acquisition as he is.
Group 3
WSJ article
Group 3
WSJ article
Companies Hoard Cash
Links:
WSJ Article: http://online.wsj.com/article/SB125712303877521763.html
Bloomberg Article: http://www.bloomberg.com/apps/news?pid=conewsstory&tkr=C%3AUS&sid=aoegJmRxtzQA
Companies are hoarding cash at levels not seen since the 1960s. According to an article titled Jittery Companies Stash Cash in the November 2nd Wall Street Journal “500 of the largest nonfinancial companies…held about $994 billion in cash, or 9.8% of their assets”. That is 2% more than last year. Now, we all remember the 3.5% growth in GDP last week, so why are companies saving cash?
Some explain this phenomenon as a “hangover” from the recession, while others claim that firms are inherently “riskier” these days. Among the 500 largest nonfinancial groups, information technology groups carry the most cash. The Wall Street Journal explains that “the 54 biggest information-technology firms held $280 billion – or 27% of their assets – in cash” citing Google as an example; “The search giant’s cash and short-term investments rose 53% to $22 billion in the third quarter from a year earlier, accounting for 58% of its total assets”
Although holding cash provides a safety net and “operating and strategic flexibility,” it begs the question of whether that cash could be put to better use in a possible future bull market. Now making market predictions could be dangerous business, but holding cash could stifle a company’s growth in a globalized market. On the other hand, holding cash could provide companies a quick source of liquidity in unsure financial times. Also, without ready access to credit, “cash can become very strategic”.
In a recent Bloomberg article, the author claimed that Citigroup and JP Morgan were “hoarding cash as if another crisis were on the way”. The article explains how Citigroup has nearly doubled its holdings in cash. Although hoarding cash may be the safe move, “it will take down the rates of returns these companies can generate” said Eric Hovde in the Bloomberg article.
This action brings into question whether banks should value rate of return over a safety net. On one hand, a safety net would ensure Citigroup’s existence and financial safety while recovering from a financial crisis. While on the other hand, investors responded to Citigroup’s diminishing rate of return through a massive sell-off on Monday. Is a bank without a decent rate of return worth investing in? Is a bank without ability to secure cash worth investing in? How much of Citigroup’s rate of return must be sacrificed for adequate financial security? We believe these questions are at the heart of Citigroup’s decision to hold more cash.
WSJ Article: http://online.wsj.com/article/SB125712303877521763.html
Bloomberg Article: http://www.bloomberg.com/apps/news?pid=conewsstory&tkr=C%3AUS&sid=aoegJmRxtzQA
Companies are hoarding cash at levels not seen since the 1960s. According to an article titled Jittery Companies Stash Cash in the November 2nd Wall Street Journal “500 of the largest nonfinancial companies…held about $994 billion in cash, or 9.8% of their assets”. That is 2% more than last year. Now, we all remember the 3.5% growth in GDP last week, so why are companies saving cash?
Some explain this phenomenon as a “hangover” from the recession, while others claim that firms are inherently “riskier” these days. Among the 500 largest nonfinancial groups, information technology groups carry the most cash. The Wall Street Journal explains that “the 54 biggest information-technology firms held $280 billion – or 27% of their assets – in cash” citing Google as an example; “The search giant’s cash and short-term investments rose 53% to $22 billion in the third quarter from a year earlier, accounting for 58% of its total assets”
Although holding cash provides a safety net and “operating and strategic flexibility,” it begs the question of whether that cash could be put to better use in a possible future bull market. Now making market predictions could be dangerous business, but holding cash could stifle a company’s growth in a globalized market. On the other hand, holding cash could provide companies a quick source of liquidity in unsure financial times. Also, without ready access to credit, “cash can become very strategic”.
In a recent Bloomberg article, the author claimed that Citigroup and JP Morgan were “hoarding cash as if another crisis were on the way”. The article explains how Citigroup has nearly doubled its holdings in cash. Although hoarding cash may be the safe move, “it will take down the rates of returns these companies can generate” said Eric Hovde in the Bloomberg article.
This action brings into question whether banks should value rate of return over a safety net. On one hand, a safety net would ensure Citigroup’s existence and financial safety while recovering from a financial crisis. While on the other hand, investors responded to Citigroup’s diminishing rate of return through a massive sell-off on Monday. Is a bank without a decent rate of return worth investing in? Is a bank without ability to secure cash worth investing in? How much of Citigroup’s rate of return must be sacrificed for adequate financial security? We believe these questions are at the heart of Citigroup’s decision to hold more cash.
Who is Paolo Pellegrini?
Group 1:
Who he is?
Who is this relatively unknown man? If you don’t know him you should. He played an integral part in the research and investment ideas that lead to Paulson’s 570% return in 2007 due to the mortgage mess. In 2008, he left hedge fund Paulson & co to start his own called PSQR Management LLC, a global macro fund.
Portfolio Performance
In 2008 he was up over 50% this year. In 2009 he is up over 80%. He made money in 2008 by shorting a lot of financial ETFS and he started shorting long term treasuries (or betting on rising yields). Pellegrini is also bullish on commodities, especially those that are scarce or of daily necessity. In particular, he likes oil and has been buying oil futures. He likes commodities since he sees global competition for them elevating. Given this commodity thesis, he also likes the Australian Dollar as the country benefits from their natural resources.
Future thoughts on the Market
Pellegrini still has a gloomy outlook for the economy. He sees the market essentially trading sideways and could even generate negative returns once you adjust it for inflation as he calls for "anemic real returns." He cites budget deficits, household debt, and increased regulation amongst other things. He has also been shorting long-term Treasuries and still going long crude oil in a wager that was formulated on the basis of dollar devaluation. He cites massive stimulus programs, huge corresponding deficits, and the fact that the US is now a debtor nation. This is also the reason for the currency's value dropping.
More in depth article
http://www.bloomberg.com/apps/news?pid=20601109&sid=akryRHYHS0Sg
Look for Paolo Pellegrin’s Bloomberg Interview on October 2nd.
Who he is?
Who is this relatively unknown man? If you don’t know him you should. He played an integral part in the research and investment ideas that lead to Paulson’s 570% return in 2007 due to the mortgage mess. In 2008, he left hedge fund Paulson & co to start his own called PSQR Management LLC, a global macro fund.
Portfolio Performance
In 2008 he was up over 50% this year. In 2009 he is up over 80%. He made money in 2008 by shorting a lot of financial ETFS and he started shorting long term treasuries (or betting on rising yields). Pellegrini is also bullish on commodities, especially those that are scarce or of daily necessity. In particular, he likes oil and has been buying oil futures. He likes commodities since he sees global competition for them elevating. Given this commodity thesis, he also likes the Australian Dollar as the country benefits from their natural resources.
Future thoughts on the Market
Pellegrini still has a gloomy outlook for the economy. He sees the market essentially trading sideways and could even generate negative returns once you adjust it for inflation as he calls for "anemic real returns." He cites budget deficits, household debt, and increased regulation amongst other things. He has also been shorting long-term Treasuries and still going long crude oil in a wager that was formulated on the basis of dollar devaluation. He cites massive stimulus programs, huge corresponding deficits, and the fact that the US is now a debtor nation. This is also the reason for the currency's value dropping.
More in depth article
http://www.bloomberg.com/apps/news?pid=20601109&sid=akryRHYHS0Sg
Look for Paolo Pellegrin’s Bloomberg Interview on October 2nd.
Gold Extends Run to Record Highs
Group 12:
The price of December gold futures continued to go up in Wednesdays’ early trading reaching record highs of $1,096.5an ounce, up $7.90 from its previous close, mainly due to Tuesday’s 200 tons purchase of gold by India’s central bank. This push in price has also come due to a long-term bull market and fears of inflation and a weaker dollar.
http://online.wsj.com/article/SB125734377038028007.html
The price of December gold futures continued to go up in Wednesdays’ early trading reaching record highs of $1,096.5an ounce, up $7.90 from its previous close, mainly due to Tuesday’s 200 tons purchase of gold by India’s central bank. This push in price has also come due to a long-term bull market and fears of inflation and a weaker dollar.
http://online.wsj.com/article/SB125734377038028007.html
Tuesday, November 3, 2009
Ford is Revving...
Ford Motor Company reported their first North American Profit since 2005. Not only is this a positive step for the entire automobile industry, but it also signifies a positive change in Detroit's suffering economic situation. In addition to announcing a $997 million profit, the company also revised their forecast for 2011.
"All domestic automakers reported positive numbers last month, but Ford Motor became King of the Hill by producing the best-a one billion dollar profit.
The company saw sales of its Ford, Lincoln and Mercury vehicles shoot up 21% versus the month before and increased 3% versus a year ago. October is the third time in the last four months that Ford sales have increased.
The company reported that sales of the Ford Taurus up 141% versus a year ago and Ford Fusion were up 24%. Sales of Ford Mustang were up 2%, Lincoln MKZ sales were up 27%, and Ford Escape sales jumped 26%. The crossovers Ford Edge and Flex saw 38% and 8% sales increases, respectively."
Ford also gained market share for the third straight month, and now has 21% of the total light-vehicle market. Comparatively, Toyota Motor Sales reported a 3.5% decrease in sales versus last October. "
Looking ahead, 2011 is going to be a pivotal year for Ford.
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