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.
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