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Is the IPO Back?

With three successful IPO’s surpassing expectations on Wednesday some were asking whether the IPO market is back to its pre-crash normal self. First Interstate BancSystem, chipmaker MaxLinear, and telecom equipment maker Calix networks all saw shares rise over 8% (MaxLinear up 32%) in their first day of trading. This is in stark contrast to an IPO market that has been virtually non-existent for a good part of the year. An uncertain market and less appetite for risk have lead several IPO’s to be either canceled or postponed damaging an already beaten down market. However, Wednesday’s news offers hope. In fact this is the first time six months we have seen three IPO’s price and trade higher in a day. And with eight more IPO’s planned to price over the next two weeks, IPO’s could see their biggest month in over two years. Several companies waiting for a sign that market conditions have improved may see this week’s success and want to jump in on a hot market. While they may not be as richly valued as the IPO’s of old, the market may just be in for a comeback.

BY GROUP 11

The U.S. and China

The political rhetoric between the United States and China has heated up once again. Just last week, Premier Wen Jiabao chastised America's call to de-peg the Yuan as well as it inflationary monetary policy, "I understand that some countries want to increase their exports, but I don't understand the practice of depreciating their currency and forcing others to appreciate theirs in order to accomplish this... I think this is a type of trade protectionism."[1] Referring to the both the recent bill being considered in Congress to name China a 'currency manipulator', which would activate certain parts of the WTO treaty that China signed when it joined in 2001 as well as some of the 'quantiative easing' methods being used by the Federal Reserve which has increased the money supply and some say will lead to a declining Dollar.

And following this, we have also seen high-level American diplomats become increasingly involved in Google's recent exit from the Chinese market. By redirecting to the uncensored version hosted in Hong Kong, Google has essentially ceased all operations on the Mainland; any uncensored results are filtered by the "Golden Shield Project" also known as the Great Firewall of China.

Whether or not this back and forth is a sustainable strategy for both parties is unclear, however, what is clear is that that both Washington and Beijing are jumping at the chance to go tit-for-tat with each other.

[1]http://www.washingtonpost.com/wp-dyn/content/article/2010/03/14/AR2010031402304.html

--Stephen Balaban

Financial Overhaul Is Next Priority of Democrats

After a successful pushing of healthcare reform, congressional Democrats have come out and expressed that, "an overhaul of financial regulations was the next legislative priority." No one is clear on what this "reform" will include and how far out it truly is, and that uncertainty is leaving a large overhanging cloud on the financial industry.

Article

Group 3

Warren Buffet: More Creditworthy than Uncle Sam

As reported by Bloomberg on March 22nd, the bond market is implying that it is now safer to lend to Warren Buffet than the United States of America.

The two-year US Treasury note is currently yielding 1.09%, whereas Berkshire’s notes of the same maturity are yielding 3.5 basis points less. In other words, putting your money into a two-year US note is more of a risk than putting your money in Berkshire Hathaway. Beyond just Berkshire, Proctor and Gamble, Johnson and Johnson, and Lowe’s debt also traded at lower yields in the not so-distant past.

The chief fixed-income officer at Fifth Third Asset Management, which oversees 22 billion dollars dubbed this development as a “slap upside the head of the government.” In our view, America’s budget deficit is now 10% of GDP, thereby making it a perfect time for a wakeup call.

Another very important statistic is that by 2014, 5 of the G7 countries will have debt-to-GDP ratios of more than 100 percent, representing “acute” challenges in tackling high public debt.

With Portugal getting downgraded by Fitch today, and the IMF having to step in to bail out Greece, it won’t be long before our unparalleled leveraging and deficit spending come back to haunt us.

-- GROUP 8

Why a Career in Finance Should Be Chosen for Passion, Not Money

A recent news report from the National Association of Colleges and Employers has found that eight of the top ten best-paid majors are in engineering, with the other two being in computer science (4th) and information sciences and systems. Petroleum engineering tops of the list with an average salary of $86,220. Comparatively, the average starting salary for liberal arts majors is at $32,555.

For Ross students recruited by companies such as Goldman Sachs, whose average employee compensation has been estimated as $500 thousand a year, this is not an issue of concern. However, it should be noted by students that are considering a finance degree simply because they assume that is where they will make the most money, as this may not be the case if you are not among the top 15% in your graduating class.

Therefore, it is very important for those choosing a career in the financial markets that this is where their passion lies and that they would love nothing more than to construct valuation models, perform technical analysis, and live in a fast-paced and dynamic environment for the duration of their career. For the members of MII, I have no doubt this is the case.

Cisco

Cisco's over-hyping of the new CRS-3 router is being compared to, "the equivalent of Steve Jobs promising a "magical and revolutionary product" and then delivering an iPhone with a faster processor." This has left many asking why Cisco pushed so hard to hype up the release of the CRS-3.

Article

Greek Debt and Credit Default Swaps

The scourges of Wall Street, the slayers of Sovereign Debt, the root of the
Financial Crisis! No, we're not talking about robber barons or Wall Street
bankers, we're talking Credit Default Swaps (CDS). CDS have come under
fire by the European Comission, the fist of the European Union. CDS are
being blamed for the current Greek debt calamaty. The Greek Prime
Minister, George Papandreou, pitched his gripe against CDS to the European
Commission. He says that CDS have pushed up borrowing costs for his
country, who's massive budget deficits are coming back to haunt it.

Now for some opinion on the matter. It is not the European Unions business
to interfere in contract between private individuals. I hope the European
Union will implement the proposed all out ban on CDS so that investors will
come to American and contract freely with each other. Furthermore, I am
perplexed as to why banning CDS seems to be a viable option to what seems
to be a much larger problem. The real problem here is not Credit Default
Swaps, it's the Greek government's spending. If Greece had kept a balanced
budget they would not have to come running to the Mommy-State when the big
mean investors come knocking at their door looking to collect.

Written by Stephen Balaban

Is Spain the Next Greece?

The tumbling Euro zone’s fourth-largest economy, Spain, has a towering unemployment rate of 19%, a deflating housing bubble and a budget deficit that is approaching 12% of its gross domestic product. We all know that Greece has sparked fear into the minds of countless global investors, as bond and equity markets get rattled on any news of Greek debt default. However, it could now be Spain that adds fuel to the fire in Europe.

According to the WSJ article by Stephen Fidler, the main problem for weak Euro-zone countries is that as a result of their involvement in the Euro they lack the ability to manipulate their currency or artificially set interest rates. In other words, Spain cannot devalue their currency to make exports more attractive and its “sunny beach resorts cheaper.” Since 1999, these monetary policy decisions have been made at the European Central Bank in Germany, making any thoughts of a global currency absolutely preposterous.

Of course, Spain could attempt to stimulate growth via fiscal measures, such as cutting taxes or increasing spending, yet stimulus spending has already been enormous. Just like our leaders did at the outset of the financial crisis, Spain’s economy minister said in an interview, “The fundamentals of our economy are solid.”

If they turn out to be anything but, it would be far costlier for Germany and France to provide a backstop, as they have pledged to do for Greece already. It’s clear that Spain has many options, yet this process can take a long time to unravel.

Worrisome Housing Market for 2010

With the rest of the economy seemingly entering recovery, the ever troubled housing sector is lagging. Indeed, home prices and buying activity are increasing, but only with respect to a devastating 2009.

Some economists believe the housing sector is bottoming out. Such assertions are based on the fact that in the first quarter of 2009, S&P’s Case-Shiller National Home Price Index had dropped 19% from the year before. In the last quarter of 2009, the same index dropped only 2.5% from the previous year (released on Feb. 23), a promising statistic for many. However, one must consider how much of an influence government intervention has had on such statistics, as well as the imminent withdrawal of government support in the housing sector during the coming months.

As we all know, the U.S. government has bent over backwards for the housing market in the past year. To lower mortgage rates and mend other financial markets, the Federal Reserve has bought over $1 trillion worth of mortgage backed securities. In addition, Congress approved a widely popular $8,000 “first time home buyer tax credit” to generate more buyers for the market…

Thus, the housing sector has shown improvement (with the government holding its hand) since the beginning of 2009, but will this re-growth carry on through 2010? Highly debatable. The Fed’s mortgage buying will cease by the end of March, and the first time home buyer tax credit expires at the end of April. Without government support, it’s hard to believe the housing sector has the capacity to not only stand on its own, but grow. In addition, other factors will hinder housing market growth such as a roughly 10% unemployment rate, the flooding of the market with an unwanted supply of newly foreclosed homes, and the lowest consumer confidence (as of Feb. 23) since April, 2009.

Only time will tell the fate of the housing sector in 2010. Until then, speculation shall rule. However, if the government isn’t ready to catch a falling housing sector halfway through 2010, total economic recovery may stay out of sight.


Alan Shaw
Group 2

Private Equity Eyes the East

With the announcement that the Carlyle Group, the Washington, D.C. based
private equity firm with strong ties to the Bush's, Saud's and the global
power-elite, announce its plans for a new yuan-denominated fund, everybody
took note. Foreign PE wants a slice and and sees yuan-denominated funds as
a way to gain competitive advantage in the Chinese markets which heavily
regulate foreign capital. Some view yuan-denominated fund raising as a
silver-bullet solution to both the myriad of regulations that govern the
use of foreign capital as well as the desire to gain exposure to the
break-neck pace of growth in the Chinese economy which grew 8.7% last year.

Carlyle isn't the only one who wants a piece of the pie, Kohlberg Kravis
Roberts & Co (KKR) and Texas Pacific Group (TPG) announced yesterday that
they are in talks to jointly acquire China International Capital
Corporation (CICC) from Morgan Stanley. Whether or not they will
successful against the heavily favored by regulation and well-connected
local competition remains to be seen. However, one thing is for sure,
there is no shortage in demand for gaining access to the Chinese economy,
which has continued to rapidly develop while the developed word has
stagnated in the aftermath of the financial crisis.

Authored by Stephen Balaban

Greece Update

Greece has just delayed its bond sale, as it negotiates with the EU on budget targets a Bloomberg report stated. The nation is likely holding out to garner some concessions regarding the proposed spending cuts its neighbors are trying to enforce. Greece intends to reduce its budget deficit by 4 percentage points this year, and return it to the 3 percent limit set by the EU sometime in 2012. It is anticipated the nation will sell $6.8 Billion in bonds as early as next month.


Greece is struggling under its current debt, and is making every attempt to borrow at reasonable levels to meet its current needs. 20 Billion of redemptions are anticipated by the end of May, and the country is estimated to need at least 53 Billion more Euros through the course of the year. If no progress is made, Greece may have to seek funding from the IMF in mid-March. Without a guarantee from the EU, it is estimated that Greece will have to offer a premium of over 400 basis points to German bunds.



http://www.bloomberg.com/apps/news?pid=20601087&sid=aEyJBXEF0zjw


Group 6

What Should We Learn from Wal-Mart’s Numbers?

According to Yahoo! Finance, the largest retailer in the world reported a 22% increase in its fourth quarter profit, citing cost cutting and inventory reduction as the main drivers in bottom-line success. However, this only paints a portion of the picture. Although total sales rose nearly 5% to 113.6 billion, same-store sales, which is often a more important measure of customer sentiment, fell 1.6%.

Current CEO, Mike Duke, who’s now entering his second year at the helm, said in a statement that he expects continued strong growth in international markets, but struggles at home in the United States. Unfortunately, many business leaders are echoing similar beliefs: Emerging markets continue to emerge while the United States remains tempered by sluggish economic prospects.

Looking deeper into the results, it becomes clear that top-line declines can be attributed to lower prices across the board, specifically in groceries and electronics. Industry experts are saying that this deflation has had to occur because people who typically shop at Wal-Mart may still be facing dire economic conditions and won’t shop if they believe they are paying more for goods than in previous years.

Although Wal-Mart is trading down today, this may be a good sign for the broader economy. It may be true that people who were shopping at Wal-Mart throughout 2008 and 2009 have decided to shop at higher end retailers and smaller grocery stores. After listening to CNBC this morning (February 18, 2010), Darden Restaurant CEO seemed positive about the prospects of his restaurant’s target customer, who according to his beliefs, make anywhere from 50,000 to 80,000 dollars per year. So, while Wal-Mart may be suffering slightly, there is potential for a broader economic recovery as well.

BY GROUP 8: Alex Harris, Brandon Lebowitz, Kevin Ondyak

The S.E.C.'s At it Again

The destructive force of the 2008 financial recession was nothing to be trifled with. After sifting through the flotsam and jetsam of various companies' and funds' remains, both businessmen and lawmakers are desperately searching for ways to mitigate such disasters in the future. While the primary concern for many on Wall Street has been getting the firm they work for back in the black or clambering out of their fund's BBB rating, the government has decided this is the opportune time to reach it's hand into America's financial affairs. One may ask, "How can the government prevent such recessions from happening again? Hasn't the Fed been taking care of this problem with interest rate cuts, bailouts, and executive compensation cuts?" Yes, but the extent of success has been limited, at least in the short term. However, hen looking around the table of government entities, it is clear that one body has been stepping up their game recently.

That's right, the S.E.C. has become a legitimate force to be reckoned with. Not only have they been making headlines with their massive Galleon Group bust and sizzling snapshots of their ringleader, Mr. Raj Rajaratnam (so affectionately dubbed "RajRaj") doing the perp walk with some blue-coated, Federal agent badasses, but they have also been revamping their internal policies for future crisis control. As an emergency precaution during the later months of 2008, the S.E.C. placed a ban on financial transactions resulting in what is known as "shorting" or "short-selling" in an attempt to control traders' ability to profit on the loss in value of equities and securities.

After the tornado siren had been turned off and the recession was considered "over," it would be safe to assume that financial activity should have resumed a somewhat normal modus operandi. Not quite. The S.E.C. has begun discussing permanent policies to be enacted that would severely limit short-selling on a hush-hush basis, meaning that more transactions will have to be disclosed to the public in order to diminish the sudden and uncontrolled tank in stock prices that often result from large transactions.

This proposed action has many investors in an uproar, including Richard Baker, president of Managed Funds Association. When discussing the negative implications of such action, the president stated, "This independent study demonstrates that recently adopted public disclosure rules in the U.K. have impeded equity market liquidity, decreased trading volumes and interfered with efficient price discovery in affected stocks, driving up transaction costs for mainstream investors and burdening businesses with a higher cost of capital."

Regulators within the S.E.C. are keen on coming to an agreement whether to pursue such action, but at this time one can only speculate how far the government will go to ensure "financial stability" in America.

Gabriel C. Suprise, Group 2

The Market Sell-off

The market has been noticeably more volatile during the last two weeks during a sharp downward trend. But how much of this is reflecting the strength of the economy? The ISM Manufacturing Index, new jobless claims, and UM's Consumer Sentiment are as strong as they have been since 2008, and the fact that the Federal Reserve is becoming relatively more hawkish suggests the economy is strong enough to withstand less monetary stimulus. So where is this volatility coming from? Some possible reasons include uncertainty over how and when the Federal Reserve will tighten monetary policy, the discussion of a international bank tax, and the potential bailout of Greece. Most of these issues will probably take several months, if not years, to resolve.

Group 5

Fed Looking to Withdraw Liquidity

Chairman Bernanke came out today to discuss the possibility to increasing the Fed's discount rate in the near future. The Fed's discount rate, cousin to the more famous Fed fund's rate, is essentially the interest rate at which banks can borrow directly from the Fed.

His raising of the rate would signal that the financial sector is stable enough to operate without any more aid from the Fed, and that upward revision to the Funds rate is on the horizon as well.

In addition, he talked about raising the rate at which the Fed pays interest on bank's required reserves, another measure to withdraw liquidity from the financial system. Taking both actions together, it would seem that Bernanke is bullish on the state of the US economy, and that he is beginning to anticipate, if not take a tougher stance, on inflation.

Group 2

Greece

Talks have begun to develop regarding the idea of other European governments agreeing "in principle" to help Greece. This will most likely come through loan guarantees. It really is the last option as the, "European Investment Bank has ruled out its involvement in a bailout, direct EU aid has been eliminated as a possibility and the European Commission vetoed suggestions of IMF involvement. If Greece is indeed bailed out, it will mark the first rescue of a eurozone member since the currency was launched 11 years ago." Will they follow in the footsteps of the U.S.?

Group 3

WSJ Article

Profiting from Bailouts

Henry Paulson, former Treasury chief, and Warren Buffett believe that the bank bailout was a success and could even turn profitable for the U.S. government and taxpayers. Paulson recently published a book, "On the Brink: Inside the Race to Stop the Collapse of the Global Financial System," defending the government's reaction to the economic crisis. At the Greater Omaha Chamber of Commerce's annual meeting, Paulson, supported by Buffett says, "As bad as this is, when we look back it's not as bad as it could have been." (considering Buffett contributed to helping out some banks). Paulson supports many actions taken by the government in the bank bailout, and believes that Wall Street is corrupt and executive pay packages are too high. Buffett supported Paulson throughout the speech, adding his praise for Paulson, the Bush administration, the new Obama administration, Ben Bernancke, and Timothy Geithner for their actions during the crisis.

Group 3

Yahoo Article

A Sweet Ending?

Amidst much of last year’s gloom, unstable markets, dire economies, corporate bankruptcy and scandal there was one light which managed to get us all to that glorious light at the end of the cold, dark tunnel; witty euphemisms regarding the potential merger between Kraft & Cadbury. It scintillated many market watchers with its drama, the give and take of the first offers, the noble spurning of Kraft’s love by Cadbury CEO Todd Stitzer, even in lieu of a 30% market premium. Though he stood to gain handsomely from the offer he knew Cadbury was a classy girl, it took more than a few pretty pence to win her over. Then in November Kraft formally began its attempts at a hostile takeover. As the tenuous courtship wore on a new suitor was found in Hershey’s. Yea the plot thickened as the two competed for the love of her chocolatey goodness, oh how they coveted her emerging market penetration, just thinking of those growth prospects… But it was not to be between Hershey’s and Cadbury’s, how could it? They were both confectioners, cousins of the first degree; if the authorities cried monopoly their young courtship would be shattered. It soon became apparent that in the end Hershey’s sugary appeal was no match for Kraft’s girthy, gargantuan pocketbook. Many thought Kraft would have her hand when CEO Irene Rosenfeld opted to offer her loads of sweet, sweet equity when, out of nowhere, a cameo appearance by the notorious old man Buffett seemed to throw the whole affair back in limbo. Buffett felt that Kraft was too good for her stating, “I think Kraft is undervalued, I just don’t think it is as undervalued as it was three weeks ago” (The Daily Telegraph). As the bell tolled midnight Kraft made a delicious offer directly to Cadbury’s shareholders, increasing the dowry by 10%, 60% of which was cash, one they simply could not refuse. With the culmination of this tenuous courtship begins a new marriage, the British damsel and the American goliath, hand in hand. When asked as to his feelings towards this unholy and unwanted union Papa Buffett bluntly voiced his disapproval, “If I had a chance to vote on this, I’d vote no”, when asked of his feelings towards the deal’s orchestrator he said, coldly. “I like Irene… She has been straightforward with me, we just disagree.” As this drama concludes there are sure to be postcoital rumblings from both sides, perhaps a headline here or there, maybe tales of the angry love affair between Rosenfeld and Buffett. However, it seems likely that without journalists using witty wordplay to relate aspects of candy to these two companies’ relations, business publications everywhere will revert to their cold, lifeless state, preaching economic doldrums and doom.
Readers at many of the streets firms will manage to get through these hard times, reportedly Goldman Sachs executives are using excessive profits to wallpaper their offices in $100 bills and avoid paying their inevitable exorbitant income taxes. Unfortunately, for some firms the only thing left were those witty turns of phrase. An anonymous employee at Citigroup said, “I don’t know if I can take it anymore. I didn’t mind when we were in the red in 08’, I mean everyone was, right? But in 09, I mean some of those guys are having record years and all I had were those awesome articles where someone would talk about Kraft’s ‘sweet’ offer. I mean honestly, knowing that there were brilliant people out there who had the stones to week in and week employ candy based double entendre, it gave me hope man. The thing with Buffett, had me on pins and needles, he is easily ten times more unpredictable than Tom Cruise, now it’s done, I knew it couldn’t last forever, but I could dream. Now they are saying we might not make money in 2010…” He was silent thereafter, but the listless look in his eyes and the conspicuously placed noose said it all. Yet hope remains, the uptick in Hershey’s stock was dubbed ‘sweet’ by the journal; perhaps if U.S. steel continues to rise some savvy correspondent might title an article ‘Hard not into Buy Steel’ and start the cycle anew, but we can only hope such wit is still out there.

Joey Kryza
Group 2

Not Just Your Average Search Engine

In a rare strategic move, Google has taken the step of applying for approval to become an electricity marketer. This will allow the Internet behemoth to buy and sell bulk power at market prices, similar to major energy traders.

With the formation of Google Energy LLC, Google’s management is utilizing its right to act as a power marketer, purchasing electricity and reselling it to wholesale customers and trading in the bulk power markets. Some believe this could be an attempt to vertically integrate their energy usage, considering the great extent of power they use to keep their servers functioning properly.

From our perspective, this could also be early indication of Google moving into the realm of finance. Could they potentially utilize their unparalleled group of programmers to create high frequency trading algorithms? We don’t see why not.

http://online.wsj.com/article/SB10001424052748704854904574644721659940760.html

Posted by Group 8