Michigan Interactive Investments, LTD.

Why We Don't Rely on Yahoo!Finance

2010-05-15T17:16:00.003-04:00

No explanation needed (See "Headlines"):

Is the IPO Back?

2010-03-26T21:42:00.000-04:00

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

2010-03-25T17:35:00.001-04:00

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

2010-03-25T11:36:00.000-04:00

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

2010-03-24T21:53:00.000-04:00

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

AIG Sells American Life Insurance Division

2010-03-22T15:30:00.000-04:00

In an attempt to expedite the process of paying back government debt, giant insurer AIG will sell its American Life Insurance Co. division to MetLife for about $15.5 billion in cash and shares as well as its AIA insurance unit in Asia to U.K. insurer Prudential PLC for $35.5 in cash and shares. Although both sales will generate approximately $31.5 in cash to pay back the New York Fed, some are worried about AIG being able to generate further capital after selling off these two valuable divisions.

AIG has announced it will withhold $21 million in bonuses from current and former employees of its Financial Products unit to reach its $45 million giveback target. The giveback target was set as a response to public outcry over $165 million paid to employees following the $182.3 billion taxpayer-funded bailout. Thus far, AIG has recovered about $40 million of the giveback target.

The new AIG intends to focus on selling property-casualty coverage to corporations as the core of its business after selling off its major life insurance units. Despite the progress, the American taxpayer’s role as an investor in AIG is still uncertain. There are concerns about the profitability of AIG’s property-casualty operations due to its recent charge to cover the claims of previously sold policies. Liberty Mutual and Chubb Corp have said that AIG lowered prices to levels that may be inadequate to cover claims. Analysts have speculated that AIG may need more than a decade to pay back all of its U.S. bailout obligations.

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

2010-03-15T21:16:00.000-04:00

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

2010-03-11T00:50:00.002-05:00

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

2010-03-10T17:09:00.002-05:00

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?

2010-02-25T15:28:00.002-05:00

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

2010-02-25T10:44:00.001-05:00

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

2010-02-24T20:57:00.001-05:00

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

2010-02-24T09:41:00.003-05:00

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?

2010-02-18T10:32:00.001-05:00

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

2010-02-17T21:31:00.002-05:00

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

2010-02-11T18:11:00.000-05:00

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

2010-02-11T00:04:00.002-05:00

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

2010-02-10T23:36:00.000-05:00

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

2010-02-10T23:28:00.000-05:00

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?

2010-01-21T16:44:00.001-05:00

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

2010-01-13T22:24:00.001-05:00

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

Investor Sentiment Shifts on Gold and the US Dollar

2009-12-10T18:33:00.001-05:00

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

CIT to Emerge From Bankruptcy

2009-12-10T16:23:00.000-05:00

On Tuesday, CIT Group Inc. won approval fo a restructuring plan that will shed approximately $11 billion in unsecured debt from its books, and will allow it to exit bankruptcy. The commercial lending giant initially filed for Chapter 11 on November 1st hoping to exit bankruptcy court quickly and without lengthy fights from creditors. CIT listed assets of $71 billion with nearly $65 billion in liabilities, making it one of the largest bankruptcies on record. Yet the company had secured strong creditor support for its prepackaged Chapter 11 reorganization plan prior, allowing a quick and expedited bankruptcy process that lasted a mere 5 ½ weeks.

As a consequence of the Chapter 11 reorganization, shareholders will likely be wiped out. Furthermore, the U.S. is unlikely to recover much, if any of the $2.3 billion in taxpayer money used to keep CIT afloat. However, senior unsecured debt holders will receive about 70 cents on the dollar plus equity in the new company. Preferred stock holders may also recover some of their losses depending on the value of CIT’s new stock. Equity in the new company is expected to be worth $5 to $11 billion.

Salary Insanity

2009-12-10T00:17:00.002-05:00

“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

Western & Asian Car Company Alliances

2009-12-09T23:47:00.003-05:00

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

Stimulus Plan Part Deux

2009-12-09T23:36:00.000-05:00

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.

Changes in Carried Interest Tax Law

2009-12-09T21:15:00.001-05:00

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

Citigroup's TARP Payback

2009-12-09T21:12:00.000-05:00

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…

2009-12-09T16:30:00.001-05:00

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

A Proposed Kraft-Cadbury Combination

2009-12-03T16:15:00.003-05:00

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.

Link: https://news.fidelity.com/news/news.jhtml?cat=Top.Investing.RT&articleid=200912031248RTRSNEWSCOMBINED_TRE5B24GF_1&IMG=N

Loeb and Banco Popular

2009-12-03T16:14:00.000-05:00

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

How High Will Gold Go?

2009-12-02T23:39:00.002-05:00

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

November Same-Store Sales Preview

2009-12-02T20:56:00.001-05:00

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

Early Signs from the Holiday Shopping Season

2009-12-02T17:08:00.000-05:00

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.

Hedge Fund Assets Increase in October

2009-11-22T13:18:00.001-05:00

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.

Group 6: Warren Doubles Down

2009-11-19T13:48:00.002-05:00

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.

Goldman

2009-11-19T13:20:00.002-05:00

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

2009-11-19T02:03:00.003-05:00

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

Flashback to the '80s: Insider Trading

2009-11-19T00:26:00.001-05:00

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

Is The VIX Providing Us An Accurate Forecast of Market Volatility?

2009-11-18T19:37:00.001-05:00

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.

High-yield sowing the seeds of underperformance?

2009-11-16T04:34:00.007-05:00

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

Wal-Mart Exceeds Estimates, Sees Sluggish Holiday Season

2009-11-15T19:55:00.001-05:00

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

Mutual Funds Time Market

2009-11-14T13:41:00.001-05:00

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

Hedge Fund Watch – Watching the Smart Money – Kraft Acquiring Cadbury

2009-11-13T14:40:00.002-05:00

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

Bear Stearns Hedge-Fund Managers: Fraudulent or Plain Incompetent?

2009-11-12T11:46:00.000-05:00

After Yesterday’s case, former Bear Stearns hedge-fund managers Ralph Cioffi and Matthew Tannin were found not guilty of securities and wire fraud. Prosecutors claimed that the two deceived investors about the deteriorating health of the funds, while removing their own partner capital at the same time due to the funds’ dismal performance. The failure of this fund in 2007 foreshadowed the proceeding collapse of Bear Stearns less than a year later.

The case was based upon a series of e-mails that were exchanged between Cioffi and Tannin that seemed to contradict the positive attitude that they were projecting to their clients. A message from Tannin in April 2007 to Cioffi stated that he knew the subprime market was ready to crash and suggested closing the funds. However, the defense stated that the e-mails were taken out of context and much of the prosecution's case was built on the current bias against the financial industry following the subprime mortgage crisis.

As popular media continues to bash the financial services industry, and as anti-Wall Street rhetoric remains common on Capitol Hill, it is highly encouraging then to see an impartial jury weigh in on such a case, devoid of biased preconceived notions. However, what Cioffi and Tannin lacked in fraudulent intentions, they surely made up for in their sheer inability to effectively manage risk. Though not criminally liable, Cioffi and Tannin were irresponsible in their roles as financial fiduciaries, and as a result lost a total of $1.6 billion for their three hundred plus clients.

Benmosche

2009-11-12T09:16:00.002-05:00

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.

If Benmosche steps down it would be AIG's fifth CEO change in less than a year and a half. This is both bad because it shows the company cannot find stability in upper management and good because it shows that the company is capable of turning profits as it has done for the last two quarters even with this instability. This might suggest that even if Benmosche steps down, there might not be much of a change in the every day operations at AIG. Secondly, this is not only a problem facing AIG, but also other institutions bailed out by the government. For example Kenneth Lewis will step down at the end of 2009 as the CEO of BoA for similar reasons and BoA's directors are having trouble finding a replacement for him.

-Group 3
WSJ Article

HP buys 3COM for 2.7B

2009-11-12T00:03:00.005-05:00

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

2 big m&a deals this week

2009-11-11T23:30:00.003-05:00

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

Buffet's Burlington Bet

2009-11-11T14:50:00.000-05:00

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.

Spin-Offs, Stubs and Liquidations

2009-11-10T13:15:00.004-05:00

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

Time to Short Gold?

2009-11-08T20:06:00.004-05:00

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.

By Alex Green

Treasuries Prices Remain High

2009-11-07T22:05:00.002-05:00

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

Good news for Ford?

2009-11-04T22:36:00.000-05:00

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

Buffet's Buy

2009-11-04T22:31:00.003-05:00

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

Companies Hoard Cash

2009-11-04T15:08:00.000-05:00

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.

Who is Paolo Pellegrini?

2009-11-04T14:21:00.001-05:00

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.

Gold Extends Run to Record Highs

2009-11-04T14:20:00.000-05:00

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

Ford is Revving...

2009-11-03T21:08:00.004-05:00

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.

Balance sheet improvement is imperative for the company in the coming quarters. Fords revolving credit facility has extended the maturity from 2011 to 2013 in exchange for reducing lenders’ commitments and increasing interest margins and fees. Ford is seeking to raise additional capital with a convertible debt offering and an equity distribution plan. Its decision to raise another $3b from investors speaks to the need to fix the balance sheet. We feel like any other auto maker, it needs a consumer-led recovery that isn’t dependent on the government.

Ford expects to be solidly profitable by fiscal 2011, excluding special items, with positive operating cash flows. According to Reuters estimates, analysts are expecting a net profit of 3.768B for fiscal 2011.

Friday Market Freak Out

2009-10-31T16:29:00.002-04:00

Following an unexpectedly strong GDP report and a consequent 200 point rally in the Dow, the blue chip index took a nosedive on Friday, taking out Thursday's gain plus another 50 points for good measure; which begs the question, are investor's taking profits, or simply unconvinced about the data?

To answer the question, consider the following scenario.

Pretend for a minute that it's Wednesday, the day before GDP is due to be released. You know that the Dow has moved lower by 209 points from Monday's open to Wednesday's close, with the market anticipating the GDP report, and with Goldman Sachs reducing their forecast to 2.7%. Surely a good number on Thursday would wipe out all of the previous days' losses, and convince skeptics that the market's huge rally lies on a solid foundation.

Now consider the following facts:

1)The market did make a huge move post GDP results, but fell 9 points short of making up for the losses clocked over the past 3 days, failing to even penetrate the 10,000 mark.

2)Volume on Thursday's rally was lighter than on Friday's decline. In other words, more bears than bulls.

3)It's been 13 days since the Dow broke, and closed above 10,000. However, the index has only been able to close above that (much hyped) level on 5 of those days; which makes the inability of Thursday's GDP report to provide sufficient catalyst to drive the market back above the mark even more telling.

4)As we mentioned in our presentation ,GDP growth without Cash for Clunkers was only 1.84%.

Putting everything together, it seems that investors have started to really doubt the market's ability to continue its phenomenal run, with the bears back out in force.

-Group 2

The Russian Risk.

2009-10-12T15:58:00.002-04:00

As a staunch proponent of non-US investing, I recently received the following video regarding investing in Russia, one of the four BRIC (Brazil Russia India China) countries, and the experience of Hermitage Capital, the most prominent Russia-focused hedge fund in the world. I wish the video, posted below, was a joke. It's not.

Link to Last Post

2009-10-04T17:22:00.001-04:00

Here's the link to the study. It links to a PDF file.

http://www.google.com/url?sa=t&source=web&ct=res&cd=1&url=http%3A%2F%2Fwww.stanford.edu%2Fgroup%2Fgreendorm%2Fparticipate%2Fcee124%2FTeslaReading.pdf&ei=FwbJSvCKGpXgNZ21gPMH&rct=j&q=the+case+for+electric+vehicles&usg=AFQjCNH7dlLTVSCnivzMvXchifcY00k2Qw&sig2=2JR668RtYyLh3L7laCQ2lw

Electric Cars: More Efficient Than You Think!

2009-10-04T16:39:00.006-04:00

Yesterday a convincing argument against electric cars was made. I'd like to provide a simple counter argument based off of a study performed by Tesla Motors.

First off, the math performed by Professor Salmeen can easily be refuted by the Tesla Motors study. In the Tesla Motors study, electric cars are presented as far more efficient than gasoline cars. While Professor Salmeen's argument centers around mathematic estimates (as implied by his title), Tesla Motors provides concrete data from actual cars.

Also, the environmental benefits of electric cars were overlooked. We know the environmental detriments gasoline cars have on our society. Although it may be currently unclear whether electric cars are more efficient than gasoline cars, the fact remains that the end user can ultimately choose which type of electricity source to use to power their car. Imagine, powering your car with solar or wind energy!

Lastly, increased use of electric cars may change the composition of energy markets, but will energy prices really increase? Electric cars are becoming more efficient with new technologies. People are harnessing unused forms of energy (wind and solar). Taking these concepts into account one could argue that electric cars could lower energy prices in the future.

Although some of my points are based off of Tesla Motors, an electric car company, they present concrete numbers from concrete studies based on actual cars. I'm confident that with the increased popularity in electric cars, we will discover the answer to whether electric or gasoline cars are the way to go.

Electric Cars are NOT the Answer: Why Electricity Makes as Much Sense as Ethanol

2009-10-03T21:41:00.008-04:00

First Tesla Motors, then the Chevy Volt. Yes, they're cool...but do they make sense?

The answer? A clear no. Below is an image from Irv Salmeen, a Prof. at the Univ. of Michigan.

And this, of course, does not take into account the (notable) increase in prices due to both global demand for the primary fuels for electricity generation and electricity itself.

Is The Economy Leveling Off?

2009-09-10T16:47:00.002-04:00

Each Fed district reports on their economic status in this WSJ article. The very few optimistic arguments include stabilizing economic data and falling unemployment numbers. Unfortunately the U.S. cannot afford to continue to operate at current or even slightly higher GDP levels and unemployment figures have fallen somewhat due to the increase in unemployed citizens that are no longer searching for a job and therefore not considered "unemployed." That does not leave a lot of possitive sentiment left in this article, especially if you are expecting a pullback in the market soon.

http://online.wsj.com/article/SB125251848881396401.html

Summer Legislation about Stock Options

2009-09-08T19:05:00.000-04:00

http://levin.senate.gov/newsroom/release.cfm?id=316060

The Shape of Economic Recovery

2009-08-28T14:53:00.004-04:00

Some interesting research from Morgan Stanley, care of Barry Ritholz:

As much as I (and many others) have been touting the need for a pullback, this picture provides some evidence to the contrary (at least in the near-term).

How to play the coming pullback and subsequent range-bound trading? Look to income-producing investments. In this field, I like BIP, VNO, STHBX, and CHL, among others (I may have positions in any/all of the aforementioned securities).

Citigroup's $100,000,000 Trader...

2009-08-17T14:34:00.003-04:00

http://dealbook.blogs.nytimes.com/2009/07/29/phibro-silent-as-white-house-slams-reported-pay-plan/

This is kind of scary...

2009-08-06T09:14:00.001-04:00

http://www.bloomberg.com/apps/news?pid=20601110&sid=ac9y1xr7yNhQ

I hope housing doesn't get this bad...

For Those of You Who Want To Start A Hedge Fund (Part II)...

2009-07-22T12:22:00.002-04:00

Read the following article about a 23-year-old kid who started a long-short fund a decent amount of time ago... and has made a good amount of money. There may be hope for some of us...

http://iimagazine.com/Alpha/Articles/2236376/features/Merritt-Graves-Undergrad-Hedge-Fund-Prodigy.html

Budget Deficit Passes $1 Trillion

2009-07-13T15:40:00.002-04:00

With a growing deficit and rising unemployment, there seems to be no light at the end of the tunnel, yet, for this recession.

Budget Deficit Passes $1 Trillion

Now I can't Buy a G8...

2009-07-10T14:13:00.013-04:00

This article discusses some of the details of the new General Motors, which finished restructuring in an astounding 39 days. US Taxpayers now own over 60% of the streamlined entity. The new company has rid itself of a substantial amount of debt and unfavorable labor contracts, potentially allowing itself to regain its position as the premier automaker in the US.

Emerging Markets

2009-06-29T08:11:00.003-04:00

For those considering taking a position in Emerging markets, this article discusses how the global recession continues to affect capital flows and may delay the growth of these economies. The World Bank estimates that the developing world will only grow by 1.2% in the coming year.

For Those Of You Who Want To Start A Hedge Fund...

2009-06-27T00:19:00.002-04:00

The following article gives an interesting view of how at least one hedge fund is catering to what may be a more informed and less passive hedge fund investor:

http://dealbook.blogs.nytimes.com/2009/06/26/starting-a-hedge-fund-in-a-shell-shocked-age/

The Answer to Our Economic Woes

2009-06-22T18:10:00.001-04:00

US To Trade Gold Reserves For Cash Through Cash4Gold.com

In the word of DB, Presented Without Comment.

2009-06-13T14:12:00.000-04:00

Who was Smuggling $134bn in US Bonds into Switzerland?

Why We Need a Bigger Real Estate Correction.

2009-06-01T10:55:00.006-04:00

While we are still down HUGE from Dow 14,000, trailing P/Es in the REIT arena are beyond ridiculous. Most would explain this as the market switching from backward looking to forward looking valuations, but how do SO many people really believe these kind of P/Es are justified? For example, big name office REITs:

And people thought the CRE shoe had already dropped...

Lessons to Learn

2009-05-17T22:42:00.002-04:00

A few words from Tom Stanley, without question the top performing mutual fund manager in history:

The Resolute Way: Tom Stanley’s Investment Philosophy

There are many ways to be a successful investor. I have no claim that what has worked for me in the past will continue to work in the future, but I would like to share with you some of the principles I have learned over the past 25 years that have helped me become a better investor.

1. Be a Long Term Investor
Too much emphasis is placed on short-term fluctuations. It is easier to anticipate long-term trends.
2. Have a Flexible Approach
Change is the only certainty and as markets change, one should change as well.
3. Actively Look for Ideas
I find many of my best ideas; they don't find me.
4. Be Skeptical
Check facts directly. Strive to understand the bias and potential conflicts of interest among the sources that provide them.
5. I Eat my Own Cooking
My only stock market investment is the Resolute Performance Fund. This aligns my interests with the rest of the unitholders.
6. I Buy my Best Ideas
I prefer to buy only my best ideas.
7. Filter out the Noise
One of the greatest challenges is to filter out the noise and use only what is relevant.
8. Be Thrifty
Moderate costs facilitate moderate fees. Moderate fees facilitate performance.
9. Outperform by Being Different
To have a chance of outperforming the market, invest differently than the market.
10. Know Your Limits
It is just as important for me to know what I don't know as it is to know what I know.
11. Stay Humble
Stay humble or the market will make you humble.
12. Being Small is an Advantage
It is easier to outperform being small.
13. Apply Spiritual Principles
An important measure of one's success is how much he benefited his fellow man.
14. Investing is Not a Team Sport
The best decisions are rarely made by committee.
15. A Good Card Player Does Not Show His Hand
Confidentiality is essential for successful small cap investing.
16. Too Much Emphasis is Placed on Precision
I don't need exact numbers to make decisions.
17. Be a Contrarian
Being a contrarian is harder in practice than in theory.
18. Strive for Effective Rationality
Do the homework; know the facts; and make decisions based on the facts.

AQR Capital Management

2009-05-06T13:39:00.002-04:00

Read the following letter of valid points written by Clifford S. Asness, founder of AQR Capital Management:

http://dealbook.blogs.nytimes.com/2009/05/05/a-hedge-fund-manager-strikes-back-at-obama/

Tax Havens

2009-05-05T10:45:00.002-04:00

Yesterday President Obama called out the multinationals that are "shirking" taxes by using overseas tax havens. The NY Times article does a good job of covering the background of the argument but one thing it fails to mention is the reason businesses use tax havens or other methods of U.S. tax avoidance. Our corporate tax rates are too high!!

Companies want to be able to compete and it's hard to be competitive when someone in another country can do business cheaper than you can. In the past corporate tax rates didn't have much impact on business decisions because businesses couldn't just get up and move, but that is not the case today. Advances in technology have lowered costs of doing business. The world is flat and information moves quickly.

From the article...

"The top corporate tax rate is 35 percent, but the Treasury Department estimated that in 2004, the most recent year for which data is available, American multinationals paid $16 billion in taxes on $700 billion in foreign income — an effective rate of 2.3 percent. "

I agree this is pathetic but if the corporate tax rate was lower this number would be considerably higher. The only reason people use tax havens is because it is economically viable to do so. The costs of moving the money is still less than paying the ridiculous 35% top tax rate. Let's say the Obama administration lowered the top corporate tax rate to 20%. This would result in more truthful profit reporting and it might even create more jobs in the process. Another potential benefit from a lower corporate tax rate is higher revenues. Actually decreasing the tax rate might put us at a point on the Laffer curve that generates more revenues.

P.S. In the last paragraph of the article Professor Jim Hines from the University of Michigan is quoted on the topic. I had him for Government Revenues (Econ 483?) and I would recommend taking the class if he is teaching it. He is really brilliant and knows everything about the tax code and its revenue implications.

WisdomTree Steps Up

2009-05-02T20:31:00.004-04:00

From the WisdomTree Q1 Announcement:

Commodities

WisdomTree intends to launch the WisdomTree Long-Short Commodity Fund. This will be a commodity fund designed to generate an absolute return through a dynamic allocation to long and short commodity positions.

Alternative

WisdomTree intends to launch the WisdomTree Absolute Return Fund. This fund will seek to generate an absolute return through a dynamic allocation to long and short commodity and financial futures positions.

WisdomTree intends to launch the WisdomTree Long-Short Equity Fund. This fund will seek to give investors “market neutral” exposure to U.S. and non-U.S. equity markets. It will be an actively managed strategy designed to capture potential excess returns between WisdomTree ETFs and comparable capitalization-weighted indexes.

I love to see to a company INNOVATE instead of REPLICATE. Keep it up WT, keep it up.

Accounting for Taxes

2009-04-29T11:34:00.004-04:00

The image below is from Qualcomm's release a few days ago:

Take note of the LAST bullet point. That's right. Check out that tax rate.

One of the Most Important Posts I've Ever Made.

2009-04-28T14:23:00.002-04:00

As DB would say, "Presented Without Comment":

MF on JC

Stop Saying Morgan Stanley Had a "Disappointing" Quarter

2009-04-27T09:46:00.003-04:00

Jeffery Harte, an analyst at Sandler O’Neill & Partners LP, commented in a Bloomberg article (below) that, “What stands out to me isn’t so much that Goldman had a blow-out quarter, it’s that Morgan Stanley had a disappointing quarter".

Disappointing? Revenue was down because they reduced risk in difficult markets. That's not "disappointing", it's prudent. While Goldman was able to step risk up and yield phenomenal trading results, it just as easily could have gone the other way. When it comes to prop trading, it's nice to shoot for the stars when that's your only focus. But when you have the government breathing down your neck about risk taking, YOU HAVE ACCEPTED TAX-PAYER MONEY, and the capital markets in which you trade are FAR from normal, reducing VaR not only seems prudent, but should have been a requirement for recipients of TARP funds. If you're going to take risk, don't do it on my dime.

Bloomgberg Article

Tech acting funny

2009-04-22T20:49:00.002-04:00

Much is moving in the tech sector.

IBM almost acquired Sun Microsystems, but backed out. Oracle went in immediately after and sealed the deal.

IBM posted bad results, missing analyst estimates. Considering IBM wasnt posting bad results when the financial industry starting going nuclear, this shouldnt have bode well for other tech counters. But...

Google beat estimates .(amazing considering their reliance on advertising)
Apple beat estimates.
EBay beat estimates. (also amazing)

More reports are coming due, but consider that Apple's products fall firmly into the expensive and luxury good categories.

Also consider that both Google and EBay rely heavily on individuals clicking on their ads and closing auction deals respectively. Once again, the connection to discretionary spending is obvious.

Isn't the country in recession?

Why Bank of America's Numbers Were TERRIBLE

2009-04-20T15:44:00.003-04:00

Net Income was $4.2B:

That's right, out of 4.2 billion in net income, 4.1 billion can be attributed to one-time events. Even worse, $2.2 billion of that is from the collapse in MER's debt, which allows BAC to book a gain (yes, I realize this is absurd).

Next, we have our favorite "we pre-released results to show you how great we're doing, but we really hope you don't look at the actual numbers" company, Wells Fargo. Stay tuned.

Bear Markets Alike: The 1970's and Today

2009-04-18T13:28:00.006-04:00

It's a scary thought that the Dow is down 22% from where it was a decade ago and would have to rise 74% to reach its peak in Oct '07. This article shares the views of long-time investors who see similarities between today's slump and that of the 1970's . After reading the article, it may become surprisingly apparent how well our country has handled the current economic crisis and not allowed it ruin Wall Street all together.

Flashbacks of the 1970s for Stock-Market Vets

A Good Time to Get Into The SKF?

2009-04-15T16:24:00.002-04:00

The ProShares UltraShort Financials ETF has fallen 59% in the past 3 months. Is this a good time to enter into this ETF? A key reason why this seems logical is the upcoming bank "stress tests." These tests, which will presumably test financial institutions' solvency, may create some selling in financials if poor results do appear. Furthermore, as the transparency (or lack thereof) of these tests have been highlighted of late, investors may get shaky and decide to start taking out profits from the recent financial rally. If traded properly (with appropriate hedges), such a play could make a nice return...

Have we seen the Bottom in the Economy?

2009-04-14T23:52:00.002-04:00

Retail sales came out worse than expected today, bringing into question how the 2nd quarter of the year will turn out. Purchases fell 1.1%, with only pharmacies and grocery stores posting a gain. After a five week rally, this type of data shows that we may still have some time before the economy turns for good. Some analysts blamed the extremely large job losses in recent months as the cause of the consumer's inability to quickly bounce back, perhaps indicating the worst of the recession has yet to be seen.

At the same time, Bernanke and Obama have spoken in favor of the long term outlook for the economy. In either case, after the strong market we have seen in recent weeks, a short-market position or at least a partial hedge seems very appropriate.

http://www.bloomberg.com/apps/news?pid=20601103&sid=a_vFy3PVrCB4&refer=news

Goldman to Payback TARP Funds

2009-04-12T22:36:00.004-04:00

There are rumors that Goldman is looking to repay their $10 billion loan from the government as soon as they can - possibly by raising capital through selling new shares. Goldman has shown interest in repaying TARP debt as soon as they could for some time. There seems to be a few reasons that they are doing this:

Show strength in the firm by issuing stock in the current environment
Putting pressure on other firms to repay TARP funds
Increase their ability to recruit top talent by being able to offer higher bonuses and issue visas

Be sure to keep an eye out in the news next week for an official announcement from the firm.

Sign of Life for PE Industry?

2009-04-11T01:06:00.003-04:00

A couple of interesting acquisitions/acquisition rumors have caught my eye lately. First off, Barclays has finalized its deal to sell its iShares unit to CVC Capital Partners for $4.4 billion. This is a pretty decent-sized transaction for the PE industry and is being financed mostly by Barclays. The other bidders in this deal: Bain Capital, Hellman & Friedman, and Goldman Sachs. That's an impressive lineup.

As if this isn't enough, Verizon is also receiving a bid for its mobile-phone operations from the Blackstone Group, and a joint bid for the same unit from KKR/Carlysle Group. Could the purchase of established assets be the latest trend for PE firms? Such a situation seems like a win-win for all: PE firms finally put their capital to work and try to fulfill their reputation of having strong business acumen, and firms who receive bids get a good chunk of change to (1) buy-back stock, (2) increase dividends, (3) pay off debt, or (4) make acquisitions in turn.

Listen to the man who Broke the British Pound

2009-04-07T18:25:00.002-04:00

George Soros, man of controversy.

Forex bets that made him rich-er overnight made the Bank of England look like a bunch of amateurs. Similar bets (although unproven) have been said to play a critical role in destabilizing asian markets in their crisis of 1997.

Whatever your view of him; irresponsible global citizen or brilliant trader, greedy and heartless capitalist or (again) brilliant trader,no one amasses 11 billion dollars without having a certain amount of talent, smarts and raw nerve.

So... moral of the story.

He says its a bear market rally, citing the lack of any traction in the economy with regards to growth as the primary reason. Sound logic, by any means. Accounting rules have been changed to the benefit of banks. It doesnt mean theyre profitable and out of the woods. It means they will spend a longer time deluding themselves.

Listen to the man.

Unemployment continues to drop

2009-04-04T00:07:00.002-04:00

US unemployment numbers jumped again in March to a 8.5% jobless rate. Despite this negative news, the market was still able to close in positive territory. However, I question the sustainability of the rally if unemployment numbers continue to drop. In the metro Detroit area, the continuing struggles of the big 3 and the waves upon waves of layoffs has completely destroyed high-end home prices. For example, the real-estate market in Oakland County is in a freeze, as the only houses that are actually sold are those that have cut the price to way below market level. With unemployment not seeing any stability, as various economists project the jobless rate could drop to as low as 10 to 10.5%, this rally may very well fall short. The equity market will indeed recover before signs of bottom in unemployment, but we are not even at that stage yet.

Mark-To-Market

2009-04-02T15:02:00.002-04:00

Today, the FASB announced a change in accounting regulations that will allow banks to value their "toxic" assets by an "orderly" transaction policy, basically trying to mitigate the effects of excessive write-downs caused by inactive markets. In the short term, this should be very positive for the market as the change came in time to hit Q1 earnings. Longterm, however, it reduces the clearity of valuing the assets which many believe may prolong the process of delevering that has already occurred for the past year.

A summary of the changes can be found here:

http://www.reuters.com/article/ousiv/idUKTRE5314PX20090402

Exodus from Goldman?

2009-03-31T17:10:00.002-04:00

What is going on at Goldman Sachs? It seems that financial minds are not seeing Goldman in the same light as they used to. Today, three of Goldman Sachs Asset Management's heads departed from the firm. Furthermore, yesterday, the Oracle of Omaha's favorite investment banker, Byron D. Trott, left the firm to open up shop. Are these departures simply a sign that the executives have gotten bored of Goldman and are feeling rather entrepreneurial? Are paychecks no longer that great? Or, is there another reason for the departures from 85 Broad? One thing remains: if Goldman is hiring, I'll be in line waiting for an interview...

Read about the hedge fund managers here: http://dealbook.blogs.nytimes.com/2009/03/31/hedge-fund-managers-leave-goldman-sachs/

Read about Mr. Trott here:
http://dealbook.blogs.nytimes.com/2009/03/31/goldman-loses-but-hold-the-pity/

Oil in the Long-Run

2009-03-31T00:43:00.006-04:00

Crude prices have been on a roller coaster ride in the past year. Although oil is up 54% from its low of $33.87 on February 12, it is certainly well below its all time high of $147.27 since the summer.

However, the current financial crisis and the corresponding economic downturn may have caused the market to undervalue oil - similar to the run up in 2008 - despite the fact that oil is already up 17% this year.

In consideration of dismal demand, here are a few convincing arguments why oil is poised for another bull run in the coming years:

1. Falling oil supply: recent data from the Cambridge Energy Research Associates confirms prevalent industry and market opinions that a considerable proportion of supply growth is at risk, representing a fundamental catalyst for an increase in crude prices in the future. The report claims that nearly 7.6 million barrels of oil a day, or 8.04% of current total world oil production per day, is threatened due to low or canceled investments in oil and gas production.

2. Anticipation of inflation: money flooding into the system due to federal stimulus programs will eventually lead to a flight to commodities in fear of inflation following economic recovery.

3. Persistent and unabated demand from China and India, possibly with no feasible alternative for the next 3 to 5 years.

Madoff: A breakdown

2009-03-29T21:44:00.003-04:00

Assume that ol' Bernie started his ponzi in the 1980s, and he pilfered $10 bn (very conservative estimate) straight into his pockets...
He would have earned:

$1.6 million / workday
$200,000 / hour
$60 / second

and they said that banking was the place to be in during the bull market...

Is Obamanomics the answer?

2009-03-28T17:14:00.003-04:00

Government aid in the past has been an injection of capital into an area of the economy that does not necessarily constitute as an efficient use of that capital. The question is whether Barack Obama can change the way we view federal aid in times of economic duress. Robert Reich certainly supports the president's actions thus far:

Obamanomics Isn't About Big Government

Strength in China

2009-03-28T02:31:00.002-04:00

The recent rally has bears labeling it as a bear market rally and bulls screaming that the bottom has arrived and we are in the midst of a fierce bull market. If you are still skeptical about the shape of the US economy, maybe it's time to look at some actions taken by China, a country actually serious about stimulating its economy and actually creating jobs.

On Thursday, Solar stocks had the best day in a long time, as large Chinese Solar names like LDK and STP rallied over 40% on the news that China would launch a new government subsidy for clean power systems. Solar projects larger than 50 Kilowatts would be eligible for a subsidy of $2.90 per watt. This would go towards covering the actual cost of installation of the panels, thereby attempting to boost demand, which is the main plague on the solar names, despite the attempt by some analysts to blame oil prices. This action can be seen as a real stimulus for the solar names and affirms the Chinese government's desire and ability to help its economy.

In addition, actual citizens in China are benefiting from the new government plan to sell "spending tickets", which can be used to purchase certain domestic goods. For example, a $100 "spending ticket" may only cost a citizen $80 to purchase. This plan actually increases consumer spending and will stimulate the economy, probably more effectively than building bike trails. The idea was first implemented in Taiwan, where the government handed out free "spending tickets" to every citizen. The China plan is a slight modification, requiring citizens to contribute as well. The best part is that the Chinese government can actually afford the stimulus.

Bears Beware

2009-03-26T23:43:00.002-04:00

While fundamental problems will likely persist for some time, regulators have a few options left that could put serious upward pressure on the markets. A revision in the Uptick Rule or the mark-to-market accounting policy could send the markets soaring higher, making a directional play in the current environment difficult.

The Notorious AIG - Scorn in the USA

2009-03-23T14:17:00.002-04:00

The Daily Show With Jon Stewart

M - Th 11p / 10c

The Notorious AIG - Scorn in the USA

comedycentral.com

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Important Things w/ Demetri Martin

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