Mutual Funds Time Market

To address the concerns of investors that mutual funds are not adaptable enough to hold their own in a down market, a number of funds have taken a more dynamic approach to portfolio allocation and have begun to time the market by shifting in between cash and regular investments on a frequent basis. The managers of these funds claim to outsmart the volatility of the market.

This strategy has worked for some funds, such as Ivy Asset Strategy, which has made 14.9% annually for the five years ended this November (about 14% above the S&P 500). For other funds, attempts to time the market have led to increased volatility. For example, the Encompass Fund used the strategy of jumping in between allocation to cash and allocation to investments. It fell 62% last year and gained 110% this year.

Additional problems with the timing the market as a mutual fund are higher transaction costs due to the increase in trading and the possibility that the fund goes to cash before a market rally.

Regardless, these types of funds add some much-needed variety to the predominately buy-and-hold mutual fund market and should be considered in a down market for investors that don’t actively manage their portfolio.

-Erik Ringo – Group 11

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

Background Information

Watching the smart money is very important. John Paulson, hedge fund manger specializing in risk arbitrage (betting on mergers) has doubled his stake on Cadbury and betting this deal will close. Eton Park , run by Eric Mindrich, also has a sizable investment of about 2.5%. A recent SEC filing has showed that Paulson owns about 2% by buying 14.8 million shares.

The bet came after Kraft took its $16.7 billion bid for Cadbury directly to shareholders on Monday, after the board of Cadbury, a chocolate company based in Britain, rejected the offer as too low.

Why the deal will go through

The reason this deal will go through is due to the rules of the deal. The differences between British rules and US rules are likely to bring a quicker close to the takeover battle and force Cadbury to fight this hostile offer on issues of price instead of resorting to the takeover defenses commonly employed in the United States.


The main difference between Britain and the United States in rules is that Britain requires that any bidder that have committed financing at the time of the making of its offer. Because of this, Kraft has been forced to drop its financing condition and replace it with a committed debt facility. In addition, because Britain does not allow due diligence conditions, Kraft has now dropped this condition as well (i.e deal goes a lot faster and costs less).


These regulatory differences, seem really weird, but exist for good reasons. For example, they need these rules because the US needs a special mechanism for a board to protect the corporate enterprise by adopting takeover defenses. In Britain there are substitutes for takeover defenses such as different labor laws so they don’t need one. Thus, again faster and cheaper cost of the deals.

By Group 1

Benmosche

AIG's CEO, Benmosche is threatening to leave because his salary is being too closely regulated by the government. Benmosche has already threatened to step down as AIG's CEO multiple times, and is adding to the unstable atmosphere at AIG. If he's going to step down, he should just stop talking about it and do it. However, if Benmosche does step down, it is possible that AIG's recent recovery efforts will be disrupted. The $10.5 million pay package offered to this already wealthy individual does not seem like that bad of an offer.

He is more complaining about the salary restrictions on his employees. His salary since being finalized, is the largest compensation package approved by the Treasury department. However, he "told AIG’s board last week he may quit because caps on compensation hurt his ability to retain staff", which is more understandable. This is an interesting example of how separate and distinct the businesses and public policy makers are. Whether or not you believe Benmosche is correct in his frustration, it brings up an interesting disconnect.

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

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

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

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

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?

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

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?

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