tag:blogger.com,1999:blog-2892072465924401582024-02-18T22:54:47.799-08:00The Lumpy InvestorA source for creative investment ideas and insightful comments on the financial markets.Lumpy Investorhttp://www.blogger.com/profile/09134871823971138266noreply@blogger.comBlogger154125tag:blogger.com,1999:blog-289207246592440158.post-16901259994092363202012-04-25T18:33:00.000-07:002012-04-25T18:33:13.198-07:00Interesting Rights Offering OpportunityIt’s been awhile since I posted a trade idea so I thought I
would offer up an interesting opportunity I recently came across. While lacking the upside potential of last
year’s tender offer for Norilsk Nickel shares (where one could make essentially
a risk-free $10,000), this trade idea offers the potential for a quick ~6%
return, with minimal downside exposure. <o:p></o:p>
<br />
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On April 18<sup>th</sup>, Ivanhoe Mines (NYSE: IVN)
announced that it will pursue a rights offering to raise C$1.8 billion by offering
existing shareholders the right to buy new shares for C$8.34 ($US8.48). Assuming all the rights are exercised (which
will most certainly be the case since Rio Tinto has agreed to backstop the rights
offering), approximately 215.8 million new shares will be issued (C$1.8bn
/C$8.34). Currently, the Company has
741.1 million shares outstanding, suggesting that existing shareholders will be
offered the right to purchase a little more than .29 shares for each share they
own (215.8/741.1).<o:p></o:p></div>
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As of the close of business on April 25<sup>th</sup>,
Ivanhoe’s stock was trading at $11.47 on the NYSE. As such, shareholders are being offered the
opportunity to buy shares at a 26% discount to its current price ($8.48/$11.47-1). Assuming the current price incorporates the
dilution from the rights offering, one can make more than 35% on the shares
acquired through the rights offering. <o:p></o:p></div>
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Lets take a simple example to see how I arrive at the 6% net
return. <o:p></o:p></div>
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Step 1: Buy 1,000 shares at $11.47 = $11,470 upfront investment<o:p></o:p></div>
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Step 2: Subscribe to the rights offering, which will entitle
you to buy 290 shares at US$8.48 = Additional investment of $2,459<o:p></o:p></div>
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Step 3: Immediately sell all 1,290 at the prevailing market
price once you have received your shares in the rights offering. Again, assuming the share price doesn’t
change between now and the issue date, you should receive $14,796 in gross proceeds
(1,290 shares * $11.47)<o:p></o:p></div>
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As such, you will net $867 from your total investment of
$13,929, which equates to a 6.2% return ($11,470 to buy your initial shares +
$2,459 to subscribe to the rights offering). <o:p></o:p></div>
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The only risk (and obviously it is a significant risk!) is
that the share price drops below the rights offer price. While possible, and certainly the shares have
been under significant selling pressure over the last few months, I think the
risk of a 26% decline in Ivanhoe’s share price (which would essentially result
in a breakeven trade) is well worth the prospect of a 6+% gain, particularly
since this will likely play out in the next 3-4 weeks.<o:p></o:p></div>
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As usual, please let me know your thoughts. <o:p></o:p></div>Lumpy Investorhttp://www.blogger.com/profile/09134871823971138266noreply@blogger.com1tag:blogger.com,1999:blog-289207246592440158.post-91621005053636219052011-12-11T19:57:00.000-08:002011-12-11T20:46:15.619-08:00Pharmasset - Interesting Merger Arb CandidateThough I usually shy away from merger arb candidates for fear of getting run over by the proverbial steam roller, Pharmasset's trading price ($129/share) relative to Gilead's all-cash offer of $137 has recently piqued my interest. Pharmasset is one of the leading biotech companies developing a drug to treat hepatitis-C, one of the fasting growing markets in the healthcare arena. Unlike other experimental drugs on the market which must be used with alpha interferon, a type of drug injected once a week that can cause severe flulike symptoms and other side effects, Pharmasset's drug candidate, PSI-7977, is the first all-oral treatment regimen, which does away with the need for interferon. Rather than rehash Gilead's investment thesis for acquiring Pharmasset, I would point readers to this article from the NY Times DealBook <a href="http://dealbook.nytimes.com/2011/11/21/gilead-to-buy-pharmasset-for-11-billion/">"Gilead to Buy Pharmasset for $11 Billion"</a> for background on the company and the hepatitis-C market. <br /><br />Gilead has recently announced a tender offer to acquire Pharmasset's outstanding shares (<a href="http://www.sec.gov/Archives/edgar/data/882095/000119312511331145/d264605dex99a1a.htm">click here for details</a>). The tender offer is slated to run through January 12th, with Pharmasset investors receiving cash shortly thereafter (usually takes 1-3 business days). As such, investors can set themselves up to receive an approximate 75% annualized gain by buying Pharmassset's shares today. <br /><br />While financing risk often explains a sharp discount to the offer price, Gilead's offer is not contigent on financing. Further, the company recently raised $3.7 billion by tapping the bond market, which when combined with more than $2 billion of cash on its balance sheet, will provide Gilead with ample capital to effect the tender. <br /><br />So why is Pharmasset trading well-below the offer price given the high likelihood of the deal closing within the next month? Firstly, I think investors are spooked by the massive premium that Gilead offered for the company. At approximately 90%, the downside risk is very signficant should the deal not go through. While I think this is a very low probability, particularly since Gilead raised its offer multiple times before winning over Pharmasset's board, merger arb specialists are undoubtedly taking into account the pre-deal price when assessing their downside exposure. <br /><br />Secondly, at ~$10 billion, Pharmasset's sizable market cap likely explains some of the gap. There is simply not enough merger arb capital out there to absorb the supply of paper being sold from long-term Pharmasset holders (who rightfully sold out of their position when the deal was announced). This is particularly the case as we head into the end of the year when investors naturally become more risk-averse. Last thing a trader wants is for a merger arb position to blow up in his face as he is wrapping up the year, particularly since the transaction won't close until after the new year. <br /><br />Finally, the last reason (and perhaps the most pressing concern for risk arb) traders is an unusual provision in the agreement, called a "Key Product Event". To avoid me misinterpreting the provision, here it is in its entirety:<br /><br /><em>A “Key Product Event” is any serious adverse event that (i) is determined by an independent safety review committee overseeing the safety of the relevant clinical study to be directly related to PSI-7977 (not predominantly related to any compound with which PSI-7977 is coadministered) and to have: (a) resulted in death; (b) been life-threatening; (c) required inpatient hospitalization or prolongation of existing hospitalization; (d) resulted in persistent or significant disability or incapacity; (e) resulted in a congenital anomaly or birth defect; or (f) required significant intervention to prevent permanent impairment or damage and (ii) (x) results in the FDA’s placing a clinical hold on the development program of PSI-7977 or (y) is likely to result in a significant delay in the development timeline of PSI-7977 as of the date of the Merger Agreement.</em><br /><br />The key point to note is that efficacy is not enough for Gilead to pull out of the deal - the drug must have resulted in death or be life-treatening. While I am not a scientist and certainly not in a position to render any opinion on Pharmasset's drug, one has to have faith that Gilead has done substantial diligence on this issue before committing to buy the company (and <a href="http://www.bloomberg.com/news/2011-12-06/gilead-increased-bid-37-as-rivals-demurred-on-acquisition-of-pharmasset.html">raising its offer 3 times</a> before finally winning the prize). <br /><br />My own personal view is that short sellers are grasping on this issue to try and push the stock down. After rising to as high as $135 after the deal was announced, Pharmasset's shares have steadily declined to $129, providing a huge windfall for put buyers that bought near-term puts following the deal's announcement. With that said, I think the fears surrounding the Key Product Event are creating a very compelling risk/reward for those investors willing to look past the noise created by short sellers.<br /><br />If anybody has anything intelligent to add to the discussion please feel free to drop me a line. Hopefully, I am not missing the steamroller as I reach for a couple of nickels:) <br /><br />Thanks,<br />LumpyLumpy Investorhttp://www.blogger.com/profile/09134871823971138266noreply@blogger.com0tag:blogger.com,1999:blog-289207246592440158.post-16187040654769477842011-11-04T07:20:00.000-07:002011-11-04T07:29:31.035-07:00Update on Norilsk NickelAfter two harrowing weeks of waiting for the tender to go through, I am pleased to report that the cash finally hit all three of my accounts this morning. While there was much skepticism on whether the tender would go through (not least by yours truly!), I am actually surprised at how seamlessly the process transpired. Save for some concerns that the government would review the tender (at the behest of Rusal, who stood to lose the most from it going through), there were really no major hiccups to report. The Company closed the tender as expected on October 28th, announced the results on Nov 2nd, and started distributing funds last night. <br /><br />As I indicated in my previous post, the biggest concern I had was that the tender would attract so much interest that there would be an oversubscription by odd-lot holders (i.e. those holding less than 1,000 ADRs). However, the proration factor turned out to be nearly 11% vs. the Company’s intention to purchase 7.7% of its shares outstanding. As such, there was never really any threat of odd-lot holders not getting paid out in full. <br /><br />Based on the handful of comments I received on the post, it sounds like there are some fortunate individual investors who decided to hold their nose and take the plunge on an attractive risk reward. Congrats to all and let’s hope we can get in the middle of another fight between a pair of Russian oligarchs in the near future!<br /><br />For all those interested, here is a great article <a href="http://online.wsj.com/article/SB10001424052970204777904576651081541236992.html">("Bread Line or Stock Sale")</a> from the wall street journal that shows the difficulty most Russians faced in tendering their shares. Unlike us fortunate Americans who simply had to place a 3 minute call to instruct our broker to tender our shares, most Russians had to tender their shares in person. The article talks about the massive "bread" lines of people that formed to take advantage of the "once in a lifetime" offer. Unfortunately, many they didn't make the October 28th cutoff.Lumpy Investorhttp://www.blogger.com/profile/09134871823971138266noreply@blogger.com3tag:blogger.com,1999:blog-289207246592440158.post-63447638718090350712011-10-27T12:28:00.000-07:002011-10-27T12:32:47.275-07:00One for the Little Guys?A common refrain from many individual investors is that the “markets are rigged” or “there is no way to beat the professionals so why even try.”<br /><br />However, I learned about an investment opportunity two weeks ago that only a small fry investor like me could fully take advantage of. It all started when my brother-in-law, who works for one of the premier option market makers, received a firm-wide email alerting him to an opportunity in Norilsk Nickel. Norilsk is a $40 billion market cap Russian-based metals and mining Company.<br /><br />The email indicated that Norilsk (ticker NILSY on the pink sheets) was conducting a tender offer for approximately 7.7% of its shares at a substantial premium to its then current trading price of approximately $20 share. More specifically, the tender offer price is $30.60/share, representing a 50+% premium. While not unusual in its own right, the fascinating part of the tender offer is that individual shareholders who own less than 1,000 shares will not be prorated in the tender. As such, assuming the Company follows through on the tender, an investor could pocket approximately $10,000 in less than two weeks time just buy tendering their shares!<br /><br />For a large institution holding several hundred thousand shares, this offer hardly seems that appealing. While they will likely be able to tender a small portion of their shares (perhaps ~5%), the vast majority of their position will not be accepted and as such they have to be primarily focused on the fair value of the Company (which presumably is around $20/share). Given that most of Norilsk shares are held by very large shareholders, the Company’s share price has hardly moved since the tender was announced, despite the fact that the offer contemplates a 50% premium to the pre-tender price!<br /><br />Ever the opportunist, and recognizing a compelling risk/reward when I see it, I purchased approximately 1,000 shares in three separate trading accounts. Tomorrow is the day of reckoning as the Company will officially close the tender and presumably announce the results thereafter. As I see it, the key risks are the following:<br /><br /><ul><br /><li>The Company decides at the last minute to pull or delay the tender </li><br /><br /><li>The Company lowers the offer price, since they see no reason to reward mostly individual shareholders with a 50% premium</li><br /><br /><li>So many small shareholders pile into the trade that even the non-prorated class ends up getting prorated (i.e. not all of my 3,000 shares are accepted for tender) </li><br /><br /><li>The government challenges the tender (this is a separate issue that is not worth going into in this email – safe to say, this issue has likely been taken off the table given recent comments from the Russian government) </li></ul><br /><p>While there is a distinct possibility the tender offer fails to go through, I still think this is an incredibly attractive risk reward that frankly I have not seen available in a very long time. In a worst case scenario, the tender offer is pulled and I end up owning stock in a $40 billion Russian metals Company.<br /><br />While not my intention to be long NILSY, most of the more bearish analysts think the stock is worth $18. In a worst case scenario, assuming it trades down to this more pessimistic view of fair value, my maximum short-term paper loss would be $7,500 [(my purchase price of $20.50 - $18.00) * 3000 shares]. My upside, assuming the tender is accepted is $30,300 [ ($30.60 - $20.50) * 3000 shares]. If you assume there is an 80% chance of the tender going through, that provides an expected value payoff of $22,740 (.8* $30,300 + .2 * -7,500). Certainly not fool proof, but a compelling risk-reward in my play book. </p><br /><p>I look forward to reporting back on the results of the tender! Knowing my luck, something bad will happen between now and tomorrow, but given the massive run in the market today, I feel even better about my downside. </p><br /><p>For those interested in reading more about the tender offer, please follow this link: <a href="http://nnbuyback.com/home.html">http://nnbuyback.com/home.html</a></p>Lumpy Investorhttp://www.blogger.com/profile/09134871823971138266noreply@blogger.com12tag:blogger.com,1999:blog-289207246592440158.post-79813363689374106502011-08-09T22:29:00.000-07:002011-08-09T22:39:04.926-07:00China's Ghost Cities and Malls - Excellent VideoHere is a great video documentary <a href="http://www.youtube.com/watch?feature=player_embedded&v=rPILhiTJv7E">("China's Ghost Cities and Malls")</a> I came across as I continue to dig into the housing and real estate bubble infecting China. Having carefully studied the market for the last 2+ years and documented many of my most salient findings on this blog, it’s painfully obvious to me that China’s housing market is a classic bubble. Nonetheless, the opposition to this view remains fierce, with many noted investors and economists downplaying the potential fallout from a correction (even if they concede that the real estate market is stretch) and so it behooves me as an investor to continue to dig for information that supports my thesis.
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<br />The video, which was put together by SBS Dateline (Australian TV) in March 2011, is about 14 minutes long so it requires some investment of your time, but definitely worth listening to. There are at least 3 major cities profiled in the documentary that are virtually unoccupied, but have the capacity to support millions of people. It’s kind of eerie to see the camera pan across these cities and show high rise building after high rise building with virtually no tenants.
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<br />Perhaps the most telling statistic in the video is that there are approximately 64 million empty apartments in China. Despite this overcapacity, the government recently mandated that 36 million affordable homes be built over the next five years, including 10 million in 2011 and another 10 million in 2012.
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<br />I also found the story on The South China Mall in Dongguan, China to be particularly fascinating. The mall, which was completed five years ago, is nearly three times the size of the Mall of America in Minnesota. As detailed in this May 2005 New York Times article <a href="http://www.nytimes.com/2005/05/25/business/worldbusiness/25mall.html?sq=donguan" st="'cse&adxnnl=" scp="1&adxnnlx=">("China, New Land of Shoppers, Builds Malls on Gigantic Scale")</a>, the mall has 150 acres of palm-tree-lined shopping plazas, theme parks, hotels, water fountains, pyramids, bridges and giant windmills. The mall also has a 1.3-mile artificial river circling the complex, which includes districts modeled on the world's seven "famous water cities," and an 85-foot replica of the Arc de Triomphe. Despite the mall’s world class architecture and its relatively close location to Shenzhen and Guangzhou (two major Chinese metropolises), the video vividly details how the mall is a virtual ghost town, with a large chunk of the mall unleased and seemingly no customers to be found on its premises.
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<br />While I will readily concede that I have never been to China and my thesis rests squarely on third party research and information, the multitude of articles written and videos produced over the last few years, provides compelling evidence that the growth in China’s real estate market remains unsustainable and enormously damaging to the global economy when it inevitably corrects.
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<br />Over the last few weeks, investors have faced unsettling news from all corners of the world. Whether it is the debate over the debt ceiling in the US, the potential contagion fears from a sovereign default in Europe, the dangerous consumer bubbles forming in Brazil and India, or the overall slowing economic growth throughout most of the developed world, investors have a lot to be concerned about. However, in my opinion, nothing is as dangerous or potentially destabilizing as the real estate bubble forming in China. So many companies, from equipment manufacturers to commodity producers to Chinese state-owned banks will be severely impacted by a slowdown in Chinese fixed investment.
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<br />While it is difficult to predict when the correction will occur, and history suggests that the Chinese government will do everything in its power to keep the charade going, the fissures seem to be developing by the day.
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<br />Already, we have learned that traditional banks have severely curtailed their lending to the real estate sector <a href="http://online.wsj.com/article/SB10001424053111904480904576498061399333624.html">("Chinese Property Firms Getting Squeezed")</a>. As such, lending has moved to the “shadow banking system” in the form of trust companies, which have more than doubled their lending to real estate developers over the last quarter vs. traditional banks, which reduced their loans for property development by 75% in 2Q (see chart below).
<br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgzYgIWlrY5_VwodabFInkNN4S_5eTsrJUxf04lNcNpIB72mnEbYqHuFtcbuB0qFyMiPXepbFCGqcP25Q94RZNc9XWrSD5a-X6mndcP-b_Cizijvjx-3_uWoHVb2F0h6X2eYKxxuVx7P8A/s1600/China+trust+companies.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 217px; DISPLAY: block; HEIGHT: 400px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5639096614104584370" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgzYgIWlrY5_VwodabFInkNN4S_5eTsrJUxf04lNcNpIB72mnEbYqHuFtcbuB0qFyMiPXepbFCGqcP25Q94RZNc9XWrSD5a-X6mndcP-b_Cizijvjx-3_uWoHVb2F0h6X2eYKxxuVx7P8A/s400/China+trust+companies.png" /></a>
<br />As we saw in the US during our own housing bubble, the migration of lending from traditional banks to an unregulated and unaccountable shadow market, represents the last leg in what we all know will end badly for these unsuspecting trust company investors.
<br />Lumpy Investorhttp://www.blogger.com/profile/09134871823971138266noreply@blogger.com0tag:blogger.com,1999:blog-289207246592440158.post-11964466090658785682011-07-31T12:20:00.000-07:002011-07-31T12:32:24.552-07:00Anemic GDP Growth Showing Evidence of Double DipFor all those concerned about the prospect of a double dip recession, this chart unfortunately gives strong credence to those fears. Essentially it shows that every time year-over-year GDP growth dips below 2%, a recession always follows. With the release of Q2 GDP on Friday (which showed a paltry 1.3% annualized growth rate), the year-over-year growth rate is dangerously close to this 2% threshold. Given the downward revision to Q1's GDP growth from 1.9% to an anemic 0.4%, future revisions of Q2 GDP could very well show that year-over-year growth is trending well below the 2% line in the sand.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiorbXIB_qpo2syO0LzslE_7Z5-dhc4Wh7J1c5vaEIFV3MioQq6XiTRg5z7RPkrIQF_eIBfrnPqgv6oNk4PkfE3PP62z0nRgyZHaBR2edqkvWAstpGde6sAF69Ehundnk9r90LnAfsP3Vg/s1600/GDP+Below+2%2525.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 400px; height: 285px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiorbXIB_qpo2syO0LzslE_7Z5-dhc4Wh7J1c5vaEIFV3MioQq6XiTRg5z7RPkrIQF_eIBfrnPqgv6oNk4PkfE3PP62z0nRgyZHaBR2edqkvWAstpGde6sAF69Ehundnk9r90LnAfsP3Vg/s400/GDP+Below+2%2525.jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5635598607388284242" /></a>Lumpy Investorhttp://www.blogger.com/profile/09134871823971138266noreply@blogger.com0tag:blogger.com,1999:blog-289207246592440158.post-68713062928884494572011-07-13T18:37:00.000-07:002011-07-13T19:09:30.944-07:00Brazil's Consumer Debt BubbleWhile investors' attention is rightfully focused on the European sovereign debt crisis, the escalating property bubble in China, and the tenuous debt ceiling negotiations occurring in the US, the consumer borrowing binge happening in Brazil represents another consequence of the easy monetary policy of the US Federal Reserve and a grave threat to the global economic recovery.<br /><br />As highlighted in this recent Financial Times article, <a href="http://www.ft.com/cms/s/0/5e5f4e1e-acb5-11e0-a2f3-00144feabdc0.html#axzz1S2VE0iRa"><em>"Credit To Redeem"</em></a><em>, </em>the consumer credit bubble occurring in the Brazilian economy is on par with the real estate and credit bubble that led to the US's undoing in the summer of 2007. This paragraph from the article says it all:<br /><br /><em>"Part of this inflation has come from rapid credit growth, particularly consumer borrowing. Observers such as Paul Marshall and Amit Rajpal at Marshall Wace, a London-based hedge fund, argue that Brazil is at risk of a full-fledged consumer credit crisis. <u>Retail borrowers are on average spending one-quarter of their disposable income on debt servicing, compared with only about 16 per cent in the US.</u> Defaults are rising. Serasa Experian, a credit monitoring agency, <u>this week said its index of consumer delinquencies rose 22 per cent between January and June, the biggest increase in nine years</u>."</em><br /><br /><em>While the central bank is forecasting credit growth of 15 per cent this year, no one agrees on how much debt households can bear. “What’s the limit that people can pay in terms of interest charges plus amortisation? When it’s getting to a third of their income, it’s pretty high,” says Mr Volpon. </em><br /><em></em><br />In another FT artice, <em>"</em><a href="http://www.ft.com/cms/s/0/3186742e-a24e-11e0-bb06-00144feabdc0.html#axzz1S2VE0iRa"><em>Brazil Risks Tumbling From Boom to Bust,</em></a><em>"</em> we learn of the remarkable borrowing rates faced by consumers.<br /><br /><em>The average rate of interest on consumer lending has jumped from 41 per cent in 2010 to 47 per cent most recently in May 2011. This rise from an already elevated level reflects the cumulative effect of tightening by the Brazilian central bank in order to contain inflation.<br /><br />The consumer debt service burden, which stood at 24 per cent of disposable income in 2010, is now slated to rise to 28 per cent in 2011.</em><br /><br />While the Brazilian central bank has aggressively tightened monetary policy, including raising interest rates to a global high of 12.25%, the bank's actions to date have had minimal impact on the growth in credit. Further, the raising of interest rates has resulted in a 40% increase in the Brazilian real and attracted significant foreign investment flows, which have only exacerbated the country's challenges.<br /><br />While always difficult to predict the top of a bubble, its very clear that the credit binge occurring in Brazil is unsustainable and will end in tears. Add this to the list of risks facing investors as we enter the second half of 2011.<br /><br /><em></em>Lumpy Investorhttp://www.blogger.com/profile/09134871823971138266noreply@blogger.com0tag:blogger.com,1999:blog-289207246592440158.post-37231675182865607492011-04-18T19:51:00.000-07:002011-04-18T20:16:37.765-07:00S&P Lowers Outlook on US Government DebtIn a strong wake up signal to our elected officials, S&P lowered its outlook on the US's long-term credit rating from stable to negative (though retained its AAA rating). As demonstrated in the chart below, outside of the Japan with a gross debt/GDP ratio of 220%, the US leads all developed nations with a ratio of 92%. <br /><p>Given that the US deficit should exceed $1.5 trillion this fiscal year, its laughable that both sides of Congress declared victory when agreeing to spending cuts of a paltry $38.5 million last week. While spending in Washington remains unrestrained, the discipline of the bond market will most certainly force action should Congress not get more serious about reducing our deficits. </p>S&P's announcement should serve as a shot across the bow for government officials who think that "deficits don't matter," particularly with the planned expiration of the Fed's QE2 program in June. <a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjVZtuv6dcuxqJURcXgySMs7XYLBQUBxWty1m5awj5Qgq_pLPZN8Lzatggw4sNOmpJLYZ4SnBmrcqVT4ndOw0Kv1aiE3ytsvihhQBYkx5-AzoLMq3OwMUxJ_NjdCTYYUVefTIo51-ePYSM/s1600/US+Government+Debt+Ratings.jpg"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 328px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5597122061686968882" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjVZtuv6dcuxqJURcXgySMs7XYLBQUBxWty1m5awj5Qgq_pLPZN8Lzatggw4sNOmpJLYZ4SnBmrcqVT4ndOw0Kv1aiE3ytsvihhQBYkx5-AzoLMq3OwMUxJ_NjdCTYYUVefTIo51-ePYSM/s400/US+Government+Debt+Ratings.jpg" /></a>Lumpy Investorhttp://www.blogger.com/profile/09134871823971138266noreply@blogger.com0tag:blogger.com,1999:blog-289207246592440158.post-88713460445931579822011-03-08T05:54:00.000-08:002011-03-08T06:01:33.035-08:00Oil Exports by CountryHere is a great chart from this morning's WSJ that breaks out oil exports by country. As suggested in the chart, Libya exports 1.5 million barrels/day of light sweet crude. While Saudia Arabia has stated that they would draw on their spare capacity to address any shortfalls in Libyan production (which is estimated to have dropped by 1 million barrels/day), Saudian Arabian oil is much heavier than Libayn oil and could not be handled by the many refineries that process Libyan oil. As such, many of these refineries that can only process light sweet crude would have to turn to a limited number of other countries for supplies, including Nigeria and Algeria, themselves the subject of growing unrest.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi3mWudECcL8gSKadtX4cw2NiTUI8ZFUxH8k0RGI1EXDgnKhvfvc_kryh_J6uPNYTRWFOsxL_QL9bz-pe6Iqv4WljvnD_-pOsGGP_4jjqJ9x4o3O9rpbhXKjhtJ_DI9dODsnavHXG35nuc/s1600/Oil+Exports.jpg"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 336px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5581708800911315314" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi3mWudECcL8gSKadtX4cw2NiTUI8ZFUxH8k0RGI1EXDgnKhvfvc_kryh_J6uPNYTRWFOsxL_QL9bz-pe6Iqv4WljvnD_-pOsGGP_4jjqJ9x4o3O9rpbhXKjhtJ_DI9dODsnavHXG35nuc/s400/Oil+Exports.jpg" /></a>Lumpy Investorhttp://www.blogger.com/profile/09134871823971138266noreply@blogger.com0tag:blogger.com,1999:blog-289207246592440158.post-82695043459882583252011-03-06T11:42:00.000-08:002011-03-06T11:58:03.716-08:00Oil Markets and the Arab Unrest<div>With the price of a barrel of Brent crude around $115 (and peaking at $120) and West Texas Intermediate crossing $100, I thought this article from the Economist (<a href="http://www.economist.com/node/18285768?story_id=18285768">"The Price of Fear</a>") provides an excellent overview of what is going on in the oil markets.<br /><br />Clearly, pricing is going up because of an increase in demand, particularly in the emerging world:<br /><br /><em>“World demand grew by an extraordinary 2.7m b/d in 2010, according to the International Energy Agency. It will probably keep growing by another 1.5m b/d this year and the same again next, as the rich world recovers and demand surges in China and the rest of Asia.”</em><br /><br />However, it’s also worth noting how seamlessly the developed world has been able to cope with higher oil prices over the last thirty years and how out of whack energy intensity remains between the developed and emerging world.<br /><br /><em>“America’s economy in 2009 was more than twice as large in real terms as in 1980. Yet over that period America’s oil consumption rose only slightly, from 17.4m b/d to 17.8m. Europe actually used less oil in 2009 than in 1980, even though its economy had grown... America’s economy, though about three times the size of China’s, uses just over twice the amount of oil that China’s does. But oil intensity in emerging countries has also been falling in recent years, as manufacturing has become more efficient and less energy-intensive service industries have increased their share of the economy.”</em><br /><br /><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 289px; DISPLAY: block; HEIGHT: 338px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5581056598457200482" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjiq6BQ1YbNz3Lev5UdWGUOMf_4wDgKU10KfTFg4HrdqRpa7bfE7FewMixuKkGOPLQ2krR3JWBhhJ0WHeOz7KIOild3nBjK2lHgDK0qD-K_N0rYMI-4umSkFwLyL0KMyCCQE_q-z7chWN0/s400/Energy+Intensity+by+Region.jpg" />In the short-term, there is no reason to believe that oil can’t take out its 2008 peak, particularly if social unrest begins to spread to the major oil exporters (Saudia Arabia, Iran, etc.). However, a sustained period of high oil prices remains unlikely in my opinion given the likelihood that elevated prices will throw the global economy back into recession (as we saw in the summer of 2008). Further, high oil prices will undoubtedly spark a new innovation wave that further reduces oil intensity throughout the world (not just in developed countries). The latter could take some time to play out, but human ingenuity should disprove those market commentators who confidently predict $200-$250 oil over the coming year. </div>Lumpy Investorhttp://www.blogger.com/profile/09134871823971138266noreply@blogger.com0tag:blogger.com,1999:blog-289207246592440158.post-74850484346612299152011-02-05T14:34:00.000-08:002011-02-05T14:38:08.973-08:00Covenant-Lite Loans are BackOne would have thought that the meltdown of the leveraged loan market in 2008 would have left a lasting impression on participants in the industry. However, the recent flood of money into the loan market has resulted in a diminution of credit standards comparable to what we saw in late 2006/early 2007. As demonstrated in the chart below, covenant-lite loans have represented 26% of all new loans issued year-to-date in 2011, nearly identical to the 25% level hit in 2007, and more than 5 times the percentage seen in 2010. While the sample size is fairly small ($8.8bn YTD 2011 vs. $100 billion in 2007), hearing the words “covenant-lite” and “PIK-Toggle” enter the lexicon of credit investors scares me tremendously.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhhaoQstZGBxyMjDrvfKpdhu059El04PohXBPO3tCeOkjoyhgMgjhXbSCf56N-PIMDX9KJAvrPs_cNaL5Q79UEitDqriTrWKql-mfFNALwufBFaNPWw441rDZTGwvu27sVWC2SJsf09ud0/s1600/Covenant+Lite+Loans.jpg"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 271px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5570337726759900050" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhhaoQstZGBxyMjDrvfKpdhu059El04PohXBPO3tCeOkjoyhgMgjhXbSCf56N-PIMDX9KJAvrPs_cNaL5Q79UEitDqriTrWKql-mfFNALwufBFaNPWw441rDZTGwvu27sVWC2SJsf09ud0/s400/Covenant+Lite+Loans.jpg" /></a>With rates and covenants so remarkably favorable to borrowers, it is only a matter of time before the LBO machine begins to ramp up into overdrive. Supply is what broke the back of the last LBO bubble - I have little doubt that it won’t do the same this time.<br /><br />Over the last year, I have been highlighting the mounting excesses in the credit markets. Admittedly, my fears have not been borne out and credit investors would have been well-served by ignoring my concerns (generally, a pretty lucrative trading strategy:). However, not in my wildest dreams could I have imagined that at this stage in the recovery, we would still be talking about zero percent interest rates “for the foreseeable future.” The Global Food Index just breached its 2008 highs and oil is flirting with $100/barrel and yet our esteemed Fed Chairman sees no evidence of inflation in the economy. How many countries have to endure mass riots over parabolic food rises before Bernanke will abandon his unyielding reliance on the heavily manipulated CPI numbers?<br /><br />With rates across the entire yield curve kept artificially low, perhaps this can go on for some time. Bernanke’s comments on Thursday talking down any inflationary pressures in the economy have given investors a license to speculate. However, I have no doubt that when the Fed begins to tighten, this mini-reincarnation of the 2007 credit bubble will quickly be snuffed out.Lumpy Investorhttp://www.blogger.com/profile/09134871823971138266noreply@blogger.com0tag:blogger.com,1999:blog-289207246592440158.post-23952509161977612282011-02-02T19:13:00.000-08:002011-02-02T19:38:21.769-08:00Companies Stock Up Ahead of Price IncreasesHere is a good article from today's WSJ <a href="http://online.wsj.com/article/SB10001424052748704775604576120533736097682.html?mod=WSJ_hp_LEFTWhatsNewsCollection">("Companies Stock Up as Commodities Prices Rise")</a> that highlights the self-fulling prophecy of higher prices. With the price of rubber, cotton, spices, and other commodities rising to new highs over the last few months, anxious customers are accelerating their inventory purchases to try and get ahead of additional price increases. Similar to what we experienced in mid-2008, when panicky restaurant owners drained Costco shelves of bags of rice, scared businesses are accentuating the inflationary spikes by collectively buying far more than the underlying demand in their businesses would suggest is necessary.<br /><br />Its difficult to say how long this could go on - and zero percent interest rates are certainly not helping - but unless end market demand truly picks up, its hard to justify this frenzied activity. In 2008, we had a good 3-4 months where it seemed like everyday the price of most commodities was moving higher. However, as Jim Grant is fond of saving, "the cure for high prices is high prices" and you can be sure that at some point high prices will break the back of this inflationary pressure. <br /><br />As can be expected, the Fed's head is firmly buried in the sand and it remains highly unlikely that they will raise interest rates anytime soon. With home prices trending lower and unemployment stuck at 9.5%, Bernanke can care less that copper and rubber prices have tripled since early 2009. However, no matter how clueless the Fed, they cannot repeal the laws of supply and demand and any investor chasing this commodity spike higher ought not to forget what happened in August 2008 when reality finally took hold in the market. <br /><br />This anecdote from the article perfectly captures the frenzied behavior of businesses across the country:<br /><br /><em>John Anton, Anton Sport's founder, saw the price of cotton shooting up, and decided to act. Last month, when his T-shirt suppliers warned about the fourth price rise in six months, he borrowed $300,000 through his home-equity line of credit and bought more than a year's supply. Mr. Anton typically has about 30 boxes of shirts on hand at one time, but now has more than 2,500.<br /><br />"It just kind of clicked that I can borrow at 2.45%, and if cotton is going to go up between 10% and 12%, why wouldn't I do this?" Mr. Anton said. Cotton prices rose 92% last year, and are up 22% this year.</em><br /><br /><em>Mr. Anton, the T-shirt seller, bought mountains of shirts after receiving letters in January warning of an imminent price increase. One supplier's letter, a copy of which was reviewed by The Wall Street Journal, urged customers to "wrap up most of your pending orders and buy at the best possible prices."<br /><br />"What's exciting here is we can now go to somebody like McDonald's and say: 'We have a price that's going to beat everyone around,' " Mr. Anton said. "At this point, I don't know if I'm the smartest guy in the room or the dumbest. But I can't see prices returning to where they were anytime in the near future."</em>Lumpy Investorhttp://www.blogger.com/profile/09134871823971138266noreply@blogger.com0tag:blogger.com,1999:blog-289207246592440158.post-36159745189550308662011-01-30T15:46:00.000-08:002011-01-30T16:09:02.089-08:00China Unveils Trial Property Tax in Two CitiesSince I was traveling in Germany last week, I missed a key development in the Chinese housing market. Two cities, Chongqing and Shanghai, introduced property taxes to help curb speculation and rising home prices (<a href="http://online.wsj.com/article/SB10001424052748703399204576108020638661088.html">"China Unveils Long-Awaited Property Tax"</a>). Although mild by most developed country standards, the introduction of the tax, coupled with an increase in minimum downpayment requirements for second homes from 50% to 60%, sends a strong signal that Chinese officials are serious about containing speculation in the market.<br /><br />In Chongqing, the city levied a real-estate tax on villas owned by individuals — usually luxury, stand-alone homes — and on newly purchased high-end homes at three rates: 0.5%, 1%, and 1.2%, depending on market transaction prices. Separately, the Shanghai government said it would levy a temporary 0.6% real-estate tax on homes and may cut the rate to 0.4% for properties whose transaction prices are below certain—unspecified—levels. Both taxes were positioned as "trials" and could be modified depending on how they impact their respective housing markets.<br /><br />As noted in prior posts, I believe one of the biggest factors driving the speculation in China's housing market is the minimal carrying costs of holding real estate. With bank lending rates below the rate of inflation and a general aversion to investing in the stock market, real estate has historically served as a store of wealth for many Chinese. <br /><br />Admittedly, past efforts to contain house prices have had minimal effect and some may believe (rightly) that the announced property taxes are too small to have any great impact on the market. However, its always difficult to identify the straw that breaks the camel's back and last week's announcement convinces me even more that Chinese officials will continue to take incremental actions until home prices (particularly at the high end) begin to respond.Lumpy Investorhttp://www.blogger.com/profile/09134871823971138266noreply@blogger.com0tag:blogger.com,1999:blog-289207246592440158.post-62215433914131404232011-01-03T13:14:00.000-08:002011-01-03T13:18:41.203-08:00China's Inflation Starting to Spike - Investors BewareAs indicated in the chart below, China’s inflation rate rose to 5.1% in November from 4.4% in October. Though down from the 8.5% rate that existed in early 2008, the spike in prices is clearly starting to worry Chinese government officials – hence the two interest rate hikes over the last ten weeks. Even more concerning, is that food inflation is running well into the double digits, and though food accounts for only one third of the CPI, it accounts for 75% of the increase. As an example, soybean oil, a key ingredient in Chinese cooking, rose approximately 25% last year, with most of the gain coming since July <a href="http://online.wsj.com/article/SB10001424052970204467204576047041668580356.html">(“Cooking Oil's Surge Shows How Inflation Hits Chinese “)</a>.<br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhAywSDpTRAc-a_LkNocFKZyN6a0sUHDJ7WMxF-cgamsN-rzZ1zWPlDCPJk7rQtoXRfCpLmHM4w0ux4dEZetX8SCM0ttDr0vH8gf5uF1BEAphtCjxZkloo3NySqelbEqPdBJnr-X2fbmig/s1600/Chinese+Inflation+Chart.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 438px; DISPLAY: block; HEIGHT: 201px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5558071525214006546" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhAywSDpTRAc-a_LkNocFKZyN6a0sUHDJ7WMxF-cgamsN-rzZ1zWPlDCPJk7rQtoXRfCpLmHM4w0ux4dEZetX8SCM0ttDr0vH8gf5uF1BEAphtCjxZkloo3NySqelbEqPdBJnr-X2fbmig/s400/Chinese+Inflation+Chart.png" /></a>While Chinese officials are hesitant to slow down the economy, the recent spike in inflation will force their hand. Just as we saw in 2006-2007, it may take some time for interest rate hikes to work their way through the Chinese economy, but inevitably they will work their magic. Given the rebound in the commodity and equity markets, investors seem to be ignoring the residual effects of China’s deliberate attempt to engineer a slowdown. With many industrial and agriculture commodities making parabolic moves over the last few months, I think it is prudent for investors to start taking off risk.<br /><br />While the easy money policies of the US Federal Reserve are starting to coax people back into equities, the 2011 theme for most of the developing world is one of tightening. China, Brazil, India, and Australia are among the largest economies that have recently raised interest rates and more are coming. As an example, in Dilma Rousseff’s inauguration speech yesterday (new Prime Minister of Brazil), she specifically mentioned controlling inflation as one of her top priorities. I think it is fair to say that when inflation becomes a key theme in an inauguration speech, investors should take notice – I know I certainly am.Lumpy Investorhttp://www.blogger.com/profile/09134871823971138266noreply@blogger.com0tag:blogger.com,1999:blog-289207246592440158.post-73432230961082128412010-12-28T09:58:00.000-08:002010-12-28T10:12:30.072-08:00China's Real-Estate FrenzyHere is a good op-ed in today's Wall Street Journal <a href="http://online.wsj.com/article/SB10001424052970204527804576043580256245602.html?mod=WSJ_Opinion_LEADTop">("China's Real-Estate Frenzy")</a> that highlights the growing real estate bubble forming in China. After experiencing a modest correction during the summer, pricing and activity appear to be back in an upswing. However, as yesterday's 25bps interest rate hike demonstrated (building on the first 25bps hike in October), Chinese government officials are slowly waking up to the realization that they need to do something before things get really out of control. One interesting point highlighted in the article is that there are no property taxes in China. As such, the carrying costs for holding an empty apartment are negligible. In order to curb speculative activity, I think Chinese officials should implement some sort of property tax, even if modest.<br /><br />Here are some other good highlights from the article:<br /><br /><em>Last week I sold an apartment in Beijing for more than 2.5 times what I paid for it five years and three months ago [more than a 20% IRR!]. When I asked the buyer why he was optimistic about real estate, he explained that land was limited in Chinese cities and government policies would keep the market going up.</em><br /><br /><em>Housing prices in the U.S. peaked at 6.4 times average annual earnings this decade. In Beijing, the figure is 22 times.</em><br /><br /><em>In the past, when China could depend on growing export markets, technocrats in Beijing were able to keep speculative frenzies in check with periodic crackdowns...But this time nobody is listening. Local governments and banks have set up off-balance sheet vehicles to conceal loans and keep the spending boom going. Fitch Ratings estimates that not only did banks exceed the central bank's 7.5 trillion yuan ($1.1 trillion) cap on lending for this year, they made an additional three trillion yuan of these shadow loans.</em><br /><br /><em>When a government loses control of monetary policy, inflation follows. A few months ago, only the scariest "China bears" predicted 6% inflation for next year; now the People's Daily is admitting it may reach those levels "in some months."</em>Lumpy Investorhttp://www.blogger.com/profile/09134871823971138266noreply@blogger.com1tag:blogger.com,1999:blog-289207246592440158.post-26016455285315179862010-12-23T09:16:00.000-08:002010-12-23T09:25:59.979-08:00Germany Not Immune to Europe’s ContagionHere is a good article from today's FT <a href="http://www.ft.com/cms/s/0/0ae7048e-0deb-11e0-86e9-00144feabdc0.html#axzz18xJzo5aT">("Germany not immune to Europe’s contagion")</a> that highlights the mounting pressures facing Germany. Although on a standalone basis, Germany should be fine, its banks are highly exposed to contagion risks in Europe's periphery. The article posits that if Spain should default, German yields (which are currently under 3%) could rise sharply higher. Further, German CDS spreads have recently hit new highs (excluding the time period surrounding Lehman's bankruptcy) and the ultra-safe swiss franc has been steadily climbing against the euro. Here are some of the highlights from the article:<br /><br /><em>The very idea that Germany could be caught up by contagion from the eurozone debt crisis seems risible. Its benchmark interest rates, those for 10-year Bunds, trade below the equivalent levels for the US, UK and France. <br /><br />Yields of just shy of 3 per cent for 10-year money hardly smack of trouble. Inflation is unlikely to cause problems soon, unlike in the UK and potentially in the US thanks to quantitative easing. It also enjoys a sizeable current account surplus, meaning it is not at the mercy of foreigners for financing, unlike many in Europe. In short, its bonds are still seen as the safe haven of at least the eurozone.<br /><br />Nonetheless, the whispers are starting against Germany. Yields have risen by more than half a percentage point since their lows in October. Unlike the corresponding rise in US yields, which many see as the result of higher growth expectations, few are touting higher output as a reason for Bunds spiking.<br /><br />Instead, the markets are firmly putting the blame on the prospect of contagion and in particular the fear that Germany could end up coughing up to bail out most of the so-called periphery of the eurozone. <br /><br />Pimco, one of the world’s largest bond investors, which by chance is owned by Allianz, the German insurer, has for several months privately been warning that German yields could shoot up once the price of the various European rescue schemes are factored in. Germany’s exposure should remain manageable if the crisis stays restricted to Greece and Ireland (and probably poor Portugal, the next in line for a bail-out). <br /><br />But the 50-100 basis points question for Germany is what happens to Spain. Should it need a bail-out – and its yields continue to hover close to euro-era highs – then Germany is on the hook for tens of billions of euros more and its yields could well shoot up.</em>Lumpy Investorhttp://www.blogger.com/profile/09134871823971138266noreply@blogger.com0tag:blogger.com,1999:blog-289207246592440158.post-3712436197387531832010-12-08T05:38:00.000-08:002010-12-08T05:52:28.966-08:00China's Inflation Is A Monetary PhenomenonHere is a good chart from todays WSJ (“<a href="http://online.wsj.com/article/SB10001424052748703493504576006820913618708.html?mod=WSJ_newsreel_markets">China's Inflation Is a Monetary Phenomenon</a>”) highlighting the growth in China’s M2 since 2002 and the recent surge in food inflation. As demonstrated in the chart below, M2 growth peaked last November at approximately 30%. Given that inflation generally lags M2 growth by 12-18 months, we are now only starting to see the effects of last year's massive lending binge work their way through China's CPI data.<br /><br />A big theme for the year ahead will be how aggressive China and other emerging market central banks are in tamping down inflationary pressures that are clearly bubbling up in their economies. Should central banks accelerate their recent tightening measures, we could see global economic growth fall well short of the more bullish forecasts starting to gain sway with investors (though the lagging effect of these actions suggests this will be more of a 2H 2011/1H 2012 problem).<br /><br /><br /><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 168px; DISPLAY: block; HEIGHT: 254px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5548306986464722738" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhV37gymM3Wz6m_Nzb7UWSUOAoccD5vcv5Rw2DmMP2pyDlb19s5qoqTZE4C7SrgTkkaWieF05nH5ywoT8bfzFgAin7c2reu2SmRChh1TMCWP0gzwNM_oGDAeKtxbEPXgHrPX8gbwYlmySs/s400/China+M2+%2526+Inflation+Chart.jpg" /><br />For a similar article on the inflationary pressures building up in Brazil see another article from today's WSJ - <a href="http://online.wsj.com/article/SB10001424052748704250704576005571077881878.html?mod=WSJ_World_MIDDLENews">"Inflation Dilemma Looms for Brazil's Rousseff."</a><br /><br /><em>On the campaign trail, Ms. Rousseff promised to lower Brazil's sky-high interest rates. But in order to tamp down inflation, Brazil's central bank is getting ready to raise rates, not lower them, economists say. Central bank directors are meeting Wednesday to discuss potential rate increases. Many Brazilian economists expect the country to boost its 10.75% interest rate—among the highest in the world—by the end of January at the latest....<br /><br />Inflation picked up as Brazil's government took on more debt to boost spending after the global financial crisis. The stimulus helped Brazil weather the downturn. But two years later, the stimulus spending has juiced up Brazil's natural growth rate of around 4.5% to a China-like 7%, creating inflation along the way.<br /><br />"The inflation issue requires a policy response," says Marcelo Carvalho, who follows Brazil at BNP Paribas in São Paulo.<br /><br />Brazil's Finance Minister Guido Mantega, who is set to remain in his job once Ms. Rousseff takes office, said this week that the federal government will introduce a series of inflation-fighting spending cuts. </em>Lumpy Investorhttp://www.blogger.com/profile/09134871823971138266noreply@blogger.com0tag:blogger.com,1999:blog-289207246592440158.post-84245313545166873362010-12-01T20:23:00.000-08:002010-12-01T20:43:07.983-08:00Eurozone Bond Spreads Blowing OutHere is a great chart from yesterday's Financial Times highlighting the growing credit crisis in the euro zone. The bottom left graph clearly demonstrates how credit spreads have blown out over the last few months. As investors turn their attention to the next dominoes to fall, Spanish bond yields have risen to approximately 300bps wide of German yields. Even more concerning is that Italian bond yields have blown out to 210bps wide of German yields (the highest spread since the euro came into effect). While Ireland and Spain both entered the credit crisis with very low government debt to GDP ratios (less than 30% for Ireland and less than 50% for Spain), the FT reports that Italy's sovereign debt to GDP will be about 118% by year end. On the positive front, Italy's banks remain far healthier than those in Ireland and Spain, though the country faces significant refinancing risk in 2011, with Eur300bn of total debt (sovereign plus bank) maturing during the year. <u>Out of this 300bn, approximately 1/3 of it is due in the first three months</u>. While equity markets continue to rally in the US, investors ought not to dismiss the contagion risks spreading throughout Europe. <br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjQEin1HtvnVIOHwsst3H7422y4DiNN9gT45O6p-_ONHFaAe23cJGqBZmAfeXEdub8p4VjUQygOKdnRHFANgW23_e9w463uI1QMhhoc6zw3gGvO9DVm952yazehrFDm1Mf7uaxfgu-147E/s1600/European+Debt+Spreads.jpg"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 385px; DISPLAY: block; HEIGHT: 400px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5545936272099034018" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjQEin1HtvnVIOHwsst3H7422y4DiNN9gT45O6p-_ONHFaAe23cJGqBZmAfeXEdub8p4VjUQygOKdnRHFANgW23_e9w463uI1QMhhoc6zw3gGvO9DVm952yazehrFDm1Mf7uaxfgu-147E/s400/European+Debt+Spreads.jpg" /></a><br /><div></div>Lumpy Investorhttp://www.blogger.com/profile/09134871823971138266noreply@blogger.com0tag:blogger.com,1999:blog-289207246592440158.post-40918377405731284732010-11-23T19:31:00.001-08:002010-11-23T19:53:18.232-08:00Spanish Banks' Dependence on Wholesale Financing<div>This chart from a September 30, 2010 <em>Economist</em> article <a href="http://www.economist.com/node/17155937?story_id=17155937">(“Two Cheers, Three Tiers”)</a> sums up the significant risk building up in Spain’s banking system.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg6I7MFOG1Qyo1V9oGo8y08i-EPoCil1KIIsOyP-qHLhIBmlL0I5mK0-4SbmGhVXf0S6qLvxCGjGtXC2WIBRLJmfZzvPJtG6TtkMm1if-L0fQQFeGaVEVddo_4B8EP3IqhnuQYSDqum8v8/s1600/Spainish+Loans+%2525+of+Deposits.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 291px; DISPLAY: block; HEIGHT: 285px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5542959127053642882" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg6I7MFOG1Qyo1V9oGo8y08i-EPoCil1KIIsOyP-qHLhIBmlL0I5mK0-4SbmGhVXf0S6qLvxCGjGtXC2WIBRLJmfZzvPJtG6TtkMm1if-L0fQQFeGaVEVddo_4B8EP3IqhnuQYSDqum8v8/s400/Spainish+Loans+%2525+of+Deposits.png" /></a> As suggested in the chart, Spanish banks’ loans as a percent of deposits have leapt to approximately 130% over the last decade. This 30% gap has been filled by wholesale financing, which tends to be much less sticky than retail deposits (think Lehman or Bear Stearns, which faced a massive run when their access to the capital markets dried up essentially over night). While the larger and healthier Spanish banks have been able to access wholesale financing (albeit at higher rates), the vast majority of the country’s financial institutions have been shut out of this market. As such, the country is in the midst of a severe deposit war, with the Economist suggesting that <em>“banks are trying to claw share from the beleaguered cajas by offering rates as high as 4%. Higher funding costs are squeezing net interest margins, which fell by 6.4% in the first half of the year for the banks and by nearly a quarter for cajas.” </em><br /><br />While drawing too many parallels to Ireland may be a bit premature, its important to note that Ireland’s bailout was precipitated by the rapid loss of retail deposits from the nation‘s largest banks. As an example, Allied Irish lost €13 billion ($21 billion) of deposits since the beginning of the year. Investors fearing contagion to Spain should monitor carefully the deposit levels in the country’s banking system.<br /><br />As if the deposit war isn’t concerning enough, the <em>Economist</em> concludes the article by commenting “that <strong><u>banks still have €323 billion of exposure to property developers, which for some is close to four times their core capital</u></strong>.” </div>Lumpy Investorhttp://www.blogger.com/profile/09134871823971138266noreply@blogger.com0tag:blogger.com,1999:blog-289207246592440158.post-5119362317215538982010-11-20T19:23:00.000-08:002010-11-20T19:31:39.470-08:00Japan's Demographic TimebombHere is a great picture from a recent Economist article (“<a href="http://www.economist.com/node/17492860?story_id=17492860">Into the Unknown</a>”) showing the rapid shift in Japan’s population from 1950 to 2055. From 1955 to 2005, the steadily increasing population of working age people (reflected in the pyramid shape of the left most schematic) and rising productivity of its workforce propelled Japan to become the world’s second largest economy. However, over the next forty years, the working age population is forecasted to shrink so quickly that by 2050 it will be smaller than it was in 1950 (dropping from a high point of 87mm in 1995 to less than 50 million by 2050; see second chart). Similarly, over this timeframe, Japan’s population, currently 127 million people, is expected to fall by 38 million or nearly 30%! By 2050, four out of ten Japanese will be over 65.<br /><br />As the population ages, the nation’s pension system is becoming increasingly strained. When public pensions were introduced in the 1960s, there were 11 workers for every pensioner. Now there are a mere 2.6, compared with an OECD average of four.<br /> <br />Finally, Japan’s rapidly aging population has resulted in a substantial reduction in the nation’s savings rate. Once above 20% of disposable income, the ratio has dropped to about 2%, and <em>the Economist</em> posits that it could go negative over the next few years. Given that 95% of the government’s debts are financed by domestic savings (primarily banks, pension schemes, and insurance companies), Japan could be forced to seek external financing to sustain its huge public sector debt. Rates would undoubtedly rise under this scenario given that Japan currently borrows at a paltry 10-year rate of 1% from its risk-averse populace. <br /><br />Given all these facts, its not terribly difficult to sympathize with the bearish thesis surrounding Japanese government bonds. <br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhg-H94stvgWSrPFYN9xPeuuizdfGxv9id4sDGq1D8jbg9s4-8HTBFhpw2jW-zKda3UT1l2GJr4q-SneiWnuNg0-2iDLJr_OdZSyGickD6gJjrvFx02Zmy5PmujCjQAVhSuDI4D4GbKTJI/s1600/Japanese+Population+Pyramids.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 378px; height: 400px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhg-H94stvgWSrPFYN9xPeuuizdfGxv9id4sDGq1D8jbg9s4-8HTBFhpw2jW-zKda3UT1l2GJr4q-SneiWnuNg0-2iDLJr_OdZSyGickD6gJjrvFx02Zmy5PmujCjQAVhSuDI4D4GbKTJI/s400/Japanese+Population+Pyramids.jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5541839269856531170" /></a>Lumpy Investorhttp://www.blogger.com/profile/09134871823971138266noreply@blogger.com0tag:blogger.com,1999:blog-289207246592440158.post-76468025423744414502010-11-11T05:26:00.000-08:002010-11-11T05:42:10.072-08:00Sovereign CDS Spreads Widening in EuropeEuropean sovereign 5-year CDS spreads are blowing out this morning, with Spain at 285bps (+58.5bps), Portugal at 495bps (+78bps), and Ireland 605bps (+65bps). As of now, concerns seem contained to the Euro zone, but I think it is only a matter of time before we start seeing the residual effects spill over into the United States. US treasuries in the belly of the curve (2-5 years) remain well bid, as investors try and front run the Fed’s $600 billion quantitative easing program, but the yields on the long-end of the curve (particularly 30-year treasuries, where the Fed will only do marginal buying) have blown out over the last few days. Yesterday’s weak $16 billion auction of 30-year treasuries could serve as the canary in the coal mine for investors who have been piling into fixed income over the last 18 months. <br /><br /><strong>Spain</strong><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEglPiIYG-g6WQpi3gjkvwN4opTTRCRMtXxYNe5X7DllIH_NC-mLKL6gPZNgLiCrqqiSpsRLBfa6F-psCQZ8GOQqs7Zku2cpZfOtsLGIPH36UuF7Fs1tHFg6EkLYSd2py5EOKao9PLqfdl8/s1600/Spain+CDS+Spreads.bmp"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 400px; height: 197px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEglPiIYG-g6WQpi3gjkvwN4opTTRCRMtXxYNe5X7DllIH_NC-mLKL6gPZNgLiCrqqiSpsRLBfa6F-psCQZ8GOQqs7Zku2cpZfOtsLGIPH36UuF7Fs1tHFg6EkLYSd2py5EOKao9PLqfdl8/s400/Spain+CDS+Spreads.bmp" border="0" alt=""id="BLOGGER_PHOTO_ID_5538286214842801634" /></a><br /><br /><strong>Portugal</strong><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEisZJJEeFLmTMakFBQPRHjnVyvKSBGoIeBJ0sAJa_24iRBxtpXqOvx2bSj11oM_IYJeTzIZ0pCmKUEpSGPvQmP_LI0ML1ollhyduFb4GKdC_A2e_TuLVe1wh6bAQkryiMYYieXASjmCaz8/s1600/Portugal+CDS+Spreads.bmp"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 400px; height: 197px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEisZJJEeFLmTMakFBQPRHjnVyvKSBGoIeBJ0sAJa_24iRBxtpXqOvx2bSj11oM_IYJeTzIZ0pCmKUEpSGPvQmP_LI0ML1ollhyduFb4GKdC_A2e_TuLVe1wh6bAQkryiMYYieXASjmCaz8/s400/Portugal+CDS+Spreads.bmp" border="0" alt=""id="BLOGGER_PHOTO_ID_5538286589949380178" /></a><br /><br /><strong>Ireland</strong><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjjntG0MHArAfEpOrIl5FGFAqyGuRZjfn0LPUk8ack_KINGxf9t-Tb_yyptHo35nzyombFidDYB6boHGrfsmrvxXlH9fRaiP5HDr1hs7d9OhixIv7UJX_oNErznzIkVXi7TklkYoa0MLmU/s1600/Ireland+CDS+Spreads.bmp"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 400px; height: 197px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjjntG0MHArAfEpOrIl5FGFAqyGuRZjfn0LPUk8ack_KINGxf9t-Tb_yyptHo35nzyombFidDYB6boHGrfsmrvxXlH9fRaiP5HDr1hs7d9OhixIv7UJX_oNErznzIkVXi7TklkYoa0MLmU/s400/Ireland+CDS+Spreads.bmp" border="0" alt=""id="BLOGGER_PHOTO_ID_5538286366476469810" /></a><br />Here are a few recent articles from the WSJ that address mounting concerns in the Euro zone. <br /><br /><a href="http://online.wsj.com/article/SB10001424052748704804504575606393486918472.html?mod=WSJ_hp_LEFTWhatsNewsCollection">Spain’s Bank Mergers Suddenly Drying Up</a><br /><a href="http://online.wsj.com/article/SB10001424052748703805004575606262000387820.html?mod=ITP_moneyandinvesting_0">QE2 Off its Course: Yields Are Going Up</a><br /><a href="http://online.wsj.com/article/SB10001424052748703514904575602650960629366.html?mod=WSJ_RealEstate_LeftTopNews">Ireland’s Next Blow Could be Home Loans</a>Lumpy Investorhttp://www.blogger.com/profile/09134871823971138266noreply@blogger.com0tag:blogger.com,1999:blog-289207246592440158.post-5975886600105902012010-11-09T09:44:00.000-08:002010-11-09T09:50:52.624-08:00Systemic Risks Posed by ETFsHere is a <a href="http://www.kauffman.org/uploadedFiles/etf_study_11-8-10.pdf">great report published by Harold Bradley and Robert Litan of the Kauffman Foundation</a> warning about the potential dangers caused by the explosion of ETFs. The authors conclude that the growth in ETFs and ETF derivatives poses more of a systemic danger to the financial system than the advent of high frequency trading. At 84 pages, the report is highly detailed and fairly technical, but definitely worth a read for those interested in learning more about the subject. While I am by no means an expert into the inner workings of the financial markets (at least as it pertains to high speed algorithmic trading), all I could think about as I was reading this report was that we could be facing another October 1987 type-meltdown should regulators continue to ignore the rapid growth in the ETF market. <br /><br /><em>ETFs have proliferated around the globe at an astounding pace, from roughly ninety at the beginning of this decade to about 450 at the end of 2005 and more than 2,300 today, with another 1,000 or so in the regulatory pipeline (see chart 4).<br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEig0e36lmmlfvyrnDLVq3o35cstOkPYid8BX-9uUxLyTCetC3j82bz6R6Cjdj3N3YXRMmvDE3P0pknabHCpMDpwYBmtnHfzQnJ-oIv4jTxKUkbVd4rgrJevCLgC4jJKlyLC-HelrQfJy1I/s1600/Explosion+of+ETFs.bmp"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 400px; height: 157px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEig0e36lmmlfvyrnDLVq3o35cstOkPYid8BX-9uUxLyTCetC3j82bz6R6Cjdj3N3YXRMmvDE3P0pknabHCpMDpwYBmtnHfzQnJ-oIv4jTxKUkbVd4rgrJevCLgC4jJKlyLC-HelrQfJy1I/s400/Explosion+of+ETFs.bmp" border="0" alt=""id="BLOGGER_PHOTO_ID_5537608338432194610" /></a><br />But there can be too much of a good thing if taken to extremes,and this is now happening with ETFs. From an asset base of about $75 billion a decade ago, ETF assets now approach $1.2 trillion, with trading reaching an astounding $18.2 trillion last year. ETFs have been morphing in new and unexpected ways. Simply put, we will argue here that ETFs and the derivatives built around them have become the proverbial tail that wags the market.<br /><br />As more ETFs are created, the risk grows that in the event of a future market meltdown triggered by any number of possible causes the rush to unwind the ETFs will aggravate any sell-off. Indeed, some creators of ETFs may not be able to honor their obligations. If those institutions or holders of ETFs are deemed sufficiently important or interdependent with other financial actors, the U.S. government could be forced again to make the agonizing decision whether to come to the rescue, as it did with AIG and a number of other large enterprises during the financial crisis of 2008.</em>Lumpy Investorhttp://www.blogger.com/profile/09134871823971138266noreply@blogger.com0tag:blogger.com,1999:blog-289207246592440158.post-48533324957461375162010-10-04T15:53:00.000-07:002010-10-04T16:02:52.865-07:00Reevaluating GoldEver since I began this blog in late 2008, I have been an advocate for investing in gold. While the massive support provided by the Fed in the wake of the collapse of Lehman Brothers helped forestall a complete financial meltdown, I thought the unprecedented monetary stimulus injected into the system would ultimately prove inflationary (admittedly this doesn’t seem to have played out yet, though the recent rise in gold and other industrial commodities suggests we may not be too far off). <br /><br />With a near 60% return over the last two years, I think it is prudent to reevaluate my thesis and consider the merits of maintaining a position. The rampant media attention given to gold’s ascent above $1300/ounce suggests that my thesis is hardly unique and that the yellow metal could be migrating into bubble territory. <br /><br />As an unrepentant contrarian, I always grow nervous when my thesis is shared by the broader investing community. Asset prices tend to climb a wall of worry and I am afraid that we are reaching a point where even the most hardened skeptics have thrown in the towel (See the A1 Section of the September 28th WSJ <a href="http://online.wsj.com/article/SB10001424052748703882404575519580713957638.html">"Gold Vaults to New High." </a> <br /><br />Despite a growing unease, little has changed since my original purchase, and I intend to hold my position for the time being (hopefully, you can sense the waning lack of conviction in that statement!). Underlying my thinking are the following points:<br /><br />1. Central banks across the globe continue to aggressively counteract strength in their currencies. The Bank of Japan is selling yen in order to hold down its currency. The US Federal Reserve gave a clear indication in its last statement that it stands ready to support the economy should evidence of a double dip begin to take hold (i.e. “QE2” – whatever form that will come in). Never mind that a second dose of stimulus implicitly proves the ineffectiveness of the first round (when the Fed purchased $1.75 trillion of treasuries and mortgage backed securities); Bernanke and crew remain willing to do whatever it takes to avoid a deflationary debt spiral and I believe they are willing to err on the side of too much stimulus rather than too little. <br /><br />Just as investors doubted Paul Volker’s ability to arrest the pernicious inflation of the late 70s (a battle which took over 2 years to win), the common refrain from today’s “experts” is that Bernanke is fighting a loosing battle. Talk of the US mirroring the path of Japan is almost as prominent as talk of gold being in a bubble.<br /><br />While I believe the Fed’s campaign may ultimately undermine the US dollar’s status as a reserve currency (hence my investment in gold!), I have read the transcript of enough Bernanke speeches to know that he remains committed to the task at hand. Until the Fed takes its foot off the accelerator, it’s difficult to turn bearish on gold. Conversely, once the Fed credibly lays out an exit plan, I will be the first to exit my position, no matter how much money I end up leaving on the table. <br /><br />2. Despite less media attention given to the situation in Europe, the PIIGS remain in deep financial distress. The situation in Ireland can only be described as a crisis, with the Irish government estimating that up to €50 billion may be needed to stabilize its banking system. Even more staggering, the country is anticipated to run a deficit of more than 30% of GDP this year! <br /><br />On the other side of Europe, Greek CDS spreads suggest that default is highly likely despite China’s commitment to buy up to $5 billion of the country’s government debt. Even credit default spreads in Spain and Portugal have edged up over the last few weeks, with investors skeptical that announced austerity measures will be enough to get their fiscal houses in order. While this would have been front page news in May, concerns over the PIIGS have receded to the background, as US investors focus squarely on the improving macro data. Despite the best September for the stock market since 1939, little has changed in Europe and investors ought not to forget the fears that existed earlier this year.<br /><br />3. The mounting problems in the $2.8 trillion municipal bond market are slowly starting to play out. While a discussion of this issue will have to be saved for another post, suffice to say that the recent default by the city of Harrisburg (which was forced to be bailed out by the state of Pennsylvania) will be the first of many defaults by a municipal borrower. Just as the bankruptcy of New Century in April 2007 served as the canary in the coal mine for the subprime debacle, so too will Harrisburg’s default for the municipal bond market. I wouldn’t be surprised if we begin talking about a TARP for state & local governments as we enter the next stage of the credit crisis.<br /><br />4. As mentioned before, while the market experienced a strong September, this move was hardly confirmed by financial stocks (many of which hit 52 week lows during the month). This lack of confirmation from the leading financials is eerily reminiscent of 3Q 2007, when the stock market seemingly ignored the mounting problems in the credit markets to rally to all times highs in October 2007. <br /><br />A slowdown in trading activity, flattening yield curve, declining loan growth, and potential for another wave of home price declines/foreclosures, suggests a very challenging environment for the banks over the next few quarters. While the Obama administration is currently taking a victory lap with the apparent success of the TARP program (which is estimated to ultimately cost US taxpayers less than $50 billion), the stalled rally in financials suggests that we shouldn’t quite yet break out the “Mission Accomplished” banners. This is particularly the case as the heightened regulations emanating from the new financial bill begin to take effect.<br /><br />5. Surplus countries, primarily China and India remain underinvested in gold (with less than 5% of their assets in the yellow metal). While China talks publicly about their commitment to both the euro and the dollar, I have to believe that behind closed doors they are growing increasingly nervous about their currency holdings. Should China and India step up their purchases of gold over the next year, the move from $800 to $1,300 may only be the beginning. <br /><br />In summary, while gold is on the throes of becoming a crowded trade, I don’t think we have reached the euphoric stage that often characterizes market tops. Similarly, I contend that the fundamentals underlying my original thesis (as noted above) remain firmly intact and that there is still decent upside from today’s levels. As long as central banks remain stubbornly committed to seemingly unending monetary stimulus and competitive currency devaluations (<a href="http://online.wsj.com/article/SB10001424052748704483004575523822949744704.html">"Beggar the World"</a>), gold should continue to climb to new highs.Lumpy Investorhttp://www.blogger.com/profile/09134871823971138266noreply@blogger.com2tag:blogger.com,1999:blog-289207246592440158.post-76894721330618240272010-09-27T15:27:00.001-07:002010-09-27T15:28:29.625-07:002010 - 2018 High Yield Maturity ScheduleThis is a great chart from Knight Libertas highlighting the maturity schedule for high yield and leveraged loans over the next 8 years. While 2010 and 2011 looks manageable ($110bn due through 2011), maturities start to ramp up thereafter with $147bn due in 2012, $245bn due in 2013, and a staggering $405bn due in 2014. As demonstrated in the chart, the lion’s share of the 2014 maturities are comprised of leveraged loans used to finance the wave of borrowing undertaken by PE firms in the 2006 and 2007 LBO wave. While the massive inflow of capital into credit could continue for sometime, I suspect we will hear more and more about this “maturity wall” as late 2012/early 2013 approaches. <br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgVEM00JXQpPNofJVeUpHLp3hK4AKXIOqDybzbKvM7WxQRMqIgxHJlAkBMUkq8umH1v3C98G0uWOhLcapkzKDiVV6rOqm3uZDbVsKntpYjWcDnqutEbvvwaYB0f_3vgUpNXoklb9sW00Vg/s1600/High+Yield+%26+Leveraged+Loan+Maturity+Schedule.bmp"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 400px; height: 279px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgVEM00JXQpPNofJVeUpHLp3hK4AKXIOqDybzbKvM7WxQRMqIgxHJlAkBMUkq8umH1v3C98G0uWOhLcapkzKDiVV6rOqm3uZDbVsKntpYjWcDnqutEbvvwaYB0f_3vgUpNXoklb9sW00Vg/s400/High+Yield+%26+Leveraged+Loan+Maturity+Schedule.bmp" border="0" alt=""id="BLOGGER_PHOTO_ID_5521723728850829618" /></a>Lumpy Investorhttp://www.blogger.com/profile/09134871823971138266noreply@blogger.com0tag:blogger.com,1999:blog-289207246592440158.post-18585821892817004712010-09-20T14:42:00.000-07:002010-09-20T14:43:50.991-07:00Momentum Stocks Getting Bid UpWhile most equity market indices are up only a few percent year-to-date, momentum stocks with strong growth outlooks (particularly in the tech sector) have outperformed significantly. As an unrepentant value investor, this has been a source of deep frustration to me since most of these stocks hardly seemed like bargains going into 2010. <br /><br />As demonstrated in the table below, I have selected a basket of 10 stocks that loosely fit the parameters of a “momentum growth” stock. The ten stocks include F5 Networks, Netflix, Akamai Technologies, Finisar, Salesforce.com, Citrix Systems, Riverbed Technologies, NetApp, VMWare, and Acme Packet. <br /><br />Nearly all are up over 50% year-to-date, recently hit fresh 52-week highs, and have business models that fit squarely into the portfolios of managers seeking growth. Unlike the bubble years of 1999, when nearly any tech stock with a “.com” at the end of its name was bid up to ridiculous levels, these 10 stocks have strong competitive positions within very attractive secular growth markets. And most importantly - All are profitable and generating decent free cash flow. <br /><br />My only contention (and of course the most critical determinant to a value investor) is the massive multiple these companies trade at relative to current and 1-year forward earnings estimates. As an experiment, I am going to pretend that I purchased $10,000 of stock in each one of these ten companies as of the close of 9/20/10. If a similar experiment had been performed at the end of 2009, one would be up 111% year-to-date. <br /><br />It will be interesting to see how this basket of stocks performs 6 months out when I will evaluate the results on my blog. I honestly have little conviction on how things will turn out, but the value investor in me thinks that most will be substantially lower. <br /><br />Now I always like to say that I passed on Google when it came public at $85 (and I evaluated it pretty extensively pre-IPO) so my opinion on growth stocks should be taken with a healthy dose of skepticism. However, the disconnect between growth and value seems more extreme than at any point since the waning days of the tech bubble. Perhaps this experiment will lend some credence to this view (or once again make me eat my words!) <br /><br />I look forward to reporting back in March of next year. <br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiZpvEX7f7ewScdqKIEloO0oLHBLMdCojVgbHHyMuu7TJ8dXTFyFLYWoEBlR4nkgEzknLPkKP2ijxMccnYoRFBw8JHHtRWmk-bonkrZ4QdeHgTJpLzF77qJo53DOSiVPWwvFNz-MlEusJk/s1600/Momentum+Growth+Names.bmp"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 400px; height: 179px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiZpvEX7f7ewScdqKIEloO0oLHBLMdCojVgbHHyMuu7TJ8dXTFyFLYWoEBlR4nkgEzknLPkKP2ijxMccnYoRFBw8JHHtRWmk-bonkrZ4QdeHgTJpLzF77qJo53DOSiVPWwvFNz-MlEusJk/s400/Momentum+Growth+Names.bmp" border="0" alt=""id="BLOGGER_PHOTO_ID_5519114634883714018" /></a>Lumpy Investorhttp://www.blogger.com/profile/09134871823971138266noreply@blogger.com0