Archive for April, 2009

Lost in regulation

By: ispeculatornew | Date posted: 04.30.2009 (8:00 pm)

Last time, I wrote about the reasons why there is currently an increased demand for compliance in general. Today, I will analyze specific compliance in the respect to hedge funds. Leaders at a recent G20 meeting agreed on stronger regulations for the financial industry. In addition, Treasury Secretary Timothy Geithner laid out a plan to more tightly oversee hedge funds. While certain groups are clamouring for more regulation, others are pressuring to keep the status quo of little oversight.

lost_in_translation_ver2Fundamentally, hedge funds invest in a diverse set of financial instruments using a variety of investment techniques. Historically, hedge funds have focused in such a way as to be “hedged”, in large measure, from material changes in stock and bond markets.

Have you seen the excellent film Lost in Translation 2003, starring Scarlett Johansson? Hedge funds often involve complex, illiquid or opaque investments and these instruments often lack the transparency associated with more conventional investments, making them more difficult to understand.

Over the years, the number of hedge funds has increased dramatically. This creates competition, which puts pressure on managers to take bigger risks or skate toward the edge of malfeasance. Hedge funds generally are led by traders, who may not be accustomed to functioning in an environment where there are rigid internal controls and procedures. That’s part of the reason why there is a growing concern about portfolio managers’ risk and compliance officers’ understanding of their risk exposures.

People investing in hedge funds are mostly high net worth individuals and institutions, and have a greater understanding of the investment structure, the risks and the management strategy than would be typical for traditional investment vehicles. Funds have also recently drawn money from the less wealthy, increasingly via pension funds, therefore exposing a wider sphere of investors. Because hedge funds’ complex structures are not fully understood, they have discovered that purchasers are more attracted to firms that have the infrastructure and procedures to demonstrate internal controls. It is highly important for a hedge fund purchaser prior to investing in order to assess whether a specific hedge fund is an appropriate choice for the portfolio. Thus, hedge funds themselves have recently taken steps towards regulation.

It is important that compliance should not be overwhelming because it is easy to get lost in too much regulation. Also, it is key that hedge funds not become less competitive because of increased supervision and that returns are not harmed by increased operational and compliance costs.

There has been much disagreement and resistance to regulation from the hedge fund industry and stakeholders in the financial markets. The self-regulatory setup may not be optimally efficient and may not respond as quickly as it could. The US government is now willing to bring hedge funds under federal supervision. It is for world leaders to pursue comprehensive regulatory reform and coordinate globally in order to re-instate and inspire confidence for the financial system.

Ways to trade currencies

By: ispeculatornew | Date posted: 04.29.2009 (5:00 am)

forexForex, the FX market, these are terms to describe trading of exchange rates. There are many different ways to trade this market and if you count it by the amount of money involved, it is by far the most important asset class in the world, and it has important impacts in the world economies.

I thought I’d explain a few of the different ways that investors can trade in the FX markets.

1-Spot trades: This is clearly the easiest one, you can buy one currency and sell another one, as is the case with a stock or a bond.

A trade example is:

Buy 1,000,000USD, Sell 700,000 Euros

2-Forward trades: Same principle but when you buy a currency, you are actually promising to buy a currency at a certain point in the future. The main advantage is that you do not have to own foreign currencies in your account.

The same trade as the spot could be used except it would be “settling” in 3 months, July 25th 2009

3-Options: An option would be a leveraged play on currencies. An example would be:

Buy call EUR/USD

It is the same principle as a stock option really. You are either buying or selling what could be compared to a lottery ticket in the sense that you pay a premium, or a an amount for a “ticket”. If it goes in your direction, you can make a good amount of profit. However, if it does not, you will basically lose the value of your ticket, or the option premium.

The situation is the opposite of course if you are selling the ticket, or selling the option.

The quotation of an fx option looks a little more confusing, for example:

Buy 1 option on 10,000,000$USD – call EUR/Put USD strike 1,5 at a premium of 50,000$.

This can be done through listed options but institutions also do a great deal of trades on OTC options, that is options between two institutions on their own agreed terms.

4-Forex Swaps: These are deals that are generally for funding purposes. For example, if you have 10,000 Euros in your account and wish to keep those because you think the Euro will appreciate but are getting no interest on Euro balances, you can make a deal that will sell your Euros right now but that locks in a buy of Euros in the future. It is similar to buying a Spot and a Forward at the same time…!

These are a few of the ways that can be used to play the FX market, best of luck to all of you who are playing this market!

The IMF is back!!

By: ispeculatornew | Date posted: 04.27.2009 (4:00 am)

imfThe IMF, the International Monetary Fund, an institution created in 1944 to stabilize the world economy, mainly through exchange rates to start off. Over the decades, the IMF has gained the reputation of being less than usefull in many circles. Why? Simply because the IMF has made some mistakes and often been the last resort for countries. The IMF required among many things, policies such as the nationalisation of specific industries. These policies are often wildly unpopular and do not clearly work. Because of this, the IMF (as is the case for the World Bank) has often been seen as a resort for countries unable to access the capital markets open. But the past few months have seen new hopes for this international organisation.

One of the problems of course is that the IMF has often been seen as simply an American instrument to impose its policy across the world and with 3 times more votes than any other country, it is difficult to argue to the contrary…

With the recent economic turmoil, one of the major consequences is fear of lending, especially to anyone with a somewhat risky situation. So countries that are viewed as fairly stable and emerging economies are now having a lot more trouble getting loans, and even countries such as Poland are having difficulties. This has caused the international community to see a renewed role for the IMF and has received increased funding to step in. Of course, it is not clear exactly what the IMF is being asked to do. You can read an interesting article from the Wall Street Journal about the new IMF mission.

In my opinion, this is a good thing no doubt about it. International organisations such as this one have an important place in the world scene and it is a good opportunity for the IMF to regain its reputation. I think one of the major things the IMF needs to keep in consideration is to not ask its lenders to do what other western countries would not do. For example, selling off water supplies to the private sector or national parks. I am convinced that there has to be ways to stabalize economies without always being so extreme. Also, the IMF should consider more advice from the likes of Jeffrey Sachs, which I have personally adored reading. His view on economics and foreign aid simply makes a lot of sense and could be applied to many countries around the world…

Ramblings

By: ispeculatornew | Date posted: 04.26.2009 (4:14 pm)

nyseLots of good reading this week, here are some of the highlights from my end:)

-A new edition of the Carnival of Financial Planning by TFB:)
-Scared of investing in banks, try this article by BMSP
-MDJ presents a few lessons he’s learned🙂
-Zach talks about the NYSE’s stock soaring
-The Wild Investor presents “When to sell a stock
Do you share your credit card with family and friends?
Is your bank working for you??
Earth Day: Another idea

Defiant? That’s an understatement

By: ispeculatornew | Date posted: 04.24.2009 (5:00 am)

tpbHave you ever heard of The Pirate Bay? No, it’s not related to those Somalian Pirates that are making the news these days. In fact, some would say it’s worse, while others would say it is legal. Basically, the Pirate Bay is one or the most used Torrent website on the internet. What is a torrent website? It is a website that gives links that make it possible for users to share content on the internet. Typically, the content is music and tv/movies of course but it actually goes a lot further. Many of these websites have gone down in recent years as legal complaints forced the users to shut them down. But The Pirate Bay kept going even posting the legal threats they were receiving and putting those complaints to ridicule. The music and movie industries have been fast to call out such websites as being illegal and immoral. But the owners of the website do have one point, a point that I have discussed previously and that is crucial: The internet has no central government.

So who rules the internet? Basically, in theory (and again legally this is debatable), the applicable law is the one where the websites is hosted, in this case Sweden. To many, it is an understatement that downloading a music album without paying for it is illegal but in reality, many countries do not have such laws and Sweden is one place where the laws are not clear on the matter. There has been a lot of media attention lately regarding the recent lawsuit against The Pirate Bay and they actually did lose the first part of the trial, you can read a good article about it here. Now, if you think TPB is going to give in and close its website, you are DEAD wrong. You can read their official response here.

Of course, it is easy to judge, especially for those in the music or movie indutry. But the fact is that losing a lawsuit does not mean much until all appeals are done and indeed, that can happen only a few years later. I’m not of the opinion that Sweden is wrong or even the Pirate Bay owners, and in fact, time will tell who is legally right. But in the meantime, I still maintain that the world needs to start thinking about a way to legislate the internet, including perhaps a more central government, comparable to the united nations. In theory it sounds great, but anyone interested in foreign affairs knows that such an institution is very very far from being created and even when it will, its efficiency will need to be proved.

Judgements and cases like The Pirate Bay do however bring up such questions about how to deal with such cases…It will be interesting to see if international institutions will be able to come up with a solution to this problem.

When to take profits on my S&P500 trade

By: ispeculatornew | Date posted: 04.22.2009 (5:00 am)

sp5002A few weeks ago, I went long S&P500 at 793 thinking that the S&P seemed to be back on its way. The trade went down slightly to start off, but it is now up 9%. I did so through XSP, a Canadian dollar ETF that tracks the USD return of the S&P 500. It is exactly what I was looking for as I do wish to be exposed to the S&P 500 but given that all of my costs are in CAD$ and that the near future direction of the CAD$ is very unclear, I did not want to have the return of my trade affected by the exchange rate fluctuations.

I had decided I would close out the trade if I made 10%, waiting for a retreat as the economy is obviously not out of its misery yet. Of course, now that the trade is nearly up 10%, I’m hesitating about my early decision. Knowing that closing trade discipline is essential, I will probably be respectful of my initial thought. But the question remains… is the S&P 500 rally about to end??

I did find an interesting analysis using the triangle model, you can take a look at a video here, it’s free:) It does confirm that the S&P 500 is running into a lot of resistance right now and it is quite unclear if I would be better served by exiting my position and re-entering at a lower point. There are so many different ways to look at this debate:

-Time and time again, research has showed that trying to time the market has resulted in poor results (TFB wrote about it last week here)

-However, there is a very heated debate right now about the notion that buy and hold can still be a successful strategy

By the way, I did not report this trade in my positions here because it is not a “trading position”, it is in my retirement account! Just wanted to clarify that!

After a spectacular rally from the lows seen last month, the S&P appears to be running into overhead resistance and for this reason I am evaluating the position. What I will probably end up doing is respecting my initial trade and close out my position if/once I reach the 10% profit to analyze the trade once more. If I do come up to the conclusion that the S&P 500 is headed back up, I will be more than happy to re-enter the trade and see how that turns out.

So once more, feel free to go check out the video, I’m sure you will agree with me that is very interesting and helpful analysis, see it here🙂

McDonald’s (MCD) trying to deal blow to Tim Hortons (THI)

By: ispeculatornew | Date posted: 04.20.2009 (5:00 am)

mcdoTim Hortons is a major player on its own field in Canada and has slowly been gaining ground in the US since its recent spinoff from Wendy’s over a year ago. For those who do not know about it, they are basically similar to Dunkin Donut’s but they quickly crushed their competition. Basically, Tim Hortons is known for its coffee and for its healthy fast food, mainly around sandwiches and soups. They have dominated the market in Canada so much to even become a symbol of Canada and something that Canadiens are proud of. Of course, McDonald’s is a major player in the fast food as it is everywhere else. But it now seems ready to act on Tim Horton’s and is putting up a major offensive on two fronts.

First off, McDonald’s has started ad campaigns that look awfully like the ones Tim Hortons would look like, around Canadian themes like hockey, family, etc. You watch the ad and feel like it is Tim Hortons and then they break it that it is actually McDonalds. Agressive? Yes, but nothing that would not be expected.

The major difference of course is the 2nd part of this campaign as McDonald’s announced it would be giving out coffee for 2 weeks in the mornings, not with any purchase, free, plain and simple. That is what I would call a major move that will be costly but could actually change the marketplace as they will succeed in having clients taste their coffee. Of course the whole point of the game will be to retain the clients and keep them after the free period.. can they do it? Hard to say but I think most Canadians will give them a shot.

Think this is not critical for THI? Figure this.. 45% of sales by Tim Hortons originate from coffee, which holds 70% of the morning coffee market share with McDonald’s holding only 10%, a very very distant future…

It will be very interesting to see how the Tim Hortons stock reacts in the next few days. There had been rumors about this attack and so the THI stock had already suffered a bit, but with details coming out, it is clearly a dangerous campaign for Tim Hortons. And I would personally not want to hold any THI stock going into Monday trading…

Oh so now you like us???

By: ispeculatornew | Date posted: 04.17.2009 (4:00 am)

swfRemember a few years ago when sovereign wealth funds made the news? They started a couple of decades ago but started to gain popularity and power only about 5-10 years ago. As time went by, they started diversifying their investments and going into private placements and taking important stakes for economic but also strategic reasons. The Chinese and middle eastern funds were the most active and raised the most attention. This culminated into a huge controversy in 2006 when the Dubai Ports Authority made an offer to buy six major US ports. The US government raised major issues with the transaction mostly because of security issues. And while those might have been legitimate, I think we all agree that there probably would have been no problem if a UK fund had been at the other end. In any case, this was a clear signal that sovereign wealth funds were not welcome under all circumstances and would have to subject themselves to more transparency than they were required by law to provide.

As the current economic crisis evolved, it became clear that these funds could have a useful role as they took important stakes in Western banks, mostly through big private placements. They started to be seen under a more favourable light and suddenly, their lack of transparency or motives became less relevant. Funny how that works isn’t it?

Last week saw another more important move on that front. As sovereign funds (SWF’s) have stepped back a bit from these major investments to avoid big losses, they are now being seen as an important way out of the current crisis. The governments are not asking them for any questions now it seems and have shifted to ask for money instead. “Britain would welcome investments by sovereign wealth funds to bolster its economy”, Business Secretary Peter Mandelson said on Wednesday. Funny how that works isn’t it? They are now being seen as an easy way to get liquidity into the system and have less downside than government debt issuance. The question of course is if these funds will step in and if they do, will the governments remember all of these contributions and help when things start to rebound?

I would personally think that the SWF’s will be investing more funds but they will be monitoring things very closely and could easily move things around and not come back if the governments do not lay off a bit when the economy gets back on its feet.

Would YOU invest in a pirate ship???

By: ispeculatornew | Date posted: 04.15.2009 (5:00 am)

pirate-ship-skull-swordThe past few months have been very interesting ones for anyone involved in sea transportation, especially those using routes close to the East coast of Africa. Increasingly, pirates, a group most thought had gone bankrupt years ago are fighting back.

They started out their expansion plans with a clear plan, going after numbers. Simply hire a low paid crew to take over ships, then ask for a ransom in exchange for the boat and everyone onboard. While they had limited equiptment to start off with, they have been reinvesting 20% of their ransoms according to their reports in order to acquire high tech GPS equipments but also increasingly impressive warfare in order to take bigger and bigger ships.

The Kenya government estimates that the Somali pirates were able to collect $150 millions in ransomes in 2008, not a bad number and a clear increase over the 2007 numbers. Thanks to their increasingly sophisticated equipment, the pirates are now also able to connect through high tech means such as the internet and text messaging that have enabled them to improve the efficiency of their operations.

There are some downsides to this investment though, here are a few:

1-They might have increased their size too quickly as they now seem to draw attention from US and other military groups that are looking to end or curve this serious problem. China is another country that seems to be increasingly concerned with the pirates

2-Unfortunately, it is very difficult to get any kind of verification of the financials as the pirates have generally not accepted any auditing of their books

3-Currently, the pirates have not diversified across the world making it too easy for military groups to limit their expansion. We will be looking into future conference text messages with pirate chiefs to determine if they have any plans related to this.

4-Given the very low cost of life, we are uncertain of the level of motivation for the pirates as they clearly have amassed enough money to slow down their operations while US military ships are out for them. We expect the 2009 Q3 and Q4 numbers to experience pressure with a return to full operations only in 2010.

One potential area of growth for the pirates is “pirate insurance”. They could charge a fixed fee for any boat going through the region that prefers not being attacked. This could even make life easier as such boats would require no work apart from collecting the fees.

If you wish to know more about the operations and perhaps place an initial investment, we recommend taking a cruise through the Gulf of Aden, you should be able to get in contact with pirates within a few hours….good luck!

Closing Apple-APPL trade

By: ispeculatornew | Date posted: 04.13.2009 (4:00 am)

appleNow that we are in April, there was only one remaining position from our 2008 picks and it is actually the last time that we did a more traditional “long only” pick, going long Apple(AAPL) on valuations purposes. The trade turned out to be quite an adventure because of one factor we had not seen in advance, the health problems of then CEO Steve Jobs, the man seen as responsible for the turnaround of the company. When rumors of problems surface, the stock suffered and then it only got worse when it was confirmed that he would be stepping down.

But we felt more comfortable than we had in the past, the stock still almost reached our stop loss which would have forced us to get out of the position. We fortunately were able to stick with our pick and the recent turnaround by both Apple and the whole market (especially in technology) proved to be of great help. The pick now stands at 23% of profit and we will be closing it out this morning at the open!

Apple remains a stock we have great interest in and will probably trade again in the near future. The biggest problem we currently see in it is its diversification. It is quite difficult to know what the company is facing given the diversity of its produts. While it has hardware such as its Ipod line, its Iphone line and even its computers, it also has a growing market in the digital markets of songs, videos and applications that are all being sold on Itunes. This makes it very difficult to get an overall view on the company. But still, we have a feeling we’ll be getting involved very soon in the company!

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