Archive for November, 2008

Sovereign Wealth Funds

By: ispeculatornew | Date posted: 11.12.2008 (4:00 am)

Over the course of the past decade or so, a new group of funds has been gaining more importance in the financial markets and the economy throughout the world; Sovereign Funds. What are these funds? They have a lot of misconceptions about them, often because lately the ones that we have heard most about are funds that come from Arabic countries. But actually, a lot of countries manage such funds, many of them are Western countries.

One of the first known funds was established such fund was set up by the government of Norway, the Petroleum fund (its funds are mostly accumulated on taxes for the oil industry in Norway) is managed by a division of the Norway central bank. They established a fund in 1990 to be able to establish a better retirement for its citizens. Believe it or not, this fund now manages almost 400$USD Billions! For some reason, this fund has not been at the centre of a controversy. But other funds, especially those from the middle east, have been bringing up a lot of debates among regulators in the past few years.

An important difference with sovereign funds is that they often have different goals than simply a risk/return objective. That is even more true in some funds such as ones in Abu Dhabi (the largest in the world with about 875$USD Billions). These funds often also have strategic objectives to either gain an exposure or a position for its government/country that might profit in other ways than economical. If you remember well, a few years ago, there was a big debate in the United States over the idea of letting a sovereign fund from Dubai buy some ports in the US and the investment never happened after all because the US viewed these ports as critical to its national security.

One of the main problems with these funds is that they are subject to even less regulations than Hedge Funds which translates into governments, regulators and the media/populations not knowing what they are up to. This year, they have been seen as a force for the good by many as they injected massive sums of money into the troubled banking system. But they might be the ones regretting those moves as they have been getting dismal returns on such investments. Morgan Stanley estimates that the nearly $2.3 trillion dollars under management by these funds have returned -25% in 2008…! Of course, these are major approximations as most of the investments by these funds are done privately, often off markets and these funds usually do not publish any results.

It will be interesting to see how these funds can evolve in the next few years and if pressure from regulators will help generate more transparency for outsiders into what these funds are up to.

Even Warren Buffet’s Berkshire Hathaway (BRK.A) is suffering

By: ispeculatornew | Date posted: 11.10.2008 (4:00 am)

Berkshire Hathaway, the investment fund managed by the famous Warren Buffet announced its results for the 3rd quarter on Friday, not much of a surprise as the fund is diversified compared to many but still very much involved in the finance/insurance sector. Berkshire managed earnings of 682$ per share, a decline of 77% and a fourth straight decline in these quarterly earnings.

Management has said it was possible to look at these results as either a half empty or a half full glass. Berkshire was helped in doing better than the market by the fact that Warren Buffet had set aside important amounts of cash because he claimed to not see any attractive valuations out there. But that is about to change as he has commited, among others, to $27 billions in investments in General Electric and Goldman Sachs, two cases in which the cash stripped companies had to give very attractive terms to the Omaha company. Deals and investments reduced Berkshire’s cash holdings to $33.4 billion on Sept. 30 from $47.1 billion a year earlier

The loss on derivatives comes mostly from a much discussed bet that Warren Buffet made. Basically, Warren Buffet sold Puts on 4 stock indexes that will expire from 2019 to 2027!! So he received that amount that he can now invest and has to put a reserve in case those indexes are under the determined strike at that date. Sounds like an irregular strategy for Buffet who has called derivatives “weapons of financial destruction” in the past, but let’s not judge the Sage of Omaha, he usually knows what he’s doing. “The contracts were entered into with the expectation that amounts ultimately paid to counterparties for actual credit defaults or declines in equity index values [measured at the expiration date of the contract] will be less than the premiums received,” Berkshire said. But some are doing just that. Kyle Bass, managing partner of Hayman Advisors said: “Mr. Buffett has enough money to be able to have his holdings drop 50% and still fly in his jets and live the way in which he has become accustomed,” Bass wrote. “Do you have enough capital to take what you have left, cut it in half, and continue to live the way you have for the past few years? I don’t.”

Another loss came from hurricanes Gustav and Ike, which apparently caused losses in the order of $1.05 billions in the current quarter.

All of these factors explain the 20% or so loss so far this year for Berkshire stock, which has increased in 17 of the past 20 years.

Yahoo (YHOO) debacle

By: ispeculatornew | Date posted: 11.07.2008 (4:00 am)

Yahoo(YHOO) has been in the news for what seems like months, since Microsoft launched an attack to buy it in May this year for 33$.. which the Yahoo management had rejected claiming it was not getting sufficient value for the company.  Fast forward less than 6 months and YHOO investors are not very happy as the stock is down significantly and it seems that unlike Ebay, Yahoo has been losing value as time has gone by.

Firstly, Yahoo has been spending a lot of energy trying to fight this by any possible means. One of these moves was an advertising deal with Google that would have made the acquisition less interesting for Microsoft. However, after months of pressure from regulators and clients, Google has finally backed out of the deal, leaving Yahoo with another effort that has resulted in no positive results. “The companies’ decision to abandon their agreement eliminates the competitive concerns identified during our investigation,” said Thomas Barnett, assistant attorney general in charge of the department’s antitrust division. “The arrangement likely would have denied consumers the benefits of competition.”

As well, the tech world has been seeing numerous talents from Yahoo depart either to work for competitors or for smaller startups, thus decreasing the value of the firm. Investors do not know what is going on at Yahoo but they do see that not much good is happening.

Then recently, one of the prime assets of Yahoo, it’s stake in Yahoo! Japan announced a major problem with fraud in its auction section as apparently 1,5M false members created accounts and sold fake items resulting in fees that now have to be reiumbursed but also a public relations nightmare for the economy and a loss of confidence from its users.

And finally, it becomes very difficult to value a company such as Yahoo! that has a big part of its value in the speculation, this time that Microsoft will come back with another offer to buy Yahoo!. It’s difficult to say if that will happen. Microsoft lost a lot of time and energy on its previous bid and it is clear that Yahoo! has lost a lot of its value since then.

Still, some analysts say that Microsoft could still offer a premium over 75% if it was to place another bid and it would be possible to invest in Yahoo on hopes of a possible bid by Microsoft but right now the Redmond company is tough to predict as it has challenges of its own and it’s not clear that its search position is as high of a priority as it was a few months ago (especially since recent reports have shown a 19% annual increase in ads on MSN, without even needing an acquisition.

But in my eyes, this remains a big gamble and not one I’d get into.

Obama is the new President, now what?

By: ispeculatornew | Date posted: 11.05.2008 (4:00 am)

As had been written last week, IntelligentSpeculator believed it was in the interest of the US economy to move to a democrat government and as we write this, it is exactly what has happened as Governer Barack Obama won a decisive victory to become the first ever African-American President.

But all is not decided yet as we currently do not know if the Democrats will provide them a Filibuster-proof Senate. This would have a major impact as it would give the Democrats the possibility of moving important legislation through without needing support from the Republicans.

It will be interesting to see how the stock market reacts tomorrow as by most standards, the win by Barack Obama had been discounted and major movements had been made (for example, stocks related to the defence industry should suffer a bit as Obama moves out of Iraq, etc). But we can still expect a bit of a rally as one of the ennemies of the stock market, uncertainty, fades away. But then again, with the possibility of a McCain win being estimated at around 2% today by some, it is possible that today’s rally was about just that, the Obama win.

Now it will be interesting to see the impacts on the markets of some of Barack Obama’s economic policies, especially if they get that Senate strong position. The more major changes in policy concern the tax modifications as Obama wishes to increase capital tax gains on those making over 250K per year. He would also increase income tax for those. As well, Obama has commited to renegotiate free trade agreements such as NAFTA (North American Free Trade agreement). As well, he has announced intentions to set important health care reform.

All of these changes will have important impacts on the stock market that we will be loooking over in coming weeks and months, as some stocks will benefit from these measures and others will suffer. A good example of a stock that might suffer is Halliburton (HAL). Halliburton was not only benefiting from the Iraq war but also from its important links to the Bush administration (vice-president Dick Chenney is a former-CEO of the company, still has important interests in the companie’s success, etc and not so surprisingly, Halliburton has been getting important contracts in the past 8 years odf the Bush administration). So no doubt about it, some important changes will occur in the US economy because of today’s changes..!

By the way, as we write this, the US dollar has been gaining ground against the Euro while Asian stocks have also been doing very well.

Ways to invest on oil speculation

By: ispeculatornew | Date posted: 11.03.2008 (4:00 am)

Oil has been one of the more volatile assets in the past few months and at this point almost looks like a play on the global economy. As perspectives of the world economy became bleak, oil began going down and has lost more than half of its value.

So there are 4 ways that I will present to invest in oil.

1-Futures: The more obvious one, investing in futures or future options on the Nymex exchange (or a few others): this is certainly an efficient way to do this as you are playing directly into oil. However, this type of investment is very risky and requires margin posting and so on. Brokers often require to have lots of cash to trade futures because you can lose a lot of money very quickly. The main difference in the next 3 alternatives is that you cannot lose more than what you invested in (assuming you went long).

2-ETF: You can invest in various ETF’s such as OIH (oil services) that are very highly correlated with oil. There are even ETF’s that track double the exposure (long or short) of oil. These have fairly low fees and are an interesting way to invest in oil.  If you want to have leverage, you can invest in DXO (that tracks 2 times the return of oil minus fees, etc). SZO is similar but tracks 2 times the return of a short position so if you own this stock, you will want oil to go down.

3-Airline stocks: Want to have an indirect play on oil? Airlines typically are very highly correlated with oil, especially some like CAL (Continental Airlines) that do not typically hedge their jet fuel costs. The airlines are an inverse play of course. As oil goes up, airlines pay more for their fuel and lose more money.

4-Solar energy: Stocks such as First Solar (FSLR) are highly correlated with oil. Not too difficult to see why. As oil becomes more expensive, alternative energy sources are more in demand. the chart at the top of this bost is one that shows the very high correlation between OIH and FSLR…

So basically, if you think the world economy will bounce back and that oil will go up you could either go:

-Long oil futures

-Long OIH or DXO

-Short an airline stock

-Long solar energy