Archive for January, 2009

Investment Talking

By: ispeculatornew | Date posted: 01.17.2009 (6:00 am)

Every Saturday, The Intelligent Speculator does a review of good read around the blogosphere. Here’s what caught my attention this week:

Dogs of the Dow at Blueprint for Financial Prosperity. This is an interesting investment strategy based on stocks from the Dow Jones.

Stock Analysis: PepsiCo, Inc. (PEP) at Dividends4Life

Alternative investing – Looking for Climax at StockWeb

1MansMoney from 1MansMoney presents We Don’t Bank With Them, But We Bought Their Stock

Education Still Looks Dangerous according to Zach. I guess it may not be the best timing for education company during a recession!

The Wild Investor thinks that the Dow can go lower!

Mr ToughMoneyLove from Tough Money Love presents to you his year end financial performance review.

Carnivals:

Festival of Stocks

Money Hacks Carnival

So were hedge funds that bad in 2008?

By: ispeculatornew | Date posted: 01.16.2009 (4:00 am)

Today, we finally received the final numbers, the returns for the most known hedge fund index, the Credit Suisse/Tremont index that tracks over 5000 index funds. And the December returns came in basically flat as the index returned -0,03% which brings us to a total of -19,07% for the 2008 calendar year. Bad or not?

First off, just to clarify since hedge fund is such a large category, only 2 categories came out with positive returns in 2008. You will easily guess the first one:

Dedicated short bias 14,87%

Can you imagine that these funds almost disapeared in the past decade as consistent positive returns since 2001 have made life very difficult for funds that are “short” market. But investors that diversified here will be very happy with their returns.

The second category is:

Managed Futures 18,33%

These funds made solid profits from the very high volatility but also enjoyed numerous trends. Think about a fund that was long oil for a while and when the trend reversed set thgemselves short. That trade alone can make a year don’t you think?

But of couse, there are some less “solid” performances! And coming in last was Equity Market Neutral which is surprising given the fact that these funds should not be affected as much with declining markets like we saw in 2008. But irrational price movements during the year certainly hurt stock pickers…so here it goes:

Equity Market Neutral: -40,32%

Ouch! But in fact, the return is not that bad. Of course, like any investment, you have to compare. Let’s compare the total return of hedge funds, -19,07% to the return of the S&P 500, which was -38,49%! True, hedge funds did not return what they have promised for years, absolute returns (positive returns in each year no matter how the market reacts), but it did still outperform the general equity markets and in that sense, it’s easy to argue once more the power of diversification and investors that had diverisifiction across asset classes probably did much better in 2008 than others. Obviously, the best portfolio for 2008 would have been a cash portfolio or invested in government TBills, but few if any analysts would have predicted such a fate.

However, there is also another important part of the story that is the much documented and discussed Madoff fraud, which hurt the hedge fund index by creating some terrible returns (-100%) for some and highlighting a risk that has been underestimated by many hedge fund investors. Since these entities are subject to little regulation from regulators, due dilligence becomes very important and many investors have thus decided to withdraw funds from hedge funds even if returns were up to expectations.

Because of that, we expect many changes in the industry over the next few years in the financial markets, in how some products such as credit default swaps are traded but also in the regulations that hedge funds must comply with…

The Prime broker business model

By: ispeculatornew | Date posted: 01.14.2009 (4:00 am)

The past few months have brought a lot of light into what the financials are all about, how much risk they had on their books and some of the downside they had. A lot of these new informations brought out some questions and many had to do with the prime brokerage business.

In theory, it is a simple and safe model for all parties involved. An investor or fund does not want to take care of the back office, settlements, accounting, etc. So they simply use a prime broker such as Goldman Sachs, Morgan Stanley, etc. They will simply send all of their trades at the end of each day to their broker. The broker will make sure the trades settle, issue reports at the end of every day about the cash, market value, and trades in the specific accounts. Simple enough?

Wait it gets better. A good example would be an equity fund that uses a prime broker. Usually there are a few sources of income for the prime broker. First off, if the fund uses electronic trading, they might be using the one offered by the prime broker. Execution commission comes in. Then, the fund manager might want to do some FX hedging. Since it is not a primary activity, they do not have much contacts and will usually do them through their PB (Prime Broker) which will collect on those through spreads.

So that’s how they make those profits? Hmm well, there is one other thing. If you have a fund that has $500 millions and is invested to 80%, then that is about $100 millions in uninvested funds. The prime broker will often keep those funds and pay out interest on those funds to the fund.

So where’s the problem?

What if you are a fund manager, have these $100 millions and hear that the prime broker you are using is investing those funds to get higher returns? And what if part of those investments are in leveraged vehicules? That works and is fine until the moment where confidence is shattered which is exactly what happened a few months ago when companies such as Citibank and Morgan Stanley were having major problems and their stocks were going in one direction, down. What happens if you had money at Lehman in your fund? Well unfortunately, you are out of luck. Sure, you will probably get most if not all of it back because of segregation rules. But it might take a long time and it will certainly make any client of that fund VERY nervous.

So what has happened now? Well, first of all, a lot of fund managers are rethinking how to deal with prime brokers. One of the differences is that funds tend to leave a lot less money at prime brokers, deciding to invest those funds theirselves or invest them in safe securities such as US TBills. That is one of the factors that contributed to yields under or close to 0% in recent months on some issues.

So what does that mean for Prime Brokers? Well, with less hedge funds and probably less profit per fund because of these changes, it probably means a big drop in revenues. How much? Tough to say, but I’m staying clear for now!

The flip side to leveraged ETF’s

By: ispeculatornew | Date posted: 01.12.2009 (4:00 am)

In last week’s column about leveraged ETF’s, I talked about the risk involved in using leveraged ETF’s when investing, especially when doing long term investments. However, there is no doubt that these products provide active investors with incredible opportunities because of their incredibly volatility. Below are two charts of the biggest movers since the markets lows of November 20th.

And there is no doubt that the right plays have been incredibly profitable. Talk about a return of over 80% for TNA and you will know exactly what we mean. And this important volatility is exactly the reason why these products have been picking up so much popularity in recent months with total assets estimated to be over $500 billions.

Even in terms of hours your investments can see volatility that would have been unthinkable a few years ago. Did you hear about FAS, an ETF that tracks 3 times the return of the US financials? A few months ago it went up over 100% in less than 8 hours of trading. That is what we call volatility isn’t it?

Of course, any experienced trader would tell you that you will not do well trading these extremly volatile products using only feelings. You will usually need a model or certain methodology as well as some very clear exit points. Are you looking for 20%? If so, when it reaches that point, get out. Looking for returns of 50% on every trade will lead you to failure, no doubt about it.

As well, I found it very interesting that after writing my piece on these leveraged ETF’s when I looked at some of the picks by other members of the friendly 2009 stock picks competition a few of them had taken these exact products. Wouldn’t it be ironic for me to lose out to other bloggers who are using the exact product that I say cannot be used long term. Ok, 1 year (the length of the contest) is probably not very long term. But you would still think the theory would apply. What I’ll say is that of course if there are big movements in the market towards their picks, they will achieve good results and better ones than ETF’s like mine (USO and GLD). But I think that if we see a fairly flat year, I will come out on top for comparable picks (USO vs 2 x Oil for example), and if that is true, then I could safely argue that over a lifetime, we will have many more “flat” years than extremly volatile years. Of course, it’s all up for debate and I’ll be the first one to come out if I prove to be wrong on this but I think that over the next few months, a lot more information will come out about how these leveraged ETF’s work, how they are maintained and the risks associated with them.

In the meantime, look the results below and hope you can capture the next 82% up move in 2 months!

Closing PCLN vs NILE

By: ispeculatornew | Date posted: 01.11.2009 (3:41 pm)

Quick note to let you know that I would now close out my recommendation from December 17th on going long Priceline (PCLN) vs short Blue Nile (NILE). It was intended to be a longer term play but with a return over 30%, I think it’s not the time to get too greedy on this one… might get into another similar trade later this week but for now, I’m out and happy with the profit.

Investment Talking

By: ispeculatornew | Date posted: 01.10.2009 (6:00 am)

Every Saturday, The Intelligent Speculator does a review of good read around the blogosphere. Here’s what caught my attention this week:

Sun’s Financial Diary is discussing if you buy stocks or mutual funds when you only have a small amount to invest.

Zack is giving his thoughts on LDK Solar.

Find out why PF Blog sold all his stocks.

D4L presents Stock Analysis: Kraft Foods Inc (KFT) posted at Dividends4Life.

Dorian Wales presents Key psychological factors in stock market success posted at The Personal Financier.

Silicon Valley Blogger presents Stock Market Predictions From Bad News Bears posted at The Digerati Life.

David Weliver presents The Best Stocks for 2009 posted at Money Under 30.

Dividend Growth Investor presents Arbitrage Opportunities – CEG and ROH

Knot vs IDC

By: ispeculatornew | Date posted: 01.09.2009 (4:00 am)

The current environment is a very challenging one for all media companies because as major ad buyers cut back their expenses, advertising is one of the most important cuts. I thought it would be interesting to take a closer look at two media companies. They are both very different in the fact that one is a financial data company (Interactive Data Corp)  while The Knot is very specialised, a website dedicated to weddings.

Interactive Corp is a financial network that provides financial data, pricing to both individuals and professionals in the financial field. They have some diversification in the field as they offer their services in various ways. They are currently expanding and given the current environment and the attention given to what is happening in the markets, I would expect this company to have solid results in the upcoming months.

On the other side is Knot, a website that has gotten hammered in recent months. It is down almost 50% from its 52 week high. And there are rumors.. When the new executive leaves after 6 months on the job, it is not a great sign.  When owners are selling their stock, doesn’t look great either. And even their website is not generating as much traffic and their recent profits have been either flat or down in recent months. One of their most importants sponsors, Macy’s has said it would not renew in 2010 when their agreement comes to an end.

They are a leader in their field and could become an acquisition target, but I simply think that trading at a P/E of 39 is just way too high, especially when I see the possibility of purchasing IDC for a PE of 18. So I would be making this pick on a relative basis, going LONG IDC and SHORT KNOT.

Gazprom (GAZP:RX)… willing investors?

By: ispeculatornew | Date posted: 01.07.2009 (4:00 am)

Gazprom, ever heard of it? It is the largest Russian company, the most important natural gas exporter in the world. You probably have not heard much about its stock simply because it is not listed on US markets. But still, at one point last year, Gazprom was the third largest company in the world (measured by market cap). To buy shares of Gazprom, you will need to venture yourself on the Russian exchange! The stock is down about 70% from its high of a few months ago and with Bloomberg reporting a P/E ratio of under 4, it certainly looks attractive from valuation measures.

The main problem of course is that Gazprom lives in a very complex business environment. Not only is it located in a fairly unstable Russia (unstable in many ways, currency, economy, mililtary, etc) but it also being used in many ways as a weapon. In fact, it is one of the major sources of power of the Russian government, perhaps even as important as its army. To see examples, look no longer than the recent spat with Ukraine. Gazprom had been selling its natural gas at a price of 179.50$ in 2007 to Ukraine and decided to take the price up to 450$ per 1000 cubic liters. Market prices going up? Sure, but this is not really the issue.

Gazprom has what is in effect a monopoly in Europe for sales of natural gas and has been known  to push around its closes neighbours as well as threaten Western Europe. Because of this, it is safe to argue that:

-Profitability is not the sole objective of Gazprom: In fact, it sometimes is not even considered in the equation when dealing with customers. Political motivations can be a lot more important in many cases.

-Since Gazprom is so crucial to the power of the Kremlin, it is easy to see how the government could change the rules of the games, especially those for foreign investors. This could happen at any point, probably not right now because Russia is suffering so much from the economic turmoil that it cannot afford to scare off investors. But give Russia some better conditions and we have no idea what will happen.

The problem with investing in Gazprom is that you have to look into so many different factors and how it’s possible to price these political factors in seems very much like playing Russian Roulette.. of course, some investors are happy to play, but I’m not!

Quick note on last trades

By: ispeculatornew | Date posted: 01.06.2009 (6:19 pm)

Good evening to all of you. I am writing a quick note to let you know that I now take back half of the trade I had suggested December 17th (see here). In that trade, I had suggested going long Priceline (PCLN) vs short Blue Nile (NILE). I had done so on a medium to long term basis based both on the current valuations of the time as well as in anticipation of better growth for Priceline given the economic context.

I still believe that the economic context will give an advantage to Priceline and so will keep half of that position but given the profit of 25.68% in about 2-3 weeks, I would now take in half of the profit.

Recent picks:

PCLN/NILE = +25.68% (half off)

BIDU/YHOO = +8.66% (including a 50% closing a couple of weeks after the trade)

EBAY = -1,36% (position open)

DOW = -29,25% (it was closed as would any trade of mine once it reached -20% but since the Kuwait deal collapsing caused it to drop drastically overnight, I went over the 20% limit.

AAPL = -3,97% (still open, awaiting results)

Overall not bad, especially my last 2 picks obviously. Dow Chemicals was a costly mistake and I still believe in EBAY and AAPL… we’ll see where that takes us!

Leveraged ETF’s…scam of the century?

By: ispeculatornew | Date posted: 01.05.2009 (4:00 am)

Over the past few months, I’ve seen many investors jumping into a new type of product that has been gaining popularity… leveraged ETF’s. What are they? They are basically structured products that promise to give you double the exposure for a specific product (most often specific indexes or sub-indexes). Seems great doesn’t it? Of course there are more fees associated with these funds because they trade more often and need to borrow funds to get the double exposure. That is fair of course and understood by most investors.

The problem lies in that this product gains double the exposure every day. “Every day”. If you are investing in a product that has a constant daily return, you will basically be getting double the return (less fees) over the long term which is what you are looking for. But very often, returns on indexes are very volatile and you will important ups and downs. 2008 was obviously a great example of that and thus IntelligentSpeculator has decided to look into the returns of some of the leveraged ETF’s for 2008.

Obviously, returns will be over a big range, but you would still expect to have a Bear and a Bull fund give close to 0% of return right? I mean if you are 2 times long and 2 times short, you should be about flat right (less fees). Some of these funds were very far from this. Look at an example such as the Betapro funds.

S&P/TSX Global Gold Bull Plus ETF -59.76%
S&P/TSX Global Gold Bear Plus ETF -73.67%

Wow!! Of course this is an example that is probably an extreme compared to most. But compare this to a YTD return for the single ETF GLD.

Long GLD: -4,9%
Short GLD: 4,9%

Quite a difference isn’t it? Honestly I think most investors have not looked at the impact between owning leveraged ETF’s for long term trading. Are they a scam? No, they’re not in my opinion because of 2 reaons:

-They are usually doing what they are supposed to (give a daily exposure equal to 2 or more times the return)
-They should be used for very short term trading such as daily trading where they do indeed give you a 200% exposure long or short.

So if you are looking into making long term picks, please do some research before going in with these leveraged ETF’s. They are becomming more and more popular and we can now even invest in ETF’s that have 3x the exposure, and are thus even more risky if volatilty lifts off!