UV Market Blogs

Tuesday, May 22, 2007

Blackstone IPO

Stay away I say,

The first few weeks of this IPO will probably be the glory days of the internet trading boom but I’m calling bust shortly after the gates are opened.  Unfortunately, I believe this deal involves far too much political tension to draw the investors BlackStone needs to raise capital.  After China’s interesting bid, I think some financiers may stay away from the once private equity firm.

There is such an idea attached to BlackStone much like a stigma to American Express charge cards and Rolls Royce automobiles.  BlackStone is all about the wealth and luxury of the world’s newly rich.

BlackStone is running into the same problems of companies such as Berkshire Hathaway or even mutual funds such as Vanguard and Fidelity Funds.  Too much money, not enough worthy investments.  BlackStone, in reality, does not need the additional capital.  I believe that an input of capital will only make the close of the group come sooner as the company stockpiles private investment dollars.

If you want in on the private equity craze, look no farther than the original.  Berkshire Hathaway is waiting for your capital.

Monday, May 21, 2007

Chinese Getting in on Blackstone

Dum dum dum.  Finally a free market?!

Quite simply, China is a cash cow and they’ve got too much cash.  More complex, China’s currency was long undervalued causing a high deficit between China and its trading partners.  Now China possesses a $1.2Trillion basket of foreign currencies.

The Chinese have always been foreign cash rich, but now it seems like the People’s Republic is finally getting down to making these cash reserves work and generate more cash.  Traditionally, the Chinese have had high dollar amounts in T-Bills but T-bills are very uninteresting, low paying, savings bongs.  Who cares?  We want real returns!

Insert Blackstone.  One of the most prestigious private equity companies in the world is going public.  It planned to raise $4 billion dollars through its IPO and might now raise twice that amount when the Chinese amounts get figured into the overall sales numbers.

There were rather strict investment criteria for the deal.  China agrees to hold its investment for at least four years so that the nation doesn’t cripple stock prices from a heavy sell off.  China may sell after holding the company four years but only at a rate of $1 billion per year.  Also, China gave up all of its voting rights that were tied to the shares in order to stay away from US Government intervention.  Surprisingly, China has been very co-operative with Blackstone and the US government regarding this investment. 

Blackstone believes this may pave the way for further investment possibilities primarily in China where Blackstone has been the weakest.  Generally Blackstone is thought to be a US Private equity company.

The deal not only caused a ruckus on the street but also politically.  American and Chinese officials just might now meet at a round table to discussing tariffs and currency valuations -good news for US consumers. 

Chinas reserves grow at a whopping $20 billion per month.  If this money were pushed into the US markets, we’d see a huge boom.  Look forward to only good news with this deal.

Wednesday, May 16, 2007

The Enhanced fund

Enhanced index funds are just that, your typical index fund such as an S&P model that is then reallocated to provide the best risk to reward ratio possible. 

The Index fund is relatively new in the history of the marketplace.  In 1975 the first index fund sprung from the earth led by John Bogle; better known for his involvement with Vanguard funds as Vanguard now has a large portion of the world’s assets.  Indices are regarded as some of the best ways to enter the market with minimal returns and decent risk factors.

Index Funds are quite simple in that they are built to model after a particular index.  The fund is dispersed just as the index is and performs all the same.  Through minimal trading and the ability to contain a large amount of investor funds, these have become a staple at mutual fund companies.

Index funds are meant to track the market as a whole.  Moving on pace with the market is the best way to curb inflation but still save enough for all of life’s large expenses.

Index funds, because of their low turnover rates, require less work to keep open.  Ultimately this low overhead leads to lower fees charged on the fund, and higher returns.  Because the fund is not flipped over that often, the management plays little role in its performance.  Also, limited volume keeps the fund in check.  A fund manager cannot so readily move the assets around. 

The enhanced index fund wishes to change all this.  Essentially, a fund manager will modify the portfolio to include stocks of the index, but reallocate the investment dollars so the fund achieves the best return possible.  These funds also speak of lowered risk, but a measurement for this figure is hardly exact.

See, the S&P money is distributed by market cap.  The largest 20 of the S&P companies account for over one third of the value of the entire index. As you can see, money in these index funds is often heavily shifted to the largest corporations which cannot sustain the strong growth rates of smaller businesses.  Index funds are rather straightforward and easy to understand from the perspective of any investor as he or she knows exactly what is being bought and sold in the fund.  This takes a lot of strain off the fund’s call centers when the fund/market has a bad year. 

In the year 2000 when the market experienced its most recent crash, the average index fund got crushed.  As you can see, the index fund is weighted by market cap.  Those stocks that had moved up 500% plus the year before were now the most heavily purchased stocks in the index funds.  A mix for disaster you might argue.  As with all market rebirths, the smallest of companies are often the quickest to show improvement.  This just happens to be a double edge sword for index funds.

One thing, as an investor, that we do not want from an enhanced fund is more active management.  In my opinion, it is more important to me that the mutual fund has lower turnover rather than an active index fund.  An active index fund is oxymoronic as indices are built for longer time periods.  Too be quite simple, with an enhanced index fund, the operator prefers to have the core strategy of an index then modify the capital allocation in order to provide the best returns.  Even simpler is the manager takes money from the largest of corporations and places it in the smaller corporations. 

Thursday, May 10, 2007

FED comforts the market

FED comforts the market

The FED does as expected and keeps interest rates at 5.25%.

The FED announced that it is really starting to keep an eye on inflation with a slowing economy but rising prices.  It is important that the committee keep rates at the current peak to ward off any inflation threats.  With Dow 13000 in full force, the government can’t risk another recession.  Moreover, policy makers can’t afford a recession.  House democrats might not mind however.

A move to raise interest rates would threaten the Dow’s record highs as more expensive capital often ties up the markets.  Even worse is that the summer slump only compounds those effects.  Raising rates slows down borrowing, and big business, operations that are profitable at a 5.25% rate may not be so profitable at 5.5%.

I still expect that interest rates will be dropped during the summer months to keep the market at its highs.  I think around July the FED may take a breather and drop the prime rate a near insignificant .10% just to gauge the market response.  This drop may come sooner though, although June seems out of the target.

Another barrier for analysts is the price of oil, which affects the cost of every product sold.  Although the price of oil always goes up in the summer, it is not really inflation but rather market sentiment.  The FED may find it tough to make a decision on rising prices that aren’t connected to high inflation.

Wednesday, May 09, 2007

The most coveted job in the world

The most coveted job in the world

No job is as prestigious, as big, nor as important as the person who will ultimately take over the reigns of Berkshire Hathaway, which Warren Buffett has taken from $20 a share to $108,000.  An investment of just $20 in the 1960s nets you an average home in the Midwest. Not a bad investment eh?

All investors, from those who just got out of “for dummies” university or the top of the top fund managers know who Warren Buffett is.  His fundamentalist investment approach has led him to become the second richest man in the world, second only to Bill Gates who happens to be one of Buffett’s good friends. 

Buffett essentially pilots one of the largest investment funds the world has seen.  After ending his partnership back in the 60s, Buffett took controlling stake in Berkshire company which at the time produced textiles.  He leveraged the abundant cash flow and onhand cash into an insurance empire.  His investments have been predominantly in the United States but as of late Buffett has sparked an interest in foreign companies.

Now, after 76 years of smart business decisions, Buffett has decided to step down as CEO and 30% owner of Berkshire Hathaway.  Unlike most CEOs on the street though, Buffett made is money through corporate ownership rather than freebie stock options.  He makes just $100,000 per year as the CEO of Berkshire Hathaway, a salary that hardly puts him in the highest paid list.  The fact is, with 30% ownership, he doesn’t need much enticement other than his own capital gain when his investments do well.

Theres still time to apply though, just 700 have applied.  More info to come soon, I expect an announcement to be made regarding his choices.

Monday, May 07, 2007

The Sharpe Ratio

The Sharpe Ratio

The Sharpe Ratio was created by William Sharpe in 1966 to find standard deviation of certain investments. His work was some of the most important in economics even today. Actually in 1990 he won a Nobel Peace prize for his work in economics. How’s that for credibility?

This is one of the most coveted ratios for those who want to protect assets and get the best return possible. Trendlines, PE ratios and overall market thinking are one way to gauge market returns but you need to figure some chance of loss into your investment mindset.

The Sharpe ratio allows investors to factor in risk to their portfolios. This is a little known ratio that really isn’t used much but my more mathematical investors. While you cannot truly apply this formula to one specific stock, it will work on a broader index or mutual fund. Anything but the highest of speculative investments will conform to the formula to give you a risk to reward ratio.

The ratio is best used when comparing two separate investments with differing returns. One investment vehicle may carry a higher risk, but you don’t know which investment pays the most, risk adjusted of course.

The Sharpe Ratio is:

(The investment)=(The average rate of return- the best return provided by risk free investments)/(the standard deviation of the return of the investment)

In words, the sharpe ratio is the average rate of return of your chosen investment minus the best return you can get risk free (IE savings accounts) divided by the standard deviation of the return of the investment.

About the variables:

Return

The return of the investment you wish to investigate can be from any time period. A day or a decade makes no difference as it can always be annualized. As long as the returns are normally distributed there is no difference. The kicker is, most returns aren’t for any set periods of time.

Risk free ROI

This one is often disputed. Should an investor put the amount INGDirect pays for savings accounts which is 5% or should they put the amount that T-bills are currently offering. At this point in time it makes sense to put the amount ING pays but in times or places of lower interest, T-bills might pay more but be inaccessible. In my opinion, money market accounts can also be included in the risk free genre even though they really aren’t. If a money market would collapse, you’d have more problems than just your lost money. So, I throw in MM accounts too, just for comparison.

After computing the Sharpe ratio for your investment you should end up with a number from 0-3. One being decent and 3 being amazing. You might be hard pressed to find a Sharpe ratio of three or higher just because its just too high. The ratio is easy to use and gives you a good idea of when it might be smarter to take the guaranteed money rather than gamble for a few extra percent.

The Sharpe ratio is best when used with investments that can be purchased on margin. With margin, the ratio can tell you how much more capital you should be willing to borrow to buy the investment.

The Sharpe ratio is just another way to pick investments. You don’t need to use it to pick the best of the best investments, its merely a comparison tool. Some do great with it, some do great without it.

Wednesday, May 02, 2007

Bonds

I see that bonds, more and more, are becoming a part of every mutual fund out there.  In my opinion, if you are under the age of 30 or currently have a mortgage on one or many properties, you should not have any amount of money tied up in bond funds or in bonds period.

I am finding that people unknowingly buy into a growth stock fund to find 7% bonds and 2-3% cash.  With the low rate of returns associated with bonds and cash, you really aren’t getting anywhere with the 10% of your capital that is tied up in these subpar investments.

Most mortgages out there right now are at 6-7% with good credit standing.  At an early age, or with a mortgage, investing in bonds that earn 6-8% per year and are subject to taxes is utterly ridiculous.  After taxes are taken out, you’ve got a 5-6% return, just barely beating inflation.  Plus with a bond you’ve go some unavoidable risk of company collapse.

This is just a reminder to check your funds often.  Rather than throw money into bonds, pay off that mortgage sooner.  You’ll save a lot more money for retirement and still have that dream home.