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Monthly Archives: May 2012
EL OVER?
Studying through the CFA Econ curriculum for Saturday’s exam (specifically the bit about deficits and how they kind of have to be paid for some day and how the general assumption is that future growth will take care of that–yada, yada…) led me on a bit of a tangent where I ended up reading Barro’s Are Government Bonds Net Wealth? Besides concluding that he’s easily one of the most genius geniuses alive, I didn’t let curiosity get the better of me and went back to stuffing myself with Nutella as I flipped over to reviewing Financial Statement Analysis. Suddenly, a few minutes later a most intriguing feeling jolted me as if someone had tipped a Gatorade-cooler of gazpacho on me; Spain is about to go bankrupt, like OMG, they’re fucking bankrupt–now what? (Maybe so what?)
My first thought is that its merely the natural conclusion of their cycle of living like Swedes while being as productive as Albanians; sure, global equity markets would recoil for a bit, the velocity of money would slow, perhaps some small businesses would have a temporary difficulty rolling over their paper, maybe even the Euro monetary union would falter and have to summarily be pruned to borders of more manageable dimensions:
Perhaps some will take offense at my hyperbole, and be sure that I’m not suggesting something as foolishly as everyone’s favorite Greek newspaper does:
But my point is a bit more serious; why not clean up the backyard before europe’s largest creditor gets wise and either demands that the Obradoiro façade of the Cathedral of Santiago de Compostela be transported brick by brick for a new exhibit at Terminal 4 of Guangzhou airport or perhaps more alarmingly, they start arm-twisting Europe into opening up its borders as they quite literally begin to suffocate from over-population. And anyway, things are starting to get quite boring on the global stage; just thinking through the innumerable permutations of interesting things that could happen if we started seeing some real countries default is enough to get me giddy. Any guesses on when the paella hits the fan?
Imaginary Value
This week many investors myself included have been hit by reality. The reality that everything is not as it may seem. Last week the whole of the investing world was enthralled by one thing. The biggest IPO it was called, an IPO to end all IPOs’, but what an anti-climax. Facebook opened had a slight upward movement then tanked. For speculating reasons only we were holding it in the JML portfolio, which is up significantly this week vix be thanked, I say speculating reasons because there really is no investment in fb right now the company is way overvalued and most people were hoping to jump in and ride the stock during its first day pop which usually occurs with most tech IPOs. The fact that LinkedIn, yelp and groupon all went public without ever making a single positive cent in earnings and cannot even touch the amount of revenue that facebook makes but all went up considerably on their first days of public trading supported this.
There are severel reasons the first day pop most people expected did not occur, it was partly due to the trading glitches that occurred, partly due to the overvaluation of the company, partly due to too many shares, partly due to the current economic environment and the fact that the main underwriter signal duped investors. All this contributed to the first day failure and the continued failure in the stock which so far is down almost 18% from IPO price.
This brings me to the main topic of this article “imaginary value”, what has the world come to when a company that is based solely on a single website is worth more than two of the biggest car manufacturers in north america combined in GM and Ford. How did the underwriters come up with a 100 billion valuation do they seriously think that Facebook will grow revenue and earnings to support such a valuation. As great as Facebook is, it is not and probably will never be, worth 100 billion dollars. Both the investing public and the underwriters believed in the hype of the name, the 900 million + users (all of which could use Facebook without ever clicking on an ad),they imagined and thus assumed that this equated to such a valuation but does it really. I still believe that any website that does not have a significant barrier to entry except that a lot of people use it is destined for failure. Tastes change, people move on from products, five years ago you could still buy a VCR you’d be hard pressed to find one now and with websites the change happens much more quickly. Previously I wrote about LinkedIn and Yelp and Max has harped on about Groupon. All recent tech IPO companies, all with very flaky business models, all significantly overvalued. I am adding Facebook to that group. I love the service that each site provides (except Groupon) but do I believe that they should be valued at 100 billion dollars I say No and I think the market is agreeing with me right now.
Give me a smile pussycat
After a chance encounter with Blythe Masters a few months ago and a new friendship with someone who will remain nameless, I’ve been on a thing for outstandingly intelligent women. This is quite a horrible endeavor. For the last couple of months I’ve been in a terribly unfortunate state of infatuation for someone best described as impossible. One would think that my adolescence would have prepared me for these chemical floods and honed me to keep some sort of scaffolding around my otherwise gelatinous existence at these occasions; but no–this one bit pretty hard. Finally though I may be cured–either I’m self-diagnosing pituitary cancer (where my endorphin onslaught was coming from) or my hypothalamus has somehow collapsed due to what I can only conclude was a supernova-like implosion caused by the supercritical accumulation of neurohormones or–just maybe–I’m a junkie and I’ve found my next fix:
Penelope Wang, Senior Writer at Money Magazine. Wawawiwa. The fluff says that Wang began her career at Newsweek, where she served as a researcher and/or writer in almost every section of the magazine, and later moved to Forbes as a staff writer, covering accounting issues and corporate management. She joined MONEY’s writing staff in 1989. Wang holds a BA in Art History from Swarthmore College and an MA in International Affairs from Columbia University.
But what’s really cool is that we’re either both at a similar level of ignorance (very possible) or she’s got the potential to start a serious conversation in the investment world about the necessity to be vewwwwy vewwwwy caweful with ETNs:
And here it is:
Beware ETNs: Risky ETF look-alikes
By Penelope Wang @Money May 24, 2012: 2:03 PM ET
(MONEY magazine) — Once again, Wall Street is turning a good idea into a lousy deal.That’s the case with exchange-traded notes, or ETNs. Like exchange-traded funds (ETFs), their older and better-known siblings, ETNs are portfolios of stocks, bonds, or other assets that you can buy and sell throughout the day.
ETNs are catching on fast, as financial services firms push them as a more tax-efficient way to buy alternative assets, such as futures and commodities.
“Because they look similar to ETFs, many investors probably own ETNs without realizing the difference,” says Matt Hougan, editor of IndexUniverse.com, which tracks ETFs and ETNs.
It’s time to take a closer look. Fact is, ETNs are very different — and they carry many more risks. Here’s what you need to know:
ETNs are less investor-friendly.
When you buy an ETN, you aren’t investing in a fund. You’re buying an unsecured debt obligation — in effect, a promise to deliver a return — and you are counting on the stability of the sponsor. (That didn’t work out well for investors in ETNs issued by Lehman Brothers.)
You also don’t have fund-like investor safeguards, such as standardized disclosure or a board of directors tasked with looking out for shareholders.
Expenses are often steep — and hidden.
If you look up an ETN on Morningstar.com or CNNMoney.com, you’ll see a fee listed. That’s not the whole story. ETNs may calculate expenses differently or levy more charges — then bury that information in a pricing supplement to the prospectus.
“ETN fees can be extremely hard to find and calculate,” says Morningstar ETF analyst Samuel Lee.
Take the iPath DJ-UBS Commodity Index (DJP), which has a 0.75% fee. Unlike regular expense ratios, which are calculated daily, DJP’s fee is based on a weighted average of the index values since the ETN’s launch, says Lee.
So you can end up paying a high amount based on past gains, even if recent performance is poor (the inverse is true too). Those higher fees can create a divergence between the return of the index that the ETN tracks and what you actually earn. Last year the gap for DJP was 1.27%, not the 0.75% you’d expect.
Looks may be deceiving.
ETNs have become the go-to option for complex alternative investments, such as the VelocityShares Daily 2X VIX Short-term (TVIX), which promises returns based on the VIX, an index of market volatility. But the ETN is actually for daily traders.
Longer-term investors got a shock when the price recently diverged from the index after the sponsor, Credit Suisse, stopped and then resumed creating shares.
The one thing you can know for sure is that ETNs usually make money for the companies that offer them. For investors, not so much. Until ETNs become more shareholder-friendly, steer clear.
CPA Update
The quarterly rebalancing of the Canadian Passive Alpha Fund will be delayed by two weeks. CFA’s got my mind on something else 
Can say that I’ll most probably be liquidating REIT holdings, adding some cheap miners, a few plays (such as Whitecap), but most of all focusing on refining our recipe of picking the best undervalued going concerns in Canada…