21. March 2009 by Dan Walkow, CFA, CMT.

According to Mary Meeker of Morgan Stanley the growth of the internet is far from over. See here latest views at The Economy & The Internet

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21. March 2009 by Dan Walkow, CFA, CMT.

There is a great debate among investors and academics about “trough” PE multiples, i.e. what is the appropriate multiple to apply to S&P 500 earnings at market trough. There is clearly a need for thorough objective analysis. The following charts and observations, going back to 1927, should help in this debate.

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21. March 2009 by Dan Walkow, CFA, CMT.

Fair compensation for a tough job. Yes. Excessive compensation arrangements which do not reflect performance - absolutely not. As an owner of companies on behalf of clients and directly we have been voting for  direct shareholder representation on corporate compensation committees. It is clear to us that  many corporate governance and compensation committees, populated by directors alone, seem to have failed shareholders.

In an information circular issued ahead of the sale of the Calgary-based company to Abu Dhabi’s International Petroleum Investment Co. (IPIC), Nova said Lipton is entitled to about $50 million US in pension and severance on top of $18.5 million he received in salary. Read more at the Vancouver Sun here.

This one really questions the integrity of corporate directors who serve on compensation committees and the outside compensation advisory firms that advise them.

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15. March 2009 by Dan Walkow, CFA, CMT.

For many investors, understanding how bonds work is a challenge at the best of times but times are-a-changin and because bonds and fixed income investments are a very important component of most investors’ portfolios, it bears comment, so here goes -

In the “old days”, a government or corporation would “borrow money” by selling bonds to the public who would buy the bonds, receive interest payments and get their money back at maturity, kind of like a CD or term deposit as we call them in Canada.

So for example, ABC Corporation would issue a bond in lots of 1000 (known as $100 par value) dollars per bond to pay interest at 10% annually to mature in 10 years. An investor in the bond would get 100 dollars interest a year and in 10 years, providing ABC Corporation was still in business, receive the 1000 principal investment back on the last day of the 10th year known as the maturity date. Still with me?

Now that the bond has been issued it is traded among investors, kind of like a stock, right up to the date of maturity. (Lets call this the interim market) . Traditional factors that affect the price of the bond  in the interim market are the credit worthiness of the company, the general level of interest rates and how much time is left to the maturity date. The price of the bond will fluctuate from date of issue to the date of maturity to reflect these conditions at any given point in time. Typically bonds prices would move slowly up or down as the market digested news of the day.

To gauge the credit quality of the bond most investors would rely on Credit Rating Agencies, such as Standard & Poors, to “rate” the bond,  AAA being the best rating and lessor quality bonds assigned lower ratings such as AA, BBB or CCC. After all who has the time to dig through every corporation’s financial statements on an ongoing basis. You get the picture.

In general terms “bonds” were always thought of as the “safe” part of ones portfolio because they ranked higher than a corporations stock in the event of bankruptcy, they paid interest and you got your money back at maturity.

So What has changed?  –A case of the tail wagging the dog…

Never ones to miss a money-making opportunity those brilliant financial engineers on Wall Street( Read AIG and crowd) came up with the idea that they could sell an insurance type product called a credit-default swap (CDS) to insure the bondholder against the bond defaulting or in layman’s terms. not being able to pay back the $1000 maturity value on the due date.

So now these CDSs are traded in the market like options and like an option a small amount of money can control and impact the price of large principal amounts.

Hedge Funds, banks and brokers are trading these things like mad and the result is amplified price swings at the speed of light in the pokey old bond market.

Of course these are a form of financial derivative that trade largely unregulated, and has become a playground for hedge funds, speculators and fast money operators.

So what does this mean for you dear bondholder?

Increased volatility in the price of your bonds in the interim market. If you own bonds be prepared for sharp price moves. Up and down. If you did your homework and you are comfortable with the company who issued the bond then don’t worry you will get your interest and your money back at maturity.

This heightened level of volatility creates opportunities for astute bond investors. Even good companies’ bonds are getting kicked around by the CDS market players and with the wide prices swings on a daily basis in this ”new era” so your best friend may be a good bond man.

It really has become a case of the Tail Wagging The Dog.

Read what Alex Trias has to say about the New Normal in the bond markets.

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14. March 2009 by Dan Walkow, CFA, CMT.

14. March 2009 by Dan Walkow, CFA, CMT.

You might want to hire a competent tax attorney before they get swamped with business.

Recent actions and pending legislation by the US government with regards to persons having secret offshore accounts is sending cold chills down the backs of offshore investors and their financial advisers alike. The charge is being led by Senator Carl Levin.

If you thought British crown dependencies such as Jersey, Guernsey, the Isle of Man were safe you might want to see what the Guardian has to say here.

I guess its back to burying gold coins in the backyard……

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14. March 2009 by Dan Walkow, CFA, CMT.

For those of you who own property or travel to Mexico on vacation you may want to pay attention to the rapidly escalating war-like conditions that are fast emerging across Mexico.

According to the LA times, since Mexican President Felipe Calederon declared war on the drug traffickers in 2007, there have been 7,337 drug war related deaths which is more than the US fatalities incurred in the Iraq war.

In recent months events have taken a ugly tone with drug gangs acquiring military type armaments such as rocket-propelled grenades and explosives as they battle each other, the Mexican police and  the military.

As the violence spreads the US authorities are becoming increasingly concerned as there seems to be no end in sight.

To gain an understanding as to the seriousness and the depth of the problem check out the excellent coverage by the LA times recent article ” Drug Cartel’s New Weaponary Means War” 

For an understanding of the magnitude of whats happening and how the violent trend is accelerating  read  Mexico Under Siege

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13. March 2009 by Dan Walkow, CFA, CMT.

Click the chart to enlarge 

Since the low of early November 2008 the Morgan Stanley A Fund has marked a gain of almost 70%. The fund is required to invest at least 80% of its assets in A-shares of Chinese companies listed on the Shanghai and Shenzhen Stock Exchange as opposed to the China 25 FXI index fund which is comprised of China shares listed in Hong Kong. Even with this eye-catching return over the past few months it could still be early days.

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13. March 2009 by Dan Walkow, CFA, CMT.

An old saw in  the stock market is that nobody “gongs” the bell to start a bull run or, on the other hand start a bear run, but it has been my experience that at market turn points there often is an event or comment that, when you look back, is seen as the “gong”.

Vikram Pandi, CEO of Citigroup put out an internal memo the other day to his staff stating that Citi actually made money for the first two months of 2009 and was on its way to having the best quarter since 2007. And then, in the past few days other major US banks have come  and commented along the same ilk and have gone further to say that they may not need any more government money.

So the bell has been “gonged” setting up a global rally in stocks over the past few days. Can it continue? Sure, there is a reasonable analytical case that a recovery rally could take the S&P500 Index up to 850 in the shorter term and 1000 or so longer term, which is where the 200 day DMA is now. After all, securities tend to revert to the mean over time and we have been bent over pretty good. Are we out of the woods yet. No! Could we get some setbacks per the doom and gloom crowd, sure. No doubt it will be perceived that this rally will peter out in short order but, as always, the market will try and fool most of the people most of the time, so don’t be surprised if the rally goes longer and higher than you might think!

It would appear that not only have Wells Fargo executives put there money where their mouth is (see my previous post on Wells Fargo) so have Citi executives and they have make a pile in a very short time.

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13. March 2009 by Dan Walkow, CFA, CMT.

Great header on investment blog, Seeking Alpha, “better than bad” retails sales, that is. It really is a matter of expectations when it comes to the stock market. Without getting to into the academic details a simple way to understand how the stock market works is that stock prices and market prices for that matter, “discount the future expectations” into current market prices. Therefore if the world “knows” that things are really bad, and we all know retail stinks, that sentiment is reflected in stock and market prices. Less bad news adjusts prices to the upside to reflect the “better than expected bad news”.  Nice rally today among Canadian and American retailers as these beat up stocks adjust to the “better than bad” news.

 So how about the stock markets in general? Well  it seems pretty bad out there whenever you turn on the TV or you read the paper.  Ask anyone and they will give you a litany of woes of about how bad things are, not just here, but around the world.  It is not like days gone by when there was no Internet and information seeped out via the press and close-in analysts, now everyone knows instantly.

As mentioned on this site ”sentiment indicators” pointed to maximum pessimism by individual investor in recent weeks so we know what expecations are.

As an investor you have to ask the question. ” Is the current news, good or bad” baked  into the price? It follows that a great company or a bad company does not necessarily make a good or bad investment. It really is a matter of expectations.

There are many examples but here is one that comes to mind. I recently wrote up the Ford Motor Company as doing things right. It would seem that the general perception is that all North American auto companies produce junk, their costs are too high, they are badly managed and they are total dunderheads as to optics, flying their corporate jets to Washington. Well if  you take the time to really investigate Ford, for example, you find that they have the number two best selling car in Europe, are set to launch the new Fiesta in China, have lowered the labors costs close to Toyota with recent labour agreements, have reduced legacy health care costs and have not borrowed any money from the government. Allan Malally, CEO of Ford commented that with recent actions now taken, Ford will be able to produce vehicles in the USA on a profitable basis; even at today’s run rate.

So why are short term (3 month)  Ford Canada  Credit bonds trading at 60 cents on the dollar while paying almost 60% on a yield to maturity basis? Something is out of whack here, either Ford will go bankrupt in the next 3 months or it is simply an issue of bond buyers so fearful and expecations so negative that there is a “buyers strike”. What happens if the news is “better than bad”?

No doubt Ford Canada Credit bonds are perceived as a risky proposition otherwise they would not be priced as they are. They are not for everyone but in my mind it is a perfect example of fear driving price which creates those opportunities for astute and risk tolerant investors.

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