What is SIV?

"SIVs are off-balance sheet vehicles that sell short-term debt, such as unsecured commercial paper, to investors such as hedge funds, then use the proceeds to buy longer-term assets, like mortgage-backed securities, that yield richer returns.
SIVs normally generate money through fees and the difference between short-term and long-term rates. But demand for short-term assets has vanished in the midst of the U.S. housing market implosion, creating liquidity problems for the vehicles."

More Metrics to Watch: Mining Companies and Asset Managers

Mining companies: Market Cap/Net Asset Value
Asset Managers: Market Cap/Assets Under Management or AUM; Revenue Yield = Revenue/AUM

One Dollar Menu, Anyone?

When I ate at Wendy's a couple of days ago, I realized that the price of each item on its Super Value Menu is not exactly $1.00, it is rather $1.19. But fortunately I had a few coins in my pocket to afford a double bacon cheeseburger. Anyways, I found interesting figures from a market research cited by Russ Klein, Burger King's global marketing, strategy, and innovation president. Burger King's Value Menu accounts for about 12% of total revenues, McDonald's Dollar Menu contributes 23%, and Wendy's Super Value Menu brings 25% to total revenues. It seems that these low-margin menus turn out to be very important driver of customer traffic and sales for these major fast-food chains.

Interesting Facts abut Luxury Retailers

Spending by middle-market customers are expected to decline in this holiday shopping season because of higher gas prices and weak housing market. This has hurt midtier retailers like Target, Limited Brands, and Zale according to WSJ. However, spending by the ultra-rich would hold up as they are less affected by these factors. The weak dollar has also boosted spending by foreign tourists, benefiting luxury retailers who have flagship stores in NYC or Beverly Hills. Saks' Fifth Avenue store for example, generates about 20% of the company's $2.9 billion annual sales. Meanwhile, Tiffany & Co., which derives 20% of its total sales of engagement jewelry, also generates 10% of its annual sales from its flagship Fifth Avenue store.

Surging Latin American Basic Materials Industry

I found this article very helpful in enhancing my understanding about the risks and rewards in doing mining business in Latin America.. It also includes interesting stats. Check it out.

http://www.mckinseyquarterly.com/Energy_Resources_Materials/Weighing_the_risks_in_South_American_basic_materials_1969

Wanna Know What The Top-Performing Hedge Funds are Holding?

http://www.stockpickr.com/port/Lone-Pine-Capital/
About Lone Pine:
http://biz.yahoo.com/indie/071116/996_id.html?.v=1

http://www.stockpickr.com/port/Maverick-Capital/

http://www.stockpickr.com/port/Atticus-Capital/
About Atticus:
http://www.thestreet.com/newsanalysis/stockpickr/10359349.html

http://www.stockpickr.com/port/Glenview-Capital-Management/
http://www.stockpickr.com/port/Pequot-Capital-Managment/

These stock-focused HFs are mentioned on a WSJ article on November 19.

Others to watch:

http://www.stockpickr.com/port/Leon-Cooperman/
http://www.stockpickr.com/port/T-Boone-Pickens-BP-Capital/
http://www.stockpickr.com/port/Renaissance-Technologies/

Some portfolios are up-to-date and some are not.. so proceed with caution!

List of HFs:
http://media.ft.com/cms/02fd5a42-f338-11db-9845-000b5df10621.pdf

Explanation about HFs (in plain English):
http://nymag.com/news/features/hedgefunds/

Today's size of global HF market:
According to Hedge Fund Research: close to $2 trillion

Challenges:
Smaller funds that lack unique investment case are struggling for new money
Emergence of cheaper hedge fund imitation: mutual funds with "130/30" strategy

HF managers often invest their own money in their funds, under an assumption that it could incentivize them to behave conservatively. This is not necessarily the case. Since the use of leverage can maginify gains or losses, a fund that obtains big returns at any point in time can quickly reverse to losses. Bottom line, investors should be aware about the danger of chasing performance. Moreover, with so much money chasing similar opportunities, the average fund will find it harder to beat stock market returns. Therefore, average returns could fall going forward.

Calculating Annualized Return

Nice free online calculator..
http://www.gummy-stuff.org/petrovski.htm

Wanna Know More about Private Equity?

Private equity firms, also known on the Street as Sponsors, are facing tough times ahead. Not only tighter credit market made it more difficult for them to do deals, it is also getting harder taking their holdings public. As the result, sponsor-related LBOs and IPOs are drying up. These firms' exit opportunities, by way selling portfolio companies to strategic buyers or listing them through public offerings, have diminished.

GP Investments,

LatAm's biggest PE firm
http://www.gp.com.br/gp/index_pt.htm

Comprehensive PE Portal
http://www.pehub.com/

How to Calculate IRR?
http://www.experiglot.com/2006/08/09/how-to-calculate-an-internal-rate-of-return-irr-and-when-not-to-use-it/
http://office.microsoft.com/en-us/excel/HA011136321033.aspx

What is economic net income (Blackstone's "eps")?
Net income excluding the impact of income taxes, noncash charges related to vesting of equity-based compensation and amortization of intangible assets. One CIO admitted that the company's valuation is very complex and it is actually a concern among investors. BX shares has fallen more than 30% since IPO.

What is CAGR?

According to Investopedia, CAGR is defined as t"he year-over-year growth rate of an investment over a specified period of time." However, the number need not be an investment. It can be profits, revenue, etc. CAGR is often mentioned in research reports and investor presentations of publicly traded companies.

Example:
According to HFR Industry Reports, aggregate fund of hedge funds AUM has grown from $76 billion in 1999 to $547 billion in 2006.

What is the CAGR?
Ending value:$547 billion
Beginning value: $76 billion
n = 7 years ; 2006-1999 = 7

=(547/76)^(1/7)-1

Apply to the formula:
http://www.investopedia.com/terms/c/cagr.asp
http://office.microsoft.com/en-us/excel/HP011225061033.aspx

OR download a free spreadsheet from this blog:
http://www.experiglot.com/2006/01/28/compound-annual-growth-rate-cagr-calculator-xls/

The answer is 32.6%.

What is Earnings Yield?

Earnings yield of a stock is the ratio of earnings to its share price. This ratio is often compared with U.S. 10-year Treasury, currently yielding 4.15%. Example: Petroleo Brasileiro. Current P/E of 19 times implies earnings yield of 5.26%, 111 bps higher than risk-free Treasurys.

2008 Iron Ore Price Increases Will Hurt Steelmakers

The possible tie-up between BHP and Rio Tinto are worrying Chinese steelmakers who do not have iron-ore reserves of their own. China is the largest producer and end user of steel. BHP, Rio Tinto, and CVRD altogether control about 75% of international trade. BHP and Rio Tinto own more than 85% of the world's largest copper mine, the Escondida deposit in Chile. This leaves Chinese steelmakers with weak bargaining position in the current negotiations. Iron-ore producers already aim about 30-50% price increase for 2008. Price hikes will ultimately affect steel's biggest end users such as auto and appliance makers. Meanwhile, the world's largest steelmaker by output, ArcelorMittal already plans price increases in the first half of 2008.

"Full of Bull"

This is a great book for investors and those who are interested in research. The author is the former top Wall Street analyst Stephen McClellan.

http://www.thestreet.com/s/open-book-how-to-decipher-wall-streets-secret-code/funds/openbook/10390466.html?puc=_dm

Should Companies Provide Earnings Guidance?

There is no right or wrong answer to this question. But take a look at this interesting article:

http://www.businessweek.com/investor/content/jun2007/pi20070629_967923.htm

A company that I found that provided detailed guidance is Intuitive Surgical (ISRG).

http://library.corporate-ir.net/library/12/122/122359/items/267611/IR_Presentation_110107.pdf

If every publicly traded company issued something like this, jobs of research analysts in forecasting earnings would have been much easier!

World's Largest Miner 2008 Commodities Outlook

On its latest earnings release, BHP Billiton issued its outlook for next year.
A few important points regarding macro and commodities:
a. "Despite moderating US economic growth, global economic fundamentals remain strong and the ongoing strength shown by emerging Asian economies (including China) should support global growth."
b. "Recent discussions with our customers have indicated that they do not expect the volatility in the US and European credit markets to have impact on raw material demand. In particular, our customers in China and India believe domestic demand criteria are much more important factors in their markets."
c. "In the interim, commodity prices are likely to stay high relative to historical levels, albeit with increasing volatility."

Consumer Spending Slowdown

According to the Commerce Department, retail sales rose only by 0.2% in October, after climbing 0.7% in September.

Link: http://www.census.gov/svsd/www/advtable.html

Economists forecast that this holiday season could be the worst in 5 years, as consumers pull back spending due to declining home prices and rising fuel and food prices. This could be bad news for retailers who obtained a bulk of their revenues in November and December.

An interesting question is whether or not the affluent customers will also cut down spending. on luxury items. Coach has issued warning regarding slowdown in customer traffic and Polo Ralph Lauren has lowered profit forecasts citing a more "conservative view of discretionary spending among U.S. consumers," as reported by the WSJ. Nonetheless, the London-based luxury-goods maker Burberry has boosted its average selling price of its luxury handbags by more than 25%, expecting that affluent shoppers will continue to spend since they are less affected by the economic slowdown.

Citi's Analyst's Bold Downgrade of E*Trade

On November 11, Citi's analyst Prashant Bhatia downgraded the online brokerage and banking firm from hold to sell due to "higher probability of a run on the bank." As another victim of the turmoil in mortage-related securities market, he thinks that "depending on the extent of asset write-downs in 4Q, E*Trade may fall below well-capitalized." The stock plunged 59% on that trading day, although it has recovered partially today on takeover rumors. This is an example of how influential a research analyst can be in moving a stock. Nonetheless, what impresses me is his blunt opinion on management. He votes "no confidence in the CEO, in the President & COO, and in the members of the Board of Directors. Management lowered its earnings guidance for the 5th time in 8 months and now management believes that it is no longer beneficial to provide earnings expectations for 2007." Very few analysts have the courage to issue such criticism to the management of the companies they cover.

Value Investing

I found a great website for those who would like to learn more about Value Investing..

http://valueinvestingresource.blogspot.com/

Curious about Gas Prices

Narrowing refining margins have hurt refiners. Oil prices are widely reported in the media, but what about gasoline prices?

"AAA's Daily Fuel Gauge Report is updated each day and is the most comprehensive retail gasoline survey available."
http://www.fuelgaugereport.com/

Citi's Deteriorating Tier 1 Capital Ratio

Citi's Tier 1 ratio is still above a 6% threshold considered by the Fed to assure that institutions are well capitalized. But its ratio- a key measure of a bank's capital cushion- is in a downtrend. It is now below the large banks' average Tier 1 ratios of about 8%.

Tier 1 ratio = Bank's capital divided by risk-weighted assets = a gauge of the banks ability to absorb huge losses

At the end of 3Q, the ratio was 7.3%, down from 8.6% a year earlier. This creates concern among investors whether or not further write-offs will hurt cash flow and the bank's liquidity. Citi has been hurt by losses stemming from the exposure to super senior CDOs that were thought to be shielded from volatility that hit riskier CDOs. By bailing out seven SIVs and bringing the assets to its balance sheet, Citi said that the move could erode that ratio by an additional 1.6 bps. Betsy Graseck, a Morgan Stanley analyst, who rated the stock "Underweight," predicted that Citi would need to cut dividends and take further steps to protect its capital position.

Cautious on the Technology Sector

In a postclose conference call, Cisco's CEO John Chambers said "We saw dramatic decreases year over year in orders from financial services" as well as softness in the automotive market. This means that the company is beginning to feel the impact of credit crunch in the U.S. After the earnings announcment, Cisco's shares have fallen to below $29 after hitting 52-week high of $34 last week. Run-up of the tech-heavy Nasdaq Composite Index has also ended. On Friday, it closed at 2628 points, 8% off the 52-week high of 2862 reached on October 31st. The tech sector was thought to be a safe haven among many investors- but disappointing guidance from Cisco and the looming impact of credit crunch on tech spending have brought down investor sentiment.

Bottom line: U.S. industries such as retail, manufacturing, and financial services have begun to cut tech orders

Beyond Traditional Metrics: Beyond the Balance Sheet

I enjoy analyzing companies beyond traditional financial metrics. If you read my posts, I pay a lot of attention to industry-specific metrics. I also found Forbes' "Beyond The Balance Sheet" series to be helpful.

www.forbes.com/bbs

Tracking Hedge Funds Performance

I am often curious about how the lucrative hedge fund industry is doing in terms of performance. I found this free site helpful to quench my thirst for such knowledge.

http://www.djhedgefundindexes.com/

Homebuilder Blues Metrics

As housing woes continue, homebuilders are suffering. Beazer Homes USA recently announced that thay are going to post $230 million pretax charges for its FY 2007 Q4 results. They will also suspend a quarterly dividend to save costs.

The charges include:
a. Costs related to land-option contracts abandonment
b. Inventory impairments (inventory values fall with home prices)

Other negative signals:
a. 53% drop from a year earlier in net new home orders- driven by high cancellation rate
b. Job cuts on 25% of its work force
c. 39% decline in home closings

What are Writedowns?

An excellent guide on "writedowns," a jargon that has become increasingly popular since the collapse of subprime-backed securities.

http://www.thestreet.com/_yahoo/s/how-to-interpret-writedowns/university/financeprofessor/10388120.html?

What is Incremental Operating Margin?

Incremental margins is a comparison of changes in revenue and operating margins.

Stock prices can be punished if investors are disappointed by op margins results- despite solid earnings growth. This is evidenced by BHI and AMZN, which declined substantially on earnings announcement days. In Q3, BHI's op margin declined to 21.76%, only up slightly from 21.17% in Q2, and much weaker than 22.65% in Q1. The company also cut its Q4 op margin guidance to 25% from its long-term goal of 30%. Meanwhile, AMZN's op margin fell consecutively to 3.77% from 4.02% in Q2 and 4.81% in Q1.

This means that investors are getting more nervous about rising costs and how it can hamper future earnings growth.

Return on Invested Capital

Great tutorial to ROIC, an often overlooked metric.

http://www.investopedia.com/offsite.asp?URL=http://www.fool.com/school/roic/roic.htm

Plus an article about how to screen stocks according to ROE and ROIC metrics.

http://www.smartmoney.com/stockscreen/index.cfm?story=20041020intro

My Favorite Acronym: CDO (Collaterized Debt Obligations)

What is a CDO? CDOs are complex structured financial products. CDOs pool different securities, often including bonds backed by mortgages, and sell slices that carry different risk and payout levels. The major banks said the majority of its CDO holdings were considered to be the safest slices but the downgrades had affected even these securities. The most troubled CDOs bundled together only subprime bonds that had low investment-grade ratings such as BBB. Many of these bonds are now rated junk. One $873 million CDO slice was rated AAA- the highest of 10 investment-grade rankings. It was cut 10 notches to a junk rating of Ba1 by Moody's. The CDO downgrades show there is no quick fix for subprime problem. Subprime mortgages were collateral in these investments, and it is eroding faster than the rating firms had expected.
What makes it worse is that the downturn would also impact bond insurers, who are committed to pay investors if a bond issuer defaults. Since these guarantors depend on solid credit standing (usually AAA) for access to capital and to win business, a possible downgrade on their credit rating could detriment banks that bought credit guarantees from the insurers on bonds they hold (generally in the form of credit default swap agreements).





Reasons for this collapse:




a. Soaring rate of delinquencies and foreclosures; about two million adjustable-rate mortgages prepare to adjust in 2008




b. Aggresive bank lending amid lax lending standards




c. Falling prices make borrowers owe more than the house is worth