May 24, 2011

Could the Gold Standard Really Make a Comeback?

It seems like everyone is buying gold lately (and silver until a couple weeks ago). Hedge funds, university endowments (University of Texas bought $1 billion of the bullion), individuals and central banks are all piling into gold, and it seems that this time the fascination with the shiny metal may last. As countries become increasingly disenchanted with the United States’ lack of fiscal discipline, and neither the Euro nor the Yuan currently provide an appropriate substitute, its no wonder that people are turning back to gold. I’d like to say that its just a barbaric relic of the past and the metal has no real value other than to Chinese and Indian women, but apparently gold remains the only stable form of currency. I have no idea how a return to the gold standard would even be possible given the mechanics of the current financial system in the western world, but it seems the notion is gaining some ground as both Ron Paul and Steve Forbes are beginning to champion a return to the standard to bring stability back to the dollar, so it can retain the dominant international currency. Check out this article: Forbes Predicts U.S. Gold Standard Within 5 Years

May 19, 2011

The Bests Analysts on Wall Street

Everybody enjoys poking fun at Wall Street research analysts for being nothing more than highly paid people who jump on the next bandwagon. However, there are a few out there who earn their keep. In a year like last year, attaching yourself to the next wave produced better results than those who pulled back after the first run, but nevertheless, most of these analysts had to have conviction in their picks to finish above the rest of the pack. The Wall Street Journal’s annual ranking of research analysts in each sector is both comprehensive and inciteful. Enjoy! link to: Industry by Industry: The Stars’ Stocks and The Master Stock Pickers

May 19, 2011

Beware of ETFs – Especially USO and UNG

Though ETFs have grown exponentially over the past few years, people are starting to realize that the ETFs do not always do exactly what they are supposed to do. Especially in times of abnormal activity or duress, ETF performance tends to deviate from the market or commodity it is supposed to track. Investors in Japanese ETFs after the earthquake realized this a few months ago, and investors in commodities ETFs should have realized this a long time ago. Anyone who invests in commodities ETFs should be aware of the effect of contango on the performance of the ETF. For those unfamiliar with contango, it is when expected future prices are higher than current prices. This has been the case with oil and natural gas for quite some time, causing their respective ETFs to considerably underperform the underlying commodities they represent. For example, while the price of oil (as measured by the front month futures contract on the NYMEX) has soared 123% over the past year, USO has only risen 19%. Despite this pathetic performance, the fund is still one of the biggest funds out there with about $2 billion under management, just a little shy of where it was a year ago. People need to do their homework before they invest their money. Sadly, it looks like there are quite a few dumb people out there… Here’s a link to a WSJ article that shows a chart of the relative performance of USO and oil.

April 29, 2011

Large Bank Recap: Favoring JP Morgan and Citigroup Over Goldman and Bank of America

I have a new article up in Seeking Alpha. Wish I could paste it here, but it’s only available on their website:…

April 29, 2011

Tiffany and Signet – A Long/Short Pair Trade in the Making

I wrote this article on Tiffany and Signet this morning for Seeking Alpha. It’s a premium article, so you could only view it there. 

Also, be sure to check out my previous articles for Seeking Alpha:

April 24, 2011

Beware of the Chinese Trap

Its unfortunate that a few alledgedly fraudulent Chinese companies are
ruining for an aggregate $50 billion market cap worth of small-cap
Chinese firms. The backdoor IPO using reverse mergers is calling into
question accounting practices at many less vetted Chinese companies
that did not undergo the traditional scrutiny that most companies go
through when filing for an IPO. Furthermore, though most of us thing
the presence of a Big 4 accounting firm suggests legitimacy, it turns
out that many of these accounting firms outsource to less reputable
Chinese firms. Somewhere along the line, the checks and balances have
gone amiss. Until there is more certainty surrounding which companies
are fully legitimate and which are either fraudulent or even have
questionable accounting practices, I would stay away from any firm
that has not had several large secondary offerings and became public
through a reverse merger. It sounds like some companies are getting an
undue bad rap, but with thousands or millions of other investment
opportunities out there, life is too short to deal with this mess.
Good article in the Economist: Reversal of Fortune
April 18, 2011

4 Large-Cap Tech Stocks Worth Watching

Here's a link to an article I wrote about Apple, Intel, Google, and Research in Motion, available exclusively through Seeking Alpha.

April 13, 2011

Is the Market Overvalued? Two Ways to Look at the Market

The famed Yale professor squares off with Bank of America's David Bianco with duelling views of whether the market is overvalued. Many investors look at a 10 year historical P/E ratio to smooth out the peaks and troughs of an economic cycle to evaluate whether the market is overvalued or undervalued. Schiller advocates keeping it simple and doesn't adjust for one-time charges and uses reported EPS, whereas Bianco adjusts for one-time write offs and also makes adjustments for dividends and equity time value. The differences are huge – according to Schiller, the market is overvalued and trading at 23x 10 year EPS, while Bianco contends the market is trading at just 14.5x and represents a good value still. I would have to agree with Bianco's methodologies (by the way the esteemed Wharton professor Siegel also agrees), though I need to do some more research on how he is adjusting for equity time value. I don't know about the market being a great deal still, but its not yet overvalued, in my opinion. Here's a link to a great chart and the whole article.
April 8, 2011

The Best Way to Invest in Citigroup

Why buy Citigroup stock when you can buy the T-DECs, Citi's 7.5% mandatorily convertible preferred, which offers a nearly risk free way to invest in Citigroup. I know you're reading this and going, hmmm, risk free huh? Well, nothing is risk free, but this is one of the best risk/reward ratios I've seen in a long time. Since these securities were issued in December 2009, their performance has closely tracked that of the stock, even though they offer tremendous downside protection. At their current price of 126, it trades at fair value vis-a-vis Citi stock at $4.45, given their are eight quarterly interest and amortization payments totaling $13.125 remaining. When issued, the T-DECs were comprised of approx. $80 of convert value that converts into 25.3968-31.746 shares of Citi depending on where the stock is trading and approx. $20 of principal and interest amortization. Given $6.875 of the principal and amortization has already been paid, there are eight quarterly distributions of $1.875 remaining (according to Citi, these distributions are tax free as well). At prices above $3.94, the conversion ratio is 25.3968; below that price, the ratio ratchets up to provide $100 of value until the share price falls to $3.15 (a conversion ratio of 31.746). This means that even if the share price falls to $3.15, the theoretical value of the T-DECs would be 113.125 – the $100 covert value plus $13.125 in remaining distributions, representing a 10% decline in value versus a 30% decline in share price. If the stock price rises, on the other hand, to say $5 or $6, the value of the T-DECs should rise 11% and 32% versus an increase of 12% and 35%, respectively for the stock. Thus you are giving up a couple of percent of upside for as much as 20% downside protection!

There are a couple of caveats that need to be taken into consideration. The biggest, in my opinion, is the "early mandatory settlement clause," which is unusual for such a security. This allows Citi to convert the T-DECs upon five days notice at any time the share price is above $5.12 at the ratio of 25.3968. It appears that they may even be able to convert when the share price is lower, though the ratio would increase to as much as 31.746. They would still need to make the holder whole for the future distributions, but the holder would miss out on some of the interest. If this were to occur today, instead of $13.125 of distributions, the holder would receive $10.669, resulting in about a 2% decrease in expected value. It is unlikely that Citi would convert these share at any point other than when they may be converted at 25.3968 so that the dilution is no greater than necessary. Also, converting early at making the make whole payment in one quarter versus spreading it over eight quarters would result in a hit to earnings for that quarter, albeit a one-time hit, that they probably do not want as well. The other important caveat, that is no longer as important is that these securities allowed Citi to defer the cash distributions to as late as 12/15/15; however, if Citi desires to pay any dividends to the common, they would not be allowed to do so until these distributions have been made to date. Given the recent announcement of the one penny cash dividend to common, this is no longer an issue. Lastly, another point that makes this an even better investment is the built in dividend protection that adjusts the ratio for any dividends issued to the common. This means that, as Citi ratchets up cash dividends to the common (which it clearly wants to do), the value of these securities will rise even more.

Finally, one last thing that makes this play even more of a sure thing would be to sell covered calls. One could sell the Jan 2013 $5.50 calls for $.40, providing an additional $10 of value to the T-DECs. In this scenario, upside would be limited to about 30%; however, even when the stock falls 30% to $3.15, one would only lose about 3%. A 10 to 1 upside/downside ratio is about as good as it gets…

April 1, 2011

When Warren Wants Plans a Shopping Spree

The WSJ speculates on what Warren Buffet is going to do with the massive cash pile Berkshire Hathaway has amassed