Who killed James Bond?

Private Equity did.

The answer is not obvious, but if you read my blog post about how Private Equity destroys companies by loading them with debt, you already have a clue.

MGM studios is in deep trouble, with a debt pile of about $4bn, and the cash flow generated from DVD sales keeps on decreasing. Does it sound familiar? Have a look at this article in the FT, and think about Josh Kosman's The Buyout of America, and you will immediately understand why MGM is in trouble.

The funny thing is, once the acquisition was made by the PE groups (together with Sony), they immediately restructured the work force... They followed the PE recipe to the letter!

Private Equity | PE | MGM | debt | loan | buyout

Should investors buy bank shares or should they rather avoid bank stocks? Personally, I avoid investing in banks, not because I believe the share prices are overvalued, but because I have no visibility on what is going on within the bank.

This being said, bank shares can be a good investment, as it was over the last year or so. Maybe they will be over the next few years, but here's what I recommend in investigating bank shares:

A typical bank borrows money from depositors and lends it to borrowers. The book value of a bank is assets minus liabilities, and therefore it equals the amount it lends minus the amount it borrows.

Shares of a listed companies usually do not trade at book value, but rather at a multiple of the book value. The reason being that the assets are expected to generate more cash than the cost of the liabilities.The same principle applies to banks.

Assuming that a bank borrows money from depositors at 1% (this is low, but interest rates are at an all time low) and further assuming the bank lends at 4% on average, the margin the bank makes is 3% on the money it borrows.

We can therefore expect banks should trade at more than book value since they are highly leveraged (a good and sound leverage factor would be 10) since the assets generate more than the liabilities.

This is indeed true in a perfect world, but in the real world things are not so simple. Add now the costs of the bankers in charge to manage the risks. Although they are not good at it (we've seen it before...), these fat cats cost a lot to the shareholders. Add on top of that all the costs to service the depositors and borrowers, the IT (imagine the mainframes and the security), etc. There is not much left after the bonuses have been paid out. But wait a minute, this still takes into account there is no default on the loans. Imagine that the bank makes 3% interest spread on the loan it makes, if 2% of the borrowers default, there is only 1% left for the bank.

So, it is then up to the investor to estimate the value of banks based on their balance sheet and an assumption on the default rate.Taking a look at the defaults that we can expect in the future as explained in this blog post, I would not be too bullish on the bank multiple!

loans | credit | lending | valuation | banks | bank stocks | shares

US seeks $ 20bn BP pay-out is the title in the FT today. Did you ever wonder if BP can afford this? You would expect a large multi-national in the Oil & Gas industry to be able to pay for this, but, did you check BP's financial statements?

BP has about $ 6bn in cash, did you know that? Of course BP has inventory, accounts receivables, etc. which accounts for a much larger value, but you don't make up a fund with that. The cash value is just $ 6bn.

Good luck to the US to get $ 20bn out of BP...

BP

The latest report of job creation in the US showed 431,000 new jobs, from which 411,000 are temporary government jobs for the census. Well, well, well, the cat is finally out of the bag.

The stock market immediately punished this bad news, but frankly speaking, many were expecting this. Why? Because the rally we have seen was a liquidity rally, nothing else. It was not related to any economic reality. Giving money to bankers to invest it in the stock market will of course bring a stock rally, but it does not much to improve the economy. It should therefore be no surprise that, firstly, the job creation stagnates, secondly the unemployment figure stays at an all time high (did we tell you that the 9.7% unemployment figure does not take into account all job seekers who have given up), and thirdly the stock market would encounter a serious correction.

There you have it, a poor policy provides poor results. There is no chance you get the right result by making the wrong decisions.

So, what should be done? The stimulus package is for the economy, not for the bankers. By the way, all the bonuses those bankers got, [the cash] will now be even more valuable if the stock market goes down and if the economy stagnates. They can now go shopping around and buy anything they want. You have been warned, I would not be surprised to see bankers converting themselves into CEO of their own real estate company.

Anyway, the point is: what should be done? Well, inject money in the real economy, not the fake economy so-called controlled by bankers who do not know how a factory works. A stimulus package is for the factories to get loans, merchants to build inventory, and businesses to keep on working.

Why is there such a frenzy in M&A (Mergers and Acquisitions) activity? Because businesses run out of cash, and they knock at the door of their competitor to be bought out. It is no difference whether you are called AIA or just a garage owner around the block, the same economic reality applies. However, what is important is that the M&A activity benefits the bankers again. They get paid massive fees to arrange the mega deals.

Food for thought

eonomy | job creation

Google and Intel announce a partnership in launching Web TV using Intel's Atom processor and Google's Android Operating System.

The only piece missing is the hardware and consumer brand name to get it into the consumer's home. That is where Sony is expected to fill the gap.

This all sounds like an explosive cocktail - explosive in the good sense, a powerful combination. Unfortunately Google everywhere again, but yeah, when the dinosaurs fail to adapt, the mouse gets the cheese.

Google is expected to tap into its community of Android developers to get a share of the pie by developing applications for the TV based on its Android OS. A whole new world opens up...

You can be sure Apple is going to reveal something similar, they have to. Apple's iPhone OS, based on its Mac OS is powerful enough to be used for a set-top box.Expect some Apple hardware in this space, maybe connecting the Hi-Fi stereo chain to the TV set with integrated iTunes, Firewire and home network.

The Good Ol' Times of Internet are back - technology stocks are the next thing again!

stocks | tech | Apple | Intel | Google | Android | Sony

What's a subprime mortgage originator ?

A person or company that pushes people between the 5th and the 29th percentile to take on debt that they cannot repay

What's a subprime mortgage broker?

A company that buys the subprime mortgages from the originator and sells it to an investment bank

What's a subprime mortgage securitizer?

An investment bank that buys the subprime mortgages from the broker, puts them in a company, and sells its bonds to investors

What's a subprime mortgage security ?

A slice of a pile of shit

What's a subprime mortgage bond rating agency?

A joker played by the investment banks to rate the slices of that pile of shit with triple A, triple B, or anything in between

What's a CDO (Collateralized Debt Obligation)?

A pile of shit made out of the worst slices of the original pile of shit. The top slices are now suddenly rated triple A, which smell better than shit (it's like deodorant - it's just smells better temporarily)

What's a CDS (Credit Default Swap)?

An insurance on a slice of shit - but the great thing though, is that you do not need to own the slice of shit to take insurance on it. It is like buying life insurance on your neighbour's head, once you own it, you'll find a way to get him dead...

subprime | CDO | CDS | insurance

2009 saw markets being flooded with liquidity to boost the economies worldwide as an incentive to resume lending by the banks. Governments around the world launched massive stimulus packages to keep their economies going, and the markets that fared well were mostly emerging markets, why?

As Joseph Stiglitz points out, during the good times, governments from emerging markets were putting money aside for potential rainy days. Basically, they learned from their past mistakes, such as the Asian crisis, the Brazilian crisis and the Argentinean crisis (among others, such as the Tequila crisis in Mexico) and they were more prepared than developed countries.

Once the rainy days arrived, they were prepared to do what was necessary to keep their economies going. They invested heavily in economic stimuli, launched infrastructure projects, etc. The surplus money these countries had saved during the boom years has now been put at work and the emerging markets are resisting the downturn.

This is especially true for China. Its stimulus package was worth US$585 billion, which is 65% of the American package for an economy that is five times smaller. No wonder the Chinese economy is performing well, pulling its neighbors with it.

For emerging countries in general, on top of the stimuli, they saw massive flows of foreign investments since they were better prepared to counter the recession and achieve growth, and these investments fueled growth even more. Indeed, investments drive growth, and foreign investments make the currency appreciate, making it even more attractive to foreign investors. However, careful with the opposite effect, once foreign investments reverse, much can go wrong very fast. Globalization has accelerated the speed of foreign investments, with huge masses of money flowing in and out rapidly following greed and fear. 

The growth in the world is therefore driven by emerging markets, and it will be as long as their reserves allow them to do so. With a little luck, their reserves will last longer than the recession.

economy | growth | Stiglitz | emerging markets

Charlie Munger, the long time partner of Warren Buffet, just released a new parable. Since Buffet and Munger are part of the most famous investors in the world, I would take this parable quite seriously. Charlie Munger is known for writing parables to educate investors. His sharp and concise views can be seen as shocking, but I would not discard parables from best of class fund managers, it shows a part of how they think.

You can find the story entitled 'Basically, It's Over' on slate: http://www.slate.com/id/2245328/pagenum/all/ .

While reading it, remember this post 'Bankers = Support Desk?' , the similarities are quite striking between Sorrowland and added value created by a supporting Banking Industry that takes you for ransom.

banks | bankers | Buffet | Munger | Berkshire

The irrationality of markets keeps on amazing me. Markets edge up by almost 1% in the US after Ben Bernanke tells lawmakers that the economy is in bad shape and that interest rates will have to be kept low.

Basically, markets cheered on the cheap credit that keeps on flowing, it sounded like free crack to junkies.

Short term cheers, but long term tears.

The US economy is still fragile: unemployment does not go down, the housing market keeps on suffering from foreclosures, small banks go belly up ever month (we reached more than 700 seized banks by now), and consumer confidence is dropping.

Perhaps the most important indicator is consumer confidence, because the best way to bootstrap the economy is to get consumers to spend again, like China achieved to do during the crisis. but with dropping consumer confidence, things won't get any better soon.

The rain is yet to come.

economy | stock market | credit

If you are working for a company owned by a PE firm, you better get ready to change jobs very quickly.

Josh Kosman makes an interesting analysis of the Private Equity industry, shedding light on how they actually make money. Did you ever wonder how they made money? How come one of KKR's founders has a net worth of $6 billion ?

I simply thought that PE firms made a living of improving the efficiency of the companies with hard work and some financial knowledge to improve ratios. Well, I can tell you my surprise while reading the book by Josh Kosman, The Buyout of America, whatever I thought was completely wrong, and my guess is that it applies to you too!

Simply put, PE firms dump a shitload of loans onto the firm they buy out, cut the costs such as customer service, R&D, and safety to increase the profits. Increasing profits can happen very quickly by decreasing customer service and R&D, but the long term prospects of teh company are going down the drain. In a couple of years the company won't have anything to sell anymore and it will be kicked out of the market by the competition.

Anyway, that is not what the PE firms care about, they care about short-term profits. Why? Because with a better profit margin, the PE firm can go back to the bank to get a second loan. This loan is then used to pay the PE firm a huge dividend while damaging even more the company since it has to repay even more than before. And the cost cutting goes on.

The dividends that a PE firm can get out of such a scheme are more than the money they put down to buy the company in the first place. So, if you think about returns, the return is higher if you can get a quick dividend compared to try to make the company grow and sell it for a capital gain. So in the end, if the PE firm sells the company for a lower value, it simply does not care, most of the value has been extracted already.

Anyway, since the long term prospects for a company owned by a PE firm are not bright, on the contrary, you better start looking for a job before it is too late.

Private Equity | PE | Josh Kosman | LBO

Finance does not create value, it is actually a support function to help the real economy (manufacturing, technology, services, etc.) function. A bit like the customer support helpdesk when your SAP system does not do what you want. However, the main difference is the salary and bonus. Why?

I wonder why, would you pay your helpdesk huge amounts of bonuses? Of course not, so why do bankers get bonuses and huge salaries? Because it is a mafia, because they have prime access to the funds, especially in times like these, when governments are pumping trillions of dollars in the system to keep it away from collapsing, who gets to pump the money in the system? Bankers of course. It is like a toll road to start with. The money is given to bankers to pump it in the system, and they take a cut out of it. 

Then, to pump the money in the system, because of regulatory issues, they cannot lend to the full extent of what the economy needs, so they invest the money in the stock market. This creates a big rally, which is in fact just a smokescreen to get a large bonus for a good performance on the stock market.

A mafia it is, using the concession-based business of managing the money flow, government links to pump the money in and out, allowed to use the money for own profits, and when they go bust, the tax-payer is the one to pay for it.

That is what happens when your helpdesk holds you for ransom, because your customers are your asset, and when the helpdesk goes on strike, you lose your assets. This helpdesk analogy is then amplified by a leverage of at least 12, just imagine what that is. No wonder everybody wants to become a banker, that much for support....

bankers | economy

Did you ever wonder how to share your future with your friends? You can now perform your financial plan on Facebook and post it on your wall!

The Wealth Manager is now on Facebook named as 'Zoltan Says' after Zoltan the fortuneteller. The application provides the same features as the Wealth Manager on ProsperityPersonal, but with a cool twist at the end. When posting the outcome to your wall, Zoltan will summarize your future with a one-liner  . Check out Zoltan Says to see what it has to say about your future...

Facebook | wealth manager

“The trouble with being educated is that it takes a long time, it uses up the better part of your life, and when you are finished what you know is that you would have benefited more by going into banking.”

- Philip K. Dick

banks | bankers

I was reading about this article (Wall Street Journal) talking about Monte Carlo simulations applied to retirement planning, it is an interesting topic. More and more people are getting more interested in financial planning, and a risk analysis on one's portfolio is an important part of it. That is where Monte Carlo comes in: it simulates thousands of possible scenarios resulting in statistical probabilities.

The Monte Carlo simulation will also show what the probability of ruin is at a certain age. The probability of ruin is the probability that a person runs out of money before dying. This could be due to this person spending too much, or because of another market crash wiping out the savings...

The probability of ruin is your number! Your probability of ruin should be as low as possible of course, to minimize the risk of going bankrupt. Now that this technique seems to gain awareness, there goes the saying that Monte Carlo is not precise enough, or at least they do not take into account extreme events like the credit crisis we experience(d). Always one step behind ....

risk | Monte carlo

Commodities start to rise again, China is buying copper, oil prices are going up again, it looks like the bear rally is not only limited to stocks, commodities are in demand again.

For consumers like you and me, the direct impact will be felt on the gasoline bills. The indirect impact will be an increase in retail goods, but with loads of inventories available for the moment and the deflation pressure, we are safe for a while on that side.

So, how to make sure you do not loose on increased oil prices? Invest in Oil ETFs. One of them is the United States Oil Fund, check it out on Google finance: http://www.google.com/finance?q=USO 

It makes sense if you own a car!

gasoline | hedging | oil

The two friends I had a bet with regarding the oil price (I bet with them that the oil price would be below 80 USD at the end of 2008), have a surprised look when I tell the the oil price is now below 40 USD per barrel. They simply cannot understand what happened, so they ask me what my view is on the oil price for 2009...

Obviously the economy is in a bad shape, and demand for oil is decreasing, driving down prices, but there is more. I believe too many powerful players benefit from low oil prices, putting a downward pressure to keep the prices low. First, the Oil & Gas majors saw many small players investing in all kinds of oil related activities. These activities range from refining (remember that Richard Branson wanted to set-up a refinery) to deep-see drilling or even reopening old depleted wells. This threatened the playground of the majors, and now is pay-back time: the current prices are below the cost of extracting the oil, hence these companies will have a very hard time, and consolidation is on the way.

Second, when I read the news about the unrest in Russia, and the problems that Iran will have wth its budget because they were expecting oil prices not below 75 USD a barrel, it looks like it is payback time for all these governments promoting anti-USA politics. Just think of Venezuela, Bolivia, Russia and Iran. They could throw money out of the window to help their 'komrads' fight againts the big bad Uncle Sam. It looks like the party is over.

No more nationalization of foreign-owned entities for Bolivia, no more Kalashnikov factories for Venezuela, no more war in Georgia for Russia and no more Uranium enrichment program for Iran. It looks like the Irak war made some politicians a lot smarter, no need to spend billions of dollars looking for weapons of mass destruction (that do not exist), just keep the oil prices low and the job is done.

I know this is very close to a conspiracy theory, well yeah, maybe, maybe not. But here are some interesting facts: Obama is strongly promoting clean energy. This will drive down the US addiction to oil. And guess what, to fund the stimulus package, I am sure he will raise taxes on fuel. This will be an incentive to consume less fuel, and it will keep prices low, to the benfit of many powerful guys...

oil | 2009

John Authers draws a beautiful chart on the performance of oil versus banks: access it here (opens a new window)

oil | banks

A good proxy for economic activity is the demand of oil, and the demand looks grim. According to the US energy department, demand for oil will continue to fall in 2009 with a continued decrease of approximately 450,000 barrels per day.

The world economy is indeed in a bad shape, and it does not look like 2009 is going to be a great year. The extreme prices we saw in commodities this year were not sustainable, and as any bubble, the implosion was foreseeable. Hedge fund money poured into commodity markets, increasing prices to unseen levels triggering riots in countries over the world. The inflationary pressures due to high energy prices are now gone, with deflation being the fear of central bankers.

Hence, what to expect for 2009? House prices in the US and elsewhere will continue to drop, and cash will be king. Oil prices will most probably stabilize around $40 - $50 a barrel before starting their upward trend towards the end of 2009. On the longer term, the World Bank predicts that oil prices would return to $75 a barrel within the next three years. This is due to the demand in emerging markets such as China and India where the marginal increase in demand has to be matched with supply.

The market for supply of oil has tremendously changed over the past few years. The high oil prices triggered the reopening of old depleted fields, with a cost of extraction being anything between $50 and $75 a barrel. These extraction fields will have a hard time to survive in the current economic environment, with very low prices forcing these adventurous companies out of business. A consolidation is therefore on the way …

economy | consolidation | oil

Now that oil prices are down to let’s say almost normal levels, it is time to think on how to avoid the trap of high oil prices.

If you believe that oil prices will go up again, then maybe it is time to think on how to offset the potential cost increase due to gasoline and gasoil price hikes. With lower fuel prices all of us are now saving some money compared to the gas station prices we saw when the barrel was above 100 $/barrel. Well, it is probably time to start buying shares of Oil companies to benefit from their share price increase just in case oil prices increase.

Funnily enough, I was not the only one thinking about this: http://seekingalpha.com/article/108283-hedging-gas-consumption-with-u-s-gasoline-fund?source=feed

hedging | gasoline