Martin Hutchinson
Is Facebook (Nasdaq: FB) a Replay of the AOL/Time Warner Deal?
I hope you didn't buy shares of Facebook (Nasdaq: FB). The valuation was always too aggressive.
And increasing both the price and amount of Facebook stock at the last moment ensured that both underwriters and retail investors ended up with far more shares than they bargained for.
In fact, the Facebook fiasco reminds me of another deal that marked the peak of the dot-com boom.
No, not the ineffable and rather sweet Pets.com- their IPO was far too small a deal to have genuine market significance.
Instead I'm talking about the AOL and Time Warner merger announced on January 10, 2000.
Like Facebook, the deal was sold as a big success. It was only later that it quickly became clear that AOL had sold itself at the absolute peak of the market.
From there on out it was all downhill as the storied merger practically top-ticked the market.
Before Facebook There Was AOL
AOL had built up a nice business from "dial-up" Internet access, but it was already obvious by January 2000 that the arrival of broadband Internet would make for a difficult transition.
As such, AOL's market capitalization of around $200 billion was purely the result of the frothy market of 1999.
Nevertheless, that rich valuation enabled AOL to become the senior partner in an acquisition of the Time Warner media conglomerate, getting 55% of the merged company in a deal valued at $350 billion. It was the largest merger in U.S. history.
Mining Stocks: Will the Downturn Last?
Over the last twelve months mining stocks have substantially underperformed the market.
In fact, the Standard and Poor's Metals and Mining select industry index (INDEXSP: SPSIMM) is off 35% in the past year, while the overall market is up 2.5%.
Admittedly commodities prices are down, but only by 14% in the last year. Meanwhile, the cost of some commodities — notably gold prices — are much higher than they were.
Given the buoyancy of global monetary policy, this is surprising. For investors, the big question is: will the downturn in mining stocks last?
It truth, though, when you look more closely at operating numbers, the weakness in commodity shares is easier to explain.
Mining Stocks: Breaking Down Barrick Gold
For example, Barrick Gold (NYSE:ABX), a gold and copper miner that is generally well regarded, posted first quarter earnings which were up just 3% from the previous year. That was a surprisingly weak performance given that its gold sales price was up 22% — even though its copper price realized was down 11%.
However, gold cash mining costs were up 25% and copper cash mining costs were up a startling 66%. So even though copper production and sales were also up sharply, margins on those sales were down 43%.
In other words, even though Barrick enjoyed a favorable operating quarter with good prices, mining costs for both gold and copper were up so sharply that Barrick enjoyed little benefit from this success.
The same picture is clearly seen around the mining sector, and indeed in the related energy sector.
Strong sales prices over the last few years have had two effects.
The Collapse of the Euro: The Secret Government Mistake That Could Topple the EU
This may sound arcane and boring, but I promise you it's not.
What I've learned will blow another hole in the already shaky euro.
Premium
Eurozone Descends into a Farce as "Grexit" Looms Large
The elections on May 6 only made the Eurozone's problems even worse. The French and the Greeks have rejected sensible policies in favor of self-delusion.
Those elections, and the failure of Greece to form a government, have actually moved the Eurozone crisis one step further – from potential tragedy into a complete farce.
As investors, we can only watch horrified, knowing that a really bad outcome would seriously damage our own wealth.
But at this point, a Greek exit – or "Grexit" as it has come to be known – from the Eurozone would be the best thing that could happen.
Confusion Surrounds the "Grexit"
The Greek election produced a very confused result. But one thing was clear: the Greek electorate has decisively rejected the rescue plan the outgoing government had so painstakingly negotiated with the EU.
The previous ruling party's joint support declined to just 32% of the vote. That might be thought of as just retribution, since those parties produced Greece's appalling fiscal mess by lying for decades about the true position of Greece's public finances. (And let us not forget being abetted by Goldman Sachs in doing so).
However, the winners were not some new paragons of fiscal responsibility and free market government. They were anti-German Nazis (a peculiar combination when you think about it), communists and a truly unpleasant new leftist party, SYRIZA, led by the 37-year-old Alexis Tsipras.
SYRIZA's politics, in that one can fathom them, spell nothing but trouble.
Premium
Romneynomics: What You Can Expect if Mitt Romney Wins the Election
Yesterday I wrote about what to expect if President Obama wins a second term in office. Today it's Mitt Romney's turn.
I'd like to look at Romneynomics – the policies that are likely headed down the pike if the underdog Mitt Romney wins in November.
As for the horserace, I think it is President Obama's to lose.
But last Friday's weak employment report indicates again that the economy could slow enough to push Romney ahead.
As with an Obama victory, I think the election will be a close one even if Romney emerges the winner. That means the Republicans will not have an overwhelming majority in Congress.
On the other hand, the Republicans might just get the four seats they need to win the Senate; if Romney wins I assume they will accomplish this. That would give them theoretical control of both the presidency and Congress, but with only small majorities.
The Top Priorities of Romneynomics
As with an Obama win, the first order of business will be to sort out the "fiscal cliff" that comes along with expiration of the Bush tax cuts and the automatic expenditure cuts that will also occur at the end of the year.
With Romney set to inhabit the White House, I expect the solution to this to involve genuine spending cuts–perhaps along the lines of the budget presented by Rep. Paul Ryan (R.-WI).
Premium
Obamanomics: What You Can Expect if President Obama Wins the Election
Now that we are left with a two-horse race for president, the markets are going to begin to handicap the November results.
However, when the markets begin to handicap the race it will be about a lot more than just picking the eventual winner.
Instead, everything will revolve around the policies and consequences that come along with the winner.
The difference in approach promises to be stark with "Obamanomics" on the left and "Romneynomics" on the right.
Each one comes with its own set of consequences, though.
Today I'm going to look at "Obamanomics II," or the policies we will get if President Obama is re-elected.
But those on the left shouldn't despair…In my next piece, it's Romney's turn.
As for the horserace itself, it's too close to call, with neither side having much chance of winning a big victory.
President Obama Has the Edge
Even still at the moment, President Obama appears to be ahead. Apart from his modest lead in the polls, my former home state of Virginia appears to be swinging definitively toward the Democrats.
Yes, Republican Bob McDonnell did win the Virginia governorship handily in 2009, but he was a very good candidate. Moreover, turnout in gubernatorial elections is normally low. Thus I believe the latest polls showing Obama with a 7% lead in Virginia are accurate, and without Virginia Romney has a very difficult path to the presidency.
If we believe the presidential election will be close, then it follows that Congress and the Senate elections must be close, too.
If Obama wins in November, the most likely outcome must be that the Democrats will hang on to the Senate, while the Republican House majority survives, albeit much smaller than at present.
With this combination, the president's more extreme wishes (or those of his team) will be restrained. But as a newly re-elected figure he will nevertheless have more power to get what he wants than he does currently.
Whatever the congressional numbers may be, the president's first task will be to face the "fiscal cliff" of January 2013, when the Bush tax cuts and temporary payroll tax cuts expire and automatic spending "sequestration" comes into effect.
Premium
The Fate of the Eurozone Hangs on Sunday's French Elections
It now looks as though Nicolas Sarkozy's days are numbered. In the balance lies the fate of the Eurozone itself.
It appears Socialist Francois Hollande will win the French election runoff on Sunday and that June's legislative elections will give the Socialists a powerful position in France's parliament.
Added to these developments is the good chance that both the major existing parties in Greece's parliament, which had jointly agreed to the bailout deal, will be voted out of office on Sunday as well and replaced by a motley set of far-lefties.
So while the Eurozone has been quiet this week, the calm is deceptive with the elections on Sunday.
Meanwhile, most of the worry in the Eurozone centers on Spain – which is quite foolish.
Spain recently elected a center-right government with a large majority, which is clearing up the mess left by its predecessors. The country does have a 25% unemployment rate, but that's a function of Spanish labor law and excessive welfare payments, both of which the current government is addressing.
Spain's budget deficit is also smaller than France's, as is its debt level. In fact, Spain's debt and deficit burdens are lower than both Britain and the United States. Spain is not the issue.
Considerable Danger in the Eurozone
As for Greece, it is a shambles.
The truth is it should have been chucked out of the Eurozone two years ago, when it was first revealed that its governments had been consistently lying about its budget numbers.
Had that happened, the new drachma would have sunk to about a third of its former value, and Greek living standards would have reduced by half, all without anything but market forces to be blamed.
Now hundreds of billions of euros have been poured into the country, and its ungrateful electorate is determined to elect every nut-job it can rake up. The whole Greek rescue project has been a complete waste of time and money, and should be ended forthwith.
Fortunately, throwing Greece out of the Eurozone will not destroy the euro – after all, nobody was relying on the strength of the Greek economy in their calculations of the euro's value.
However, France is a different matter entirely.
Unlike Greece, if France gets into serious trouble, the remaining "solid" euro economies led by Germany are not big enough to save it.
And, led by Hollande, France looks to be in considerable danger.
Premium
The Secret System that Blew Another Hole in the Euro
This may sound arcane and boring, but I promise you it's not.
What I've learned will blow yet another hole in the already shaky euro.
It begins with Bernd Schunemann, a law professor at the Ludwig-Maximilian University in Munich. He has sued the German Bundesbank over its participation in the Eurozone "Target-2" settlements system.
Now I'll be the first to admit that yes, my eyes do glaze over when thinking about settlements systems-and I used to be a merchant banker.
But looking at the details of the case I had something of a banker's moment of clarity.
I realized that Schunemann was claiming that the settlements system had saddled German taxpayers with a potential liability of 615 billion euros, over $800 billion, in exposure to Greece, Italy, Spain and Portugal.
After all, who would have to bail out the Bundesbank if it became insolvent?
What's more, when you un-glaze your eyes and look closely, the risk is entirely unnecessary. It is yet another huge botch-up job by the EU bureaucrats.
Here's what I mean…
The Euro and the Target-2 Settlement System
The Target-2 settlement system was introduced in 2007, as a replacement for Target (Trans-European Automated Real-time Gross Settlement Express Transfer System).
The first Target was the large-scale payments system between central banks that had been introduced with the euro in 1999.
Under the system, when a Greek makes a large euro payment to a German, his Greek bank makes a payment to the Greek central bank, which in turn makes a payment to the Bundesbank. Once it reaches the German central bank, it pays the German bank, which pays the German.
For ordinary trade transactions, that's all fine and good. Greek exports to Germany are balanced with German exports to Greece.
If, however, there's a big trade imbalance between the two countries, then gradually an imbalance grows up between the central banks. As it develops, the Bank of Greece ends up owing the Bundesbank more and more money.
Even more serious is when Greek citizens rush to get their money out of Greek banks and put it in German banks. Every million euros Greek citizens remove from their banks is a million euros by which the Bundesbank increases its exposure to the Bank of Greece.
You can see how this could be big problem-especially since that's the arrangement all around the Eurozone.
Investing in Bonds: How to Build a Bond Ladder
With interest rates at near-record low levels it appears that the only way for rates to go is up.
As the U.S. economy moderately strengthens, that means the bond bubble will begin to leak. Even darker, the bubble might just burst altogether.
The prospect of yet another bursting bubble makes investing in bonds difficult. The same is true for stocks.
After all, stocks tend to underperform when rates head north, while gold will certainly drop back once interest rates begin to rise ahead of inflation (which may take a considerable time.)
However, there is one strategy that enables you to prosper even in this tough environment.
It is called the bond ladder. It works like this…
Bond investing in a rising rate environment can be a terrific way to lose money.
If you buy short-term bonds, the yields may well be less than inflation, causing you to lose money in real terms.
And if you invest in long-term bonds, your immediate yield will generally be higher, but you run a large risk of losing part of your principal as rates rise and bond prices decline.
These losses can be a large multiple of your interest payments.
For example, if 30-year bond yields rise from their current 3.11% to 5.11% over the next year, your principal loss on a 30-year T-bond will be $30 on every $100, far more than the $3.11 you will have received in interest.
Of course, if you hold the bond for the next 29 years you will get your principal back at maturity.
But meanwhile you will have spent 30 years locked into an investment at interest rates below the market, and probably below the level of inflation. Not a wise choice.
Investing in Bonds: Building a Bond Ladder
The problem of investing in bonds then is one of reinvestment. You really don't know at what rate you will be able to reinvest your money when the time comes.
This problem is solved by buying bonds in a range of maturities, from short to long, and reinvesting the proceeds of each investment as it comes due.
For example, you could invest 10% of your money in each Treasury bond maturity from 1 to 10 years.
Then when the first bond came due in year 1, you would reinvest the proceeds in a 10-year bond, so you would again have 10 equal bond investments coming due in years 2 through 11.
Here's a concrete example.
One of the Telltale Signs Behind Risky Stocks
Short-term corporate thinking has been blamed for many of America's economic ills.
With little foresight beyond next year, management sometimes closes down plants and fudges accounting to make this year's earnings look better and boost the stock price.
Often, it is simply because management is excessively rewarded by short-term incentives such as stock options.
While investors might benefit from these shenanigans in the short-run, a new study points out the long-term effects are frequently negative.
A new Harvard Business School study entitled "Short-termism, Investor Clientele and Firm Risk" has shown that short-termism is bad for investors increasing their risks without any corresponding increase in returns.
In other words, risk and the short-term thinking usually go hand in hand.
Breaking Down the Conference Call
The study used a very interesting method to find out which companies are short-term oriented or more risky.
RSS
