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.
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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.
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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).
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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.
France May be the Domino that Causes the Euro to Collapse
Commentators are wringing their hands again, worried the troubles in Spain could cause the whole euro project to collapse.
As a result, all eyes are now on Spanish 10-year debt yields, which went above 6% last week as the threat of euro-chaos returned.
But it's not Spain the markets should be worried about.
The reality is that Spain is not in too bad a shape and that a rescue would be affordable for the European Central Bank even if it was needed.
The real tottering European domino to worry about is France.
After all, it would be impossible for the remaining solvent members of the EU to bail out France if it began to fall.
The larger reality is that France's fiscal position is considerably worse than Spain's.
The country's debt-to-GDP ratio was 85% at the end of 2011, while Spain's was only 66%. What's more, France's public spending is 56% of GDP, according to the Heritage Foundation, compared to Spain's 45% of GDP.
Spain's current government has also instituted a stiff austerity program, mostly comprised of cuts in public spending, which will reduce its deficit below France's by 2013.
Meanwhile, France's austerity has so far consisted almost entirely of tax increases on the rich -not actual spending cuts.
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How to Make Your Mega Millions Last
Thanks to the millions of starry-eyed dreamers, the Mega Millions Lottery was finally worth $656 million before the winning tickets were sold.
As I discussed yesterday, that's a fair chunk of money– far too much to spend at once.
But it is fun to think about.
It also makes for a great discussion about how you would begin to invest such an enormous sum.
But here's the thing. Whether you have $656,000 or the entire $656,000,000 jackpot, your thinking is basically the same.
In this case, it is just a matter of scale. It may sound odd but it's true. Let me explain.
If you were lucky enough to hit the big one, here's how you might want to handle the winning ticket.
Mega Millions Decision Number One
Before you did anything, your first decision is whether to take the jackpot in a lump-sum or in annual payments.
Admittedly, after tax and discounting, Saturday's jackpot comes to only $355 million as a lump-sum, or 26 annual payments of $19 million.
The discount rate between the two is only about 2.6%, so if you think you can make more than that on your money, you should probably take it as a lump sum.
Maybe if you wanted to be very conservative on your investments, or thought the stock market was hopelessly overvalued, an annuity would be preferable.
For example, if you had won that amount in early 2000 you might have invested some of the lump sum in the dotcoms before the crash. In that case, you'd have been better off with the annuity!
But market crashes aside, generally, the lump sum looks a better deal.
Then there's the amount you are going to need for your spending spree. I discussed this yesterday suggesting that a spending spree of more than $30-40 million, spread over a year or so, would probably not make you happy and might incur costs for the future.
In particular, you need to be careful not to buy large items that incur running costs.
By all means buy a really nice sailboat, but a $100 million yacht or a house that requires a full staff of servants are likely to drain your resources in years to come, and could lead you eventually to ruin.
To avoid that it probably makes sense to devise a budget for how much you can spend.
If you're fairly young, ideally you would want the money after your spending spree – about $300 million– to last you the rest of your life.
With interest rates so low and inflation a risk, that means you shouldn't plan on spending more than about $10 million a year in today's money, with spending perhaps increasing along with inflation.
That should be ample for all the toys and lifestyle you want, again provided you haven't bought Downton Abbey or equivalent in a yacht.
How to Invest Your Mega Millions Jackpot
The next thing to be clear about is that you shouldn't invest all the money in the stock market at once.
Here's why.
U.S. Housing Market Forecast: How to Profit as Real Estate Rebounds
It was the most atrocious bubble in U.S. history, pushing tens of millions of Americans into financial misery.
Even today, the last of the lawsuits have yet to be filed.
But five years later it's finally coming back.
The housing market has bottomed and there's money to be made on its return.
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