Happy New Year

Three diversions from football, food, and wondering about the market

Today I bought three books as diversions for the next few days. Nothing too challenging, but good stuff I hope.

First, "Death at La Fenice" by Donna Leon. This is the first book of the Commisario Brunetti mysteries. I've read six others since early November when I inadvertantly stumbled onto this series. Nothing like this has happened to me since the Hardy Boys in the fourth grade(telling comment perhaps). For the mystery genre, in my limited experience, these are remarkably well written, civilized, observant, and relaxing. They are great bedtime reading, train reading, plane reading and just plain reading. They're quick, and don't get in the way of other reading. For me they have also replaced wasting too much time watching CNBC while eating lunch. Instead I read. The one I bought today is the last that Barnes and Noble or Amazon
have available in paperback, all Penquin at $7.99, so this little treat may be reaching a hiatus in a day or two.

Second, "A Story of Detection" by Michael Chabon. This is a novella that I know nothing about, except that it has excellent reviews and it follows the writer's big success with "The Amazing Adventures of Kavalier and Clay". I didn't read that book, because each time I tried to read excerpts at bookstores it didn't click for me. And it was really long with small print. So this seems to be a way for me to try out this writer. You know, short with big print.

Third, "My New Orleans" edited by Rosemary James. This is a collection of short essays on New Orleans, most post Katrina, and part of the proceeds will go to a fund for New Orleans based writers. Having been to New Orleans many times and to many Jazzfests, in my little and inconsequential way I actually do know "what it means to miss New Orleans". Keep the unique spirit of New Orleans alive in 2006.

Happy New Year

"Politically Incorrect" article is MIA

Yesterday on www.thestreet.com there was an article that was fascinating because of how "politically incorrect" it was from a "business" as usual perspective. I saw it in the evening and didn't jot down any notes because I assumed it would still be there twelve hours later. It's gone.

What was it, I hope you ask. It was an interview with a global market strategist at Citigroup. The thoughts presented were as follows: the top 1% of Americans control an immense amount of the nation's wealth, their share continues to grow, and statistics were given to support that; the top 1% of citizens of the rest of the world in the aggregate control an even larger share of wealth, it's also growing, but no statistics were given for that aside; any pressure on U.S. equity markets in 2006 due to reduced consumption by the bottom 99% would be largely but not completely offset by the increased consumption of the top 1%; therefore those who want to do well in 2006 should overweight luxury goods stocks, and examples were given such as Tiffany, Porsche, and three or four others; the article warned that there were some luxury goods stocks that would not work, and gave the example of a manufacturer of private aircraft that unfortunately also had some mundane infrastructure development component within its corporate umbrella; as to the foreign top 1%, much of that wealth is in countries without the capital market depth to absorb their investment needs, so much of it is attracted to the U.S. market and is the primary reason for any seeming aberration in the yield curve.

The facts of the article about wealth concentration are well known, but the magnitude of the concentration indicated in the article is I'm sure debatable as most statistics are(I wish that the article was still up so that the I could reference them and the reader could judge them). The forecast that these concentrations will provide a significant cushion to the impact of broader economic weakness and that the current inverted yield curve is a result of this concentration globally may or may not be right. But the tone of the article was that we could all sleep well because things will work out ok.

This came from Citigroup, the U.S. based global financial services firm with a huge position in the U.S. credit card market and in the low income focused consumer finance market. Was this the strategist from their private banking division? Did he clear this interview with PR? It's a far too candid reflection of the way that segment of the bank may think, but is this wise to say. Does this man still have a job?

Whether the forecast is right or not for 2006, it seems that almost anyone should be able to see that this is not a sustainably healthy situation. It may sound hackneyed, but strong democracies have been built through growing the middle class. We preach that to others. This deal seems headed in the wrong direction. The article was refreshingly "politically incorrect" because it did not reflect carefully considered corporate-speak, and now it's gone.

Merry Christmas

a friend asked and here's the answer

After looking at this almost two week old website, a friend e-mailed with the question, "ok, so what are you buying today or thinking of buying and why". Fair question since all I've done so far is point out that: Sirius has done well in 2005; Citigroup and JPMorganChase would have been good investments to make over two months ago and there may still be upside; Time Warner has significant potential but only if managed; and short term CD's are very attractive parking spots.

Well, it's the holidays so I'm not doing anything now and am not thinking about what to do next. I'll leave this time to the market professionals, those managing tax positions and fund managers dealing with perception issues in their year end statements. So, in answer to the question I'll list what I did do between Thanksgiving and mid-December.

----Reinvested the proceeds from Treasuries and CD's that matured in November, primarily in 6 month CD's at 4.25% and a one year CD at 4.35%.

---Bought positions in ETFs as follows: EEM(emerging markets)---I mostly missed the emerging market party of 2005 and now this is the safest and least expensive way that I know to stick my toe in the water. Events in Bolivia will cause concern about Latin American momentum; PHO(global water)---brand new ETF, and long term water seems like a good bet to me. Hmm, may be a reasonable way to play a very granular market; FXI(China)--I added to an existing position for no other reason than that global asset allocation should suggest some level(?) of exposure to the fastest growing major economy; EWS(Singapore)--Just in case this fiefdom becomes the Zurich of Asia, I want some exposure.

---Added to positions in the following mutual funds: FSTMX and FSEMX(Fidelity Total Market Index and Fideltiy Extended Market Index). Both of these index funds have a 10 basis point management fee, give broad based equity market exposure, have minimum expense, limited tax exposure, and limited surprises outside of the market itself. FSTMX is large cap U.S. and FSEMX is mid-cap and small cap U.S.; TAVFX(Third Avenue Value Fund) a mid-cap global fund with a limited number of positions, limited turnover, and an excellent track record. An added bonus is that their quarterly newletters are well written, thoughtful, and seemingly honest; FSCOX(Fidelity International Small Cap)--This relatively new fund is in the early stages when managers have the liquidity and thoughts "in the bank" to do well, and I've had good experience with a larger American Century fund that has the same mandate; FJSCX(Fidelity Japan Smaller Companies)--this has performed well, and earlier adds have worked. There are not too many ways for individual investors to play Japan below the large cap level.

---Bought the following individual stocks: New position---BMY(Bristol Myers)--5% dividend, top two shareholders are Capital Group and Morgan Stanley Investment Mgmt., beaten down like most big pharma, and big but not too big to be bought. Added to PFE(Pfizer)---at this point, it's almost either sell painfully or buy more. I'm operating on the premise that big pharma, like large cap finance for a long time, has become cyclical and will rebound when calm arrives, and especially the best companies like PFE. And the dividend pays for the wait; Added to GE---I just like the company, its business portfolio management, and either its foresight or public relations as now it's become an industrial environmental services concern. I have owned various levels of GE since the mid-80's.

---Sold the following: FFRHX(Fidelity Floating Rate High Income)--This mutual fund that invests in short stubs of LBO type debt had disappointed in a big way, and was yielding less than 50 basis points more than money markets while having principal risk and a higher expense ratio. This was a relatively large position; GNLB(Genelabs)--I had traded in and out of this biotech since the mid-90's, always buying it between $1 and $2 and selling between $3 and $5. After a several good round trips, this one didn't work and I gave up at 45 cents; CRDS(Crossroads Systems)--I had ignored this remnant of the late 90's in a small account and was actually surprised to see the amount of my loss. At this point it feels like a gift for tax purposes. But when $80 a share goes for 80 cents a share, even if it's not that big, it's startling; ALTH(Allos Therapeutics)--- this biotech was once going to cure cancer. Hopefully it still will. $11 to $2 for tax purposes, with no conviction left.

That's it.

Citigroup stalks 50, JP Morgan Chase 40

With C up 12% and JPM up 20% since mid-October, both are approaching territory that they haven't seen for 18 months--for C $50 a share and for JPM $40. As multifaceted financial services conglomerates, these firms had until recently not participated in the average 37% rise in pure play investment banks this year, despite clearly being among the leaders in that field. With both having current dividend yields around 3.5% and with the expected yield curve crunch on the consumer business not materializing, the relative attractiveness of these powerful but complex franchises is finally getting the attention of the market. While the thresholds of $50 and $40 are cosmetic, in the corridors of these firms with broad based stock and/or option programs for employees, it probably looks and feels attractive. That's a good thing.

Syriana--great first half

Iran, Georgetown, Geneva, Cap D'antibes, Princeton, Spain, the opening of Syriana moves across the globe like a Ludlum adventure comic. Syriana is involving and entertaining, as one focuses on how the various caricatures interact into a coherent plot, or plots. The look of the film is terrific and at times it is informative and thought provoking. But, about 70 minutes in, the film decides to change gears when the second son Amir hopeful says to a U.S. analyst(not verbatim) "Your president just has to call my father and say you need jobs in Texas or Washington state and he will sign a contract to buy things we don't need". For me it was like in Saving Private Ryan when Ted Danson shows up on the bluff after the beach has been taken. I'm in Cheers, and the spell is broken. In Syriana's case, the spell is broken by the not unexpected news that this film has a message and will do the thinking for the viewer the rest of the way. With subtlety gone, focusing on accepting, rejecting or modifying that message was the task. After Ted Danson, Saving Private Ryan became a regular war movie. After the direct message, Syriana becomes a regular international intrigue movie, a genre that always teaches that spies are useful until they are not.

Postscript---I do not want in any way to equate Saving Private Ryan with Syriana. Saving Private Ryan is a great movie, that will still watched 25 years from now. Syriana is a current topical movie, that in a year or less will be out like yesterday's newspaper.

Catalyst for Time Warner? Part 2

So to continue, enough of the textbook talk. Conglomerates created by large mergers sometimes are under the impression that the resulting businesses somehow all magically work together, have synergy etc., just because they belong to some common industry group. That's rarely so. CEO Parsons has apparently been the right person at the right time for TWX, an executive with the skill and demeanor to deal with the immediate needs and, importantly, the significant internal strife of the company a few years ago. But progress has been made on those fronts, and now it is possible to begin to do something. Manage the assets, express a point of view about how these businesses all work together. Is there common distribution(No), are the skill sets complementary(not really), does Time Warner as an overarching brand mean anything(not to consumers I guess). So is it just capital strength, the capacity to be global, and the ability to pay really really well that defines the reason for Time Warner. Well those aren't all bad, but my guess is that if the market sees a direction through real active management of the company's assets, THAT IS THE CATALYST. Even little stuff will help. I read somewhere that "management is mulling the sale of the Atlanta Braves". My goodness, SELL IT. Those are rich men's hobbies and fortunately this one is valuable, but not locked in a conglomerate. There has to be lots of pruning that can be done. Feelings will be hurt, fiefdoms will be challenged, and the argument will be made on each one that it's not going to make that much difference. Right, possibly, if you're talking individually in EPS terms, but wrong if you're talking in terms of changing management culture and market perception. And as far as EPS, little actions added together over time can of course be material. Then there's AOL, a big one. Would a joint venture with Google or Microsoft make it more manageable? Wouldn't, in fact, TWX be ceding real management control to the experts, Google or Microsoft. Why wouldn't investors just buy Google or Microsoft and let TWX sit with an illiquid stake? I may be missing something, but what. Spin off AOL, Sell AOL, what's the linkage to TWX, what's the rationale to the significant management commitment when there are so many other potential growth assets within TWX that are not in AOL's very gradual wasting away mode. Other big M&A possibilities can be contemplated as well by management and by the market, and valued by the market even if they never happen. But they cannot be contemplated and valued if management does not walk the liquidity walk.

Finally, there is a portion of the market that believes in the possible positive scenario. TWX's two largest shareholders are Capital and Alliance, great large value investors, and it is sort of amazing that a company that represents 0.73% of the S&P 500 and has TWX's performance wouldn't have indexers at the top of their shareholder list. Also among the top ten shareholders Dodge and Cox, Wellington, and Morgan Stanley(which added 30mm shares to their position in the third quarter). I view this as good company to keep.

Catalyst for Time Warner?

A Wall Street Journal article on 12/14 by James Stewart asks the question "Is there some undiscovered law of nature that says TWX has to trade below $18 a share?". Seems like it at times. What will be the catalyst to move this valuable assembly of media assets to a higher valuation? Right now theTWX valuation appears to be reflecting a huge "conglomerate discount". Conglomerates must been seen as having two things in order to be appropriately valued by investors: transparency, or financial and competitive positioning reporting that allows investors to understand where money is being made and how, and liquidity, or the reassurance that the conglomerate will manage its assets like any capable investor would manage their own assets, investing in, buying, or selling assets to achieve the best possible business mix and to fully realize the value of its franchise. The icing on the cake for a conglomerate is a pervasive management culture that lives and breathes teamwork and economic value. So where does TWX stack up on these characterics. Of the must haves, transparency is a check from my distance but I can't speak for the security analysts that follow it intensely. But liquidity is a minus, so why would an investor buy TWX to manage their assembly of assets when they can buy those assets individually and do it themselves? As for the third, a wish list must have, it's a long term build for any firm created by major combinations. So the issue to my eyes is liquidity, and not liquidity driven by Carl Icahn but liquidity driven by management's own view that the timing is now right to get on with it. SEE NEXT POST FOR MORE.

Part 2--Even Dylan doesn't move XM

So, to continue from the previous post, XM has a number of highly reputable lead steer institutional shareholders among its top ten, and S has one. And more facts: Debt to capital is about the same, at X .80 and at S .70; but price to sales is radically different, at X 14x and at S 50x; and short interest is also very different, at X 11% and at S 3%; and one more fact--S has as CEO the apparently highly regarded corporate pitchman, dealmaker, and self promoter Mel Karmazin, and X has somebody else.

Conclusions:
---SIRI is currently in favor, with retail buying, a higher growth rate off a lower base, shorts at bay, Stern coming on, and a super salesman at the top.
---XMSR has far more top tier institutional holders, more subscribers, nominal subscriber growth projected well in excess of S, a lower market valuation than S, and Major League Baseball. Who knows how this small new growth industry will be treated as a whole by the market, BUT on a relative basis XMSR should outperform SIRI in 2006. If this shift comes in a stable market, the shorts will need to cover and the ramp could be dramatic. And who wants to bet against baseball and Bob Dylan.

Even Dylan doesn't move XM

At 8am yesterday, 12/13, the story crossed on PR Newswire---Bob Dylan to DJ one hour show each week on XM radio. In a positive day for the market, XMSR was flat. Contrast that with the fact that the mouth of Long Island, Howard Stern, seems to have meaningfully moved up rival Sirius radio over the last few months. Granted, Stern will be on every day for several hours, but is that a positive. How out of it am I?

A few facts: Subscribers-- XMSR 6mm, SIRI 3mm; 2006 projected sub growth rate--X--50%, S--65%; market cap--X 6.6 billion, S 9.3 billion; one year stock price perf.---X (23%), S(12%); 6 month stock perf.--X(6%), S +14%. What explains this. In an interview on CNBC, the CEO of XM was asked this question and explained that because S has many more shares floated and therefore had a much lower nominal stock price than X(S around $7, X around $30)that S was the beneficiary of more retail demand. My immediate thought was "this guy doesn't have a clue about finance and what drives stock prices". But I looked. S is 33% institutionally held(very low) while X is 95% institutionally held(very very high). In the third quarter Fidelity, Legg Mason, Alliance, Janus, Wellington Boston, and Delaware Inv.(strange for a dividend shop) all added to their already large holdings in X(all over 2% , some well over). The only non-index, non private equity, instl investor in S with a more that 2% position was Oppenheimer Global Fund. Conclusion--see part 2 next.

The Yield Curve? continued

So to continue, why are investors, especially the not so marginal foreign investors, choosing to sign up for 10 years at 4.5% instead of preserving liquidity and price stability at much shorter maturities. Could it be any or all of the following: a premium paid for the relative safety and stability of U.S. markets; a recognition by major trading partners of their economic dependence on the health of the U.S. economy and consumer or, in other words, reinvestment in the source of their wealth; a statement about the lack of confidence in global investment alternatives, especially in equity markets; a market that is portending, over time, global deflation, despite or perhaps related to the rise in commodity prices; a market that has been prescient enough to anticipate the strength of the dollar in 2005. Eyes Not Sold does not know. But each of these reasons is, whether right or wrong, tradeable.

But what if the current yield curve is the result primarily of the search for any yield advantage, with that search presumed to be safest in the most liquid market. What if the migration of trading technology, trading skills, and hedging products over the last 10 years to China and other major trading partners has led to a belief that the risk can always be managed by the smart and the swift. What if that Fed referenced 150 basis point gap(prior post) happens in one week and not gradually. LTCM on a global scale? Eyes Not Sold does not know, but as long as some at the Fed and other market pros use the word "conundrum" in describing the yield curve today, WELL, WHO KNOWS?

The Yield Curve?

There has been much market comment about the current flat yield curve in U.S. fixed income markets. With the benefit of absolutely no specialized knowledge, Eyes Not Sold tackles the subject. Market commentators, pundits and pretenders alike, have explained that huge and growing cash reserves in foreign central banks and multinational corporations are being invested in U.S. securities, attracted by the deepest, most liquid, and perhaps most transparent capital market in the world. A recent Fed paper apparently estimated that foreign buying has created a drag on long term yields estimated at 150 basis points. But Eyes Not Sold has been under the impression that financial market prices were the result not of supply/demand but of economic value. Of course supply/demand is important in the short term, but investors, as opposed to traders, presumably try to understand the economic value of any security, because economic value is expected to ultimately prevail. Right? So it's a given I guess that the U.S. has become the world's money market account, but what draws this savings glut in a way that creates the current curve? ...Next

Commissario Brunetti's thoughts on Venice

"He had read enough to know that there were countries whose citizens did not perceive their government as an inimical force, where they believed, instead, that the government existed to serve their needs and respond to their wishes. How would he react if someone he knew were to maintain this to be true here, in this city, in this country? Religious mania would be less convincing proof of mental imbalance."
'Uniform Justice', Donna Leon, copyright 2003