Wednesday, May 31, 2006

iShares GSCI Commodity Trust GSG files prospectus

Barclay’s iShares filed a prospectus for the iShares GSCI Commodity Indexed Trust. (GSG) The fund will invest in CERF futures which are linked to the total return of the GSCI Excess Return Index.

The GCSI-ER index is calculated as the return from actually investing in the GCSI commodities index. The excess return index accounts for the effects of rolling futures contracts, and of earning interest on margin deposits. The GSG fund is investing in futures that express the total return it would have earned had it passively invested in the underlying contracts of the GSCI index.

The result is that the iShares fund doesn't have to pay the trading costs it would have had to incur if it actually owned and managed the futures contracts themselves. Therefore the iShares fund is more efficient than a fund that directly invested in the underlying futures. This is shows up in a low management fee of 0.75%, and immaterial expected operating expenses. Compared to (DBC), at 1.30% the iShares fund is quite cheap.

However investing in the new iShares fund requires that you agree with the thinking behind the Goldman Sachs Commodity Index [GSCI]. The GCSI is an index of 24 commodities weighted by world production. Goldman Sachs believes each commodity should be weighted in proportion to the amount of that commodity flowing through the economy.

Because commodities can be held in many different ways it is impossible to directly measure the amount of capital dedicated to holding that asset. For a stock you can measure its market capitalization which represents the total amount of capital dedicated to holding that stock. But for commodities, you can't do that. The way to measure economic significance of commodity is to measure its production, which in turn is related to how much capital is dedicated to that commodity.

At this point, theoretical elegance clashes with investment prudence. The worlds most widely produced and traded commodity is oil and related products. Reflecting that, the GSCI has a 73.5% weighting in energy commodities. Of the total index, 45% is weighted to Crude Oil. Of the remaining 27% of the index, 10% is allocated to each of agricultural commodities and industrial metals. The final 7% is split between precious metals and livestock. The GSCI is designed to reflect reality without concern for investability.

The question is do you want exposure to commodities in proportion to their economic impact? If so, then like the global economy, you will be mostly concerned with crude oil and not concerned with other things. The GSCI index is diverse (24 components) because global commodities markets are diverse. But it is fantastically concentrated in oil because the global economy is concentrated on oil.

Compared to the GCSI, the Deutsche Bank Liquid Commodity Index is minimalist. The benchmark for (DBC) is made up of 35% crude oil, 20% heating oil, 12.5% aluminum, 11.25% corn, 11.25% wheat and 10% gold.

Recently Deutsche Bank has implemented an algorithm that attempts to roll the futures contracts in the index so as to minimize the effects of contango and take advantage of backwardation. Until the new DBC index is established, we can't tell if the advantages of Deutsche Bank's roll yield management will outweigh the difference in cost (1.30% vs 0.75%) and the effects of index performance.

Sunday, May 28, 2006

The Vonage VG to the bottom of the Sea.

The recent Vonage (VG) IPO (May 24, 2006) is sign that the IPO market has wised up since 1999. I'm sure that Citibank (C), the lead underwriter for the offering was thinking of H. L. Mencken's famous quote:
No one in this world has ever lost money by underestimating the intelligence of the great masses of the plain people.

Sadly for Citibank, the great masses were not interested in owning shares of cash burning company that faces total destruction of its business model. Even after getting the customary IPO discount, and the option for over allotments, Citibank has lost money on this one. But Vonage will also lose money on this IPO as well.

13.5% of the shares in the offering were reserved for Vonage customers who were induced to directly purchase shares. These customers will not be amused after losing 25% of their investment in two days. These customers will dump both their shares and their subscription to Vonage.

The fundamental problem with Vonage, is that their business model of selling a VOIP tap is nearing expiration. And even worse, the company its self is not profitable and does not have a clear time frame for doing so. Between free PC Phone software and VOIP services from telco's and cable companies, Vonage is stuck between a rock and several hard places. The private equity sponsors realized that Vonage was about pass the sell-by date. And so they sold out, leaving public equity investors holding the bag.

I would not be surprised is there is a class action lawsuit. That lawsuit will probably be dismissed because of the prospectus disclosures. If Citibank/Vonage are smart, they will give Vonage customers an option to sell shares back for the IPO price. An expensive option, but cheaper than getting exercised on a lawsuit.

Friday, May 26, 2006

Pacific Ethanol PEIX PIPE deal,

Today Pacific Ethanol (PEIX) has just completed a PIPE (Private Investment in Public Equity) deal, that sold 5,496,583 shares to private investors for $26.38 along with warrants to buy a further 2,748,295 shares at $31.55 in six months.

This deal immediately increases shares outstanding by 17%, and would increase shares out 26% if the warrants are exercised. The stock market took a very dim view of such grievous dilution of the common equity, with shares of PEIX dropping $3.11 (8.79%) in premarket trading today.

The CEO/CFO should be fired for even thinking about using PIPE deal to raise money. PIPE deals have a well deserved reputation for being very dilutive and also as a sign that the company is desperate for cash. As such they tend to cause a rapid decline in the stock price, much worse than that caused by announcing a secondary public offering.

The company claims it will use the net proceeds of $138 million (not including exercise of the warrants) to pay for its goal of finishing five ethanol plants totaling 220 million gallons per year by the end of 2008. This is part of a larger plan to increase total capacity to 420 million gallons per year by the end of 2010.

Selling stock at 10% discount to private investors is a betrayal of the previous shareholders, it is also poor form to do a PIPE deal so soon after 2,719,072 shares were sold/registered on April 20th, 2006. That cash out sale increased shares out by about 9% and went unnoticed by a market stuck on an ethanol binge. Selling stock for 10% less than the going market price also implies that PEIX stock was trading for at least 10% more than its true value.

These dilutive financings may be a reason that Chief Operating Officer and Corporate Secretary Ryan Turner as well as Company directors Charles Bader and Kenneth Friedman resigned on April 24 2006.

Tuesday, May 23, 2006

Van Eck GDX releases Briefing Book on Gold Miners index ETF.

Van Eck Global, sponsor of the new GDX AMEX Gold Miners ETF, has rung the AMEX opening bell, as shares of GDX started trading yesterday.

Van Eck now has a homepage for GDX, which includes a briefing book on the ETF. Page ten of the document begins describing the investment case for GDX.

  1. The GDM index has 44 components, which makes it more complete and diverse than other Gold focused indexes (^HUI and ^XAU).

  2. Gold Miners are uncorrelated to S&P 500. Van Eck reports a three year beta to S&P500 of 0.17, with a correlation of 0.07 (meaning that only 7% of GDX's movements are explained by movements in the S&P 500).

  3. Gold Miners are leveraged to the spot price of gold, Van Eck reports a three year beta to gold of 1.82, with a correlation of 0.77

  4. Gold Miners tend to have some exposure to silver; GDX has beta and correlation of 0.66 and 0.50 to silver

  5. Gold companies have a chance to benefit from development and exploration successes, and company-specific increases earnings. With good management a gold mining company will have asymmetric beta towards to gold prices.

  6. Income from dividends, Van Eck says the index should yield about 0.6%.

  7. Tax advantaged compared to direct investment in gold. 28% vs 15% capital gains tax rates.

Of course in sections on benefits of ETFs as class Van Eck fails to mention cost, probably because Van Eck's own mutual funds have extravagant management fee's of more than 2% compared to GDX's 0.55%. Bill Cara thinks that Van Eck launched GDX to provoke a rally in gold mining stocks, similar to how precious metals ETF's helped start the current metals boom.

I think that GDX is better than the precious metals ETFs. It has real potential for growth above that from movements in gold. It pays dividends. It offers more exposure to gold for the same dollar investment. It is not guaranteed to lose value. And most importantly, GDX still provides the diversification benefits of investing in precious metals.

Useful site of the day.

Form 4 Oracle wins the coveted useful site of the day award. This handy website presents data from SEC form 4's, which disclose insider transactions. The site is both elegant and fast. For example you can compare insider sales for Google (GOOG) and Pacific Ethanol (PEIX)

Monday, May 22, 2006

PIMCO's Bill Gross and the rise of savings accounts

Global inflation has remained low, but the combination of U.S. consumption propelled by a multi-year housing boom, Chinese reciprocation in the form of massive investment spending, and the positive knock on effects in Japan and numerous "emerging" economies produced surging global growth that has caused central banks and indeed private investors to enforce higher real yields as recompense. Bill Gross: PIMCO Investment Outlook June/July 2006

Competition for deposits has caused a huge run up in thinterestst rates being offered by online banks. High yield saving account rates now range from 4.5% to an astounding 4.75%. According to Comscore 27-percent increase over the previous year in online banking usage. Even worse from the bank perspective is the fact that online-only high-yield savings accounts have had disruptive impact on customer asset loyalty. In other words banks now have to deal with yield sensitive customers who will shop for the highest rate. Make sure to do your part to help enforce higher real yields.

Saturday, May 20, 2006

The lush life of an ethanol bubble

Scott Burns, an analyst at Morningstar has written a nice article about the current excitement over ethanol. These days the stock market thinks that any company that can link itself to ethanol has future filled with wine and roses. Scott makes a sobering point, that there is a decent amount of capital infrastructure yet to be built before ethanol can be widely used.

Beyond the obvious short-term infrastructure issues, to meet our long-term needs, we would need to build a new refining, pipeline, and storage system to get the ethanol from the Midwest to the rest of the country. We basically need to recreate what the oil industry has spent the past 100 years building and perfecting. This is no small challenge and shouldn't be taken lightly. In this challenge, there will undoubtedly be numerous investment opportunities and likely an even greater number of pitfalls that investors could fall into.

At this point, my take on the ethanol boom is that it's mostly smiles and soap. Ethanol is a basic industrial chemical that can be produced cheaply from many sources. It is not special or magical. Ethanol can and is made by petrochemical synthesis from ethylene hydration. It is cheaper for Exxon Mobil (XOM) to make ethanol, on an all-in cost basis than it is for (ADM) to brew it from corn. The Saudi's are sitting on the worlds biggest supply of ethanol.

Friday, May 19, 2006

Bill Cara on GDM Van Eck Gold Miners ETF

Bill Cara is not amused by the new Gold Mining ETF (GDM) sponsored by Van Eck Associates.

Bill Cara points out an a very important issue with the recent development of Metal/asset backed ETFs. The question is if the ETF is creates demand for itself. For several months before the
iShares Silver Trust (SLV) came online, silver prices rallied on the expectation that the creation of the silver ETF would raise prices. The same thing has happened with Gold ETF (GLD). A vicious circle was established in which rising gold prices lead to increased demand for GLD shares which caused higher prices for gold. Excellent fuel for a bubble.

Bill Cara wonders if a similar situation will happen after the Gold Mining ETF has been launched. If the GDM index continues to have a beta of 2.0 relative to gold, then it will attract heat chasing gold investors. More demand will raise prices for the ETF shares and for the underlying gold stocks. Van Eck isn't a disinterested sponsor. Van Eck runs several gold and hard asset mutual funds, that would greatly benefit from a rise in gold stocks caused an ETF launch.

I'm not as jaundiced as Bill Cara. I think that Van Eck is thinking like First Trust; they realize that it is better to collect smaller fees on a really big ETF than it is to collect high fees on small mutual funds.

Thursday, May 18, 2006

MWA Mueller Water Products IPO, a possible stub?

Water has become the hottest investment since Texas tea, that is, Oil, black gold!

Tiny water treatment company Basin Water (BWTR) initially planned for 5.0 million share IPO at $8-$10 a share. Demand for shares was so great, that the company upped the IPO by 20% to 6.0 million shares and raised the price $12 a share. Shares are currently trading on the NASDAQ for $16.

Next up on the water IPO calendar is Mueller Water Products [link to SEC Form s-1], which makes, fire hydrants, water pipes, and valves. Mueller is currently part of Walter Industries, (WLT) which is a classic diversified smokestack conglomerate. Walter Industries’ core business are mining coal, building single family homes, and making things from iron and steel.

The consensus view is that Walter's component businesses would have greater valuations if they were independent of the company. So to create shareholder value, WLT will spin off Mueller via an IPO and then later on declare dividends of MWA stock to current shareholders.

The planned IPO of Mueller Water Products is for 23.5 million shares at a range of $16 to $18. This would give Mueller a market cap of 400 Million (for the publicly traded shares) and 1.4 Billion (for the 87.3 Million shares trapped in Walter) if we assume that the shares go for $17 each, compared to Walter Industries Market Cap of 2.7 Billion. However given the results of the Basin Water IPO, should the shares go for more $17 a share, then it becomes increasing likely that Walter Industries will become a stub.

IPO stub phenomenon occurs when a spinoff company is worth more than the parent company. The classic example is the Palm Inc (PALM) spinoff from 3Com (COMS) during the boom. In the months after the Palm IPO, the relative valuation of Palm and 3Com (which owned 80% of Palm) assigned the value of all of 3Com's non-palm businesses to be -$63 a share. Usually IPO stubbing is not so extreme, but it often represents a chance to buy shares in the parent company's business very cheaply.

Given how cheap WLT shares are relative to this years expected earnings of 5.80 a share, I think it is likely that the sum of "New Walter" and Mueller Water Products together will be worth more than "Old Walter" at the current price.

The initial prospectus for Mueller Water Products is very complex, because of the convoluted history of the company. Basically Walter Industries took on a lot of debt to buy "Old Mueller" and then merged it with the existing U.S Pipe and Foundry Company owned by Walter. The newly public company, does intend to pay a dividend of $0.28 yearly, and so based on that we can conjecture than EPS is expected to be greater than $0.30/share. The roadshow for retail investors is now online. Walter has posted the most recent 10-Q and S-1 forms for Mueller on its website

Wednesday, May 17, 2006

PEIX Pacific Ethanol insider sales, awfully familiar

Insiders at Pacific Ethanol (PEIX) are selling lots and lots of shares. However the insiders at Pacific Ethanol, are insignificant gnats compared to the real masters of inside sales.

Insider sales are excellent sign that a company is overvalued. With Pacific Ethanol trading with a forward P/E ratio of 182.56 and 37.10 times book value. PEIX is overvalued, and the smarter money knows that. Google (GOOG) is cheap at a mere 65 P/E ratio and 10.7x P/B ratio. To visualise the extent of the ethanol bubble, here is a chart of PEIX vs a real ethanol stock.

Deconstructing PKB Building & Construction Portfolio

Recently Roger Nusbaum wrote an article for about new ETF's that cover the homebuilder sector: Homebuilders SPDR (XHB) and Dow Jones U.S. Home Construction Index Fund (ITB).

Before these funds existed there was the Powershares Dynamic Building & Construction Portfolio (PKB). Many people complained that (PKB) didn't have enough concentration in homebuilders to be an effective proxy for the homebuilding sector. Those sorts of complaints remind me of the person who returns a newly purchased hammer to Home Depot (HD), complaining that it isn't very good at putting screws in. (He should have bought a Klein Tools Ratcheting Screwdriver instead.)

The Powershares fund, as its name suggests, is about Building & Construction. It is not about homebuilders. While homebuilders are part of the building & construction industry they are certainly not the entire industry.

Complaining that PKB isn't declining fast enough relative to pure homebuilding ETFs, suggests that the person complaining did not read the prospectus and/or the PKB portfolio holdings. This all goes back to the critical sucess factor of understanding why things work. Memorizing formulas only gives the appearance of competence.

Looking at the holdings would show that the Dynamic Building & Construction Intellidex is currently about 30% Homebuilding stocks. As a Dynamic index, the Intellidex is will try to weight itself towards stocks with the greatest potential for capital appreciation. That means that it is going to underweight/exclude stocks that the black box algorithm expects will underperform. Each quarter the index components change. For example, based on SEC documents (Form N-Q) on January 31 2006, the PKB fund owned shares of Caterpillar (CAT), Building Material Holding Corp (BMHC), and SCP Pool Corp (POOL) while it did not own any shares of Lowes Stores (LOW).

Investing in Powershares Dynamic funds is a bet that the quant AMEX Intellidex algorithm will outperform passive indices. Based on several years of experience it does seem that the BlackBox can beat passive indexes. The best use of the Building & Construction fund is as tactical investment to capture the increased building and construction activity that happens in the early part of an economic expansion. If you want to bet on homebuilders, stick to XHB.

Tuesday, May 16, 2006

The flight to SDY quality

A fairly interesting graph of the performance of the SPDR Dividend ETF (SDY) vs. (SPY) The S&P 500 ETF. SPY and SDY nicely delink on Friday with the SPY declining much more than SDY.

Because most of the constituents of S&P Dividend Aristocrats a large cap companies, ordinarily, SDY tends to closely track the S&P 500. In my opinion the rapid declines on Thursday and Friday [May 11-12 2006] caused a flight to quality. The greater value exposure and higher earnings quality of the Dividend Aristocrats helped to moderate the effects of a general decline in equity values.

SDY is one of my core portfolio holdings, because of the combination of diversity, proven quality, and low expenses (0.30%).

Monday, May 15, 2006

Lisanti on Dividends

A recent article in Business week, One-Stop Dividend Shopping by Joseph Lisanti reviews the major ETF indexes.

The indexes that underlie the eight dividend ETF currently trading, represent a movement away from the idea of indexes as passively replicating the underlying market. Instead newer indexes are being designed to have certain investment attributes as the result of applying quantitative screens to the investment universe.

As of May 2006, there are basically three models for dividend indexes. The most popular (in terms of ETF assets) is Dow Jones's DJ Select index. The developers of the Down Jones Index sought to impliment their understanding of the thinking process of dividend investors. The Mergent/S&P indexes used by Powershares, State Street and Vanguard are based on selecting companies with a history of raising dividends each year. The Morningstar indexes use a method with a certain theoretical attraction to it. The Morningstar indexes weight companies on the amount of cash they pay out as dividends rather then yield or the size of the dividend. If you owned the Morningstar Dividend Composite Index you would own each US company in proportion to its contribution to the pie of all dividends paid by companies in the index.

The Dow Jones, Morningstar, and the customized Mergent/Vanguard index all use some type of quality screen. Each of these indexes requires dividend growth over a five year period along with a screen for the sustainability of dividend payouts. Because these indexes are not pure market cap weighted indexes, they are "synthetic" rather than natural representations of underlying investment universe.

Each of the dividend ETFs represents an idealized dividend paying stock that is the sum of all the enterprises in the index. Viewed from that perspective, the most interesting ETFs are (PID) and (SDY). The Morningstar ETF profile PowerShares International Dividend Achievers shows that it is most concentrated in the financial services and manufacturing sectors. It is the only foreign value ETF other than (EFV). The SPDR Dividend ETF (SDY) is cross section of established blue chip companies across all economic sectors. Because the S&P Dividend Aristocrats consist only of companies that have raise dividends for at least 25 years, the relatively young technology sector is under represented.

Saturday, May 13, 2006

DBV DB Currency Index Value Fund

Mick Weinstein, of asked me about the new DB Currency Index Value Fund (DBV). The DBV fund purchases treasury securities and uses them to purchase long futures with 2x leverage on the three G10 currencies with the highest interest rates. At same time the fund sells short, with 1x leverage, futures on the three G10 currencies with the lowest interest rates. Over time, it is expected that high interest rate currencies will become more valuable, and low interest rate currencies less valuable.

This exchange traded fund involves several concepts that are not my specialty and which I tend to avoid: these concepts are foreign exchange [FOREX] trading, using futures to speculate on forex, leveraging risky investments, and long/short strategies.

The problem with long/short funds, is that there is always a chance of the spread between the Long and short sides widening or staying the same. That widening on each side can produce two fold losses, before leverage. Investors like to say that It Can't Happen Here, but as the Nobel prize winning managers of Long term Capital Management found out, It Can Happen Here

I am not sure if investor's are psychologically prepared for volatile investments whose volatility increases with market stress. FOREX trading is very volatile. Most people aren't as risk tolerant as they think, and should view investing as being about risk avoidance and not risk tolerance. I'm not sure if people need, what Roger Nusbaum called a "high risk cash investment". A high yield money market account should be enough for most people. If they wanted foreign currency exposure, I think that a global floating rate income fund would be the best choice

Historically the currency convergence that Deutsche bank describes in the prospectus does occur. It is also possible that the convergence might not occur or even reverse under some sort of market conditions that have never been seen before. The collective history of the financial markets is very short, and unusual events occur much more often than would be expected.

Friday, May 12, 2006

A Merrill Lynch index for all seasons :: Part 3 of 4

This is part three of a four part series. Part two discussed the Merrill Lynch Interest Rate Sensitive Index.

The third index in the Merrill Lynch basic 4 series, a set of indices containing companies affected by different parts of the economic cycle, is the
The Merrill Lynch Stable Growth Index.

The index components are select beverages, foods, household products, packaged goods, pharmaceuticals and tobacco stocks in the S&P 500. These companies have earnings that are not very sensitive to the economic cycle. While you would expect that this index would be very stable, in reality it sensitive to investor psychology depending on if a flight to or flight from quality is occurring. Companies like Pfizer (PFE), Procter & Gamble (PG), and Johnson & Johnson (JNJ) are boring. They may be very profitable, and they may raise dividends each year, but they lack the transient sparkle of Google (GOOG) or Evergreen Solar (ESLR).

Tuesday, May 09, 2006

A preferred stock ETF, Why Not?

Since the 2003 Tax act which lowered the tax rate of dividends, more investors have been seeking equity income. There are now eight dividend focused ETFs with almost $7 billion in assets. But there is hollow spot, because there are no ETFs devoted to preferred stock, which is the logical investment for fixed dividend income.

Preferred stock is senior equity. In exchange for a limited claim on the company’s assets and future growth; preferred shares are entitled to a dividend preference and fixed rate of dividends. Before any dividends can be paid on the common shares, all dividends owed to the preferred stock classes must be satisfied.

Unlike common stock which typically yields 1.7% (S&P 500 average), preferred shares tend to pay between 5% and 9%. Dividends on traditional preferred stock are "qualified dividends", which means you only pay 15% tax on them. A second ETF that would be useful, would be a hybrid preferred ETF that invested in preferred shares that did not pay qualified dividends. There is a huge market for these types of shares which are issued by REITs and capital funding trusts. This ETF would have a somewhat higher yield than one that restricted itself to traditional preferreds only.

A preferred stock ETF that tracked traditional preferred shares rated BB+ and better, would yield at least twice as much as high yield dividend ETFs like (PEY) or (FDL) currently yield (~3%). At the same time, preferred shares are less affected by the gyrations of the stock market. They are mostly sensitive to interest rates and credit quality. This makes them an excellent source of diversification.

Investment advisor Flaherty & Crumrine specializes in preferred stock. They run several closed end funds that invest in preferred stock, as well as sponsoring which has a searchable database and educational materials.

Monday, May 08, 2006

Annaly Mortgage Management NLY :: Making do in touchy times

Annaly Mortgage Management (NLY) is the most plain vanilla of the residential mortgage REITs. They have a very simple business model. Annaly starts by purchasing mortgage pools issued by GSE's (Freddie Mac, Fannie Mae, GNMA), these mortgage pools have implied AAA ratings. Because the quality of the collateral is AAA, Annaly can easily borrow money to finance these mortgages. Because the spread between what Annaly can borrow at and the mortgages pay is so slim; Annaly uses lots of leverage to earn a decent return on equity. Historically NLY works at 10:1 leverage to earn a 14% return on equity.

Because of the great amount of leverage involved, managing interest rate risk is critical. Annaly uses a "barbell" strategy of owning a blend of fixed rate and adjustable mortgages with variable durations. In theory interest rate environments that hurt fixed rate bonds (rising interest rates) benefit floating rate bonds and vice versa. Most of Annaly’s assets are financed using floating rate repurchase agreements. When the yield curve flattened and inverted, NLY was crushed in a vice. And it is slowly recovering. My personal opinion is that NLY is one of the most solid players among the pure RMBS investors. If you think that the yield curve will steepen soon, (and given the threat of inflation from Helicopter Ben, long term rates will rise). Then NLY is very well positioned to take advantage of that.

The Annaly website has collection of insightful commentary that I highly recommend reading. There is an archive of monthly commentary, as well as longer archived articles. I also highly recomend listening to Annaly's 4Q05 and 1Q06 conference calls which can be listed too on yahoo. What makes the conference calls especially interesting is that management spends almost all its time on talking about the mortgage markets and business conditions rather than just reading back the 10-Q or earnings release. If you are interested is learning about the mortgage markets from the trenches, the Annaly conference calls are a gold mine.

Friday, May 05, 2006

Bausch & Lomb BOL, is cheap.

Bausch & Lomb's stock (BOL) has been badly damaged over reports fusarium keratitis associated with one of their contact lens products.

Previous experience with product recall related problems, suggests that they tend to blow over quickly. Ultimately Bausch & Lomb is a diversified company of which their consumer contact lens products are portion of total sales. Bausch's main business is making contact lenses as well as selling equipment for ophthalmologic surgery, such a lasers and implants. None of that is affected by the recall of contact lens solutions.

Bausch's disposable contact lens business is agnostic to the lens care solutions business. The solutions business will recover in due time. In my opinion the right analogy would be Gillette's razor blade business and shaving cream business. In the meantime BOL is trading at 1.51 times book value with a forward P/E ratio of 10.6

Thursday, May 04, 2006

Microsoft MSFT is the Money Stock For Tomorrow

ThinkEquity's Michael Moe has a new post up on the ThinkBLOG about why china is the next big thing for the next 50 years. Buried at the bottom is his wise observation:

Microsoft jilted its many loyal fans by saying it was going to ramp up its investments to more aggressively compete for global web dominance. $32 billion of market value was taken off of Microsoft shares on Friday. I hate to say it, and it's the first time in a long time, but MSFT stands for "Money Stock For Tomorrow"; the company is doing the right thing and buying at $24 will be very rewarding over the next couple years in our opinion.

Microsoft (MSFT) is the Consolidated Edison (ED), United Gas Improvement Corporation (UGI), American States Water Company (AWR), and United Illuminating Company (UIL) of the information age. It is cheap at $24 with %1.50 dividend yield. Just because the build out of the software infrastructure of the information age is mostly complete, does not mean that Microsoft is obsolete. Just like Intel, momentum chasing technology investors have abandoned Microsoft. The MoMo investors are ignoring the enormous underlying strength and profitability of MSFT's monopoly franchise. In many ways Microsoft has become similar to a public utility corporation: they have a stable monopoly, are very profitable, tend to grow in a slow and accretive manner, and pay generous dividends.

Wednesday, May 03, 2006

Van Eck gold mining ETF perfect for goldbugs.

Van Eck Associates has filed a prospectus with the SEC for an ETF based on the AMEX gold miners index [GDM].

This index is modified market capitalization weighted index comprised of companies involved primarily in mining for gold (GLD) and silver (SLV). The index requires that companies be actively traded and have a minimum $100 million market cap. The index is much broader than than AMEX gold BUGS index [HUI], which limits itself to gold miners that do not hedge their gold exposure past 1.5 years.

According to Van Eck, the GDM index has a beta of roughly 2.0 compared to the price of gold bullion. Every dollar change in gold spot prices tends to move the index by two dollars. For people seeking gold related volatility, this is perfect. Unlike physical gold, gold miners do generate income and pay dividends. Also unlike the metals ETFs, capital gains from trading in shares of the gold miners index fund will be taxed at 15% and not 28%. Van Eck plans to charge 0.55% as management expense, which is slightly less than the 0.60% typical for narrow sector ETFs.

Update:Now that GDX has begun trading on the AMEX, Van Eck has created a homepage for the fund, with plenty of information on it.

SLV Robert Kiyosaki says buy silver. The fat lady is singing but who's listening?

Robert Kiyosaki is now promoting silver. Kiyosaki lists five factors he feels are bullish for silver. Kiyosaki is able make cliches appear to have meaning and insight. His thoughts and thinking process are typical of the cliche's noise traders piling onto silver use to rationalize their purchases.
  1. Kiyosaki's first claim is that silver is a consumable precious metal, which makes it different from gold. This is specious. The bottom has fallen out of the industrial market for silver. Silver is the new lead. In 1970 lead has extensive uses: leaded gasoline for cars, lead paint for houses, and non corroding lead pipes for everyone. By 1985 each of these markets were gone. For silver the single biggest market was photography, that market is disappearing at the same 15-25% YoY rate that the lead market shrank. Silver is being replaced in consumer photography, X-ray, and movie photography. It is also being displaced in the offset printing market as well. The imaging market is the industrial market for silver. In ten years the industrial market for silver will be mostly gone, and the market will consist of traders passing metal back and forth.
  2. Kiyosaki then claims to have had a deep thought, that silver is a monetary metal, while "standing on a mountaintop in Peru, doing my due diligence on a gold mine." I deeply doubt Robert Kiyosaki has ever been in Peru doing due diligence on a gold mine. I further doubt that "For years, I [Robert Kiyosaki] have visited gold and silver mining sites all over the world," unless you consider Amway motivational seminars to be gold and silver mines.
  3. For his third claim, Kiyosaki rehashes cliches about the meltdown of the dollar. He makes the profound statement "and the way you short the [dollar] is by going long on gold and silver." Which is false because buying gold is a fiat money vs. hard asset bet, it is not a pure dollar Vs other currencies bet. The price of gold is based on the supply/demand for gold, not on the supply/demand for dollars. The price of gold fluctuates against all currencies together. Any pricing disparity between gold prices and exchange rates will be quickly destroyed by arbitrageurs. If you specifically wanted to short the dollar, then you would buy foreign currencies directly.
  4. Kiyosaki's forth assertion is that "Equities (stocks) and commodities (gold, copper, oil, and silver) are counter-cyclical." and that magical 20 year cycles are the invisible hand that is lifting commodities. Therefore "around 2016 to 2020, start getting back into stocks and out of commodities." The claim that vast deterministic market cycles exist, is baloney. The economy and capital markets are dynamic and ever changing, their movements and behavior are not guided heavenly bodies that can be charted. The psychic friends network was not able to predict their bankruptcy in 1998
  5. Finally Kiyosaki claims that the iShares silver trust ETF (SLV), has made silver accessible to the masses Kiyosaki ends his article with the deep thought: "I could also be wrong -- but at under $20 an ounce, silver is a good buy, in my opinion. I believe it's the last great affordable investment for the masses. And when the masses find out, another bubble will inflate and, of course, at some point burst."

The current ETF fueled gold and silver bubble will end just as badly as all previous bubbles. Gold, like tulip bulbs or internet stocks does not produce income. Precious metals are only a speculative vehicle, a short bus for greater idiots. The only way to make a profit with gold is to find a greater idiot willing to pay a higher price than you paid.