Archive for January, 2011

Egypt’s Protests Strain Market

Sunday, January 30th, 2011

Following in Tunisia’s footsteps, Egypt’s streets have been full of protestors demanding President Mubarak to step down and end his 30 year reign. Mubarak announced early Saturday that he had asked the country’s government to resign, and pledged to install a new government with a better democracy; proclaiming to be on the side of the people, willing to respect their freedom of speech as long as they protested peacefully. However, as protests continued, curfew was broken, and government vehicles were torched, Mubarak mobilized the army to control the crowds. The White House threatened to cut off its annual aid of $1.5 billion to Egypt if security forces continued to use violence to suppress protestors.

Egypt’s Suez Canal conducts an estimated 8% of global sea trade, carrying approximately 1.8 million barrels a day of crude oil and refined petroleum in 2009, according to the U.S. Energy Information Administration. U.S. crude futures rose to $89.43 a barrel, up 4.4% on Friday. Investors worry that uncontrolled protests could destabilize the already volatile region, and have an even greater impact on crude prices. The CBOE volatility index (VIX), used to gauge fear in the market, jumped more than 24% Friday and the Dow Jones Industrial Average fell 1.4 percent to 11,823.70 after a straight 9 week gain.

Stocks worldwide plunged the most since November, crude oil posted the biggest jump since 2009 and the dollar rose versus the euro after protesters posed the biggest challenge to Egyptian President Hosni Mubarak’s 30-year rule. Egypt’s dollar bonds sank, pushing yields to a record.

The MSCI All-Country World Index of stocks in 45 countries lost 1.4 percent at 4:59 p.m. New York time. The Dow Jones Industrial Average fell 1.4 percent to 11,823.70, preventing its longest weekly winning streak since 1995. Oil futures increased 4.3 percent to $89.34. The dollar appreciated 0.9 percent to $1.3611. Yields on Egypt bonds due in 2020 surged 22 basis points to 6.51 percent. Gold futures jumped 1.7 percent, the most in 12 weeks.

Egyptian protesters clashed with police throughout the country and into the night, defying a curfew and setting fire to buildings. Mubarak imposed the curfew after tens of thousands of marchers chanted “liberty” and “change.” After U.S. markets closed, Mubarak said he asked the government to resign. The demonstrations offset data showing that growth in U.S. gross domestic product accelerated in the fourth quarter.

“The unrest in Egypt has people concerned,” said Mark Bronzo, who helps manage over $25 billion at Irvington, New York-based Security Global Investors. “When it comes to the Middle East, there’s worries the unrest is going to spread. It has negative implications for the world.”

The Dow had to close above 11,871.84 to post a ninth straight weekly gain. Before today, it had risen 1 percent this week, supported by higher-than-estimated earnings. More than 74 percent of the 183 companies in the Standard & Poor’s 500 Index that reported quarterly earnings since Jan. 10 beat the average analyst projection, according to data compiled by Bloomberg.

Egypt overshadowed evidence the U.S. economy, the world’s biggest, is improving. GDP expanded at a 3.2 percent annual pace in the fourth quarter, up from 2.6 percent during the prior three months, as consumer spending climbed by the most in more than four years.

Investors who pushed the Dow above 12,000 for the first time since 2008 this week may be getting ahead of themselves. It surpassed that level the past two days. More U.S. stocks are trading above their 200-day average price than any time since April, when the Dow began a 14 percent slump. The cost to insure against S&P 500 losses with options has fallen to an almost three-year low.

The Dow may have surged too fast following its more than 2,000-point jump since August even as analysts forecast a third straight year of profit growth for the S&P 500, said James Investment Research Inc.’s Tom Mangan and BB&T Wealth Management’s Walter “Bucky” Hellwig. Mangan and BGC Partners LP’s Michael Purves see signs investors are too optimistic about the next few months.

Shares of Ford Motor Co. plunged 13 percent as the automaker said profit slid 79 percent. Inc. declined 7.2 percent after saying earnings may miss analysts’ projections. The Chicago Board Options Exchange Volatility Index, which measures the cost of insurance against losses in U.S. stocks, jumped 24 percent, the most since May.

The NYSE Arca Airline Index lost 4.3 percent after oil jumped. Any disruption to Middle East oil supplies “could actually bring real harm,” U.S. Energy Secretary Steven Chu said on a conference call.

The Suez Canal, which connects the Mediterranean and Red Seas, is located in Egypt. One million to 1.6 million barrels a day of oil and refined products moved north to Europe and other developed economies in 2008 and 2009, according to the Energy Information Administration, the statistical arm of the U.S. Energy Department.

Microsoft Corp. had the biggest drop in the Dow, retreating 3.9 percent, after a shortfall in Windows revenue raised concerns about demand. The slump drove the Nasdaq Composite Index to a 2.5 percent decline, the most since August. The S&P 500 fell 1.8 percent, the biggest decrease since Aug. 11.

The dollar and Swiss franc advanced the most in three weeks against the euro as a day of clashes in Egypt between police and protesters spurred demand for the safety of the currencies. Egypt’s pound traded at an almost six-year low against the American currency. Fitch Ratings revised the Middle East nation’s outlook to negative.

The Swiss franc advanced 1.4 percent to 1.2806 per euro. Egypt’s currency traded at 5.8575 per dollar after touching the weakest level since January 2005 yesterday. Turkey’s lira sank as much as 2.1 percent to 1.6171 per dollar, falling along with the currencies of other nations near Egypt. Israel’s shekel declined as much as 1.8 percent to 3.7141.

Treasuries rose, pushing two-year yields to a seven-week low of 0.54 percent. Yields on 30-year bonds had reached a nine- month high of 4.64 percent following the report showing U.S. GDP growth accelerated.

Gold futures for April delivery rose 1.7 percent to $1,341.70 an ounce, the biggest gain since Nov. 4. The metal climbed to a record $1,432.50 on Dec. 7.

Wheat Prices Reaches All Time High!

Thursday, January 27th, 2011

Algeria’s purchase of 800,000 metric tons of milling wheat this past Wednesday pushed wheat prices to an all time high of $8.61¼ a bushel, up 2.1%. Wheat prices have reached a record high, greater than during the 2007-2008 food crisis. The shortage first began when Russia banned its wheat export in the summer after the drought. The situation magnified after rains damaged both Australian and Canadian wheat crops, rendering them suitable only for livestock. Political unrest in the Middle East over food prices has encouraged countries to actively increase their wheat import. The inflation of wheat prices are not only being felt in the Middle East; Taiwan aims to lower import tariffs on wheat and wheat flour by 50% over the next 6 months in order to shield their local markets from rising global food prices. The UN fears that countries short-term measures, such as export bans, may lead to more serious long-term effects.

In addition, Bernanke’s QE2 has not helped slow down the rise in agricultural commodity futures.  As investors greedily purchase agriculture etfs to diversify their portfolios and jump on the continuous reflation bandwagon, the U.S. continues to cause inflation for developing nations.  As if causing Iceland’s bankruptcy wasn’t enough, now we in the U.S. are re-igniting global hunger.  I am sure this is easing tensions in the Middle East and helping our relationship with other emerging nations going forward.

U.S. wheat futures surged to fresh 29-month highs Wednesday as growing concern over food prices drove Algeria to make another large grain purchase on the world market.

Soft red winter wheat for March delivery, the most-actively traded contract, reached a high of $8.61¼ a bushel at the Chicago Board of Trade, eclipsing an intraday high set last August when a drought led Russia to ban grain exports. Futures ended up 18¼ cents, or 2.1%, to $8.56½.

Algeria sparked Wednesday’s rally by buying 800,000 metric tons of milling wheat, with traders estimating the deal brings the African nation’s total purchases for January to about 1.8 million tons. The source of Algeria’s latest purchase wasn’t disclosed.

The January purchase equals a third of what the U.S government expects Algeria to import for the current marketing year that ends May 31, raising expectations the forecast will be increased. Earlier on Wednesday, Algeria’s aggressive buying pushed wheat futures in Europe to their highest level since March 2008.

Government buyers across North Africa and the Middle East have stepped up wheat purchases in recent weeks following unrest in Tunisia, Jordan and Egypt. Rising food prices are helping to drive the discontent in those countries.

Weekly U.S. wheat export sales for the week ended Jan. 13, the most recent period for which data are available, reached 1.1 million tons, up 73% from the prior four-week average, according to U.S. government data. The U.S. is the world’s largest wheat exporter and seen as one of the last remaining sources for high-quality wheat that can be milled into flour.

The U.S. is “sitting in a pretty good position right now, especially with the value of the dollar,” said Don Schieber, chairman of the U.S. Wheat Associates, an industry group focused on exports.

Wheat futures have nearly doubled since this past summer, fueled at first by the Russian export ban. Buyers around the world have been scrambling to secure supplies after rains damaged crops in Australia and Canada, leaving farmers with large supplies of wheat that is suitable for feeding livestock, but not human consumption.

Traders are looking for Saudi Arabia to become the next Middle Eastern country to seek high-protein milling wheat. Egypt, the world’s top wheat buyer, also is expected to issue a tender to buy wheat this week.

“Political unrest due to high food costs has many countries actively shopping for wheat,” analysts at Minneapolis-based Benson Quinn Commodities wrote in a note to clients.

Concerns about high prices stretch to Asia as well. Officials in Taiwan said the country plans to lower import tariffs on wheat and wheat flour by 50% over the next six months to cushion the impact of rising global food prices on domestic consumer prices.

Indeed, rallying food and grain prices have pushed food-price inflation to the top of the international agenda. The United Nation’s food agency on Wednesday warned governments that short-term measures to combat price inflation, such as export bans, could have damaging long-term effects. The Food and Agriculture Organization said prices reached a record high at the end of 2010, above the peaks of the 2007-08 food crisis.

Draining Silver Inventories

Thursday, January 27th, 2011

Scotia Mocatta, one of the world’s biggest bullion banks has sold out of its silver inventory. Of their silver bar related products, the bank only had the 1kg Valcambi silver bar, which is no longer in stock. The bank now has the 100 oz silver bar back in stock. Though Scotia Bank and HSBC are the two banks that have been losing the bulk of their silver, other banks and dealers have been running low on bullion stock for a the past couple of months. The recent drain on bullion inventories of banks may be the result of precious metal investors buying in bulk because of the decrease in the price of silver.

Over the past week, we have seen a slight correction in gold and silver, ($1318/oz.) on the back of greater commodity weakness.  Energy commodities have weakened as OPEC has declared that it will increase oil supply in 2011, and U.S. surpluses of natural gas and oil at the hubs have surprised traders.

The spread between brent crude and nymex hasn’t been this high in years (~$11)!  Kudos to those who can set up a play to arb the difference.

For those interested in the prices of gold and silver, I found these sites to be pretty nifty.

Durden on silver inventories.

It seems that not a day passes by without some major dealer running out of a precious metal in inventory. Last Thursday when we presented the most recent inventory at Scotia Mocatta (alongside the ongoing firesale at the US Mint where incidentally total silver sales in January are now at a fresh all time record 4,724,000 ounces), one of the ten market-making members of the London Bullion Market Association and one of only 5 banks to participate in the London gold fixing, we indicated that of all silver bar related products, the bank only had the 1kg Valcambi silver bar, that was listed 3 weeks ago, in stock. As of today, this object is no longer in inventory even at the unit price of CAD$980.11. Reader S. presents the two logical alternative for what is happening: “This can only conclude two things: 1. They purchased a limited amount (due to low supplies) and was sold off quickly. 2. They purchased a large amount and was sold off due to major purchases.” Alternatively, the bank now has the 100 oz silver bar back in stock. We will keep tabs on how long before this also becomes “sold out.” Our question is whether the ongoing shortage at most dealers, despite the so-called drubbing in PM prices, is nothing but definitive evidence that just like in stocks, precious metal investors are merely using every drop in prices as nothing more than a chance to “buy the fucking (fisical) dip”?

Tunisian President Steals $65 million in Gold

Wednesday, January 19th, 2011

The ongoing Tunisian riots and demonstrations regarding unemployment, corruption, and poor living conditions that started last December, led to the deposition of former president Zine el-Abidine Ben Ali. Ben Ali and his family fled Tunisia on January 14 with 1.5 tonnes of gold, estimated at around $65 million. French intelligence say that Ben Ali’s wife, Leila Trabelsi, withdrew gold from the Tunisian central bank last week as the protests escalated. The governor initially refused access to the gold; however, conceded after direct pressure from the president. After denied exile in France, Ben Ali and his family re-routed to Saudi Arabia where they were welcomed by authorities.

Relatives of ousted Tunisian leader, Zine El Abidine Ben Ali are thought to have fled the country with 1.5 tonnes in gold, Le Monde reported on Monday, citing French intelligence sources. At Monday’s prices, 1.5 tonnes in gold would fetch USD 65 million on the open market. According to Le Monde, President Nicolas Sarkozy’s office has been briefed by French intelligence that Leila Trabelsi, Ben Ali’s second wife, withdrew gold ingots from the Tunisian central bank last week. The governor initially resisted her request, but backed down under pressure from Ben Ali himself, the report said. Ben Ali and Leila have now fled Tunisia, under pressure from an unprecedented wave of street protests amid anger that their family is accused of looting the country’s resources.

Wall Street’s Annual Frat Party

Wednesday, January 19th, 2011

Alan Breed – President, Edgewood Management

Peter Georgiopoulos – Chairman and CEO, General Maritime Corp.

Jane Gladstone – Senior Managing Director, Evercore Partners

Pam Goldman – Vice President, Invemed Associates

Joseph Goldsmith – Founder and Managing Partner, Goldsmith & Co.

Candace King-Weir – President, C.L. King & Associates

Steven Langman – Managing Director, Rhone Group

Robert Lindsay – Co-Managing Director, Lindsay Goldberg

Roberto Mingone – President, Bridger Capital

John Miller – Managing Director, Barclays Capital

Seth Novatt – Managing Director, Alliance Bernstein

Mitch Rubin – Managing Director, RiverPark

James Sampson – Senior Managing Director, Lebenthal & Co.

Peter Schulte – Managing Partner, CM Equity Partners

Michael Tennenbaum – Senior Managing Partner, Tennenbaum Capital Partners

Andy Walter – Managing Partner, Blue Orchid Capital

Meredith Whitney – CEO, Meredith Whitney Advisory Group

For members of Kappa Beta Phi, an exclusive, secretive Wall Street fraternity, plunging stock prices, the waves of layoffs and bank failures have yielded a dividend in punch lines.

“I feel like the mayor of New Orleans after Katrina,” quipped Alfred E. Smith IV, the group’s leader, or “Grand Swipe,” at the opening of its annual black-tie dinner last week. “Today, the FBI put out a warning that Al Qaeda was planning an attack to cripple the U.S. economy,” inductee Martin Gruss joked later in the evening. “I’ve got news for them, Congress has already done that.”

Though a number of the society’s luminaries — including former Bear Stearns Cos. Chief Executive James E. Cayne, Lehman Brothers Holdings Inc.’s Richard S. Fuld Jr. and ex-Merrill Lynch & Co. Chief Stanley O’Neal — have faced rebuke and were conspicuously absent, members still standing haven’t lost their sense of humor. This year’s attendees gave a rare standing ovation to a rendition of Don McLean’s “American Pie,” rewritten to read: “Bye, bye to my piece of the pie.”

Established before the stock-market crash in 1929, Kappa Beta Phi meets just once a year and always at the St. Regis, the more than a century-old Beaux Arts hotel on Fifth Avenue. The society, with its grandiose titles and playful rituals, dates back to a time before television when societies and clubs were big sources of entertainment. It also dates to when the term “Wall Street” referred to the warren of streets around the New York Stock Exchange and not to the complex, global network of hedge funds and structured derivatives it has become.

Kappa Beta Phi continued to meet through the depression — a 1932 Wall Street Journal story about the gathering carried the headline “Wall Street Chapter to Revive Ghosts of ‘Good Old Days’ Tonight” — but its annual dinner was suspended for a few years during World War II.

Kappa Beta Phi’s membership remains a roster of Wall Street power brokers past and present, including New York Mayor Michael Bloomberg and New Jersey Gov. Jon Corzine, two more no-shows at this year’s dinner. Mary Schapiro, President-elect Barack Obama’s nominee to head the Securities and Exchange Commission, is also a member, as is former Goldman Sachs & Co. Chairman John C. Whitehead. About 15 to 20 new members — eminent all — are inducted each year, having been nominated by members and approved by the group’s leaders.

But Kappa Beta Phi, whose name is a play on Phi Beta Kappa, the academic honor society, is more about cornball comedy than high finance. Its Latin motto “Dum vivamus edimus et biberimus” is freely translated as, “While we live, we eat and drink.” Like Phi Beta Kappa inductees, members of Kappa Beta Phi also receive a fob, or key. Phi Beta Kappa’s key includes a hand pointing at three stars that symbolize the society’s principles: morality, friendship and learning. Kappa Beta Phi’s key has images of a hand, a beer stein, champagne tumbler and five stars. The stars represent Hennessy cognac and the hand is there to hold a glass.

Under the painted clouds and gilt chandeliers of a room called the St. Regis Roof, this year’s attendees, including Alan Schwartz, the ex-Bear Stearns president and chief executive, and Sallie Krawcheck, the former head of Citigroup’s wealth-management arm, enjoyed an evening of ribald humor and old-fashioned hazing.

The material was choice, since in the year since the group last met, all five of Wall Street’s major independent investment firms have been taken over, have failed or have been transformed into commercial banks.

Society members, some wearing the society’s key on a red ribbon around their necks, started with cocktails then moved on to dinner of beef tenderloin and cheap wine — $10 bottles of Chilean cabernet sauvignon. About 150 members showed up, fewer than usual. Some, including BlackRock Inc. Chief Executive Laurence Fink and Gregory Fleming, who resigned as Merrill Lynch’s No. 2 executive the day of the dinner, only stayed for a drink.

Part Friar’s Club roast, part “Gong Show,” Kappa Beta Phi’s annual dinner is held for the official purpose of inducting new members, who sit at a long table with a black tablecloth at the front of the room. The inductees, “Neophytes” in Kappa Beta Phi parlance, must perform a variety show for the old crowd. Mr. Smith, a Wall Street veteran and great-grandson of legendary New York Gov. Al Smith, served as the evening’s master of ceremonies.

Neophyte Mr. Gruss poked fun at a fellow investor. “There’s Wilbur Ross over there,” Mr. Gruss said at one point, referring to the member who recently became the society’s “Grand Loaf,” one of Kappa Beta Phi’s four offices. “Doesn’t he look like a visitor from another planet? That’s the reason brothers and sisters shouldn’t marry.”

“There’s a need for Wall Street to have a little bit of humor,” Mr. Ross said this week. “If anything, people needed a little more cheering up this year.”

The group’s humor is anything but politically correct. One crude joke took aim at Rep. Barney Frank’s treatment of the U.S. taxpayer, with a reference to Mr. Frank’s sexual orientation. Mr. Frank is the first openly gay member of Congress.

Together with professional coaches, the Neophytes stage Wall Street’s version of pledge night. This year, at the suggestion of last year’s class, the male Neophytes appeared in falsies and pigtail wigs, some in gold and bright pink. The men, some sporting a dab of blush, also wore cheerleader skirts and shirts bearing the society’s Greek letters.

This year’s crop of 17 Neophytes included Don Donahue, chairman and chief executive of the Depository Trust & Clearing Corp., J. Tomlison Hill, vice chairman of the Blackstone Group, Peter Scaturro, former chief executive of U.S. Trust and Goldman Sachs Group Inc.’s private-wealth arm, and James S. McDonald, chief executive of Rockefeller & Co., a wealth-management firm that advises the Rockefellers and other families.

The female members of the class, dressed as male cheerleaders, wore short-hair wigs and tights. The three female Neophytes were Sarah Cogan, a partner of Simpson Thacher & Bartlett, the Wall Street law firm, Sara Ayres, managing director at New Providence Asset Management, and Marianne Brown, chief executive of OMGEO LLC, a firm that handles the post-trade details of securities transactions.

Backed by a five-piece band, the Neophytes performed renditions of musical standards, from Bing Crosby’s “White Christmas” to the Beatles. There was at least one attempt at rap, by Mr. Hill, who was quickly jeered offstage. Rockefeller’s Mr. McDonald tried to sing a version of “Joshua Fought the Battle of Jericho,” renamed “Treasury Fought the Battle of Lehman Bro.” and met a similar fate.

In one ditty, a play on Dr. Seuss’s “You’re a mean one, Mr. Grinch,” the performers took aim at several of Wall Street’s fallen stars. One target was Kappa Beta Phi member and former Grand Swipe Mr. Cayne, absent though he was. The song’s lyrics included the line, “You’re an odd one, Mr. Cayne,” and made light of his reported use of “ganja.” He has said he didn’t engage “in inappropriate conduct.”

Treasury Secretary Henry Paulson, a former Goldman Sachs CEO who is not a member, also made it into the Grinch tune: “Where’s the TARP money, Mr. Hank? Did any of it fall through the cracks? You let Lehman go under but not your beloved Goldman Sachs.”

The hit of the evening, however, was this new take on “American Pie” performed by Mr. Scaturro:

A long, long time ago…

I can still remember

How the Dow Jones used to make me smile.

And I learned my trade and had my chance

The music played I did my dance

And I made seven figures for a while.

I can’t remember if I cried when they pulled the plug on Countrywide…

It sucks that Iceland is out of ice….Bye, Bye to my piece of the pie…Now I travel coach whenever I fly…Maybe this will be the day that I die.

Another Medical Leave – We Wish Mr. Jobs the Best

Wednesday, January 19th, 2011

Apple’s CEO, Steve Jobs announced earlier this week that he would be taking another medical leave and Chief Operating Officer Tim Cook would be taking his place during his indefinite absence. When diagnosed with pancreatic cancer in 2003, Jobs and Apple hid his illness until 2004, when Jobs admitted to being diagnosed with pancreatic cancer. He assured investors that the tumor was successfully extracted, and that he would not need any chemotherapy or radiation. However, when introducing the iPhone 3G in 2008, Jobs appeared exceptionally thin and frail. He assured investors that his appearance was due to a “common bug,” but shares fell 10% nonetheless. In 2009, day-to-day operations were handed over to Tim Cook, who would take Jobs place until his return. It was revealed later that year that Jobs had undergone a successful liver transplant.  Steve Jobs is a world class innovator, and unfortunately must have worked through considerable pain over the past five years.  We at L.A. wish him the best.

The following timeline details the reports about Apple Inc. Chief Executive Officer Steve Jobs’s health since his cancer diagnosis in 2003. Jobs took another leave of absence today to focus on his health, ceding day-to-day operations to Chief Operating Officer Tim Cook.

October 2003: Jobs is diagnosed with cancer in his pancreas and tries to treat the illness by switching to a special diet to avoid surgery, according to a 2008 article in Fortune magazine citing people familiar with the matter. Apple decides not to tell investors after consulting lawyers, the magazine said.

Aug. 1, 2004: Jobs, then 49, discloses the cancer for the first time, saying he had successful surgery to extract the tumor. The operation removed the cancer in time and he won’t require chemotherapy or radiation, Jobs says. Cook runs the company until Jobs returns to work in September.

June 12, 2005: Jobs talks about his fight with cancer during a commencement speech at Stanford University. He says he was diagnosed about a year earlier and that doctors told him he wouldn’t live longer than six months. The cancer turned out to be treatable with surgery “and I’m fine now,” he says.

June 9, 2008: Jobs, while introducing the iPhone 3G at Apple’s developers’ conference, appears thinner and frail. The company blames a “common bug.”

July 21, 2008: Responding to concerns about Jobs’s appearance, Apple says he has no plans to leave the company and that his health is a private matter. Investors aren’t reassured, and the shares fall 10 percent.

July 23, 2008: The New York Times reports that Jobs has been telling associates and Apple’s board he is cancer-free. Jobs had a surgical procedure earlier in the year to address a problem that contributed to his weight loss, the newspaper reports, citing unnamed people close to the executive.

Sept. 9, 2008: Jobs, introducing new iPod media players at an event in San Francisco, still looks thin. “Reports of my death are greatly exaggerated,” Jobs jokes.

Dec. 16, 2008: Apple says Jobs won’t give his usual speech at the Macworld conference. Jobs had used the forum to introduce new products for 11 straight years.

Jan. 5, 2009: Jobs says he has a hormone imbalance, causing him to lose weight. Jobs vows to remain CEO during treatment. “The remedy for this nutritional problem is relatively simple and straightforward,” Jobs says in an open letter.

Jan. 14, 2009: Jobs gives up day-to-day operations to Cook until June, saying his health problems are more complex than originally thought. Jobs says he will remain involved in major strategic decisions. “I look forward to seeing all of you this summer,” he says in a letter to employees.

June 23: Methodist University Hospital Transplant Institute in Memphis, Tennessee, confirms in a statement that Jobs had a liver transplant and has “an excellent prognosis.”

June 29, 2009: Apple announces Jobs’s return to work. During his absence, Apple share rose 66 percent.

Sept. 9, 2009: Jobs makes his first public appearance since his return to work, introducing new iPod models in San Francisco. He says he was the recipient of a liver transplanted from a young adult who had died in a car crash. “I am back at Apple and loving every minute of it,” he says.

Oct. 20, 2010: Jobs appears on stage to unveil a lighter MacBook Air laptop and a version of the Macintosh operating system called Lion.

Jan. 17, 2011: Jobs, 55, takes another medical leave, telling employees in an e-mail that “I love Apple so much and hope to be back as soon as I can.” Cook, who received total compensation of $59.1 million in fiscal 2010 because of bonuses for filling in for Jobs, is left in charge.

China’s Renminbi Heads for Floating Exchange Rate

Saturday, January 15th, 2011

It was announced earlier this week that China has launched its Yuan for free trade in the open market. China has managed to keep the value of the Yuan, also know as the Renminbi, at a depreciated value, which some analysts argue is undervalued by up to 40%. The Bank of China’s decision to move towards a floating exchange rate, though still tightly controlled, offers hope to those who believe China’s weak currency policy is the root cause of the global economic imbalance. The gradual inflation of the Renminbi may help take away China’s disproportionate advantage in export goods and bring jobs back to the US.

Call it liberalization by a thousand cuts.


The Bank of China, one of the country’s main state-owned lenders, is now allowing American firms to trade in renminbi, another step in China’s effort to position the renminbi on the world stage.


In July, China started a renminbi settlement system for cross-border trade in Hong Kong, but it placed limits on how much currency could be exchanged.


Currency trading in the renminbi was already possible at other banks, but the move by a state-owned lender signals a shift in official policy.


The Chinese central bank bowed to international pressure last summer and agreed to make its currency more flexible; the renminbi is now allowed to move as much as 0.5 percent each day. At the same time, the country is cautiously pursuing a strategy of making the renminbi into an international exchange currency.


“China sees the global financial system as too U.S.-centric and dollar dependent,”’ said Robert Minikin, senior currency strategist at Standard Chartered in Hong Kong. “That created issues during the financial crisis.”


Now, he said, the country is trying to take a step away from that dependence. “Conditions are in place for sustained yuan appreciation against the U.S. dollar,’’ he said, predicting that it would increase by 6 percent this year, to 6.20 renminbi per dollar.


With a forecast for high inflation in the expanding Chinese economy, an appreciating currency could help the country dampen so-called imported inflation by making foreign goods less expensive.


With the Bank of China move, China is promoting the renminbi to Americans at a time when loose monetary policy on the part of the United States Federal Reserve has some concerned that the dollar’s value will continue to decline.


The Bank of China said in an announcement on the Web site of its New York branch that trading firms and individuals could now open accounts in renminbi, buying the currency from and selling it to the bank.


While the limits on personal accounts are $4,000 a day and $20,000 a year worth of renminbi, and those accounts are largely for the purposes of exchange and remittance, the bank is also soliciting business from trading firms.


China’s decision to keep the renminbi effectively pegged against the dollar at an exchange rate that favors its exports has long been a source of contention between Washington and Beijing. China’s trade surplus with the United States was $181 billion last year, a 26 percent increase from the previous year, The imbalance is likely to put further pressure on the exchange rate.


That said, the renminbi hit a new high of 6.6128 against the dollar on Wednesday, an auspicious prelude to a visit to Washington next week by China’s president, Hu Jintao.


Separately, the city of Shanghai said it was creating a new investment window, allowing qualified private equity firms to buy renminbi and invest in mainland companies. Reuters reported that the pilot project could grow to be worth $3 billion.

Groupon Raises A Billion Dollars

Wednesday, January 12th, 2011

Analysts are debating whether or not Groupon’s capital raise sets the record for the largest raise by a private company in a single venture capital round. However, until it is revealed how much of the financing was new equity capital, we cannot know for sure. Groupon did not detail how the company plans on spending the money, besides using it to “fuel global expansion, invest in technology, and provide liquidity for employees and early investors.” In the past year, Groupon has expanded from 1 to 35 countries, launched in almost 500 new markets, up from 30 markets in 2009, increased subscribers by 2500% reaching over 50 millions users, saved consumers 1.5 billion dollars, and worked with 58,000 local businesses, serving over 100,000 deals worldwide. The Company’s success stems from its ability to offer small businesses that don’t usually advertise online a way to reach local markets. Their success has attracted big investors, including Andreessen Horowitz, Battery Ventures, Greylock Partners, Maverick Capital, Silver Lake, Technology Crossover Ventures, and DST.

Groupon, the site that sells daily coupons for local businesses, has raised $950 million from investors, the largest amount raised by a start-up.

The investment follows Google’s $6 billion bid for Groupon, which fell apart last month. The list of new investors in the company include some of Silicon Valley’s hottest names, like Andreessen Horowitz and Kleiner Perkins Caufield & Byers.

Groupon, which is just over two years old and based in Chicago, has quickly catapulted into the ranks of the top tech companies. By selling coupons, like ones that offer $20 worth of books for $10 at a local bookstore, it gives small businesses a way to advertise and find new customers without spending money upfront.

“They’ve cracked the code on a formula for how to basically give access on the Internet as a marketing channel for offline merchants,” said Marc Andreessen, co-founder of Andreessen Horowitz and a veteran of Silicon Valley. “It’s a very, very big deal because there are a lot of offline merchants that have not been able to use the Internet as a marketing vehicle.”

Mr. Andreessen said Groupon can play the same advertising role for small, offline businesses, like dry cleaners and cafes, that Google’s AdWords has played for online businesses.

“That’s why Google was interested,” he said.

Some analysts have questioned whether Groupon, whose revenue has been zooming upward, can continue to grow at the same rate. Local businesses usually heavily discount their products on Groupon, so they may not want to sell coupons more than once or twice, and some businesses have complained that they lost money on Groupon and that the people who bought the coupons did not become repeat customers.

But in an interview last week, Rob Solomon, Groupon’s president, said there were so many small businesses worldwide that Groupon can continue to grow rapidly, expanding beyond businesses like restaurants and yoga studios to law firms, for instance. He also said the company planned to offer other services to small businesses, like tools to manage their relationships with customers. These include running promotions themselves.

The record-breaking amount of money that Groupon has raised gives the company the ability to expand into those new areas — and to cash out earlier investors who may be getting impatient after the company walked away from Google’s buy-out offer.

For the venture capital firms, the investment is a way to get into one of the fastest-growing companies. Kleiner Perkins, which made a name for itself last decade with investments in Google and, has been slow to social media, but is turning that around with recent investments in Twitter and Groupon.

Mr. Andreessen said he considered Groupon, Facebook, Skype and Zynga — all companies in which his firm has invested — to be the four most promising companies in this era of Web start-ups, comparable to Google, Yahoo, eBay and Amazon a decade ago.

Other investors include Battery Ventures, Greylock Partners, Maverick Capital, Silver Lake, Technology Crossover Ventures and DST, the Russian investment firm that previously invested in Groupon.

Goldman Values Facebook at $50 billion, Digital Sky Technologies Makes 400% on its Investment Since 2009!

Monday, January 3rd, 2011
The New York Times announced today that Goldman Sachs and Russian Investor Digital Sky Technologies are investing $500 million into Facebook at a valuation of $50 billion.   According to Second Market, some private investors have bid up the Company’s shares to imply a value of $56 billion.  This bid comes soon after Google announced a $6 billion bid for Groupon a couple weeks ago.  Some call the Facebook valuation astronomical, and it theoretically doubles the net worth of founder Mark Zuckerberg to approximately $14 billion.  Two years ago Microsoft attempted to purchase a stake in Facebook at $15 billion, which at the time was deemed too high.  Digital Technology’s original 2009 stake in Google, which valued the company at $10 billion has since quintupled.  While Goldman is purchasing shares, VC firm Accel Partners is selling very aggressively at much lower valuations.  When examined more closely, with this purchase, Goldman may have bought it’s right to the Facebook IPO.  If Goldman is able to IPO shares of the company at a higher price, it could eventually simply divest of its shares in the open markets at a higher valuation and make a fat fee in the process.
According to Reuters, “Goldman Sachs is investing $450 million of its own money into Facebook and that it’s bringing along $50 million from Digital Sky Technologies and as much as $1 billion more from its high-net-worth clients — all at a valuation of $50 billion.

The enormous sums of money involved here clearly ratify the valuation: this isn’t a handful of shares trading in an illiquid market, it’s an investment substantially larger than most IPOs.

It’s worth remembering here that only two years ago, when Microsoft bought into Facebook at a $15 billion valuation, that sum was described in the NYT as “astronomical”. But that said, Facebook’s multiples have clearly shrunk from those heady days: in 2007, Facebook could actually use Microsoft’s $240 million to fuel its expansion. Today, it’s reportedly earning $2 billion a year, which implies to me that this is a cash-out rather than a dilutive offering. Facebook has raised, in total, about $850 million to date, and there’s no obvious need for a massive new round of funding which would dwarf that entire sum.

If Goldman is leading the buyers, then, who are the sellers? VC shop Accel Partners has been selling Facebook shares quite aggressively of late, at lower valuations than this. They could easily provide all the shares that Goldman is buying and still be left with a stake worth some $3.5 billion. And it’s entirely conceivable that some early employees might well want to diversify their holdings and have maybe a little less than 99% of their net worth in Facebook stock.

As for Goldman, it has probably bought itself the IPO mandate, which could easily generate hundreds of millions of dollars in fee income. It has also become the only investment bank which can give its rich-people clients a coveted pre-IPO stake in Facebook: the extra cachet that brings and the possible extra clients, make this investment a no-brainer. Facebook doesn’t need to stay worth $50 billion forever — Goldman just needs to engineer an IPO valuation somewhere north of that, then exit quietly in the public markets. And that is surely within its abilities.

According to Dealbook, “the deal could double the personal fortune of Mark Zuckerberg, Facebook’s co-founder.

Facebook, the popular social networking site, has raised $500 million from Goldman Sachs and a Russian investor in a deal that values the company at $50 billion, according to people involved in the transaction. The deal makes Facebook now worth more than companies like eBay, Yahoo, and Time Warner.

The stake by Goldman Sachs, considered one of Wall Street’s savviest investors, signals the increasing might of Facebook, which has already been bearing down on giants like Google. The new money will give Facebook more firepower to steal away valuable employees, develop new products and possibly pursue acquisitions — all without being a publicly traded company. The investment may also allow earlier shareholders, including Facebook employees, to cash out at least some of their stakes.

The new investment comes as the SEC has begin an inquiry into the increasingly hot private market for shares in Internet companies, including Facebook, Twitter, the gaming site Zynga and LinkedIn, an online professional networking site. Some experts suggest the inquiry is focused on whether certain companies are improperly using the private market to get around public disclosure requirements.

The new money could add pressure on Facebook to go public even as its executives have resisted. The popularity of shares of Microsoft and Google in the private market ultimately pressured them to pursue initial public offerings.

So far, Facebook’s chief executive, Mark Zuckerberg, has brushed aside the possibility of an initial public offering or a sale of the company. At an industry conference in November, he said on the topic, “Don’t hold your breath.” However, people involved in the fund-raising effort suggest that Facebook’s board has indicated an intention to consider a public offering in 2012.

There has been an explosion in user interest in social media sites. The social buying site Groupon, which recently rejected a $6 billion takeover bid from Google, is in the process of raising as much as $950 million from major institutional investors, at a valuation near $5 billion, according to people briefed on the matter who were not authorized to speak publicly.

“When you think back to the early days of Google, they were kind of ignored by Wall Street investors, until it was time to go public,” said Chris Sacca, an angel investor in Silicon Valley who is a former Google employee and an investor in Twitter. “This time, the Street is smartening up. They realize there are true growth businesses out here. Facebook has become a real business, and investors are coming out here and saying, ‘We want a piece of it.’”

The Facebook investment deal is likely to stir up a debate about what the company would be worth in the public market. Though it does not disclose its financial performance, analysts estimate the company is profitable and could bring in as much as $2 billion in revenue annually.

Under the terms of the deal, Goldman has invested $450 million, and Digital Sky Technologies, a Russian investment firm that has already sunk about half a billion dollars into Facebook, invested $50 million, people involved in the talks said.

Goldman has the right to sell part of its stake, up to $75 million, to the Russian firm, these people said. For Digital Sky Technologies, the deal means its original investment in Facebook, at a valuation of $10 billion, has gone up fivefold.

Representatives for Facebook, Goldman and Digital Sky Technologies all declined to comment.

Goldman’s involvement means it may be in a strong position to take Facebook public when it decides to do so in what is likely to be a lucrative and prominent deal.

As part of the deal, Goldman is expected to raise as much as $1.5 billion from investors for Facebook at the $50 billion valuation, people involved in the discussions said, speaking on the condition of anonymity because the transaction was not supposed to be made public until the fund-raising had been completed.

In a rare move, Goldman is planning to create a “special purpose vehicle” to allow its high-net worth clients to invest in Facebook, these people said. While the S.E.C. requires companies with more than 499 investors to disclose their financial results to the public, Goldman’s proposed special purpose vehicle may be able get around such a rule because it would be managed by Goldman and considered just one investor, even though it could conceivably be pooling investments from thousands of clients.

It is unclear whether the S.E.C. will look favorably upon the arrangement.

Already, a thriving secondary market exists for shares of Facebook and other private Internet companies. In November, $40 million worth of Facebook shares changed hands in an auction on a private exchange called SecondMarket. According to SharesPost, Facebook’s value has roughly tripled over the last year, to $42.4 billion. Some investors appear to have bought Facebook shares at a price that implies a valuation of $56 billion. But the credibility of one of Wall Street’s largest names, Goldman, may help justify the company’s worth.

Facebook also surpassed Google as the most visited Web site in 2010, according to the Internet tracking firm Experian Hitwise.

Facebook received 8.9 percent of all Web visits in the United States between January and November 2010. Google’s main site was second with 7.2 percent, followed by Yahoo Mail service, Yahoo’s Web portal and YouTube, part of Google.

For Mr. Zuckerberg, the deal may double his personal fortune, which Forbes estimated at $6.9 billion when Facebook was valued at $23 billion. That would put him in a league with the founders of Google, Larry Page and Sergey Brin, who are reportedly worth $15 billion apiece.

Even as Goldman takes a stake in Facebook, its employees may struggle to view what they invested in. Like those at most major Wall Street firms, Goldman’s computers automatically block access to social networking sites, including Facebook.”

Paulson Proves He is Not “One Hit Wonder,” Pulls in $1.25 billion for 2010

Sunday, January 2nd, 2011


After being bashed by many hedge fund managers as a “one hit wonder,” Paulson closed well in 2010, putting another strong year under his belt.  The Paulson Advantage Fund was up 14% at the end of 2010 (after being down more than 10% earlier).  His largest stakes were in Hartford Financial Services, MGM, and Boston Scientific.  The Paulson Gold Fund also performed well, given the runup in physical commodities this year.  After outperforming many of his competitors, it is rumored that the hedge fund manager will earn $1.25 billion for himself this year.  It is also interesting to see the divergence in HF manager earnings in the U.S. versus the U.K…

According to Daily News UK, “multi-billionaire US hedge fund manager John Paulson, who pulled off one of the biggest coups in Wall Street history when he made £2.3bn by betting against the sub-prime housing market, is showing the Midas touch again writes Edward Helmore from New York. 

Initial reports suggest his firm, Paulson & Co, has made returns of nearly treble the industry average of 7 per cent in 2010, giving him a personal gain estimated at more than £800mm ($1.25 billion). 

That would eclipse even the biggest earners on the UK hedge fund scene, based in London’s swish Mayfair district.

Colm O’Shea of fund group Comac is reported to have made nearly £10mm last year as did Jonathan Ruffer, of the eponymous investment company. 

Crispin Odey, founder of Odey Asset Management took home £36.4mm. ”

According to Dealbook, “two years after Mr. Paulson pulled off one of the greatest trades in Wall Street history, with a winning bet against the overheated mortgage market, he has managed to salvage a poor year for his giant hedge fund with a remarkable come-from-behind showing.

Defying those who said his subprime success was an anomaly, Mr. Paulson appears to have scored big on bets he made on companies that would benefit from an economic rebound.

In less than three months, his flagship fund, the Paulson Advantage Fund, has turned a double-digit loss into a double-digit gain. At mid-December, the fund, which was worth $9 billion at the start of the year, was up about 14 percent, according to one investor in the fund who provided confidential figures on the condition of anonymity.

It is a remarkable turnabout for Mr. Paulson, whose winning gamble against the housing market plucked him from obscurity and transformed him into one of the most celebrated money managers in the business.

What precisely propelled the sharp rebound in Mr. Paulson’s hedge fund is unclear. A spokesman for Paulson & Company declined to comment, and regulatory filings of significant changes made to Mr. Paulson’s funds typically lag behind by several weeks.

But it is clear that several of Mr. Paulson’s largest stakes — in Hartford Financial Services, MGM Resorts and Boston Scientific — went on a tear in the final quarter of the year, with gains of 16 percent, 30 percent and 26 percent, respectively.

“Several of his general investment themes this year came to fruition,” the investor in the Paulson Advantage Fund said.

Mr. Paulson stands out in what may go down as a lukewarm year for many hedge fund managers. The average return for funds through the end of November was 7.1 percent after fees, according to a composite index tracked by Hedge Fund Research of Chicago. Investors would have done better buying a low-cost mutual fund that tracks the Standard & Poor’s 500-stock index, which rose 7.8 percent during that period.

With volatile markets creating uncertainty for hedge fund managers this year, some investors are surprised that these funds did even that well. But they expect the funds to continue to attract money from investors, particularly state pension funds seeking higher returns to offset their budget shortfalls.

“When investors look back at the year they’re going to be pretty happy,” said David T. Shukis, a managing director of hedge fund research and consulting at Cambridge Associates, which oversees $26 billion in hedge fund assets for clients.

But the lackluster performance has other people wondering: are hedge funds worthwhile? The high fees and muted returns — and a long-running federal investigation into insider trading in the industry — has cast a cloud over a business that long defined Wall Street wealth.

“A client told me the other day that paying these ridiculous fees for single-digit returns, then worrying about these investigations — it’s just not worth it,” said Bradley H. Alford, chief investment officer at Alpha Capital Management, which invests in hedge funds. “A lot of these things you can sweep under the rug when there are double-digit returns, but in this environment it’s tougher.”

This year, bets by hedge fund managers were whipsawed by the stock market “flash crash” in May; the European debt crisis; frustration with the Obama administration over what many in the business viewed as anti-Wall Street rhetoric; and the Federal Reserve’s unusual strategy of buying bonds in the open market to hold down interest rates.

“It was an interesting year where you had to have a couple of gut checks,” said David Tepper, founder of Appaloosa Management, whose Palomino fund, which invests largely in distressed debt, was up nearly 21 percent at the end of October, according to data from HSBC Private Bank.

“If you had those gut checks, looked around and made the right decisions, you could make some money,” Mr. Tepper added.

There are still many hurdles for the industry to clear, including the insider trading investigation, lingering difficulty in raising money, and the liquidity demands from investors still fuming over lockups in 2008 that denied them access to their cash.

Some hedge fund notables will probably remember 2010 as a year they would like to write off. For instance, Harbinger Capital, run by Philip A. Falcone, was down 13.8 percent at the end of November, according to HSBC’s data.

But the Third Point Offshore fund, run by Dan Loeb, was up 25 percent for the year through November after it made successful bets on one of Europe’s largest media operators, ProSieben, and Anadarko Petroleum, according to a report obtained from an investor in the fund.

Other big names also fared well. SAC Capital Advisors, run by Steven A. Cohen, was up about 13 percent in its flagship fund, one of his investors said.

A handful of other usual suspects turned out solid performances this year too, according to investors in their funds: David Einhorn notched a 10.5 percent return at his Greenlight Capital hedge fund through November, raising the fund’s total to $6.8 billion.

And after two consecutive years of losses, James Simons, the seer of quantitative hedge funds, was up 17 percent in his two public Renaissance funds, which now collectively manage $7 billion.

The figures reflect performance after fees through November, and do not take into account the strong market rally in the final month of the year, some investors noted.

For many, being in the right sectors of the market — distressed debt and emerging markets, for instance — paid off handsomely.

“If you look at how some of the distressed managers performed, you’re seeing some really good returns among a number of funds,” said David Bailin, global head of managed investments at Citi Private Bank.

Bets on distressed debt produced a return of more than 19 percent as of the end of October for the Monarch Debt Recovery Fund, overseen by a pair of former Lazard managers. Similarly, Pershing Square, a fund run by William A. Ackman, was up 27 percent after fees through the end of November.

Mr. Ackman’s big win was a bet on the debt of General Growth Properties, a developer that emerged from bankruptcy last month.

It was a bumpy year for Mr. Paulson who, besides making a huge bet on gold — which rose 30 percent — also took large stakes in several companies he believed would benefit from a sharp recovery in the economy, including banking and financial services companies.

But as the economic recovery sputtered along, Mr. Paulson’s portfolio sank, prompting some critics to claim that his funds had become too big to manage. Some of Mr. Paulson’s investors asked for their money back around midyear.

At one point this summer, in fact, other hedge fund managers were selling short stocks Mr. Paulson held in his funds, betting that redemption requests would flood in and that he would be forced to sell down some of his big positions, according to a hedge fund trader at another firm who declined to be named for fear of damaging business relationships. He said investors were making similar bets against stocks held by Mr. Falcone’s Harbinger fund.

As recently as the end of September, Mr. Paulson’s flagship Advantage Plus fund was down 11 percent. As of last week, the fund was up more than 14 percent for the year. (His clients are mostly institutions that invest a minimum of $10 million in the fund.)

Patience paid off for Mr. Paulson as many bets he made late last year and early this year finally shot higher in the last quarter.

This year, Mr. Paulson bought 43 million shares of the gambling company MGM, whose shares have soared more than 30 percent since the end of September. A bet of 40 million shares in the cable giant Comcast has risen 22 percent this quarter.

Shares of Boston Scientific, of which Mr. Paulson owns 80 million shares, have skyrocketed 26 percent, and his 44 million shares of Hartford Financial Services climbed 16 percent in the quarter.

One of Mr. Paulson’s newer positions, a stake in Anadarko Petroleum, moved up 20 percent in the quarter.

With the last-minute rally, Mr. Paulson saved himself from being the headliner among flat funds this year. Most were not so fortunate, with many hedging against their stakes late in the year, expecting that stocks would end the year down. That move, some say, probably limited their gains.

“Psychology is such a fragile thing,” said William C. Crerend, the chief executive of EACM Advisors, which oversees a $3.6 billion fund for Bank of New York Mellon.”