Archive for February, 2011

Warren Buffet BH Annual Shareholder Letter – 2010

Sunday, February 27th, 2011

Warren is ready to start making acquisitions.  Berkshire Hathaway is now earning nearly $1 billion per month in net income and has nearly $38 billion in cash reserves, the largest reserve hoard since 2007.  WB has been known to use his cash cow insurance business to fund acquisitions.  Investment income from his insurance operations alone was $5.2 billion in 2010, and earnings were up 61% from 2009.  It is hard to imagine how Mr. Buffet started his career by purchasing a couple pinball machines.  His company’s cash reserves now rival the gold reserves of many developing nations.  BH’s annual letter to shareholders was released on 2/26/2011 and bodes well for the U.S. economy.  Since 1965, Berkshire has averaged annual returns of 20.2%, while the S&P has returned 9.4%, including dividends.

Warren Buffett 2010 Berkshire Hathaway Letter

Warren Buffett, in his widely followed annual letter to shareholders, said he is prepared for “more major acquisitions,” as the conglomerate on Saturday reported a 61% jump in 2010 earnings and a growing cash hoard.

“We’re prepared. Our elephant gun has been reloaded, and my trigger finger is itchy,” the billionaire investor said in the letter accompanying Berkshire’s annual report.

The Omaha, Neb., company’s 2010 net income of $13 billion received a big boost from railroad operator Burlington Northern Santa Fe, which Berkshire acquired for roughly $27 billion last February. In his letter, Mr. Buffett called the deal “the highlight of 2010″ and said it is working out “even better” than he had expected, The railroad business generated $4.5 billion in operating earnings last year and $2.5 billion in net earnings, up about 40% from 2009.

While Berkshire has spent tens of billions of dollars on capital-intensive businesses like railroads and utility operators in recent years, its other businesses, such as insurance, are still generating large amounts of cash for Mr. Buffett to invest in financial assets and to acquire more businesses. At the end of 2010, Berkshire’s pile of cash and cash equivalents stood at $38 billion, the highest year-end amount since 2007. Berkshire’s businesses, Mr. Buffett noted, are now earning about $1 billion a month.

As Berkshire tries to keep growing from an ever-expanding base, Mr. Buffett has to find more avenues to invest to achieve his long-stated goal of increasing the company’s value faster than the rate of growth in the Standard & Poor’s 500-stock index.

WSJ’s Jamie Heller and Erik Holm discuss the implications of the newly released letter to Berkshire Hathaway shareholders from billionaire investor Warren Buffett.

Berkshire’s book value, a measure of assets minus liabilities that is a rough proxy for the company’s actual, or “intrinsic,” value, grew 13% in 2010 to $95,453 per share, versus last year’s 15.1% total return in the S&P 500. It was the second year in a row, and only the eighth time in Mr. Buffett’s 46 years of running Berkshire, that the company’s book value change didn’t beat the index, whose returns include dividends. Berkshire is now a component of that index following last year’s B-share stock split and purchase of Burlington Northern.

Mr. Buffett repeated a refrain from past years, stating that Berkshire’s future performance is unlikely to replicate its past. Noting the company’s “now only satisfactory” performance against the S&P in recent years, Mr. Buffett wrote: “The bountiful years, we want to emphasize, will never return. The huge sums of capital we currently manage eliminate any chance of exceptional performance.”

Berkshire’s Annual Report

Mr. Buffett said if Berkshire over time outperforms the market, as shareholders should expect from the company, it will likely be from producing better relative results in bad years for the stock market while suffering poorer results in stronger years.

Shareholders last year weren’t disappointed. Berkshire’s Class A shares, which don’t pay dividends, gained 21% in 2010, besting the S&P and giving the company a market value of roughly $200 billion at year end. The shares are up nearly 6% this year, closing at $127,550 on Friday.

Berkshire’s book value, which grew $26.2 billion in 2010, was boosted by the continuing recovery of stocks in Berkshire’s giant investment portfolio. Wells Fargo & Co. and Coca-Cola Co., Berkshire’s largest equity positions, each rose 15% last year, and each holding is now valued at more than $11 billion.

Stocks and Burlington Northern weren’t the only part of the portfolio that delivered.

A host of Berkshire-owned businesses that had suffered from declining sales and shrinking profits amid the recession now appear to be recovering. Mr. Buffett heralded improvements at units including Fruit of the Loom Inc., Israel-based toolmaker Iscar Ltd. and electronic-components distributor TTI Inc.

Net earnings from Berkshire’s manufacturing, service and retailing operations more than doubled from a year earlier to $2.5 billion in 2010 as the businesses rode the recovering economy. The company’s annual report said it anticipates that “general economic conditions will continue to gradually improve, albeit unevenly, over time.”

Mr. Buffett said an “overwhelming” part of the future investments of Berkshire’s businesses would be in the U.S. Of $8 billion in capital spending slated for 2011, which his letter called a record amount, Berkshire will spend all of the $2 billion increase from last year in the U.S. He said the U.S. offers “an abundance” of opportunity.

Berkshire’s insurance units give Mr. Buffett money to invest until the premiums collected are needed to pay claims years in the future. Mr. Buffett calls these funds “float,” and he reported Saturday that the pool of funds swelled to about $66 billion from $63 billion a year earlier. Investment income from the insurance operations was about $5.2 billion, compared with $5.5 billion in 2009.

In the letter, Mr. Buffett discussed what he and Berkshire Vice Chairman Charlie Munger would regard as a “normal year” for Berkshire. That would be one with a general business climate better than last year’s, but weaker than 2005 or 2006, and one without a large catastrophic event that could trigger large payouts from its insurance business. In such a year, Berkshire’s assets could expect to earn about $17 billion in pretax and $12 billion in after-tax earnings, excluding capital gains or losses, he said.

Mr. Buffett, who turned 80 years old last August, also touched on succession planning in his letter. Besides being Berkshire’s chief executive and chairman, Mr. Buffett is also its chief investment officer with responsibility for the company’s investment portfolio of more than $150 billion in cash, stocks, bonds and other assets. He has said that when he dies, his job at the helm of Berkshire will be split into three, with a separate chairman and chief executive, and one or more chief investment officers.

Berkshire recently hired former hedge-fund manager Todd Combs as an investment manager following a lengthy search for candidates that could potentially step into Mr. Buffett’s role as Berkshire’s chief investment officer. Many money managers had good investing records recently, but Berkshire has been looking for individuals who have a deep understanding and sensitivity to risk and can anticipate the effect of events that have never occurred, Mr. Buffett wrote.

“When Charlie and I met Todd Combs, we knew he fit our requirements,” Mr. Buffett noted. He said the 40-year-old would initially manage funds in the range of $1 billion to $3 billion, an amount that can be reset annually. While Mr. Combs’s focus will be on stocks, he isn’t restricted to that type of investment, Mr. Buffett noted.

The search for competent money managers isn’t over. Mr. Buffett said Berkshire may, over time, add one or two investment managers “if we find the right individuals,” and the managers’ compensation will be tied to their performance.

As in previous years, Mr. Buffett devoted portions of his annual letter to praising the managers of Berkshire’s operating units, including some individuals that company watchers believe are candidates for the Berskhire CEO job.

Mr. Buffett wrote that he “can’t overstate the breadth and importance” of achievements by David Sokol, chairman of utility operator MidAmerican Energy Co. and chief executive of NetJets Inc., who turned the fractional jet ownership business around from a loss.

He noted that Tony Nicely, who runs auto insurer Geico, increased its market share to 8.8% from 2% when he joined the company in 1993, adding he owes Mr. Nicely a huge debt. And Ajit Jain, head of Berkshire Hathaway’s highly profitable reinsurance business, “has added a great many billions of dollars to the value of Berkshire. Even kryptonite bounces off Ajit,” Mr. Buffett quipped.

Mr. Buffett made it clear he has no plans to relinquish any of his jobs. Referring to the investment portfolio, he wrote: “As long as I am CEO, I will continue to manage the great majority of Berkshire’s holdings, both bonds and equities.”

He said that when he and Mr. Munger, 87, are no longer around, Berkshire’s investment managers will have responsibility for the entire portfolio in a manner then set by Berkshire’s CEO and board of directors. The board, he added, “will make the call on any major acquisition.”

Rebel Libyans Get Ready to Attack Tripoli

Sunday, February 27th, 2011

Yesterday, I saw at least 600 New Yorkers with the rebel Libyan flag protesting in Times Square…It has been weeks since a semi-deranged Ghaddafi/Qaddafi/Khaddafi/Kadafi waged war on his people.  With tons of mustard gas in storage and hired mercenaries being paid $2,000/day to open fire on women and children, it surprises me that the man has not yet been deposed.  Western Libya is now in the hands of rebels, who also control Zawiya, the third largest city in the country, miles away from Tripoli.  There are 6 check-points between Zawiya and Qaddafi, and the dictator seems to be getting nervous that an attack is being planned.  This weekend, he announced $400 awards for all Libyan citizens and interest-free loans for the purchase of apartments.  If the man really cared about his people, he would have acted before 850,000 barrels (of 1.6mm) of daily oil capacity was shut down by foreign interests, €20 million of his assets were frozen in the U.K., and 90% of his 45,000 man army left his control.

The streets of Tripoli are deserted, as citizens fear being shot out in the open.   They hide in their homes as their food reserves dwindle…many without cell phone or internet service.  And this is the 21st century?  The per capita GDP of Libya is about $12,000, but most don’t realize that most of this is in the form of oil revenue captured by the government.  With soaring commodity prices, many young Libyans are hungry and unemployed.  They are leading the attack on Qaddafi, and they don’t want/need any help: “They don’t want to be rescued, they don’t want any military intervention,” Garcia-Navarro reported from Benghazi. “They have done this themselves, they say, and they will get rid of Moammar Gadhafi finally themselves, as well.”

“Rebel forces in the city closest to Libya’s capital braced for a possible counterattack by troops loyal to Moammar Gadhafi on Sunday, as opposition leaders in the east announced a national council to serve as the face of the uprising.

Hundreds of opposition fighters with tanks and truck-mounted anti-aircraft guns occupied the center of Zawiya, about 30 miles west of the capital, Tripoli, according to The Associated Press. Gadhafi forces were positioned on the outskirts of the city, which is close to an oil port and refineries.

The tricolor flag of the former Libyan monarchy — now a symbol of revolution — flew from one of the bullet-riddled buildings in Zawiya. Hundreds of people chanted “Gadhafi out” and “Free, Free Libya.” Many streets were blocked by palm tree trunks or metal barricades, and an effigy of the Libyan leader hung from a light pole in the main square with “Execute Gadhafi” emblazoned across its chest.

There were at least six checkpoints controlled by troops loyal to Gadhafi on the road from Tripoli to Zawiya, the AP reported. Each checkpoint was reinforced by at least one tank, and the troops concealed their faces with scarves.

Militiamen and pro-Gadhafi troops were repelled last week when they launched attacks trying to take back opposition-held territory in Zawiya and Misurata in fighting that killed at least 30 people.

Gadhafi loyalists remain in control of the capital, Tripoli, which was reported to be quiet early Sunday, with most stores closed and long lines outside the few banks and bakeries open for business. Traffic in the city was close to its normal level.

Residents thronged Tripoli’s banks Sunday after state TV announced that each family would receive $400 as well as credits for phone service and interest-free loans to buy apartments.

Protesters Say They Don’t Want Foreign Intervention

A bloody government crackdown on the uprising that began nearly two weeks ago in the eastern city of Benghazi prompted the U.N. Security Council to slap sanctions on the regime Saturday. The resolution imposes a travel ban and foreign asset freeze on Gaddafi and his inner circle as well as a weapons embargo against the country.

It also demands an immediate end to violence that it says may amount to crimes against humanity and refers the regime’s crackdown on protesters to the International Criminal Court for possible prosecution.

“The text sends a strong message that gross violations of basic human rights will not be tolerated and those responsible for grave crimes will be held accountable,” U.N. Secretary-General Ban Ki-moon said after the unanimous vote by all 15 member nations.

NPR’s Lourdes Garcia-Navarro said the vote is being met with a more muted response among anti-government protesters in the liberated east of Libya. They welcomed the U.N. action, but feel the international community didn’t move until foreign nationals were evacuated out of the country. Protesters also made clear that they do not welcome foreign intervention in Libya.

“They don’t want to be rescued, they don’t want any military intervention,” Garcia-Navarro reported from Benghazi. “They have done this themselves, they say, and they will get rid of Moammar Gadhafi finally themselves, as well.”

A number of former top aides have deserted Gadhafi since the uprising began 11 days ago, and even the Libyan dictator’s Ukrainian nurse reportedly plans to flee the violence and return home.

Halyna Kolotnytska, 38, is joining senior government officials, diplomats and pilots who have left Gadhafi’s inner circle, according to Ukrainian newspaper reports citing Kolotnytska’s daughter Tetyana.

Ex-Justice Minister Chosen To Head Opposition

As Gadhafi’s control over the country dwindles, opposition leaders on Sunday appointed a former justice minister who defected in the early days of the uprising to head a national council. Mustafa Abdel-Jalil was chosen by the committees running the eastern Libyan cities now in the rebellion’s hands, according to Benghazi city council member Fathi Baja.

“It’s a symbol here, people say, of the fact that they will never acquiesce to be under Gadhafi’s rule,” Garcia-Navarro said in Benghazi, which rebels have described as the capital of “Free Libya.”

Abdel-Jalil, who resigned last week, has accused Gadhafi of ordering the 1988 bombing of the Pan Am flight that killed 270 people, mostly Americans, over Lockerbie, Scotland. The bomber, Abdel Baset al-Megrahi, was released from prison amid controversy and returned to Tripoli in August 2009 on the grounds that he was suffering from prostate cancer and would die soon.

A Libyan rebel fighter displays heavy caliber ammunition found at a military barrack in Benghazi on Sunday.

In an interview with The Sunday Times of London, Abdel-Jalil said the bomber threatened to provide evidence that Gadhafi masterminded the bombing and blackmailed the Libyan leader into securing his release. Gadhafi plowed $80,000 a month into a fund that paid for legal fees, lobbying and family visits to the prison, according to the Times report.

Secretary of State Hillary Clinton said Sunday that the U.S. is “reaching out” to Libyans trying to organize a post-Moammar Gadhafi government and is “ready and prepared to offer any type of assistance.”

“We are just at the beginning of what will follow Gadhafi,” Clinton told reporters en route to a U.N. meeting in Geneva.

Britain revoked diplomatic immunity for Gadhafi and members of his family, and Italy’s suspended a treaty with Libya that includes a nonaggression clause — removing a possible obstacle to Rome taking part in any peacekeeping operations in Libya or allowing the use of its military bases.

Italian Foreign Minister Franco Frattini said Sunday that “de facto suspension of this treaty, even without declaring it, is already a reality.” He said that when there is no government infrastructure, as is the case now in Libya, a treaty is suspended.

President Obama said Saturday for the first time that Gadhafi should step down.

“When a leader’s only means of staying in power is to use mass violence against his own people, he has lost the legitimacy to rule and needs to do what is right for his country by leaving now,” the White House said in a statement, summarizing a telephone conversation between Obama and German Chancellor Angela Merkel.

Clinton said the U.S. is revoking visas for senior Libyan officials and their immediate family members and that future applications from those blacklisted for travel to the United States would be rejected.

The U.S. tone shifted sharply on Friday after Americans in Libya were evacuated from the country by ferry and a chartered airplane.

Amid Evacuations, Some Left Stranded

The U.N. High Commissioner for Refugees reported Sunday that about 100,000 people, mostly foreign migrant workers, have fled over Libya’s borders into neighboring Tunisia and Egypt in the past week — creating a growing humanitarian crisis.

Egyptian people fleeing Libya race to get on buses at the Ras Jedir border post, near the Tunisian city of Ben Guerdane, on Sunday.

“We call upon the international community to respond quickly and generously to enable these governments to cope with this humanitarian emergency,” U.N. High Commissioner for Refugees Antonio Guterres said. The agency has begun to airlift relief supplies to Tunisia for the refugees at the border.

Western nationals have scrambled to get out of Libya as the level of chaos continues to rise. Germany’s foreign minister said the country’s air force has rescued 132 people during a secret military mission involving two German military planes that landed on an undisclosed runway in the Libyan desert.

In a daring rescue Saturday, British military planes entered Libyan air space to collect 150 people, Defense Secretary Liam Fox said. The C-130 Hercules planes, carrying Britons and other nationals, safely landed in Malta after picking up the civilians south of the eastern Libyan port of Benghazi, he said.

But NPR’s Garcia-Navarro reports that others in Benghazi haven’t been as fortunate.

“There are people who have been left behind, citizens of poorer countries who simply haven’t been able to get a boat out of here,” she said. “I’m talking about Bangladeshis, Somalis, and I’m also talking about sub-Saharan Africans.”

Tens of thousands of foreigners in Libya work at oil installations and construction companies, and many of them are sub-Saharan Africans. Some of them left stranded in Benghazi said they have been targets of violence because people believed that they were mercenaries sent in by Gadhafi to quell the unrest in the east.

“They tell terrifying stories of having to hide in the desert to avoid beatings and even killings,” Garcia-Navarro said.

Tunisia’s Prime Minister Quits

Tunisia’s embattled prime minister said Sunday that he will resign, bowing to a key demand of protesters after at least five people died in a groundswell of new unrest in this North African country.

Mohamed Ghannouchi, 69, was seen as a holdover from the old regime by Tunisians behind the so-called Jasmine Revolution that toppled autocratic President Zine El Abidine Ben Ali a month ago. Tunisia was the first Arab country to rise up in revolt against its rulers.

“I am not ready to be the man of repression, and I will never be,” Ghannouchi said in an appearance on state television. He did not say when his resignation would take effect.

He warned that unspecified forces appeared to be swelling to try to quash the move toward democracy, saying, “There are signs that a plot is being hatched to cause the revolution to fail.”

Deadly Clash Reported In Oman

Riot police in Oman clashed with pro-democracy protesters Sunday, killing at least one in a sharp escalation of tensions in the tightly ruled Persian Gulf nation.

Witnesses told the AP that police fired tear gas and rubber bullets at protesters in Sohar, about 120 miles northwest of the capital, Muscat. The deadly clash marked the second day of protests and suggests that a government shake-up by Oman’s ruler on Saturday failed to quell the tensions.

Protesters Reject Offer Of Talks In Bahrain

Thousands of people in Bahrain rallied peacefully in the capital city’s streets Sunday, rejecting the monarchy’s appeals for talks to end a nearly two-week uprising in the tiny island nation.

At least three processions paralyzed parts of the capital, Manama, and appeared to reflect a growing defiance of calls by Bahrain’s rulers to hold talks to ease the increasingly bitter showdown in the strategic island nation, home to the U.S. Navy’s 5th Fleet.

“No dialogue until the regime is gone,” marchers chanted as they moved through the highly protected zone of embassies and diplomatic compounds.

NPR’s Deborah Amos reported from Pearl Square, which has been that heart of the demonstrations, that people were headed to the office of the prime minister to demand his resignation.

Protesters shouted slogans against King Hamad bin Isa Al-Khalifa plastered fences with flyers denouncing security forces for attacks that have killed seven people since the first protests Feb. 14 inspired by revolts in Tunisia and Egypt.”

With reporting from NPR’s Lourdes Garcia-Navarro in Benghazi, Libya; Deborah Amos in Manama, Bahrain; Larry Miller in London; Tom Gjelten in Tunis, Tunisia; Sylvia Poggioli in Rome; and Linda Fasulo in New York. This story contains material from The Associated Press.

Check out our intensive investment banking, private equity, and sales & trading courses! The discount code Merger34299 will be activated until April 15, 2011. Questions? Feel free to e-mail thomas.r[at]leverageacademy.com with your inquiries or call our corporate line.


Greenstone Value Opportunity Fund, LP 2010 Annual Letter (Distressed, Deep Value Fund)

Friday, February 25th, 2011

After closing three strong years of performance (2008 – 2.5%, 2009 – 36.5%, 2010 – 15.6%), Greenstone shares its outlook for 2011, as the year of “dividend chasing.”  2010 was certainly a year of “credit chasing,” where all funds searched for yield in high yield bonds, leveraged loans, and REITs.  About 80% of the Greenstone portfolio is investing in traditional deep value securities, and 20% is invested in “special situations.”  The last bullet point in Greenstone’s themes is that historically, “economies with the highest growth produce the lowest stock returns by an immense margin (yes, you read that right). In fact, stocks in countries with the highest economic growth have earned an annual average return of 6%; those in the slowest-growing nations have gained an average of 12% annually (source: Credit Suisse Global Returns Yearbook). This could be especially true in 2011, where equity investors in emerging markets are fighting policymakers.”

Here are Greenstone’s selected themes for 2011:

• We still like equities, particularly in the U.S. While they currently seem short-term overbought, and a technical correction is possible, we still see the most value in this area, especially when we consider the alternatives.

• In reviewing our letters from early last year, we talked about 2010 being the “Year of the Yield Chaser” in the credit space. We cut the majority of our credit exposure in Q1 and Q2 of 2010 because of what we thought was limited further upside appreciation potential. We can see 2011 being the “Year of the Dividend Chaser”.
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• Offshore deepwater drilling is the last bastion for hydrocarbon discovery. We think a lot of “first time” emerging market demand characteristics and higher oil prices will lead to increased deepwater programs by the IOCs and NOCs. We have a handful of positions that give us exposure to this area.
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• We would consider shorting natural gas companies because of the supply/demand dynamics and high valuations. We could see a scenario where the contrarian call is to go long physical natural gas because 1) it’s unloved and 2) the historical ratio between gas and oil prices is creating the perception that gas might be a buy. However, even with increasing demand for natural gas expected in the U.S. this year, we still have a tremendous overabundance of supply. We’re keeping an eye on high multiple natural gas companies and MLP’s that derive a generous amount of “other income” from hedging programs that are set to roll off.
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• The M&A space is one that, for various reasons, we see doing well going forward. This primarily derives from the cash reserves on S&P 500 company balance sheets, which are at the highest level in ten years (currently over $1.2 trillion). This is almost 50% more than the $825 billion held in cash in September 2008. Information technology is the leading sector with cash reserves. With a near 0% interest rate environment, how long can companies hold so much cash? VC’s and Private Equity have not had a genuine chance to monetize their portfolios for 2-3 years now, and we believe they will search out the cash rich/public company exit option. We currently have 5+ names in the portfolio that we believe could benefit from such a trend.
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• This year could finally be the year where companies have the ability to pass through their increased input costs to consumers. This would result in inflation showing up in the U.S., despite what the CPI is saying.
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• Along with middle of the road valuations, allocation shifts could be a boom for the equity market in 2011. It is interesting to hear people like Byron Wein say that “Institutional portfolios have to have more of their money invested in places like China, India, and Latin America,” essentially saying that developing countries are generating a majority of the world’s growth, and institutional portfolios should have exposure to these markets. Mr. Wein recommends large conventional institutions substantially increase their allocations to hedge funds and emerging markets.
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• European and municipal debt issues will once again provide buying opportunities when the markets turns south on these worries. With municipal budgets due in early June, expect more movement in and around this time frame. We have taken advantage of market gyrations that these events have previously offered, and would look to do so again.
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• The dramatic equity rally from the lows at the end of June occurred almost entirely with net outflows from domestic equity funds, and net inflows into domestic fixed income funds. Late in the fourth quarter, this dynamic switched for the first time in a long while, with inflows into equities and outflows from bond funds. If this trend continues, which it appears that it might, even more fuel could be added to the recent stock market rally.
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• Even in light of the money flows just mentioned, we don’t expect John Q. Public will come charging back into the market any time soon. We are wary, however, about the potential shift of pensions and endowments (who manage John Q. Public’s money) into equity markets. Essentially, there are way too many underperforming endowments (relative to their liabilities), and they may be forced to chase returns in order to meet their obligations.
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• In contrast to the Byron Wein bullet point above, Elroy Dimson of the London Business School has decades of compelling data from 50+ countries to support the view that high economic growth in emerging markets doesn’t ensure high stock returns. His book, ‘Triumph of the Optimists: 101 Years of Global Investment Returns’, along with several other studies, have underlying evidence that economies with the highest growth produce the lowest stock returns by an immense margin (yes, you read that right). In fact, stocks in countries with the highest economic growth have earned an annual average return of 6%; those in the slowest-growing nations have gained an average of 12% annually (source: Credit Suisse Global Returns Yearbook). This could be especially true in 2011, where equity investors in emerging markets are fighting policymakers (who are trying to cool off overheated economies with monetary policy, etc), while developed markets are receiving tailwinds from policymakers (who are aggressively trying to lift the prices for risk assets). While many are clamoring for additional exposure to emerging markets, we believe the best risk/reward is to continue to find value in developed markets like the United States.

December 2010 (1) Letter from Distressed Debt Investing Blog

Crude Oil Makes $6, 7 Standard Deviation Move in Four Hours

Thursday, February 24th, 2011

After a steep run-up in crude oil (both Brent & WTI) crude fell from $103 to $96 dollars in only two hours, a 7 standard deviation move.  Over the past week, Colonel Qaddafi’s violence in Libya had driven up prices to as high as $120/barrel (brent) and $103/barrel (WTI), as oil consuming nations feared that Libya could take 1.6mm barrels per day or 2% of global supply offline.  Libyan oil is also sweet (low sulfuric content) versus other fuels, and is very valuable to Europe and Japan, which do not have the refining capabilities we have in the United States.  As a result, analysts fear that if this supply is kept online for a prolonged period of time, prices could rise and have significant inflationary impact.  Nomura (which has numerous problems of its own, i.e. a lack of business) was bold enough to predict $220/barrel crude, adding oil to the fire.  After that silly forecast, we at Leverage Academy have decided to never give the bank any vote of confidence again.  Fear mongering…maybe that will help your prop desk, eh?
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Soon after OPEC announced that it would increase output (Saudi) and the U.S. exclaimed that it would release strategic oil supplies, rumors arose that Qaddafi has been shot.  Within minutes, oil fell two dollars (then another $4) and the S&P500 was up 15 points.  Talk about volatility.  Tomorrow, I am getting ready to invest in the oil VIX, as the 6 months of low volatility the market has experienced are long over.

Top 50 Small Cap Stocks (Bank Target Price vs. Current Price) – 2.24.11

Thursday, February 24th, 2011

Ranking  |  Company (Ticker)  |  Potential Upside
1 Progress Software Corporation (NASDAQ:PRGS) 984.0%
2 Media General, Inc. (NYSE:MEG) 493.7%
3 Alexza Pharmaceuticals, Inc. (NASDAQ:ALXA) 347.8%
4 MELA Sciences, Inc. (NASDAQ:MELA) 317.5%
5 Cytokinetics, Inc. (NASDAQ:CYTK) 311.2%
6 Celldex Therapeutics, Inc. (NASDAQ:CLDX) 269.6%
7 Peregrine Pharmaceuticals (NASDAQ:PPHM) 241.5%
8 The Princeton Review, Inc (NASDAQ:REVU) 240.1%
9 Somaxon Pharmaceuticals, Inc. (NASDAQ:SOMX) 222.2%
10 AVANIR Pharmaceuticals (NASDAQ:AVNR) 215.8%
11 Neostem Inc. (AMEX:NBS) 214.7%
12 LECG Corporation (NASDAQ:XPRT) 209.2%
13 Enzo Biochem, Inc. (NYSE:ENZ) 205.0%
14 NeurogesX, Inc (NASDAQ:NGSX) 194.1%
15 Microvision, Inc. (NASDAQ:MVIS) 177.8%
16 Novavax, Inc. (NASDAQ:NVAX) 168.7%
17 Rodman & Renshaw Capital Group Inc. (NASDAQ:RODM) 166.7%
18 Vical Incorporated (NASDAQ:VICL) 164.6%
19 American Apparel Inc. (AMEX:APP) 163.2%
20 CytRx Corporation (NASDAQ:CYTR) 158.0%
21 PURE Bioscience (NASDAQ:PURE) 155.5%
22 Zogenix, Inc. (NASDAQ:ZGNX) 148.0%
23 Ligand Pharmaceuticals Inc. (NASDAQ:LGND) 148.0%
24 BioSante Pharmaceuticals, Inc. (NASDAQ:BPAX) 145.2%
25 Inhibitex, Inc. (NASDAQ:INHX) 135.0%
26 Broadwind Energy Inc. (NASDAQ:BWEN) 132.2%
27 MannKind Corporation (NASDAQ:MNKD) 127.8%
28 L&L Energy, Inc. (NASDAQ:LLEN) 127.0%
29 Inovio Pharmaceuticals, Inc. (AMEX:INO) 125.2%
30 Nymox Pharmaceutical Corporation (NASDAQ:NYMX) 120.0%
31 Dyax Corp. (NASDAQ:DYAX) 118.0%
32 Omeros Corporation (NASDAQ:OMER) 117.2%
33 Pharmacyclics, Inc. (NASDAQ:PCYC) 115.6%
34 Allos Therapeutics, Inc. (NASDAQ:ALTH) 115.2%
35 Keryx Biopharmaceuticals (NASDAQ:KERX) 112.3%
36 CKX Inc. (NASDAQ:CKXE) 110.0%
37 FuelCell Energy, Inc. (NASDAQ:FCEL) 108.3%
38 Array BioPharma Inc. (NASDAQ:ARRY) 106.6%
39 Value Line, Inc. (NASDAQ:VALU) 106.5%
40 Local.com Corp. (NASDAQ:LOCM) 105.4%
41 Geron Corporation (NASDAQ:GERN) 102.4%
42 Cenveo, Inc. (NYSE:CVO) 102.1%
43 Neuralstem, Inc. (AMEX:CUR) 102.0%
44 Rochester Medical Corporation (NASDAQ:ROCM) 100.1%
45 Chelsea Therapeutics International Ltd. (NASDAQ:CHTP) 99.1%
46 EXACT Sciences Corporation (NASDAQ:EXAS) 97.3%
47 Dynavax Technologies Corporation (NASDAQ:DVAX) 94.8%
48 Cornerstone Therapeutics, Inc. (NASDAQ:CRTX) 93.4%
49 Aoxing Pharmaceutical Company, Inc. (AMEX:AXN) 91.4%
50 Biodel Inc (NASDAQ:BIOD) 91.3%


Providence Superintendent Sends Dismissal Notices to All 1,926 Teachers; Providence is Officially Bankrupt

Thursday, February 24th, 2011

California, Michigan, and Illinois are not the only states with multiple towns heading for bankruptcy.  Rhode Island was recently added to the list, as the school district had a budget shortfall of $40 million dollars this year.   So, it is laying off all of its 1,926 teachers.  How did this happen?  Poor planning and a worsening local economy:

“Providence Rhode Island school district has a huge budget shortfall of $40 million. It does not know how many teachers it will need to layoff so instead, the city plans to fire all of them.

The school district plans to send out dismissal notices to every one of its 1,926 teachers, an unprecedented move that has union leaders up in arms.

In a letter sent to all teachers Tuesday, Supt. Tom Brady wrote that the Providence School Board on Thursday will vote on a resolution to dismiss every teacher, effective the last day of school.

In an e-mail sent to all teachers and School Department staff, Brady said, “We are forced to take this precautionary action by the March 1 deadline given the dire budget outline for the 2011-2012 school year in which we are projecting a near $40 million deficit for the district,” Brady wrote. “Since the full extent of the potential cuts to the school budget have yet to be determined, issuing a dismissal letter to all teachers was necessary to give the mayor, the School Board and the district maximum flexibility to consider every cost savings option, including reductions in staff.” State law requires that teachers be notified about potential changes to their employment status by March 1.

“To be clear about what this means,” Brady wrote, “this action gives the School Board the right to dismiss teachers as necessary, but not all teachers will actually be dismissed at the end of the school year.”

“This is beyond insane,” Providence Teachers Union President Steve Smith said Tuesday night. “Let’s create the most chaos and the highest level of anxiety in a district where teachers are already under unbelievable stress. Now I know how the United States State Department felt on Dec. 7 , 1941.” That was the day the Japanese government bombed Pearl Harbor.

Smith, who has forged a groundbreaking collaboration with Brady that has received national recognition, said he believes this move comes directly from Mayor Angel Taveras, not the School Department. In a conversation with Taveras earlier Tuesday, Smith said the mayor also hinted at school closings but didn’t elaborate.

Providence is facing a daunting budget crisis. The city had a $57-million deficit last year and expects a higher figure for the year ending June 30. In addition, the city, under then-Mayor David N. Cicilline, nearly depleted its reserves to cover day-to-day expenses. Taveras is currently awaiting completion of a report by an independent panel, which he commissioned to get a better handle on the city’s financial situation.

Commendable Action

Sending out notices to all teachers is exactly the correct approach. Until contracts are negotiated, no one knows the exact number.

In reality, no teachers have to be let go. All the teachers have to do is agree to wage and benefit concessions that will save every job. They will not do that, so the mayor has no choice.

Hopefully the mayor will play similar hardball with police and fire unions as well. However, the best approach is for the city to declare bankruptcy and get it done with. Then the city could set, not negotiate, haircuts on benefits and salaries.

The problem is Rhode Island does not have a statute authorizing towns to use federal bankruptcy court.

Central Falls

Central Falls is another Rhode Island bankrupt city.  The city’s financial problems are so profound that the only way to solve them is through a merger with Pawtucket or a regionalization of city services, the state-appointed receiver said in a report Thursday to the Carcieri administration.

“Central Falls, in my judgment, cannot remain a stand-alone community as it presently is, unless the state wants to subsidize this into the future,” said retired Superior Court judge Mark A. Pfeiffer, the man appointed by the state Department of Administration in July to run the city, with elected government officials in advisory roles, after those officials had earlier declared the city insolvent. …

At Central Falls high school, since the school year started Sept. 1, there has not been a single day when all of the 88 teachers at Central Falls High School have shown up for work.

On that first day, two teachers called in sick and a third took a personal day.

And there have been only five days — all in September — when administrators were able to replace all the missing teachers with substitutes.

Last week alone, there were at least 19 teachers out every day, 10 to 13 of whom called in sick each day.

The severity of the problem came to light last week when The Journal reported that more than half of the high school’s 840 students didn’t receive a grade in one or more classes for the first quarter.

The school’s leaders, Deputy Supt. Victor Capellan and co-principals Evelyn Cosme-Jones and Sonn Sam, said 453 students did not receive solid instruction in several classes, and therefore no grade could be given.

Since Nov. 12, there have been at least 20 teachers missing or absent at the high school each Friday. Starting Oct. 21, there were 14 to 19 teachers absent daily for seven straight days. And 453 of the 840 students at Central Falls High School didn’t receive enough instruction this fall to earn a grade in at least one class.

A former Rhode Island Supreme Court judge has been named as receiver for the tiny, financially distressed city of Central Falls, Rhode Island.  Robert Flanders will replace Mark Pfeiffer, who has served as receiver since the city was taken under state government control last July. The exact date of the transition has not yet been decided, a Chafee spokesman said.

Central Falls, a city of 1.5 square miles with a population of 19,000 and an annual budget of $16.8 million, has an unfunded liability for its pension plans and retiree health care benefits totaling $80 million, Pfeiffer said in a report last month.

He warned the city might need to turn to a rarely used Chapter 9 municipal bankruptcy if major fiscal reforms are not implemented. Notwithstanding this comment, it is not clear whether the city is eligible to file for Chapter 9 as Rhode Island is one of about 25 states that do not have a statute authorizing its towns to use federal bankruptcy court.

In California, which has such a statute, several entities have filed for bankruptcy in the past two decades, including the city of Vallejo in 2008 and Orange County in 1994.

The first step in fixing any problem is admitting what the problem is. This problem is plain to see whether anyone admits it or not. Providence and Central Fall are bankrupt.

Wages and pension benefits have been promised that cannot be met. The only way out for those cities is bankruptcy.

For a second time I make my plea for governor Lincoln D. Chaffee, an independent, to ask the legislature to allow bankruptcies. It is the only hope for Central Falls and more importantly, Providence.”

Mike “Mish” Shedlock

http://globaleconomicanalysis.blogspot.com

Detroit is Bankrupt, Allen Park, Michigan Sends Layoff Notices to Entire Fire Department

Thursday, February 24th, 2011


For those that saw the bankruptcy of Detroit and Hamtramck, Michigan as a isolated events, guess again.  Allen Park, Michigan has also filed for bankruptcy, sending lay off notices to its entire fire department.  Police officers may be forced to resign as well.  Many other towns in the greater Detroit area may go bankrupt by 2013.

“Allen Park, Michigan, a town of about 28,000, sent layoff notices to its entire fire department. This is a procedural move because the town is unsure how many it will need to lay off. However, the situation looks grim.

The city’s finance director said today that Allen Park must lay off 25 to 30 employees by June to avoid a $600,000 deficit for the current fiscal year.

Tim McCurley said in an interview that the city sent layoff notices to everyone in the fire department to comply with a clause in the firefighters’ union contract requiring a 30-day notice. He said some or all of the firefighters could lose their jobs, and that the police department faces layoffs too.

“It’s not easy to lay people off,” McCurley said. “No one wants to do that. It’s never easy, but we are trying to work through it.”

The finance director said the layoffs would only keep the city’s books balanced for this year and have nothing to do with any funding cuts in Gov. Rick Snyder’s proposed budget for fiscal 2012.

According to McCurley, the city faces a fiscal crunch because revenue in several areas has fallen short of projections. Collections from traffic tickets are $819,000 below what was budgeted, and ambulance billing collections are $200,000 under budget, he said.

McCurley said the city also had to refund $80,000 under order of the Michigan Tax Tribunal.

In other areas, spending has exceeded projections, including $130,000 in parks and recreation. McCurley said the city failed to budget for $150,000 for unused sick and vacation time for employees who have retired.

Overtime in the fire department is $150,000 over budget, even after firefighters agreed to limit overtime pay as part of concessions negotiated last year, McCurley said.

City Council members approved laying off the 25-person fire department Tuesday night.

Fire Chief Doug LaFond said he would be laid off as well.

The fire chief said he did not believe the entire police department was being threatened with layoff, but said the police force is about double the size of his department and could see significant cuts.

This is the second such maneuver we have seen recently where a town sent layoffs to an entire department.

Earlier in the year,  leaders of this Hamtramck met for more than seven hours on a Saturday not long ago, searching for something to cut from a budget that has already been cut, over and over.

They slashed money for boarding up abandoned houses — aside from circumstances like vagrants or obvious rats, said William J. Cooper, the city manager. They shrank money for trimming trees and cutting grass on hundreds of lots that have been left to the city.”

Here is a story that was published before its pending bankruptcy:

“We can make it until March 1 — maybe,” Mr. Cooper said of Hamtramck’s ability to pay its bills. Beyond that? The political leaders of this old working-class city almost surrounded by Detroit are pleading with the state to let them declare bankruptcy, a desperate move the state is not even willing to admit as an option under the current circumstances.

“The state is concerned that if they say yes to one, if that door is opened, they’ll have 30 more cities right behind us,” Mr. Cooper said, as flurries fell outside his City Hall window. “But anything else is just a stopgap. We’re going to continue to pursue bankruptcy until the door is shut, locked, barricaded, bolted.”

Bankruptcy, increasingly common among corporations and individuals, remains rare for municipalities. Local leaders who want to win elections find it unappealing and often have other choices for solving financial woes. Besides, states have a say in whether a municipality may pursue bankruptcy at all, and they have every reason to avoid such an outcome, not least of all for fear of a creating a ripple effect that could cripple the muni bond market and drive up the cost of borrowing.

Yet with anemic property tax revenues and forecasts of more dire financial times ahead, some experts and elected leaders fear that more localities may have to at least consider bankruptcy.

“There could be many cities in this position next year,” said Summer Hallwood Minnick, director of state affairs for the Michigan Municipal League, who added that in this state, cities had already struggled with billions less than expected in state revenue sharing. “All our communities have done is cut, cut, cut. They’re down to four-day workweeks and the elimination of parks, senior centers, all of that. So if there’s anything else that happens, they will be over the edge.”

This month, the authorities in Rhode Island said the city of Central Falls, RI could face bankruptcy if immediate, drastic changes — perhaps the city’s annexation into a neighboring municipality — failed. Some leaders in Harrisburg, Pa., which owes millions in debt payments tied to an incinerator project, say bankruptcy may eventually be the only choice.

Prichard, Ala., which stopped paying monthly checks to retired city workers when its pension fund ran out last year, is appealing a bankruptcy judge’s ruling that it did not qualify for Chapter 9 under Alabama law.

Only about 600 cities, counties, towns and special taxation districts have filed for bankruptcy (known as Chapter 9 for these sorts of entities) since 1937, said James E. Spiotto, a municipal bankruptcy expert at Chapman & Cutler, a law firm in Chicago, and fewer than 250 in the last three decades. In part, it can be hard — even impossible — to do: about half the states have statutes authorizing such filings, but some of them set limits or require elaborate approval processes. Other states have no specific provision allowing cities to pursue bankruptcy, and at least one, Georgia, bans such moves.

So far, the financial misery of the past two years has not caused a surge in bankruptcy applications; about 15 municipalities pursued bankruptcy in the last two years. But if revenue forecasts continue as predicted, 2011 might bring a rise in cities faced with such a fate.

Hamtramck (pronounced ham-TRAM-eck) did not anticipate its current circumstances. Officials in Detroit announced this year that they had for years overpaid Hamtramck in a revenue-sharing deal related to a General Motors plant that sits smack on the border of the two cities. The dispute is likely to be resolved, eventually, in court, but meanwhile, Detroit has stopped paying $2 million a year, and Hamtramck is watching a growing gap in its $18 million budget.

Here, the urgent search for services to cut has turned all attention to a realm that is also emerging at the center of budget debates in cities and states around the country: the costs of salaries, benefits and pensions of public workers.

Mr. Cooper, the city manager, says that everything else that could be cut already has been, while the city goes on spending 60 percent of its total general fund to pay for its police and firefighting forces — 75 current police officers and firefighters and about 240 former workers and spouses now on pensions. Mr. Cooper said that an entry-level police officer costs the city about $75,000 a year in salary and benefits, and yet repeated efforts to renegotiate contracts have failed.

“They kind of have the Cadillac plan,” Mr. Cooper said, “and we’d kind of like the Chevy.”

The police and firefighters question whether the city’s bankruptcy talk is really just a scare tactic for negotiation. Earlier discussions with city officials, they say, have urged them to accept pay cuts, layoffs, increased worker payments to pensions and even a suggestion that officers might pay for part of their own bulletproof vests — all this while the city has opted not to increase taxes.

“Nobody likes the police until you need them,” said Jon Bondra, the incoming president of Hamtramck’s police union.

(Found, Mr. Cooper says, posted on the wall of the firefighters’ barracks was his name — crossed out — on a list of former city managers and the word “Next?”)

Hamtramck, all 2.1 square miles of it, is a gritty city, a proud one and a place “that can do more with less than anywhere on earth,” in the view of Greg Kowalski, 60, who has lived here since childhood. Immigrants have arrived in waves over time, leaving layers like sedimentary rock — from Germany, Poland, Bosnia, Albania, Bangladesh, Yemen and more. Along Joseph Campau Street on a recent morning, a woman in a burqa strolled past Stan’s Grocery, which boasts about its Polish pierogi and kielbasa.

Hamtramck — once a community of more than 50,000 people but now fewer than half of that — grew up around an enormous auto factory that John and Horace Dodge built here a century ago. It remains a city woven together by union history, a fact that makes the turmoil filtering out from City Hall all the more pronounced.

“Look, if I was king of the world, I’d give them all a million dollars,” Charles Sercombe, the editor of The Hamtramck Review, the local newspaper, said of police officers and firefighters. “But this is the new economy, welcome to it.” He noted that his own job was now part time and that he received no health benefits.

Although Mr. Cooper says he believes bankruptcy, which could allow the city to “start over” with its labor contracts, is the only solution, the authorities in the State of Michigan have so far rejected the city’s request that the governor issue an executive order allowing Hamtramck to file for bankruptcy. An official from the state’s Treasury Department said that no city in Michigan had gone through bankruptcy, and that the governor had no such authority; the state has specific provisions for authorizing a bankruptcy filing, including intervention from an emergency financial manager and an emergency loan board. The current administration, which will be departing later this week, has urged Hamtramck to seek state assistance, including a possible emergency loan.

Rick Snyder, a Republican who is to be sworn in as governor of Michigan on Saturday, said the circumstances in Hamtramck concerned him, particularly for what it might bode elsewhere.

“We could have a large number of jurisdictions facing insolvency,” Mr. Snyder said. “Major reinvention” will be a necessity, he added, including taking a serious look at the structure of local governments and the possibility, in some places, of consolidation of services.

A new fear is bubbling up along the streets here: that Hamtramck, in so much fiscal distress, may ultimately disappear (either through bankruptcy or, simply, default), and wind up sharing services with or becoming a part of Detroit, a place many here describe as painfully rundown and unsafe.

“I’m not going to wait for two hours for a cop to show up,” said Shannon Lowell, the co-owner of a coffee shop. “We’ve trimmed every bit of fat. What else are we going to do? Borrow money from our dying grandmother?”

Moody’s Cuts Japanese Debt Outlook to Negative

Wednesday, February 23rd, 2011

Japanese Prime Minister, Naoto Kan, has been working to garner lawmakers’ support for measures to reduce national debt, including possible sales tax increases. Prime Minister Kan must work to persuade legislators to back his budget related bills, which include plans for financing the national budget with increased sales taxes. Yoshimasa Maruyama, a senior economist at Itochu Corporation in Tokyo commented on the national debt crisis, stating, “Japan can’t sustain its borrowing needs without real tax hikes. The more the government delays this, the more its debt burden’s going to swell. We’re running out of time.”  This political impasse will continue to strain efforts to control the country’s debt, which is currently predicted to surpass twice the size of the economy this year, and will reach up to 210 percent of gross domestic product by 2012 – compared to an estimated 101 percent for the United States.  This marks the biggest debt burden held by any country and the highest percent of GDP of all the countries tracked by the Organization for Economic Cooperation and Development.

Moody’s Investors Service, a credit rating agency which performs international financial research and risk analysis on commercial and government entities, lowered Japan’s debt rating outlook from stable to negative. Moody’s stated that they believed Japan’s economic and fiscal policies “may not prove strong enough to achieve the government’s deficit reduction target and contain the inexorable rise in debt.” Along with Moody’s Investors Service, Standard & Poor’s lowered its rating stating that the Japanese government did not have a  “coherent strategy” for addressing the current debt situation. The decrease in rating had lowered the nation’s rating to AA-, comparable to China.

Japan’s debt rating outlook was lowered to negative from stable by Moody’s Investors Service on concern that political gridlock will constrain efforts to tackle the biggest debt burden of any nation.

Economic and fiscal policies “may not prove strong enough to achieve the government’s deficit reduction target and contain the inexorable rise in debt,” Moody’s said in a statement today. The rating is Aa2, the company’s third highest. Standard & Poor’s cut its rating last month to fourth highest.

Today’s move adds pressure on Prime Minister Naoto Kan as his public approval rating slides and he struggles to secure lawmakers’ support for measures to reduce debt, including a possible sales-tax increase. Japanese shares accelerated declines after the announcement and amid tensions in the Middle East. The Nikkei 225 Stock Average slid 1.8 percent today.

“Politicians will take today’s announcement as a warning sign, but their biggest priority right now isn’t Japan’s fiscal health — it’s maintaining their seats in parliament,” said Yoshimasa Maruyama, a senior economist at Itochu Corp. in Tokyo. “Japan can’t sustain its borrowing needs without real tax hikes. The more the government delays this, the more its debt burden’s going to swell. We’re running out of time.”

The risks to Japan’s credit rating are “predominantly on the downside,” Thomas Byrne, senior vice president at Moody’s, said at a Tokyo news conference today.

Financing Budget

The dollar traded at 83.10 yen as of 5:38 p.m. in Tokyo compared with 83.14 in New York yesterday.

Finance Minister Yoshihiko Noda told reporters he won’t comment on decisions by private rating companies. Japan needs to maintain fiscal discipline and push ahead with efforts to make its finances healthy, Chief Cabinet Secretary Yukio Edano said at a regular news conference today.

Moody’s also lowered the credit-rating outlook for Japan’s three largest banks to negative from stable, saying “the government debt rating is a key input into the supported senior unsecured ratings for the Japanese banks.” The change relates to long-term debt at the banking units of Mitsubishi UFJ Financial Group Inc., Sumitomo Mitsui Financial Group Inc. and Mizuho Financial Group Inc.

The cut by Standard & Poor’s last month was the company’s first in nine years for Japan and reduced the nation’s rating to AA-, on a par with China.

Political Opposition

Kan’s task of securing legislation to finance the national budget for the year starting April 1 is more difficult because the opposition controls the upper house of parliament. Sixteen lawmakers in his party last week vowed to oppose a plan to increase the sales tax, further complicating his efforts to pass the budget-related bills.

The prime minister’s public approval rating fell to 20 percent in an Asahi newspaper survey taken Feb. 19-20, down 6 percentage points from January and the lowest since he took office in June, the paper reported yesterday.

There is “increasing uncertainty over the ability of the ruling and opposition parties to fashion an effective policy reform response to the debt and growth challenges,” Moody’s said in today’s statement.

Fitch Affirms Rating

Fitch Ratings affirmed its AA- rating for Japan, with a stable outlook, in an e-mailed statement today.

Japan’s gross domestic product contracted in the fourth quarter and the nation was overtaken last year by China as the second-biggest economy.

The nation faces “chronic deflationary pressures” and can’t grow its way out of debt, making fiscal adjustments essential for mending its finances, Moody’s said. At the same time, Japan’s large economy and deep financial markets can help the nation withstand shocks and the ratings company doesn’t see any funding crisis “in the near- to medium-term.”

A downgrade could be triggered by a failure to push through tax reform, a swing to a current-account deficit, or a drop in household savings cutting the domestic appetite for government debt, Moody’s indicated.

While Moody’s could keep Japan’s Aa2 rating, “the risks are predominantly on the downside unless there are very good results for the tax reform program and also good results for the government’s efforts to revitalize economic growth,” Byrne said.

Japan’s public debt is set to exceed twice the size of the economy this year and reach 210 percent of gross domestic product in 2012, the highest among countries tracked by the Organization for Economic Cooperation and Development, compared with an estimated 101 percent for the U.S.

The debt will probably swell to 997.7 trillion yen ($12 trillion) in the year starting April 1, Japan’s Finance Ministry said last month. When Standard & Poor’s lowered its rating, the company said the government lacks a “coherent strategy” for tackling the debt.

Aziz Premji Foundation Works to Revolutionize Indian Education

Wednesday, February 23rd, 2011

Aziz Premji, an Indian business tycoon, started his non-profit, Azim Premji Foundation, in 2001 with his own financial assets. The foundation’s main goal is to provide quality universal education in India. The initial focus has been on revolutionizing the public school education system. The new approach encourages students to be more creative when learning; writing stories and conducting independent projects, rather than mindless memorization and stressful year end exams that many children fail. Most students drop out before they reach tenth grade. India has a literacy rate of only 64%, quiet different from China, whose government focus on education has effectuated a literacy rate of 94%. Premji hopes to cause maximum impact by providing help and support to public schools around the country, giving his foundation $2 billion worth of shares in his company. The shares will be used to set up a university in Bangalore, and help spread the new program to 50 of India’s 626 school districts.

PANTNAGAR, India — The Nagla elementary school in this north Indian town looks like many other rundown government schools. Sweater-clad children sit on burlap sheets laid in rows on cold concrete floors. Lunch is prepared out back on a fire of burning twigs and branches.

But the classrooms of Nagla are a laboratory for an educational approach unusual for an Indian public school. Rather than being drilled and tested on reproducing passages from textbooks, students write their own stories. And they pursue independent projects — as when fifth-grade students recently interviewed organizers of religious festivals and then made written and oral presentations.

That might seem commonplace in American or European schools. But such activities are revolutionary in India, where public school students have long been drilled on memorizing facts and regurgitating them in stressful year-end exams that many children fail.

Nagla and 1,500 other schools in this Indian state, Uttarakhand, are part of a five-year-old project to improve Indian primary education that is being paid for by one of the country’s richest men, Azim H. Premji, chairman of the information technology giant Wipro. Education experts at his Azim Premji Foundation are helping to train new teachers and guide current teachers in overhauling the way students are taught and tested at government schools.

For Mr. Premji, 65, there can be no higher priority if India is to fulfill its potential as an emerging economic giant. Because the Indian population is so youthful — nearly 500 million people, or 45 percent of the country’s total, are 19 or younger — improving the education system is one of the country’s most pressing challenges.

“The bright students rise to the top, which they do anywhere in any system,” Mr. Premji said over lunch at Wipro’s headquarters in Bangalore, 1,300 miles south of Uttarakhand. “The people who are underprivileged are not articulate, less self-confident, they slip further. They slip much further. You compound a problem of people who are handicapped socially.”

Outside of India, many may consider the country a wellspring of highly educated professionals, thanks to the many doctors and engineers who have moved to the West. And the legions of bright, English-speaking call-center employees may seem to represent, to many Western consumers, the cheerful voice of modern India.

But within India, there is widespread recognition that the country has not invested enough in education, especially at the primary and secondary levels.

In the last five years, government spending on education has risen sharply — to $83 billion last year, up from less than half that level before. Schools now offer free lunches, which has helped raise enrollments to more than 90 percent of children.

But most Indian schools still perform poorly. Barely half of fifth-grade students can read simple texts in their language of study, according to a survey of 13,000 rural schools by Pratham, a nonprofit education group. And only about one-third of fifth graders can perform simple division problems in arithmetic. Most students drop out before they reach the 10th grade.

Those statistics stand in stark contrast to China, where a government focus on education has achieved a literacy rate of 94 percent of the population, compared with 64 percent in India.

Mr. Premji said he hoped his foundation would eventually make a difference for tens of millions of children by focusing on critical educational areas like exams, curriculum and teacher training. He said he wanted to reach many more children than he could by opening private schools — the approach taken by many other wealthy Indians.

Mr. Premji, whose total wealth Forbes magazine has put at $18 billion, recently gave the foundation $2 billion worth of shares in his company. And he said that he expected to give more in the future.

Those newly donated shares are being used to start an education-focused university in Bangalore and to expand and spread programs like the one here in Uttarakhand and a handful of other places to reach 50 of India’s 626 school districts.

The effort’s size and scope is unprecedented for a private initiative in India, philanthropy experts say. Even though India’s recent rapid growth has helped dozens of tycoons acquire billions of dollars in wealth, few have pledged such a large sum to a social cause.

“This has never been attempted before, either by a foundation or a for-profit group,” said Jayant Sinha, who heads the Indian office of Omidyar Network, the philanthropic investment firm set up by the eBay founder Pierre Omidyar.

Although the results in Uttarakhand are promising, they also suggest that progress will be slow. Average test scores in one of the two districts where the foundation operates climbed to 54 percent in 2008, up from 37.4 percent two years earlier. (A passing mark is 33 percent or higher.) Still, only 20 of the 1,500 schools that the foundation works with in Uttarakhand have managed to reach a basic standard of learning as determined by competence tests, enrollment and attendance. Nagla is not one of the 20.

“We are working with the kids who were neglected before,” said D. N. Bhatt, a district education coordinator for the Uttarakhand state government. “You won’t see the impact right away.”

The Premji Foundation helps schools in states where the government has invited its participation — a choice that some educational experts criticize because it seems to ignore fast-growing private schools that teach about a quarter of the country’s students, including many of India’s poor.

Narayana Murthy, a friend of Mr. Premji and chairman of Infosys, a company that competes with Wipro, said he admired the Premji Foundation’s work but worried it would be undermined by the way India administers its schools.

“While I salute Azim for what he is doing,” Mr. Murthy said, “in order to reap the dividends of that munificence and good work, we have to improve our governance.”

Mr. Premji says his foundation would be willing to work with private schools. But he argues that government schools need help more because they are often the last or only resort for India’s poorest and least educated families.

Mr. Premji, whose bright white hair distinguishes him in a crowd, comes from a relatively privileged background. He studied at a Jesuit school, St. Mary’s, in Mumbai and earned an electrical engineering degree at Stanford.

At 21, when his father died, Mr. Premji took over his family’s cooking oil business, then known as Western Indian Vegetable Product. He steered the company into information technology and Wipro — whose services include writing software and managing computer systems — now employs more than 100,000 people. He remains Wipro’s largest shareholder.

While the foundation has been welcomed by government officials in many places, the schools in Uttarakhand provide a glimpse of the challenges it faces.

After visitors left a classroom at Nagla school, an instructor began leading more than 50 fifth-grade students in a purely rote English lesson, instructing the students to repeat simple phrases: Good morning. Good afternoon. Good evening. Good night. The children loudly chanted them back in unison.

Another teacher later explained that the instructor was one of two “community teachers” — local women hired by a shopkeeper to help the understaffed school. Although under government rules Nagla should have nine trained teachers for its 340 students, it has only four.

Underfunding is pervasive in the district. But so are glimmers of the educational benefits that might come through efforts like the Premji Foundation’s.

Surjeet Chakrovarty, now a 15-year-old secondary school student, is a graduate of Nagla and still visits his old school regularly. The son of a widower who is a sweeper at a local university, Surjeet aspires to become a poet and songwriter — something he attributes to the encouragement of his former teachers at Nagla.

“My teachers here gave me so much motivation to write,” he said.

One of those Nagla teachers, Pradeep Pandey, shared credit with the Premji Foundation, and its assistance in developing new written and oral tests.

“Before, we had a clear idea of the answers and the child had to repeat exactly what we had in mind,” Mr. Pandey said. “We can’t keep doing what we did in the past, and pass them without letting them learn anything.”

Zynga Valued Over $7 Billion, Will The Company Go Public?

Wednesday, February 16th, 2011

Zynga Inc., the social gaming company, has already raised $360 million from venture capital and investment firms, not including an undisclosed amount from Google. The company recently began raising another $250 million in a new round of funding in hopes to value the company between $7 billion and $9 billion. By publishing titles like FarmVille and CityVille, which have 96 million and 51 millions active players, respectively, the company has made $850 million in revenue, and $400 million in profit. Hiring Dave Wehner from Allen & Co. as their chief financial officer last year has increased interest from potential investors who believe the company will go public soon. Many investors wish to get a piece of the company through privately negotiated deals with current or former employes, or by investing in limited liability companies. Larry Albukerk, managing director of the San Francisco based investment firm, EB Exchange Funds, says he has gotten many requests from wealthy clients hoping to invest in Zynga even before it goes public.

Social-gaming company Zynga Inc. is holding discussions with potential investors about raising around $250 million in new funding in a deal that could value the three-year-old start-up at between $7 billion and $9 billion, according to people familiar with the matter.

In April Zynga filed papers authorizing the issuance of new stock that valued the company at about $4 billion.

The discussions are the latest sign of the investor frenzy around a small class of large, fast-growing Web start-ups focused on the consumer market that have yet to go public. Facebook Inc., Twitter Inc. and the group-buying service Groupon Inc. have all recently raised large rounds of funding at sky-high valuations, with some recent discussions concerning Twitter valuing the micro-blogging service at $8 billion to $10 billion. The business social network Linked In Corp. and Internet radio service Pandora Media Inc. recently filed to go public.

Any decision to raise a fresh round of funding by San Francisco-based Zynga, which sells virtual goods in Facebook games, could be weeks away and may not happen, said the people familiar with the matter. Although valuations of the most successful Internet start-ups are getting pricey—topped by Facebook’s eye-popping $50 billion value in its latest round of funding—part of Zynga’s appeal is that it has tapped into a lucrative method of making money online.

The company makes an addictive array of games like FarmVille and CityVille in which people spend real money to buy virtual goods, such as seeds to produce crops in FarmVille and virtual cash to construct buildings in CityVille. Using the social connections people maintain on Facebook to spread virally, City Ville and Farmville now have 96 million and 51 million active monthly players, respectively, according to AppData.com, which tracks Facebook statistics.

The huge audience for its games—Zynga has a total of 275 million active monthly users across all its titles—helped Zynga generate about $400 million in profit last year on approximately $850 million in revenue, said another person familiar with its finances. A spokeswoman for Zynga declined to comment.

The company has no immediate need for financing because it is profitable and has raised a sizable war chest already, several people familiar with the matter said. Zynga has said it has raised $360 million from a range of venture-capital and other investment firms. That figure doesn’t include an undisclosed amount from search-giant Google Inc.

Zynga is in conversations with at least one major bank about raising financing, as well as mutual funds and others, according to people familiar with the matter.

According to a person familiar with the company, Zynga has been barraged with interest from potential investors, who view the company as a likely candidate to go public within the next one to two years.

Zynga last year hired investment banker Dave Wehner from Allen & Co. as its chief financial officer in a move that was seen as readying itself for an eventual initial public offering.

One financing method Zynga will likely avoid is a “special-purpose vehicle” akin to the one Goldman Sachs Group Inc. created to allow wealthy foreign clients to invest in Facebook during the social-networking company’s recent round of financing. Goldman teamed up with Russian Internet investment firm Digital Sky Technologies to invest $500 million in Facebook in January and raised an additional $1 billion through the special-purpose vehicle.

But Goldman decided against letting U.S. clients invest in Facebook because it feared it could run afoul of certain regulations relating to private placements of stock. The episode has soured people on structuring such deals, and Zynga isn’t seriously looking at that option, according to a person familiar with the matter.

Zynga could use any new financing to help fuel its torrid acquisition pace. The company has averaged one acquisition a month for the past nine months, most of them involving smaller game developers. The company hired more than 800 people last year and now has roughly 1,500 employees.

The heat around Zynga is creating a frenzy among investors who are trying to get a piece of the company in the private-company share market, otherwise known as the secondary market. Some investors can purchase stock of private companies by investing in limited liability companies created to purchase such shares, or through deals brokered with current or former employees.

Larry Albukerk, the managing director of San Francisco-based investment firm EB Exchange Funds, has already brokered tens of millions of dollars of such deals for shares of hot private Internet start-ups such as Facebook, LinkedIn and Twitter. He finds employees who want to sell and then connects them to interested buyers, helping to negotiate the deal at an agreed-upon price.

Mr. Albukerk said he has gotten calls about Zynga lately from more than 100 wealth managers and professional investors. After Facebook, Mr. Albukerk said, Zynga is the hottest company. “Guys call me up and tell me just go out and get it,” he said. “The number of requests and activity is crazy compared to last year.”