Investments

Readers of this blog will have noted my fascination with Warren Buffett and not least so lately in such dire times of market collapses and faltering economies.

I came across this brilliant article  on Fool.com (The Motley Fool  as they are known remains one of my favourite financial sites and blogs), written by Anand Chokkavelu who intelligently questions Mr Buffett’s decisions and investment sanity of late.

Here follows some of the highlights from the same article  which puts Buffett’s investment strategies and future in perspective :

Anand starts by asking provocative questions about Buffett’s acumen of late :

Has Warren Buffett just been lucky all these years? 

It feels like sacrilege, but in light of recent events, I have to ask the question. After all …

• His company, Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B), has reported $10 billion in writedowns on its equity put options — i.e., derivatives.
• His hefty positions in financial stocks, including Wells Fargo (NYSE: WFC), US Bancorp, and American Express (NYSE: AXP), have been absolutely throttled in this banking crisis.
• He loaded up on shares of oil titan ConocoPhillips at the height of the oil bubble last summer — a mistake for which he expresses regret in his letter to shareholders.

I’m not the only one questioning the Oracle of Omaha’s investing prowess. One of the ratings agencies took away Berkshire’s pristine AAA debt rating. The price of Berkshire credit-default swaps (which are basically insurance against Berkshire defaulting) is at levels more usually found with companies rated as junk. And finally, shares of Buffett’s holding company are trading at half of last fall’s prices.

Anand then goes on to ask the vital question of whether Buffett has just been extremely lucky through major risk-taking over the decades, or whether in fact he is sticking by his famous strategy that has made him one of the world’s most renowned investors and accumulators of capital :

Buffett’s entrance into derivatives, which he famously described as “financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal,” might lead you to believe he’s both hypocritical and risk-happy.

After all, since he made that claim in 2002, Berkshire has participated in four types of derivatives contracts, including taking $4.9 billion to write $37.1 billion worth of equity put options.

Still, believe it or not, Buffett’s not being hypocritical, he’s not being overly risky, and he hasn’t made terrible deals.

Unlike many investors (and investment banks), he uses derivatives very carefully. In the equity puts, for example, Buffett has bet that stock markets in the U.S., Europe, and Japan won’t utterly collapse over the long term. He gets the $4.9 billion up front, and he has to pay up only if the markets are lower when the various contracts expire between 2019 and 2028. But under mark-to-market accounting, he has to record those bets as losses because of the short-term plunge of the worldwide stock markets.

Buffett prices and monitors each contract himself. There are certainly risks involved, but those risks aren’t as dramatic as they seem. In the case of the $37.1 billion in equity put exposure, world markets would have to fall to zero for Berkshire to pay out the full amount — and the markets have between a decade and two decades to make up the $10 billion in paper losses. In the meantime, Buffett gets to invest and grow the $4.9 billion in premiums.

OK so Anand concludes he is not lucky or especially risk prone considering market facts and history etc - but he then moves on to question his recorded bad investment decisions of 2008 which cost Berkshire Hathaway  billions :

The carnage so far this year has likely continued that drop in book value, but remember that investing in the stock of public companies is only one facet of Berkshire’s operations. It also includes the core insurance business (including GEICO and its reinsurance businesses), its other subsidiaries like its utilities and Dairy Queen, and Buffett’s aforementioned derivatives contracts.

Many of Buffett’s stock positions are much worse off than they were just months ago, but it’s worth noting that Berkshire’s own stock-price drop has more than priced in these missteps. Furthermore, Buffett has been doubted often in his nearly half-century at the helm of Berkshire Hathaway — you’ll recall the assertions during the tech bubble that Buffett’s investing style was obsolete — only to be proven right time and time again.

Even here Anand is Ok with what has happened and remains unconcerned about Buffett’s empire’s future on those grounds, however, he is concerned about two factors in Buffett’s portfolio - the first of these being his diversion into the reinsurance business :

The first is Berkshire’s reinsurance business. Quite simply, Buffett and his trusted associates are in the business of pricing catastrophic events, which feature “very large transactions, incredible speed of execution, and a willingness to quote on policies that leave others scratching their heads.”

Yes, Berkshire pools this risk and generates very attractive rates for it, but a few mistakes could blow the whole operation. Just like GE Capital has crippled General Electric (NYSE: GE), adverse events in Berkshire’s insurance operations could take down the whole conglomerate.

And the second hitting home even closer to many of us, namely Warren Buffett’s own mortality and undisputed role as head and brains of Berkshire Hathaway :

The second problem is that, contrary to the hype, Buffett is mortal. Even more so than Steve Jobs at Apple (Nasdaq: AAPL), Buffett is Berkshire Hathaway. It may not seem like it at these prices, but there is a considerable premium baked into Berkshire stock because he’s the one running it.

One of Anand’s conclusions to his article is not only that Buffett most likely remains the guru and oracle he has earned himself a name as, give and take, but that we as investors, private orinstitutional, must at all times question everything and everyone around us before we make major decisions investment wise, regardless of the status of the entity we are investing with (The Madoff scandal is another good example of that !) :

Buffett remains the greatest allocator of capital on this planet, and he’s getting some great opportunities thrown his way. Down-on-their-luck companies from Goldman Sachs (NYSE: GS) to GE to Harley-Davidson have sought his financial help and reputation, at very, very favorable terms.

There is plenty of risk in Berkshire stock, but at current prices, I believe that Berkshire Hathaway is worth the risk. In fact, the recent price drops convinced me to put my money where my mouth is — I recently bought Berkshire Hathaway stock.

Read the full article here - it is worth it.

Equity Investment, Investment Company, Investment Fund, Investment Management Financial crisis, investment crisis, risk-taking, Warren Buffet

The long-awted letter to his Berkshire Hathaway Shareholders was released yesterday by billionaire Warren Buffet and he admits to having had a very bad 2008 with record losses and share value drops.

He is also convinced that 2009 is out the window given the disastrous state of the US and global economies but beyond that he is hesitant to predict the future - at least the immediate future.

Let us take a look at what his investor letter contained and where Mr Buffet sees it all heading.

MarketWatch quotes  Buffet from his letter with regards to future predictions :

We’re certain, for example, that the economy will be in shambles throughout 2009 — and, for that matter, probably well beyond — but that conclusion does not tell us whether the stock market will rise or fall,” Buffett wrote.

The article goes on to quote a brutally honest Buffett on his 2008 mistakes and bad investment choices and timings :

Buffett, known as the “Oracle of Omaha,” admitted to mistakes last year. “During 2008 I did some dumb things in investments,” he said. One such error, he said, was the purchase of a large amount of Conoco Phillips Inc. stock when oil and gas prices were nearing peak levels.

“I in no way anticipated the dramatic fall in energy prices that occurred in the last half of the year,” he said. “I still believe the odds are good that oil sells far higher in the future than the current $40-to-$50 price. But so far I have been dead wrong. Even if prices should rise, moreover, the terrible timing of my purchase has cost Berkshire several billion dollars.”

Buffett also said his acquisition of shares in two Irish banks have turned out badly — with losses of more than 89%.

On the positive side, the investor is pleased with buys totaling $14.5 million in fixed-income securities issued by General Electric Co.  and William Wrigley Co. “We very much like these commitments, which carry high current yields that, in themselves, make the investments more than satisfactory. But in each of these three purchases, we also acquired a substantial equity participation as a bonus.”

Equity Investment, Investment Company, Investment Fund, Investment Management, US Investments Berkshire Hathaway, ConocoPhillips, Hyper inflation, Investor news, US Economy, Warren Buffet

Traditionally economists and policy makers as well as the man on the street worry about inflation and not so much deflation (which to many just mean cheaper prices) but lately the talk has swung around to deflation being the bigger of the two evils as the world economies shrink and people lose their jobs as a result.

This post looks into which of these two monsters are likely to prevail in the short-medium and long term and also what the experts have to say about each as governments right now ready themselves to fight the deflation monster.

A Reuters article  has this quote on the issue :

“Deflation is as dangerous as inflation, and we will take every step to counteract it,” Richard Fisher, president of the Federal Reserve Bank of Dallas, told reporters after a speech at Bryant University in Smithfield, Rhode Island.

So while deflation seems to be the present evil Mr Fisher is very aware of the fact that soon he could be figthing inflation again :

As companies across the country cut jobs and consumers spend less, many economists are worried about the potential for a sustained decline in prices.

 

The Dallas Fed calculates price pressures based on personal consumption expenditures, or PCE, and in the bank’s December report, the bank found that more than 50 percent of the market basket was going down in price, Fisher said.

 

But Fisher cautioned it was far from certain whether this decline will continue in coming months.

 

“There are price pressures on the downside, but we will make sure that deflation does not take hold,” Fisher said.

 

At the same time, Fisher said U.S. central bankers are keeping a watchful eye on inflation. Some economists have voiced concern about the potential for inflation down the road as the Fed has cut interest rates to near zero and pumped hundreds of billions of dollars into the financial system to unfreeze key credit markets.

Mark Crosby of TheAge.com.au has these comments to make on the subject :

Two questions that arise are what is the purpose of an inflation target, and why adopt an inflation target now, when there is no sign of inflation?

Inflation targeting started in the late 1970s and 1980s, when the Bundesbank in Germany, and the Swiss central bank used targets for inflation to guide their decisions about growth in the money supply.

At this time, many central banks were targeting the money supply, with the view that reducing money growth would reduce inflation from then high levels. But the Bundesbank was much more successful than other central banks in keeping inflation low, and tended to follow the strategy of using an inflation rate of about 2 per cent to guide its money growth targets.

And the article continues to explain :

Since being given inflation targets, and the independence to pursue these targets, central banks have been very successful in maintaining low inflation.

The main purpose of explicit targets is to anchor expectations of businesses and unions: if businesses believe that inflation will stay at around 2 per cent they will tend to increase prices by around that amount. Similarly unions will know that to increase wages significantly above 2 per cent plus a margin for productivity will put jobs at risk. These expectations of businesses and unions will then help sustain the low inflation target.

The reason for targeting inflation above zero is that there is a feeling among economists that a small amount of inflation “greases the wheels” of the economy. Furthermore, deflation can be very damaging to an economy, and so it is best to keep clear of a zero inflation rate or lower.

John Lonski, who is chief economist of of Moody’s Investors Service, is also more worried about the deflationary economy and explains why :

I’m still more worried about price deflation looking ahead than I am about inflation. We still have a ways to go yet as far as forming a top for the unemployment rate. And I wouldn’t be surprised if to an unprecedented extent, many employers both in the public and private sector decided to freeze wages, if not cut wages.

Senior Economist Milton Ezrati  sees the issue somewhat differently :

Well for the short term, for the intermediate term the next six or 12 or even 18 months, I don’t think we have to fear very much either from inflation or deflation. For the longer term, however, inflation is the threat largely because of the tremendous liquidity the Federal Reserve has poured on our markets.

Andy Serwer provides this brilliant overview of the inflation vs deflation issue at hand at The Captain’s Blog from CNN Money :

High inflation is bad of course, but a little bit of inflation is a good thing and actually optimal. A moderate rate of inflation seems to make it easier for businesses to raise prices (which is good for growth) and allows employees to ask for raises. A little bit of inflation also encourages folks to invest their money instead of leaving it in their mattress. On the other hand, deflation, or falling prices, is a bad thing since it causes people to freeze up and delay purchases until prices are lower. This can induce a death spiral of deflation and economic contraction, which is what happened in Japan. Right now economists are much more concerned about deflation than inflation. No question, we are pulling in our spending horn right now, which seems to have eradicated inflation, now the question is, will prices fall?

And he has these words when it comes to what we can expect on price developments in 2009 :

So if you were a betting person, would you wager that prices overall will fall this year? Well, the wild card is energy, but other than that, it’s tough to see prices going up. Just how badly this hurts the economy is a huge unknown. Hey, we made it through 1955, we will most likely make it through 2009.

Christopher Grey of TheStreet.com explains why the US Government is dead scared about the looming deflation :

In just a few months, the Fed has effectively printed trillions of dollars and the Treasury has spent more than a trillion dollars trying to increase the supply of money. That should demonstrate their seriousness about preventing deflation.

According to Grey there is also an even bigger agenda as to why the US Government has a strong incentive to create a strong inflationary economy and hence fight deflation tooth and nail :

Second, it is in the national interest of the U.S. and the personal interest of most American consumers to create inflation. The U.S. government owes trillions of dollars to foreigners. It has a strong financial incentive to destroy the value of the dollar in order to repay that foreign debt with cheaper currency. Similarly, most Americans are deeply in debt and would benefit from inflation that would effectively reduce that debt burden on their households.

Grey finishes off his insight into the inflation vs. deflation issue with some sound reasoning why the consumer should look at inflation as a positive thing and also what can be done now to ensure financial success assuming of course that Grey is right and that inflation will soon prevail :

Another way to benefit from future inflation is to take advantage of low-interest rates and lock in long-term financing to buy income property such as apartments in supply-constrained markets that will benefit from future inflation through increased rental rates and higher cash flow to the owner.

Do not believe the hype about deflation. It could be dangerous to your financial health. Right now is the best time to start hedging against future inflation because most people don’t believe it’s going to happen. Now is the classic time to buy a straw hat in winter, because people are just giving them away.

So let battle commence between these two giants ! It does, however, seem that major economies such as the US, Japan and China have more to lose by allowing deflation to take over from the traditional inflationary economies and hence we should expect strong efforts by Obama and Co to fight deflation on all fronts which hence is likely to be major theme for 2009 and probably also 2010.

How it all works, US Investments China, consumer spending, deflation, inflation, Japan, US Economy

Amidst Doom & Gloom and negative results and share price meltdowns, one company has shown the way with impressive 2008 profits and growth despite its industry suffering heavily as consumer demand dropped.

Danish toy maker LEGO is that company and they have just announced their 2008 results with an impressive 32% increase in year-on-year profits and 19% increase in its revenue from 2007.

How did that come about ?

BusinessWeek reports :

Lego said it saw strong sales in its City, Star Wars and Indiana Jones product lines, even though the global toy market declined because of the economic downturn.

The Telegraph elaborates on how this impressive result has been brought about by pointing to LEGO’s venture into well-known film brands and blockbuster movies :

Lego, which estimates that children spend 5 billion hours a year playing with its multicolored bricks, has bought licenses from movie makers including Lucasfilm and Walt Disney to fend off competition from electronic toys and computer games.

The article also highlights that some of the success in 2008 was derived, in LEGO’s own words, from the company having been through a major crisis some years before which had now put the company in a good position to weather the storm :

“We’re dodging much of the effect of the financial crisis, probably because we went through our own crisis a few years ago and now have a strong, streamlined company,” Chief Executive Officer Joergen Vig Knudstorp said.

The toymaker cut costs and more than 1,000 jobs after reporting its two biggest net losses in 2003 and 2004.

Lego’s share of the global toy market rose to a record 3.6pc last year, from 2.9pc in 2007, Mr Knudstorp said.

Global market share of the toy market rose to a record 3,6% from previous 2,9% and the company is also moderately optimistic when it comes to 2009 :

The company expects to increase its share further this year as revenue will grow between 3pc and 7pc amid a “moderate decline in the overall market, he said.

Lego’s royalty payments to license holders rose 32pc to 639 million kroner. The company also produces “Batman” and “Harry Potter” building block sets.

“We’ve had much success with ‘Indiana Jones,’ but now we’re looking for new license products,” Mr Knudstorp said. Lego will introduce its first building block sets based on a Disney Pixar animation movie in 2010, after signing a license agreement with Burbank, California-based Disney this month.

Profit next year will be “satisfactory compared with 2008’s level, when considering the global situation,” Mr Knudstorp said.

The Danish company remains privately owned and its main shareholder, Mr Kjeld Kirk Kristiansen, is according to Forbes.com  now the 145th- richest man in the world with a net worth about $6.5 billion.

Not bad for a company that produces plastic  bricks and who estimates that that children spend 5 billion hours a year playing with its multicolored bricks.

How it all works, Investment News Forbes.com, Kjeld Kirk Kristiansen, LEGO, Toy Industry

Whilst real estate sectors and markets have collapsed in most markets world-wide in the past 6-9 months, it seemed according to analysts and experts that Cyprus was holding its own despite the global crisis.

Now with the weak and weakening British Pound and a collapse of the traditional mortgage market it seems that Cyprus too has been hit hard by the crisis but some feel that the many appeals of this Mediterranean island will make it less vulnerable to the crisis.

Let us see what is being said and written about Cyprus lately.

Assetz, a reputed UK real estate news provider and portal, quotes the readership of investor magazine Jet-to-Let for having Cyprus a preferred place to invest for 2009 :

For some of those buying in various places with lots of sunshine, golf may be a particular attraction, both for investors keen to tap into this part of the tourist sector and those who enjoy playing themselves, but in the case of Cyprusthe issue of water supply had been raised as a potential stumbling block to further development, until the recent vote by the government to allow 14 new courses to be built. As government spokesman Stefanos Stefanou commented: “It was taken for the purpose of strengthening the tourism product in Cyprus and boosting economic activity.” The courses will have to provide their own desalinated water, he noted.

While these plans have attracted much media attention of late, it would be an exaggeration to suggest that Cyprus is about to shoot to the top of the leader board among some overseas property investors because of these developments. The reason for this is simple - it is already there.

The readership of investor magazine Jet-to-Let revealed this in the annual survey of buyer intentions for 2009, which found that the island remains the single most popular place to invest, just as it was last year, with France still in second place and the US up to third, a position previously occupied by Spain.

Assetz conclude in their article that despite the apparent lack of golf courses on the island, Cyprus seems to have a very promising future in terms of its real estate investment sector :

So Cyprus, golf courses or not, is already a top performer. While whacking a white ball around a large open space may appeal, so too will sunshine, beaches, nightlife, history and culture, food and even the chance to go skiing on the island’s high mountains. For all the recent talk of 14 new golf courses, it may be suggested there are already many more than 14 reasons to visit - and invest on - this popular Mediterranean island.

Renowned property blog, International Property Investments, disagrees and reports in their latest article on the Cyprus market that the property market has now collapsed :

The Cyprus property boom is over. Whatever the internet investment websites and realtors claim, the Cypriot property market has irreversibly collapsed. The worldwide economic crisis has completely deflated the speculative bubble, and many property owners are desperately trying to sell properties on an already flooded market. Sadly, they face a long wait or must sell at an obscenely low cost, losing around 30%.

The turmoil in the British economy has completely finished off the Cyprus property boom. The weak pound means that the British are not buying and are, in fact, desperately trying to liquidate their assets and export the money back to the UK. In addition, the collapsing UK housing market has ensured that the days of second mortgages for holiday homes are a distant memory. With no British buyers, there is no market. Whilst many Cypriots, especially the construction industry, made money from the boom, backing a single horse is unwise if it falls at the final hurdle. Constructors are laying off workers on an unprecedented scale, and the whole sector is suffering an enforced streamlining process.

Banks, constructors, realtors and the government all shared the blinkered belief that the property values for foreign buyers would continue to rise, unabated. They made no attempt to prepare for the inevitable, and the whole economy is now suffering. Just as with British and American companies, they lauded the free-market when times were good, but now demand governmental interference when they begin to suffer. Deal with it, Guys - you backed the wrong horse and you lost. Just as in the rest of the world, prices will sink to a more realistic ‘bricks-and-mortar’ level.

On the positive side, the article admits that for those with money and if one is on the look-out for a nice luxury home in the Mediterrenean, now is not a bad time to be buying in Cyprus :

Of course, when there are losers, there are also winners. Whilst the days of making a quick buck have gone forever, for those wanting to buy a beautiful holiday home, now is the time to buy from a strong bargaining position. Developers are desperate to sell, you can knock at least 30% off the asking price. If you drive a hard bargain, and offer a quick deal and quick turnaround, they will fall over themselves to sell.

Their finishing comments, however, are not to be mis-understood though :

The Cyprus property boom is over, dead, kaput, finito, ciao, auf wiedersein, goodbye……..

It will be interesting to see if Cyprus with its fragile economy and its heavy dependance on tourism and real estate can come through the global credit crunch and recession unscathed.

Investment opportunities, Real Estate Investment Cyprus, Property Market, Realty

Less than a year ago Swiss banking giant UBS was considered by many the best bank in the world, certainly for its wealth management which was also the largest at the time, and its image and reputation were top notch amongst private clients as well as institutional and government entities.

Not so these days : Their combined losses in 2008 and beg 2009 have shaken the financial community and left many of their clients and investors much worse off than when they started out with the bank and their shares have been in a free fall from its peak around US$ 60+ to now around US$ 10.

Now the bank finds itself in the wrong kind of spotlight again now having been sued by none other than the US Government who wants the bank to immediately hand over the names and full details of all their US clients, estimated around 52,000, who allegedly hid their secret Swiss accounts from U.S. tax authorities.

Bloomberg reports :

U.S. customers had 32,940 secret accounts containing cash and 20,877 accounts holding securities, according to the Justice Department lawsuit filed today in federal court in Miami. U.S. customers failed to report and pay U.S. taxes on income earned in those accounts, which held about $14.8 billion in assets during the middle of this decade, according to the court filing.

“At a time when millions of Americans are losing their jobs, their homes and their health care, it is appalling that more than 50,000 of the wealthiest among us have actively sought to evade their civic and legal duty to pay taxes,” John A. DiCicco, acting assistant attorney general in the Justice Department’s tax division, said in a statement.

UBS does not intend, however, to just roll over and provide the IRS with these details according to the article :

UBS said in a statement that it expected today’s filing.

“UBS believes it has substantial defenses” to the U.S. attempt to enforce the summonses and will “vigorously contest” the case, the bank said in the statement. The bank’s objections are based on U.S. laws, Swiss financial privacy laws, and a 2001 agreement between UBS and the IRS, according to the statement.

The article goes on to quote a professor for saying that this could indeed mean the end of the famed and heavily guarded Swiss banking secrecy for which Switzerland is so well-known, at least in certain parts of the world including the EU and the US :

Roy Smith, a finance professor at New York University’s Stern School of Business and a former Goldman Sachs Group Inc. partner, said a UBS loss in the case would be “very bad news” for Swiss banks.

Swiss Secrecy

“If you get to the point where you’re able to get information on 52,000 accounts just because they exist, not because of evidence of a crime, you’ve gotten rid of Swiss banking secrecy forever,” Smith said. “If the European Union follows suit, it’ll virtually be the end of secret accounts in Switzerland.”

The Washington Post puts another interesting angle on the story by including the former UBS banker, Bradley Birkenfeld, into the case :

The U.S. government has been probing UBS with help from sources such as a former UBS banker, Bradley Birkenfeld, who last year pleaded guilty to helping a California real estate mogul evade millions of dollars of taxes. Birkenfeld told investigators that UBS personnel went to elaborate lengths to help U.S. clients stash money in secret Swiss accounts.

 The investigation led to the indictment in November of a top UBS executive. The U.S. government has used internal bank documents to accuse UBS management of conspiring to deprive the U.S. Treasury of tax revenue.

In Wednesday’s settlement, UBS admitted that it schemed to defraud the United States, in some cases by helping clients set up offshore companies to hide the true ownership of their Swiss accounts. The operation allegedly generated hundreds of millions of dollars of profit for UBS. The government said it demanded smaller penalties from UBS than it could have in consideration of the international financial crisis.

At the moment UBS admittedly seems to have the upper hand in this unwinding case with only around 300 names and clients having so far been surrendered to the IRS and with UBS arguing a very strong case against the US law suit reference its Swiss banking laws, but as The Washington Post article concludes that this in itself may mean the biggest blow to Swiss banking secrecy ever and hence its image to world-wide clients who will wonder who is next in line :

By targeting information based in the United States, the IRS obtained the names of about 323 clients who held UBS accounts in both the United States and Switzerland and transferred money between them, IRS agent Daniel Reeves said in a separate court filing yesterday.

The greatest blow to Swiss bank secrecy thus far may be UBS’s decision to close the secret Swiss accounts of its American clients, forcing depositors to move their money and sending a message that customers can’t rely on the bank to keep their assets hidden.

Investment Banking, Investment Management, US Investments Bloomberg, IRS, Swiss banking sector, UBS, US Government, Washington Post, Wealth Management

Mr. R. Allen Stanford

Just when the financial world is trying to come to grips with the unravelling Madoff financial scandal and Ponzi scheme, another major financial scandal is breaking ! This time also from The US in the form of Texas billionaire R. Allen Stanford whose Stanford Financial Group is now under close scrutiny by the SEC and they have now Mr Stanford and two other persons with major financial fraud to the amount of 8 billion US$.

Forbes.com reports :

Hoping to halt what it called “a fraud of shocking magnitude that has spread its tentacles throughout the world,” the Securities and Exchange Commissioncharged billionaire R. Allen Stanford and other executives at his massive financial services company, Stanford Financial Group, with operating a multibillion-dollar fraudulent investment scheme.

In a complaint filed early Tuesday in U.S. District Court in Dallas, the SEC alleged Antigua-based Stanford International Bank (SIB) fabricated investment returns in order to market and sell high-yielding certificates of deposits.

Certainly the method Mr Stanford and his partners went about their scheme has strong resemblances with Mr Madoff’s as the Forbes article highlights :

The complaint charged SIB with selling approximately $8 billion of CDs to investors by promising improbable and unsubstantiated interest rates.

The bank falsely claimed it was able to pay high interest rates because of its unique investment strategy, which allowed it to achieve double-digit returns on its investments for the past 15 years, according to the complaint.

Earlier Tuesday federal agents raided Stanford Financial Group’s offices in Houston. A sign hanging outside the office reads: “Now under management of a receiver.”

The SEC says it has frozen Stanford’s assets. He had no comment.

LA Times also looks  into Mr. Stanford’s “”unique investment strategy”" :

“Stanford and the close circle of family and friends with whom he runs his businesses perpetrated a massive fraud based on false promises and fabricated historical return data to prey on investors,” said Linda Chatman Thomsen, director of the SEC’s enforcement division. “We are moving quickly and decisively in this enforcement action to stop this fraudulent conduct and preserve assets for investors.”

The SEC called Stanford’s promises of high-interest returns on his bank’s certificates “improbable and unsubstantiated.” The 25-page complaint filed in federal court in Dallas cast doubt on Stanford’s claims of a “unique investment strategy” that allowed the bank to achieve double-digit returns on its investments over the last 15 years.

The US investigation will most likely be complicated by the fact that Mr Stanford’s entity is domiciled in Antigua but that will not deter the SEC from pursuing the case according to LA Times :

It wasn’t immediately clear how much of the Stanford empire would be subject to the SEC action. Federal investigators raided his Houston offices and shut them down, but much of the financial services group is based abroad, primarily on the tiny Caribbean island of Antigua, part of the two-island country of Antigua & Barbuda.

Stanford Group is regulated and audited by the Financial Services Regulatory Commission of Antigua & Barbuda. Commission Chairman Leroy King told Reuters news service Tuesday that he hadn’t initiated any special probe of Stanford’s operations because the commission hadn’t received any complaints from island citizens.

“We have no credible information coming to us to say that they are not sound,” King said.

However, news agencies later reported a run on the Bank of Antigua, a Stanford entity that was not named in the SEC complaint.

Stanford’s whereabouts were unknown. He has homes in Texas, Antigua & Barbuda and the U.S. Virgin Islands. A duty officer for the U.S. Marshals Service declined to say whether a warrant had been issued for Stanford’s arrest or whether the billionaire had been taken into custody.

Stanford Financial Group has offices in 14 U.S. cities in addition to its operations in the Caribbean.

Neither Brian Bertsch, a spokesman for Stanford Group, nor Rose Romero, the SEC’s Fort Worth regional director, responded to The Times’ inquiries about what authority the U.S. financial watchdog might wield over Stanford’s foreign-based assets.

Ironically, Stanford Group issued a calming letter to its investors in December 2008 amidst the height of the Madoff scandal according to LA Times :

In December, Stanford Group initiated a monthly newsletter to investors to calm their concerns over world markets and the failure of Madoff’s alleged $50-billion Ponzi scheme.

“We want our depositors to know that SIBL had no direct or indirect exposure to any of Madoff’s investments,” Stanford’s 30,000 clients were told. “Just as the bank had no direct or indirect exposure to the securitized debt or subprime meltdown.”

Where this breaking scandal ends no one knows but the timing could not have been worse for the US and its struggling financial markets and scene with investor confidence already at an all-time low. This blog will monitor this case even though this one is a mere US$ 8 billion !

Equity Investment, Investment Company, Investment Fund, Investment Management, US Investments Madoff Scandal, Ponzi scheme, R. Allen Stanford, The Securities and Exchange Commission (SEC)

Whilst the IT sector is suffering along with all other sectors of business during the global recession and downturn, the IT sector stands out in one very conspicuous way : It is to a large extend a very cash rich industry sitting on huge piles of cash !

None less so than IT giant Cisco Systems Inc. who sits an impressive second on S&P’s 500’s Richest Companies list only after Exxon Mobil Corp with close to US$ 30 billion in cash in the bank.

Now analysts are beginning to wonder what Cisco will do with all that cash and whilst paying back shareholders through buy backs of shares is one obvious option, most seem to think that Mr.Chambers, Cisco’s CEO,  is actively looking into acquisitions now.

Andrew Schmitt of SeekingAlpha.comhas this observation on Cisco’s near future moves :

We acknowledge it is entirely possible Cisco is filling a war chest for acquisitions. Everyone loves to play the who-will-Cisco-buy-next-game (our longstanding bet is Adtran (ADTN)). Cisco CEO John Chambers answered questions in his typical guarded way during an interview last month, indicating “The perfect target is a company with 100 people and a hot product that customers are saying they should go out and buy” and “We do not believe in the acquisition of large peers in any space.”

Cisco could fund such small acquisitions out of working capital, and any large acquisitions could be funded by a bond offering after the announcement, just as they did with Scientific Atlanta. This forces one to ask the question – why did Cisco just decide to triple the amount of cash it has for domestic use if we assume it isn’t for acquisitions?

Schmitt also sees another strategy by Cisco for putting its massive cash pile to good use which he headlines The Bank of Cisco :

We believe Cisco is growing operating cash in order to serve as a lender of last resort to its distributors and customers. An expanded balance sheet will ensure adequate capital is available not just for its own operations, but also the operations of its channel partners and customers.

If a key distributor were to suddenly lose a line of credit because the bank underwriting it implodes, Cisco can step into the breach and act as lender. If a contract manufacturer cannot obtain inventory financing Cisco can extend terms. Just as the Federal Reserve is the lender of last resort for the nations banks, Cisco can become the lender of last resort for the supply and demand chain.

So helping their partners and distribution networks to survive by extending credit lines sounds like a smart move indeed and Schmitt argues well that Cisco’s lower cost of capital is indeed a very useful weapon against its main competitors and not least the likes of HP and Huawei who are nowhere near as cash rich as Cisco.

But who will or should Cisco be buying then ?

MarketWatch’s Benjamin Pimentel, has this menu to suggest :

Chief Executive John Chambers himself has hinted strongly that the company is looking to extend its reach, but he has not yet specified a direction.

Data centers

“We believe that our opportunities to expand in our current markets, market adjacencies, are actually increasing,” he told analysts in last week’s earnings call. “This is true from the data center to the home market and the service provider to the small business and consumer. … You will continue to see us invest aggressively where appropriate.”

It’s a logical strategy, according to analyst Roger Kay of Endpoint Technologies Associates, who said Cisco is one of those companies that “invests for the future” in down times.

“It has to diversify,” he said. “It can’t stay in just networking forever.”

But where should Cisco look to expand?

Given the company’s position as a major player in the market for technology used by big companies, some analysts are naturally focusing on the enterprise arena. For instance, there’s much speculation that Cisco is planning to enter the blade-server market, where it would end up battling it out with the likes of Hewlett-Packard.

Investment News, Investment opportunities, US Investments Cisco, Data Center, Huawei, IBM, IT

The world’s luxury property markets have taken a massive hit lately due to the economic downturn and financial global crisis and none more so than Dubai - the once home to the Miracle Boom.

Lately, Morgan Stanley has come out with some very dire predictions on Dubai claiming that “”it is worse than expected”" - this post looks into their arguments and where they have these from.

The Luxury Property Blog reorts :

The latest Morgan Stanley UAE property sector report is out and is not pretty reading. “Fallen off a cliff,” and “Worse than expected,” are not words one usually associates with the Dubai luxury market. So if Morgan Stanley have come clean, it might actually be accurate. The issue with Dubai is always lack of transparency and even MS are resorting to “anecdotal evidence,” of which there is no shortage.

Around $263 billion worth of real estate projects have been delayed or canceled as the UAE’s property sector is dealt a “worse than expected” blow by the global financial crisis, according to their report.

HSBC research reported recently that cancellations had reached $75 billion in Dubai alone, but a Morgan Stanley spokesperson said HSBC had failed to include three further large projects in its assessment.

The author of the blog does emphasize what this blogger has also personally witnessed lately namely that most of the information on Dubai and its troubled real estate sector is indeed anecdotal and not factual though there is admittedly so much of it that one would believe that something is not right :

Some of the project cancellations that have been officially announced are Sunland Group’s $654 million Atrium project and the $790 million Trump Tower project by Nakheel on Palm Jumeirah. Prices are falling dramatically as the sector is hit by job losses and project delays. A few choice quotes:

“Real estate prices in UAE capital Abu Dhabi are down by an average of 20% since a peak last summer as the UAE’s property sector is hit particularly hard by the global economic situation.”

“Residential property prices in Dubai have also fallen, by 25% in the last 4 months alone, with high-end real estate units taking the biggest hit.”

“Since September, Dubai apartment prices have fallen 25% and villa prices are off 26%, “belying the argument of some developers about the price resilience of villas and low-rise building segment.”

“Anecdotal evidence suggests sharp falls in transaction volumes in the fourth quarter due to deteriorating economic conditions, the disappearance of speculative buying and the lack of financing.”

“Prices of high-end Dubai properties including those at the Burj Dubai development that includes the world’s tallest tower, which reached its final height last week, as well as the man-made Palm Jumeirah are down 35% since their peak”

Emaar Properties is likely to be the “worst affected” among Dubai developers by the sudden plunge in prices.

“We believe that Emaar runs a high risk of sales returns and defaults among its recent launches.”

“The company’s high-end developments, the Burj area and The Old Town, have taken the biggest hit since the peak.”

Many analysts are predicting further falls in prices in 2009 for luxury property in Dubai, Khajeel Times is suggesting 50%, The Global Financial house only 30%.

Gulf Times of Doha, Qatar reports that property investors have called on Dubai’s real estate watchdog to act quickly to avoid a “complete collapse” of the sector :

“”amid growing fears on the financial strength of some developers and their ability to deliver more than $1tn worth of projects. “”

The article goes on to suggest that The Dubai Property Investors Group wants the official Dubai real estate authority, RERA, to rid of the fly-by-night investors and bring some order to the sector :

The Dubai Property Investors Group, made up of more than 300 local and international investors, lawyers and real estate developers, has delivered a petition to Dubai’s Real Estate Regulatory Authority, or RERA, to urge the watchdog to clamp down after a slue of corruption scandals raised concerns over standards.
The group is targeting “fly-by-night developers” that aren’t able to deliver projects amid tightening liquidity and project financing, even though they’ve taken down payments from investors.
“Any measure short of announcing which developers are bankrupt will continue to let real estate prices free fall,” the petition seen by Zawya Dow Jones says. “We do not want to make any more payments until we have proof that the developers have the financial ability to deliver our units.”

Transparency is also something that is needed and demanded :

“Sentiment amongst real estate investors in Dubai is very poor right now,” said Eric Swats, a partner at Dubai-based investment bank Rasmala Investments. “RERA needs to be as transparent as it possibly can, but also to allow the market to adjust to the new realities as quickly as possible.”
Last week, a Morgan Stanley report said $263bn worth of the UAE’s $1.25tn construction projects have been delayed or canceled.
Separate research carried out by the Dubai-based market research firm Proleads said $582bn worth, or 45%, of the Emirates’ projects are currently on hold.
Sentiment has worsened since a spate of damaging real estate scandals that led to the arrest of several prominent executives in the industry over the last year in Dubai.

The article concludes through quotes that lack of real demand and huge over-supply are two of the worst enemies to bring the market back to parity :

In the petition, the investor group urges RERA to cancel more mega-projects such as the $110bn Dubailand development and Nakheel’s Waterfront “until real demand exists.”
It says with thousands of people leaving Dubai on a daily basis as financial and real estate firms lay people off, oversupply is a real concern. “Cancelling of projects will reduce supply, increasing prices, but more importantly will increase confidence in the emirate that government is prudent,” investors say.
The group is also concerned that some developers are abusing recently introduced laws, which say that all money deposited into escrow accounts must be used for construction.
They say some developers are “illegally siphoning money” from the accounts for administrative or marketing costs, or for land payments to master developers.
Investors add that the new interpretation of existing laws by RERA in November no longer protect them if they default on payments.
At one time, investors were entitled to a minimum of 70% of any money paid to a developer if they defaulted, but the group says RERA’s new interpretation of the law means the developer will keep 30% of the total contract value if an investor defaults.

Will Dubai get it right and rectify what is a potentially devastating situation for the once famed Miracle City, or instead keep, to a large extend, pretending that nothing is wrong and cannot be saved by improved market conditions, or will it in fact become a ghost town thanks to the exodus of expatriates and workers, or perhaps even be bailed out by an oil rich Big Brother from Abu Dhabi or Saudi Arabia ?

Time will show and options are plenty but it remains a fact that if Dubai wants to remain a point of attraction for private as well as institutional investors it has to act now and with full force and transparency.

How it all works, Middle East Business, Real Estate Investment Dubai real estate, Emaar, Luxury Real Estate, Morgan Stanley, Nakheel, RERA

Like the search for The Holy Grail, private as well as institutional investors are looking more than ever for an investment which will hold its own during times of market turmoil and downsizing, and whilst gold & other key commodities indeed look like a good investment these days, few seem to have discovered “The Holy Grail of Investment”.

This post, however, identifies one such and the keyword is Forest Land and Timber.

Larry Light of WSJ says in his recent article on the subject of timberland investment, that timber seems to be the ultimate long-term investment and elaborates :

Through Sept. 30, the value of timberland rose 5%. When the National Council of Real Estate Investment Fiduciaries reports 2008’s final quarter this week, this number is unlikely to move much. That marks a slower pace of growth, yet it is growth nonetheless. In 2007, timber appreciation was a towering 15%.

How can positive returns exist in these dark days of shrunken prices for everything ranging from real estate to commodities to stocks? Oil, after a summer price spike, was down 54% in 2008, while corn lost 11% and copper 54%. (Gold, as a refuge commodity, rose 6%.) Prices for lumber, a key forest product, have fallen by 34% over the past year as housing construction has ebbed.

The answer to this riddle is that timberland is the ultimate long-term investment, with relatively little bought and sold each year — and demand still respectable for what does change hands. “As long as the sun shines, the trees will grow,” says Jeremy Grantham, chairman of Boston money manager GMO and a long-time fan of timber investing. “Timber will never be an orphan.”

He goes on to say that whilst timber does generate decent cash returns year on year, the long term dividends is where the real value and ROI lies :

Timber often is likened to high-grade bonds, meant to be held for 10 years or more. The average annual timberland appreciation for the past decade is 4.1% versus minus 3.8% for the Standard & Poor’s-500 stock index. The timberland appreciation figure, which encompasses both the land and the trees, is based on sales and appraisals. After 10 or 15 years, investors cash out when the land is sold.

On top of the appreciation, timber generates regular income. Trees are constantly chopped down and sold for everything from boards to paper mulch, albeit in smaller volumes these days. Cash returns from this “harvesting,” as it’s called, are now 1.5% of the property value, down from 3% in 2007 and about 5% annually the three years before that.

He does, however, also mention that one of few downsides on timber investments is the fact that timber is rather illiquid and also that one needs to have substantial amounts of cash to get in :

“Trees keep growing 4% per year, no matter what happens to inflation, interest rates or market trends,” says Dennis Moon, head of U.S. Trust’s group overseeing timberland, as well as farm and mineral investments. “You don’t have to cut them down this year if that doesn’t make sense.”

On the downside is that, as the ultimate long-term investment, timber is very illiquid. Looking to park your kid’s college tuition someplace for eight years? Forget wood. Plus, timber’s cost of entry is dauntingly high. The best returns, adjusted for risk, come from large, multimillion-dollar partnerships called timber-investment management organizations, or TIMOs, sponsored by the likes of GMO and U.S. Trust. But these require a minimum $250,000 investment, and often many times that.

TIMOs’ overhead can be onerous, too: They may charge from 3% to 5% per year in assets for property management, taxes and insurance.

A cheaper way of investing in timber is via several real-estate investment trusts. Most prominent is Plum Creek TimberCo., the largest private land holder in the U.S. Investors can get in for around $32 per share. Over the past 52 weeks, its price has fallen 26%, better than the S&P 500’s 37% drop. Indeed, Plum Creek’s showing is better than the S&P paper and forest product index, which has slid 50%. The index is focused on board-making companies like Weyerhaeuser, whose fortunes are more closely tied to the housing industry, rather than the slow-growing majesty of a maple.

Chris Mayer of Capital & Crisis also highlights the flexible nature of timber as an investment :

Timberland is a crisis-proof investment because the growth of the trees does not move in step with economic cycles. You don’t have to harvest when demand is soft. Let them grow, and trees will become more valuable anyway. Bigger trees equal more dollars.

Timberland as a timely and crisis-friendly investment might seem odd, given its ties to the housing market. In fact, demand for timber as a building material is weak right now, at least in the U.S.

As the housing market reaches depths not seen in a long time, the end of the deflating housing bubble seems a ways off. Housing inventory in the U.S. at the end of June was 4.9 million homes, or about 12 months of supply – a glut we have not seen since 1981. New housing starts are near 17-year lows. And perhaps most surprisingly, even though housing prices have fallen quite a bit already, there is probably plenty of room to go, based on at least one good historical indicator: price to income.

Mayer explains in detail why it is that despite a weakening housing market globally and no sign of a quick recovery either, timberland value continues to climb :

There are three reasons for this, all making timberland a good investment today. They are scarcity, global demand, and institutional interest. Let’s take a look at each of them…

Growing scarcity of quality of timberlands. The mountain pine beetle infestation had a very real effect on supply. North America will lose about 20% of its spruce, pine, and fir lumber over the next five to eight years. In addition, much of Canada’s boreal forests are not economical, thanks to high costs and Canadian taxes, unless lumber prices rise significantly. Many of these businesses have already shut down.

Also, the U.S. government continues to set aside timberland for conservation – about 1.4 million acres per year. Add up all three, and you have a good case for tight supply.

The other big issue outside of North America is the reduction in Russian logs. Traditionally, Russia has been the low-cost provider of timber, but log export taxes have taken much of its timber off the global market. So as Russian logs withdrew, prices skyrocketed in markets in which Russia was a key supplier. In the frosty Baltic states, for example, lumber prices recently hit 18-year highs. Softwood prices were 57% higher than a year ago.

Global demand should increase. China is a giant here. It is the world’s largest importer of logs. Its appetite has increased 16-fold in the last 12 years alone! As the Chinese build more homes, they’ll need plenty of lumber.

In addition to China, the demand for biofuels has an impact on timberland. The use of wood pellets and cellulosic ethanol for fuel, for example, provides a source of growing demand for wood products. Wood is environmentally friendly, which could become more important as we get into reducing carbon emissions.

Growing institutional interest in timberland. There is a big slug of money in institutional vaults – like pension funds – slated for investment in timberland. By some estimates, there is at least $10 billion in funds seeking timberland investments. All the usual appeal of timberland – steady inflation-beating returns – has caught the interest of these whales. This provides a floor of demand for timberland.

These three factors keep timberland prices strong, even as housing markets stay weak. There is one other interesting point… Lumber has not yet really joined in the commodity cycle. Its pricing lags that of many other commodities.

Lumber pricing lags even competing building materials. The gap among lumber prices and concrete and steel, for example, is as wide as it’s been in 20 years. So timberland – an increasingly scarce resource – ought to participate sooner or later.

So if one assumes and believes that the above three factors remain in play, and this seems likely, timberland should prove to be a gem amongst the many asset classes the investor is considering so maybe it is time to plant a forest somewhere on Mother Earth and harvest the yield in years to come ! Who said eco-friendly investments cannot be the best ?

Alternative investments, Investment opportunities forest, Recession, timber, timberland