Investments

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

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

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

These days they say everything is possible and the world has certainly witnessed a lot lately with the world economies and markets in what looks like a free fall, major financial scandals and bankruptcies, massive lay-offs and a record low consumer confidence index. But there are few glory stories out there that catch our the eyes and which, if they are to be believed,  are indeed encouraging news amidst one of the gloomiest times most of us have ever experienced.

Twitter, the much acclaimed micro-blogging and social-networking platform which claims 6 million users and growing fast, has supposedly recently raised a new round of funding on the basis of a higher valuation (read : than in December 2008), which seems a major achievement considering the dire times.

Even more surprising is this fund raising from so far un-named venture capitalists, perhaps, in view of the fact that Twitter remains a website and business without any documented revenue streams.

How does that work ?

US News reports :

Small talk is now a very big deal. Twitter, the popular micro-blogging and social-networking site, has entered into an agreement with one or more venture capital firms, valuing the company at a staggering $250 million, according to TechCrunch. ComScore data shows that Twitter logged about 5.57 million users in September 2008, representing an impressive five-fold increase over the year-ago period.

Although the company has achieved mass adoption since it launched in March 2007, Twitter has yet to offer a viable business model; it still hasn’t shown how it will generate revenues and sustain profit growth. The company recently turned down a half-billion dollar acquisition offer from Facebook, although most of it would be paid with stock.

“Rumor is Twitter hit up more than a few venture firms to pitch the $250 million valuation, and got more than one ‘no’,” TechCrunch wrote. “But someone’s bit, perhaps encouraged by Twitter’s breakneck growth and the interest from Facebook. That means Twitter gets a new cash injection and time to figure out its business model at an even more leisurely pace.”

Paul Boutin of The Industry Standard does not get how this happen when Twitter does not have a viable business plan :

Relentless biz-blogger Kara Swisher is pushing againfor Facebook to acquire Twitter.  Twitterwill never IPO on its own, she says, and Facebook is Twitter’s most natural fit as a parent company.

But there’s an important number missing from Swisher’s post and all other Twitter punditry: How much does it actually cost to run Twitter, and how will that number grow ever more rapidly as more customers sign up?

Twitter’s PR team hasn’t responded to my email, so I’m stuck with guesses.  First, how many employees does Twitter have?  Wikipedia says 31.  Using a West Coast average of $125,000 per year in salary, benefits and overhead for staff, that’s just under $4 million per year for staff.

More importantly, how many tweets per month is Twitter sending to customers, and how much does it cost them?

Twitter doesn’t charge its users anything. The company pays for all messages sent to cellphones through Twitter. That’s the burn that no one’s been able to estimate with any certainty.

Mr Boutin goes on to speculate how Twitter could be a victim of their own huge success when considering what he calls the out-of-control and escalating cost basis of Twitter’s service :

Last year, the company’s blog claimed costs of $1,000 per user per year to send SMS messages to Europe — which is why Twitter stopped sending them. But there are no numbers for what its U.S. customers cost.  To calculate that, we’d need to know the total number of tweets sent through the system in, say, a month, plus the per-message price that Twitter has (hopefully) negotiated with cellphone carriers. I can’t even find a good guess anywhere on either of those.

Finally, the biggest problem of all is the network effect of Twitter’s popularity. As the number of people using a network goes up, the number of connections between them rises much, much faster.  Most Twitter users now have several times more followers than they did a year ago.  As a result, every update sent to all of a user’s followers costs the company more to send to everyone who’s subscribed by phone.

It’s an exponential function: The more people use Twitter, the faster the number of messages grows. Twitter’s SMS bill is not only climbing, it’s accelerating, and each new customer costs more than the last one. Any company looking to acquire Twitter has done calculations to estimate the future cost of the service, which could grow from a reasonable expense to a profit-destroying nightmare if Twitter’s acquirer were successful at marketing the service without charging for it.

Some analysts speculate that the end game of Twitter is to sell out before having to engage in commercializing their offering, much like YouTube did it, and Google and FaceBook are the two obvious names that pop up in that discussion.

Others note that people from Google AdSense division have recently left Google only to join Twitter so perhaps there is a revenue plan for Twitter after all !?

This blog will continue to follow the success of twitter and see whether it will in fact bury them because of their escalating costs and lack of revenue streams or instead make their founder and owners the next dot.com millionaires.

Alternative investments, Investment opportunities, Online Investment dot, FaceBook, Google, Social Networking, Twitter, venture capitalists

Dr Marc Faber

The renowned expert on economies’ & markets’ downfall, Dr Marc Faber, has recently made his views on the state of the world economies known in an interview with CNBC and he is not all that optimistic either :

The new bank bailouts are not likely to work because they are run by the same people who prolonged the economic agony by throwing money at weak companies rather than allowing them to fail and encouraging the strong ones, Marc Faber, the publisher of the Gloom, Doom and Boom Report, told CNBC Monday.

Britain threw its troubled banks another multi-billion pound lifeline Monday by allowing them to insure against steep losses and guaranteeing their debt, while an adviser for U.S. President Elect Barack Obama said the rest of the TART money will be used to clean out bad assets from the financial system.

“The financial crisis has occurred because of government interventions,” Faber told “Squawk Box Europe.”

It is not all bad news, however, says the man who dislikes bail-out packages :

“The contractions actually serve to build for the future growth, because the weak competitors are eliminated. If you support the weak competitors you essentially penalize the strong competitors and therefore I am very much against these bailout packages.”

Not surprisingly Faber predicts a tough 2009 with a possibility that the second half could prove even worse than the first half and he seems not to share some of the optimism expressed by many experts that the world economies and markets are set for a recovery in the 2nd half of 2009 :

Investors counting on the fact that stock prices are very low for long-term growth should bear in mind the Japan lesson, where prices are virtually at the same level they were in 1981, Faber noted.

Commodities may be a better play as some time, when the global economy picks up, prices will rise because investment in new exploration or mining has all but stopped, he said.

“I have shares in Asia, mining stock, exploration companies, physical gold,” Faber said.

“As far as currencies are concerned, I think the dollar is a disastrous currency but the others are even worse. I am leaning more towards the view that the dollar could strengthen even more.”

Watch and listen to the entire interview here

Asian Investments, Equity Investment, Gold Investment, How it all works, Investment opportunities Gold vs Equity, Marc Faber, US Dollar

Warren Buffett

Times are hard and the markets are down again. Investors are gripped by fear of what 2009 will bring after a disastrous 2008 and most have bearish outlooks for major economies and markets alike. US job figures as of yesterday, which revealed that 693,000 people lost their jobs in the run up to Christmas, are making economists now expect Friday’s payroll figures to show that more than 700,000 people lost their jobs last month.

Obama has recently described the US economy as “very sick” and predicts the situation to worsen in 2009 and most agree with him.

One person, however, seems to be having the time of his life (at least since the 1970s when he was very gung-ho as well in the midst of a major economic global crisis) : He is not surprisingly Warren Buffett, Billionaire investor and chairman & CEO of  Berkshire Hathaway.

The shares of Berkshire Hathaway may have dropped 32 percent in 2008, making it the worst performance in more than three decades, but Mr Buffett has remained positive and very aggressive which one of his famous quotes also underlines :

“I will tell you how to become rich. … Be fearful when others are greedy. Be greedy when others are fearful.”

Yes stocks are cheap right now after their dismal performance in 2008 year and hence Buffett would argue that they offer a great buying opportunity, but others remain sceptical and see further losses and drops in stock prices.

So is Warren Buffett right to be in a buoyant buying mood ?

This posts looks into what others have to say about this.

Jim Mueller of Fool.comis impressed with Buffett’s track record and his ability to spot a good buying opportunity on the back of dismal market conditions:

Of course, past performance is no guarantee of future returns, but take another look at that quote above. Then read this one, also from Buffett, from his 1990 letter to shareholders:

“The most common cause of low prices is pessimism — some times pervasive, some times specific to a company or industry. We want to do business in such an environment, not because we like pessimism but because we like the prices it produces. It’s optimism that is the enemy of the rational buyer.”

Were you one of those who checked the table above when I told you the date of that quote? The man knows what he’s talking about.

You demand proof? In October 1990, just as bearish sentiment was peaking at 48%, Buffett revealed that he had upped his position in Wells Fargo to just shy of 10% of the company. In the following 12 months, while the market returned a “mere” 29%, that one investment returned 123%. In the five years following that bearish peak, it returned 290% or 31.3% average per year! And that doesn’t even include the dividends. He still owns about 7% of the company.

Mueller  continues to emphasize that with today’s major bearish market and outlook, Buffett has yet again proven to be good to his word and started the year by buying major positions in integrated oil giant ConocoPhillips  and also upped his position in health-benefits manager WellPoint and he concludes on the same note:

Will those work out for him? Given his record, probably. However, the question you’ve got to ask yourself today isn’t “What is Warren doing?”

Rather, it’s “Am I going to be greedy?”

I hope you’ll answer “yes” to that question.

CNBC’s Alex Crippen has a story  on Morningstar StockInvestor and its editor Paul Larson who recently named Mr Buffett as their CEO of the year despite some rather controversial and bad timing decisions by Mr Buffett during the latter half of 2008 :

Morningstar StockInvestor editor Paul Larson recounts Buffett’s “perceived mistakes” of recent months, including Berkshire’s big put option contracts on stocks, investments in General Electric [GE  16.11    -0.75  (-4.45%)   ] and Goldman Sachs [GS  84.50    -4.21  (-4.75%)   ], and Buffett’s October call to buy U.S. stocks.  “With the market taking a sharp turn for the worse in late October and again in November, clearly the timing was not the best on these particular bullish actions.”

But, writes Larson, “We do not view these as any reason to lose confidence in Buffett’s abilities, either as an investor or corporate manager.”

He argues that worries about the option contracts are overblown and points out that even though the GE and Goldman warrants are underwater right now, Berkshire gets a 10 percent annual return on its $8 billion worth of preferred shares in the two companies, no matter what their common stocks do.

The article goes on to stress how impressed Larson is by Buffett’s gung-ho attitude and not least ability to steer Berkshire away from risky derivatives and excessive leverage :

“By practicing prudence and patience earlier in the decade, Berkshire was in a position to put large amounts of capital to work in 2008. In other words, rather than blowing its ammunition hunting squirrels a few years ago, Berkshire has been able to shoot the proverbial elephants now walking by.”

Morningstar’s bottom line:

“Beyond creating a company that treats common shareholders with the utmost fairness and respect, one needs only to look at the long-term value created at Berkshire Hathaway to see why Buffett deserves the award. Since taking the helm of the sleepy textile business 44 years ago and turning it into arguably the strongest conglomerate on the planet, Buffett and his managers have grown the book value per A share from $19 to just over $77,500, as of Sept. 30. This translates to a 20.7% annualized increase in book value since 1965, versus a mere 9.6% annualized return in the S&P 500 (including dividends) over the same time period.”

Seattle Times’ Hugh Son quotes  a senior investor for saying he does not believe that despite some recentquestionable investment decisions by Berkshire Hathaway that Mr Buffett has far from lost his magic touch:

“Buffett has the opportunity to do what he does best, which is acquire new companies at prices that have him licking his lips,” said Frank Betz, a partner at Carret Zane Capital Management, which holds Berkshire shares. “I don’t think Mr. Buffett is bummed out at all.”

This seems indeed to be the general sentiment of analysts and observers and despite his 78 years of age and a negative performance during 2008, one really should not write Buffett of as one of the most important and skilled investors of our time,  in fact it may be a very good idea to by into his Berkshire Hathaway now, that is if you can afford such a thing.

Finally, if you are interested to follow investment guru Warren Buffett here is a great site to bookmark - it also features all Buffett’s famous quotes in its headline so check it out - Warren Buffett Post

Equity Investment, Investment Company, Investment Management, Investment opportunities, US Investments Berkshire Hathaway, ConocoPhillips, Financial crisis, Stock markets, Warren Buffet

2008 was a bad year for stocks and credit alike.  The Credit Crunch and global financial crisis meant worsening and at some levels disaster credit flow conditions for companies and governments alike and as remarked by Wall Street Journal :

The relationship between U.S. stock and credit markets is ending 2008 in fittingly dysfunctional fashion.

For much of the year, the two markets have been out of sync, with credit often worsening even as stocks rallied. Now, credit seems to be improving, but the stock market isn’t.

Junk bonds, that are also defined as high yield bonds (click herefor a full definition of Junk Bonds from Wikipedia) has now in some investors’ minds traded down to tempting levels as well and whilst the risk remains high in terms of defaults some are now pointing to these junk bonds as a prospective investment opportunity.

This post looks into the pros and cons and Junk Bond investments and where they are possibly headed here on the threshold of 2009.

Toby Shute from Fool.com has this to say about Junk Bonds as a viable investment right now :

Whether you opt for an exchange-traded fund or a closed-end fund, both provide a convenient way to pick up a diversified basket o’ distress. Corporate defaults are definitely headed higher, but the firms that survive ought to generate returns that are fabulous enough to outweigh the zeroes. That’s all the more true if you buy during another dramatic sell-off akin to what we saw in early October and late November.

Shute goes on to also recommend individual securities if one is more hook on companies’ debts :

If you’re bearish on the broader economy, or your inner stock picker urges you to hone in on individual securities, there is another easy way to dip a toe into this part of the market. There’s a fair amount of debt out there that’s listed on a stock exchange and traded just like stock. The usual denomination for these notes is $25, so you’ll see them trading around that price in normal times — remember those?

General Motors (NYSE: GM) has exchange-traded debt priced at around $3, or a dozen pennies on the dollar. But that discount isn’t altogether unreasonable, and it’s not really the kind of opportunity I’m thinking about.

More interesting to me are cash cows like Comcast (NYSE: CMCSA)and CBS (NYSE: CBS). Comcast, the largest cable company in the country, has a note (ticker: CCS) trading below 80% of par. Viacom (NYSE: VIA)spinoff CBS has two issues (tickers: CPV and RBV) trading around $0.50 on the dollar. That is pretty astonishing for an investment-grade credit.

I know both companies are likely in for a rough 2009, but visions of default do not dance before my eyes.

Stephen Taub of CFO.com analyses what he sees as a deterioating credit quality among U.S. speculative-grade issuers in recent months and goes to list the dire credit news of 2008 :

Total downgrades for the year reached 518 as of Dec. 17, the most since 2001. What’s more, the 311 downgrades in the second half of 2008 make the highest second-half total ever, already eclipsing the total of 308 in 2001. “We expect downgrades to continue at this pace in the first half of 2009,” S&P predicted in a new report.

The percentage of issuers with negative bias — those designated as “CreditWatch negative” or with a negative outlook — has climbed to 37.5 percent, nearly a six-year high.

Mark Gongloff of WSJis somewhat mystified that the stock market has not recovered after the Federal Reserve recently lowered its base rate down to zero, making colerporate lending easier for US companies but offers a couple of likely explanations :

One possible explanation is that credit markets are behaving as they sometimes do after dramatic Fed actions — bears rush out, then bulls rush in but end up burned.

Something similar happened after big Fed cuts in September 2007 and January 2008, notes Brian Reynolds, chief market strategist at WJB Capital Group. Each time, credit enjoyed a brief rally that ended in tears. This time, credit speculators may be hedging their bets by shorting stocks.

and if this is not the case he has another couple of explanations ready at hand:

A more benign interpretation is that stocks are simply lagging credit, as they have for much of this crisis. Thin holiday trading could be exaggerating moves in credit or muting the stock-market response. That suggests the stock rally that began after Nov. 20 and petered out on Dec. 15 could resume with the new year.

But another possible explanation is that, while credit has improved some, it hasn’t improved enough to offer assurance to stock investors. Even after their recent rally, high-yield bonds still fetch nearly 20 percentage points more than Treasurys, a bit wider than at the recent stock-market bottom on Nov. 20.

Whilst he admits the usual relationship between bonds and equity is not clear as present he does not see any signs of the US economy slipping into the much-feared Depression though despite the lacking US stock market uptake:

Given the massive jolts of stimulus being fired at the economy, a depression seems unlikely. But the economy isn’t healthy, either. The upshot: Credit could recover even further without sparking much of a response in stocks.

Randall W. Forsyth of Barrons.com draws parallels to the 1930s Depression when it comes to the corporate bonds’ spread:

Yields of Baa-rated bonds fell from about 9.25% when that column ran to a little bit over 8%. That decline roughly paralleled the plunge in U.S. Treasury- bond yields over that span, which means corporate bonds’ spread — the extra yield investors demand to compensate for risk — has remained near the peaks of the 1930s. The question is whether corporate defaults will equal those the Great Depression.

Looking ahead Forsyth quotes two leading players in the bond market for predicting further price gains and hence yield declines :

The narrowing swap spread is a harbinger of further contraction in corporate bond spreads, according to Michael T. Darda, chief economist of MKM Partners and an early bull on Baa corporates at their peak yields in October. He sees further price gains (and yield declines) ahead. Darda notes that corporate bond yields peaked 17 months before the economy bottomed in the last cycle. That would be consistent with his forecast of a recovery coming not until late 2009 or 2010. Junk bond yields topped out 11 months before the economy’s trough, so there’s still time to buy speculative-grade debt by that schedule.

Similarly, Jeffrey Rosenberg, head of credit research at Banc of America Securities, also thinks high-grade corporates yielding over 8% offer return potential that’s competitive with equities, but with lower risk. He also favors sticking with investment-grade bonds until the default picture in leveraged finance becomes clearer-before being tempted by 22% yields on junk debt.

Whether or not investing in high-risk debt as junk bonds are is the way forward in 2009 obviously remains to be seen but it seems that analysts agree that the market situation at present is quite unique and may offer good returns for the risk prone investor. The question is of course if Junk Bonds is a better option that buying back into the stock markets which now seem set for some kind of return if not a bull market come the 2nd half of 2009.

This blog will continue to follow the at present off relationship between bonds and equity.

Bond Investments, Investment Securities, Investment opportunities, US Investments Bond, Credit Crunch, Federal Reserve, Investment opportunity, Junk Bonds, US base rate

In recent years, well almost a decade now, leading economists and financial analysts from all over the world have been amazed by what has been termed by many as The Dubai Miracle which tells a story of a city’s explosive and phenomenal growth and expansion, real estate projects on a scale that would be large even by US or Chinese standards and announcements of further growth and developmentsthat make even the most gung-ho developers dizzy.

Recently many of us thought we had it wrong when reading about the latest plans in Dubai to have one of its prime beaches cooled down artificially for the benefit of the guests at the hotel (read the full story on this here) but then again we are talking about Dubai - a place where everything seems to be possible.

Lately, however, Dubai has started to feel the effects of the major world financial crisis, despite strong government and semi-government statements from as recent as November (click here to read Mr Mohammad Al Abbar’s statement from November) refusing to agree that Dubai would be sucked into this global financial turmoil.

There are now clear signs that Dubai is beginning to suffer too, not least in its major real estate sector where most of the major projects are focused but also its tourism sector, and there are now many voices of concern and unhappiness emerging from consumers and investors alike not to mention the financial institutions who are heavily exposed in this massive project called Dubai.

This blog looks into some of the signs and concerns that are now facing Dubai and asks the questions whether the Dubai Miracle is coming to an end or if in fact they will somehow come through this crisis stronger and better than before.

The Wall Street Journal tells a story about Dubai lenders beginning to feel the squeeze as mortgage defaults by overstretched borrowers is now becoming common:

Borrowers are being squeezed by higher interest rates and job cuts by major employers hurt by the global financial crisis. Property developers also were affected Sunday as tumbling oil prices hurt sentiment, leading the region’s stock markets lower.

As borrowers run into trouble, officials at HSBC Holdings PLC, the largest international bank by assets offering mortgages in Dubai, told Zawya Dow Jones that the lender has been contacted by a growing number of customers in the emirate struggling to pay their home finance.

At Emirates NBD, the Gulf’s largest lender by assets, an official said the bank has witnessed “significant defaults from the speculative community.” However, the official wouldn’t disclose if the bank itself has been experiencing defaults.

The same article from WSJ goes on to point out that even though banks and lenders have the right to re-possess properties from clients if they default, there is no precedence for foreclosures in Dubai which could lead to additional worries and problems for the financial institutions who are heavily exposed in the property market:

Although new mortgage laws say banks are entitled to repossess a property if a borrower defaults on a mortgage for more than 60 days, experts said foreclosure may be a lot more difficult in practice.

“There is a mechanism in place for foreclosures, but it’s never been tested before,” said Charcol’s Mr. Dommett. “In practice, the process could take a very long time, and banks could be left with property on their books that they’re unable to sell.”

Local Dubai-based newspaper, Gulf News, tells a story on how several companies are now struggling for finance and credit and how they are trying to raise cash from investors:

Dubai-based property developer Union Properties said Monday that it wanted to issue up to Dh2.5 billion of convertible bonds, as securing project financing from banks had become difficult during the financial crisis. Convertible bonds allow investors who have lent money to companies to change the debt into shares in the business.

Also, Shuaa Capital, a leading regional investment bank said on Monday it would seek shareholder approval next month to extend the maturity of its convertible bonds.

“The signal is that they need cash. Banks will not give you cash now or they will do it with too many conditions. Selling bonds is a tool to get money and the strategic investor is entitled to an interest dividend of 6 or 7 per cent,” said Hamood Abdullah Al Yasi, general manager at Emirates International Securities on Monday.

 Meanwhile, and perhaps rather surprisingly amidst the majority of observers being quite possimistic about Dubai’s economic outlook, Swiss banking giant Credit Suisse has reiterated a positive outlook for Dubai’s troubled real estate sector as business daily Emirates Buisness 24/7 reports:

Swiss bank Credit Suisse has reiterated a positive outlook for the UAE property sector, as it believes that real estate market will recover quickly from the current turmoil due to the country’s solid macroeconomic fundamentals.

“As a result of a slowdown in economic growth and liquidity challenges in the GCC region, we downgrade our target prices for most real estate stocks in the UAE. However, we stay overweight on the sector as we believe the UAE real estate market will recover quickly from the current turmoil thanks to its solid macroeconomic fundamentals,” the bank said in a report titled “Emea Real Estate Outlook 2009.”

The article goes on to quote Credit Suisse for predicting that both the Dubai and Abu Dhabi governments will have the biggest effect on the future of the real estate sector:

The bank believes that there are three potential catalysts that should be monitored in the short term: Oil prices, which have a strong effect on the UAE’s liquidity and hence the real estate market. Any sign of upside in oil prices would be viewed as positive news; bringing the real estate sector under the umbrella of the federal government, which is dominated by Abu Dhabi, thus ensuring the availability of liquidity; and positive news about the condition of the real estate market in Dubai.

“We believe that the market is discounting most of the negative newsflow about the lack of funding, shortage of mortgage availability and the fact that Dubai is a highly leveraged market in a global credit crisis. In our view, it even assigns a zero value for some projects in the pipeline for some UAE developers. We expect that developers will cut supply as demand deteriorates as a result of negative sentiment and the shortage of liquidity, which will in turn affect their forward NAV as they sell fewer units than expected.”

The article goes on to quote Credit Suisse for saying that the governments must control and also cut the supply of real estate projects in order to avoid a collapse and get back on track:

Credit Suisse believe that cutting supply to keep a sustainable level of demand will not be enough without an effective solution for financing problems in the UAE, especially on the demand side.

“We think that the UAE federal government (through sovereign funds) will have to play an active role in providing financing for both home buyers and developers, as the financing situation, especially in Dubai, is currently under pressure.”

The old question of whether Abu Dhabi, which is where the Federal Government sits and also where 90%+ of all UAE’s oil revenue stems from, is truly committed to financing and underwrite Dubai’s massive real estate expansion, is also highlighted by Credit Suisse as a key factor to the recovery:

“We are confident that the Abu Dhabi government is still committed to financing development projects in the emirate and will provide the required support for those projects. However, we think the most important question is, will the federal government, which is dominated by Abu Dhabi, provide financial assistance to the real estate market in Dubai?

“We believe it is in the interests of the UAE that the Dubai market remains sustainable and think the federal government may step in to make sure that the real estate market in Dubai doesn’t go into a deep slump because of the current shortage in liquidity. However, it is difficult to determine the form of this involvement. We also believe that there is likely to be some sort of consolidation among developers in both emirates, thus bringing the sector under the umbrella of the federal government in the future,” Credit Suisse said.

What the next chapters in the Story of Dubai have to reveal only time will tell but it goes without saying that Dubai’s growth and expansion till date as spearheaded by its visionary ruler Sheikh Mohammed Bin Rashid Al Maktoum has been a truly amazing story to follow and whilst many analysts and economists now remain cautious if not pessimistic about Dubai’s future and ability to come through this current and deepening crisis unscathed, this author would not put it past Dubai to come out on top - once again.

This blog will continue to follow the ups and downs of Dubai to see where it all ends - or as it may be begins again.

Investment News, Investment opportunities, Middle East Business, Real Estate Investment Abu Dhabi, Credit Suisse, Dubai, Dubai real estate, Financial crisis, UAE

With a very troubled 2008 soon behind us and many private as well as institutional investors breathing a short sigh of relief, the big question facing the world is of course: will 2009 be a year of recovery or will the crisis worsen and prolong the Recession or even, as some fear, slide further into a full blown Recession ?

This post looks into what some of the analysts have to say about 2009 and whether to world economies and all its dependants are in for a recovery or if indeed we shall have another very tough year to face up to.

MarketWatchpoints out that whilst the downturn is gathering pace in Europe and The US, the same crisis has now also spread in full to The Far East and Asia with the pace of the economic downturn in China being the most surprising factor to economists and experts.

Quoting experts on the development of the economic downturn in Asia, the article says:

Experts painted a grim picture for the Asian region in 2009.

“Asia is not doing well at all,” said Son Won Sohn, an economist at the Martin Smith School of Business at California State University, Channel Islands.

“Decoupling, which looked for a while like it was going to work — turned out to be a myth.”

Japan is mired in a recession, South Korea will be lucky to reach 2% growth this year and Chinese growth could fall below 6%.

The downturn in global trade has just begun to have a negative impact on China’s economy, but it is pressure that will last for most of 2009, according to Brad Setser, an expert on China at the Council of Foreign Relations in New York.

“The latest data for November was off-the-charts bad,” Setser said.

In addition, China’s own domestic cycle looks to have turned, he said.

“The pace of the downturn has been a little bit of a surprise,” he said.

Asian Investments, How it all works, Investment Management, Investment News, Investment opportunities, UK Investment, US Investments 2009 Recovery, China, Depression, Europe, Recession, US Economy

The US Dollar has had a turbulent year, first dropping to an all time low against the Euro in July only to surge to around the 1,20 level in October / November on the back of dropping equity markets, working as a safe haven for investors.

In recent days the Dollar has again dropped significantly in value against major currencies and especially the Yen & the Euro and the question is now what we can expect to see from the Dollar in 2009 with an ongoing credit crunch and crisis, wavering economies and lack on consumer demand in most sectors and countries ?

This post looks into some of the prevailing views on where the US Dollar is headed in 2009.

MarketWatch highlights the irony of the strong Dollar in the second half of 2008 which was based not on a strong US Economy but rather the fact that investors and governments alike fled into the Dollar as a safe haven and falling US interest rates too supported the increasing Dollar:

In 2008, the dollar did what most analysts expected it to do, but not for the reasons most had expected.

The U.S. economic recovery that many had predicted failed to materialize. Instead, the credit crunch morphed into a crisis, the slowdown turned into a full-blown recession, and U.S. interest rates went further down instead of up.

But the dollar still came roaring back to life in the second half, buoyed not by better U.S. fundamentals but by a mostly unexpected rush to safety.

The consequences of the dollar’s strength in the second half of 2008 will be seen throughout the first half of 2009. The prior strength of the dollar will eat into the profit margins of many U.S. companies that are doing business abroad,” said Kathy Lien, director of currency research at GFT in New York.

“This move is very well-justified and has a long way to run.” Standard Chartered is preparing to cut its dollar forecasts, Minikin said.

Currency, Investment News, Investment Securities, Investment opportunities, US Investments bonds, Currencies, Euro, US Dollar, US Treasury, Yen