Investments

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

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

For many years luxury real estate world-wide has had a fantastic time with soaring prices and strong demand, be that from the shores of Dubai till European top destination, the US and The Far East.

Last year the global economies and markets collapsed and with it the real estate sector, in fact it was the overheated  and over mortgaged US housing market that started it all. It would therefore seem only natural if luxury real estate plunged even deeper than ordinary real estate as times got tough but some seem to argue that luxury real estate is still doing well despite global crisis, credit crunch and financial scams.

This post takes the temperature on the luxury real estate market and how it is faring globally.

Shannon Molloy of Brisbane Times, Australia has an article about the dried up luxury real estate market and says:

Brisbane’s prestige property market will ‘languish’ this year as former corporate high-flyers rein in their spending, according to experts.

The top end of local real estate has enjoyed soaring prices and strong demand for several years, but RP Data researcher Cameron Kusher believes the good times are over.

Holiday homes, executive apartments, luxury property and tourism-driven investments could soon flood the market as the global financial crisis and economic uncertainty force owners to sell, Mr Kusher said.

And demand for million dollar homes looks certain to dry up thanks to factors such as poor company profits, lower than expected bonuses and losses in the stock market, he said.

“As a result of these changes in the top end, there will be a lot more forced sales… the affluent-type markets are likely to languish,” Mr Kusher said.

The article goes on to quote local experts for saying that long-term the market shall recover its value but short term remains grim:

Mr Greensill said demand for luxury homes had been in “almost free-fall” for months, but he did not believe there would be a long-term drop in values.

“Now is not a good time to sell a prestige home, so meeting the market requires a significant drop in price… but I think values will hold steady in the long run,” he said.

Jens Fischer of Pravda, Russia is one of the optimists and he argues that the European luxury real estate market has remained stable and not lost its value and appeal :

Many people think that if there is a crisis, crisis is everywhere. However, there are several sunny islands in the storming ocean, that keep prospering and attracting survivors. Name of one of them is Luxury Real Estate. The American real estate crisis has reached Europe – a fact that cannot be denied on the one hand but that has to be seen in different ways. Whilst prices in many regions and countries in Western Europe for standard houses have dropped up to twenty-five percent in 2008, which applies to almost all countries in Western Europe, the luxury market remains relatively stable. No substantial consolidation can be seen here, nor do experts expect a consolidation period to come during the next months.

The European luxury property market mainly refers to properties in traditional, posh, sought-after and highly reputable prime locations throughout Europe. Prices ranging from 1 million Euros up to more than 125 million Euros are being paid to some of the most exclusive freehold houses and mansions currently on the market in France and Spain and 750k and more for exclusive condos. Such properties usually qualify as luxury consumer goods pretty similar to sports cars, yachts and jewellery, and therefore are less influenced and affected by the general market downfall. Buying these properties is of a rather more emotional than of a reasonable nature and as a result is subject to differing behavior.

Professional real estate blogger and writer, Mark Knowles, disagrees with Mr Fischer in his comments to the latter’s positive views on luxury real estate and has the following to say to him:

Much as I hate to rain on anyone’s parade (not true), I feel I must break some bad news to you Mr Fischer - London luxury propertyprices fell 20% last year and are continuing to decline rapidly. I personally can introduce you to a Russian aluminum magnate who will sell you a villa in Italy, just over the border from France’s Cote D’Azur, that was bought last year for E 3.5 million that he would cheerfully take E1.5 million for. Roman Abramovich will sell you his yacht Pelorus for any sensible offer, and the previously mentioned aluminum magnate has already taken his boat out of the water and fired all the staff.

UBS Bank of Switzerand’s shares fell again todayafter the SonntagsZeitung reported  they had made $7.2 billion in losses in Q4, bringing their total losses for the year up to almost $20 billion; the biggest Swiss corporate loss on record. No comment from the bank apparently.

Hardly seems worth discussing Marbella, but there are now a few “interesting,” property scams coming to light in the Spanish markets. A British politician is calling for an equiry into Ocean View Properties, a British property company that transferred £100 million to a Spanish developer which then evaporated (the money not the developer). The deal was apparently brokered and arranged by convicted fraudster Sean Woodhall, who conveniently disappeared in a light aircraft crash in Brazil last May. No bodies were recovered, but the Spanish developer claims to have paid back the money. There have been a lot of these recently - last month aloneFortuna Estates were busted for land fraud and Aifos, a Marbella-based developer was forced into recievership by one of their creditors. The owner and Managing Director of Aifos were both arrested for fraud some time back, but the failure of yet another developer Tremon apparently prompted the proceedings. Unravelling the mess of the Spanish property markets  is going to take years.

Deidre Woollard of Luxist.com explains how the once untouchable and in-demand London and Manhattan luxury real estate markets have also suffered lately :

A recent article predicted continued gloom for the California real estate market this year but two other expensive markets are also in peril. The high-end market in Manhattan, once believed to be impervious to economic doom, spent the last quarter of 2008 catching up to the rest of the world. Properties that once would have been snapped up in days for a price close to list have now sat on the market for months and faced deep price cuts. A report from Prudential Douglas Elliman reveals that the median sales price of a luxury apartment (defined as the top 10 percent of the market) fell nearly four percent to $4.02 million in the fourth quarter of 2008 compared to last year. The top of the market is likely to continue to weaken as the fallout from failed banks and Wall Street firms continues to be felt. Our Sunday real estate round-up continues to show buying from financial fat cats but many are trying to sell their apartments for readily available wealth. StreetEasy.com says that almost 42 percent of the 259 Manhattan homes currently listed for $10 million or more came on the market since September. What affects Manhattan also affects the Hamptons with vacation and second homes searching for buyers that may be less ready to invest in something for pure pleasure.

It’s not much better across the pond. Bloomberg reports that luxury home values in London’s nine most expensive neighborhoods fell almost 17 percent last year. Like New York City, London is a big financial center and the loss of jobs in banking, finance, insurance and related industries is having a big impact on the market. The real estate brokers at Knight Frank report that the number of houses and apartments sold for at least 1 million pounds last year fell 49 percent from 2007’s record number. Overall it is predicted that London luxury housing values could fall by 30 percent by the time the real estate slump hits its inevitable bottom.

Yusuf Abdullah of  Media Monitors Network has this interesting report into the much talked about Dubai real estate scene of which quite a lot can be categorized under the luxury umbrella :

The property bubble in Dubai has burst as credit has become scarce and international investors have scrambled to dump their assets to minimize losses. That may shatter Dubai’s goal of creating a sustainable economy by building the Persian Gulf hub for finance and tourism, forcing it to depend on oil-rich neighbor Abu Dhabi for financing. The rulers of Dubai had speculated that the price of oil would perhaps continue its upward surge–it had reached $147/barrel before its precipitous fall to $40/barrel or less in recent days. With Dubai’s reserves at a paltry 4 billion barrels compared to Abu Dhabi’s 92 billion, Dubai is more vulnerable to such price fluctuations.

Banks have tightened lending or frozen it altogether. Amlak Finance PJSC, one of the biggest mortgage lenders in the UAE, announced on November 19 that it had suspended new home loans. London-based Lloyds TSB Group Plc stopped offering mortgages for apartments in Dubai on November 11 and reduced the amount it will lend for villas from 80 percent to 50 percent of the price. This has naturally had a negative effect on property values. For instance, in November, the cost of a seven-bedroom villa on Palm Jumeirah dropped to 19 million dirhams ($5.2 million), still an exorbitant price, down from 30 million dirhams in September, according to the Dubai unit of German real estate company Engel & Voelkers AG.

Simon Packard of Bloomberg confirms that the London luxury real estate market is not in a good condition:

Luxury home values in central London fell in 2008 by the most in more than three decades as the worst banking crisis since World War I decimated demand from the city’s financial professionals.

The average value of a house or apartment in London’s nine most expensive neighborhoods fell almost 17 percent last year, according to Knight Frank LLP, which tracks prices dating back to 1976. Values declined 2.2 percent in December, the ninth consecutive monthly drop in an index that mostly covers homes costing at least 1 million pounds ($1.5 million).

Demand for residential property in the U.K. capital has waned amid a worldwide credit crisis that the research firm Oxford Economics estimates could cost London 60,000 jobs in banking, finance and insurance by the end of 2010.

“The market’s fortunes will be driven by economic conditions — especially those in the City,” said Liam Bailey, Knight Frank’s head of residential research, referring to London’s main financial district.

Worst hit so far have been homes worth up to 2.5 million pounds, a segment of the market where values fell 22 percent last year. Homes in that tier are favored by financial professionals who have been hit with job losses and “fears of further job cuts in 2009,” Bailey said.

The flip side of this negative status quo and short term outlook for the luxury real estate market is of course that it offers a tremendous buying opportunity for the cash rich and affluent investor so if you are looking for your dream luxury holiday or retirement castle and you match this profile of sitting on a mountain of cash, now is not a bad time to go shopping !

Real Estate Investment, UK Investment, US Investments Dubai real estate, London, Luxury Real Estate, Manhattan, Mark Knowles

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

Every retailer expect and need surging sales in Q4 peaking with Xmas sales and it is no different for the E-tailers, traditionally led by eBay and Amazon.com.

Lately, however, whilst traffic and revenue figures have continued to grow for fixed-price online E-tailer Amazon.com, the picture is quite different for auction site eBay who is seeing a drop in year-on-year traffic and sales figures. this year. And that worries observers of the industry who are now asking themselves whether eBay has got what it takes to turn around this negative trend and win back its lost market share and end-users.

This post looks into the problems at the heart of eBay and what experts and analysts have to say about this falling giant who only a few years back was synonymous with E-tailing.

Christopher Lawton of Wall Street Journal points to the dropping performance by eBay as being primarily caused by customers who now seem to favour the fixed-priced sites such as Amazon.com and where eBay has less of an edge and also because of continued problems with unscrupulous sellers which make customers turn to other sites with better control over the purchase process:

Weekly traffic to the auction site fell 16% between Nov. 3 and Dec. 14 from a year ago, according to research firm comScore Inc. In contrast, Amazon.com had 6% more unique visitors during the same period.

The weakness is showing up in the sales of eBay sellers such as Gary Meyer. Mr. Meyer owns Gem Enterprises Inc. in Merchantville, N.J., which lists more than $300,000 in tech equipment such as printers on eBay. So far this holiday season, Mr. Meyer’s sales on eBay are down 30% to 40% from a year ago, he says. “We’ve geared up our Web site more and started listing on Amazon.com and other venues,” Mr. Meyer says.

Mr Lawton continues by hinting that after the change a year ago of their CEO from Meg Whitman to Mr John Donahoe, the company’s strategy and course are now more confusing to users and analysts alike as new initiatives trying to win back lost clients seem to have led to mixed results and so far not encouraging financial results:

EBay performance this quarter could be a referendum on the changes Mr. Donahoe has made this year. Since taking over for former CEO Meg Whitman in March, Mr. Donahoe has sought to rev up growth and reclaim buyers who had stopped visiting the Web site.

His most significant move has been to make eBay less of an auction house and more like Amazon, Walmart.com and Sears.com, selling fixed-priced goods, which consumers now prefer for speed and convenience. Among other changes, Mr. Donahoe has cut the fee to list fixed-price items on eBay and boosted the fee charged when an item sells, a model that helps fixed-price sellers better set profits.

Yet the changes have so far had little financial impact — and have angered many loyalists. Transaction revenue per listing between October and the end of November plunged 28% from a year ago to $1.44, according to Majestic Research. Wall Street analysts now estimate the San Jose, Calif., company will post its first year-over-year revenue decline when it reports fourth quarter earnings next month. Seattle-based Amazon has forecast an at least 6% increase in fourth quarter revenue over last year.

“We haven’t observed…any material positive changes on the buyers’ side of the equation,” at eBay, says John Aiken, managing director with Majestic Research.

The fact that the purchase process is faster and less complicated on fixed-priced sites such as Amazon.com should not in some experts’ views make eBay abandon their core strategy which is all about offering consumers the chance to sell and buy at flexible prices. Lately, however, eBay has under its new leadership of John Donahoe been encouraging sellers to offer items at fixed prices, making it appear more like a traditional online retailer.

Stephen Foley of UK-based The Independent quotes Laura Martin, a media analyst at Soleil Securities for putting the blame for this wavering strategy at the top of the company:

Consumer spending numbers are going down for all retailers, but eBay has particular problems because it is becoming increasingly difficult for customers to find the deals that they want on there, amidst all the clutter of fixed-price items. I don’t understand why eBay is making itself more like their competitors instead of less.”

Michael Fowlkes of Bloggingstocks  reminds us that eBay is still the King of e-commerce but he does acknowledge that there are problems facing the giant especially as Amazon’s traffic and revenue numbers continue to grow despite financial crises:

While it is true that eBay has been seeing a large number of users defecting to other popular e-commerce sites such as Amazon, Walmart.com and Sears.com, it is also important to note that eBay is still the king when it comes to e-commerce, and the site is still sitting on three times the volume of its competition. Regardless, the writing is on the wall, and the site is doing all it can to move quickly into the fixed-price marketplace that has been gaining steam over the past couple of years.

Mr Fowlkes goes on to point out that eBay could find themselves in the classic stuck-in-the-middle strategy if they are not quick to clearly define what their business and service is all about to end-users and investors alike:

It is a tough situation for eBay as it tries to aggressively redefine itself. For a company that has built itself on the back on the auction business, a too rapid and aggressive move into the fixed-price business is definitely going to ruffle a few feathers. The company has to try its best to appease its current sellers while at the same time moving as strongly as it can to keep and regain buyers, all the while trying to entice new shoppers into the site.

Some sellers have voiced disapproval, stating that the company is moving too quickly into the fixed-price business, and that their loyal customers are still more interested in finding the lowest price merchandise available, which is often achieved through the auction side of the business.

Though it remains a fact that eBay has many loyal users and bidders, there seems to be a trend among consumers lately to prefer the no-nonsense fixed-price sites to the auction based ones with speed, convenience and assurance to get the item one wants being the key reasons for consumers preferring an Amazon type online offering to the auction based ones which eBay invented and still rules.

So when Amazon is about to officially record its best ever Xmas sales, eBay is about to record declining sales for the first time in its operating history and one has to ask the question if eBay’s strategy is the right one moving forward?

How it all works, Investment Company, Investment News, Online Investment, US Investments Amazon, E-Tailers, eBay, Online shopping

For more than two decades, software giant Microsoft has gone from strength to strength and has despite its obvious failure to get into the online business sphere and take on Google, managed to grow its revenues and profits at a staggering rate.

2008, however, proved to be a bad year for Microsoft in some of its key areas : The failed and much debacled Yahoo! take-over fiasco and its Vista OS failure rang amongst the most notable headlines for Microsoft who is now facing the prospect for the first time of not having their founder, Bill Gates, working at the company as he retires to run his charity organisation with his wife.

While analysts and experts disagree on the state of this giant and how it will fare in 2009 and beyond they do seem to agree that for CEO Steve Ballmer there lies a very challenging year ahead for Microsoft.

This post looks into some of the experts’ opinions and also what exactly lies ahead for Microsoft in 2009.

Shane O’neill of Networkworld.com highlights the obvious areas where Microsoft got it very wrong but is also quick to point out that not everything that Microsoft did during 2008 was a disaster, in fact the contrary :

Equity Investment, Investment Management, Online Investment, US Investments Google, Microsoft, Operating system, search advertising, software