This Week in Finance

Welcome to WallStreetOasis.com's latest This Week in Finance newsletter, where we profile the hottest investment ideas, substantive market data, incisive financial blogging, and the best under-the-radar research Wall Street has to offer.

Investments: Asset Allocation

On both a macro level, as the Bush administration's reliance on foreign debt to finance extravagant spending and tax cuts has helped push the US economy to the tipping point, and a personal level, where individual citizens are now facing personal financial crises from years of a national savings rate of zero, the American culture of debt has proven itself to be amongst the largest reasons for the trouble we currently face. As hope abounds for a reversal in thinking, both politically and economically, policies led by a fiscally responsible government that encourage saving and retirement planning will hopefully become more prevalent. Seeing this phenomenon, coupled with more options available to invest those savings, the various theories of asset allocation as we save toward retirement become more important than ever.

The rule of thumb in terms of asset allocation has been something along the lines of your percentage allocation to stocks should be "120 minus your age." Therefore, a twenty year old person should invest 100% of his savings in stocks, a forty year old 80%, and so on, with the rest split between bonds and other low-risk, income-generating investments such as cash and municipal securities. And this all before even taking into consideration the various options that make up a category as broad as "stocks" (domestic vs. international, growth vs. value, small-cap vs. large-cap). The Iowa Public Employees' Retirement System (IPERS) has a good asset allocation calculator that spells out the suggested asset allocation under conditions you choose and adjust, such as age, current assets, tax-rate, required income, and risk tolerance.

There are also many new theories on asset alloction, many of which involve investments in asset classes that include commodities and various alternative asset classes such as real-estate, hedge funds, and private equity. Though more complex and difficult to access, there is supposed value in these as many (commodities, hedge funds) can be counter-cyclical, and thus provide valuable diversification in an investment portfolio. TheSkilledInvestor.com has a number of good articles that address these issues.

Research of the Week: Read the commentary

One way to find good research is by looking into the firms most closely associated with investing. While nearly all successful investment firms produce various market commentary and security analysis as part of their investment and research process, many also, in fact, publish a good amount of this commentary as a service to both their clients and to potential investors. PIMCO and ING , two large global players, have a large amount of content available on their websites, with myriad articles and commentaries covering a variety of topics. Other firms who operate within a narrower band often publish their monthly or quarterly commentaries as it relates to their investment universe. Pzena Investment Management and Horizon Asset Management are two such firms. In general, it never hurts to search and find out what is publicly available from any investment firm that you respect.

Blog-Wrap: Not what you expected

In terms of headline stories, much of the coverage this year has been focused on rising energy prices, a weak housing sector, and a falling US dollar. However, as of the start of September, the numbers actually tell a different story. Bespoke Investment Group examines how homebuilders and US dollar indexes are actually up on the year, while the energy sector is down.

TWIF Notes: Just for fun

Check out the Hedge Fund Implode-O-Meter for the latest in hedge fund collapses!

Selling high on the Cubs. The supposedly cursed Chicago baseball team could not have picked a better time to have great success on the field for owner (and now seller) Sam Zell.

Welcome to WallStreetOasis.com's latest This Week in Finance newsletter, where we profile the hottest investment ideas, substantive market data, incisive financial blogging, and the best under-the-radar research Wall Street has to offer.

Investments: Weighing the options

Since the credit crisis began to unfold in earnest last summer, volatility has steadily risen and has remained elevated across many asset classes. As an example (using a common benchmark for volatility), the VIX index, which measures the implied volatility of S&P 500 index options, has averaged 23 since August 2007, while averaging only 13 during the prior twenty months. The most obvious beneficiary of an environment of increasing volatility is option prices, which are largely dependent on volatility. How exactly to play options in an already volatile environment is the tricky part, and I’ll address some possibilities below.

First things first though – you need the ability to trade options before you can think of how to trade them. While most online brokerages have options trading available, and will you let you do more complex strategies, especially when phoning in the orders, there is one particular broker that stands out when it comes to derivative trading expertise and execution. Interactive Brokers has very competitive trading costs and minimums, while offering a very wide array of products and expertise, particularly in options markets. If you are serious about trading, IB is a great place to do it.

As for strategies, there’s certainly no shortage. The New York Mercantile Exchange (NYMEX), the largest commodity derivative exchange, offers a nice summary of the payoff profiles of multiple options strategies. In terms of just capturing gains from a jump in volatility (having no opinion on whether the price of the underlying will go up or down), the purest strategy is a straddle, where you buy an at-the-money call and an at-the-money put. The resulting V-shaped return profile means that if the underlying moves sharply in either direction (thus is volatile!), you make money. Of course, there are many more risks and complexities associated with trading options (too many to go into here) - the Options Clearing Corporation has an extensive document that addresses these issues.

Finally, the CBOE now offers trading in VIX futures, an easier way to play volatility than jumping through the multiple hoops required to set up successful options strategies. The exchange offers a great introduction to these products here.

Research of the Week: Don’t ignore the academics

Much of what we read today comes in an easily digestible, filtered form. Newspapers, webpages, and blogs do the work (with varying success) of taking data and research and presenting it in an easy to understand format. However, if you’re interested in more academic pieces, there is a great amount of research available through the Social Science Research Network (SSRN). SSRN.com offers users the ability to search papers by topic – you can enter in anything from “hedge funds” to “private equity,” “value stocks” to “CDOs,” and get research from all over the globe. While financial research papers are often highly mathematical, there is often a lot of useful information available outside the numbers - a quick search into any topic you are interested in or working with will certainly prove useful.

Blog-Wrap: Jobs on Wall Street, or the lack thereof

Naked Capitalism looks at the most recent trend in financial employment – specifically how the specialization of roles during the “boom” years has created great difficulty for those looking to now make a transition into other financial careers. A great point brought up here is that the allure of big payoffs often leads young professionals down this road without consideration of the future and how risky these specialized roles can be.






TWIF Notes: Struggles continue

Successful hedge funds, most notably Harbinger Capital run by Phil Falcone, are struggling this summer , as the short financials/long energy trade has reversed violently. Dan Loeb’s Third Point has also suffered from this about-face.

Insider trading maybe? Someone bought $1.7 million worth of put options on Bear Stearns, betting that the stock would fall about 50% in less than two weeks (when the options were set to expire), and made $270 million in the process.

Re-release of 2008 Recruiter Database!


We have released a new and improved version of the 2008 Recruiter Database. You just have to log in (or register if you haven't already) to view it and click on "Recruiter Database" in the green welcome block to see it. This list is more extensive than the one up previously and also includes websites (where all the data was compiled) and location.

Welcome to WallStreetOasis.com's latest This Week in Finance newsletter, where we profile the hottest investment ideas, substantive market data, incisive financial blogging, and the best under-the-radar research Wall Street has to offer.

Investments: I want my money in Hedge Funds!

As more and more assets flow into hedge funds (some estimates have total AUM reaching $4 trillion by the end of this year), it is strange to notice the lack of availability of these investments to retail investors. Granted, hedge fund related strategies are more complex, but given the growing allocations by large pools of traditionally long-only money (pension plans, endowments, foundations), is it that far-fetched to assume that individual retirement accounts should allocate some percentage to alternative investments (and specifically, hedge funds)? I would argue no, and that, in fact, as this need becomes more apparent, the availability of products that allow this type of exposure will begin to grow at a rapid pace. As of yet, however, it is hard for the retail investor to gain access to the asset class.

This begs the question of what is currently available. Though far from perfect, there are a few options. Firstly, there are the stocks of publicly traded companies whose main revenue stream comes from hedge funds. These companies include Och-Ziff Capital Management Group (OZM), GLG Partners (GLG), and Fortress Investment Group (FIG). As these are public companies, you can track the performance of their underlying funds through required filings (usually available on their webpages), keeping in mind that performance isn't always the main driver of the stock price - interest rates, sentiment, asset-growth, and industry trends, among other factors, can all contribute to gains or losses on the stock irregardless of performance. Greenlight Reinsurance (GLRE), while technically an insurance company, invests the vast majority of its float in the Greenlight Capital hedge fund, thus tying a large amount of its income to the performance of the hedge fund, given normal payouts over time.

There are also mutual funds and ETFs that offer hedge fund style investing - that is, the ability to go long and short. MSN has a listing of the best performing long-short mutual funds, while About.com has a few "bearish" mutual funds, which are either completely short or short-biased.

Finally, there are so-called "short-extension" strategies, which are starting to be offered to the investment public. The most popular of these strategies is the "130/30" where $100 of stock is bought and $30 of stock is shorted, from which the proceeds are used to buy $30 more of stock on top of the original $100, keeping a net exposure of $100 but using leverage to enhance returns and provide access to gains on short positions as well as long. A list of available 130/30 funds can be found here.

Research of the Week: Forecasts

In nearly all categories of investments, understanding the expectations built into the economy is key to gauging sentiment and understanding why certain valuations persist. Gathering as much information as possible with regards to the future of key economic data points, including growth and interest rates, is always the best way to go about estimating what to expect in the near-to-middle term. In that light, SIFMA has just released its semi-annual economic outlook. Wachovia posts an economic review and forecast publication monthly. The latest can be found here.

Blog-Wrap: A bad sign

GigaOm examines the growing number of sales on Craigslist. With both garage sales and overall items for sale growing at alarming rates, one can only infer that the need to sell off assets by more and more citizens is driving this surge, indicating further economic hardship in the U.S.

TWIF Notes: In the news this week

Merrill Lynch sold off a large chunk of its "toxic" CDO exposure, giving Lone Star Funds a great deal just to continue the long process of cleaning up its balance sheet. The bigger question is how many other banks will follow suit, and in what size?

Land lines continue to lose market share but not necessarily for the reasons you may think.

Welcome to WallStreetOasis.com's latest This Week in Finance newsletter, where we profile the hottest investment ideas, substantive market data, incisive financial blogging, and the best under-the-radar research Wall Street has to offer.

Investments: Cash is King

Some may not think of "cash" as an investment - it's not volatile, sexy, or even particularly interesting. You won't see great returns having your money sit in cash - but (at least the great majority of the time) you won't lose any money either, which in today's market can be seen as the biggest victory of all.

When I refer to cash, I mean vehicles where you can keep your money "risk-free." Money market savings accounts, certificates of deposit (CDs), government bonds, various money market and "stable-value" mutual fund products are all cash equivalents. These securities, however, do vary, and especially in today's wild markets, choices between them can be very important. The yield on these various instruments can be vastly different, and usually vary with the credit risk and stability of the underlying issuer (banks, governments). Bankrate.com and Bankaholic.com have good lists comparing the offerings (and rates) available at various banks.

There are two main concerns when holding cash. One, as mentioned above, is the stability of the underlying institution. With the recent failure of IndyMac and growing concerns over numerous banks (Washington Mutual in particular), the safety of deposits, though FDIC insured up to $100,000, is at the forefront of many investors' minds. Until the credit crisis comes to pass, always be aware of the condition of any bank that you keep any significant amount of money with.

The second concern is holding cash in a currency that is losing value. With inflation fears persisting and prices rising, a weak US dollar is certainly something any cash investor should monitor. Now, however, certain banks are offering foreign currency savings, money market, and CD accounts Everbank.com, offers a multitude of CDs that offer exposure to currencies and interest rates from other countries, and combinations of countries based on geography and other characteristics including commodity, energy, and oil exposure. Though the interest rates are not as high for these foreign cash accounts as you would receive investing directly in a respective foreign bank, certain currencies offer significantly higher interest rates than US banks, and all offer the chance to participate in the appreciation of the currency vs. the US dollar. And the best part? Everbank is holding up tremendously well, having just released record earnings.

Research of the Week: Rumors

For those of us who work in finance, and in the hedge fund and private equity community in particular, we understand the importance of gossip. Keeping track of who's doing what, when they're doing it, at what price and with whom are not only interesting to keep track of, but very relevant in understanding how money is being made (and lost).

Albourne Village is a great site to keep up with all the goings on the hedge fund and private equity space. They have daily and weekly alert emails, news updates, resident boards, and a "library" where current research pieces can be downloaded. All you need to do is complete a quick and free registration process. Other good sites to keep you up on the gossip of the day include FinAlternatives, HedgeWeek, and Private Equity Wire.

Blog-Wrap: Fannie and Freddie (everyone's got an opinion!)

Blogs have been teeming recently with Fannie and Freddie. EconBrowswer takes a look at their role in the subprime crisis. Accrued Interest wants them broken up. And the New York Times reports on hedge fund manager extraordinaire Bill Ackman's plan to rescue the troubled GSEs (which "amazingly" involves wiping out the current equity, which he is short!)

TWIF Notes: Some good news for a change

The Wall Street Journal has five things to be bullish about right now.



TheStreet.com has 5 reasons to buy Lehman Brothers.

Welcome to WallStreetOasis.com's latest This Week in Finance newsletter, where we profile the hottest investment ideas, substantive market data, incisive financial blogging, and the best under-the-radar research Wall Street has to offer.

Investments: Atop the capital structure is where you want to be

As the S&P 500 officially enters bear market territory, down 20% from its October, 2007 highs, investors continue to grow weary of value traps and equity markets in general. Fixed income investments, on the other hand, have outperformed, but with a hawkish fed spurred on by inflation fears making rising interest rates more and more likely, this may soon end as well. Additionally, with corporate defaults rising, bonds, which are unsecured and may suffer severe losses, do not seem like a safe place to park money.

In a company's capital structure, secured bank loans are the safest asset (the "top" of the structure), as they are backed by a lien against the company's assets ("secured") and they normally have shorter duration (less interest rate risk). Leveraged loans are made by banks to lower-rated companies, often as part of the financing of a takeover or merger. During the recent market turmoil, these securities have traded down to historically low levels as banks and other investment structures (CLOs, SIVs) continue to sell off assets (even good ones) in order to raise capital, deleverage, and in some cases, completely liquidate. Though it is difficult for the retail investor to gain direct access to the leveraged loan market, there exist a number of closed-end ETFs that hold a portfolio of these assets. On top of the yield that these securities offer, due to the nature of closed-end funds, which can trade at a significant discount to the underlying NAV, there is additional equity-like upside in many of these securities. As an example, for a closed-end fund priced at a 10% discount to NAV, where the underlying loans are trading at an average of 85 cents on the dollar, if the underlying portfolio moves closer to par (say, 95 cents), and the closed-end fund discount moves back to neutral, an investor would make nearly 25% on this appreciation alone, before even taking into account the monthly interest collected.

SeekingAlpha has a good write-up on a number of these closed-end funds. ETFConnect.com has an entire section devoted to loan participation funds. You can also compare multiple funds on one page (total assets, current discount to NAV, current yield) using the site's "Find a Fund" feature. Finally, be sure to take concentration (how big are the top 10 holdings as a percentage of the fund), liquidity (how much does the CEF trade), and leverage (how much does the fund borrow vs. its total equity) into consideration for any potential investment.

Research of the Week: Only for the very brave

As mentioned above, investing in equities right now is not an easy thing to stomach. Volatility remains high and stocks that seem "cheap" by any historical standard have faired poorly against headwinds of continued selling in the market. In fact, momentum stocks have significantly outperformed cheap ones over the past year. However, for those with a longer-term outlook and the guts to take short-term losses, many stocks are priced very attractively. Zacks Investment Research is a great place to obtain free (well, a lot of it is free) equity research - everything from various screens you can use to filter and find attractive stocks, to in-depth analyst reports, to various blogs, advice columns, and investment metrics. If you're looking for ideas, this is a good jumping off point.

Blog-Wrap: The Death of Bear Stearns

Portfolio.com delves into the fascinating Vanity Fair article that details the final days prior to Bear Stearns' collapse and the ensuing negotiations surrounding its rescue by JP Morgan and the US Federal Reserve. Whether or not you agree with this blog about "pointing fingers," the article is a fantastic read for those who enjoy both high finance and high drama.

TWIF Notes: Did you know...

...that if you invested in the S&P 500 10 years ago, you'd be DOWN right now.

...that JP Morgan's CEO Jamie Dimon sat down with Charlie Rose for one of the most insightful amd interesting interviews of the year.

...that the trader who nearly single-handedly caused the largest hedge fund collapse in history, Brian Hunter (of Amaranth fame), granted his first interview to Fortune Magazine and not surprisingly, makes few apologies.