Sunday, May 26, 2013

"My Cousin Vinny", U.S. Jobs, Recent Market Moves and More

On May 14, hedge fund manager David Tepper (Appaloosa Management) presented a positive market view on CNBC and referenced a line from the 1992 movie “My Cousin Vinny” when he emphasized “the evidence is overwhelming” that the U.S. economy is improving and reduced stimulus by the U.S. Federal Reserve should be good news for investors. His comments triggered a sharp positive move in equity markets.

Last Wednesday, Federal Reserve Chairman Ben Bernanke’s testimony to Congress included “the job market remains weak overall: The unemployment rate is still well above its longer-run normal level, rates of long-term unemployment are historically high, and the labor force participation rate has continued to move down. Moreover, nearly 8 million people are working part time even though they would prefer full-time work.” 

Bernanke’s comments triggered a strong move up the U.S. equity market(under the assumption that stimulus efforts will continue) followed by a quick reversal and decline for the day. Several sources cited that this type of price move was similar to March 24, 2000 (dotcom bubble) and October 11, 2007 (credit bubble) where the S&P 500 hit new highs then declined by more than 1%. James Mackintosh (Financial Times) suggested, “we probably do not need to be braced for another crash just yet. True, equities are expensive compared with long-term profits... Still, a real crash is hard to imagine when central banks are in effect underwriting markets....Barring any further bad news, a 5-10 % fall looks like a short-term buying opportunity.” Also on Wednesday, Japan’s Nikkei 225 equity index, which had risen about 50 % since the beginning of 2013, dropped 7.3% for the day
  • Regarding Tepper’s comments – he is widely followed and his comments have moved markets in the past. Investors should note that similar to other top-tier money managers, if markets move against him, he would likely take defensive action. 
  • Regarding Bernanke’s comments – the slow pace of job market improvement, along with limited Congressional action to address the problem, is increasingly a concern of both Main Street (where the pain is) and Wall Street (where the money is).
  • Regarding market moves in the U.S., Japan and elsewhere – the strong positive moves in global equities have surprised many market participants. As summer vacation season approaches, investors may be more interested in protecting profits, rather than pursuing new investment ideas.

Sunday, May 12, 2013

After the $45 Million Global Bank Heist, Where did the Money Go?

Last week, the U.S. Attorney’s Office (Eastern District of New York) announced that two cyber-attacks resulted in a theft of $45 million from the global banking system.
  • The first incident (December 22, 2012) used prepaid debit cards issued by RAKBANK in the United Arab Emirates to withdrew $5 million via 4,500 ATM transactions in 20 countries (during a 2 1/2 hour period in New York City, there were about 750 transactions made at 140 ATM locations).
  • The second incident (February 19-20, 2013) involved prepaid debit cards for the Bank of Muscat in Oman. Within 10 hours, about 36,000 ATM transactions in 24 countries withdrew about $40 million ($2.4 million came for 3,000 ATM withdrawals in New York City.
  • The initial systems break-ins occurred at ElectraCard System (Pune,  India) and EnStage, Inc. (Bangalore, India) that provide outsourced services to MasterCard.
  • U.S. Attorney Loretta Lynch said, “Moving as swiftly as data over the Internet, the organization worked its way from the computer systems of international corporations to the streets of New York City, with the defendants fanning out across Manhattan to steal millions of dollars from hundreds of ATMs in a matter of hours.”
  • Secret Service Special Agent Steven Hughes said, “New technologies and the rapid growth of the Internet have eliminated the traditional borders of financial crimes and provided new opportunities for the criminal element to threaten the world’s financial systems”
  • Federal prosecutors noted that “Unlimited Operations” such as these have three main characteristics: 1) a “surgical precision” to carry out an attack, 2) a global cybercrime organization, and 3) a fast and well-coordinated ground operation. Authorities in Japan, Canada, Germany, Romania, United Arab Emirates, Dominican Republic, Mexico, Italy, Spain, Belgium, France, United Kingdom, Latvia, Estonia, Thailand, and Malaysia cooperated in the investigation, which continues to seek crime ring members in Europe and Asia. The defendants in New York were charged with money laundering and conspiracy to commit access device fraud.
  • Because these arrests account for a small fraction of the total fraudulent transactions, it is likely that more arrests will be announced in the future
  • In addition, these incidents are a reminder that cyber-crime is one of the fastest growing areas of crime, which also presents threats to power plants, electrical grids, and the information systems of government and major companies
  • As a result, demand for a broad set of solutions and services that identify, monitor and protect against cyber-attacks continues to expand.

Sunday, May 5, 2013

Notes from Milken Institute - Global Conference 2013

Last week, the Milken Institute’s annual conference in Beverly Hills, CA provided discussions on topics including “Inventing the Impossible” and “Bioscience Discoveries That Will Blow Your Mind” and interviews with global players such as Tony Blair, Al Gore and Carlos Slim

The following notes highlight themes from three sessions.

On Commercial Real Estate Investing: Panelists thought that the U.S. is less risky that other regions.
  • Barry Sternlicht, Starwood Capital Group - is concerned about some financial firms and said “the same guys that drove the bus off the cliff are driving the bus again; the banks are issuing as fast as they can and selling it off faster.”
  • William McMorrow, Kennedy Wilson - likes Ireland and the U.K..
  • Sam Zell, Equity Group Investments – likes Brazil, Colombia and Mexico.
On Private Equity Investing:
  • Leon Black , Apollo Global Management – this is a “fabulous environment to be selling into” and “we are selling everything that’s not nailed down in our portfolio, and what is nailed down, we are refinancing. There are selective deals to focus on… but we are most focused on strategic sales”.
  • David Bonderman, TPG Capital - “Europe is not going to fall into the sea”, Indonesia seems pricey, China seems oversold, the U.S. is safety but worrisome, emerging markets are reemerging and Japan is problematic.
  • Jonathan Nelson, Providence Equity Partners - “there is a disconnect between public equity valuations and what we see and what we worry about”.
  • Jonathan Sokoloff, Leonard Green & Partners - “there is a complete disconnect between the performance on Main Street and performance on Wall Street.”
  • Scott Sperling, Thomas H. Lee Partners - “you have to spend more time, and work more intensively, to put together transactions.”
On “Global Markets in Uncertain Times”:
  • Madelyn Antoncic, VP/Treasurer - World Bank - the U.S. Federal Reserve has to be careful about how it exits its stimulus efforts.
  • Willem Buiter, Chief Economist – Citigroup -  central banks can comfortably live with any size balance sheet without any inflation risk.
  • Terry Duffy, CEO - CME Group -  central banks don not understand their exit strategy from stimulus efforts.
  • Mohamed El-Erian, PIMCO - “investing fundamentally is like being a surfer in a surfer competition, You’re waiting for the right wave but you cannot wait forever”.
  • Ken Griffin, Citadel - “central bank policies are allowing our politicians to delay the difficult decisions.”