Clear Indexes Ideas

Shopping for Profits in the Retail Aisle

The Summer is flying by and excitement is building as we diligently work on setting up the fall 2008 portfolio and ETF design contest (students/professors/administrators: there is still time to get your school involved, email me). Of course, I’m not the only one excited for the upcoming school year—retailers are reading their cash registers. Bath & Beyond (BBBY)’s most recent 10-Q notes “sales levels are generally higher in August, November, and December.” August was primetime in the $65.7 billion (2007) back-to-school shopping market. But given the economy and the drop of household wealth between the stock market pull back and the decrease in home values, how much will parents open their wallets this year?

According to a survey conducted for the National Retail Foundation (NRF), the average American family with children will open their wallets wider this year and spend $594.44 on back-to-school shopping—a 5.4% increase compared to last year! Amidst a slowing economy and $4 per gallon gasoline, is such a gain feasible or is it wishful thinking on the part of an organization that encourages rising spending? A contrasting survey by Deloitte & Touche (http://www.deloitte.com/dtt/press_release/0,1014,sid%253D2281%2526cid%253D217302,00.html) found that 71% of parents plan on spending less on back-to-school shopping than last year. With imprecise forecasts such as these, it is important to apply common sense. Yes, spiraling energy costs and household net worth will change shopping habits. But school supplies, basic clothing, and certain electronics remain necessities.

It’s more likely that consumers will change where they buy than what. The retailers and producers that are most affordable should benefit the most from the changing distribution landscape of consumer spending. Discount retailers like Staples, Inc. (SPLS) and Wal-Mart (WMT) should fare well as shopper seek the basics at a discount. While there, a wondering eye make create additional purchase opportunities, adding to the “must haves list.” This is where Wal-Mart has an advantage.

Investors have embraced the stock—it is trading near a 52 week high. In Q1 of 2008, international sales increased by 22%. It has ridden the globalization wave from 1991, when the company opened its first international outpost in Mexico City, to Wal-Mart International making up 25.4% of its most recent posted revenue. The division has been able to profit from inroads made in Brazil, China, and India—and a presence in Russia could be imminent. It is in the unique position of being able to capitalize on growing wealth—and consumption--in emerging markets while at the same time becoming increasingly attractive to American shoppers looking for a bargain.

Mr. Corn is CEO of Clear Indexes LLC. He holds no positions in the stocks mentioned.

Which Screen Makes the Most cash?

The Digital “channel” is growing fast, but has yet to eclipse traditional media.

Last month, iTunes reached 5 billion songs sold. Apple (AAPL) has extended the reach of the app from the personal computer, to the mobile phone and the ipod. As many of us can attest to, iTunes has been a huge hit thanks to offering a wide array of movies and music in a logical and easy to use interface in conjunction with a stress-free buying process. Traders have made it clear that Apple is onto something (when looking at a two year stock chart). Its business model of offering choice and convenience to the consumer is where the retailing of media is headed. The general consensus is that digital is the way of the future—and if a media company isn’t at the forefront of this movement, its stock price will be depressed accordingly. But maybe not just yet. Real revenue has been achieved, surely there is traction here. The supply chain  has been reduced to near zero and the price per song has clearly gone up. My hat is off to Apple for all of these achievements.

Yet when you forgo the hype and emotion generated by iTunes, and view media from a quantitative perspective, a decidedly different picture emerges. PricewaterhouseCoopers reported in their Global Entertainment and Media Outlook that as of 2007, digital and mobile distribution made up only 5% of total spending on entertainment and media. PWC projected that this percentage will increase to 11% by 2012. Yes, this growth is rapid, but the viewing shift that will stem from an estimated 16.1% annual increase in broadband use and the proliferation of high-speed wifi networks makes it a feasible projection. Even with momentum generated by the aforementioned favorable growth trends, 11% is still a small percentage of the $2.2 trillion annual spending on media and entertainment.

It appears that the “digitalization” of traditional media is occurring slower than we think. Yes new firms with new ideas are creating real shareholder value and influencing society, but the big bucks are yet to be made. While the MSM discusses the hype on CNBC behind the latest iPhone by market day, we go home and watch television at night.  Much hullabaloo has been made about the aging of the baby boomers, and how this shift in demographics will create profit opportunities in the healthcare, pharma, and retirement sectors. But what do many of the 78.2 million boomers do for entertainment? Most are computer savvy, but the class grew up in the golden age of television. The sheer magnitude of this group should keep traditional television afloat, even as the under 30 crowd shrugs its shoulders for the internet. The PWC study did project that internet advertising will grow at a 19.5% compounded annual clip. So the growth is there, but on what base figure.  Smart investors know the difference between growth and value and how to invest in both.

News Corp. (NWS) is well positioned to take advantage of the traditional media and entertainment tastes of many aging boomers with its roster of television networks and print newspapers. The company has also embraced the internet as a growth channel. Its Myspace.com division continues to soundly trounce Facebook in monthly unique US visitors by a 100% margin (72 million vs. 36 million) with revenue growing at a rate of 25 to 30% yearly. News Corp. (NWS) also worked with NBC Universal (NBC) to develop Hulu.com, a competitor to Google’s YouTube (GOOG) that legally streams ad-supported programming with superior picture quality. News Corp flexes its balance sheetfor new media acquisitions opportunistically. Although NWS’s revenue from online properties makes up a small percentage of the $28.655 billion in total revenue booked for fiscal year 2007, it is a company prepared to capitalize on favorable short-term trends while developing—and acquiring--internet assets for the long-term.

Investing in media can be profitable. Investing in rapid growth has its issues, and newer firms such as Yahoo (YHOO) which stumbled again this quarter comes with challenges. Size, strength, growth can be competing assets in the media industry. Each can awarded a different price to earnings ratios as evidenced by the firms mentioned in this blog.

Sources:
MediaPost Research Brief: Net Generation Driving Growth In The Global Entertainment & Media Industry

http://www.nytimes.com/2008/06/16/business/media/16myspace.html

http://www.techcrunch.com/2008/06/12/facebook-no-longer-the-second-largest-social-network/

Disclosure: Mr. Corn is CEO of Clear Asset Management Inc. Google (GOOG) is a holding in the Clear Large Cap Growth portfolio. Mr. Corn owns shares of (GOOG) by his participation in the portfolio. He owns no shares in the other firms mentioned. This blog was originally drafted by Clear intern Jimmy Baker.

The Battle for Global Domination: Smart Phone Showdown

Last year I caused a small uproar posting purely about investing in Research in Motion (RIMM) and (AAPL). I am a Blackberry user and continue to be intrigued by the iPhone. My readers know that I do not believe that one man's opinion is statistically significant.

A recent study by Harris Interactive last week indicates that those who plan on reducing spending based on economic conditions will do so by decreasing electronics purchases (71%) and by dining out less (74%). Yet despite this apprehensiveness, only 41% of those polled said they would "go as far as" reducing mobile phone spending to cut costs. Let's face it, for many, their mobile communications device is an indispensable part, and partly defining facet of life. Just look at the legions of professionals addicted to their "crackberry", or the rise of text messaging as a preferred form of communication. Although it's a small segment in overall usage of cell phones, following the progress high-end phones has always been compelling for me because they steer the direction-and features-of the future phones utilized by the masses. Going back a few years, the Motorola (MOT) RAZR enjoyed a run as the "in" phone, and spawned an array of copy-cats.

Of course, these days it's all about iPhone and Blackberry. It seemed as if (RIMM), with its ease of communication and overall connectivity offered by Blackberry keyboards, was the way of the future, but that was pre-iPhone. Last summer, Apple's (AAPL) iPhone burst on the scene offering an elegant interface and design, ipod-like music functionality, and a PC-esque web browsing experience. Despite placing pretty big barriers to ownership, its high price tag, exclusive AT &T (T) service provider contract, incompatibility with corporate email juggernaut Microsoft Exchange/Outlook (MSFT), millions of iPhones were sold an capturing 25% of the US Smart Phone market.

Up until this month, Apple (AAPL) and (RIMM) have coexisted, with heavy reconnaissance but not openly attacking each other. Last week, Steve Jobs and co. got the blogosphere abuzz with iPhone 2.0 Not only has the entry price of the phone been cut to $200, Apple has included 3G network compatibility to erode the edge Blackberry held in browsing speed, made the device more corporate-friendly with Microsoft Exchange compatibility, and quashed a differentiator between iPhone and RIMM by incorporating built-in GPS. The new iPhone makes Apple's intentions clear: RIMM is in its cross-hairs. Meanwhile, the upcoming Blackberry Bold has adapted a sleeker design-and rumors of an iPhone-like touch-screen model abound. After all, what is good for the goose…

It's been roughly a year since iPhone first appeared-and it is clear that the interface is a game-changer that has captured its users through a new type of experience best attributed to Apple and Jobs, and is heavily influencing all phone design. There may be(hopefully) an expiration date on its exclusive contract with AT&T. Yet Apple has been reluctant to release its phone into emerging markets, thus creating a grey-market for exporting the iPhones and giving RIMM time to gain further footing in China and India. However, this stands to change quickly. Later this year, Bharti Airtel and Vodaphone (VOD) will begin selling the iPhone in India giving Apple the opportunity to build brand and customers from the collective one hundred million (and growing) subscriber base of the two telecom companies . It's only a matter of time until the Steve Jobs moves into China where (RIMM) already has a growing base.

Mr. Corn is CEO of Clear Asset Management Inc. Research in Motion (RIMM) is a holding in the Clear Large Cap Growth portfolio. Mr. Corn directly owns shares of (RIMM) through his participation in that portfolio.

Dividends and Consumers: Hanging with the Seniors

Today's WSJ has a data packed piece on why the US market is at "fair value." Translated, this means a few things, if we assume that the WSJ article is right.

First, indexers should expect volatility that goes no where. Perhaps the ride will be interesting.

Second, for active managers, moving sideways is known as a stock pickers' market. But as all stock pickers know, every market is a stock pickers' market. That is why we wake up without alarms and run to our computers in the morning, and get to work before everyone else. It is what we do. Pick stocks with the intent of beating the market.

Third is my real topic: how important is the stock market to consumers. Not the speculative consumers who live life paycheck to paycheck even as their income rises. I mean the "silent majority" types. This weekend I went to the beach where I found myself discussing various topics with fellow visitors, many of whom are regulars, and about one third are retirees.

One senior described how she rides out market volatility. She is no multimillionaire with a huge cushion. Most of my fellow beach people are teachers, social workers and middle managers.

She struck me with the wisdom of her buy and hold strategy. She is a Warren Buffet type investor not selling on volatility. She would only sell if either she no longer trusts the firm, or the stock deteriorates beyond reconciliation.

"I'm OK waiting for the market to return." She says. "It's the dividends: if they cut those, then I'm not sure what to do."

She lives off social security, a very modest pension and her dividends. Her holdings and her home will hopefully be passed onto her kids and grandchildren, and she will not ever have to sell them for necessities. Inflation cuts heavily into her earnings and she recognizes that. If the market goes higher, and she realizes capital appreciation, that will offset some of her erosion, and she is aware that the market rising is no reason to go out and spend. The best way for her to keep up with inflation is higher dividends.

Buy and hold and take the dividends. Not a bad investment philosophy.

This year we will see how the market and the big cap stocks hold up. We will also see how and if these firms can actively affect consumer spending through their dividend policy. The big question and source of anxiety for my friend and thousands like her is dividends, not 6-18 month market fluctuations. She is the type of consumer that is the backbone of the economy. She pays her bills on time. She eats out and goes to the movies with her grandchildren. She travels to see relatives and for pure adventure.

She is a core consumer. Let's see if public companies cut her pay. They may be cutting off their noses to spite their face.

(LEH) Lehman Brothers Discussion on Bloomberg Radio

Today at 9:10 am I will be discussing (LEH) Lehman Brothers and the ibanks, (MER), (GS), (MS) specifically. Where the industry now and what is next for the ibanks? I feel the opportunity for taking the high ground of mark to market and setting aside reserves in case the market deteriorates further is long gone. My call for this action along with full disclosure dates back to the fall on both Bloomberg radio and TV.

Listen to the perspective. Click here.

Disclosure: Mr. Corn is CEO of Clear Asset Management Inc. and Clear Indexes LLC. He does not directly own any of the securities mentioned. Clear Indexes publishes the Clear Global Exchanges, Brokers and Asset Managers Index which is tracked by the ETF (EXB). Mr. Corn owns shares of (EXB).

Help Yourself

This summer we are blessed with a plethora of interns. Our college contest spawns resumes of the best of the best that are looking to work with boutique firms for the summer and perhaps longer if the geography and schedules work.

We have every chair filled this summer and we have three exceptional CVs to share with other firms who are not yet filled. One student did his spring semester in Beijing and the internship he thought was lined up was canceled. These students are available for a variety of reasons.

It would be a loss to the student and a host firm for him to be idle this summer.

Our firm benefits from internships in many ways and I would like to share a few , especially with firms considering taking on an intern but have not yet jumped in.

• It sharpens our supervisory and education skills. As we have learned from experience, so must our junior staff begin learning how to supervise. The interns have senior interaction but are the direct responsibility of junior people. The guidance, life tools and skills that we draw upon to nurture our junior professionals is transferred. Good interns brings out the best in us.
• It tests our patience. At Clear, we assign real work. Work that is perhaps beyond their young training and experience and we are not sure of the short-term results. Re-explaining an assignment frequently doesn’t work. Providing the real-life path to the best outcome for even a seemingly small project can at first appear trying. A positive part of the outcome may be formalizing a  process complete with documentation.
• My favorite; interns are unaware of “what can’t be done” and that “we have always done it that way.” Their lack of experience, youth, and eagerness can deliver results we did not think possible. A new perspective can be brought by the untrained, untainted mind.

Far from every student and group will break new ground at every firm. Interns are required to perform grunt work everywhere. Paying the dues is part of the process. The key to success is to treat interns as professionals, while opening doors and windows of opportunity. Test their thinking and ingenuity. Let them fail in a public setting and allow them to feel senior support, mentorship and share your knowledge. Let them know that taking the risk, the process is as important as the result.

It will benefit your organization through productivity, energy and the completion of stalled projects.

Don’t tell the paper pushers, but it will enrich the student and you at the same time. Of course don’t let the other cat out of the bag; it may add some fun to your office as well.

If you have a spot open, please contact me and I will share the CVs of some potentially extraordinary students. acorn@clearam.com

A Team Worth Joining

Unfortunately, cancer has touched most of our lives in some way.

Too many people are often left feeling hopeless and powerless against these awful diseases. My family along with friends decided to take some action by supporting the American Cancer Society’s Relay For Life®.

We (that means my wife and kids leading and me following enthusiastically) have formed a Relay for Life team called "The City Kids" to raise money in order to make a difference in the fight against cancer. We love this event, because it brings people together in an atmosphere of hope and participation. It also fits one of my prime donation criteria. It has the highest percentage of donation going directly to the cause rather than administration or other purposes.

So far, the kids have had multiple and successful lemonade and cookie sales and a big tag sale this past fall to raise money.

This weekend we will be part of the big event: Relay For Life is an overnight event that brings our community together to help and support the American Cancer Society's lifesaving mission. Our team has at least one member walking or running on the track at the relay site for 24 hours.

We are actively seeking sponsors.

All donations are tax deductible! We would really appreciate your help! Every donation helps us meet our goal.

Please visit the team’s mini site to make a donation:
http://main.acsevents.org/site/TR/RelayForLife/RelayForLifeEasternDivision?px=4319700&pg=personal&fr_id=4245&et=PKekOCPK1lmswWSbL1o1Ew..&s_tafId=90498
 
Thank you!

Sowing Profits

As the fluctuating cost of oil has drastically altered the economic outlooks of this country and many of our trading partners, certain sectors and industryies have been materily effected. For example the airline industry has been adversely effected while clean tech appears to be in gold rush mode.

The main stream media seems to have overlooked the world's dependence on another key commodity. A recent article by Don Miller in MoneyMorning suggests that investors should be "lining their pockets with Timber" and that the commodity has the potential to be a potent investment play.

According to the article, Housing Starts totaled 692,000 in April 2008- this is the lowest it has been in seventeen years (and about 42% less than April 2007); new construction, in conjunction with consumer sentiment, is declining. Since byproducts of Timber are an instrumental part of the construction industry, timber owners should feel the effect of decreased demand. There are many reasons why this thesis is not accurate. Housing and construction are in a recession in much of thr west, but in Asia, housing and construction are on a steady rise.

Even in hard hit North America, there is no "expiration date" on trees-timberland owners have responded by tailoring their output to reduced demand. The land can be leased for recreation and what is under the land in the form of metals or perhaps coal may also be ripe for harvesting when the time is right to sell the trees.

Meanwhile, it's been boom-time for paper and pulp mills. The BRIC countries have a consistent-and rapidly growing-need for paper. Despite this demand, timber-land owners have kept supply limited to protect prices. Inreality, even in boom times tmost forest products go to making packaging rather than milled wood. The article states:

"the higher cost of pulp is being passed straight along to the paper mills. And they're frantically trying to pass those increases along to purchasers. Blake Hutchison, director of purchasing for the Menomonee Falls, WI-based printer Arandell Corp., says that most, if not all paper mills increased prices for 2008 by 5% to 7%."

Suppliers of paper and pulp based products are at the mercy of timber-land owners. Their business depends on access to timber-and thus, they are generally obligated to absorb cost increases.

The stability associated with the immense amount of control timber-land owners hold is a key factor of what drew me to the commodity as an investment. Even during a housing "recession", prices have held steady because land-owners choose to limit their supply. And when construction heats up again, land-owners will be more than ready to meet greater demand-and to collect the greater profits that accompany it. Investing in Timber can also be a hedge, as the commodity has traditionally had a low correlation with the performance of the index.

According to the article, about 2/3 of harvestable timberland is private. For decades, owning timber-land was reserved for the big guns of the investing world; however, REITs and more recently our very own Clear Global Timber Index which is licensed for the ETF (CUT), which gives investors access to an array of global equities that own and manage timberland, have created a vehicle for small investors to reap the benefits of timberland.

Disclaimer: Mr. Corn is the CEO of Clear Indexes LLC which publishes the Clear Global Timber Index which is tracked by the ETF (CUT). Mr. Corn owns shares in (CUT)

Another Senior Gain for Clear

Today we issued a press release that states: Attorney and ETF Expert Named COO and Chief Compliance Officer of Clear Asset Management Roger Braunfeld Joins Clear Asset Management and Clear Indexes.

Roger previously served as both Managing Director and General Council of XShares Group LLC where he was integral in the launching of 31 exchange-traded funds (ETFs) and oversaw general business operations. Prior to XShares, he practiced business law at Blank Rome LLP. Roger will be spending one to two days a week in Philadelphia cultivating relationships with both clients and vendors.

Roger is as much a senior manager of the business as he is a lawyer and compliance officer.

If anyone caught the article in FundFire I am quoted as describing him as having impossible energy. He is going to need it as we move the firm from development to launching into growth mode.

Stay tuned.

A Giant Leap for Our Firm

This morning we issued news that simply cannot be captured in a traditional press release.

Fred S. Fraenkel has joined Clear as CIO (Chief Investment Officer).

Fred has over 30 years of experience including having headed up global research at Lehman Brothers (LEH) and as a member of Barron's Year-End Roundtable to name just a few of his accomplishments.

Some of our staff cannot get over addressing him as Mr. Fraenkel!

No doubt that they have good reason to outwardly display some awe. Fred left Wall Street to found a Venture firm. We met through one of Clear's investors who asked him to "check us out" before they allocated to us.

That began a long courtship. Fred checked us out from a VC's and from an investment process perspective. He became an investor in the firm and we also have the privilege of managing money for his family as we do for all of our board members.

Over the last year, Fred became more involved with the firm moving from valued counselor on business and investment decisions culminating in our announcement today.

Fred is needless to say a brilliant man, but Wall Street is filled with brainiacs. The qualities that distinguish Fred are his uncommon sense, his knowledge and experience in so many areas of investing and research including the process of how to get to positive outcomes, and being a great person on all levels.

It is a pleasure to agree, disagree, challenge and be challenged by Fred.

If you do not know him, or only know him by reputation, his bio is now proudly displayed on our web site here.

http://www.clearam.com/Company/boad.aspx

Today marks another major milestone for Clear as a firm. It is good to celebrate and recognize the moment. After all, with a new CIO in town, tomorrow begins another day of hard work.