Clear Indexes Ideas

The Paper of Record Gets the Investment Thesis: (JNR)

Sunday’s NY Times Business section had a piece by G. Pascal Zachary titled:
Vaccines and Their Promise Are Roaring Back. I was hoping he read my blog post from 8/22 concerning the Clear Vaccine Index, but as I read on I realized he hadn’t. After reviewing the author’s web site, I noticed he is concerned with Africa which further underscores our investment thesis; the world needs vaccines to eradicate disease. The excitement of innovation for public health blended with investment opportunity is rare and well presented by Mr. Zachary.

The prospect of profit drives innovators, perhaps as much as solving the technical problems that make innovation possible.

This truism is gaining new currency among innovators in the once-legendary field of vaccines. In the 1950s, vaccine inventors were the stars of American innovation, celebrated the way Steve Jobs of Apple and the pair who founded Google are today. In 1955, Jonas Salk virtually wiped out polio with a vaccine, becoming the most celebrated scientist in America. In a phenomenal run starting in the late 1950s, Maurice Hilleman created vaccines for flu, measles, mumps, rubella and other illnesses, getting credit for saving more lives than any medical innovator in history.

By the mid-1990s, however, innovation in vaccines had virtually come to a halt. Only a handful of companies even tried to develop new ones, compared with 25 in 1955.

But in a stunning reversal, innovators today are chasing dozens of vaccines, stimulated by some recent high-profile successes. “People see vaccines as money makers,” says Paul A. Offit, chief of the infectious diseases section at the Children’s Hospital of Philadelphia and the author of “Vaccinated,” a new book on Hilleman’s career.

A facet of Clear Indexes’ investment thesis is that disease prevention is cheaper than treatment and therapies creating a compelling opportunity and enormous market. Each participant of the vaccine chain stands to profit.

“Vaccine makers are tackling major public-health problems again,” says Adel Mahmoud, a vaccine expert and a professor in the department of molecular biology at Princeton. “The size of the market is incredible, both in America and around the world.” Dr. Mahmoud was previously president of Merck’s vaccines unit.

Indeed, there is already money to be made and that can grow.

To date, the biggest winner in the revival is Merck, which in the first six months of 2007 posted revenue of nearly $2 billion from vaccines alone, more than the company’s vaccine sales for all of 2006. As recently as 2005, Merck’s vaccine sales totaled barely $1.1 billion and were essentially flat over the prior three years. But last year, Merck received permission to sell three new vaccines, including a breakthrough preventive treatment for cervical cancer, and another for shingles.

As we have stated, partnerships are being formed by a myriad of firms with major investments.

Across the industry, the research pipeline is bulging. Companies are spending billions trying to develop vaccines for various cancers, staph infections and malaria.

Vaccines are mandated by the US government for entrance to all levels of education and selective service. Beyond the government mandate, the universe of vaccine targets is expanding in the private sector and across the globe.

Governments are more interested in funding vaccination programs after years of neglect, and public fears that vaccines cause harmful side effects are subsiding. Those fears are now largely discounted by medical experts. The specter of bioterrorism has also heightened interest in new vaccines, spawning new funding sources.

From a historical basis, scientists and companies are once again being attracted to vaccines. Being associated with the prevention of a major disease holds an allure of fame all its own, plus the obvious financial benefits.

The allure of the silver bullet — of wiping out an entire class of related diseases with a single injection — remains a powerful symbol of technological advance. Fifty years ago, vaccine creators captivated the world’s imagination. With the return of vaccine-making to the center of the pharmaceutical business, new sources of profits are emerging, and new heroes of innovation.

The bottom line for the Clear Index is the bottom line. Clear licensed the index to the ETF: Claymore/Clear Global Vaccine Index (JNR) to offer a great investment opportunity with our not so secret hope that we can add value across the planet as well. The global vaccine business is just beginning to expand after years of weak demand and under-investment.

The ETF:  (JNR) provides:

• Liquidity which allows vaccine discovery and other firms in the value chain better access to the capital markets for growth and the further R&D
• Access to new markets related to the threats of a flu pandemic and bioterror, a global push for higher inoculation rates, and the promise of therapeutic vaccines.
• Exposure to companies with growing revenue streams related to the vaccine business.
• A strong long-term investment opportunity – for institutions and individual investors to profit from the discovery and proliferation of vaccines.

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Remember: Today in 1963, to more than 200,000 people, Dr. Martin Luther King Jr. gave his "I Have a Dream" speech at a civil rights rally in Washington, D.C.

I Am Not Worthy

I live in a women’s world, at least outside of work. So shopping is not foreign to me, it is a several times a year weekend outing. One thing I am sure of, yes sure and not merely confident, is that figuring out the female mind and dominant purchasing motive is elusive to me. The AMP Agency based in Boston has conducted a survey that claims to have figured women out, at least from a shopping standpoint and I bow to their analytics, demographics and psychographics, with one caveat: assuming they are right.

They performed a survey online of over 3,000 women, a methodology that does not include sitting and having coffee or glasses of wine and chatting, or sneaking into book clubs to overhear the real conversations. AMP concludes: how a woman approaches shopping does not change as she grows older, shifts from life stage to life stage, moves from region to region, has children, or moves income brackets. A woman's approach to shopping is very much part of who she is: "it is part of her DNA."

In a market of over $418 billion, understanding how women shop can help retailers: stores, catalog and online venues determine how to differentiate themselves and connect with women efficiently and effectively. This information was intended for brands to better focus and craft their communications, which is the business of AMP. There are some common sense conclusions here and perhaps they are investable.

The report states that there are distinct female mindsets to shopping, slicing and dicing women across four distinct types:

• The Content Responsibles (Practical, Loyal, Efficient)
• The Natural Hybrids (Confident, Balanced, Classic)
• The Social Catalysts (Social, Smart, Trendy)
• The Cultural Artists (Creative, Impulsive, Adventurous)

As a great admirer of the species (mostly you my dear, assuming my wife is reading this) there are approximately 67,560,586 women in the United States between the ages 18-49 and they break down into groups based on discretionary and nondiscretionary spending.

• Social Catalysts: 24 Million / Spending $153 Billion / average of $6,035 annually
• Natural Hybrids: 23 Million / Spending $133 Billion / average of $5,383 annually
• Content Responsibles: 13.5 Million / Spending $70 Billion / average of $4,778 annually
• Cultural Artists: 7.5 Million / Spending $62 Billion / average of $7,672 annually

Total: 67.5 million people / Spending $ 417.7 billion annually

While the trendsetting Cultural Artists rank at the bottom for overall spending, they are spending the most on an individual basis. And when it comes to key influencer categories including Fashion, Beauty, Health and Wellness, and Food categories, the Cultural Artists spending leads the way.

This 11% of consumers falls at the highest end of the influence spectrum as the super influencers. Almost half stated they frequently go shopping just to see what's new in the stores. They are always shopping and almost all of them (97%) are willing to try new and different things and generally, with 85% wanting to be the first to try new things. They rely strongly on information from friends, particularly across fashion, technology and health and beauty categories.

The Natural Hybrid (34%) is a cross between a social and trend-follower and a grounded domestic. They look for classic products, things that are not too trendy and are long lasting. Though 80% like to try new products, only half say they are likely to be the first of their friends to try new things, while the other half would rather their friends try first and report.

The Social Catalyst (35%) scores near the top of the influencer spectrum and can be one of the strongest brand advocates. They are the planners and organizers, and they take pride in their friendship status, considering themselves the experts amongst their group. Almost 80% of this group thinks a night on the town is money well spent, but they are likely to seek out bargains to keep up with the latest trends.

The Content Responsible (20%) group is neither a trendsetter nor trend spreader and not much of a spender. However this group can be a lifelong and increasingly loyal customer. Approximately 80% agreed that social status was not an important part of their life. These practical, responsible, loyal consumers seek a hassle free shopping experience. Shopping to them is not seen as fun pastime, but rather an errand or chore.

The stores they shop in are of as a wide of a variety as the women themselves including: TGT, GPS, URBN, NWY, JWN, LTD, JCG, ANF, JNY, AEO, ARO, TLB, DBRN, SKS, M, TJX, LIZ, ANN, GES, RL and many firms that are not yet public.

If one of these categories describes women in your life than the validity of the AMP survey and its analysis may be reasonably confirmed for you. Brands and retailers take notice: one facet of a women’s behavior may be categorized without sounding like Woody Allen in Annie Hall!

Disclosure: No positions mentioned.

The Clear Global Vaccine Chain Index: the ETF is JNR

With the media talking about a global market pandemic, I want to take a moment to talk about risk management, in this case prevention of disease; specifically through the use of vaccines. As economists calculate the growing cost of healthcare on a global basis, it is immediately apparent that a dose of prevention costs far less than treatment. The big healthcare companies already participate in both ends of these solutions. However much of new drug and therapy discovery is performed by smaller more focused firms. The larger firms provide compliance processing, manufacturing, distribution, education and of course marketing. The long-term profit potential is distributed between firms of multiple sizes.

Why vaccines? Vaccines are an important and frequently overlooked component to disease prevention. Illuminating this concept reveals a potentially potent investment opportunity.

Vaccines stimulate the body’s immune system to produce antibodies that fight a form of the virus (that is the ultimate target) that is not harmful. Then, if the person is infected by the real virus, the body has been prepared to prevent and/or fight it.

Public health issues such as pandemics have changed the course of history several times. Vaccines have changed the way the modern world manages the risks of many diseases.. In the last 150 years we have virtually eliminated countless diseases in the industrialized world.

As numerous diseases are eradicated, new diseases, some with the threat of global pandemic have made headlines in the main stream media and are regularly discussed by politicians. With the integrated nature of the global economy and the speed and ease of international travel, new potential pandemics are more far-reaching and potentially spread faster than ever before.
The rise in threat of potential global epidemics has produced advances in preventive medicine. The vaccine field now is experiencing growing demand and a higher profile. We believe this is a long-term trend.

The threat of a potential global pandemic has been highlighted in recent years by such issues as avian flu and SARS outbreaks. Demand for flu vaccine has been significant, with many regions in the United States reporting shortages in recent years. In addition, concerns about bioterrorism have raised the profile and need for vaccines. With the re-emergence of previously contained diseases, such as polio, additional future sources of demand for vaccines exist. Vaccines are moving from a privilege to a right in Africa, Asia and South America aiming to eradicate diseases such as polio, mumps and chicken pox, many of which are unheard of in Westernized countries.

New and evolving uses for vaccines are also contributing to growth. A vaccine for cervical cancer is in development which could have widespread applicability and possibly be a government mandate.. The list of potential vaccines is growing.

Vaccines are also breaking news (click to read the headlines, warning an 8 meg .pdf) on the technology, biotech and pharmaceutical fronts. Today vaccines have the backing of billions of dollars in research and development aiming to defeat common diseases, to potentially preventing worldwide pandemics such as bird flu, West Nile disease and other infectious diseases.

The Investment Thesis

As every parent in the US knows, vaccination is a requirement for all children entering school, public or private, grades K-12 and just as stringent rules apply to entering college or grad school. These requirements are now being adopted globally and beyond academia.

Government mandates are not a new investment theme. Vaccines are far reaching, saving millions of lives every year and the investment goes far beyond government mandates to the discovery of vaccines for a host of applications.

Vaccines are a global issue with major corporations and banks, venture capital firms and non-profits forming unlikely alliances to finance and  develop new vaccines and delivery methods to solve new problems. These range from AIDS, several types of Cancer and Alzheimer’s to preventing addictions and today even certain types of obesity.

Today and for the foreseeable future, the research, production, distribution and delivery of vaccines is a global business with enormous backing; a history of successful therapies and a world of need. It is comprised of global pharmaceutical companies and supported by dozens of specialty firms, some of which may grow to be the global firms of the future. During index design, Clear chose a modified market cap weighting system to prevent big pharmaceutical firms from dominating the index allowing a voice for smaller discovery and other types of firms that are material to the vaccine value chain.

The firms that research, develop, manufacture and provide wholesale distribution of vaccines may prosper faster than the overall market making it a very attractive investment area.

Disclaimer: Mr. Corn is CEO of Clear Indexes LLC which publishes the Clear Global Vaccine Chain Index. The index has been licensed to Claymore Securities, Inc who has issued the ETF: Claymore/Clear Global Vaccine Index (JNR).

Today in Auto History

I’m not much of a car buff but I do love history and try to learn from it. This post however is just for fun.

Today in 1901, the Cadillac Company (named after 18th century French explorer Antoine de la Mothe Cadillac, founder of the city of Detroit) was established. Also today in 1902, President Theodore Roosevelt became the first United States chief executive to ride in an automobile.

China Follows Through

As part of our investment thesis for the Clear Global Exchanges, Brokers and Asset Managers Index tracked by the ETF (EXB) is that we live in a truly global marketplace, and that much of the growth of the index constituents would come from beyond our boarders. China seems to be fulfilling a piece of our hypothesis.

The Financial Times reported on 8/21 China stated that it would allow individuals to directly buy securities offshore for the first time.

Investors will be able to open accounts at Bank of China to trade securities listed in Hong Kong, whose markets, unlike the mainland’s, are integrated with the global economy. China’s State Administration of Foreign Exchange (SAFE) also said these investments, under a pilot scheme, would be exempt from a $50,000 (€37,050) limit on the foreign currency Chinese citizens can buy or sell every year.

Safe said it hoped this opening of the capital account would relieve upward pressure on the renminbi while giving citizens more investment options. “This is an important action for widening the channels for foreign exchange to leave the country and promoting basic equilibrium in the international balance of payments.”

There are already many investors in China seeking investments outside of their own country. We believe that mid- to long-term this will prove to be material for the liquidity and movement of the global capital markets.

Disclosure: Mr. Corn is CEO of Clear Indexes LLC which publishes the Clear Global Exchanges, Brokers and Asset Managers Index that is tracked by the ETF (EXB). Mr. Corn owns shares of (EXB).

To My Fellow Number Crunchers

Today in 1888, William Burroughs patented the adding machine. 

E-Trade Financial Corp. (ETFC) Update

Soon after my post on E*Trade (ETFC) the stock and our index that is tracked by the ETF (EXB) had tanked. Both are looking strong this morning as financials may win the day today. The market roller coaster ride is being stemmed by the Fed, but frankly, valuations are so out of whack with fundamentals that something has to change in the equity markets.

 The news specifically on ETFC which I have borrowed from MarketWatch tells the story by itself.

 e trade financial corp com disclosed more information on its mortgage holdings late Thursday to try to calm investor concerns. The discount broker also said that it's so far seen no material changes in the availability, pricing or margin on its wholesale funding sources, including repurchase agreements. "Management maintains that it does not believe that the current market capitalization accurately reflects the financial strength and performance of the business," E-Trade said in a statement. The company's $15.7 billion first-lien mortgage portfolio contains home loans with high credit scores and low loan-to-value ratios, plus private mortgage insurance, E-Trade explained. The company noted that $9.2 billion, or 74%, of its home equity portfolio is tied to loan to borrowers with credit scores of at least 700. E-Trade also disclosed that $12.6 billion, or 99%, of its mortgage-backed securities are rated AAA.

 
The news on the stock begs the question: will the credit crunch put the brakes on E*Trade bank and hurt revenue and profits? Is the increase in transactions at its brokerage unit larger than a slow down at the bank and will it off set it? What new opportunities will arise from all of this?

 With every crisis there are after all challenges and opportunities.

Disclosure: Mr. Corn is CEO of Clear Indexes LLC. E*Trade Financial (ETFC) is a constituent  in the Clear Global Exchanges, Brokers and Asset Managers Index that is tracked by the ETF (EXB). Mr. Corn owns shares of the ETF (EXB).

As Market Volatility Rolls So Do the Futures Exchanges - CME

As the markets continue to ride the roller coaster, investors have choices to make in the equity markets. As I wrote last evening, there is money to be made in all market environments, this one is no exception. Some people have pulled out of the market which causes prices to sour more potentially creating increased opportunity. Some will re-enter the market with uneven timing. Many institutional investors employ derivative strategies, futures and options and there are ways to profit from their moves too.

When trading equity derivatives, stock options may be used or futures and options on futures contracts can be traded on the broad equity indexes. Stock options trade on various securities exchanges; whereas futures contracts trade on their own exchanges and even have their own regulatory authority and rules.

The Chicago based CME Group Inc. (CME) is a constituent in the Clear Global Exchanges, Brokers, and Asset Managers Index licensed for the ETF (EXB). The firm, which operates the Chicago Mercantile Exchange and Chicago Board of Trade futures exchange, offers diverse trading exchanges of futures contracts for a variety of U.S. commodities, currencies, fixed income securities and equity indexes.

Ignoring the market fluctuations in July/August for a moment, let’s look at the first half of 2007. CME benefits from volume. As volume has grown this year CME’s year-over-year Net Income has grown 29.52%. Its one year Return on Equity (ROE) of 30.29% doubles the industry average of 15.10% and its Net Profit Margin of 38.26% is well above the industry 8.20% margin.

Why has futures trading grown so much? To better understand this we may look at the historical development of CME.   

The history of modern futures trading began in Chicago in the early 1800s. Since Chicago is located at the base of the Great Lakes and close to the farmlands and cattle country of the U.S. Midwest, it was a natural center for transportation, distribution and trading of agricultural produce. As gluts and shortages of agricultural products would occur in the region chaotic fluctuations in prices would also occur. To address this problem, a trading market developed that enabled farmers, processors and sellers of agriculture products to trade in cash forward contracts related to these commodities. Such contracts would insulate them from the risk of adverse price changes by allowing them to hedge against such fluctuations and consequently stabilize prices to consumers. 

In 1898, the roots of CME were first established to help dairy and egg farmers stabilize their prices with the formation of the Chicago Butter and Egg Board which eventually became known as the Chicago Mercantile Exchange in 1919. In 1972, the exchange  created the first financial futures contracts by introducing futures on seven foreign currencies. The introduction of stock index futures contracts shortly followed. In the late 1980s, the Chicago Mercantile Exchange developed and received regulatory approval for its Globex Electronic Trading System. This was no small task in the face of a deeply embedded regulatory tradition that preached open outcry as the only fair auction method to trade futures contracts. This past July, CME was formed when the Chicago Mercantile Exchange significantly expanded its product base with the acquisition of the Chicago Board of Trade (CBOT) making it the operator of the largest futures exchanges in the world with respect to the number of outstanding contracts.

Today, futures trading has evolved well beyond price protection for farmers living in Midwest America. Futures and options on futures contracts are offered in a multitude of product areas, including interest rates, equity indexes, foreign exchange, agricultural commodities, and energy, as well as alternative investment products, such as weather, real estate, and economic derivatives.  Futures trading has become heavily inter-related to a wide variety of markets and applied in a multitude of investment strategies globally.

The beneficiaries of this has not only been the futures brokers and exchanges, but also investors, by providing other ways to better manage risk and weather the volatility storms as they pass through the various trading markets. 

At this moment of volatility and big market swings, and, with the proliferation of hedge funds, futures trading has escalated.  Trading volumes of futures contracts have reached historical heights as more investors seek to hedge the risk on their portfolios and make bets of the direction of certain securities. High volatility in the markets has most likely been financially favorable for CME and other exchanges.

The question for EXB is: have the brokers and asset managers been oversold while this volume spike in exchanges has not been realized in the stock prices of the exchanges? If that is so, a bounce back in this ETF could prove significant.

Disclosure: Mr. Corn is CEO of Clear Indexes LLC which publishes the Clear Global Exchanges, Brokers and Asset Managers Index that is licensed by the ETF (EXB). Mr. Corn owns shares of the ETF (EXB) and does not own shares directly in (CME).

Nathan Detroit Always Wins

With all of the volatility in the marketplace, it is good to see “the house” still makes money on every bet. The house I am referring to are the exchanges. Just as Nathan Detroit from the 1955 play Guys and Dolls knows, if you are facilitating the game and get a cut of each transaction, you always win. Your winning potential actually increases as the markets gyrate with volatility breading volume.

 
Aaron Siegel at Investment News posted this story earlier today titled: Markets Fall in Value, Rise in Volume.

 NYSE Euronext, the transatlantic exchange group said transaction volumes between its American and European operations topped 23 billion shares, setting a new weekly all-time high for NYSE Group.

 Furthermore, an all-time record of 5.37 billion shares traded on Aug. 9 and a record average daily volume of 4.7 billion shares traded daily was set during the week.

 NYMEX Holdings Inc. the parent company of the New York Mercantile Exchange Inc., said it set daily volume records on the CME Globex electronic trading platform on Aug. 9, including more than 1 million total contracts traded.

 Total contracts traded on CME Globex reached 1,039,413 surpassing the 993,324 on July 26.

CME Group, the parent of the Chicago Mercantile Exchange, experienced record electronic volume on Aug. 9 in its benchmark Eurodollar futures contract with 5,246,828 contracts trading on CME Globex, the exchange's electronic trading platform, surpassing its previous electronic record of 4,962,178 Eurodollar future set on Feb. 27.

So being  the game or running it can ultimately, when the smoke clears, potentially be profitable. A way to play this investment thesis is (EXB) which is an ETF comprised of approximately 1/3 exchanges. How the brokers and asset managers (the rest of the ETF) fared will prove interesting as assets were flowing, trades occurring and volatility ruled the roost for several weeks.

 Disclosure: Mr. Corn is CEO of Clear Indexes LLC which publishes the Clear Global Exchanges, Brokers and Asset Managers Index that is tracked by the ETF (EXB). Mr. Corn owns shares of the ETF (EXB).

Leverage and Hedging

Is our headline about weapons of mass destruction or tools to increase alpha while reducing beta? Leverage and Hedging are two distinctly different techniques that can be used independently but, we believe, belong together. True this post could have been titled: Juicing Returns Balanced with Proper Risk Management, but it is not. As a disclaimer, Clear Asset Management cannot use either of these techniques by mandate.

Testing these tools reminds me of the first time I pressed the accelerator of a car. My brave big brother, who took me to the local school parking lot for my first foray, told me many times about the power one feels when jerking several thousand pounds of steel forward. He instructed me to use the power in a calculated way. It could take me where I want to go faster than my feet or bicycle, and there are times to accelerate more and times to ride the break. This was an early lesson in the use of leverage and hedging. Unlike in financial markets, a car for a new driver cannot be back tested, nor can it be paper traded before deploying live money.

The volatility in the market has caused us, along with many other managers, to take a beating. This has occurred during this and other downturns. Volatility is inescapable in any investment, but especially for long-only managers, including us. I have posted about our risk management and we have been turning our portfolios over based on protecting gains and stopping losses as our risk and trading rules mandate, and will weather this storm as we have so many previous ones.

Our tools are not the exact same as some employed by hedge funds because we are long-only, meaning we can not sell short a stock with the intention of profiting when it goes down. As a long-only manager, we cannot hedge. Balancing long and short positions is known as hedging, hence the name.

The issue right now seems to be that too many hedge funds are not currently hedged. Yesterday Bloomberg.com reported that the Raptor Fund managed by industry legend Tudor Investment Corp. lost 9% in July. Sowood Management LP, led by a former Harvard Management executive, said July 30 that it lost $1.5 billion and Caxton Global Investments, an $11 billion fund, held on to a mere 3.5% gain for the year through July, which lags three out of four of our flagship portfolios.

Many of the losses at these hedge funds, along with two funds at Bear Stearns that cost the head of its asset management division his job, were due to the use of leverage. Leverage is essentially the scaling up of a purchase. Two to one, five to one, ten to one or twenty to one leverage has been in place at some funds. An example of how this can backfire is to use $1 million with 10x leverage, putting $10 million to work in the market. If the leveraged securities go down 5% you just lost $500,000 or 50% of your initial capital. Now imagine this technique being applied to billions of dollars. To prevent these types of losses, the better firms hedge their long positions with short positions so catastrophe cannot strike. It appears some funds have lost their discipline, with respect to hedging, leverage, or perhaps both.

The losses by these large funds add to the market volatility that, the consensus of the media and Wall Street chiefs agree, has been caused by credit markets tightening due to subprime mortgages in default. Their losses add to the uncertainty, adding to the volatility of the market.

Ultimately the long-term returns of the majority of hedge funds usually under perform top quartile performing long-only managers such as Clear Asset Management. These hedge funds are supposed to deliver performance without the volatility that is indicative of long-only management and is part of why investors sign up in the first place.

Of course only time will tell how this year will end and next year will begin. While we are all on this ride called the equity markets, our investors rest assured that Clear will not stray from its mission or its disciplined investment strategy and risk management.