Clear Indexes Ideas

The Wire Is In: Value In A Spin-Off

Western Union (WU) is a constituent of the index we publish that is tracked by the Claymore/Clear Spin-off ETF (CSD). It is also (for full disclosure) a holding, since mid August, in the actively managed Clear Large Cap Value portfolio. The company is a provider of bill payment and money transfer services and was spun off from First Data (FDC) in October 2006. First Data, a $25 billion US-based electronic commerce and payment service provider originally acquired WU in 1994 through the acquisition of Financial Management Corp. Western Union had been acquired by Financial Management Corp one year earlier. According to First Data, the Western Union spin-off in 2006 provided both FDC and WU the opportunity to focus on their core competencies and businesses.

The justification for the spin-off provided by FDC supports Clear's basic investment thesis for spin-offs. Other facets of our thesis which we believe benefit's WU are: aligned compensation for performance of senior and junior managers at the firm, elimination of the conglomerate discount, and increased transparency for investors and analysts. Taken together; these factors yield a better understanding of the firm which can best lead to fair valuation.

The New York and Mississippi Valley Printing Telegraph Company was the original name for Western Union when it was founded in 1851. The firm changed its name to Western Union Telegraph Company in 1856 at the insistence of Ezra Cornell, one of the founders of Cornell University, to signify the joining of telegraph lines from coast to coast. In 1884, 28 years after the name change, Western Union was one of eleven stocks included in the first Dow Jones Average.

Although it is a spin-off, WU is already the 800 pound guerrilla on the money transfer playground. With a market capitalization of $15.29 Billion, it overshadows its largest competitors Checkfree Corp (CHFR) at $4.1 Billion and Moneygram International Inc. (MGI) at $1.65 Billion. With its 150 year history and recent solid financials post spin-off, the company appears to be strong going it alone.

Looking at the statistic requires some digging. Its most recent quarterly revenue growth of only 8.0% lags some of its smaller competitors. Looking carefully at the numbers, there are more than 312,000 Western Union Agents in over 200 countries and territories. Western Union produces an industry leading $788,136 of revenue per employee. The business is showing efficient use of this revenue through its trailing 12 month operation margin of 27.96% which trounces its competition. Additional supporting data points include a trailing 12 month Return on Equity of a 55.12% and Return on Assets of 15.74%.

These impressive numbers also require further analysis. WU's success is somewhat due to the scale it has achieved. The money transfer industry has high fixed and fairly low variable costs. As a result, it is advantageous for established companies such as WU to expand into as many regions and markets as possible. WU has the business model, credibility, and finances to do so at a fairly quick clip. Illustrating this is the recent signing of an agreement with EGT that outlines plans to build and maintain 500 additional facilities in Chile. Western Union also announced this summer that its services in Mexico will now be available at an additional 410 locations, bringing its number of branded Western Union sites and its affiliates there to 13,700.

As Western Union expands internationally, the company is maintaining its history of corporate responsibility which enhances it brand. Its charitable assistance programs such as its 4+1 program was implemented in Mexico bringing support at the grass roots level where many of its customers operate.

As for the stock's valuation, there is evidence that it may very well be undervalued. WU sports about an average price to earnings (P/E) ratio compared to its closest competition yet it is more profitable. When looking at a since spin-off chart, it is apparent that traders have not been hot on the stock since the spin-off. More recently, looking at one, two and three month charts versus the S&P 500 tells a different story. After the stock was hit along with any firm with the word "financial" associated with it mid summer, the stock has out-performed.

The market is now wondering, as an already efficient company, is its profit generation almost fairly priced? Additionally, considering its fordable size, can it open up enough markets to move the needle on revenue growth?

Disclosure: Mr. Corn is CEO of Clear Indexes LLC and Clear Asset Management Inc. Western Union (WU) is a constituent in the Clear Spin-Off Index licensed for the ETF (CSD). It is also a holding in the Clear Large Cap Value portfolio. Mr. Corn owns shares of the ETF (CSD) and shares of (WU) directly through his participation in the portfolio.

The Market Thrives on Newton's Law

The stock market is a highly emotional as opposed to logical place. Sentiment seems to drive the market more important than fact. The reason that sentiment being a driver makes sense is that stock prices are based not only on fundamentals, meaning what earnings have been historically, where there are now and, they are based on the big unknown, future earnings.

Company disclosures/guidance and analyst estimates are the basic guiding principles of how future earnings are priced into the market, which sounds logical and well grounded.

Newton’s law is simple: Every object in a state of uniform motion tends to remain in that state of motion unless an external force is applied to it.

Future earnings or the belief in them is also driven by external forces such as news, rumors and the “holy grail” information advantage which is the perceived currency that traders seek to gain an edge on the direction of the market, sectors and individual stocks. There are new businesses being spanned to provide this edge from blog scrapes to new forms of predicting crop output. The best of these information gathers start their own funds.

Another major external force is government regulation. The less the better theme is the universal mindset and first priority of businesses and the market. The events that move markets are new laws or regulations, or the threat of change.

The perceived threat to the status quo can send shares in either direction as rapidly as Brittney back to rehab.

Part of the teeth the government holds is the faith its citizens place in it. We are currently at record lows as research published this week in the latest American Pulse Survey by BIGresearch.

The sad state of affairs is self explanatory and is a report card on both sides of the aisle. The painful statistics are clearly set below. We do not trust our law makers regardless of what party they represent.

Trustworthiness Quotient
	All 18+	Male	Female	18-34	35-54	55+
The President	14.2%	15.8%	12.7%	11.7%	12.8%	18.6%
Members of Congress	2.6%	2.6%	2.6%	2.8%	2.8%	2.2%
Members of Senate	2.2%	2.5%	2.0%	2.3%	1.1%	3.6%
The Media	4.4%	4.7%	4.2%	5.0%	3.8%	4.7%
Bloggers	5.8%	5.4%	6.3%	8.5%	6.1%	2.8%
I don't trust any of the above	70.7%	69.0%	72.3%	69.7%	73.4%	68.2%
Source: BIGresearch American Pulse, September 2007

And, when specifically asked about integrity the numbers are also staggering.

Perceived Integrity Of The Elected Officials In The Congress & Senate
Rating	All 18+	Male	Female	18-34	35-54	55+
Straight & narrow / honest	3.0%	4.1%	1.9%	5.1%	2.4%	1.4%
Middle of the road (some honest, some not)	62.3%	57.7%	66.7%	60.4%	61.3%	65.5%
Majority are dishonest, untrustworthy	34.7%	38.2%	31.4%	34.5%	36.2%	33.0%
Total	100.0%	100.0%	100.0%	100.0%	100.0%	100.0%
Source: BIGresearch American Pulse, September 2007

Laws are passed partially based on sentiment, lobbying and pressure exerted by the media based on popular beliefs of what the majority want from its government. This moves the market. With approval so low, grid lock occurs as laws are slow to be passed and issues are debated to death, literally, where nothing passes.

Ultimately people thirst for leadership. Perhaps this next election cycle will bring us a new crew where trust can be built, intelligent laws passed that protect the people, aid business development and move the country forward, and have our citizen believe that these events are true and their elected officials have their hearts and votes in the right place.

This too would be good for the market and our country.

Pushing the Passive / Active Line – or Just Applying Common Sense?

As we design indexes, one of our philosophies at Clear Indexes LLC seems rather main stream, capture the best of the investment theme. What separates us from other index designers is that we seek robust exposure, but not necessarily to every potential constituent in the universe, meaning not all constituents are created equal.

So this brings up a few questions:

1. Is this active management?
2. How does it affect attribution analysis?
3. How does it affect performance?

Let’s first step back and ask ourselves a basic question: do we really want to own every company in a sector? To depersonalize this conversation let’s look at the beaten down homebuilders (not an index we cover). The current indexes basically hold all of the homebuilders.

Yesterday morning, UBS updated some of its home building sector research:

• TOL, CTX, KBH initiated buy
• RYL, MTH, HOV initiated neutral
• LEN, PHM, DHI, SPF, BZH initiated sell

This is a clear statement of who they believe are the winners and losers. So I pose the question again; do you really want to own all of them?

Clear Indexes utilizes multifactor models to select the final constituents of many of its indexes. This may open Pandora's box: is this active management, what is the weighting design, how often is the index reconstituted and what does this mean for turnover and taxes. I will leave these questions to other posts. Let’s focus on not owning every constituent in the universe.

The first question usually posed by analysts performing due diligence on our indexes concerns the quality of our multifactor model or screening process. The answer is that our multifactor model spawned in the same waters as the models of our parent company, Clear Asset Management Inc. an active equity manager, whose top quartile performance is passing its three year live money milestones (September/October 2007).

Let’s address questions #2 and #3 which are the ultimate questions – does the quant model add value? There are two schools of thought; can the weakest names be eliminated? Or, can the strongest names be selected? The answer is yes, and that is our intent.

We do not set out with a notion of how many stocks to include or exclude, it is all about what works best for investors in our testing.

We do not make decisions or select constituents by debate, by committee, media pressure, fads, marketing ploys or our egos.

Our selection process mirrors a solid investment selection process. It is based on testing, mathematical results of performance and attributes. Once we discover optimal performance we also examine relative risk, volatility and look at top down measures such as Sharpe ratio, draw down and time to recovery. We then go back in bottom up examining the fundamentals of ever constituent in the potential universe and our selection.

Our answers can be found in the math.

A Look Back (A personal post)

With all that is going on in the news today, I thought I should seek a few sources; most notably the NY Times archive and share a few events of the day in history.

Today in:
1493- Christopher Columbus set sail from Cadiz, Spain, with a flotilla of 17 ships on his second voyage to the Western Hemisphere.

1513- Spanish explorer Vasco Nunez de Balboa crossed the Isthmus of Panama to reach the Pacific Ocean.

1775- American Revolutionary War hero Ethan Allen was captured by the British as he led an attack on Montreal.

1789- The first United States Congress adopted 12 amendments to the Constitution and sent them to the states for ratification. (Ten of the amendments became the Bill of Rights.)

1890- Mormon president Wilford Woodruff issued a manifesto formally renouncing the practice of polygamy.

1957- Under escort from the U.S. Army's 101st Airborne Division, nine black students entered all-white Central High School in Little Rock, Arkansas.

1981- Sandra Day O'Connor was sworn in as the first female justice on the U.S. Supreme Court.

1995- Ross Perot announced that he would form the Independence Party.

2001- Saudi Arabia cut its relations with Afghanistan's ruling Taliban.

2006- The Louisiana Superdome, a symbol of misery during Hurricane Katrina, reopened for a New Orleans Saints game.

Looking back at the US and the world is healthy and instructive, let’s learn from the past and keep moving forward.

Vaccines are a Global Business

I received a call from an advisor from a major wire house who performed his own due diligence on the index behind the ETF (JNR) for a doctor client of his.

After a discussion on the effectiveness and efficiency of vaccines to world health, he asked me a great question: is it a viable business? The affirmative answer he received is derived not just from our research, but also from sources such as the Wall Street Journal. Even a Mega Cap stock such as Merck & Co. (MRK) can have its needle moved by vaccines.

Merck & Co. continued its turnaround, posting a 12% increase in second-quarter profit on strong sales of drugs for allergies and cholesterol, as well as vaccines.

My challenge to my now advisor friend was to run a daily Google (GOOG) alert on the word “vaccines” for a week. If he wasn’t jumping on board with the ETF then, I would walk away from our discussion. The mains stream media is obsessed with vaccines.

Keep in mind there were no scare results this week such as global pandemics or promises of new discoveries in Cancer, Alzheimer’s, Avian Flu or Mad Cow disease.

Here is a partial list of results from this week’s Google Alert.

Gates Foundation goes after TB
Science Daily (press release) - USA
The largest share of the money -- $200 million -- will go to Aeras Global TB Vaccine Foundation of Rockville, Md., to develop new TB vaccines. ...


Iomai Patch-Based Vaccine Cut Rate of Travelers' Diarrhea by 75 ...
CNNMoney.com - USA
Travelers' diarrhea is the most common travel ailment in the world, yet there are no effective vaccines available for the condition. ...


Vaccines to begin next week
Daily Telegraph - Sydney,New South Wales,Australia
A total of 20000 vaccines are due to be imported next Thursday and could be used to protect the racing population, subject to approval at a national DPI ...


Vaccines Make Day Care Healthier
CBS News - New York City,NY,USA
"Are day care centers safer in the era of vaccines? Absolutely they are," says Larry Pickering, MD, a specialist in infectious diseases at the CDC in ...


EL Health District offers flu vaccines, lice eradication
The Review - East Liverpool,OH,USA
The influenza vaccines will be available at the city health nurse's office at City Hall, though the majority will be given at designated community sites. ...


GenVec's Malaria Vaccine produces immune response in clinical ...
SpiritIndia - New Delhi,New Delhi,India
"The results from these studies are encouraging and support the use of our adenovector technologies in developing effective malaria vaccines," Joseph Bruder ...


Pregnancy Problem
Central Illinois Proud - Peoria-Bloomington,IL,USA
That's because less than 40% of pregnant women are getting flu vaccines. That's according to the Centers for Disease Control and Prevention. ...


Media has a part to play over MMR
ic Wales - United Kingdom
Vaccines have been proven to be effective in preventing illness, disability and death, not only for children and adults but also in unborn babies. ...

The ETF is yet to be promoted by its issuer. With major organizations ranging from the Gates Foundation to Goldman Sachs interested in promoting vaccines globally, the Claymore/Clear Global Vaccine Index ETF – JNR should track (code word for benefit) the future of vaccines.

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 ETF(JNR).

Index Design - the Designer's perspective

There are a variety of topics to discuss in index design. Some are open to debate and should be aired and opined by all. These topics, which are a matter of opinion will not be totally resolved for 20 years when we can measure which real world results, but by them marketing machines may keep the debate going (just like climate change). There are already topics not debatable and are simply fact, yet are being debated. I will address one of those today and continue to post on index design the next few weeks.

The original question was "What determines invest-ability?" and now as the parlor game that originally launched ETFs becomes more mature, we are focusing on the right question: what is the best deign for investors? Of course this is best answered based on the type of investor, invest goal and time horizon. This debate already exists in the institutional world that I come from where debating such issues and active versus passive, investment themes, weighting designs, quantitative versus fundamental and so on have been raging for years

One question I thought was put to bed is about tracking error of ETFs to their underlying index. This question continues to come from advisors and brokers so I want to revisit it. Let's look back on a post from May 30, (http://www.clearamideas.com/clearam_ideas/2007/05/trading_volume_.html) where I provide an in depth answer.

Paraphrased; there seems to be an "inconvenient truth" that low volume and the appearance of spreads in fact do NOT make bad trades or investments.

This negative rumor stems from ignorance and that this rumor helps the dominant players, so they are not going out of their way to educate advisors and investors.

For the majority of low trading ETFs, they print trades at or very near the NAV of the underlying index. This is what the investor is buying, all the stocks in the index at the prescribed proportions and current prices. The fact is, the bid/ask is determined by the NAV of the underlying index which is calculated and disseminated tick by tick. The trade is NOT dependent on the day's or three month volume, the assets under management of the ETF (shares outstanding) or yesterday's ETF closing price.

An ETF is more like the Federal government than a common stock (but in a good way). If the specialist needs more shares to sell then they create them. The good difference that I refer to is that each share of the ETF is backed by shares of the underlying index. This alignment of shares and index in simple equity ETFs is the job of the specialist, issuer, custodian etc. and so far they are performing an admiral job (disclosure: we license to ETFs that are currently widely and thinly traded). Conversely if there are more sellers than buyers, the specialist contract the number of shares outstanding selling the shares in the underlying index. There cannot be a run on an equity-based ETF.

Disclosure: the author is founder and CEO of Clear Indexes LLC which creates and publishes custom indexes using a combination of qualitative research and quantitative methods. The indexes are used for custom institutional benchmarks and investment product design. Clear indexes licenses indexes or has consulted for the indexes used in the ETFs: (ROB), (CSD), (MCG), (EXB) and (JNR).

With All of These Media Appearances Do I think it Safe to Purchase (EXB)?

I admit to having been a media hound this week; doing  interviews  on TV and radio three times discussing the earnings of investment banks Lehman Brothers Holdings Inc. (LEH), Goldman Sachs Group Inc. (GS) and  Bear Stearns Companies Inc. (BSC). I have been discussing the industry outlook, effects of disruption of deal flow and the impact of the subprime mess. I am already booked to discuss earnings soon after they are released for Merrill Lynch & Co. Inc. (MER).

Each firm is so different with (GS) having deep multiple lines of business  with a strong international presence  and (LEH) moving to a similar strategy and (MER) having its strong retail asset gathering machine. Only (BSC) did I hang out to dry as their asset management is almost non-existent and without their prime brokerage unit their numbers would have been lower. With all the bad news baked in, is this segment set for a rebound?

The ETF (EXB) is comprised of global companies in three areas: exchanges, brokers and asset managers. Each area is off this year’s high. Our original investment thesis is as true today as it was when we first published it back on 7/16/07 (http://www.clearamideas.com/clearam_ideas/2007/07/claymoreclear-g.html) only now the valuations have come down. Keep in mind this isn’t a trade, it is an investment; I suggest re-reading our original post.

Our investment thesis is that globally, people accumulate wealth by participating in the capital markets. This is in Brazil, China, the UK, the US; everywhere. Not much has changed on that front.

For disclosure, my money was in the first ticket for the ETF. As of the close of today’s market the ETF is down less than $0.40 since inception and the three subsectors have quote “had a nightmare” until helped out by the Fed. I am encouraged by the performance.

Has these subsectors hit bottom? If I knew that…

What I am willing to state is that firms like (GS) who beat estimates partly because of all of the volatility will find ways of making money scouring the globe, Franklin Resources (BEN) will continue to collect its fees and gather new assets and the pace of M&A will continue at least short-term for the exchanges.

Long-term, my investment is based on the thesis and believing these subsectors will beat the broad market over a standard cycle.

Disclosure: Mr. Corn is CEO of Clear Indexes. All stocks mentioned are constituents of the Clear Global Exchanges, Brokers, and Asset Managers Index which is licensed for the ETF Symbol (EXB). Mr. Corn owns share of (EXB).

Former Lehman Brothers Research Head Joins Clear Asset Management's Board

Fred Fraenkel Named Chairman of Clear Asset Management Board of Directors

We are pleased to announce that today Fred Fraenkel joined our Board of Directors as chairman. Fraenkel is chairman of Millennium 3 Capital, a venture firm specializing in early stage companies. Before founding Millennium 3 Capital in 2000, Fraenkel served as vice chairman of ING Barings Furman Selz and chief operating officer of Furman Selz .

Below is from our press release:

Fraenkel’s long career in investing includes his being a member of Barron’s year-end roundtable from 1982-1985, and heading global research at Lehman Brothers from 1987 to 1993.  During that time, Lehman Brothers had its first ascension to Number One in the Institutional Investor rankings.

“ClearAM has a robust, disciplined investment process that has yielded superior results and I am excited to help the company enhance its institutional process and further build the firm,” said Fraenkel.

Previously Corn served as both CEO and chairman of ClearAM.  ClearAM is separating its CEO and chairman positions to prepare for significant growth in institutional asset management, index publishing for ETFs and other packaged products and performance-fee based funds.

In June 2007, ClearAM was named “Equity Manager of the Year” by Opal Financial Group for its long-only portfolios. In addition to its separately managed accounts, ClearAM, through its wholly-owned subsidiary, Clear Indexes LLC, runs four indexes that are tracked by exchange traded funds (ETFs) with another index in registration.

Fraenkel joins a distinguished board that includes Roger Ehrenberg, former president and CEO of DB Advisors, a Deutsche Bank affiliate responsible for Deutsche Bank's global proprietary hedge fund activities, and Robert Murphy, a former vice chairman of the board of directors of the NYSE and former CEO of LaBranche & Co., LLC.

About Clear Asset Management
Clear Asset Management offers four equity style portfolios to institutions, financial intermediaries and individuals in separately managed accounts. Portfolio construction and stock selection is performed utilizing its proprietary multifactor models that screen, rank and weight stocks. Transparency, risk management and a focus on delivering consistent long-term results while avoiding the human bias and conflicts of interest that have plagued Wall Street and the fund industry all set ClearAM apart. ClearAM is a Registered Investment Advisor. For more information, please see www.clearam.com.

Through its wholly-owned subsidiary Clear Indexes LLC, it creates and publishes custom indexes that are tracked by exchange traded funds (ETFs) including (EXB), (CSD), (MCG) and (JNR). The company has recently moved from Park Avenue to its new and larger offices in the Trump Building at 40 Wall Street.  For more information, please see www.clearindexes.com.

Getting Called on My Calls

This morning on Bloomberg radio I was questioned about my outlook in March concerning the investment banks. I am told I predicted another great year.

Well, the first half of the year I was right. This quarter is looking like it's another matter. The subprime mess, credit / lack of liquidity in fixed income and the huge slow down in underwriting has already driven down the share price of the average investment bank. This afternoon I will be a guest on Bloomberg TV (at 4:40) and provide our view on the first of the big four to report this week Lehman Brothers Holdings Inc. (LEH). The big question I am hoping they will ask is when is it safe to go back in the water? I look forward to providing an answer.

Disclosure: Mr. Corn is CEO of Clear Indexes. Lehman Brothers Holdings Inc. (LEH) is a constituent of the Clear Global Exchanges, Brokers, and Asset Managers Index licensed for the ETF Symbol (EXB). Mr. Corn owns share of (EXB).

While Others Panic

It is just like in so many stories; the movie It’s a Wonderful Life comes to mind for me first. In the movie, the “bad” guys are buying anything they can, from real estate to the shares of the Building and Loan at 50 cents on the dollar.

Jimmy Stewart asked the only real question “why are they buying while everyone is selling” and in a panic. The reason may be that the investment banks have calculated that they can profit greatly by buying, holding, reworking and selling these securities over time.

This morning in Money Management Executive it is reported that:

Goldman Sachs is raising money to launch a new hedge fund to exploit distressed-debt bargains, according to Reuters.

The bank has raised more than $1.5 billion in the past few weeks for Goldman Sachs Liquidity Partners, sources said. Its reported goal was $1 billion.

The fund will invest in a broad range of distressed assets, including mortgages and buyout loans. Goldman’s efforts come at a time when a number of hedge funds are asking for capital for new distressed debt funds.

Goldman’s rival Lehman Brothers is preparing a $2 billion fund, a person familiar with the situation stated.

More than a dozen distressed funds have raised $23 billion through last month, topping the $18 billion raised for such funds last year, according to research firm Private Equity Intelligence.

It seems that while some are panicking, others are bargain hunting. These investment banks have a strong history of success. History seems to have a funny way of repeating itself, smart bankers making money while others panic.

The market is trouble finding the ground again today. Let’s look at history for guidance.

Disclosure: Mr. Corn is CEO of Clear Indexes. Lehman Brothers Holdings Inc. (LEH) and Goldman Sachs Group Inc. (GS) are constituents of the Clear Global Exchanges, Brokers, and Asset Managers Index licensed for the ETF Symbol (EXB). Mr. Corn owns share of (EXB).