Clear Indexes Ideas

Why Not Raise Prices?

Apple (AAPL) may have fumbled its initial roll out of the iPhone but no such misstep has befallen Nintendo Co Ltd (NTDOY.PK) when it introduced the Wii. Pricing came down on the iPhone early on leaving some egg and rebate paperwork on the face of Apple. All may now be forgiven based on sales but the memory lingers.

Rumors of a price decrease for the Wii are not just exaggerated, they are unfounded.

NTDOY has a lot on its plate; approaching the selling / key holiday season, its launch in China along with its new interactive web-based features.

The company shipped about 3.9 million Wii units around the world in the last three months, according to its most recent earning report, bringing the total since launch to 13.2 million units. This breaks down regionally as 5.5 million in North America, 3.7 million in Japan and 4.0 million in other markets.

According to a report on CNN Money, adding to the pressure are newly announced Wii accessories which include: a floor pad for exercise and dancing, a steering wheel for driving games and a gun-shaped "zapper" for shooting.

It appears the pressure is to keep the shelves stocked not to lower prices.

The quote coming from Nintendo president Satoru Iwata says it all: "we're still focusing on how to meet booming demand, we're absolutely not considering a price cut."

Disclosure: The author has no positions in the stocks mentioned.

Borrowing from Peter to Pay Paul

A lot of ink has been spilled this week concerning Countrywide Financial Corp. (CFC) and its seemingly magnanimous offer to refinance sub-prime loans as long as the borrowers have a reasonable record of repayment. Essentially CFC announced a "recycled" program that they billed as a "program that will help up to 82,000 homeowners avoid foreclosure by allowing them to refinance or modify their mortgage loans." I call it generating additional origination revenue while avoiding more underperforming loans. I also call it smart business and PR.

Now let's look at a government effort or as I call it "a drowning man grasping even for a sword." Minnesota Senator Norm Coleman proposed legislation that would allow individuals who are 60 days late on their mortgage payments to withdraw up to $100,000 from their 401(k) or IRA without a tax consequence. There would be no income tax as long as the withdrawals are paid back within three years. It would be limited to borrowers making no more than $114,000, or $166,000 for joint filers.

My questions include: how does the government know where the money is going? Why a bulk amount? After getting their back mortgage paid how do we know they won't lose their house three to six months later? Can the cash be used for whatever they want; it's their money isn't it? How will the process work for withdrawals and who pays for it? Who will monitor the pay backs?

Senator Coleman calls it "without a penalty," meaning to the person withdrawing money. Yes, losing one's house is far worse than borrowing from one's 401(k), but perhaps this half baked idea should go back into the oven to be more thoroughly thought through. A lesson in tax-free compounding will demonstrate the long-term penalty, one to be paid by the up coming generation. The real effect will be felt years from now when participants can't retire or will lose their home to buy necessities. Who will pay for that bailout?

What does this program really do? Many people are aware or can find out by asking, they can borrow against their 401k, frequently at low interest rates. Borrowing requires some paperwork which the plan sponsors already have in place with the processes to fulfill, monitor and administrate all well defined.

The 900 pound elephant in the room is: calculating the odds of a withdrawal under any circumstance ever being paid back! Does the Senator have a fix for Social Security at the same time? We will need it.

Senator Coleman wants to have people bail themselves out with little to no out of pocket expense from the government. I do not believe that the government budgets a lot of revenue from penalties from early IRA or 401 (k) withdrawals. The program sounds good until scratching the surface. The scratch reveals a bad smell. It smells of doing nothing at all and packaging it to look good.

People who borrow from Peter to pay Paul are no better off. They still have Peter or in this case their 401 (k) to pay back. It postpones a bad outcome, it doesn't prevent it.

President Bush recently cast a heavy veto preventing people making well less than $114,000, or $166,000 for joint filers to gain healthcare for their children. What make him think the president would help out homeowner?

Perhaps we can create a choice for the government; houses or healthcare? I would choose both and not based on who has the stronger lobby.

Disclosure: Long finding a better way for people not to lose their homes and insuring children's health.

So What Have You Done For Me Lately? (MSFT)

Yes, Microsoft Corporation (MSFT) blew through its numbers with its fastest growth rate since the 90s. Many have stated that some key facets of their business are eroding and unsustainable. I am focusing on their attempt to become a major player in online advertising.

For several years now MSFT has been playing, but this year they have thrown their hat in the ring in a bigger way with two equity investments; online advertising seems to becoming a leading strategy.

A perfect entrance into how fabulous the Facebook deal is, right? Not so fast.

For Microsoft, the deal is a full admission of how important online advertising will someday be to its top and bottom line. Without a series of previous blunders, in fact, online ads would already be a major contributor to both its top and bottom lines. With the Facebook deal and the acquisition of aQuantive, it is time to prove to the street that MSFT can generate revenue and feed the bottom line. Show me the money!

How hard or easy should this be for MSFT?

BusinessWeek reported this week:

The arrangement gives Microsoft control over the placement of banner ads on Facebook outside the U.S., where about 60% of Facebook's 49 million active users reside. Microsoft had already reached agreements to sell U.S. banner ads for Facebook through 2011. "It signals an enormous vote of confidence from our largest advertising partner," Kevin Johnson, president of the Platforms & Services Div. at Microsoft, said during a conference call announcing the investment.

Please note Kevin Johnson’s title, not very online ad focused. Next, if it is time for lunch we know who is eating Microsoft’s, Google Inc. (GOOG).

Google already has a lock on placing ads on the top social networking site MySpace. In a transaction outlined in 2006, Google is in charge of placing search-related ads on MySpace. Google also serves as the main MySpace search engine. Among social networking sites, MySpace received 76% of U.S. traffic in the week ended Oct. 20, compared to 15% for Facebook.

In the end, the deal was more important for Microsoft because the software giant has badly lagged Google in online ad revenue. While Microsoft won the right to serve banner ads overseas, it's unclear what else the company got. Van Natta said the deal didn't include Web search, a business that could prove quite valuable.

What exactly did Microsoft gain? It coughed up $240 million in cash (keeping in mind MFST has $23.4 billion in cash hoarded away) for 1.6% of Facebook , hardly a material stake in the firm while creating a valuation for Facebook that is too obscene to print. 

MSFT also received the right to sell international remnant banner advertising. Remnant ads are just what the term implies; pieces that fell through cracks after major purchases cherry picked what they wanted. Facebook will be selling the prime space itself. Note: MGST also did not get the search rights, a key part of the business.

So what has MSFT done lately that warrants an investment after the post earnings report afterglow?

Disclosure: Mr. Corn is CEO of Clear Asset Management Inc. Mr. Corn hold no position in Microsoft Corporation (MSFT). Google (GOOG) is a holding in the Clear Large Cap Growth portfolio. Mr. Corn owns shares of (GOOG) directly through his participation in the portfolio.

WSJ Notes Clear’s ETF Contest

I figured it was time for an update on the Clear Next Generation ETF Contest when the Wall Street Journal published this yesterday:

THE OLD COLLEGE TRY: "It's sort of like 'American Idol' for ETFs," says Andrew Corn, chief executive at Clear Indexes, referring to his firm's exchange-traded-fund contest and the music reality show that gives amateurs a shot at stardom.

Clear Indexes LLC, a subsidiary of Clear Asset Management, is sponsoring a contest seeking the most creative, original and marketable idea for an ETF from students at three East Coast colleges -- Columbia University, New York University and Lehigh University.

The competition's winner will receive a $4,000 prize and a paid internship for at least one semester at Clear Indexes, a New York firm that creates custom benchmarks. The winner will see the development of the ETF as an index and participate in a bell-ringing ceremony on the ETF's first trading day. ETFs are similar to mutual funds but are listed on exchanges and trade like stocks.

Entries can be submitted on the firm's Web site. Winners will be chosen by Clear Indexes and its advisory board and announced on Facebook.com, the social-networking site. The deadline is Nov. 26.

"We're looking for great new investment themes," Mr. Corn said. "Why limit ourselves to just our own ideas?"

--John Spence C13, WSJ 10/24/07

The contest has been picked up by a number of news organizations and bloggers.  Just to name a few:

Financial Times:
http://ftalphaville.ft.com/blog/2007/10/11/7991/latest-etf-launch-platform-facebook/?source=rss

MarketWatch:
http://www.marketwatch.com/news/story/contest-gives-college-students-chance/story.aspx?guid=%7B9080F94E%2DC59A%2D48AB%2DBB38%2D5ED463B41207%7D

Information Arbitrage:
http://www.informationarbitrage.com/2007/10/leveraging-the-.html

Theflyonthewall:
http://theflyonthewallblog.blogspot.com

Trade King:
http://tradeking.financialblogs.com/post/blog/do_you_have_an_idea_for_an_innovative_etf.html

Evestors:
http://www.etftrends.com/2007/10/facebook-enters.html

Mutual Fund Wire:
http://www.investmentwires.com/common/article.asp?template=article&storyID=16069&wire=mfwire&wireID=2

Investors Business Daily:
http://www.investors.com/breakingnews.asp?journalid=62015824

Ok, that might have been more than a few, but we are really proud of this contest and believe in the endless possibilities of the student mind.  We were surprised by the competition not just by students but school to school. Is there a subway series in the making here or will our friends in PA run away with the top prize?

With the submission deadline over a month away, we are already pleased with the early entrants. We are excitedly waiting to see who else gives it the "Old College Try."

A Big Week For RIMM

First opening up China and now on to another large Venue: Facebook!

Now that I have established a Facebook presence, I have come to realize how big it really is. I love how it is described as "social networking," a guess a label, however off base, makes people comfortable.

This week, Research In Motion (RIMM) launched Facebook software designed for its smartphones making it easier for users to browse Facebook. T-Mobile is the first carrier to provide the new software to its customers.

The application similar to BlackBerry e-mail, will let users receive Facebook notifications and messages automatically and scroll through them quickly. Users can also read and compose messages off-line, also similar to the email application Blackberry users are accustom.

Another feature, totally for the retail audience enables photo uploads to Facebook which is integrated with the BlackBerry's camera and photo management software.

Who knows… one day (RIMM) might add music!

Disclosure: 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 owns shares of (RIMM) directly through his participation in the portfolio.

Bloomberg Radio

Today at 10:07 AM eastern I will be discussing Merrill Lynch's (MER) first loss since 2001. MER is a constituent in the Clear Global Exchanges, Brokers and Asset Managers Index.

What Can Move Big Pharma? Vaccines.

This is the second consecutive quarter for strong increases in income for Merck & Co. Inc. (MRK) left investors content. Reported earnings were up to 62%. Merck’s new products and restructuring efforts have outshined the $528 million reserve for Vioxx legal defense. Although its anti-cholesterol drug joint venture with Schering Plough (Vytorin and Zetia) contributed to this, it is important to note there was another factor as well - strong sales of vaccines.

Sales cervical cancer vaccine GARDASIL increased 17% from the previous quarter as the company launches the vaccine in more countries. Merck’s overall sales were up 12% to $6.1 billion of which vaccines totaled $1.2 billion. Gardasil accounted for 35% or $418 million of its vaccine sales exceeding many analysts’ expectations.

Merck earned $1.53 billion or 70 cents per share compared with $941 million or 43 cents per share last year. They have raised their earnings outlook from $3.10 to $3.14 per share.

The once sleepy vaccine market is on the rise with new markets and new disease prevention.

Disclosure: Merck & Co. Inc. (MRK) is a constituent of the Clear Global Vaccine Chain Index. Mr. Corn is CEO of Clear Indexes LLC which publishes the index which is licensed to Claymore Securities, Inc who has issued the ETF:(JNR). Mr. Corn does not own sharse in (MRK) directly and does own shares of (JNR).

How Are You Paying For Crude Oil?

Many countries, peg the price of crude oil in US dollars (USD). This makes sense as the currency of many countries is tied to the greenback including trading partners in this hemisphere all the way to China. Crude oil can be pumped from many US and US associated sources ranging from Alaska, the North Sea and the Gulf of Mexico to Oklahoma and good old Texas crude. As we all know only too well, oil also is derived from less stable regions such as West Africa, the Caspian Sea, to the Middle East and Venezuela. Where ever it’s extracted, much of the world’s resources are in “US dollar-quoted crude.”

This year, price increases in crude oil have been reported in the press as being on a rocket, heading mostly up due to global demand and unstable geopolitical conditions. Competition for oil amongst economies is so great that governments have interceded adding another layer of complexity in exploration, environmental impact and M&A activity. This is all further complicated by currency exchange rate volatility between the US and its trading partners. US housing and credit market turmoil have cultivated a macroeconomic climate which has led to rapid depreciation of the US dollar; the greenback recently hit a 31-year low with the Canadian dollar (CSD) and its gap with the Euro (XEU) is now upwards of 40%.

Since late August of this year, US dollar-quoted crude has swiftly risen in relation to XEU- and CAD-quoted oil. Looking over the past five-year period, the current gaps in relative crude prices is at their greatest as seen in the chart below. In April of 2003, oil prices grew at roughly equivalent rates among the three currencies, and in May of 2005, prices again rose in comparative lockstep. Price disparities began to rapidly widen in June of this year and were significantly amplified in late August, as US economic tumult began to manifest itself on the dollar.

Current trends encompassing simultaneous increases in energy prices and a fall of the USD do not bode well for the US economy as it is trying to avert a slowdown. Even with exports and incoming tourists, consumers and businesses collective demand for oil is fundamental to US economic health.

Speculators, geopolitical instability, and the vagaries of inventory levels at the Nymex, be additive forces resulting in even higher prices of global crude and what may be worse for the US economy would be for the US dollar continue to move inversely.

Disclosure: Mr. Corn does not invest directly in commodities.

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Government Mandates Can Make Great Investing

I remember (yes I am dating myself) when air bags went from fad to great idea to omnipresent to mandated safety issue. These types of progressions for products and services that inevitably become “mandated” have been tracked by progressive money managers and have benefited their investors for years.

Vaccines are mandated by various government agencies, school systems and business throughout the developed and much of the emerging world. These mandates along with many vaccines being “strongly recommended” are key components to the investment thesis for the Clear Global Vaccine Index.

The Annals of Internal Medicine reported this week that the Advisory Committee on Immunization Practices, a division of the Centers for Disease Control and Prevention (CDC), has released its 2007-2008 recommended immunization schedules for adults in the US.

The schedule, which is established each year by the CDC, has been endorsed by the American Academy of Family Physicians, American College of Obstetricians and Gynecologists, and the American College of Physicians.

The schedule can be found here:

Some of the Recommended Adult Immunization Schedule deals with vaccination for major diseases such as tetanus and diphtheria to childhood oriented diseases; measles, mumps, rubella (MMR) vaccination to the controversial vaccine shown to prevent cervical cancer.

The scheduling of recommendations can be found here:

This once sleepy corner of medicine is in a renaissance as Governments and prominent Non-Government Organizations (NGOs) are promoting disease prevention over treatment aimed at saving millions of lives, reducing suffering and saving billions preventing the need for treatment. There is a niche of the industry that is developing promising new vaccines, add the manufacturers, distributors, educators and delivery firms and the vaccine chain stands to profit while delivering positive change to the quality of life for generations to come.

Disclosure: 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:(JNR). Mr. Corn owns shares of (JNR).

Google's Earning Could Be Even Better

Third quarter's earnings passed expectations. Q4 could be helped by China. I read over on WebProNews that China is blocking everything except Baidu.

Chinese citizens trying to access sites owned by Google, Yahoo, and Microsoft aren't having much luck; instead, they're often getting redirected to Baidu.

In any event, the problem seems to have affected Google Blog Search, Microsoft Live Search, the main Yahoo site, and YouTube, at the very least. And there is, of course, no word on when or if the redirect to Baidu will be reversed.

This is the type of "who knows what China might do" action I posted on earlier the week http://www.clearamideas.com/clearam_ideas/2007/10/china-in-perspe.html.

Being barred from the largest population in the world has not stopped the Google (GOOG) machine from increasing its profit-growth rate, even while accelerating its biggest expense; payroll. Revenue jumped 57% which also beat consensus analyst estimates.

International operations represented 48% of revenue during the third quarter, which is similar to second quarter results.

This is a firm that is doing everything right. The firm would greatly benefit and compete fairly with Baidu with an open, fair China.

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) directly through his participation in the portfolio.