Clear Indexes Ideas

Earn Two Percent and Change the World

It is that time of year, the holidays. The old movies are on TV and one of my favorites is It’s a Wonderful Life. A key take-away of the movie is that everyone is connected. Our actions can have an impact on a global basis.

That same powerful, enabling concept can hold true in investing.

Now let’s move to US foreign policy. There is a hypothesis in some circles that our vast aid sometimes breeds resentment. The richest country in the world is providing a handout. Many people are proud and resent handouts. The old Chinese proverb goes: “give a person a fish, feed them for a day, teach a person to fish and feed them for a lifetime.” This philosophy of investing in individuals’ ability to make their own living can translate as follows:

The Investment Thesis

• Touch over 100 lives with a minimal investment of $1,000 (a three year lockup)
• Loan people the tiny amount they need to buy “a fishing pole;” we are not “teaching anyone to fish”
• Earn 2% in the process

The essence of my investment thesis combines interest income with touching over 100 lives over three years, empowering them to help themselves through an entrepreneurial endeavor. The concept of MicroBanking is not new. Unfortunately it has been perverted by some large banks. My family has had the privilege to meet and work with a not for profit organization. They charge the lowest amount of interest possible as a microleander and pay interest back to their investors.

The Bank was founded in 1975 by the World Council of Churches and is the largest, most far reaching organization of its kind. The loans have no religious overtone. This is only about non-profit microbanking, not about converting the masses. I believe in this so strongly that I have started a personal web site to assist them at www.InvestingBack.com which is chock full of information.

How to Get Started

I recommend you invest your hard earned money to help people earn their way out of a life of poverty. They accomplish this by borrowing small amounts of money and paying it back. The default rate is lower than credit card defaults in the US. Every investor has received their principal investment back along with interest.

Invest a minimum of $1,000 for three years and earn a two percent interest rate. This is not a donation! It is an investment.

The money will be loaned, mostly to women, who will use this money ($100 borrowed on average) to devise a way to make an honest living, feed and clothe their family and provide basic healthcare.

I believe giving someone money because he or she is poor is not helping them as much as lending them money to create a business, get on their feet and keep earning money. I am investing in people helping themselves.

It truly is a wonderful life!

Your money is invested in the loan pool of the Micro Bank which invests it over and over again, helping many people. You are NOT placing one cent into administration or fund raising. Your investment touches many people (remember the movie scenario) helping individuals, families and touching whole communities. Yes, each investment into the loan portfolio makes a material difference!

My Quest
The promise I made to my family, who are all in on this, is not to stop talking, writing and cajoling people about micro banking until at least 99 additional families have invested along side us. For those that know me well, the whisper number is 999. Together we can help a lot of families and repair a small piece of the world.

Invest Now!
http://www.investingback.com/ap/Invest/tabid/56/Default.aspx

The bottom Line
Too many funds are down for the year. A daily liquid savings account pays near zero. How many money markets are invested in level three junk bonds and are in trouble? Through this investment, you know who the lender is, where the money is going and all of the stats are a few links away.

I suggest investing more than the minimum and doing it with your family this weekend.

Make money and make a difference.
www.InvestingBack.com

The Very Rich: Profiting Is the Best Revenge

As I have previously posted highlighting various studies that show wealth accumulation for the top 1% of the world’s population is growing faster than any other group. This weekend the NY Times covered the story and the statistics in the US. It paints a picture that can be frustrating for hard working people at all levels of income and wealth who have not achieved this status.

The increase in incomes of the top 1 percent of Americans from 2003 to 2005 exceeded the total income of the poorest 20 percent of Americans, data in a new report by the Congressional Budget Office shows.

The poorest fifth of households had total income of $383.4 billion in 2005, while just the increase in income for the top 1 percent came to $524.8 billion, a figure 37 percent higher.

The total income of the top 1.1 million households was $1.8 trillion, or 18.1 percent of the total income of all Americans, up from 14.3 percent of all income in 2003. The total 2005 income of the three million individual Americans at the top was roughly equal to that of the bottom 166 million Americans, analysis of the report showed.

The report is the latest to document the growing concentration of income at the top, a trend that President Bush said last January had been under way for more than 25 years.

I am no politician and although I have strong opinions, I post this blog to share observations about markets, and focus on how to profit from them. Before sharing the investment thesis there is some significant data that I believe holds the clue to how best to profit from this trend.

Much of the increase at the top reflected the rebound of the stock market after its sharp drop in 2000, economists from across the political spectrum said. About half of the income going to the top 1 percent  comes from investments and business.

On average, incomes for the top 1 percent of households rose by $465,700 each, or 42.6 percent after adjusting for inflation.

So is it time to be mad or jealous? As a quant, I say no and coldly examine the situation. The rich are able to participate in the capital markets allowing them to accumulate wealth as incredible rates compared to people who only work and do not invest.

The investment chain is fairly simple. Money goes to asset management firms, either directly or through brokers. The asset managers trade through prime and other types of brokers. Most of their investment activity goes through exchanges. This holds true not just in the US,  it is pretty much the same flow chart globally. The investment thesis is to invest in these three narrowly focused subsectors simultaneously.

Clear Indexes LLC publishes the Clear Global Exchanges, Brokers and Asset Managers Index with is tracked by the exchange traded fund (ETF) issued by Claymore trading under the symbol (EXB).

The ETF launched in August, look at a chart sine then. You may not be captaining a fund, an internet mega millionaire or titan of Wall Street, but you can profit from their investments.

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

(LEH) Reports Earnings Tomorrow, (GS) Already Has Stolen the Show

I will be doing an earnings preview tomorrow on Bloomberg Radio at 7:20 AM and then reaction to the release at 8:50 AM. But Lehman's earnings are not the only numbers people will be examining. Tomorrow Lehman will be announcing its bonus pool for 2007.

Today the news is all Goldman Sachs (GS), the firm most of the country loves to hate and admire. Goldman set the bar high for all of Wall Street by setting aside $18 billion to pay salaries, benefits and bonuses compared with $16.5 billion last year.

Goldman employs more people than last year 29,905 compared with 26,467. Being that Goldman did have write downs, albeit less than their peers, average bonus per employee has dropped from $623,000 last year to $601,900 this year even though the total pool is a new record.

Lehman Brothers CEO Richard Fuld was awarded approximately $35 million of restricted shares for 2007. Tomorrow we will find out how the rest of the firm fared. The credit markets are still doing flip flops and analysts are not sure if the writedowns are slowing or over-influencing earnings and bonus pools. Analysts, along with luxury retailers and Hampton-based realtors are anxiously awaiting the results.

Disclosure: Lehman Brothers (LEH) and Goldman Sachs (GS) are constituents in the Clear Global Exchanges, Brokers and Asset Managers Index licensed for the ETF: (EXB).

Retailers: More on the Influence of Gift Cards

Despite gloomy news in the press and blogsphere, the US population is at least in the giving spirit this holiday gift season with 69.4% saying they would rather give than receive this year. This is According to the BIGresearch American Pulse Survey published 11/27/07. The research was conducted with 4,069 respondents.

The gift the majority of respondents want: Gift Cards or cash. In fact 52.1% said they would rather receive a gift card or cash.

This is a significant statistic for retailers as the increase in gift card giving slows revenue, as gift cards are not considered revenue until redeemed for merchandise. Gift cards brings cash in the door since gift cards are paid for on the spot or by credit card and may ultimately, boost short-term profits.

One reason for the consumer preference for gift cards that may be gleaned from the research is that consumers frequently do not like the gifts that were chosen for them.

The data includes; 45.4% of those who received clothing didn't like or didn't wear their gift, 46.3% of those who participate in gift giving/receiving say they hate to return gifts because it is a hassle. When it comes to having the energy and enthusiasm to handle exchanges, only 22.7% like to exchange gifts for things they would prefer to have. 

Gift cards are big and getting bigger this year as 82.4% of those surveyed said gift cards are a smart gift alternative for people they don't know well.

Stores love gift cards as they can represent free cash. Consumers purchase the gift cards and 13.5% of gift card recipients have reported that they have never redeemed them and16.1% have received gift cards that they have only partially redeemed. Even the cards redeemed supply a new source of revenue before they are redeemed; float. The use of the incoming cash is new discipline for retailers. How many are equipped to profit from cash management? What are the new risks?

These questions sound a lot like the profitable business model of American Express and others that have rung the cash register for many decades peddling travelers and gift checks. The difference is the experience in financial markets.

Not everything is bright this holiday season as consumers discuss spending overall. 59.1% predict they will spend less this year than in seasons past and 56% say they will be looking for sales more as they holiday shop.

Much of this change in spending habits is about sentiment as 47.7% "feel" that compared to last year it is becoming harder to pay monthly bills. More concretely, more survey respondents say they are living paycheck to paycheck. One solution to cut corners is 22.5% have re-gifted actual gifts while 10.5% have re-gifted gift cards received.   

Overall Gift Cards are not a fad. The accounting is tricky making stores appear more profitable during the gift card selling season taking in cash without revenue or expenses. Retailers then record higher revenue and lower margins when gift cards are redeemed which is something to watch closely. Some retailers create reserves anticipating shoppers armed with their gift cards. I have posted before that this class of shoppers frequently exceeds the amount of the gift card when shopping. The bulk of gift cards are redeemed in January and February and by June are accounted for as dead by most retailers, meaning the pocket the cash with no reserve for future redemptions. Stores with the proper data may be better able to forecast January and February revenues.

Today, savvy retailers are already on board with fast selling gift cards and have specific marketing teams and promotional material on-line and in-store aimed at gift card buyers.

Retail analysts require more data on gift card purchases to properly judge the health and growth prospects of retailers. Perhaps even more important at this moment in the economic cycle, as global economists and Fed Chairman Ben Bernanke and Vice Chairman Donald Kohn focus on consumer spending as a quantitative measure of the health of the US economy, transparency is still sorely lacking.

More investor friendly reporting is swiftly needed to fully assess this and future holiday retail seasons.

Giving is a Year Round Gift

I have told several friends that my next career will be giving away their incredible wealth. They feel blessed to have accumulated vast wealth and appreciate my perspective on where their hard earned cash can truly make a difference. Helping others is a gift not just limited to well off people or the ultra high net worth. Performing community service is something that almost every family and person can experience. It is a wonderful thing to do and share.

It is, however, the domain of the most fortunate to write big checks to causes in which they believe. Our Global Vaccine Index was inspired by two wealthy families that like to play bridge together and discussed how they may change the world. They have dedicated a foundation that will be short lived and highly influential. It is called the Bill and Melinda Gates Foundation and has very specific goals. It is partially financed from a $20 billion gift from Warren Buffet.

For the rest of the high to ultra high net worth donors, many share a desire to volunteer and to include their children in their philanthropic planning, yet there are many differences among the groups.

A study has just been released, it was commissioned by the Bank of America and conducted and analyzed by Indiana University’s Center on Philanthropy.  This study, which may be the largest of its kind, is based on a random sample of 1,150 individuals with an annual income of $200,000 or net assets of $1 million or more.

The 137 page report identifies specific donor types within different levels of wealth groups and how they go about giving away their money. It is chock full of fascinating statistics.

A common these across groups and levels of wealth is a concern about administrative expenses. Donors want to know what percentage of their gift is put to work and how much is used paying expenses. This ratio influences the amount of their gift and if a gift is appropriate.

The research pointed to two of the most generous profile types likely to lead the pack and drive trends in philanthropy in the coming years. They are: the “Very Wealthy,” households with a net worth of at least $50 million, and the “Entrepreneur,” households where at least 50% of wealth comes from entrepreneurial assets.

The Donor Archetypes

• The Very Wealthy: Households with a net worth of $50 million or more.
• The Bequeather: Households that report having a provision in their will where they will leave 25% or more to charity.
• The Devout Donor: Those households attending religious services weekly (or more often) and donating to religious causes.
• The Secular Donor: Households that do not attend religious services and do not give to religious causes.
• The Entrepreneur: Households with 50% or more of their net worth in entrepreneurial assets.
• The Dynast: Households that give their children money which the children use to donate to charity.
• The Metropolitan: Those households whose primary residence is in a city with a population of 500,000 or more.
• The High Frequency Volunteer: Donors who reported volunteering more than 200 hours per year.
• The Strategic Donor: Households that have created foundations and/or donor advised funds and that give to relatively few subsectors.
• The Transactional Donor: Donors who have given to many or all of the subsectors and who have not created a foundation or donor-advised funds.
• The Altruistic Donor: Households that report being motivated by a sense that “one should help meet critical needs in society” or that “those with more should help those with less”; however, that said, “they would not give more to charity if they received a better return on their financial investments.”
• The Financially Pragmatic Donor: Households that reported being concerned about the “return on their financial investments” and “feeling more financially secure.”

The reasons they give from highest to lowest are:

• Giving back to society
• Meet critical needs
• Those with more should help those with less
• Bring about a desired impact
• Set an example
• Nonprofits should provide services government cannot
• Identification with causes
• Being asked
• Religious beliefs
• Leaving a legacy
• Limit funds to heirs
• Makes good business sense
• Expected in social network

Does this mean that rich people are actually the biggest gift givers? If they also volunteer and get involved with a group (I am firmly in the entrepreneur group) then they are the ones who receive the most. It is actually better to give than receive.

Whatever your type, whatever your reason, there is no time like the present to consider donating. Or better than considering, just do it.

The full report can be found here midway down the page:
http://newsroom.bankofamerica.com/index.php?s=press_kit&item=92%3C/a

Have a good weekend.

PS A place I am investing in microcredit can be found on my personal web site:
http://www.investingback.com/ap/default.aspx

Disclosure: Mr. Corn is the CEO of Clear Indexes LLC publisher of the Clear Global Vaccine Index licensed for the ETF: (JNR). He owns shares of (JNR).

Blue Index, Red Index

Politics as Usual at the Super Bowl of Indexing Conference

Over 600 people converged for drinking, golf, eating and networking in Phoenix this week at the big game at the ultra-luxe Hyatt. Reuniting in person and yukking it up with most of the firms in the index-to-ETF food chain was productive. Plan Sponsors were wooed by trading firms to create index baskets and ETF issuers discussed fee levels to take a share of the business. The mash up of services and buyers all in person was worth the stormy plane ride from NY.

IMN ran a great conference. The agendas and debates set up industry leaders to discuss issues. What was missing, though no fault of IMN, was depth. The two debates concerning market cap versus dividend versus fundamentally weighted indexes was predictable. These are heavily entrenched one-size-fits-all, our-way-is-the-only-way camps. John Bogle, Jeremy Siegel, David Blitzer and Rob Arnott were in usual form: funny, ears closed, self-promotional and filled with more conviction than facts. It was just like watching one of the presidential debates!

There was no new information or research offered and very little new learned. It was, however, worth the price of admission to watch them go at each other. Don't get me wrong, these folks are brilliant. They are a balance of marketing and product design with a huge overlay of conviction and well rehearsed public speaking.

As a quant that prefers to believe what can be measured; one methodology of constructing an index cannot logically or mathematically create every optimal outcome. So my issue with the panels was the absence of new and innovative thinking. Sticking even with just the weighting issue, I understood eight generally accepted weighting designs.

But…

Discussing index design with peers at the conference and being blessed to be working with intelligent open minded professionals that are trained in math, engineering and finance, we have found weighting methodologies beyond market cap, fundamental and dividend that make logical sense and have back tested with superior results. Each has its place based on the investment thesis and desired results. The key is having open minds, ears and eyes.

Superior performance does not always imply better returns. It is defined and measured by attributes that include alpha and beta, volatility, wipe out and recovery, Sharpe ratio and tracking error; all where applicable.

Talk isn't cheap. These measures directly affect a person's or institution's overall portfolio designed risk and expected return. It is up to the industry leaders to bring the index and fund industry to the next level.

And let's not forget that weighting is only one facet of index design.

An open dialog is already happening with academics, index designers and institutions. The industry leaders who spoke from the podium acknowledged that they are being challenged and have increased their thinking due to the inflow of competition and new ideas, many of which are fact rather than conviction-based. The rate of change may be faster than their large corporate strategy groups have assessed in their five year strategic plans.

I look forward to attending next year's Super Bowl or Indexing. I just hope it is less of a game.

Global IPOs Prove Sarbox Works

Anuj Gangahar of The Financial Times posted the news that ever enemy of shareholder friendly laws and strong SEC rulings see as their worst nightmare. New York will once again pass London for the first time in three years in money raised in IPOs.

Money raised through stock market debuts in New York is set to hit levels not seen since the dotcom boom, with $51.3bn raised this year on the NYSE and Nasdaq combined, according to figures from Dealogic, the data provider. In London, debuts on the London Stock Exchange and Aim have raised $45.8bn in the year to date.

However the US of A seems to have been edged out in the number of deals but not materially. This suggests that a few outlying large deals are not tilting the numbers.

However, London just eclipses New York in terms of the number of companies that have come to market this year, with 208 deals compared with 202 in New York.

The NYSE used to cede certain listings to the NASDQ as many firms did not meet their strict standards to list on the big board. Today competition is global and much of the game is moving east to attract Chinese and Indian companies to list that are seeking new and large pools of liquidity.

Market turmoil is not helping the exchanges on either side of the puddle.

In the past two weeks, 11 companies that had planned to float their shares on US stock exchanges have either withdrawn or postponed their deals.

This comes after a dozen IPOs, which had expected to raise a total of $2.5bn, were pulled in October.

Markets fluctuate, and as they do, news of companies pulling their IPOs is no surprise. The real issue debated among politicians and financial experts has been if Sarbox rules are too stringent to attract new listings. The answer after a few years is no.

Competition is healthy and creates an overall larger global marketplace. We have written before about the importance of Sarbox and recently about how global uniformity of financial reporting would narrow borders further and increase the ability of investors to make informed decisions.

As investment managers and designers of indexes, we seek transparency, accuracy and uniformity across industries and borders in reporting.

The number of listings and dollars raised is proving that Sarbox is not the deterrent that its detractors claim it to be. Looking back on previous posts of ours, we supply the conclusion we knew all along: non-US firms willing to file and list in US are awarded a premium for doing so.

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