Clear Indexes Ideas

It May Be Oscar Night But for Many, It is on April 4

In the movie world, rarely does a sequel manage to transcend the excitement and essence of the original. If the inaugural "Clear Next Generation ETF Contest" was The Godfather, then "The Spring 2008 Clear Next Generation ETF Contest," beginning February 25th, is The Godfather II. It captures the ingenuity and innovation of student minds that made the first contest great, it is materially bigger and improves upon it. The spring edition of the Clear Next Generation ETF contest runs from February 25th to April 4th.

The stakes are higher. The winner receives $5,000 and a paid internship at Clear Asset Management. Three runners-up will each collect $1,000, and ten honorable mentions will also be named.

With the ante upped, the competition is fierce. Any full-time, part-time, undergraduate or graduate student with a valid email address at Middlebury College, York University, Penn State University, University of Pennsylvania, Harvard University, Cornell University or Johns Hopkins University is eligible to participate. We have been working with professors at each of these schools, and the response has been overwhelmingly positive.

Why team with Universities? All one has to do is look at Silicon Valley, the 495 Tech area around Boston or the biotech start ups in the Potomac area to understand that collaboration frequently yields great success.

We encourage students to dream, take chances without judgment understanding each student or group can submit up to five concepts. Some will be winners. Today we have two interns from our first contest. This summer we will have in more.

There were some fantastic ideas in the first round of the contest; elevating the competition by upping the number of participating schools from three to seven only stands to increase the scope for great ideas. Visit http://clearindexes.com/etfcontest.aspx for more information. Students and professors, be sure to join our Facebook group! We're eager to see the exceptional investment ideas that university students bring to fruition in this round.

Get that gray matter working and submit up to your five proudest concepts.

An early invitation: to have your school participate in our fall 2008 contest, contact Amber Sharif at asharif@clearam.com.

Has the Media Forced a Recession?

When consumers spend, there is growth as consumers are approximately 65% of the economy. When consumers get nervous and stop spending, it can slam the brakes on the economy. This is why Wall Street places so much weight on consumer sentiment.

As the two sayings go: the media is the message and the only reality is perception.

On February 20, Credit Suisse (CS) announced it was incurring a $2.85 billion dollar write-off. Credit Suisse is just the latest casualty in the string of write-downs that banks have incurred in the past eight months. Add in a historic loss at SocGen and the average investor does not feel it is safe to spend freely. Many people on and off Wall Street are asking if the write downs are over or now contained?

Extensive media coverage of write-downs likely played a huge role in the results of the latest BIGresearch Consumer Intentions & Actions Survey for the month of February. According to the survey, only one out of every four Americans expects the US economy to perform strongly for the month of February. This is compared to roughly 50% in the good times of February, 2007. In addition to the write-downs, falling housing prices (outside of Manhattan) and rising gas prices have contributed to this negative outlook.

Fifty-percent of those surveyed foresee job layoffs happening in the next six months, yet only five percent are worried about the status of their own jobs. The constant media coverage of the credit crisis seems to have instilled a sense of anxiety in the American outlook of the economy; yet on an individual level, workers have confidence that their jobs will be retained.

There aren't as many numbers as the media leads us to believe to back up the current level of negative sentiment. Unemployment is currently up only slightly at 4.9% in January, compared to a 4.6% average for the year 2007. The Dow Jones Industrial Average is off roughly 13% from its high. The incoming tax rebate checks will also likely impact the US economy regardless of whether they are spent or saved and are likely to raise consumer sentiment.

Many home prices, despite having fallen, are still near historic highs. The issue is for unqualified buyers and those who bought near the top. Unqualified buyers who bought at the top are the defaulters of today and the near future. Still, they are not an enormous percentage of homeowners.

A quick scan of news sites today shows projections of a recession in 2009, falling home construction and prices, and rising inflation. Only time, not projections or the oh so loud look-at-me media will tell where the economy is headed. From the results of the survey, it seems as if the average American has bought into the media's negative assessment of the situation.

We hope not to have a media induced self fulfilling prophecy.

The “Next Generation” Blogger

Clear Asset Management and Clear Indexes have been running on all cylinders lately and I have had little time to post. With the start of our next Index Design contest coming next week, we thought it would be fun to have Jimmy Baker, our paid intern and winner of our first contest to do a post about his experiences.

It’s been a little over a month since I started working at Clear; a month of excitement, learning, work, and time management. I’m Jimmy Baker, the winner of the first Next Generation ETF contest and a freshman at New York University. I was ecstatic when I found out from Andy that my idea for an Export ETF, which consists of US companies that derive their revenue primarily from exports, had been selected as the winning entry. In addition to receiving a very generous cash prize, I also began working at Clear as a marketing intern. This past month has been a blur. I’ve spent time researching stocks that may be included in the Export index; it’s been amazing watching my idea transform into a professional and polished product thanks to the hard work of the Clear team. I’ve also found a niche drafting blog posts and writing official press releases. And of course, I’ve had the opportunity to do some media appearances and interviews to talk about my idea and the contest. Being interviewed by TheStreet.com in front of the New York Stock Exchange was an unforgettable experience. Fox News was another first: I had to put makeup on. I had never done any press interviews before the contest, but Andy was always along to guide me.

Speaking of the contest, I’m currently working on setting up the next round of it. My boss Amber (who’s great by the way) is running it; so far, I’ve helped organize it and brainstorm marketing ideas to ensure that word gets out about it. It’s been really interesting seeing how the contest works behind the scenes after being an entrant in the last round. The prize money has been upped and more schools are competing so it’ll be exciting to see how it turns out. Other duties include customer service and telling a joke of the day to (sorry my material has been lacking lately) the portfolio managers. I’ve enjoyed going out to lunch with all the other interns. Out of the places I’ve tried around Wall Street, Rosario’s is my favorite. I recommend anything on the menu there. In between working at Clear and taking classes at NYU, I have a full- but very manageable- schedule. Every day on the job, I learn something new; it’s been an amazing experience!

My advice to entrants in the Spring Next Generation ETF Contest: construct your entry with the future- both short term and long term- in mind. Marketability is key; it’s all about WHY your idea is attractive to investors.

Disclosure Guest blogger Jimmy Baker, 18, is the winner of the first Clear Next Generation ETF Contest and a marketing intern at Clear Asset Management.

Is it Time to Get Back in the Water (EXB)?

The dust that emerged amidst the chaos of the credit crunch has begun to settle and significant signs insinuate that it may be time to get back into financials. These indicators exist in the form of surprising earnings, Goldman Sachs's (GS) stance on distressed assets, Warren Buffet's long-term confidence in financial companies and opportunities from consolidation.

Deutsche Bank (DB) impressed analysts with its recent earnings announcement. The street expected poor numbers because of the bank's heavy dependence on debt-related products; however the bank managed to pull in 2007 earnings that exceeded 2006 earnings by 7%; including $1.4 billion profit in the fourth quarter. Like the majority of the investment banks, Deutsche Bank participated in write downs ($1.3 billion) in Q307, however there were no subprime related losses in Q407 indicating that most losses that needed to be accounted for have already been taken care of and priced into the stock.

Goldman Sachs, a company that is legendary for being in the right markets at the right time, has expressed interest in being an aggressive buyer of distressed mortgage and credit assets.

"Goldman is also going to continue its investment banking expansion in the middle market sector and sees a good opportunity to become a more aggressive buyer of distressed mortgage and credit assets. Viniar (Goldman CFO) said: "We will be a buyer of distressed assets at the right price."
-Financial News Online

Even if the credit crisis has not quite bottomed out yet, Goldman's current interest signifies that they at least believe the bottom is near.

Warren Buffet may be the only investor more coveted by Wall Street than Goldman Sachs. Buffet has made billions on his strategy to "get scared when the market gets greedy and opportunistic when the market gets scared." Buffet's actions in the past few months (spending $6 billion on deals) indicate that he agrees with Goldman Sachs that this is the time to get back into the market. It is widely believed that Buffet is looking to invest in the "oversold" financial or industrial industry. Buffet shared his confidence in the rehabilitation of the US economy on Wednesday Feb 6th when he told the Financial Times,

"I'm a bull on the United States. Just think about how silly it would have been to be anything other than a bull on the United States since 1790. It is not a smart thing to sell the United States short over the years - or Canada for that matter. The world does get better. People get more productive. More human capacity is unleashed over time."
-Financial Post

In addition to the possible rehabilitation of the investment banks, there are a number of other exciting investment opportunities in the financial sector. Exchanges have been profiting from the increased volume that has stemmed from the recent market volitility. Additionally, there has been significant consolidation in the exchange sector primarily as a means to combine technology, diversify products and expand globally.

In January 2008, the NYSE Euronext (NYX) agreed to acquire the AMEX in a $260 million all stock deal. This deal is anticipated to close in Q308 and to provide $100 million worth of synergies within 2 years. The Big Board is expecting earnings to begin increasing in 2009.

The CME Group Inc. (CME) which runs the Chicago Mercantile Exchange and Chicago Board of Trade is also looking to consolidate and has been involved in merger talks with the New York Mercantile Exchange (NMX). The proposed $11 billion deal would create an exchange of market value $45 billion.

The asset management community continues to take in new assets. The ICI continue to report inflows to mutual funds. This is IRA season and there are additional inflows to these firms seasonally both here and globally.

Wealth creation is a global phenomena and gaining momentum. The BRIC countries and other parts of the developing world are minting millionaires faster that the developed world.

The invest-ability of these trends is something that my firm tracks through the Clear Global Exchanges, Brokers and Asset Managers Index (CGE) which is licensed for the Exchange Traded Fund trading under the symbol (EXB). It may be time to go back into the water, or perhaps the firms that manage the portfolios, clear the transactions and facilitate the trades.

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

SPACs: Danger or Enhancer?

Earlier this month the NY Times ran a piece: The Unseen Mergers Boom: SPACs, which I felt is intriguing and should be brought to your attention. These blind investment vehicles have accumulated a war chest and will influence, through their acquisitions, the market in 2008.

SPACs are companies organized to purchase one or more operating businesses. The equity funds to acquire these businesses come from their initial public offering. Think private equity for the masses.

According to SPAC Analytics, in 2007 SPACs raised approximately $12 billion in proceeds in sixty six initial public offerings. Fifty five SPACs are already in the pipeline to sell shares to the public, according to one recent report. Even in today’s troubled climates these companies should sustain a steady flow of private M&A activity in the next year. It won’t quite match the private equity boom but a nice chunk of business in troubled times.

In 2007, approximately 23 percent of the total number of U.S. initial public offerings and 18 percent of the money raised were SPAC related. If the current figures hold 2008 will be even better.

My question is who is buying into these deals and the bigger question is why?

SPACs have a distasteful reputation due to a number of scandals associated with them in the 1980s. Initially, when they first reappeared on the scene the major banks and M&A law firms refused to represent them. Morgan Joseph and Ladenburg Thalmann did the hard work of establishing a market.

Demand however brings respectability. Citigroup recently underwrote the largest SPAC IPO ever by Liberty Acquisition Holdings, a $1.035 billion initial public offering with Cleary Gottlieb as underwriters counsel. The New York Stock Exchange and Nasdaq still refuse to list SPACs, giving this burgeoning market all to the American Stock Exchange, but don’t expect their forbearance to last if the SPAC trend continues.

Though bigger banks and more prestigious law firms are garnering the fees as the industry grows, that doesn’t make the deals smell better.

A purchase of SPAC securities is typically an investment in a single, to-be-determined acquisition. At the time of his or her purchase, a public investor is uncertain what business or industry the SPAC will enter, the size of the SPAC’s acquisition and the leverage it will bear and whether the SPAC’s management will have any facility in the industry of the investment. Their influence on these matters is instead limited to a vote on the acquisition.

There are many naysayers that point out that if an investor doesn’t approve the acquisition the cash returned to them is less than they put in. This is well disclosed and relatively obvious. Salaries need to be paid during the hunt and the lights have to be on.

Because SPACs are public vehicles and their acquisition targets often are not, there are traders who can profit from the inherent inefficiency of this structure.

A SPAC acquisition is also an arbitrageur’s dream. The approval of the transaction often occurs several months after announcement. The proxy statement to approve the transaction, which includes the relevant financial and other information is not immediately filed after announcement yet investors can trade the SPAC shares in the interim in anticipation of the acquisition thereby sidestepping the gun jumping provisions normally imposed on I.P.O.’s. This creates short term trading opportunities for arbs to take advantage of information deficits.

Additionally, there is a gun to the head of management at the SPAC to make an acquisition swiftly. This seems to make sense, as once the investors have their money in, action is required. Market conditions and knowledge of a SPACs timeline requirements can help create bad outcomes.

The typical requirement that a SPAC consummate an acquisition within 18 months creates additional distortions in bargaining incentives as SPAC managers face pressure to complete an acquisition within this timetable.

Investment bankers need the work. Investors seem to have an appetite for the investments. For now this seems like another acquisition vehicle that will impact the markets in 2008.

The fallout or success of SPACs will probably not be felt in 2008 but the money they pump into the market may have a positive influence. Hopefully this is not another bubble builder with heavily paid consequences for investors in years to come.