Clear Indexes Ideas

Fear and Greed or Discipline and Flexibility – You Choose

Tennille Tracy wrote for yesterday’s Wall Street Journal that the Volatility Index, the VIX, closed at its lowest level of the year. That close, 20.06, remains slightly above the all-time average (19.08), and comfortably below the average of the year to date (25.22). It’s nowhere near the high-water-mark set during the collapse of Long Term Capital Management. It reached an eye-popping 45.74 on October 8, 1998—the same day that the House of Representatives voted to initiate impeachment proceedings against then President Clinton.

Some market professionals look at the VIX, “the fear/opportunity gauge,” to assess day-to-day sentiment, because the index measures how much volatility options traders expect in S&P500 stocks in the next few months. However, long-term investors know that fear alone is not a winning strategy.

Imagine, that someone used the VIX to “time the market,” with a strategy of selling when the VIX closed at or above 30 and buying when the VIX returned to 20 or below. If a person followed this strategy to “time” the S&P500, he would have done the following:

August 15, 2007: VIX closes at 30.67, cash out of the S&P500 at 1406.70
September 21, 2007: VIX closes at 19.00, buy back into the S&P500 at 1,525.75
November 12, 2007: VIX closes at 31.09, cash out of the S&P500 at 1439.18
December 21, 2007: VIX closes at 18.47, buy back into the S&P500 at 1484.46
January 22, 2008: VIX closes at 31.01, cash out of the S&P500 at 1310.50
Yesterday, April 24, 2008: although the VIX is still above 20, the S&P500 was 1388.82

This strategy would have lost 15% in 8 months! Moreover, during the time that this person was sitting on cash, he missed gains of 17%.

On the contrary, imagine an investor who is agnostic toward the day-to-day emotions of other market participants. She would have stayed in the market during this entire stretch and lost roughly 1% (before dividends).

Of course this is an oversimplification. A trading overlay on a long-term investment strategy can produce incremental alpha. Historically it has also shown relatively how much investors will be rewarded for buying volatility on a given day.

The detailed explanation of the VIX methodology from the Chicago Board Options Exchange can be found here: http://www.cboe.com/micro/vix/vixwhite.pdf

The Wall Street Journal article is here:
http://online.wsj.com/article/SB120909414580544133.html

Disclosure / Shout Out to intern Adam Hoffman for his research and draft!

What Is Missing From Apple’s (AAPL) Guidance?

It is a shame that the market chooses to ignore mango earnings and revenue and move the stock only based on BS guidance. Let's look at some facts.

The native version of MS Office for Apple creates a whole new set of converts for the sleek elegance of the Mac. Ads are already running in traditional Apple territory such as the Daily Show.

True, many businesses will not go out and purchase a whole new slew of Macs tossing their PCs. However, professionals who bring their work home, small business owners and business students can overcome one of the few last objections and jump on the Mac bandwagon.

The ubiquitous iPod is now available in more sizes and colors than Magnolia cup cakes. The iPhone is now tracking with estimates. Both of these devices bring soft sales of downloads and revenue shares of phone service. These sources of reoccurring revenue are crucial to understanding the firm’s growth. It is the razor and blade game done to perfection.

Last are  sales outside the US which are growing nicely. Plus go to any Apple store on the east coast, the language spoken is not geek and certainly not English. It is the tongues spoken by the people who have made the  US their shopping destination of choice. That is defined as anyone whose native currency is Euros.

Add it up. Under promise and over deliver. How many quarters will it take for the street to catch on to the game?

Mr. Corn is long Apple (AAPL) and Microsoft (MSFT).

The (New) Media’s Influence

Over the past weeks, New York has lost its governor, a major investment bank, and nearly lost a second investment bank to the rumor mill. Billions have been raised to shore up balance sheets and to quiet critics. According to the press and some analysts, the economy has been moving into or towards recession and certain industries are called out as most vulnerable. Calls for bail outs and subsidies are loud even entering the presidential election debate. Consumer confidence has plunged. Amidst the turmoil in Albany, Washington and on Wall Street, another crisis is brewing. A recent survey by WeMedia/ Zogby found that 2/3 of Americans believes that traditional journalism "is out of touch with what Americans want from their news."

I have previously posted about the feeding frenzy that is the main stream media. The feeling among politicians and many on Wall Street is that the media has added to the probability of recession and will influence the speed and timing of recovery. Consumer sentiment has a direct correlation to discretionary spending and is directly influenced by the tone and content of what media is broadcasting. Lately, that tone has been dire. A quick excerpt from MarketWatch:

Consumer sentiment sunk to its lowest level in 26 years in early April, according to a report from University of Michigan/Reuters, as worries about the economy, unemployment and inflation deflated hopes for the future.

U.S. consumer sentiment index fell to 63.2 in early April from 69.5 in March. Sentiment is at its lowest level since March 1982. Economists surveyed by MarketWatch were looking for an April result of 68.8.

The bulk of information received by consumers is from the main stream media. The power of the press is vastly underestimated when it comes to creating and influencing sentiment. TV, cable, web pundits, and newspapers guide conversations everywhere from bars to golf courses. A new and not as well disseminated influence is having some people "feel" they may have a newer perspective or inside scoop. Some of the influence sphere is changing.

Americans across the country aren't just complaining about the state of journalism, they are taking action. 77% of those polled in the survey see "citizen journalism" as a critical part of correcting errs of the traditional media. One only needs to look at the rise of user generated content via blogs and RSS feeds into MyYahoo and custom Google pages, and even into the very small screens of Blackberrys and iPhones to realize the influence. Look to the user generated content on Facebook, Myspace, Digg, and YouTube to witness that the "Me" generation of savvy internet users wants to both control and create content. This generation also marks a profound shift in media usage: 55% of those polled between the ages of eighteen and twenty-nine relied on the internet as their primary news source. This figure will only increase as today's tech savvy children reach adulthood. The instantaneous web, combined with rich media and interactive content made possible by broadband and more recently mobile has made the internet an attractive source for news: written, audio and video.

The internet has also democratized opinion and created a new form of journalism and commentary. Anyone (myself included) can start a blog and join the conversation. Some bloggers are inevitably more knowledgeable and better read than others. This flood of viewpoints and commentary can and is helping to fix "broken" parts of traditional journalism by covering issues from more angles. Of course it can also add a lot of noise. The point of professional journalism is that it is written and edited by pros. The down side of blogs is that they can present perspectives from non-experts, and goal oriented public relations "spin doctors" can present pseudo content. The up side is that blogs also can be written by people with expertise far beyond what a well meaning and even Ivy League educated journalist can be expected to possess. Many bloggers have specialized knowledge and focus that a journalist could not hope to achieve. These may be the same experts sought after and interviewed by journalists, or possibly professionals with niche knowledge unknown to the media. Many people seeking knowledge welcome these new writers to the conversation. One of the big differences between blogging and traditional journalism is that it creates a conversation. There is noise, there is self serving content, but for those willing to dig, there is also a deeper conversation.

In our more polarized society, "traditional" journalism can be out of touch in terms of objectivity (Fox News) and medium (broadcast TV and many Newspapers). It can also serve to point out the obvious but now under the guise of entertainment (Colbert and The Daily Show). The spread of news has always been an essential part of the fabric of society, and will continue to be in the future. The quest for news dates back to its recitation in town squares and the sharing of news in the pubs near ports, and spreading across the countryside.

One of the main developments in the spread of news is globalization created by technology and it's near instantaneous effect on society and the business world. I analyze what the markets are doing in Asia when I first wake up to gain a feel for what might transpire in the US markets. Like many other market participants, I read the commentary not just look at the numbers. Thanks to technology, the world today is near real-time; in the midst of typing this post, I received an alert from the WSJ updating a pending merger.

My hope is that schools and Universities in the industrialized world and global projects like One Laptop Per Child (www.laptop.org), an organization started by MIT faculty that ambitiously distributes low-cost laptops to developing areas throughout the world, spur the development of a new generation of global citizen responsible blogger/journalists.

From a revenue and career path standpoint, there will always be a market for objective and balanced "traditional" journalism. The blogsphere to date has been a business for a few, supplemental income for many, a hobby for thousands, and a source of new information for tens of millions. It also acts as a valuable supplement for journalism and analysis. The existence of blogs creates meaningful dialogues encouraging deep analysis of topics and the potential to uncover material facts and perspectives of interest. Based on the results of the consumer confidence survey and my assessment of the landscape I have two words of advice for my fellow bloggers: Keep Writing.

Spring

It seems each year we write about this season. The trees are budding in NY and my recent travels to Washington and Philadelphia have allowed me to witness the new blossoms of the season that are now reaching NY. Yesterday in NY there were blue skies, crisp clean air and the feeling of renewal.

The markets have been hurt badly this past nine months. Volatility remains at peak levels, but as with the change of season, new positive sentiment brings the chance of calmer waters and renewal.

In the past 10 days the chiefs of Morgan Stanley (MS), Goldman Sachs (GS) and most recently Lehman Brothers (LEH) have come out publicly to state the worst is behind us in the credit crisis. Their words all sounded similar, enough so to force me to pause and raise a skeptical eye.

Floyd Norris of the NY Times wrote a piece in the paper today titled: Looking Up, but From a Deep Hole. I want to share a few clips.

Since the big banks first realized last fall that their capital situations were perilous, more than $100 billion has been poured into them. Without all that cash, the system would be in horrid shape, and there would be a lot more blood on the Street.

The chief executive of Lehman told his shareholders this week, just two weeks after Lehman raised $3 billion by selling convertible preferred stock on terms that were onerous but not debilitating.

The trouble with such assurances is that the bosses of Wall Street have been repeatedly blindsided by newly discovered risks that their firms - and others - had taken. The optimism of today may prove to be correct, but it follows a lot of other optimism that was not.

Things at Merrill Lynch (MER) have been tougher. They had similar exposures and have Merrill Lynch Bank adding more troubled paper to their portfolio than their peers. Their write-downs caused a change in CEO in the fall of 2007.

In January, Mr. Thain did tell me he had raised more capital than Merrill really had to have, and the latest write-offs are not being accompanied by a search for more capital, another indication of confidence.

There has been a surge of new capital injected into investment and many commercial banks, primarily from foreign government funds. These funds have two agendas: first, they wish to insure their vast existing investments tied to the US economy and markets. Second, they see deep value investing in banks that have historically made billions of dollars for their shareholders and in good times practically printed money.

In general, it appears that the sovereign wealth funds that moved in quickly could have gotten better deals by waiting. But at least Citic Securities, the Chinese company that announced a $1 billion investment in Bear Stearns in October, avoided disaster. Perhaps Citic sensed disaster coming, and the transaction was never completed.

If pools of capital from outside of the country are not enough, the US Government has assured the world that the Fed is ready to step in to assure efficient markets and liquidity.

Even if the capital is not adequate, however, investors are starting to assume that the government stands behind Wall Street. The share prices of investment banks began to recover just after the Fed made it clear the investment banks could borrow from it.

Merrill Lynch paints perhaps a more realistic picture, pointing to the ripple effect of the credit crisis in another article also in the NY Times today. These quotes are from a conference call their new chief had with their 16,660 financial advisors.

"So far the slowdown has been finance-driven," Mr. Thain said. "What we haven't seen yet is the impact on the consumer of falling house prices, rising energy prices, higher food prices and higher unemployment."

The recession, he said, is going to move from being a finance-driven problem to a consumer-driven one, and Merrill may continue to struggle as a result.

With the negativity pouring out of the anything to get ratings media machines, it is good to hear Wall Street chiefs display leadership and the press to pause and at least give them some ink on their more positive outlook. We remain skeptical and, as with the change of weather, cautiously optimistic.

The equity market is a predictor of the future economy. It is predicted to be 78 and sunny in NY today. We are hoping for a seasonal lock step market performance with the renewal of spring.

Disclosure: no positions in the securities mentions. However, (LEH), (GS), (MER) and (MS) are constituents in the Clear Global Exchanges, Brokers and Asset Management Index licensed for the ETF (EXB). Mr. Corn is CEO of Clear Indexes LLC which publishes the index and owns shares of (EXB).

When??!!!

As the Second Clear Next Generation ETF Contest approached its final hours, I eagerly and compulsively checked the site to see the new ETF idea submissions rolling in. My enthusiasm was undoubtedly warranted as we received a slew of ideas from students at all of the participating Universities (Penn State, Cornell University, University of Pennsylvania, Middlebury College, Harvard, Johns Hopkins University, and York University.) The ideas were delivered in various forms; we received both individual and group entries via the website, and many entrants provided supplemental information in word, excel, and even a 59 slide Power Point! Although we are anxious to read through all the material and deliver a winner as soon as possible, the quantity and depth of the submissions warrant thorough deliberation. We plan to announce the winner in about two weeks.

Stay with us and check the Facebook group or the Clear Indexes web site.

When the Time is Right, Spin-Off

How to respond to a $12.1 billion dollar first quarter loss and stumbling stock price? For UBS AG (UBS), the answer could be “spin-off”. The bank championed the integration of private banking and investment banking under one roof- until subprime losses rocked both units. Now, activist shareholders are calling for the break-up of the combination.

Generally speaking, a spin-off can create immediate returns for investors by unlocking intrinsic value shrouded by a poor performing division. In the aftermath of the M&A frenzy and easy credit of the last four years, there stands to be a lot of this value to be found over the next few years.

Barry Diller’s IAC/InterActiveCorp. (IACI) ambitiously assembled a “GE style conglomerate for the digital age” of diverse (and fairly unrelated) new media businesses. Now Diller plans to disassemble it into five separate companies – multi spin-off.

Many great spin-offs are the result of the explosive growth of a division of a larger firm. Many of these instances tend to be “value diminished” by being weighed down by an array of mature sibling divisions in a conglomerate. It becomes more difficult to reach “fair valuation” of what very well may be twice the P/E ratio.

In another current example, Phillip Morris International (PM), a spin-off of the Altria Group (MO), began trading on the NYSE last week. Phillip Morris accounted for a substantial 2/3 of Altria’s revenue. By completing the spinoff, Altria is betting that the world’s largest publically traded cigarette company makes for a more attractive investment proposition as an independent entity. There are litigation matters that may follow the firm forever. Or perhaps they won’t.

Spin-offs come in all shapes and sizes and need to be evaluated properly. Why was the firm spun off? What kind of shape will the firm be in during month one, six, and beyond?

More investors than ever are looking for specific solutions for their portfolio. An easily understood company in a specific industry (without excess “fat” or suffering from a conglomerate discount) can fairly swiftly unlock shareholder value. Simpler to explain can also mean simpler to acquire. Management alignment directly with shareholders is another part of this story. Those lofty C level executives do not like working hard for other divisions which will blend into their P&L. Aligned motives of shareholders and management have proven to work. It is better for many senior managers to have their work and success reflected directly in their share price and P/E multiple.

Give a high growth unit the chance to reap the benefits of a high growth stock, shed a non-core business, or give investors the chance to buy into a specific industry without taking on other divisions. We believe Spin-Offs stand to become increasingly prevalent in the near future.

Disclosure: Mr. Corn is CEO of Clear Indexes which publishes the Clear Spin-Off Index (CLRSO) which is licensed for the ETF (CSD).

Why I am Going Out Tonight

A toast is in order! Today marks the 75th anniversary of the repeal of prohibition.

In 1927, New Yorkers saw Herbert Hoover (the then US commerce secretary) in the first successful long-distance broadcast of television. This helped spawn a future generation of couch potatoes for the World Health Organization to deal with (in addition to providing life-saving vaccinations to people throughout the world and other great work). The WHO was founded on this day in 1948.

Rodgers and Hammerstein’s South Pacific opened on Broadway on April 7th, 1948. I love that show and am seeing the revival playing at Lincoln Center soon.

April 7, 1953 marked the appointment of Dag Hammarskjold to secretary-general of the United Nations. Hammarskjold is the only secretary-general to have died while in office.

The last electric trolley traveled the Queens-Manhattan route in 1957 to “pave” the way for the proliferation of buses and the development of an underground subway system; they can’t quite match the scenery of the Queensborough Bridge trolley route though.

The Supreme Court struck down laws prohibiting the possession of obscene materials on this day in 1969. Would the web be here without that law?

John Poindexter was convicted for his role in the sale of weapons to Iran in the Iran-Contra trial of 1990. History, however short has left Ronald Reagan unscathed by the affair.

On a more somber note: it has been 146 years since the ending of the Battle of Shiloh. On this day in 1862, Union forces led by General Ulysses S. Grant, ended the battle after two days of heavy fighting and 23,741 casualties near Pittsburgh Landing in western Tennessee. This extraordinary amount of casualties was greater than the fatalities in all of the Civil War's major battles up to that date (Bull Run, Wilson's Creek, Fort Donelson, and Pea Ridge) combined. So let’s drink for freedom and choice, and toast in remembrance of all of the Americans that were killed and wounded.

To end on a joyous note, a posthumous happy birthday to the great Lady Day aka Billie Holiday; she was born on April 7, 1915.

P.S. I missed it. Every kid and kid at heart celebrates yesterday which marked the 78th anniversary of the creation of the Twinky. There’s a lot to celebrate in the month of April!

Disclosure: yes I am a history buff but the NY Times web site has most of the information used in this post.

High Expectations

Clear's Spring Next Generation ETF Contest ends this Friday at midnight. In the fall the bulk of our submissions came in the last 48 hours and this contest seems to be taking the same path. Please submit as early in the day as you can. With seven schools, we do not want anyone to encounter server overload. The sever is preprogrammed to turn off the submission pages at midnight.

Part of the challenge to winning one of the prizes is to express your ideas in the space provided. James "Jimmy" Baker, the winner of our fall contest excelled at that skill providing him the third leg of the stool, investment thesis, marketing concept, and the ability to communicate both. He is an excellent intern producing high quality work.

The competition for the top prizes is stronger this time around as we have more than double the amount of schools and a larger total student population. Students from Johns Hopkins  Wharton, Harvard, Cornell, York (in Toronto), Middlebury  and Pennsylvania State are participating.

Check out our Facebook Group to share  submission ideas. You will also notice professors and industry professionals joining the group. They are there to support students and to be part of the process.

Personally, I am resting my eyes Friday night with high anticipation of reading incredible concepts throughout the weekend.

Based on the recent SEC ruling on active ETFs, the possibilities have expanded.

Submit your best!

Bloomberg Radio Today at 11:37

Today I will be discussing the 12 billion-franc ($11.9 billion) first-quarter loss at UBS AG (UBS) and Lehman’s (LEH) $4 billion oversubscribed offering. Wait, it is not necessarily time to cheer as the convertible preferred shares have a coupon of 7.25%.

Tune in.

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