Clear Indexes Ideas

Bloomberg Radio Tomorrow

I am pleased to be able to provide some notice of a radio appearance. It is tomorrow 3/18/08 at 11:30am eastern to discuss earnings for Goldman Sachs Group Inc. (GS) and Lehman Brothers Holdings Inc. (LEH). Both firms are caught up in the Bear/subprime/credit/liquidity mess. Earnings are of course historical. Investors, clients and most of the business world are more interested in liquidity and each firm’s ability to conduct business moving forward.

As an investor, I share these concerns, but I am curious well beyond survival. I will be scrutinizing how each firm, from an operating profit and earnings perspective, have weathered and adapted to a vastly changed environment.

Both firms are constituents in the Clear Global Exchanges, Brokers and Asset Managers Index which is licensed for the ETF (EXB).

Disclosure: Mr. Corn does not directly own the stocks mentioned and does own shares of (EXB).

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."

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.

Bloomberg TV

Today at 1:10 PM eastern I will be discussing spin-offs. The conversation may go to Discover and Tyco and will also focus on what makes a spin-off strong enough to be included in our index that is tracked for the ETF CSD.

Speaking as an Emerging Manager

“Risk Management Overlaid on Multifactor Models. Alpha Generator or Beta Reducer?”

This is the topic that my talk will cover this Thursday, May 17th in Chicago at the Opal Conference.
http://www.opalgroup.net/conferencehtml/2007/
emerging_managers07/emerging_managers_agenda.php
The topic of risk is an important one for all portfolio managers and designers of investment products. Only when an investor fully understands the risks can they comprehend the rewards of an investment.

I plan to outline the benefits and challenges of designing a risk management program. It will include the ever popular “how to implement” portion.

Last note: I am presenting this topic based on a long only portfolio, not in the context of a hedge fund. We are hoping that it will serve as a reminder to all investors seeking investments: vanilla, chocolate or otherwise; that all flavors of investments begin with risk. If there wasn’t risk, there can not be a reward.

Bloomberg radio twice tomorrow

Tomorrow at (argh!) 6:20 in the morning NY time I will give my view on Lehman Brothers Holdings Inc. (LEH) earnings. So far on the big brokers I am batting 1,000 as I hit Goldman last night.

Bloomberg will follow up with a second interview at 8;20 and I will bask or eat crow.

Stay tuned.

PS Clear Indexes will soon be publishing the Clear Global Exchanges, Asset Managers and Broker’s Index which is already licensed to Claymore for an ETF. We anticipate beginning publishing in early April.

Goldman's Earnings, the blow out as predicted.

I enjoyed being right on Bloomberg TV. Last evening I predicted Goldman Sachs (GS) would deliver another blow out quarter and they did. The quarter ended 2/23 missed some of the market down turn and correction. Prop trading desks like the one at (GS) tend to make big money on volatility and I believe that it would have only helped them. Other aspects of the business fared well too.

Goldman earned $3.2 billion or $6.67 a share on net revenue of $12.73 billion compared to $2.48 billion or $5.08 a share last year. The business has all pistons firing and my enthusiasm was rewarded.

As a side note, we had the good fortune to meet with some of the MDs in their prime brokerage operations. It was not a perfect fit. Yet we walked away with more than just having made a good set of contacts. Our firm received leads for institutional business and the ability to reference GS when calling. Goldman is a real class act.

Where did my prediction originate? When you like a company and think they will blow through earnings estimates don't you want to own them? As quants we study the numbers. The numbers were in Goldman's favor. The market conditions were right too. So this begs the questions why Clear Asset Management LLC doesn't hold the stock in one of its Large Cap portfolios; value or growth? The answer is a balance of stock price and fundamentals. We compare all stocks within their sub-sectors, sectors and then their investment styles. We rank every security and for our investors, we only own the top ranked stocks.

Liking a firm and buying a stock is asking for a bad result. Isolating a single event and buying a stock is also requesting a bad long-term result. We are investors not traders. We will do our calculations and analyze the situation and make a purely unemotional decision. Discipline and mathematics define our investment process as style investors. 

Media Appearances:

I will be a guest today on NPR’s On the Money Radio show discussing the index behind the Claymore/Clear Spin-Off ETF and it will be replayed 2/28, both are at 6pm. Or listen to a play back on the web after the first show at http://www.onthemoneyradio.org/Listen.php.

While we are tooting our own horn, our Large Cap Value portfolio is performing really well, see our press release here.

Shameless Self-Promotion

This Friday, shortly after noon (at 12:10 PM EST), I will be interviewed on Bloomberg TV. This segment focuses on boutique investment banks and brokerages. If you have a few moments, please tune in.

Some of these firms are constituents in a new index we will be publishing late this year.

Born Free

When a company allows a subsidiary or division to trade on its own, gaining its freedom, market out-performance is likely. We call them spin-offs.

Why spin-offs? The Wall Street Journal quoted us on October 24, stating that it began with academic research, followed by Street research that inspired us to explore the viability of spin-offs as an asset class.

Sunday's NY Times reiterates and expands the spin-off concept in a feature story by Barry Rehfeld:

In 1999, a 10-year McKinsey study found that shares of spin-offs trounced the S.& P. 500 over comparable two-year periods by 10 percentage points. Spinoffs also beat so-called carve-outs or partial spinoffs, in which the parent keeps a majority stake in the company, by three percentage points, the study showed.

In February, a Lehman Brothers report looking at spinoffs from 2000 to 2005 told a similar story. It found that the average two-year gain of spinoffs was 45 percent higher than the S.& P. during the period.

Often the best time to buy shares in a spinoff is weeks or months after the company goes public, after the stock price has drifted lower. At that point, the shares may have been put under pressure for reasons that have nothing to do with the merits of the company. Institutional investors will often dump a spinoff when it does not pay a dividend, or otherwise fails to meet the criteria for its portfolio, according to a 1993 study by Keith C. Brown, a business professor at the University of Texas at Austin.

Investors may sell the shares because their stake in the spun-off company is too small to bother with, or the company does not fit their asset allocation or is not included in an index. Demand for shares may be particularly weak for small and midcap spinoffs, the McKinsey study noted, since such companies may not find an immediate following among analysts or investors. So a flurry of shares being sold into the market may find few ready buyers.

Rehfeld in his accumulation of information hits some key factors that we also concluded:

1. Timing of the market's acceptance of a firm based on its own merits is not immediate
2. The total duration of ascent and sustained market out-performance is material and measured
3. Many firms revert to the median over time
4. It can be an excellent investment strategy
   
   One professor interviewed sums up the common sense side to this equation:
   
   "No one is good at managing half a dozen different businesses," says Hemang A. Desai, a business professor at Southern Methodist University. If you allow someone who knows a business well to run it independently and give them the right financial incentives, "you'll see its operating performance improve," Professor Desai said.
   
   Additional points:
   
   
5. It requires owning several to many spin-offs for an investor to realize proper exposure to the segment
6. Not every company will beat the broad market

To address these issues we created an index consisting of 40 names. This brings enough diversification for a broad representative list of spin-offs. We then overlaid a blend of our value and growth algorithms to narrow our approximate universe of 200 names over the past several years, comprised of the 40 names we calculate to have the highest probability to beat the market.

More information will be posted to our web site at www.ClearIndexes.com.