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Showing posts from July, 2008

Solar's Silver Lining

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There is not much going on in the stock market these days. It's hard to be bullish on any sector because the fundamentals remain awful, especially in the financial sector where it seems that tons of securitized garbage is still parked in their "off-balance sheet" books. (I must confess that I am not long financials and the only ETF that I will trade is the Ultrashort Financials proshares - the SKF).

But tonight I am not going to write about the miserable state of financials or about pension governance (I can just hear the collective sigh of relief from all those senior pension fund managers!). Instead, I want to focus on renewable energy, paying particular attention to the solar sector.

Let me first direct your attention to Charlie Rose's excellent interview with Amory Lovins, chairman and chief scientist of the Rocky Mountain Institute (click here to see the interview). Lovins has authored 29 books and hundreds of studies addressing alternative energy and the economy…

Merrill Gives Away Its Toxic Waste

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The market reacted favorably today to Merrill Lynch's announcement that it is selling its CDOs to Lone Star Funds, a Dallas private equity firm, for the basement-level pricing of 22 cents on the dollar. Most market analysts viewed this move as 'constructive' or a 'watershed for banks' , but investors better scrutinize this deal before jumping to any conclusions.

I read two important articles that critically examined this deal. The first, Merrill’s Latest Misfire, was written by Elizabeth MacDonald of Fox Business News. Ms. MacDonald states the following:

Merrill Lynch’s shocking announcement after the market’s close yesterday that it will book a huge pre-tax $5.7 bn writedown in its upcoming third quarter from its toxic securities and hedges with bond insurers, plus raise another $8.5 bn in new stock, should make investors who piled into the shares just last week at $31 thinking the worst was over after Merrill reported its disastrous second quarter results feel tot…

Pension Governance: Risk Management Gone Awry!

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Risk management is a cornerstone of sound pension governance yet very few pension funds understand what proper risk management actually entails. I will discuss some important risk management concepts below, highlighting the strengths and weaknesses of risk management using some clear examples.

Let's begin by defining "risk management". The five major risk categories below are taken from CPP Investment Board's site:

Investment risk: The risk inherent in achieving investment goals and objectives, including market, credit and liquidity risk. The operationalization of our Risk/Return Accountability Framework has substantially increased the risk management focus of our investment decision-making. Under this approach, risk decisions are made at the total portfolio level. The board of directors approves an active risk limit, and management strives to maximize active returns within this limit not within individual asset classes. Strategic risk: The risk that an enterprise or pa…

KKR: Has Private Equity's Death Knell Just Rung?

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Private equity giant KKR, which gained fame by taking RJ Reynolds private two decades ago, will go public on the New York Stock Exchange through a takeover of its Amsterdam-listed investment fund KKR Private Equity Investors LP.

This morning David Faber talked about the deal on CNBC's Squawk Box (click here to see discussion). It is worth mentioning that KKR isn't looking to raise new capital, but the arrangement with KKR Private Equity gives it access to the fund's investments at a much cheaper price. And for investors in KKR Private Equity, who have watched shares fall from their initial listing price of $25 to the $10-range, the deal provides assurance that they will recoup some of their losses.

Unlike Blackstone's partners, KKR's partners will not cash out on the deal. At least not for the next six years. Instead, the two founding partners released the following statement:

"For KKR, this transaction provides us with additional capital for our business. Moving…

The Straw That Breaks The Camel's Bank?

Last October, Fortune published an article, The $915B bomb in consumers' wallets, which highlighted the problem of credit card debt in America. The article described the "doomsday scenario" as follows:

Just like CDOs and other asset-backed securities, credit card debt is sliced, diced, and sold off again as packages of securities. Rising delinquencies would hurt not only the banks involved but the securities backed by the credit card receivables. Those securities would decline in value as consumers defaulted, leading to bank losses as well as portfolio losses in the hedge funds, institutions, and pensions that own the securities. If the damage is widespread enough, it could wreak havoc on the economy much as the subprime crisis has done.

Importantly, the article mentions that credit card debt is different from subprime debt in a fundamental way:

Unlike mortgages, credit card debt is unsecured, so a default means a total loss. And while missed payments are at a historical l…

Remembering Randy Pausch

Tonight I want to take a moment to remember an extraordinary human being. Randy Pausch, the Carnegie Mellon University computer scientist whose "last lecture" about facing terminal cancer became an Internet sensation and the basis of a best-selling book, died today. He was 47. Pausch was diagnosed with incurable pancreatic cancer in September 2006. His popular last lecture at Carnegie Mellon in September 2007 garnered international attention and was viewed by millions on the Internet. In it, Pausch celebrated living the life he had always dreamed of instead of concentrating on his impending death.
In May, Pausch spoke at Carnegie Mellon's commencement ceremonies, telling graduates that what mattered was he could look back and say, "pretty much any time I got a chance to do something cool, I tried to grab for it, and that's where my solace comes from." "We don't beat the reaper by living longer; we beat the reaper by living well and living fully…

Pension Governance: Focus on Alignment of Interests

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When I was responsible for analyzing and monitoring hedge fund managers, I would always start by looking at a few basic things like how they are aligning their interests with the interests of the pension fund. Does Mr. or Mrs. XYZ Hedge Fund Manager have skin in the game? If they are not investing in their own fund then why should I invest pension money with them?

Another thing that I would look at is the number of people on the sales staff relative to the number of people on their investment staff. Hedge funds typically charge a 2% management fee and a 20% performance fee. Those that primarily focus on marketing will garner a lot of assets under management in a short period of time. This typically happens after a period of strong performance. Most of these large hedge funds then go on cruise control and forget about the performance fee because they are content collecting 2% on a billion or more dollars (they basically become large asset gatherers).

The main point is that when it comes …

Whither Financial Orgy?

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Roughly a week ago, I wrote about how financial stocks were technically oversold and due for a bounce. And boy did they bounce hard off their lows. I track a number of them every day and I was amazed to see the volume and the ferocious moves up. Depending on which financial dog you bought (Fannie and Freddie come to mind), you could have easily doubled or tripled your money in a fews days if you were brave enough to buy those lows.

I couldn't help chuckle watching all the Wall Street cheerleaders parading on CNBC and CNN, telling us that the earnings from banks are positive and that the worst is behind us. One of them cited the increase in Wells Fargo dividend yield to 10% as a "sure sign" that the economy isn't as bad as the media portrays it to be.

I got nothing against Wells Fargo and I know Warren Buffett owns a good stake in that bank. Nevertheless, I can't shake this feeling in my stomach that the Paulson-SEC-Wall Street machine is throwing everything but the…

Guest Commentary: Diane Urquhart Analyzes PSP Investments' 2008 Results

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This blog has given me the opportunity to meet and talk with some very interesting people. One of those is Diane Urquhart who I already favorably alluded to in my very first blog entry on the ABCP's of Pension Governance.

Diane Urquhart is an independent financial analyst and former senior securities industry executive who appeared before the Parliamentary finance committee’s hearings into Canada’s frozen non-bank ABCP.

She was one of six witnesses to address the committee and appeared on behalf of a group of retail customers of non-bank ABCP (she also appeared with the support of the National Pensioners and Senior Citizens Federation).

Diane brought to my attention that PSP Investments' 2008 Annual Reportfailed to highlight significant losses in credit default swaps (click on image above taken from page 60 of the 2008 Annual Report). She went over the financial statements very carefully and shared these comments with me and she allowed me to post them on my blo…