23 January 2015

The only way to hold Euro-denominated Bonds

Whatever you make of the latest measures taken by the ECB to 'boost the economies' of the Euro-zone do keep in mind one key rule for your financial survival: Do not hold any bonds denominated in Euros unless they are backed by the full-faith and credit of Germany. As the interest rate on many of those bonds is now turning negative it probably is advisable to give them a miss as well and stick to cash. At some stage some members of the Euro-zone may default or leave the Euro-zone and the value of their obligations will nose-dive. So buying Italian or French bonds just because they return a measly 1.5 percent is akin to picking up pennies in front of a steamroller. Index-hugging fund managers playing with other people's money in the big investment institutions will continue to play this game of Russian Roulette and you should make sure that you avoid them if they play this dangerous game.

22 January 2015

Media complicit in IPO hypes

Time and again one reads headlines such as this one: 'Burger chain gears up for $568 Mio. float'. This one is from CityAM and refers to the planned IPO of another Burger Chain. Apart from the question of how many such chains the world really needs - and the question of the benefit of eating too much meat, especially red meat - one has to wonder why the reporters do not take the trouble to look more closely at the purported 'valuation' that is implied by such a headline.
It is quite understandable that the lucky few among the original promoters behind the business and their (well-paid 'advisers') would put such a 'valuation' into circulation. This is known as 'anchoring' and is a well-known trick used by any wily negotiator. But by repeating this number without any proper analysis of its merits the commentariat is making itself complicit in giving this 'valuation' the appearance of correctness.
Looking behind the scenes in this particular case should give any experienced investor who is not just a momentum player or index hugger pause for thought.
Shake Shack had total revenues of just $ 82 Mio in the nine months to September 2014 (up from 58 Mio in the year ago). Net income was a grand total of $3.5 Mio (4.9 Mio) and Net Equity was a less-than-impressive $14 Mio. All that from 53 shacks (33 a year ago).
Now there have been some hefty valuations in the fast-food business during the recent past and Chipotle Mexican Grill (ticker CMG) continues to trade at vertigo-inducing levels. This may or may not be the correct 'valuation' for a fast food chain. History will sort this out.
But it would be only good journalism if news items about new share issues would be treated as more than just re-hashed publicity items. Much emphasis is being put by policy wonks on the importance of fostering wider share ownership as part-solution for the evolving retirement crisis many baby boomers and succeeding generations will face. Giving them 'access' to new issues trading at stratospheric levels will only benefit the (early?) retirement of the 1% - or even only the 0.01%.

21 January 2015

Do you understand the fees that you pay for Private Equity?

If even very large institutional investors have difficulty understanding the various fees that are charged by Private Equity firms it should be obvious that any investor should have intense scrutiny performed before allocating any funds.

Oil won't hit $80 for decades?

Prediction is very difficult, especially if it's about the future. A useful reminder for this Strategist. (CNBC)