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A few things every investor should know about Japan

Just because you're not in Japan doesn't mean your not affected

HedgeFundLIVE.com —

Nuclear energy production

According to the International Atomic Energy Agency, Japan’s 54 nuclear reactors generate 280 billion kilowatt-hours every year, making Japan the third largest producer of nuclear energy in the world behind the US and France.  The Fukushima Daiichi station that is the focus of the world’s attention houses 6 of the nation’s reactors and all of them came on line in the 1970’s.  Although the US generates more nuclear power, nuclear is a smaller percentage of total energy production in the US, around 20%.  Nuclear power is responsible for just under 30% of electricity in Japan.

What happened after the Hanshin earthquake in 1995

The Great Hanshin earthquake that took place on January 17, 1995 is probably the closest parallel to this one.  In the month following the Hanshin quake, Tokyo’s TOPIX index fell by 7%.  Through 6 months the TOPIX was down 11%.  During that same 6 month time period the JPY/USD fell from 100 Yen per Dollar to 80-85 Yen per Dollar, a drop of 15-20%.  Nonetheless, in months 6 through 12 after Hanshin, the TOPIX rallied by more than 30% and the Yen nearly returned to its pre-earthquake levels.

Insurers’ exposure

Credit Suisse was out yesterday saying that US-based insurers’ exposure to the March 11 earthquake is limited due to the rural nature of the primary affected area and a low insurance penetration rate, particularly by foreign insurers.  Metlife’s acquisition of Alico from AIG last year did, however, came with about $7 billion of revenue exposure to Japan.  According to company reports, “In Japan, Aflac (AFL) is the number one insurance company in terms of individual insurance policies in force”, and Japan comprises approximately 70% of AFL earnings.  Prudential (PRU) and Reinsurance Group America (RGA) also have exposure to Japan.  Japan and Korea are Prudential’s largest ex-US markets and Japanese life reinsurance accounts for about 3% of RGA’s premiums.  (In related news, Gilbert Gottbried was fired as the voice of the Aflac duck for tweeting jokes about Japan that were “lacking in humor”.)

Retail exposure

In high end retail, Tiffany’s (TIF) and Coach (COH) have significant exposure to the Japanese consumer.  In 2009, 19% of Tiffany’s net sales were attributed to Japan.  Coach has 665 retail locations across the globe, 161 of which are in Japan, second only to the US.  20% of Coach’s net sales come from Japan.  On the lower end of the retail spectrum, Walmart (WMT) has notable exposure to Japan as well.  In terms of international operations, Japan is tied with the U.K. for number of stores operated with 371, behind only Mexico and Brazil.

US Bank exposure

CLSA released a note yesterday quantifying US banks’ exposure to Japan at about $100 billion.  The most direct impact to US banks will likely be resultant of muted capital markets activity and deflated asset values in the region.  Morgan Stanley (MS), Bank of America (BAC), Goldman Sachs (GS), Citigroup (C), and JP Morgan (JPM) each have subsidiaries in Japan.  An interesting point in the note was that “banks could well be the beneficiaries of massive infrastructure spending through financing increased loan demand, and the opportunity for corporate Japan to draw down on hitherto little-used credit lines.”


Trust me, the iPad craze is just beginning: iPad2 sales crush original

ipad 2 iphone apple at&t

How nice it must be to sit in an iPad 2 line

Rumors are surfacing across the web that disappointed customers who stood online for their very own iPad 2 today, but left empty-handed, were told to come back early tomorrow morning as new shipments will facilitate restocking early this morning.  One might think that the iPad 2 went on sale this morning, and that Apple, as usual, “underestimated” demand and will ship more.  But the new and improved Apple tablet went on sale in retail locations at 5pm EST this past Friday!  My friend who lives on West 67th street described the scene outside the Apple Store at 1981 Broadway in NYC: “the line went up 67th street, up Broadway, and down 68th street, only to finish on Amsterdam Avenue”, so about 4 blocks worth of people hoping there would be an iPad 2 in stock for them.  Mashable.com relayed the story of Manhattan Community College student, Amanda Foote, who sold her first-in-line position at the NYC Fifth Avenue store to app developer HAzem Sayed for $900.  I’d say Amanda deserves a Finance credit or two for that transaction.

Analysts across Wall Street and Silicon Valley are estimating that Apple may have sold 1 million iPads over the weekend.  If you recall, it took Apple nearly a full month, about 28 days, to move 1 million units of the original iPad.  Apple stores, AT&T and Verizon stores, Targets, Wal-Marts, and Best-Buys all sold out of the iPad 2.  Ravi Jariwala, a spokesperson for Wal-Mart said “We expect to sell as man iPad 2′s as we can receive from Apple.”  So I take you back to my original question: why should iPad be so different from iPod?  The iPod debuted in 2001 and continues to sell multi tens-of- millions units every year.  Back when the iPod hit the market many of us thought that was it - Apple created a best-in-class mp3 device, but there’s not much tweaking that needs to be done.  Today’s iPods look nothing like their forefathers, and I would venture to bet that 2021′s iPads will be similarly evolutionary.  I have no idea what iPad 10 will look like since the current super-thin internet surfing device stretches my imagination enough, but that’s why I don’t work in Apple’s design department.

HCA IPO will be biggest in a long time and is actually oversubscribed

HCA IPO brings focus back to hospitals/healthcare

HedgeFundLIVE.com — Tonight will see the pricing of HCA Holdings Inc.’s third IPO and second from private equity ownership in what should be the largest U.S. private equity backed IPO ever.  HCA is the largest privately owned hospital chain in the U.S. and is looking to raise about $3.5 billion from the offering.  This would translate to a market cap somewhere in the $15 billion range.  Back in 2006 the company was taken private by Bain Capital, KKR, and Merrill Lynch Global Private Equity in a $32 billion deal at the peak of the LBO craze.  Below is a sampling of the company’s business overview from its 10-K filing:

At December 31, 2010, we operated 164 hospitals, comprised of 158 general, acute care hospitals; five psychiatric hospitals; and one rehabilitation hospital. The 164 hospital total includes eight hospitals (seven general, acute care hospitals and one rehabilitation hospital) owned by joint ventures in which an affiliate of HCA is a partner, and these joint ventures are accounted for using the equity method. In addition, we operated 106 freestanding surgery centers, nine of which are owned by joint ventures in which an affiliate of HCA is a partner, and these joint ventures are accounted for using the equity method. Our facilities are located in 20 states and England.

Many of HCA’s hospitals are located in “high growth” urban and suburban areas with 9,808 beds and 38 hospitals in Florida, as well as 10,410 beds and 36 hospitals in Texas.  On the company’s most recent earnings call Chairman Richard Bracken said that the company’s size, efficiency and diverse nature should promote future growth on the bottom line.

According to Renaissance Capital shares are expected to price in the $27-$30 range, but I have seen rumors that demand is high, the deal is significantly oversubscribed and that shares may actually price at $31.  Some analysts, however, are suggesting investors wait until August after the 6 month lockup period expires to buy shares.  At that time another 383 million shares will be eligible for sale.

The excitement about the offering ignores a heavy debt burden and a somewhat uncertain regulatory environment for healthcare providers.  HCA has more than $27 billion of long-term debt on its balance sheet and the Republican majority in the House continues to try to hack away at Obamacare by withholding funding if not outright repeal.  Nonetheless, I can understand the deal’s oversubscription.  Healthcare spend in this country continues to grow and will approach 20% of GDP over the next several years.  The aging of the Baby Boomer generation has just started and hospitals will be a prime beneficiary of this country’s largest generation’s diseases and surgeries.  With an economic recovery underway (most would argue), it’s only a matter of time until hospitals see meaningful recovery in their patient volumes and the expansion of the insured population under Obamacare will further reduce bad debts.  If nothing else the HCA IPO will bring some attention to a healthcare sector that has lagged the overall market for the past 2 years at a time when investors are looking for more than gold and silver as defensive plays.


Happy Birthday to the March 9, 2009 Bottom

What the bears feel like

HedgeFundLIVE.com — Today marks the two year anniversary of the March 9, 2009 market bottom; or as the self-promoting co-anchor of CNBC’s Squawk on the Street calls it, the Haines Bottom.  In th past two years the markets have recovered admirably and perma-bears, for the most part, have gotten their faces ripped off.  Below is a graphic reproduction of an article our of Reuters that recaps the performance of notable indexes and stocks over that past 24 months.  Whether you’re a momentum guy, a contrarian, or just a passive investor, it’s probably worth a look.

2 year market returns from March 9, 2009



The Future of Wall Street (and some other stuff) according to Alan “Ace” Greenberg

Ace embraces Hedge Fund LIVE

HedgeFundLIVE.com — Last night I was privileged to attend an excellent event at the Bloomberg headquarters hosted by the Yeshiva University Wall Street Group.  The event was titled “After the Financial Crisis: New Strategies for Investing and Managing Risk”.  The panel was a smorgasbord of Wall Street elite:  Dr. Henry Kressel, Chairman of Yeshiva University and Senior Partner at Warburg Pincus, Isaac Corre, Senior Managing Director at Eton Park, and Seth Masters, Partner and CIO of Defined Contribution at Alliance Bernstein would have sufficed, but the headliner was Alan “Ace” Greenberg, former CEO and Chairman of Bear Stearns and current Vice Chairman Emeritus of J.P. Morgan.  From thumbing through Mr. Greenberg’s management handbook, Memos from the Chairman, I knew he was philanthropic (he instituted a policy at Bear that Managing Directors donate 4% of their income to charity), parsimonious as a manager, a great investor, magician, dog trainer, and bridge player.  I also knew he was funny, but I guess great comedians are always funnier in person than they are in print, and Ace is no exception.  (The following is by no means a transcript, but the spirit of Ace’s retorts is intact.)

Q: Please tell us a little about yourself

A: I work at J.P. Morgan.  Our primary business is “lending money to people and hoping they pay us back”.  But I’m not involved with that, I work in asset management.


Q: How have your investing practices changed since 2008?

A: My approach to investing really hasn’t changed much.  I still invest in large U.S.-based companies with good management.  I have never invested outside of the United States, “I won’t even invest south of Houston”.  I remain opposed to leverage.  Leverage can work two ways and “one way is down”.  In our business people make projections and eventually they’re right – “my advice to those people is to quit”.  These people make one correct call and then go start a firm named after themselves and continue to try to make calls.  There was a woman (Elaine Garzarelli) who predicted the crash in 1987 and I don’t think she’s gotten another thing right since then.  There was a guy named Grandall (??) who used to make stock market predictions and people would pay top dollar to fill the room at his seminars.  Eventually he got like 20 predictions in a row wrong, so he switched to predicting earthquakes and tornadoes instead – that was a smart move.  Recently there was a woman who predicted that Citi would cut its dividend (Meredith Whitney), and since then she’s been wrong.  She’s predicting that there will be several hundred billion dollars worth of municipal bond defaults by June; we’re in March, so she’d better hurry up.


Q: How has your firm changed since 2008?  (This question was asked to all panelists and was not specific to Bear Stearns)

A: Well, “our firm has changed considerably” (crowd goes wild).  Investment banks are gone and will not come back, that includes Goldman Sachs.  Broker-dealers will do well and boutique investment banks will do fine.  Everyone involved in a deal these days wants representation.  There are 8 investment banks involved in every deal so boutiques will have what to do.  (The Alliance Bernstein CIO made an interesting point here – he said that their clients are more risk-averse than ever before and they want bond exposure, but if it were up to him he would be more heavily exposed to equities.)


Q: How do you feel about high frequency trading?

A: It doesn’t bother me.  If someone wants to flash 22 and then really sell for 22.02 I don’t care.  Making 2 cents is a non-event for me.  If I’m trying to buy Wells Fargo and I buy it for 2 cents higher than I thought it doesn’t make a difference.  Overall these guys add liquidity which is good.  Sometimes the liquidity can disappear, but liquidity can always disappear.

The rich really are getting richer: LVMH acquires Bulgari maj. stake at 60% premium

If you’re rich LVMH will hook you up

HedgeFundLIVE.com — Moet Henessy Louis Vuitton (LVMH) announced today that it has acquired a majority stake in Bulgari.  The Bulgari family which was the majority shareholder in the eponymous company will exchange 152.5 million Bulgari shares for 16.5 million LVMH shares and become the second largest family shareholder with a 3% stake.  Paolo and Nicola Bulgari will stay on as Chairman and Vice Chairman of the company and will have the opportunity to appoint 2 new members to the LVMH board of directors.  Bulgari’s CEO will be tapped to manage LVMH’s watches and jewelry division later this year.

Bulgari is just the latest in Bernard Arnault, the LVMH CEO’s, growing stable of luxury brands that already includes Dom Perignon, Marc Jacobs, Fendi and Tag Heuer.  This move played out quite differently from Arnault’s surreptitious acquisition of a 20% stake in the Hermes family’s closely-held Hermes International.  The Hermes family has gone to unnecessary lengths to ensure their company’s independence from LVMH.

What is most surprising in this time of economic uncertainty and financial malaise is the 61% premium that LVMH paid above Bulgari’s closing price on Friday.  Arnault has repeatedly stated in interviews that he is not concerned with the spending habits of the US, UK, and EU – his focus is on the emerging markets where, for example, he last year opened a Louis Vuitton store in Mongolia.  Asia, excluding Japan, accounted for 25% of LVMH revenue last year.  Margins are lower, in line with lower average sale prices, but growth far exceeds any other demographic the company tracks.  Other LVMH outposts can be found in Ho Chi Minh City, Vietnam, Cambodia, Macao, and Abu Dhabi.

If the emerging markets are going to continue to drive luxury brand sales the natural question is “who’s next on the deal list?”  Shortly after news of the Bulgari acquisition hit, both Burberry and Tod’s shares were up about 4% in European trading.  Stifel Nicolaus is out saying that Tiffany (TIF), Coach (COH), and Sotheby’s (BID) are the dominant US luxury players in their verticals and could therefore be ripe for a takeover.  At 60% premiums it may not hurt to take another look at the Claymore/Robb Report Global Luxury Index ETF, ticker ROB; top holdings are Hermes, Swatch, and BMW.


iPad 2 is here - Why should the iPad be so different from its iPod cousin?

Apple will continue to out-pace the tablet comps

HedgeFundLIVE.com — While watching the live Engadget’s live blog of Apple’s iPad2 unveil event I could not help but snicker at the following caption: “Steve is back ‘it weighs 1.3 pounds’”.  For a minute it seemed that the blogger was commenting on Steve’s wiry post-chemo frame, but I’m pretty sure he was referring to the new iPad’s weight.  But that’s enough of that – I’m happy to see Steve back and strong enough to present.  Let’s hope he’s around at least until his brain can be attached to a robot that will live forever.

There has been a lot of chatter on the Hedge Fund LIVE desk about the iPad2 not being that big of a deal.  And I am not here to argue whether or not that is true.  I was very impressed by the Apple presentation, and, as usual, I want the iPad2, but I’m probably not going to buy it.  I usually wait for the price to come down a little bit and by that time the next iteration of the device is out and the cycle starts all over again.  What I would argue though, is that the iPad family of products will not be that different from the iPod family.  Back when I was in college I remember the release of the original iPod, the one without the clickwheel, without the color screen, and certainly without a touchscreen.  A 10GB iPod was somewhere in the neighborhood of $300 and I was like “F that”.  So I went and got myself a Rio mp3 player.  It had all the memory and all the features of the iPod and was a third the price.  The Rio was good, but by the time the third iPod came out Rio had still not innovated and I made the switch.  At this point in time I am on my fourth iPod and considering a fifth.  So yes, there are dozens of other tablets to choose from, but Apple will continue to innovate and the other guys will have a hard time keeping up.

For those of you who think the iPod has seen its heyday I would argue that it’s still relevant.  In 2008, 2009, and 2010 iPod sales were 54.8m, 54.1m, and 50.3m units respectively.  Apple’s first quarter, which is their holiday quarter, iPod sales peaked in December of 2008 at 22.7m units, but they still sold 19.5m iPods in the same quarter in 2010.  By that time the iPhone had been around for 2 and a half years and the iPad for 3 quarters, so not as much cannibalization as you might have thought.  For my money Apple has a ways to go with all of its iP… products; the Pad, the Phone and even the Pod.


LVS Upped, but Down after upgrade & subpoena

Has LVS crapped out for now?

HedgeFundLIVE.com — In this morning’s rendition of HFL Ugprades / Downgrades I heard that a Credit Suisse analyst upgraded Las Vegas Sands (LVS) from neutral to outperform and put a $56 price target on the stock.  I did a quick news search and saw that casino revenues in Macau rose 48% on a year-over-year basis, according to the Macau Gaming Inspection and Coordination Bureau, to a record 19.86B  patacas ($2.49B). I haven’t seen the Credit Suisse note but it very well may have something to do with this fact.  The Chinese New Year was in February this year and last year so the comp seems to be apples-to-apples.  Nonetheless, LVS stock closed down more than 6% today.  This was thanks to a sneaky little paragraph in the “Risk Factors” portion of the LVS 10-K that was filed today.  The paragraph went something (or exactly) like this:

Any violation of the Foreign Corrupt Practices Act or applicable anti-money laundering regulation could have a negative impact on us.

We are subject to regulations imposed by the Foreign Corrupt Practices Act (the “FCPA”), which generally prohibits U.S. companies and their intermediaries from making improper payments to foreign officials for the purpose of obtaining or retaining business. On February 9, 2011, LVSC received a subpoena from the SEC requesting that the Company produce documents relating to its compliance with the FCPA. The Company has also been advised by the Department of Justice that it is conducting a similar investigation. Any determination that we have violated the FCPA could have a material adverse effect on our financial condition.

We also deal with significant amounts of cash in our operations and are subject to various reporting and anti-money laundering regulations. Any violation of anti-money laundering laws or regulations by any of our properties could have an adverse effect on our financial condition, results of operations or cash flows.

My first thought after reading this was: “why didn’t the Credit Suisse analyst wait until the 10-K came out before publishing his upgrade?”  LVS filed their 2009 10-K on March 1 last year, so I can’t imagine it was much of a surprise that one would be filed today.  The investigations by the SEC and the DOJ are related to a wrongful termination suit that was filed by Steven Jacobs, the former CEO of LVS who claims that he resisted “repeated and outrageous demands” to employ “leverage” with Macau government officials.  Between Jacobs’ lawsuit and these investigations it looks like LVS equity will be plagued by an overhang for at least the near future if not longer.  LVS is in talks to develop a $20.3B project in Spain which current LVS CEO Sheldon Adelson has referred to as a mini Las Vegas Strip in Europe.  It is hard to believe that these events will improve those talks.  Then again Spanish government officials may not be too upset.


Liquidity and the Cash Conversion Cycle

HedgeFundLIVE.com — Fusheng on the Duke Fuqua University desk asked the following questions: “Is there a good framework to quantify the liquidity risks by combining all the factors including cash flow, cash/receivables/working capital positions?”

Cash Conversion Cycle

Now, I am not certain as to how complex a framework Fusheng is looking for, but I would like to suggest that a company’s Cash Conversion Cycle (CCC) be an integral part of that process.  The CCC is calculated as Days Inventory Outstanding (DIO) + Days Sales Outstanding (DSO) - Days Payables Outstanding (DPO).  Inventory can be purchased on credit, resulting in accounts payable, and Sales can be sold on credit, resulting in accounts receivable.  Conventional wisdom says that a company would like to keep DIO low.  If a company is selling things that people want those items will not sit in inventory for too long.  DSO should also be relatively low.  The quicker a company can collect its outstanding receivables the better off they are - you’d rather have your money in your pocket than in somebody else’s.  And DPO should be the opposite for that same reason.  Higher DPO means that a company is able to keep cash in its own account as opposed to immediately paying its creditors, thereby earning interest on that money.

Get that cash in your pocket

In summation, the CCC measures how quickly a company can turn its products and receivables into cash, and how well it manages that process.  Fusheng, is this along the lines of what you are looking for?  Let me know…


Facebook (and I guess Google) Should Finish What They Started in the Middle East

Are Google and Facebook more responsible for Egypt and Tunisia?

Shimon Peres, Israel’s current President, is for all intents and purposes, to me, a Gever; a term that can be loosely defined as the Modern Hebrew language equivalent of Dude.  The man has seen some stuff.  He joined the Haganah alongside other founding fathers of the Israeli state and played an integral role in securing arms for Israel’s independence war in 1948.  Throughout his political career he has served as Transportation Minister, Defense Minister, Foreign Minister, and Prime Minister.  On the first of a 4-day visit to Spain, Peres spoke to Spanish Parliament.  In his speech he addressed the unrest in Egypt and Libya that continues to spread across the Middle East region.  He mentioned that he sees these uprisings as “opportunities for peace”, and said that “we believe the biggest guarantee of peace is having democratic neighbors…”.

What I found most interesting was Peres’s message to large technology companies.  He alluded to the fact that these companies, e.g. Facebook, Google, Microsoft, have hefty coffers full of cash ready to be deployed.  Peres noted that “these companies have the means and they can help…aid is currently directed mainly at sick people in poorer countries, [but] it’s better to cure the state and let it treat its own ills.”  In the realistic department these comments probably come in at about a 4 on a scale of 1 to 10, but in the idealistic department they’re more like a 9.  Imagine if for-profit companies actually spent their hard-earned money on foreign aid the way leading governments of the world do.  Back when Google IPO’d they made a big hullabaloo about their “Do No Evil” motto – they wanted to ensure that everyone got a fair chance to participate in their stock offering and presumably a fair chance in life as well.  The Founders of Facebook probably feel similarly.  I’m not sure what their motto is, but it’s probably something that evokes thoughts of democracy.  So do these technology giants have a responsibility to the people who use their services?  If Facebook enables a dictator’s demise, should they participate in the process of establishing a fair successor?  These are big questions, but I do like where Shimon Peres was going.  Every once in a while the world needs to be reminded that there is a fairly successful Middle Eastern democracy situated in the middle of all this turmoil; it’s called Israel.