Thursday, September 30, 2010 2 comments ++[ CLICK TO COMMENT ]++

Phil Falcone's Bold Telecom Bet

I haven't talked him in a long time but even I am surprised by the boldness of it all. Phil Falcone, the contrarian investor whom I had likened to Wilbur Ross, is turning into someone else. In bold move that could make or break his reputation, Phil Falcone is betting as much as 40% of his partners' funds in LightSquared, a company trying to provide 4G wireless communications throughout America. The goal is to provide wholesale wireless services through a network of terrestial towers and orbiting satellites. Reuters has a lengthy story on Phil Falcone:

Harbinger's two main investment funds are the owners of LightSquared, an upstart Reston, Virginia-based telecom company that plans to use two orbiting satellites to bring high-speed Internet service to some 260 million in the U.S. by 2015.

Roughly $3 billion or 40 percent of Harbinger's assets are tied-up in LightSquared, say people familiar with the funds. Formerly known as SkyTerra Communications, the telecom company is the hedge fund's single largest and most concentrated bet.


In some respects, Falcone's LightSquared gambit is one of the riskiest hedge fund trades ever. And that's saying a lot for an industry where brash managers are famous for making outsized bets on everything from oil to gold to natural gas to lumber.

The difference is few hedge funds have ever staked so much on the success of a single business -- especially one a manager is trying to build himself largely from scratch in the protean technology field.

Harbinger's gradual metamorphosis from a fund that specialized in distressed debt investing to a mobile telecom incubator is a stark example of how some big hedge funds are looking more and more like private equity firms or even venture capital shops.

Wednesday, September 29, 2010 0 comments ++[ CLICK TO COMMENT ]++

A graphic on the smartphone market

I have been researching Nokia lately and here is an interesting graphic. (On another note, I don't know if anyone else is researching Nokia but I just learned that Nokia Siemens, its equipment manufacturing subsidiary owned 50% by Nokia, is consolidated in its financial statements.)

On top of the hard-to-see colours, I don't like charts that only focus on a small period, such as the two years in the following graphic. Nevertheless, it's an interesting graphic that captures the current state of affairs in the smarphone market.

(source: gigaom)

Sunday, September 26, 2010 0 comments ++[ CLICK TO COMMENT ]++

Sunday Spectacle LXXXIX



Some thoughts on Nokia

(Image by Brett Ryder. "The curse of the alien boss," The Economist. August 5, 2010)

The above pic comes from an article in The Economist and refers to Nokia's history. At one time, Nokia used to make rubber boots. In fact, the pre-cursor to the Nokia Corporation started off in 1867 as a forestry company. Nokia has gone through many changes over its 100+ year life. The question now is whether it can adapt and maintain, or possibly strengthen, its market position. Nokia is on my watchlist and I've been following it closely of late.

Wednesday, September 22, 2010 3 comments ++[ CLICK TO COMMENT ]++

Valuation compression in the mid-cap reinsurance industry

The only long-term "buy & hold" investment I have right now is a small-cap/mid-cap reinsurance company called Montpelier Re (MRH). I purchased it a few years ago and I'm slightly down overall, mainly because US$ declined against C$, and also because I made a newbie valuation mistake (I didn't know insurance companies should be valued based on book value.) In any case, in the last two years, I have thought about purchasing more shares. The company is very high-risk and is a black box (I have no clue what their insurance model is or how well it can handle adverse events) but I like how the company has been run in the last few years (management has bought back around 25% of shares in the last 3 years while shares were trading below book value).

One of the most difficult things for newbies like me is trying to figure out what is a proper valuation for a company. One approach is to look at historical market value to the present but one can never be sure if there is a rational reason current valuation may be low. Such is the case with many insurance companies today.

One of the peculiar things I notice about the insurance industry, at least mid-cap reinsurers, is how the market has been marking down their valuations over the last 5 or so years. This is somewhat surprising given how these insurance companies aren't correlated with the economy and aren't exposed very much to the troubled real estate industry.

The following chart, courtesy Morningstar, plots the price to book value of a random selection of mid-cap reinsurers against the S&P 500 ratio. These companies aren't necessarily comparable given some difference in their risk profiles of their clients. Nevertheless it presents an overview of valuation compression. (As usual, click the picture for a larger one.)

Monday, September 20, 2010 0 comments ++[ CLICK TO COMMENT ]++

Longest US recession since the Great Depression ended in June 2009

An Associated Press story via The Toronto Star:

The longest recession the United States has endured since the Great Depression ended in June 2009, a group that dates the beginning and end of recessions declared Monday.

The National Bureau of Economic Research, a panel of academic economists based in Cambridge, Mass., said the recession lasted 18 months. It started in December 2007 and ended in June 2009. Previously the longest post World War II downturns were those in 1973-1975 and in 1981-1982. Both of those lasted 16 months.


Any future downturn in the economy would now mark the start of a new recession, not the continuation of the December 2007 recession, NBER said. That’s important because if the economy starts shrinking again, it could mark the onset of a “double-dip” recession. For many economists, the last time that happened was in 1981-82.

To make its determination, the NBER looks at figures that make up the nation’s gross domestic product, which measures the total value of goods and services produced within the United States. It also reviews incomes, employment and industrial activity.

The economy lost 7.3 million jobs in the 2007-2009 recession, also the most in the post World War II period.

The Great Depression lasted much longer. The United States suffered through a 43-month recession that ended in 1933. Then, it slid back into recession, which lasted for 13 months. That ended in 1938.
Unlike some countries, the official towncrier in USA uses metrics other than GDP change to mark recessions. The fact that the recent recession was the longest since the 1930's is not that important. Instead, I believe the most important fact is that the economy hasn't recovered much. Although unemployment is a lagging indicator, I still think it is fairly high from a historical point of view. Unlike most of the past recessions, when central banks "induced" a recession by raising rates, the recent one is one of the rare ones where rates were the least of the problems.
I don't think a double-dip recession is likely given the present low level of economic activity. The real risk is that the economy doesn't grow much, perhaps no better than 2% per year for next 5 to 10 years.

Sunday, September 19, 2010 0 comments ++[ CLICK TO COMMENT ]++

Sunday Spectacle LXXXVIII

Sunday, September 12, 2010 0 comments ++[ CLICK TO COMMENT ]++

Sunday Spectacle LXXXVII

(Original source unkown; Image downloaded from VisualizingEconomics)

Sunday, September 5, 2010 0 comments ++[ CLICK TO COMMENT ]++

Sunday Spectacle LXXXVI

Toronto Film Festival is upon us—or at least anyone that cares around here—so I thought I would do a movie-related post. Here are some tables listing the movies with the top all-time gross after adjusting for inflation (US market only), top movies that never opened wide (not adjusted for inflation), and the top grossing genres since 1995 (not adjusted for inflation). Click on the images for a larger, more legible, one.

Top Movie Gross - Inflation Adjusted (USA only)

The industry has changed over time—importance of movies has declined over time due to competition from other entertainment—so many of the top grossing films of all time are from several decades ago. The top 5 in order are:
Gone with the Wind (1939) [$1.6 Billion 2010 US$]
Star Wars (1977) [$1.4B]
The Sound of Music (1965) [$1.1B]
E.T.: The Extra-Terrestrial (1982) [$1.1B]
The Ten Commandments (1956) [$1.0B]

Note that these numbers are for the US market only and it is highly unlikely that any other movie will break the record set by Gone with the Wind unless a movie is re-released in the future and it becomes a hit. But do note that in terms of worldwide gross, modern films likely hold all the records.

Top Movies that Never Opened Wide
(Approximately Less Than 1000 Theatres)

source: The Numbers

These are the indie or artistic films that became hits or cult films. If you want a non-mainstream film that isn't too experimental or too foreign, check out these films. Many on this list are really good. For example, a movie such as The Shawshank Redemption apparently never opened wide but is a cult film that is rated #1 by readers at imdb. If you haven't seen them, I would recommend Fargo, Memento, and Boyz n the Hood.

Top Grossing Genres since 1995

source: The Numbers

This list depends on the definition used for each genre but it appears comedy has been the most popular in the last decade and a half. But, not surprisingly, action and adventure have the highest average gross. The piece that's missing here is the cost of production. If we factor in costs, my wild guess would be that something like horror or documentary will produce the highest return on investment, even though their average gross is lower.

Friday, September 3, 2010 1 comments ++[ CLICK TO COMMENT ]++

Better to use P/E ratio without any interest-rate adjustment

I ran across an interesting article by Mark Hulbert on using the P/E to forecast future returns. Mark Hulbert cites a study by Clifford Asness, "Fight the Fed Model: The Relationship Between Stock Market Yields, Bond Market Yields, and Future Returns" (Dec 2002), that suggests that using a raw P/E ratio is better than using one that is adjusted by the interest rate.  Recall how many look at the P/E ratio (or its inverse, the earnings yield) relative to bond yields (or interest rates). The Asness study appears to show that the absolute P/E value matters most.