Tag Archives: Coverage

watchdogcover

New book to examine biz journalism role in crisis

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A new book will be published early next year from Columbia Journalism Review‘s Dean Starkman that will examine why the financial media failed to uncover the economic crisis before it happened.

The book will be called “The Watchdog That Didn’t Bark: The Financial Crisis and the Disappearance of Investigative Journalism,” and it will be published by Columbia University Press.

In the book, Starkman travels back to the early 20th century and juxtaposes the work of reporters against other forms of journalism, particuarly muckraking. These two genres merged when mainstream American news organizations institutionalized muckracking in the 1960s and created a powerful watchdog over the public interest.

For many reasons, access journalism came to dominate business reporting in the 1990s, a process Starkman calls “CNBCization,” and rather than examine risky, even frankly corrupt, corporate behavior, mainstream reporters focused instead on profiling executives and informing investors. This is why, Starkman argues, that mostly outside reporters picked up on the brewing mortgage crisis while insiders failed to connect the dots.

Starkman concludes with a critique of digital-news ideology and corporate infuence, which threatens to further undermine investigative reporting, and shows how financial coverage, and journalism as a whole, can reclaim its bite.

“A defining trait of the financial crisis was the degree to which it took the public, and the press itself, by surprise,” said Starkman in an email to Talking Biz News. ” The failure was so big, so catastrophic, and so comprehensive that all aspects of the financial system must be called into question, the journalism that covers it very much included. How could so many, covering something so closely, miss something so big so completely? Why did a few, mostly outside the mainstream, get it?”

Microsfot logo

How the Microsoft reorganization was covered

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The ubiquitous software giant Microsoft announced Thursday a huge internal overhaul in hopes of sparking innovation and putting a stop to the infighting that’s damaging the company.

Here are excerpts from the Wall Street Journal story:

Microsoft Corp. unveiled a broad reorganization Thursday aiming to break down internal fiefs that have slowed product development and caused friction among teams of employees.

In its place, Microsoft is imposing a more horizontal plan with managers who will oversee different kinds of functions—like engineering, marketing and finance—and apply them to multiple product and service offerings.

—–

Microsoft’s restructuring follows a strategic plan, which began taking shape about a year ago, to shift its identity away from being a producer of operating systems and application software. Instead, the company wants to be known for devices—designed by Microsoft itself or by partners—and services that are closely tailored to work with that hardware.

The strategy shift, though it still relies heavily on software development, emulates the way rivals like Apple Inc. and Google Inc. have approached development of products such as smartphones and tablets.

Microsoft had already developed successful combinations of hardware and software, like its Xbox videogame console, but in other cases has been hurt by largely independent product units working in isolation.

The New York Times outlined details about how the company will restructure in an attempt to get divisions to work together instead of against each other:

Microsoft said it would dissolve its eight product divisions in favor of four new ones arranged around broader themes, a change meant to encourage greater collaboration as competitors like Apple and Google outflank it in the mobile and Internet markets. Steven A. Ballmer, the longtime chief executive, will shuffle the responsibilities of nearly every senior member of his executive bench as a result.

“To execute, we’ve got to move from multiple Microsofts to one Microsoft,” Mr. Ballmer said in an interview.

It remains to be seen whether more cohesive teamwork, if that is what results from all the movement, will offer the spark that has been missing from so many of Microsoft’s products in recent years.

The company has been widely faulted for being late with compelling products in two lucrative categories, smartphones and tablets. Its Bing search engine is a distant second to Google and loses billions of dollars a year for Microsoft.

Rivalries among the company’s divisions have built up over time, sometimes resulting in needless duplication of efforts. Microsoft managers often grumble privately that one of the most dreaded circumstances at the company is having to “take a dependency” on another group at the company for a piece of software, placing them at the mercy of someone else’s development schedule.

The Reuters story makes an important point for shareholders to remember, that the internal changes will be a large distraction for the staff:

The moves realign the company that helped revolutionize the personal computing industry in the 1980s into what Chief Executive Steve Ballmer calls a “devices and services” corporation – a nod to Apple Inc, which has surpassed it in profit and market value in recent years.

It is also an implicit rejection of “software”, the business which Microsoft helped pioneer and drove the worldwide adoption of personal computing, but in which it faces stiff competition from new rivals that have popularized Internet-based services.

Executives told reporters and analysts on a conference call they did not plan layoffs for now. But a certain amount of employee disruption is to be expected as the company modifies its device marketing and development strategies.

“It can be a major distraction. The details have to be ironed out, there will be a lot of water-cooler talk and that’s happening as the company has some critical products coming out, like a unified phone, Xbox,” Gillis said.

Microsoft’s shares have gained almost 30 percent this year, helped by a rally that began in late April when the company released strong revenue and earnings during what was one of the worst quarters for PC sales on record.

They closed Thursday up 2.8 percent at $35.685.

The Journal reported that the old structure had been in place since 2005, but the new one might not solve all of Microsoft’s problems:

The current corporate structure had largely been in place since 2005. At the time, Mr. Ballmer had argued that greater autonomy would allow product groups to make decisions more quickly. Now, however, he argued that greater collaboration was a more pressing priority, as devices and online, or “cloud” services, must work better together.

“We will pull together disparate engineering efforts today into a coherent set of our high-value activities,” he wrote in the memo. “We will see our product line holistically, not as a set of islands.”

Analysts and former Microsoft executives noted that the change will require more discussion and negotiation among managers, neither of which are necessarily conducive to speedy action. Once action is taken, however, the results for users could be improved.

This is an important story for shareholders. Despite the stock’s gains made this year this reorganization will likely determine returns for the next several years. Anything that helps the behemoth become more nimble is a good thing for investors. Here’s hoping that it’s not too late.

Businessweek hedge funds

SEC lifts marketing ban on hedge funds

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The Securities and Exchange Commission is lifting an eight-decade ban on marketing certain types of securities to investors. But does that mean your inbox will suddenly be full of unsolicited investment proposals? And what does that mean for media coverage of certain secretive industries?

Here are some excerpts from the New York Times coverage of the SEC move:

Federal regulators on Wednesday lifted an 80-year-old ban on advertising by hedge funds, buyout firms and start-up companies seeking capital, a move that will fundamentally change the way that a large swath of issuers raises money in the private marketplace.

The Securities and Exchange Commission voted to approve a rule that Congress included in last year’s Jumpstart Our Business Startups Act, a law meant to help bolster small businesses and create jobs in the wake of the financial crisis.

The move allows start-ups and small businesses to use advertising to raise money through private offerings. Hedge funds and buyout firms, whose investment vehicles fall under regulations for private offerings, will also be able to promote their investment vehicles to the public. Restrictions remain on who can invest in hedge funds and private equity funds.

This is great news if you’re looking to raise money in the private market. The Wall Street Journal reported that safeguards will still be in place:

The SEC did propose a package of investor protections that officials said will help the agency track and police the roughly $900 billion in private offerings sold annually affected by the ban. The proposal would require hedge funds and companies to notify the SEC 15 days before an offering will be publicized. Currently, businesses must file a notification within 15 days following the first sale, but there are few if any penalties for failing to do so. Companies that fail to provide advance notice would be disqualified from making new private offerings for one year. Firms also would have to provide the SEC with additional information about their offerings.

The New York Times story also pointed out that the private placement market would likely be the biggest beneficiary of the new rules:

Even private placements, which are investments in privately held companies, have become more accessible to the public. In recent years, so-called secondary exchanges have developed on which trading in private companies takes place. Facebook was heavily traded in the private market before selling stock to the public last year. Today, shares of closely held social media companies like Twitter and SurveyMonkey change hands in online exchanges like SecondMarket. And small companies are looking to raise money through social media and other technology.

Though they garner far less publicity than splashy initial public offerings, private placements play as prominent a role in the financial markets. The amount of money raised through private offerings in 2011 was about $900 billion, compared with about $1.2 trillion in public stock offerings and debt deals.

The ban on advertising will officially end some time later this year after a 60-day waiting period. The rule will require hedge funds and companies that use general advertising to notify the S.E.C. 15 days before the solicitations begins.

But according to a Bloomberg story via Ad Age, we’re not likely to see hedge fund television advertisements anytime soon:

An SEC advisory committee recommended in October that the commission rewrite the proposal while seeking to insure better compliance with a required form that tracks the initial offer. The committee also said the SEC should restrict the number of people eligible to invest by refining the definition of an “accredited investor,” or those considered rich enough to understand the risks and withstand an adverse outcome.

The limit to sell only to accredited investors explains why many hedge funds probably won’t respond to the rule change by taking out print and television ads seeking new investors, said David S. Guin, a partner at Withers Bergman LLP whose clients include hedge funds.

Instead, the rule may free up hedge fund managers to communicate more freely at conferences and to offer more information about fund performance on their websites, Guin said.

“You wouldn’t expect the type of person who is typically sought as an investor to be investing off of an ad in a newspaper or magazine,” Guin said.

Operating companies also will be able to advertise for investors after the ban is lifted. They’ll benefit because they’ll be able to reach “a much broader audience than they would be able to with their own contacts,” Guin said.

While Madison Avenue isn’t staffing up just yet, it will be interesting to see which of the larger firms decide to advertise to increase name recognition. I’m sure executives at many firms are beginning to formulate plans for reaching target audiences in a vastly different manner, an exciting development for marketing professionals.

There was no mention in these initial stories about what this might mean for media coverage, but where there are marketing materials, there is paper for reporters to track down. Some of the best investment fund stories have been written from presentations and other marketing materials. Here’s hoping there are well-connected and enterprising reporters who will be able to access to funds’ information, shedding some light on private placements and other corners of finance.

The dream of seeing David Einhorn in a commercial will likely remain just that for now – a dream.

Libor-Scandal

NYSE to run Libor: What does it mean?

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London is losing Libor, the London Interbank offered rate benchmark, to the NYSE Euronext, in a sale meant to bring more accountability to the scandal-plagued rate.

The terms of the deal weren’t disclosed, but my first question was: How is that going to work?

Most of the media coverage started off with more background about Libor and its recent struggles, saving the details for how Libor might operate for the bottom. This was probably the right approach for a general audience, but the nerd in me was curious exactly how an exchange might run this process.

Apparently, there won’t be an immediate shift in how Libor is determined, according to the Wall Street Journal. Below are excerpts, so be sure to read the whole story:

Since its inception in the 1980s, Libor has been run by the British Bankers’ Association, a London-based trade group whose members are some of the world’s biggest banks. But the rate has been engulfed in scandal in recent years, due to attempts by a number of banks to manipulate the rate for their own financial gain. Three banks have settled rate-manipulation charges, agreeing to pay a total of roughly $2.5 billion in penalties to U.S. and British regulators.

At the same time, the transaction highlights the rise of companies such as NYSE Euronext into major players in the markets for financial derivatives. Libor and other related benchmarks serve as key components in many of those derivatives contracts, which are traded on exchanges owned by NYSE Euronext. The company itself is in the process of being acquired by IntercontinentalExchange Inc., an Atlanta-based company that operates exchanges around the world.

At least initially, NYSE Euronext is expected to continue the current process for calculating Libor, basing the rate on daily estimates from banks about how much it would cost them to borrow money from other banks, according to a U.K. Treasury official. That process will be supplemented by cross-checking those submissions against market transactions, the official said.

In the future, the new owner plans to work with market participants and regulators to “evolve how Libor is calculated” to bring it in line with recommendations last year from another U.K. commission, the official said.

The New York Times story offered this context about how NYSE was selected and the purpose behind the sale of the rate:

Until now, the daily process through which Libor is set has been run by the British Bankers’ Association, an industry group in London. A British government review of Libor led by Martin Wheatley, at the time the managing director of Britain’s Financial Services Authority, recommended last fall that the responsibility for formulating Libor should be given to an “independent party.”

NYSE Euronext beat other contenders, including the London Stock Exchange, said a person briefed on the process, who spoke on the condition of anonymity ahead of a public announcement.

The company was picked by an independent committee led by Sarah Hogg, chairwoman of the regulator responsible for financial reporting, after a tender process that started in February. The deal will still need to be approved by the Financial Conduct Authority, now led by Mr. Wheatley.

The so-called Wheatley Review recommended that Libor should continue to be set through daily consultations with the world’s largest banks. But while those banks now provide estimates of how much they are charging for short-term loans, in the future the administrators of Libor are also supposed to use data from actual short-term loans.

The Reuters story had the best skeptical take on the deal:

But with uncertainty about the future regulation of Libor – and given NYSE Euronext is being bought by U.S. peer IntercontinentalExchange (ICE) (ICE.N) for $8.2 billion – not everyone was convinced by the appointment.

“We had a ‘fox guarding the henhouse’ issue here, and we should learn from that,” said Bart Chilton, a member of the U.S. Commodity Futures Trading Commission (CFTC) regulator.

Chilton added: “I firmly believe that having a truly neutral third-party administrator would be the best alternative, and I’m not sure that an exchange is the proper choice.”

NYSE Euronext did not say in its statement how it would address such concerns, but the source close to the situation said it would involve “a very strong governance and oversight regime”. This would based around an oversight committee and involve a code of conduct “to ensure there is no repeat of what we’ve seen in the last few years”, the source added.

British and U.S. regulators have so far fined three banks -Barclays Plc (BARC.L), UBS AG (UBSN.VX) and RBS (RBS.L) – a total of $2.6 billion and two men have been charged for manipulating Libor and similar benchmark rates. But more banks and individuals remain under investigation.

But what is clear is the importance of Libor in determining investor returns, the rates paid on mortgages as well as other financial pricing points. The Wall Street Journal has this primer:

More than $800 trillion in securities and loans are linked to the Libor, including $350 trillion in swaps and $10 trillion in loans, including auto and home loans, according to the Commodity Futures Trading Commission. Even small movements—or inaccuracies—in the Libor affect investment returns and borrowing costs, for individuals, companies and professional investors.

Either way, bringing a sense of integrity and transparency back to the rate is important. But what’s also interesting is how little the general public knows or cares about Libor. A prominent CEO lost his job (Bob Diamond at Barclays) and several banks have paid fines, plus, it’s a rate that actually affects most people, even if they don’t know it.

It seems that more investors should have been outraged by the manipulation and pay attention to its sale. Here’s hoping that NYSE can bring more transparency and oversight to the benchmark to avoid any future misconduct.

Workplace

NYTimes to start workplace column

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The New York Times Sunday business section will add a column on workplace issues next month.

The column will be written by Rob Walker, who has written about technology, business and culture for a variety of publications, such as The New York Times Magazine, The Atlantic, The New Republic, Fast Company and Wired, as well as the public radio program Marketplace.

“The Sunday Business section is already known as the place for the Haggler, our witty, effective consumer help column by David Segal,” Sunday business editor Vera Titunik about the new column. “Rob Walker will bring a similar spirit of smart, common sense thinking to workplace advice.”

From 2004 to 2011, Walker wrote the Consumed column for The New York Times Magazine, addressing consumer culture, design and marketing. He currently writes a tech column for Yahoo News as a contract writer.

In a short item online, the paper states, “Whether you’re wrestling with a career issue, trying to finesse delicate office politics, or are just flummoxed by one of the countless workaday irritations of life on the job, send your questions to workologist@nytimes.com.

“You can request that your name be withheld for publication, but we may need to reach you for clarification, so please include your name and daytime contact information.”

Read more here.

stock_market_scam

Pre-market stock stories: predictive or prescriptive?

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The pre-market “stocks are set to open up/down” story is a stable of daily wire service coverage. When I worked in a newsroom, I would come in to the early stock reporters chatting with traders about which way the market was heading and scanning the futures markets. They were scrambling to predict the whims of investors before they were even allowed to trade.

Here’s an example of a pre-market story from Monday from the Associated Press (via the Huffington Post):

U.S. stock futures are building on gains from Friday’s strong jobs report as Wall Street turns its attention to the traditional start of earnings season.

Dow Jones industrial average futures are up 68 points at 15,144. The broader Standard & Poor’s 500 futures are up 9.20 points at 1,636.50. Nasdaq futures are up 18 points to 2,974.

Aluminum giant Alcoa Inc.’s quarterly earnings report, expected after the markets close Monday, kicks off the summer earnings season.

The overall corporate earnings outlook has dimmed. Analysts now predict that second-quarter earnings for companies in the Standard & Poor’s 500 rose 3 percent compared with a year earlier, according to a survey by S&P Capital IQ. But as recently as April 1, they predicted a gain of nearly 7 percent.

Here’s a Reuter’s example for the European markets:

European stock index futures pointed to a higher open on Monday, with investors in the region focused on Greece as it looks set to reach a deal with its lenders over its latest aid payment.

At 0601 GMT, futures for Euro STOXX 50, for UK’s FTSE 100, for Germany’s DAX and for France’s CAC were 0.4 to 0.7 percent higher.

Most of these stories are quickly replaced with ones that have the current share price and then are continually updated as the market ticks up or down. But how much influence do these stories actually have on the market?

In the middle of the trading day, this was the top of the Bloomberg story:

U.S. stocks rose, giving the Standard & Poor’s 500 Index a third straight day of gains, as investors waited for Alcoa Inc. (AA) to kick off earnings season.

Alcoa increased 0.6 percent, as the largest U.S. aluminum producer will report results after markets close today. Dell Inc. (DELL) rallied 2.9 percent after the biggest shareholder-advisory firm said investors should accept founder Michael Dell’s buyout offer. Priceline.com (PCLN)added 3.2 percent after Morgan Stanley raised its recommendation on the stock. Intel Corp. slumped 3.8 percent amid an analyst downgrade.

The S&P 500 (SPX) added 0.4 percent to 1,638.77 at 1:35 p.m. in New York, trimming an early gain of 0.8 percent. The Dow Jones Industrial Average rose 75.48 points, or 0.5 percent, to 15,211.32. Trading in S&P 500 stocks was 6.9 percent below the 30-day average during this time of day.

“We’re still working through sideway movements and we’ll have a leg up between now and the year-end,” Tom Wirth, a senior investment officer for Chemung Canal Trust Co., in Elmira, New York, said in a telephone interview. His firm manages $1.7 billion. “Accelerating economic growth will be the driving force. I don’t think second-quarter earnings are going to be great. There are going to be a lot questions on how companies’ order books look like.”

The S&P 500 (SPX) gained 1.6 percent last week, as better-than-estimated economic data tempered concern over a possible scaling back of Federal Reserve stimulus. Employers added more jobs than forecast in June, and other data during the week showed jobless claims decreased and manufacturing improved. While the index has fallen 1.9 percent since its May 21 record, the gauge is up 15 percent for 2013.

Throughout the day, reporters are talking to traders, presumably those who are smart and tapped in. This color goes into the daily story and helps inform how people are looking at the markets. For example, traders could sell retail stocks before consumer confidence numbers that are expected to be weak.

But as more and more people pile into a trade, it pushes the market down. It’s interesting to think that a Bloomberg story predicting that the stock market will open down could in fact cause the market to do just that as people sell ahead of the drop.

Because both institutional and retail investors have access to the same basic information from the media, it’s easy to think that stock market coverage could in fact shape the direction of the market.

On the other side, institutional managers and those with large positions are presumably not trading on what’s in the Wall Street Journal or based on which direction Bloomberg says the market will go. They sell their abilities to analyze information and make independent decisions.

Reporters are also likely talking to those with the largest positions, so it’s possible the story mirrors the market because managers have already made an investment decision and acted on it before they’re quoted in the paper.

It’s an interesting thinking about which comes first, the market moving story or the traders that talk about their market moves after the fact. I’ll bet the truth lies somewhere in the middle.

Fannie and Freddie

Fannie, Freddie sued by hedge fund

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Just when you thought the fallout from the housing crisis was over as buyers return to the market, hedge fund Perry Capital is suing the government over Fannie Mae and Freddie Mac dividend payments. This could be interesting, except that it’s yet another distraction for the housing agencies as they try to move forward.

The Financial Times had these details:

Perry Capital, one of the largest US hedge funds, is suing the US Treasury over the terms of large dividend payments it has been receiving from Fannie Mae and Freddie Mac, the mortgage companies taken over by the government during the depths of the housing crisis in 2008.

The hedge fund, which has invested in Fannie Mae and Freddie Mac, alleges the Treasury violated the rules associated with its control of the companies in 2012 when it began requiring them to funnel all their profits back to the US government in the form of a dividend.

This year, Fannie Mae and Freddie Mac have paid $66bn to the US Treasury as the housing market recovered and their finances improved. The Obama administration projects $238bn in revenues related to dividends from these “government-sponsored enterprises” over the next decade.

According to the Wall Street Journal, Perry Capital is angry about changes to payments that have made its long-held bet on the housing market invalid:

Investors have piled into the shares of the two firms in recent months as a rebounding housing market has resuscitated the fortunes of Fannie and Freddie, which have begun to report large profits. Fannie and Freddie, which purchase or guarantee mortgages, last month paid $66 billion to the Treasury.

Perry Capital hasn’t disclosed its stake in the preferred shares of Fannie or Freddie, though a lawyer for the firm said Sunday that the firm had made a significant investment. Investors at Perry Capital had concluded in 2010 that the firms were likely to be profitable—a position that wasn’t widely held at that time—and began buying up preferred shares that year, the lawsuit said. The firm isn’t seeking any damages in the lawsuit but would benefit if the changes made last summer were ruled invalid.

The government took over Fannie and Freddie through a legal process known as conservatorship in 2008 as housing-market losses mounted. The government agreed to inject huge sums of capital to keep the companies afloat. In return, Treasury received a new class of “senior preferred” shares that initially paid a 10% dividend, as well as warrants to acquire nearly 80% of the firms’ common stock. The government currently holds nearly $188 billion in senior preferred shares and has received nearly $132 billion in dividend payments.

Last August, the Treasury amended the stock-purchase agreement, instead requiring the firms to pay nearly all of their profits as a dividend to Treasury beginning this year. The firms don’t have to make any dividend payments when they are unprofitable. As a result, the firms can’t rebuild capital or redeem any of the senior preferred shares the government has taken.

That dividend “sweep” upended the bets of hedge funds such as Perry Capital. Sunday’s lawsuit alleges that, as Fannie and Freddie were returning to profitability last year, the government “maneuvered to ensure that Treasury would be the sole beneficiary of the companies’ improved financial position,” the filing said.

Bloomberg points out that the fate of Fannie and Freddie could be in question as the government tries to determine how they should move forward:

A bipartisan group of senators, led by Tennessee Republican Bob Corker and Virginia Democrat Mark Warner, last month introduced a bill that would dismantle the companies and replace them with a system in which the government would serve as a catastrophic reinsurer of mortgages.

Shareholders behind the government would only recoup losses after taxpayers had been made whole. Fannie Mae and Freddie Mac purchase mortgages and package them into securities on which they guarantee payments of principal and interest.

The Perry Capital lawsuit follows a shareholder claim filed in the U.S. Court of Federal Claims in Washington last month, which sought $41 billion in damages as a result of the takeover.

Perry Capital didn’t ask for monetary damages in its lawsuit. It sought a court declaration that the third amendment isn’t legal, and orders setting it aside and preventing the Treasury and the Federal Housing Finance Agency from implementing it.

This story is interesting since it seems that smart investors should reap the rewards from their foresight and patience. If Perry’s claims are right, it feels unfair for Treasury to change the rules in the middle of the investment game.

But, that’s what happens in many situations – companies are acquired or go bankrupt. People place bets on managers or dividends, which can also change. I think the outcome of this suit will be interesting going forward since it could differentiate the government from other corporations in terms of flexibility and capital management. It’ll definitely be interesting to see the outcome or if they decide to settle the case.

usatoday-climatecover

Business journalists eschew climate change deniers

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Climate change deniers should not be given a place in business coverage at a time when industries from agriculture to insurance are making real financial decisions dealing with its impact, according to some of the nation’s top business journalists.

Joe Strupp of Media Matters for America writes, “With climate scientists in agreement that climate change is occurring and being triggered by human activity, major companies are acknowledging and evaluating the impact of that change on their businesses. Top consulting groups have pointed out that climate change is a major risk to insurance companies, and a 2011 survey found that most investors now consider climate change consequences across their organization’s entire investment portfolio.

“In spite of this emerging consensus among business leaders that climate change is a real concern for their companies, Media Matters found that 24 of the 47 substantial mentions or segments on climate change in 2013 on CNBC, or about 51 percent, cast doubt on whether man-made climate change even existed. Prominent CNBC figures have claimed that climate change is simple ‘a scam analysis’ by ‘high priests.’ More than 14,000 people have signed Forecast The Facts’ petition calling urging CNBC’s executives to stop their network from promoting climate change denial.

“Kevin Hall, McClatchy national economics correspondent and president of the Society of American Business Editors and Writers, said that CNBC’s promotion of climate denial is unusual.

“‘I don’t see a lot of evidence that deniers get a lot of ink,’ he said. ‘I think it is in the broader political debate. The insurance industry hasn’t waited to see if this is going to be correct or not, they are making certain assumptions, they are acting accordingly, they are not doubting it, their livelihood depends on it.’”

Read more here.

Money

Investor wrap-ups

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The second-quarter wrap stories are trickling in, and the news for investors wasn’t pretty. After the Federal Reserve indicated it might pull back on low interest rates, the decline in some parts of the market caused steep losses for many investors.

Here’s the Wall Street Journal story about the declines:

As the second half of 2013 gets under way, investors have been tossed out of the frying pan and into the fire.

Front and center in the second quarter were the risks investors had taken by piling into strategies predicated on the Federal Reserve pumping an open-ended stream of money into the financial markets.

Then, as the Fed hinted at pulling back on its unprecedented low-rate policies, many investors were blindsided by the speed and scope of the resulting losses. Some of the biggest declines came in corners of the markets traditionally viewed as safe but offering higher yields, such as municipal bonds and dividend-paying stocks.

When it came to higher-yield investments, “everybody knew there was a bubble forming,” says Brian Singer, head of dynamic allocation strategies at William Blair & Co., which manages $56 billion. “They had just thought they would be the first ones out the door.”

As investors lick their wounds, they are seeing with new clarity how signals from the Fed and other major central banks can undermine the performance of higher-yielding investments—and markets in general.

However, the easy-money policies that drove investors into rate-sensitive strategies in the first place remain a dominant force in the markets.

The Bloomberg story talked about all the money investors pulled out of fixed income funds and piled into cash:

Investors who poured $1.26 trillion into bond funds in the past six years pulled out record amounts of cash last month, leaving the world’s biggest fixed-income managers struggling to stem the flow.

The funds saw $61.7 billion of withdrawals as money market mutual fund assets rose $8.17 billion in the week ended June 25, according to TrimTabs Investment Research and the Money Fund Report. Bank of America Merrill Lynch’s Global Broad Market Index dropped 2.9 percent in the past two months, the most since the inception of the daily gauge in 1996, as Federal Reserve Chairman Ben S. Bernanke laid out possibilities for reducing the $85 billion in monthly bond purchases supporting the economy.

Market bears say losses are just getting started because yields barely exceed inflation, leaving little relative value in bonds as the global economy improves. Pacific Investment Management Co., BlackRock Inc. and DoubleLine Capital LP, which together oversee about $6 trillion in assets, said the worst is already over because the securities are fairly valued.

Bloomberg also pointed out that many investors took lower yields in order preserve capital:

Investors often retreat to money-market mutual funds during times of financial stress, accepting lower yields compared with bonds in exchange for higher liquidity. Assets surged during the credit crisis to a peak of $3.92 trillion in January 2009, according to data from the Investment Company Institute. Money funds held $2.59 trillion in the week ended June 26, data from the Washington-based trade group show.

Money-fund yields averaged 0.04 percent this year, based on the Crane 100 Money Fund Index, with the yield for the week ended June 26 at 0.03 percent. U.S. equity mutual funds had assets of $6.61 trillion as of April, according to the most recent ICI data. Bond fund assets were $3.56 trillion.

The USA Today article led with the stock market posting its best first-half gains since 1998:

It was a somewhat scary but ultimately satisfying second quarter for stock investors.

U.S. stocks shook off recent fears of a coming shift by the Federal Reserve to a less market-friendly monetary policy and a weak day Friday to finish the quarter in positive territory. The Standard & Poor’s 500 stock index, after a 2.4% second-quarter gain, finished the first half of 2013 up 12.6%, its best start to a year since 1998.

The Dow Jones industrial average gained 2.3% in the quarter, extending its first-half gain to 13.8%. The Nasdaq composite notched a quarterly gain of 4.2% and is up 12.7% for the year.

While the April-through -June quarter wasn’t nearly as profitable as the first quarter, when the major indexes posted double-digit percentage gains after the economy avoided going over the so-called “fiscal cliff,” the bull market in stocks remained intact.

The continued move higher came despite a bout of nerve-rattling volatility beginning in late May that was sparked by heightened uncertainty over the Fed’s timetable for pulling back on its massive bond-buying program. The Fed’s purchases of mortgage-backed bonds and long-term U.S. government bonds, which began in late 2008, have been instrumental in driving borrowing rates to record lows and goosing asset prices, including stocks. The prospect of less Fed support for markets and the economy led to initial negative reactions in both the stock and bond market.

All of this recent volatility and uncertainty will leave many investors searching for yield at a time when the safest investments aren’t so safe, the Wall Street Journal said:

That leaves investors having to thread the needle, still hunting for yield in a market where the safest investments—namely government debt—are offering meager returns by historical standards. At the same time, global economic growth continues to face challenges, which makes greater risk-taking harder to stomach.

Most of the coverage focused on the last part of the quarter and the Fed’s potential pull back from easy money policies. The stock market gains played a lower position in several of the stories but was the focus of the USA Today piece. One thing is certain, the recent volatility has cost a lot of people money in the past few weeks, and they’ll be looking for ways to make up lost ground in the second half of the year.

market money

What the market is doing to private equity

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Volatility can scare away even some of the most steadfast of investors, and it also tends to cause problems for those looking to cash out investments. That’s particularly true for private equity, according to a Wall Street Journal story:

It all was going so well. For the first 5½ months of the year, private-equity firms took advantage of soaring markets and eager investors to raise about $35 billion by selling stakes in their companies, not to mention billions of dollars more through initial public offerings.

The rush for cash prompted some buyout executives and bankers to view 2013 as the year of the exit, a moment to reap what they sowed, including on some highly indebted, controversial deals just before the eruption of the financial crisis. Leon Black, Apollo Global Management LLC co-founder, in April called the market’s receptiveness to such sell-downs “biblical.”

Then the markets turned. Stock and bond prices fell amid fears of an end to the Federal Reserve’s stimulus, and the resulting market turbulence this month threatens to disrupt the sales planned by private-equity firms and possibly put the brakes on a blistering pace of big paydays for their top executives and investors.

The public offering of HD Supply Holdings Inc., a construction-materials supplier, priced Wednesday at $18 a share, far below the range of $22 to $25 the company previously expected. Private-equity-owned information-technology company CDW Corp. on Wednesday priced its IPO at $17, also well below the company’s previously expected range of $20 to $23. The private-equity owners have decided not to sell their stakes in either deal.

According to the Financial Times, the biggest drop came from more developed countries:

The decline was sharpest in the US and Asia, where volumes contracted 67 per cent and 66 per cent respectively. Europe recorded an increase of 56 per cent in volumes to $27bn from the first quarter, helped by the acquisition of Ista, a German metering company, by CVC Capital Partners for €3.1bn. It is also a 25 per cent jump from the same period the previous year.

While private equity groups have found it harder to deploy capital, they have exploited renewed appetite from trade buyers to sell investments.

Private equity-backed exits rebounded 78 per cent in the second quarter to $61.6bn, compared with the first quarter. There were 310 in total, including the $8.7bn disposal of Warburg Pincus’ eyecare company Bausch & Lomb to Valeant Pharmaceuticals. However, exits were down 39 per cent from the second quarter of last year.

So-called secondary buyout exits, where private equity assets end up in the hands of another private equity buyer, more than tripled to $25bn in the second quarter from a three-and-a-half year low in the first quarter. The second-largest exit was such a deal: the acquisition of Springer Science by BC Partners for $4.4bn. It was also the fourth-largest buyout in the first half.

Given the growing backlog of private equity exits, bankers are hopeful that the rest of the year will remain active. However, recent market turmoil after Ben Bernanke, the US Federal Reserve chairman, signalled the end of his stimulus programme adds an air of uncertainty.

Firms are also having trouble adding to their portfolios right now since valuations are all over the place, according to the New York Times:

Buying new companies is a different story. Some $62 billion worth of deals greater than $1 billion have been announced this year, according to Thomson Reuters. That’s slightly more than all of last year. Yet the two biggest – a $27 billion purchase of the H.J. Heinz Company and $18 billion purchase of Dell Inc. – are atypical. The former was more Warren E. Buffett than private equity, and the latter is largely a mogul buying back his company.

Ignore these two, and there have been only five transactions amounting to $16 billion. The industry has $187 billion of dry powder to do deals, according to Preqin. At typical leverage ratios, that could amount to more than $700 billion of deals. At this year’s rate, it would take decades to put that money to work.

Part of the explanation lies in a mistrust of current valuations. But a hardening of boardroom attitudes since the leveraged buyout boom figures, too. The industry is seen by some as being too sharp-elbowed to be a desirable buyer. These may be halcyon days to sell, but the industry may need to buff its reputation if it wants to replenish its inventory.

So what does this all mean? While not much for retail investors, buyouts are huge business for investment managers, pension funds and banks. Investment banks will earn less money on advisory fees as well as helping private equity firms exit their holdings.

Pension funds and other investment managers may have difficulty reaching their return targets. It’s also important for private equity firms to show solid returns as well. The Journal again:

Such investment exits are crucial for private-equity firms because they create deal profits for the firms’ executives and the pension funds, universities and wealthy individuals that give them money to invest. When buyout firms successfully cash-in on deals years later, it helps them raise a new round of money from investors—a virtuous cycle that can be damaged if selling down an investment doesn’t deliver the desired profits.

While it might seem like an inside Wall Street story, private equity touches nearly everyone on a daily basis from the clothes we buy to the returns in pension accounts. A slight bump might not be so bad, but if the markets continue to be uncertain, pensions and universities may need to looks elsewhere for returns.