matisse capital management

Around the World

• Two more US lenders struggling with subprime: International Herald Tribune
• Pound falls on news of Barclay's "cash crisis": Guardian
• President of S & P steps down over faulty subprime ratings:  Telegraph
• Viet Nam companies can now list on London Stock Exchange: Telegraph
• Mobius: "Emerging markets will have to bail out US" and "many will burn their homes in revenge to the banks": Standard
• Australian dollar continues to rise against US dollar: Perth Now
• RBS cuts US staff: The Australian
• French banks announce: "We haven't been hurt by subprime" and have been "more prudent than German banks.":L'Expansion

Around the World

• Australian fund fails because of subprime: International Herald Tribune
• Germany wants foreign oversight of US markets: International Herald Tribune
• Eurotunnel still in the red: Guardian
• Merkel questions competency of US credit rating cos.: BBC
• The 10 richest people in Germany for 2007: Deutsche Welle
• China begins new foreign investment agency: The Standard

Time to Buy REITs?

Over the past year, REIT prices and multiples have come down considerably.  Many stocks are now paying very attractive yields based on their current valuations: ProLogis (PLD) at 3.2%, Simon Property Group (SPG) at 3.7%, Macerich (MAC) at 3.6%, and SL Green Realty (SLG) at 2.5%.  But will prices go lower?  Cap rates may be the best place to look to answer this question.  Cap Rates are used in commercial real estate to value properties - the net operating income is divided by the cap rate, so the lower the rate the higher the value.  Over the last few years, buildings have sold at rates of 6.0 and 7.0 percent, and even as low as 5.0 percent in the best locations.  Over the last 20 years, however, cap rates have been a lot higher, averaging probably closer to 8.0 or 9.0 percent.  In historic terms, this may mean that values will adjust downward if rates return to more "normal" levels.  Although P/E ratios for REITs are at there lowest levels in five years, it is probably still to early to buy as there may be some balance sheet adjustments yet to come.  Above, chart of SPG and PLD over the last six months.

Around the World

• China inflation could spark social unrest.
• Crocs to make plastic clothes.    CROX
• London bonuses up 30%, Wall Street's down 15%.
• Incredible pictures of sea foam in Australia after high waves.
• Jaguar and Land Rover may be bought by India's Tata Motors.    TTM

Foreign Stocks: The Best of Russia

Below, some great Russian stocks, with their returns over the past year.  Above, architecture in Novgorod, north of Moscow.

VIP, Vimpel Communications, +122%, 1.4% dividend

WBD, Wimm-Bill-Dann Foods, +118%, 0.4% dividend

ROS, Rostelecom, +53%, 0.5% dividend

TNTTY.PK, AO Taftnet Oil, +29%

GUMRY.PK, Gum Department Stores, +17%

• Credit card default rates go higher; a bad omen for stocks.
• Deutsche Borse may acquire Nasdaq's stake in London Stock Exchange.
• Russia accuses oil firms of cheating investors.
• Telegraph UK looks at US exporting of subprime loans.

Inflation Subsides, but ECB likely to Raise Rates

Eurozone inflation reportedly dipped to 1.8 percent last month.  Inflation has been below the European Central Bank's (ECB) 2.0 percent target for the last eleven months.  Will the bank cut rates?  Probably not.  Analysts say the ECB will likely raise rates yet again to 4.25% in September. Since 2005, the rate has been lifted by a quarter point eight times. This begs the question: why would the central bank add liquidity to the market (as it has recently) and raise rates at the same time?

In the EU, inflation varies considerably between the various countries: Malta (-0.2%), France (1.2%), Ireland (2.7%), Bulgaria (5.5%) and Hungary (7.5%).  These varying rates are the reason the ECB is sometimes criticized for its "one size fits all" monetary policy.  But note that a rise in ECB rates and a much anticipated cut by the fed on September 19 would devalue the dollar further.

Foreign Stocks: The Best of Europe

Below, some great European stocks, with their returns over the past year.  Above, the City of London, from the London Eye.

ABN, ABN AMRO Holdings, +73%, 4.1% dividend

MX, Metso Corporation, +65%, 2.9% dividend

BF, BASF Corporation, +55%, 3.2% dividend

NVO, Novo Nordisk, +53%, 1.1% dividend

NBG, National Bank of Greece, +42%, 2.5% dividend

NHY, Norsk Hydro, +32%, 2.0% dividend

UL, Unilever plc, +30%, 3.1% dividend

EON, E.On AG, +27%, 2.8% dividend

SYT, Sygenta, +27%, 1.6% dividend

Foreign Stocks: The Best of Canada

Below, great Canadian stocks, with their returns over the past year.  Above, the City of Vancouver.

RIMM, Research in Motion, Ltd., +211%

OPY, Oppenheimer Holdings, Inc., +62%, 0.9% dividend

GIL, Gildan Activewear, +37%

BAM, Brookfield Asset Management, +21%, 1.4% dividend

SLF, Sun Life Financial, +17%; 2.7% dividend

RY, Royal Bank of Canada, +16%, 3.0% dividend

MFC, Manulife Financial Corp., +15%, 2.2% dividend

TD, Toronto-Dominion Bank, +15%, 2.8% dividend

Analysis Brief: CEG - Constellation Energy Group

Part wholesale energy provider, and part regulated utility, a Fortune 200 company based in Baltimore, Maryland (formerly Baltimore Gas and Electric).

P/E = 18.3; PEG = 0.9.  At current price of $83.30 the stock is slightly overvalued.  Value = $81 using estimated 2007 EPS of $4.56,  discounted cash flow valuation with 17% increase in earnings each of the next 3 years (the company estimates 25%), 3% reversion growth and 10% discount rate.  Dividend yield = 2.2%, dividend paid quarterly with 28% payout ratio.  ROE = 19%.  Long term debt = 19% of total assets. Constellation's energy is 61% nuclear, 35% coal, gas and oil, and 4% alternative. The company is diversified geographically and in its industry through seven business that range from wholesale and retail electric power, to natural gas distribution, an energy consulting business and a regulated utility (BGE). Major institutional holders include Barclay's, Goldman Sachs, B of A, TIAA-CREF, and Deutsche Bank.  Dvidends have been paid consistently since 1986, although it should be noted that they have been raised and lowered in the past.  At right is a map of Constellation's operations in America (click to enlarge).