matisse capital management

Global Markets Sink in Sea of Red Ink

  It's just as well the markets are closed in the US today.  Around the world, markets are selling off in anticipation of a global slowdown or recession.  Unless there are some incredibly positive earnings, Tuesday promises to be tough on Wall Street.  So far today, the markets are down as follows:

    FTSE 100, London -4.0%

    CAC 40, France, -5.2%

    DAX, Germany, -6.4%

    Nikkei, Japan, -3.9%

    Hang Seng, Hong Kong, -5.5%

    Straits Times Index, Singapore, -6.0%

    Bovespa, Brazil, -5.1%

  Banks and miners are the biggest decliners with Bank of China expected to take subprime write downs.  In London, oil prices dropped in anticipation of a slowdown and the FTSE erased 18 months of gains.  In Germany, WestLB Bank, declared it lost around €1bn last year and would write off another €1bn in sub-prime exposure.

REITs, the Next Financial Problem

   While the US Markets have been focused on Citigroup and Merrill Lynch, a major Australian REIT has quietly become a victim of the credit crisis.  Centro Properties owns retail developments in Australia, New Zealand and the US.  In the US, the company owns over 650 shopping centers and is one of the largest retail REITs.  American bondholders now claim that Centro has defaulted on $450 million in debt.  The company first ran into trouble two months ago when it could not find a lender to refinance $3.9 billion in debt.  It had previously borrowed from JP Morgan as discussed in this story.  Additional information on the Centro debacle can be found here and here.

   In Australia, the company's share price has dropped from $2.09 per share to $0.32, and shareholders have been enraged by the CEO's golden parachute, which is tiny by US standards. The following quotes about Centro are from the Sydney Morning Herald.  They have to make you wonder, is this problem company specific, country specific or across the board?

   "It is understood the "package" of assets that Centro has offered to lenders as collateral for its $1.3 billion debt refinancing is now worth as little as $750-800 million, due to huge overvaluations on its assets and a scarcity of buyers in the current market."

   "In these boom times all the major (property) groups have been borrowing money against property using friendly valuers, and several banks have been happy to accept those friendly valuations," one senior banker said. "But now it's all come to a screaming halt and everyone's holding these valuations and they don't know what to do with them."

Dollar Likely to Fall on Rate Cuts

   Bernanke just announced that "We stand ready to take substantive additional action as needed to support growth and to provide adequate insurance against downside risks."  The market responded with a +100 point move ion the DJIA.

   On the other side of the Atlantic, the Bank of England left rates unchanged at 5.5% (incredibly) citing a weak pound that has fallen 9% against the euro since August and "inflationary pressures from energy and food costs." The BOE has to balance the same conditions as the Fed: a slowing economy and rising inflation.  The full story can be found at the Guardian.   Also today, the ECB left interest rates unchanged at 4 percent.  Although the ECB's Governing Council discussed raising rates , but that the consensus was to keep them on hold.  However, Trichet, head of the ECB made it clear that the bank is in a rate hiking mode: "The Governing Council remains prepared to act pre-emptively so that second-round effects and upside risks to price stability over the medium term do not materialise. We are in a position of total alertness."  This will put further pressure on the dollar - the euro is up 1.4% against it today.  I am looking for the euro to move above $1.50 when the Fed cuts rates at the end of January.

Art Market, Returns by Artist

The art market is still surging, perhaps an alternative to the stock market, given rising uncertainty, the spectre of recession and volatility.  There were a number of important auctions in November and December that brought record prices for works by several artists.  The reasons for the high prices include the weak U.S. dollar, as well as growing wealth in other parts of the world that has brought new buyers into the game.  New buyers have emerged in particular from the BRIC countries, Brazil, Russia, India and China.  Below are the annual returns generated by four artists based on recent sales.

Pissarro +17.9% per year. Les Quatre Saisons (the Four Seasons) by French painter Pissaro, a cycle of four landscapes, sold for $14.6 million in November of this year.  It had previously sold for $8.9 million in 2004.  This equals a compound annual rate of appreciation of 17.9 percent. 

Modigliani +10.3% per year.  Amedeo Modigliani's 1916 painting "Portrait of the Sculptor Oscar Miestchaninoff" sold for $30.8 million.  It had previously sold for $9.5 million at Christie's in 1995.  This equals a compound annual rate of appreciation of 10.3 percent.

Picasso +22.6% per year. (pictured above left). A  painting by Picasso of his mistress "Femme Accroupie au Costume Turc (Jacqueline),'' which had previously been purchased for $2.6 million in 1995 sold for $30 million, at Sotheby's. The rate of appreciation is 22.6 percent per year. 

Warhol +10.5% per year.  According to Artnet, the mean estimate of a Warhol at auction was about $442,000, up from $66,000 in 1988.  Warhol is among the most easily traded of all artists, and has an established market.

Foreign Markets Decoupling From US?

The Dow (DJIA) dropped 238.42 points, or 1.86 percent today.  The Standard & Poor’s 500 index dropped 25.99 points, or 1.84 percent.  But foreign equities in general fared much better today, even those that lost some ground.  Look at the following indices:

EWM, iShares Malaysia, +1.74%

INP, IPath India Index, +0.91%

EWL, iShares Switzerland, +1.1%

EWG, iShares Germany, -0.69%

EWZ, iShares Brazil, -0.01%

EWA, i Shares Australia, -0.89%

EEM, Emerging Markets Index, -0.78%

What's in Store for the Dollar in 2008?

   New York Times recently had an article entitled: "Could It Be the Year of the Rising Dollar?"  The story is here.  The short answer is "No, probably not." The next Federal Reserve meeting is January 30 and 31.  Given the recent jobs report and the struggling economy, it is a foregone conclusion that the Fed will cut rates, and probably by 50 basis points. 

   Meanwhile, the ECB's Governing Council will meet in Frankfurt on Jan. 10.  It is widely expected that the ECB will keep its benchmark rate at 4 percent when it convenes.  This will move the dollar lower against the euro in the short term, likely breaking through the $1.50 level.  Inflation in the eurozone remains a problem.  In December it was 3.1 percent for consumer goods and producer costs were up 4.1 percent.  The target rate for inflation in the eurozone ios 2.0 percent. The money quote from ECB President Jean-Claude Trichet's January 5 meeting in Weisbaden was:  "The ECB's Governing Council stands ready to counter upside risks to price stability."  Translation: no near term rate cut and the possibility of increases.  The Bank of England is more likely to cut rates at its next meeting. The economy in Britain has been struggling with the many of the same credit issues as the US and there are mounting fears of a recession (although arguably, many of the problems were exported to Britain from the US). The results of the Bank of England meeting will be announced Thursday morning at 7 a.m.  The money quote from the minutes of the bank's prior meeting: "On balance, the Committee thought that the downside risks to the economy and inflation in the medium term from the deterioration in financial market conditions outweighed the potential upside risks to inflation from short-run cost pressures.  So while the pound may devalue wit the dollar in the short term, the euro is likely to go the other direction.

Market Notes

Levitt & Sons, America's iconic homebuilder, files bankruptcy.  The company built the Levittown development New York, followed by subdivisions in Pennsylvania and new Jersey.  In 1950 they advertised "buying a house is easier than buying a car." International Herald Tribune

No slowdown for commercial real estate in Canada.  Industrial space remains in short supply in most cities across the country, from Halifax to Vancouver, and higher oil prices are expected to increase demand. Time to look at Canadian REITs like BAM? Globe and Mail.

Brazil ends 2007 with another trade surplus.  Although lower than last year, it was still $40 billion.  Another strong year is projected for 2008, particularly as the EU is a larger trading partner than the US.  If the Central Bank lowers rates, even more growth. Brazzil Magazine

IPOs Worth A Second Look

The big IPO winners of the last few months were VMW (VM Ware) and MELI (Mercado Libre).  Both have seen their shares soar.  But the following companies also went public and they may hold some long-term promise.  Most generate positive net income and they are not tech or pharma.   They are definitely worth a second look:

OESX, Orion Energy Systems, currently $18.80 per share

SHOR, ShoreTel, currently at $14.00 per share

EDN, Edenor SA, currently trading at $22.00 per share

OESX manufactures energy efficient lighting.  The company may use some of the IPO proceeds for acquisitions.  SHOR, ShoreTel, provides internet protocol telecommunications.  It has no long-term debt, and its cash flow has exceeded net income by a wide margin in the last two years.  EDN, Edenor SA, is the largest electric utility in Argentina, providing electric service in Buenos Aires ad other urban markets.  The company does not pay a dividend at present, and may not do so this year.  And while it had large increases in revenue and net operating income, the bottom line was impacted by the company's debt, as discussed here.  Upcoming IPOs that look interesting include DTWO, Digital Domain, Intrepid Potash, and Visa Inc.  Visa, of course, should be a success, but the date has not yet been set.