Capital Markets - News and analysis

It is summertime and some of our readers might have some more time for reading. We post here a complete set of Warren Buffett's partnership letters from 1957 until 1970. It is exciting to get the views of the legendary investor in his first phase. Enjoy!

Keywords: Warren Buffett, Value Investing

The Big Picture Interview: Felix Zulauf

Keywords: Felix Zulauf, Asset Management, Hedge Funds

WSJ: Big Investors Fear Deflation; Bill Gross Among Those Bracing for Possible Decline in Prices: 'It's Happening', August 1, 2010

Some of the world's leading investors are becoming more worried about deflation and are re-shaping their portfolios to prepare for a possible period of falling prices.

Bond-fund heavyweight Bill Gross, investment manager Jeremy Grantham and hedge-fund managers David Tepper and Alan Fournier are among the best-known investors who are bracing for a possible bout of deflation, a development that could cripple global economies and world stock markets. read more

Keywords: Deflation, Falling Prices, Double Dip

Bloomberg: Berkshire Hathaway May Hire Li Lu to Help Run Portfolio, Journal Reports, July 30, 2010

"Li Lu, a hedge fund manager, is in line to help manage Berkshire Hathaway Inc.’s portfolio, the Wall Street Journal said, citing Charlie Munger.

“In my mind, it’s a foregone conclusion” that Li, 44, will become one of the top Berkshire investment officials, Munger, Berkshire’s 86-year-old vice chairman, told the Journal.

Li introduced Buffett to BYD Co., a Chinese battery and auto maker; Buffett’s stake has surged six-fold since then, the Journal said.

Buffett declined to comment on his succession plans, the Journal reported, adding that he doesn’t rule out bringing in investment managers."

Source: Bloomberg

Whether Li Lu is effectively considered as a manager at Berkshire Hathaway or not, he made a fascinating career, as demonstrated in a 1998 New York Observer article:

New York Observer: Tiananmen Square to Wall Street: Li Lu Hits the New York Jackpot, May 17, 1998

Keywords: Value Investment, Berkshire Hathaway

Excellent insights and graphs!

The Contribution of the Financial Sector Miracle or Mirage? Speech by Andrew Haldane, Executive Director, Financial Stability, Bank of England, at the Future of Finance Conference, London, July 14, 2010

Keywords: Financial Sector, Financial Sector Output, Returns to Financial Sector

Bill Gross believes that the US Government should not just flush a lot of money down the economic toilet - but focus on enhancing the competitiveness of the US economy:

Keywords: Bill Gross, Investment Outlook, Structural Problem

Dailami, Mansoor, Sovereign Debt Distress and Corporate Spillover Impacts (July 1, 2010). World Bank Policy Research Working Paper Series, Vol. , pp. -, 2010. Available at SSRN: http://ssrn.com/abstract=1649255

Abstract:

"In much of the standard corporate finance literature in which sovereign debt is treated as a risk free asset, corporate bond prices are seen to depend on idiosyncratic risk factors specific to the issuing company, with public debt playing an indirect role to the extent that it affects the term structure of interest rates. In the corporate world, however, the ability of a borrower to access international capital markets and the terms according to which it can raise capital depend not only on its own creditworthiness, but also on the financial health of its home-country sovereign. In times of financial stress, when investors lose confidence in the government's ability to use public finances to stabilize the economy or provide a safety net for corporations in distress, markets' assessment of private credit risk takes on a completely different dynamic than during normal times, incorporating an additional risk premium to compensate investors for the potential consequences of sovereign default. Using a new database that covers nearly every emerging-market corporate and sovereign entity that has issued bonds on global markets between 1995 and 2009, this paper investigates the degree to which heightened sovereign default risk perceptions during times of market turmoil influence the determination of corporate bond yield spreads, controlling for specific bond attributes and common global risk factors. Econometric evidence presented confirms that investors' perceptions of sovereign debt problems translate into higher costs of capital for private corporate issuers, with the magnitude of such costs increasing at times when sovereign bonds trade at spreads exceeding a threshold of 1000 bps. The key policy recommendation emerging from the analysis relates to the need to improve sovereign creditworthiness in order to prevent a loss in investor confidence that could trigger a panicky sell-off in sovereign debt with adverse macroeconomic and fiscal consequences. Implications for future research point to the need to develop better models of corporate bond pricing and valuation, recognizing explicitly the role of sovereign credit risk."

Keywords: Public Debt, Corporate Debt, Cost of Debt

Keywords: Principal Agent Problem

It is sometimes fun to take a look back! Fascinating!

Where to draw lines: stability versus efficiency, by Thomas J. Sargent, New York University and Hoover Institution, July 2, 2010

Abstract:

"What kinds of assets should financial intermediaries be permitted to hold? What kinds of liabilities should they be allowed to issue? Should a government or a central bank offer explicit deposit insurance or implicit deposit insurance by acting as a lender of last resort? This paper reviews how tensions involving stability versus efficiency and regulation versus laissez faire have for centuries run through macroeconomic analysis of these questions."

Project Syndicate: Who Should Safeguard Financial Stability? by Robert J. Shiller, July 22, 2010

Keywords: European Bank Sress Test, European Bank Stress Test

NYT: An A.I.G. Failure Would Have Cost Goldman Sachs, Documents Show, by Gretchen Morgenson, July 23, 2010

Since the United States government stepped in to rescue the American International Group in the fall of 2008, Goldman Sachs has maintained that it would have faced few if any losses had the insurer failed. Though it was the insurer’s biggest trading partner, Goldman contended that it had bought credit insurance from financial institutions that would have protected it, but it declined to identify the institutions.

A Congressional document released late Friday lists those institutions and shows that Goldman was exposed to losses in an A.I.G. default because some of the investment bank’s trading partners, such as Citibank and Lehman Brothers, were financially unstable and might have been unable to make good on large claims from Goldman. read more

Keywords: AIG Failure, Goldman Sachs

Outcome of the European Bank Stress Test (Source: Homepage of Committee of European Banking Supervisors):

Committee of European Banking Supervisors: Aggregate outcome of the 2010 EU wide stress test exercise coordinated by CEBS in cooperation with the ECB, July 23, 2010

Selected reactions of experts:

Keywords:European Bank Stress Test, Committee of European Banking Supervisors

A. Davidson Hall, head of Stephens' leveraged finance group, talks about the correction debt markets have seen in recent weeks:

Keywords: US Debt Market, Leveraged Finance

Eurointelligence: The rating agencies are no longer rating, July 23, 2010

"The three dominant credit-ratings providers in the US have requested their clients not to use their credit ratings, reports the Wall Street Journal. This is the direct consequence of a new law, in particular a small paragraph that made it into the law in the very last moment (FT Deutschland). The new law will make ratings firms liable for the quality of their ratings decisions, effective immediately. The companies are now refusing to let bond issuers use their ratings until they get a clearer understanding of their legal position and no one knows how long this will take. Many structured products cannot be issued now, as the law obliges them to include a rating in the documentation. “That means new bond sales in the $1.4 trillion market for mortgages, autos, student loans and credit cards could effectively shut down.”"

Source: Eurointelligence

Keywords: Rating Agencies, Liability for Rating Agencies

Keywords: Media Investment Advice, Investment Decisions

Keywords: Competitive Advantage, Money, Philanthropy, National Debt, Wealth Disparities