micc journal march 2011

8/6/2019 MICC Journal March 2011

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The MICC Journal

Volume 3, Issue 1

Mutual Investment Club of Cornell Monthly Newsletter March 3, 2011

1

The (un)expected Impact of QE2By Zachary Peskin

The Federal Reserve’s second round

of quantitative easing, often called QE2

by those in the know, had a relatively

simple goal. Buying 600 billion dollars

of US Treasuries over the course of al-

most a year would push bond prices

higher and keep rates at historic lows.

Low rates make mortgages cheap, re-nancing attractive, and tend to push up

equities and other asset classes. The

Fed largely met their goals. The antici-

pation of QE2 kept rates depressed

and equity markets rallied. At this level

of analysis, Chairman Bernanke should

declare victory and be named the best

central bank chairman in the history

of central banks. However, unfortu-

nately for Chairman Bernanke’s legacy

and the world economy, a deeper level of analysis on QE2 shows unan-

ticipated and alarming consequences.

While the recent rally in equity prices

has been substantial, many believe it

is simply a small bubble. With rates

depressed near all time lows, investors

sought greater returns and jumped to

equities, which sent the stock mar-

ket soaring. As interest rate levels

normalize, nancial theory and his-

tory suggests that equities will not

be able to sustain their recent highs.

Investors also transitioned from

bonds to commodities. As with eq-

uities, low interest rates caused in-

vestors to buy commodities seek-

ing greater return, which pushed

up global commodity prices. Com-

modities were denitely the story of

2010. By the end of 2010 oil neared

$100/barrel and wheat prices grew

alarmingly quickly. Higher oil and food

prices means that consumers have

to spend a larger percentage of their

disposable income on food and trans-

portation pushing down consumption

in other areas. In countries, like Egypt

and Tunisia, which import the majority of their food, higher prices led to civil

unrest. Even though riots in Egypt and

Tunisia were largely protesting for gov-

ernment form, they were motivated

to take to the streets by rampant pov-

erty exacerbated by high food prices.

Back on the home front, many politi-

cians criticized the Federal Reserves

second round of bond purchases as

inationary. These politicians aren’t

wrong. In some respects, Chairman

Bernanke wants to increase the level

of ination. Prior to QE2, ination lev-

els were dangerously close to head-ing towards deation, which is widely

viewed as something to avoid at all

costs. Chairman Bernanke hoped that

$600 billion in bond purchases would

push prices higher and add some up-

ward pressure on prices. Even today,

headline and core ination (what the

Federal Reserve really cares about) is

below implicit Fed targets. Whether

the politicians were right about QE2

causing long run, high levels of in

tion is still unknown, but as Key

said, “We are all dead in the long ru

The Federal Reserve can cross the

ationary bridge when it gets the

Currently we are in a transitory p

riod for the economy. Unemplo

ment has decreased, GDP growth h

resumed, and markets have recoverHowever, all of these improveme

have occurred with the assistance

monetary and scal policy. Would t

economy have recovered as quickly

not more quickly, without this stimul

It’s impossible to say. What is mo

certain, however, is that the Fede

Reserve will probably not engage in

third round of Quantitative Easing. T

risk/reward prole of a third rou

of bond purchases simply doeswarrant additional Fed action at t

point so long as the economy mo

or less stays on its current trajecto

The Federal Reserve is more likely

pursue a tight monetary policy as

ationary concerns begin to emer

So was the Fed right to engage

QE2? That’s hard to say. It depends

the relative importance of certain fa

tors. If stabilizing the domestic ecoomy in the short run without rega

to long run or global impacts is m

important, then yes QE2 made sen

If, however, global nancial health a

long run conditions are most impo

tant coming out of a deep recessi

then the Fed failed. As with most pol

decisions, QE2 probably did a little

of good coupled with a little bit of b

“equity prices have risensignicantly, volatility in

the equity market hasfallen.”



By Abhishek Shah

A Year-To-Date Look at the MICC Portfolio (as of 2/25/11)

Overview YTD 3 Mo 6Mo

Portfolio ▲1.2% ▲3.3% ▲12.4%Portfolio (excluding cash) ▲2.3% ▲6.4% ▲26.1%

S&P 500 ▲3.9% ▲11.0% ▲24.0%

Dow Jones▲

4.2%▲

9.4%▲

19.5% NASDAQ ▲3.2% ▲9.7% ▲29.1%

A Look at Some Por tfol io Updates

Cash to JNK, A Major Portfolio Change

On 2/12/11, MICC members voted to convert asignificant portion of the fund’s cash reserves to the

high-yield ETF JNK. The thesis for this move is to put

our cash to “work” by generating dividends (JNK has

current yield of 9.72%) while preserving capital through investing into a bond fund. As this does not

rely on capital gains, there will be considerableliquidity in the position available to MICC for any

future moves. The addition of JNK will greatly

improve the fund’s performance while maintainingour risk profile.

Say Goodbye to GGP and HHC, and Say Helloto Otter Tail (OTTR) and Scania (SCG)

The Real Estate Sector successfully pitched areallocation from GGP/HHC to two energy

providers – OTTR and SCG. After profiting over 200% from this position, the group decided that it

was time to take profits off the table and invest in

historically stable, steady growth stocks. At 7.8% of our total portfolio (14.4% of invested assets), this

move greatly alters our fund composition. The group

selected 68.33%/31.67% blend of OTTR/SCG toreduce the position’s beta from ~4 to ~1. Through

this, the beta of the overall portfolio (excluding cashreserves) will move to ~1.10 and reduce our exposure to market risk.

A Look at Future EarningsMarch 8: EM

March 10: IGOI

Portfolio Per formance Year-To-Date

The portfolio has been trailing the major indices, which can be

attributed to the ~50% cash holdings in the portfolio. Excluding this, the year-to-date gains are roughly 2.3%.

Major Winners and Losers

Overal l Weighting in Por tfolioInc luding Cash Excluding Cash

EM ▲16.17% 2.63% 4.93%BCO ▲15.66% 4.06% 7.61%

TEF ▲11.78% 2.85% 5.34%

CSCO ▼7.91% 2.88% 5.40%TSYS ▼8.34% 1.75% 3.29%

HXM ▼17.91% 3.10% 5.82%(EM: Emdeon Inc., BCO: The Brink’s Company, TEF: Telefonica S.A., CSCO:Cisco Systems, Inc., TSYS: TeleCommunication Systems, Inc. HXM: HomexDevelopment Corp.)

Key Por tfolio Statistics (Excluding cash reserves)P/E fo r wa r d: 14.10

P/B: 2.73

ROA (Return on Assets): 6.16

ROE (Return on Equity): 13.33

Yie ld %: 1.57%

Beta1: 1.33

Avg. Mar ket Cap : $10,965.88 MM

Note1: Calculations for beta excluded HHC and EM.



Netix: Short or Long?By Aly Bandali

Company Background

Inspired by the prevalence of late

fees in the video industry, Reed

Hastings founded a website called

Netix.com in 1997 on the prem-

ise of offering unlimited rentals per

month with no late fees for one

xed price by mailing customers

their rented movies rather than hav-

ing a physical store. Since then Netf-

lix has eschewed the idea of offering

one xed rate in favor of a tiered

subscription plan where customers

can pay as much or as little as they

desire based on how many movies

they plan on renting a month. After

initiating an IPO by selling 5.5 mil-

lion shares for 15 dollars in 2002,

Netix has exploded into promi-

nence in the video industry surpass-

ing giants like Blockbuster and Hol-

lywood Video. This success is due

in large part to the spread of the

DVD player to most homes, and the

popularity of their new streaming

service as well as their exceedingly

popular video recommendation

platform that operates on a propri-

etary algorithm. In the last year, the

share price of Netix (NFLX) has

gone from 63.10 to about 237.50,

spurring a debate among investors

about whether Netix is a stock to

short or invest in for the long haul.

Netfix as a Long-term

InvestmentThose who believe that Netix is

indeed a solid company for a long-

term investment cite the compa-

ny’s ability to maintain solid hiring

practices, their knack for fostering

impressive customer loyalty, and

their drive to expand their mar-

kets. Netix is company that prides

itself on hiring talent that will inno-

vate and move the business forward.

They are proponents of the “free-

dom and responsibility culture”,

which perpetuates company’s ability

to grow rapidly while constantly in-

novating. Customer loyalty is another reason why Netix may be a solid

long-term investment. The billions of

ratings that their 20 million custom-

ers have submitted have been stored

and analyzed in a successful effort to

make the service more compelling

and personal for its users. Accord-

ing to a survey from Business Insider

around 94% of the 500 subscribers

they surveyed said they would strong-

ly recommend Netix to someoneelse. Lastly, Netix’s CEO Reed Hast-

ings hinted at the intention for Netf-

lix to access not only the 100 million

households in the US but the 330

million people in the entire country

through individualized accounts that

would take advantage of mobile and

personal devices. This bold strategy

coupled with the current solid state

of the company makes Netix and

attractive long for some investors.

expansion possibilities for Netix in

video streaming capability. Amazon’s

acquisition of LoveFilm limits the

expansion possibilities for Netix in

Europe because they have to directlycompete with Amazon. Amazon wil

most likely dominate the area since

they have far deeper pockets. Also

Netix’s margins appear to be on

the verge of getting smaller because

they are estimated to have to pay be-

tween 500 million and 1 billion dol

lars for content starting next year be

cause of expiring content contracts

Most notably, their contract with the

premium cable channel Starz is due to expire next year. Increased com

petition in the US and around the

would as well as lower margins has

gave investors reason to believe that

Netix is overvalued and will eventu

ally fall from its unprecedented rise

Shorting Netfix

Many investors are very skeptical

about the meteoric rise of Netix,

commenting that Netix is a good

stock to short because the com-

pany is showing signs of a classic

“dot-com bubble”. The presence of

strong competition is a compelling

factor for why Netix may be a vi-

able short. Amazon, ITunes, and nowCoinstar’s Redbox offer high quality

streaming services (although ITunes

is not subscription based).. The

most daunting of these competitors

is Amazon who recently acquired

LoveFilm, a company that has been

touted as the “Netix of Europe’ due

to its similar DVD mail service and

video streaming capability. Amazon’s

acquisition of LoveFilm limits the

Recommendation

As evidenced by hedge-fund manger

Whitney Tilson, who recently had to

yank his short on Netix due to itscontinued success, it is extremely dif

cult to bet against companies that

are succeeding in a growing indus

try as e-commerce. Tilson’s mistake

also illustrates the point that valua-

tion does not correspond with tim

ing. Although Netix does appear to

be overvalued, it is hard to predict

when exactly the bubble will pop

Even though it appears the stock

is a little ahead of itself I would notfeel comfortable shorting the stock

based on how the stock has been

continuing to rise despite naysay-

ers. I would also advise staying away

from the long because of the inux

of competition and the prospect o

lower margins. Although Netix is a

fascinating company with interest

ing prospect, the risk seems to out-

weigh the reward by far too much

3



Gold: The Past, Present and FutureBy Shashwat Samudra

Over the past two years, traders

have poured into precious met-

als; gold prices have seen a nearly

50 percent surge, silver prices have

increased by 70 percent, and the

two most popular gold ETFs, State

Street’s SPDR Gold Trust and iS-

hares’ COMEX currently hold more

of the metal in reserve than China.

But will the gold rally last? At best,

there’s mixed evidence. A Bloom-

berg Businessweek article reported

that investors have more than $102

billion invested in a bet on higher

prices, and Swiss bank UBS AG fore-

casts that gold ETFs will see inves-

tors purchase more than 450 tons of

gold this year. The Treasury is selling

its gold reserves, while others – most

prominently China and India – are

rapidly importing the metal, putting

themselves in line to become the top

buyers of gold in the world. Further,

the rampant political instability in the

Middle East and North Africa and

the inationary aftereffects of QE2may act to support gold’s current

position at around $1400, with inves-

tors seeking a safe haven yet again.

But there are slivers of bad news in

the market. A couple weeks back,

Forbes’ Robert Lenzner reported

that January saw record redemp-

tions among investors in gold ETFs,

with almost $2 billion more worth

of shares sold than bought. Gold

holdings have dropped nearly 100

metric tons since Dec. 20. And ris-

ing Chinese ination – one of the

main drivers of gold’s bubble – may

be curbed soon. Rumors circulate

that Chinese policymakers may soon

tighten monetary policy and hike in-

terest rates, cooling the surging econ-

omy. In doing so, they would join India,

South Korea, Thailand and Indonesia.

Ultimately, gold is a market driven by

extremes in speculation, as it’s an en-

vironment where analysts predicting

prices around $2000 are just as com

mon as forecasts of massive slumps

to $500. So what are the most likely

forecasts for the metal? Last month

longtime technical strategist Robin

Grifths said on a CNBC interview

that he believed gold would eventu

ally “go exponential,” bucking the “lin

ear trend” he characterized its run

over the last ten years as. But many

analysts believe that gold is currently

experiencing a “rally within a cor

rection,” and Forbes’ Tom Anspray

believes that ETFs may test key sup

port values of $131.25 and $126. 40

With all this in consideration, it’s most

likely that gold will continue to trade

within a narrow band for the time

being. Investors will likely take stock

of turmoil in the Middle East and key

American economic indices, such as

unemployment and housing – both

of which are experiencing doldrums

It seems that 2011 may yet still see

a gold peak, but a hard correction is

very likely, and may come very soon

Visit us online:

www.cornell-micc.com

4

MICC’s Interview Questions

Q.Three envelopes are presented in front of you by an interview-

er. One contains a job offer, the other two contain rejection letters.

You pick one of the envelopes. The interviewer then shows you the contents of one of the other envelopes, which is a rejection

letter. The interviewer now gives you the opportunity to switch

envelope choices. Should you switch?

A . Y e s . S a y y o u r o r i g i n a l p i c k w a s e n v e l o p e A . O r i g i n a l l y , y o u h a d a 1 / 3 c h a n c e t h a t e n v e -

l o p e A c o n t a i n e d t h e o f f e r l e t t e r . T h e r e w a s a 2 / 3 c h a n c e t h a t t h e o f f e r l e t t e r w a s e i t h e r

i n e n v e l o p e B o r C . I f y o u s t i c k w i t h e n v e l o p e A , y o u s t i l l h a v e t h e s a m e 1 / 3 c h a n c e .

N o w , t h e i n t e r v i e w e r e l i m i n a t e d o n e o f t h e e n v e l o p e s ( s a y , e n v e l o p e B ) , w h i c h c o n t a i n e d

a r e j e c t i o n l e t t e r . S o , b y s w i t c h i n g t o e n v e l o p e C , y o u n o w h a v e a 2 / 3 c h a n c e o f g e t t i n g

t h e o f f e r a n d y o u ’ v e d o u b l e d y o u r c h a n c e s .

micc journal march 2011

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