Research Watch

PORTFOLIO POINT: This is a sampling of the week's best research notes. In a world of too much information, we hope our selection helps you spot the market's key signals.
It’s been a big week, the final week for Research Watch this year. US interest rates have been cut to nearly zero, the Senate has stalled a bailout for the big three auto companies and as Wall Street firms continue to announce losses the US dollar plunges. But above all, a $US50 billion Ponzi scheme called Bernard L Madoff Investment Securities has put the whole fund-of-hedge-fund industry into disrepute. Operated by a senior industry player, it is possibly the biggest case of fraud in America’s financial history. As yet no Australians have been directly impacted, but a large group of US and European institutional and private investors was affected, from HSBC, Fortis and BNP Paribas to Tremont Capital, Banco Santander, RBS and the Man Group. Expect lawsuits. Also hurt were Baroness Thyssen-Bornemisza, Carl Shapiro, Steven Spielberg, Elie Wiesel and Yeshiva University. Even former New York governor and Wall Street hard man Eliot Spitzer (aka client number 9) became victim. There was one notable absence, however '¦

Madoff’s sons didn’t invest '¦ “Bernie, it turns out, isn't the only member of the family with a charitable trust. Both of his sons, Andrew and Mark, had them, too. And there's an amusing side note to the Madoff sons' non-profit activities, particularly as investigators examine how much Madoff's sons knew about the scheme, if anything at all. Although the millions in Bernie's foundation were managed by his own investment firm, neither son entrusted their charitable trusts to their dad. Mark Madoff's $5 million account was parked at Lehman Brothers. Andrew's $2 million trust was in an account at Neuberger Berman.” (Cityfile New York, December 16)

And some even knew it was a scam '¦ “For years and years I've heard people say that [Bernie's] investment performance was too good to be true. The returns were too steady -- like GE earnings under Welch – and too high given the supposed strategy. One Madoff investor, himself a legend, told me that Madoff's performance 'just doesn't make sense. The numbers can't be straight.’ Another sophisticated Madoff investor actually went through trade confirms in order to reverse-engineer the strategy and said, 'it doesn't add up’ '¦ One friend who saw this coming said Madoff had his own broker-dealer and a relative as his finance guy; another friend said he was suspicious because of the 1–2% a month returns with never a down month (much less quarter or year), combined with never showing anyone his portfolio. Ninety-nine percent of the time, if it sounds too good to be true, IT IS!” (Reader contributions compiled on ClusterStock.com, December 12)

But at least others are making their money back '¦ “Bernie Madoff allegedly fleeced investors for tens of billions of dollars, and now you can buy a Madoff Securities fleece. A former trader for Madoff, has put up the fleece on eBay. The latest bid was $100... [And] As the Madoff scandal continues to unfold, the latest artefact to be discovered is a 1996 cookbook called The Great Chefs of America Cook Kosher, co-edited by Bernie's wife Ruth. It features recipes from superstar chefs like Daniel Boulud and Wolfgang Puck, ironically not Madoff victims '¦ The book is currently soaring up the charts on Amazon. Just a couple of hours ago, it was the 100,000th or so most popular book. Now it's the 24,965th most popular book.” (ClusterStock, December 16, 17)

And so much for emerging markets '¦ “The economic and credit outlook for emerging market economies has worsened dramatically as the 'credit crunch’ that originated in the so-called 'advanced’ economies contaminates the developing and emerging world. The negative impact on emerging market economies of the recession in the G7 is magnified by the sharp curtailment of financing from international banks and investors and, for commodity producers, by falling export prices '¦ With even China’s economy slowing and now forecast by Fitch to expand by just 6% next year, its lowest rate since 1990, emerging markets are forecast to grow by just 2.5% in 2009 '¦ only marginally faster than in the aftermath of the Asian and Russian crises in 1998.” (Fitch Ratings, December 17)

But Norway’s rainy day is saved '¦ “Norway is poised to dip more deeply into its $US332 billion sovereign wealth fund to finance a new fiscal spending package. The oil-rich Norwegians will use the fund, the world’s second-largest after Abu Dhabi, to offset a rapid slowdown in economic growth next year. Jens Stoltenberg, Norway’s leftwing prime minister, said '¦ 'We have held back and been restrictive in our use of oil revenues in strong times but we can start to spend more now that we see a downturn coming’ '¦ 'We have already adopted a budget that will stimulate the economy by 0.7% of GDP [gross domestic product] and we will announce a new package with added stimulus in January.’ Oslo is one of the best-placed governments in the world to spend its way out of the downturn. Norway uses oil revenues to finance its non-oil budget deficit and invests the rest overseas via its Global Pension Fund, or Oil Fund as it is commonly known.” (Financial Times, December 14)

And there’s no car crisis in Mexico '¦ “General Motors, the biggest automaker in the US '¦ [has] increased production of $US12,625 Chevrolet Aveos south of the border while seeking a bailout to keep domestic plants from closing. The Detroit-based company and competitors such as Ford shifted more manufacturing to Mexico this year to capitalise on wages less than an eighth of those in the US and factories that make fuel-efficient models. Through November, Mexican plants turned out 5% more vehicles than a year earlier, versus an estimated decline of 30% in the US. Mexico is so far weathering the collapse of the global auto industry better than its North American neighbours. Even with a projected decrease in production of as much as 20% in 2009, the world’s 10th-largest maker of light vehicles will still suffer less than the US. (Bloomberg, December 17)

Meanwhile home ownership makes you miserable '¦ “Grace Wong [from the Wharton School of Business, University of Pennsylvania] dived deep into a survey of 809 women in Columbus, Ohio, in 2005 – before the property bubble burst – and came up with some startling results '¦ 'I find little evidence that home owners are happier by any of the following definitions: life satisfaction, overall mood, overall feeling, general moment-to-moment emotions (ie, affect) and affect at home '¦ They are also more likely to be 12 pounds heavier, report lower health status and poorer sleep quality. They tend to spend less time on active leisure or with friends. The average home owner reports less joy from love and relationships '¦ The results are robust after controlling for reported financial stress’ '¦ Home ownership is overrated and that it carries a downside as well as an upside. Today, of course, the biggest downside is the risk of foreclosure. But even absent that risk, buying a house doesn't seem to make people any happier, and in fact home owners find their home to be more of a source of pain than of pleasure '¦ it's hard to see why anybody would want to buy. In fact, if Americans could be persuaded that rent payments aren't 'wasted money’ and that owning often makes less financial sense than renting, I think the rate of home ownership might, happily, drop substantially." (Felix Salmon, Condé Nast Portfolio, December 11)

And some apparently still take forecasters seriously '¦ “Francisco Blanch, the Merrill Lynch analyst who called the $US147.27 record crude-oil price almost on the nose, sent markets into a tailspin with his forecast that the next move may be back to $US25 a barrel in 2009. Such relief for consumers may be short-lived once the global recession ends, he said. 'If we reignite economic growth to a very fast level, we will have a shortage of energy again’ '¦ Blanch changed his 2009 price forecast at least four times this year as the worst global slowdown since 2001 spreads '¦ 'What changed our views is that the credit cycle became explosive. (Bloomberg, December 16)