Blackstone Shares Fall

Blackstone Group's share price is now below its IPO price of $31. The shares, which shot up to $38 following the company's IPO can now be bought for $30, 3% lower than price the shares were sold to the public at.

While four trading days isn't really that significant, if I had just taken the other side of a trade with some of the shrewdest investors in the world, I would be very uncomfortable when the price of those shares falls, I might begin to think someone had outsmarted me.

Lunch With Buffett -- $265,000

Every year Warren Buffett auctions off the opportunity to join him for lunch. The proceeds from the auction benefit Glide, a San Francisco charity that Buffett supports.

This afternoon, the lunch is going for $265,100.

John Mauldin previews Paul McCulley's new book in his letter this week. Overall, I think it sounds like a great book, but this excerpt really stood out:

"There is nothing investors can do about the potential deficit problem now. It is often true in investing that even when you anticipate a problem correctly, there is not much you can do about it in advance, if most investors have decided not to worry about it for now. In fact, acting too early can be a big mistake. So, in the case of budget deficits, it will have to be wait and see, and be ready to act."

While the specific example of budget deficits (and bond yields) is true, I think this applies to a lot of issues. While many people argue that markets fully discount all future events, I don't think that is really true. Life is really a long curved road, and I think markets often only discount around the first turn, they aren't very good at thinking two turns ahead, meaning that prices can easily go up or down more than someone with perfect knowledge (or even a reasonably good guess) about the long term would expect.

Calling All Lawyers

Davita's (the country's number two kidney dialysis company) CIO was interviewed in today's Journal about his time working on the front lines at one of the company's dialysis centers. The company is one of many that is trying to get top execs some experience working in front line positions to learn more about their employees and customers.

While this generally seems like a good idea, it may not work so well in the medical field, and regardless of what field you are in you don't want management saying anything like this (emphasis added):

"The immersion experience prompts changes far from the clinic floor. Harlan Cleaver, DaVita's chief information officer, felt terrified when dialysis-machine alarms sounded during his clinic work -- even though a technician was nearby. "I didn't have a clue what I was doing but I had [the patient's] life in my hands," Mr. Cleaver recollects.

After the program, Mr. Cleaver accelerated plans to extend the training period for new analysts on the company's computer help desk, and lowered his expectations of productivity from such new hires. Before Reality 101, he notes, "I never really realized how incompetent entry-level people are when they start their jobs."

Who is On the Other Side

This morning the Blackstone Group, a well known and respected private equity firm, went public. The shares are currently trading up 16% from the IPO price. I don't think I can improve on what the Daily Reckoning has to say about it, so here it is:

"On the surface, it makes no sense. Why would the smartest investors on the planet want to share their gains with the unwashed multitudes? If they can make so much money in private equity why would they want to go public? The only reasonable answer is the obvious one: The Masters of the Universe believe their own shares are overpriced.

Even more remarkable, here are the same schleps whom Blackstone commonly outsmarts lining up to be suckered again. Today's FT tells us that the IPO is already six times oversubscribed, despite Senate action that threatens to double the firm's tax bill beginning in 2012. The poor boobs think they are going to put one over on Blackstone. For isn't that the real nature of this transaction? The world's most successful insiders are on one side of the table; the world's most naïve public market investors are on the other. Who's going to get the better end of the bargain?"

$10 DSL = ???

From Seeking Alpha:

"AT&T is now offering DSL internet service for $10/month, something it is apparently trying to keep secret. The cheap broadband, which offers download speeds of 768 kbps and upload speeds of 128 kbps, was part of AT&T's deal with the FCC when it acquired BellSouth in December for $86 billion."

Not too long ago DSL was the telecom answer to price competition. AT&T and Verizon spent a ton of money to build the capacity to offer DSL, now I can't imagine the ROI they are earning on that investment at $10 per month.

China Reduces Holdings of US Treasuries

From Merrill:

"That’s right. Friday’s TIC data showed China selling on net $5.8 billion of its Treasury holdings, the largest outside of a $10 billion decline in June 1997 and the first outright sale since Oct 2005. This will further add to concerns that the Chinese, and in particular the PBOC, will noticeably diversify their reserve holdings."

Be careful what you ask for, if you don't want the Chinese to manage their currency, then they don't need to buy as many Treasury Bonds, and that means rates go up in the US.

"Meltdown"

From the WSJ:

"The situation got worse last week when Treasury bond yields, on which the loans are based, shot up.

"It's going to bring the price of real estate down," says Gary Mozer, principal with George Smith Partners, a Los Angeles-based commercial real-estate finance firm. The "meltdown" in the CMBS market, as Mr. Mozer calls it, has caused a "sea change" in the amount that real-estate investors can borrow. "People can't pay as much for property because they can't get as much positive leverage," he says.

Mr. Mozer estimates borrowers can get 20% to 30% less than they could have eight weeks ago.

"I've had lenders walk away from the table," he says. "I have an institutional client, one of the largest REITs, that was at the table with a lender for a $230 million deal. The lender walked away and gave back the deposit, saying if they closed, they would lose $20 million. Keep in mind, this client borrows $6 billion a year overall. So that says a lot. The whole market is in upheaval," he says."

“Fixing Our Reputation Daily.”

Wow.

Ford took the top honors in JD Powers annual initial quality survey. Ford, Lincoln, Mercury and Jaguar all made the top 10 for initial quality. This is a big deal for an American car maker whose products have a reputation for, well, let's just say they don't have a reputation for being Toyota. Based on the results of the survey, that might be a good thing for once.

For all of the recent news about who is buying what part of what auto maker and who owns shares of whom, this is the best sign for a turn around for a US auto maker. Ford has been running ads highlighting how the Focus sedan does better in consumer surveys than the Accord of Camry, now Ford comes in at number one for initial quality.

Could Detroit be on a new run?

Now on Sale: Risk

Yesterday US 10 year treasury bond yields fell back below 5%, ending the day at 4.97%. The recent rise in bond yields, coupled with the recent rise in the S&P 500 has brought the earnings yield on the S&P to within 58 basis points of the 10 year treasury.

At the start of the day, the S&P 500 was trading at a P/E of 18.01, in other words a 5.55% earnings yield. The "Fed." model holds that the earnings yield on stocks should equal the 10 year treasury, and thus the earnings yield falling below the 10-year would indicate that the stock market is (on average) overvalued.

AAA corporate bonds are trading at a yield of 5.65%, and Baa (lower quality) bonds are yielding 6.59%, spreads of 68 and 162 basis points over the 10-year.

I think it is safe to say that investors aren't asking for much of a premium to take on substantially more risk than the 10-year.

"Investors Yawned"

Fortune's Adam Lashinsky has a great article about how Rich Kinder made a boat load of money taking his company, Kinder Morgan, Inc., private.

One of the hottest questions in investing circles is the role of private equity. In my mind one of the biggest things private equity has in its favor is that ownership by a single entity, or small group of entities, removes a big part of the "agency" issue. Most public companies are run by management teams answering to weak boards with little interest in the company and primarily owned by institutional investors who manage money for the actual owners of the company. Most funds take little interest in the actual management of the company and typically outsource most voting decisions, primarily to a company called ISS. In other words, there are typically three layers of "agent" in between the investor and the company, private equity only deals with one level of "agent."

On excerpt from Lashshinsky's article that highlights this problem:

"In February, Kinder had personally informed investors that a planned megaproject, the $4.4 billion Rockies Express pipeline under construction in Colorado and Wyoming, was fully booked for customers. That meant the Kinder Morgan empire was virtually assured of fat profits from the project. Still, investors yawned, and the weak response was all an aggressive investment banker needed to set the buyout wheels in motion."

It is probably accurate to substitute "Wall Street Analysts and Big Mutual Funds" every time "investor" shows up in that sentence. Also, you could add "Private Equity (and Rich Kinder) ate the lunch of the index hugging funds that couldn't or wouldn't buy Kinder Morgan stock." at the end.

Fewer Specialists = Problems for ETFs

Seeking Alpha (following up on a Journal article) reports having fewer specialists at the NYSE is creating problems for new ETFs:

"Over the past year, specialists on the NYSE have declined by over 30% as floor traders are phased out in deference to electronically cleared trading. Exchange traded funds [ETFs], which resemble mutual funds but trade on the open market like stocks, use seed capital to create shares (usually between 100,000 and 500,000) so that the ETF can begin trading with a big enough float to keep flow liquid. As recently as two years ago, specialists were offering ETF firms $50 million to seed promising ETFs.

"Now, many ETFs are launching with as little as $3 million, making them unattractive to institutional investors who need the ability to move in and out of large share blocks with minimal slippage.

"Case in point: In late 2006, Claymore MacroShares Oil Up and Down Tradeable Shares, which track crude oil prices, were hit with an unusually large order, causing share prices to fluctuate to over 10% premiums and discounts to its net asset value."