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pete with firms that were mem-bers of the NYSE trading on the floor, and after some trails, the firms technology be-c a m e t h e NASDAQ. As one of the key players in de-veloping the NASDAQ, he served as the Chairman of
the Board of Directors and on the Board of Governors of the NASDAQ. He was caught when he told his sons that the asset management branch of the firm was a giant Ponzi scheme, who passed the infor-mation to authorities. (continued on Page 4)
Bernard Madoff is the former chairman of the NASDAQ stock exchange and mas-termind behind the largest Ponzi scheme in American history. Madoff was under house arrest until his court date, where he is now in solitary confinement pending sentencing. Madoff did not reach a plea bargain and pleaded guilty to all 11 charges, including fraud, per-jury and money laundering. While no one else has been implicated into the scandal, the FBI is looking closely at relatives and associates who they believe must have known something was going on. How-ever, it could be more than a year before any accomplices are charged due to the large
paper trail of $65 billion and more than 5,000 victims. Madoff founded his Invest-ment Securities firm in the 1960s and was the chairman until his recent arrest. He started the firm as a penny stock trader with very little capital. The firm used an inno-vative system in order to com-
Special Point of Interest:
Current Event
Stock Picks
Club Biography
Weekly Markets Summary
$65 Billion, 5000 victims, 150 years By Oliver Peng
Inside this issue:
Stock Picks 2, 3
Economic Calendar 2
Market Analysis 3
Political Perspective 5,6
International Market 7,8,9
Educational Corner &
Personal Finance
10,11
Club Biography 12
Volume 1, Issue 4
Owl Financial Journal
A Rice University Student Publication
March 15, 2009
U.S.
DJI 9.00%
S & P 500 10.71%
NASDAQ 10.64%
Foreign
FTSE 100 5.15%
DAX 1.12%
Nikkei 225 0.46%
We have seen an amazing rally in the stock market this last week, the best week since November, after news came out that Citigroup posted a profit, the uptick rule may be reinstated, and pos-sible changes to accounting standards. Although I agree these are all nice things for the market, by no means do I think that this is the huge signal needed for the market turn-around. Little do people remember that just last week unemployment numbers came out worst than expected, companies were carrying record levels of debt, and most econo-mists were calling for lower market lev-els. What I think we saw this week was a classic bear market rally, much like the ones seen throughout the 1929 crash and through the early 1980’s. I urge everyone to go and look at the graphs of the Dow during these times. These bear market rallies, even as the market was approaching the depression in 1929, were very aggressive and could last for a couple of weeks, just to be followed by the market falling off a cliff again. Now is a great time to pick up some short positions after this rally to either hedge or profit against what I feel is an inevi-table further downturn in the market. When looking for a stock to short, I wanted to find a com-pany which I felt had bounced way too far past its recent lows, was weighted down with debt, and which had a product or ser-vice which was going out of style, especially during tough eco-nomic times. Low and behold I found
my stock, Brinker International Inc. (Symbol: EAT). This company’s largest restaurant holding is the Mexican chain Chili’s, followed by others such as a Maca-roni Grill, Maggiano’s Little Italy, and On the Boarder Mexican Grill. In the past couple of months, the stock has taken a huge bounce off of its 52-week low of $3.88 to its current price of $13.18. Fun-damentally this stock is a mess, with $839 mil-lion of debt and a loss of $.31 a share in last y e a r ’ s E P S ( s o m e t h i n g which makes me very worried about future earnings). Even in its latest quar-ter, Brinker’s revenue fell by 8% and earnings fell even lower than those posted this quarter a year ago, down to $.27 a share. They have also unloaded all but a 20% stake in Romano’s Macaroni Grill; a restaurant which I feel is
one of their strongest in rough times. To
top it all off, the company was an aggres-sive buyer of its shares when things were good (aka @ 25+ dollars a share). How-ever at these current prices, that was a lot of cash burnt which could have been put to great use now as well. Along with these analytical reasons, I believe there are many commonplace reasons to look at as well. First of all, at most of Brinker’s main chains, the majority of their cus-
tomers fall somewhere in the middle class finan-cially. It’s also the middle class who has the most elas-tic demand for casual dining, thus meaning the ones who I believe will be the first to stop eating out at casual restau-
rants given a change in their economic situations. I feel that many very high end restaurant and cheap fast-food restau-rants are less vulnerable to this and have much more inelastic demand, but that these casual dining areas where a burrito costs $15 will be hit hard. Secondly, many of these restaurants do not offer anything unique. This means that these restaurants can easily be grouped with many of their competitors and thus have no competitive advantages against local dining. When you put all of this together along with the potential macro environ-ment, it creates a formula for a huge stock flop. (At the time of writing EAT was at $13.18 a share).
Things Are Getting “Chili” for Casual Dining: Brinker International Inc. By Chris Kopczynski
Page 2 Owl Financial Journal
A three month Price Chart for Brinker Inc. w/ 90 Day moving Average
Mon Mar 16 Empire Manufacturing
Mon Mar 16 Net Long-Term TIC Flows
Mon Mar 16 Capacity Utilization
Mon Mar 16 Industrial Production
Tues Mar 17 Building Permits
Tues Mar 17 Core PPI
Tues Mar 17 Housing Starts
Tues Mar 17 PPI
Wed Mar 18 Core CPI
Wed Mar 18 CPI
Wed Mar 18 Current Account Balance
Wed Mar 18 Crude Inventories
Wed Mar 18 FOMC Rate Decision
Thurs Mar 19 Initial Claims
Thurs Mar 19 Leading Indicators
Thurs Mar 19 Philadelphia Fed
Economic Calendar
My previous articles have focused on short-term investments, but today, I will look at a potential long-term stock. Par-tyGaming (LON: PRTY) is an England-based online casino gaming company. It owns the rights to PartyPoker, Party-Bingo, PartyCasino, as well as a slew of other gambling-related websites. Due to current United States federal government restrictions, Party has been unable to attract American consumers for the last few years. Instead, it has focused on the European market, and has made solid earnings in the fourth quarter of 2008, and the first quarter of 2009. The major reason to be interested in this stock is the new Democratic Party controlled Con-gress, which is trying to repeal the por-tions of the UIGEA Act (which essentially makes depositing money into gambling sites difficult for United States residents) that define poker as a game of luck, and not as one of skill. This will help Party enter the American poker marketplace again. Party is a mainstream company in
Europe, and was a large player in the early online poker boom in the United States, before the UIGEA Act took effect. Of course, like any other stocks, there are downsides to consider. Firstly, since the economy is not in good shape, there will be less discretionary spending, so people are less likely to spend money on online poker. Assuredly, this is already priced into the stock, and as the economy heals, we can expect Party’s earnings to rise. Sec-ondly, critics of this stock will argue that as European curren-cies continually weaken against the dollar, Party’s relative earnings will also decrease. This is definitely a concern, but once the UIGEA Act is refined, the influx of American players will more than com-pensate for the potential losses while the dollar strengthens.
The underlying theme is that Party will
be significantly more attractive once the
UIGEA is edited by Congress. The trick is
to figure out when this will happen. At
this moment, Congress is working on
potentially restructuring the financial
landscape of the United States. The
UIGEA may be on the back burner at the
moment, but it should be addressed
within this congressional term. At that
point, expect Party’s share price to jump
in anticipation. Unless you believe that
we are still far away from a bottom in this
market, Party is a very appealing long
term buy. The stock has already been
hurt by relatively negative expectations
in the current economy, and I believe
that there is nowhere for this stock to go,
but upwards. This stock is not intended
to make quick profits; instead it will re-
ward the patient investor for his or her
foresight.
PartyGames: Coming Soon to America By Arjune Bose
Page 3 Owl Financial Journal
“Party will be
significantly more
attractive once the
UIGEA is edited by
Congress. “
Have We Hit the Bottom? Don’t Count on it By Erin Noel
another 10-15% before finally leveling out.
Throw in the fact that post-recessionary
inflation could be a serious problem after
the splurge of government spending and
extremely low interest rates and the out-
look becomes even dimmer. The stock
market trades off of expectations and gen-
erally recovers 6-9 months before the real
economy. However, the chance of a genu-
ine, worldwide recovery by the end of this
year is slim. Then why have we seen such
a massive rally this week? History tells us
unequivocally that major bear markets
always see short-term rallies. From the
The last week of trading saw the first appreciable gains in the market so far this year. The first nine weeks of the trading year brought about a 27% de-cline in the Dow, bringing the index to levels not seen since the mid-1990s. But suddenly markets rallied on March 10 on news that Citigroup operated at a profit during the first two months of the year. In three trading days the Dow ad-vanced 10%, the first signifi-cant rally since the end of 2008. Could this finally be the bottom of the worst bear mar-ket since the Great Depres-sion? Don’t count on it. By all ac-
counts we still have a long way to go in
this recession. Unemployment currently
stands at 8.1% and is only expected to
increase through at least the first half of
2010, consumer confidence continues to
decline at startling rates, and home val-
ues remain far from stable. Home
prices, which have already fallen 26%
nationwide, are projected to fall at least
crash of 1929 through the bottom in the
market in July 1932, there were six
clearly defined rallies. Even the more
recent bear market spawned by the tech
bubble crash witnessed similar rallies. In
times of fear, uncertainty, and pre-
vailing bearish attitudes, good in-
formation is especially capable of
catalyzing rallies. With 9 straight
weeks of bad news, poor earnings
reports, and unprecedented losses,
the market was just waiting for a
significant piece of positive news on
which to rally. Citi’s after-hours
announcement Monday fit the bill,
triggering the massive gains seen
this week.
I’ve been saying for a few weeks now that
we’ve been overdue for a bear market
rally. Ultimately, though, I think we’ll see
the market move below these recent
lows. In the end, a few positive reports
from one bank, regardless of how large
that bank is, can’t mask the more sys-
temic issues faced by the global economy.
The Pharmaceutical Industry in Motion By Kevin Beale
Page 4 Owl Financial Journal
industry are destined to either merge or perish. This is especially so in the biotech industry, where patents expire on medi-
cine after set stretches of time and cheaper generic drugs of the same effect hit the shelves. Even if a pharma-ceutical company is as big as Pfizer, if its research and devel-opment doesn’t pro-duce a new drug before patents run out it may be essen-tially forced upon them to buy a smaller company
out, despite the cost, in order to continue to turn a profit. The trend of pharmaceutical buyouts will likely continue, but which companies will be next? Bristol Myers Squibb (BMY), AstraZeneca (AZN), Sanofi-Aventis (SNY), and Novartis AG (NVS) are likely candi-dates, big enough to make a splash with a merger. Pharmaceutical giants will likely continue
buying out one another in order to stay
afloat, the only question remains, who will
be next?
After months of tortuous courtship, Roche Holding AG (RHHBY) has finally persuaded Genentech (DNA) into a merger. The company an-n o u n c e d Thursday that it was to ac-quire the re-maining 44% of the com-pany it does-n’t already own at $95 a share, for a total of $46.8 billion. The deal will grant Roche access to Genentech’s robust “pipeline” of drugs, a large number of which are for cancer, a section of the biotech market in which the company has a domineer-ing presence. This acquisition marks the third major pharmaceutical merger this year, con-tinuing the trend that the pharmaceuti-cal industry faces. In the hostile envi-ronment of the financial crisis, there exists in some sense an industrial Dar-winism, in which a large number of companies across the pharmaceutical
Continued from Page 1
his investment company. His top assets include $22 million in houses and prop-erty, $45 million in securities, $700 mil-lion in his investment business, $12 mil-
lion in a charter jet, $17 million in cash and $2.6 million in jewelry. Sources claim that many clients have filed class-action suits against Madoff that may be able to claim significant amounts of his assets, especially if evi-dence of involvement on his wife’s part is discovered.
Madoff is expected to serve his sentence at a low-security prison made for many white-collar offenders, however he could be sent to a more high-security prison due to the length of his sentence.
While there had been concerns about the profits that Madoff claimed to de-liver since 1999, there were never any serious inquiries. When questioned, Madoff stated that he had started the Ponzi scheme in the early 1990s. He also stated that he had every intention of ending the scheme, but it proved “difficult, and ulti-mately impossible” to get out. He even-tually accepted the fact that he would eventually get ar-rested. Madoff is currently valued at $823 mil-lion, with most of the value coming from
This isn’t the economic recovery that
Obama supporters envisioned, as the stock
market has logged its worst performance
for any new president. Other economic
indicators are exhibiting weaknesses as
well. After a decline of more than 650,000
jobs in February, unemployment has jolted
to 8.1 percent. Last week’s Dow close at
7,170 was nearly 2,500 points below the
9,625 closing on Election Day. The 25%
freefall has translated to an over one trillion
dollar loss to shareholders, which pales in
comparison to the $3.6 trillion proposed
budget and the massive deficit that accom-
panies it.
Although these drastic numbers represent
an inherited recession from the Bush ad-
ministration, the new president has failed
to ease economic tensions. The $787 billion
stimulus plan and numerous bank bail-
outs aimed at restoring the economy
have only increased investor fears, as
Obama and Treasury Secretary Timothy
Geithner fail to provide a lack of specifics
on how the administration will rid banks
of toxic assets. Without specifics, the
country is shrouded in uncertainty,
which breeds fear into the market result-
ing in a Dow Jones nose-dive after every
important speech by the new administra-
tion.
However, the Wall Street crisis has seen
its lone bright spot in the past week. A
possible adjustment in regulation to the
mark-to-marketing accounting rule
would aid financial institutions in dealing
with their toxic assets. There has also
been congressional support to regulate
short selling by enacting the uptick rule,
which would decrease plunges in the
market fueled by short-selling. With
fears easing in the past week, now is a
crucial time for the administration to
impress Wall Street with specifics on
how they plan to jumpstart the econ-
omy. Focusing on the nation’s most dire
problem and taking a hard-line position
would infuse investor confidence and
reverse the downward spiral created by
fear and uncertainty. However, it re-
mains to be seen if the Obama admini-
stration can formulate a response to the
economy before the next credit crisis
shock hits; otherwise, we may see the
collapse of a market that is already on
life support.
Obama’s Bear Market By Prateek Malhotra
Page 5 Owl Financial Journal
Free Trade and Globalization: the
Scapegoats?
As history has shown, politicians are often
tempted to accuse free trade and
globalization for causing eco-
nomic downturns and reces-
sions. Recently, the U.S. House
approved Obama’s $819 billion
dollar economic stimulus pack-
age that contains a "Buy Ameri-
can" provision. It seems the old
stories never fail to recur.
However, if our policy makers
carefully studied the history
books, they should remember it
was protectionism that indeed
dragged the U.S. into the Great
Depression. Fear rose at the
recent Davos meeting that the
U.S. government would revert to the pro-
tectionism policy of the Smoot-Hawley Act
of 1930. It is clear that the current crisis
stemmed from the subprime mortgage
market, not free trade, but why is globaliza-
tion always the first to blame?
Obama’s Dilemma
One obvious reason is perhaps the pres-
sure from taxpayers and domestic
manufacturers, especially the steel un-
ions that were backing Obama during
the election. The "Buy American" provi-
sion limits the usage of iron and steel
for any stimulus-funded infrastructure
project to be purely “American made”.
Facing the current historically high un-
employment rate and increasing fear in
the job market, Obama argues that the
new stimulus package could save or cre-
ate more than three million jobs.
Despite the support from domestic
manufacturers and unions, how-
ever, an opposing voice was heard
from the businesses side and inter-
nationally. With 95 percent of the
world's consumers living outside
the United States, protestors state
that American workers would suf-
fer, instead of benefit, from the
start of this trade war. The poten-
tial participants in this “war” in-
clude China, who is the biggest
creditor of the U.S. and was just
branded to be a “currency manipu-
lator” by the Obama Administra-
tion. Pascal Lamy, the head of the
World Trade Organization, also ex-
pressed his stance that U.S. should com-
ply with its international obligations
stated in the Doha round of trade nego-
tiations.
(Continued on page 6)
Free Trade vs. Recession By Samantha Dong, Cornell University
Page 6 Owl Financial Journal
In an effort to curb the national debt, Presi-dent Barack Obama has unveiled his plan to reduce the budget deficit in the long run. Obama’s proposed budget includes $989 billion in new taxes, lev-ied on businesses and individuals with an an-nual income in excess of $250,000. These taxes would start in 2011 and include the expiration of the Bush tax cuts and a hike in the capital gains tax. But perhaps the most important change under the new budget would be the repeal of the LIFO accounting system, which analysts estimate would cost businesses $61 bil-lion. Under the United States Generally Accepted Ac-counting Principles (GAAP), there are four allowed inventory valua-tion methods. These in-clude First-In First-Out (FIFO), Last-In First-Out (LIFO), Weighted Average, and Specific Identification. While all methods track the cost flow of inventory, they differ in how they assign costs to sold inventory. FIFO assumes that the inventory purchased earliest is sold first. On the other hand, in LIFO, a sold item is assigned the cost of the
most recently purchased item. Because prices generally rise due to inflation, this means that LIFO results in greater ex-penses and consequently a lower net in-
come. According to a 2009 article in the Journal of Accountancy, the LIFO method is common in the United States but rarely found in other countries. This is because United States federal tax guide-lines allow com-panies to use LIFO in their tax returns, so long as they also use LIFO in their financial state-ment s . Wit h lower reported
net income, LIFO reduces the tax liability of corporations. Over the years, compa-nies have relied heavily on this tax bene-fit. In their 2007 SEC filing forms, Exxon Mobil Corp. reported that if it had switched from LIFO to FIFO accounting, its net income would have been over $25.4 billion higher.
One often cited problem with the LIFO system is the idea of the LIFO reserve. Because the oldest inventory items are never expensed, this creates layers of inventory that vary significantly in his-torical cost. In the event that a company switched from LIFO to FIFO, they would then immediately start expensing these old LIFO layers. Because these LIFO re-serve inventories are so much lower in cost, this would result in a drastically higher net income. As a result, many companies have criticized the idea of a transition. President Barack Obama is not the first to call for an end to LIFO. The Interna-tional Financial Reporting Standards (IFRS) differs from GAAP. While it in-cludes FIFO, Weighted Average, and Spe-cific Identification, IFRS does not allow the LIFO method. Ever since the Securi-ties Exchange Commission (SEC) adopted IFRS in August 2008, there have been indications that the United States is heading away from LIFO. In November, the SEC announced a road map plan for the transition of American companies to IFRS. Currently, Obama’s budget is under de-
bate in Congress. According to the
Obama administration, LIFO repeal
would generate $17.8 billion from 2010
to 2014.
Can Ending LIFO Help the Economy?
By Kern Vijayvargiya
Now What?
While Obama refused to compromise de-
spite the criticism from Republicans and
businessmen, things seemed to change af-
ter European Union’s threat to retaliate
were protectionism to occur. Last week,
Obama said in a TV interview, “I think it
would be a mistake, though, at a time when
worldwide trade is declining, for us to start
sending a message that somehow we’re just
looking after ourselves and not concerned
with world trade.” Press secretary Robert
Gibbs of the White House clarified Obama’s
remarks by stating that what the President
wanted to strike at was to continue to get
the economy going without unnecessarily
starting something with US trade partners
all over the world.
During this global banking crisis, the US
is not the only one facing problems re-
garding trading policies. At Davos,
CEOs, company chairmen and politi-
cians suspected that free trade might be
under threat as countries deal with ris-
ing unemployment and financial insta-
bility. France's finance minister Chris-
tine Lagarde stressed the challenges of
helping atrophying industries without
damaging free trade, "We're facing two
major risks: The first is social unrest.
The second is protectionist risks."
However, the world we are facing right
now is totally different from decades
ago. The scope of trade and globaliza-
tion has reached an extent to which
countries are more dependent on goods
and services from each other. And that is
why the rest of the world wouldn’t stay
calm if one country were to increase its
trade barriers. Yet, this level of interde-
pendence may also suggest that free
trade may help us out of this economic
turmoil. Exports can make up the lack in
domestic demand, while imports can
fulfill demand when domestic productive
capacity slacks. As long as policy makers
could figure out a way to balance domes-
tic concern and free trade policy, we will
see if this past scapegoat will turn into a
hero that helps us out of this recession.
Continued from Page 5
Page 7 Owl Financial Journal
In my previous article, “A Dent in the Asian
Miracle”, I mentioned the stuttering econ-
omy of China and pointed out that, con-
trary to popular belief, the Chinese econ-
omy has decoupled and, hence, would not
be affected by a declining American econ-
omy. The Chinese economy has taken a
huge blow and cannot cope with the un-
precedented jumps that they have seen in
their GDP in the past years. Statistics re-
leased by the National Bureau of
Statistics on March 10, 2009, so-
lidified this fact as figures men-
tioned in the report implied that
the Chinese economy has started
showing signs of deflation.
Deflation refers to a decline in the
general prices of goods and services
in an economy. Investopedia ex-
plains the evils of deflation and
mentions: “Declining prices, if they
persist, generally create a vicious
spiral of negatives such as falling
profits, closing factories, shrinking employ-
ment and incomes, and increasing defaults
on loans by companies and individuals.”
Commenting on the state of the Chinese
economy, Commerce Minister Chen
Deming said, “It’s fair to say in coming
months we will see quite a grim picture.”
Due to the economic turmoil, local con-
sumer confidence is shaky and demand
for goods and services in general has
gone down. Demand from exporters has
also decreased due to low foreign de-
mand. The decline in foreign and local
demand coupled with a glut of factory
capacity and low oil prices has dragged
prices down by 1.6% in February 2009.
This stands in sharp contrast to an 8.7%
increase in prices during the same month
last year, which made the Chinese gov-
ernment sweat as it tried hard to calm
the spikes in prices and curb inflation.
Note that prices were excessively high in
February 2008 because of severe snow-
storms, which shook the market as sup-
ply-side shortages and excess demand
occurred.
Nonetheless, there are signs of deflation
haunting the Chinese economy. The
Chinese government should realize
this before it’s too late and should
take specific measures to tackle this
issue. Further expanding money
supply, which the Chinese govern-
ment has been doing excessively,
will harm the financial structure
and the state-controlled banking
system. Reflationary policies such as
increasing public spending in an
attempt to increase demand, may
act as a ray of hope in this gloomy
night for the developing economy.
Deflationary Signs Haunt Chinese Economy By Fahad Punjwani
Accounting may not be your favorite sub-ject, but without a basic grasp of some ac-counting topics it’s impossible to truly understand why some things happen in the market. This past week saw a particular ac-counting topic in the spotlight, mark-to-market accounting, and one needs only to look at the largest bank failure in American history – Washington Mutual (OTC:WAMUQ) – in order to see why this accounting practice is significant. Mark-to-market accounting is basically the practice in which an organization records an asset or security’s value at its current market value rather than the book value.
For example, let’s say an engineering firm buys a rapid prototyping machine
for $250,000. In the traditional accounting practice of erring on the side of caution, the firm’s balance sheet would record the pur-chase as a $250,000 asset. Even if the firm could sell the equip-ment for $300,000 in the marketplace, they
would still record the asset at the origi-nal purchase price. Now let’s introduce mark-to-market accounting into this scenario. In mark-to-market accounting, assets and securi-ties are recorded in the balance sheet as their market value. So the next day, if
the prototyping machine is worth $300,000 in the market, the company writes that value down in its balance sheet. Sounds fair, right? It’s how banks mark their assets nowadays, and it’s a system that has worked well since the 1980s. But sometimes the mark-to-market system can greatly harm an or-ganization. Let’s say a bank is forced to calculate the selling price of all its assets during an economic crisis. Because of the crisis, it’s likely that those assets will be greatly undervalued, especially if there is a crisis in the housing market. That could mean that the bank owns a lot of houses due to the fact that a lot of people have been forced to foreclose because they can no longer make the payments on their mort-gage. (continued on page 8)
The Significance of Mark-to-Market Accounting
Pedro R. Silva
Can you see how this would be very bad for
the bank? Now imagine the bank was heav-
ily invested in CDOs (collateralized debt
obligations) and mortgage-backed securi-
ties. It turns out that mark-to-market ac-
counting can have an even greater impact
on these complex financial derivatives dur-
ing a crisis, and the effects can be devastat-
ing to the institution.
The scenario above is similar towhat hap-
pened to Washington Mutual and some
other failed banks, and although mark-to
-market accounting is certainly not the
fundamental cause of the crisis we’re in,
it is certainly making it worse.
This past week, some members of Con-
gress started considering whether mark-
to-market accounting should be sus-
pended to help financial institutions.
While banks love this idea, it’s a slippery
slope. If organizations are given the free-
dom to mark assets to whatever value
they think is fair, it could make investors
lose even more confidence in our finan-
cial system. However we proceed with
the mark-to-market issue, it is important
that we do so with caution. While sus-
pending mark-to-market could help fi-
nancial institutions, it’s important to
remember the fundamental reasons why
we are in this recession, and mark-to-
market accounting is a minor one at best.
Continued from Page 7
Page 8 Owl Financial Journal
the crucial factor that would help China recover quickly from the financial crisis. Drawing from her experience in China, she spoke about the strong desire the Chinese people have to be a part of the modern world. She also compared China to Japan, an economy relying heavily
upon exports, making it ex-tremely vulnerable to outside economic changes. After the economic crisis struck Japan, its exports soon plunged, whereas China, whose economy relies both on exports and domestic demands, did not suffer as much. However, there are still a num-ber of challenges facing the Chi-nese government. According to Yao Wenliang, Consulate Gen-eral of the People’s Republic of China in Houston, there is the problem of shrinking external demand and rising unemploy-
ment among other issues. In order to solve these issues, the Chinese govern-ment has initiated a two-year program which involves housing and environ-mental projects as well as plans to pro-vide jobs for migrant workers. Further-more, Yao maintains that there should be more cooperation among countries like China and America. Past experience shows that trade protectionism will only worsen the problem. Therefore, it is im-portant to move forward trade and in-vestment liberalization. Countries should also work together in areas such as global financial supervision and regulation, and enhance transparency in financial mar-
At this time, Sino-U.S. relations have be-come more important than ever. The econo-mies of these two countries have become so interdependent that it is time to strengthen the relationship between these two coun-tries and form a strategic partnership. This eagerness is demonstrated by President Obama’s over-all positive comments on this relation-ship, as well as Secretary of State Hillary Clinton’s visit to China last week. The Asia Society’s 2009 Annual Corpo-rate Confer-ence, which was held in Houston at the end of Febru-ary, provided an excellent opportunity to think about Sino-U.S. relations. The theme of this year’s conference was U.S.-China: Facing Common Challenges, Shaping a Shared Future. Experts from various fields shared their opinions on how the global economic crisis affects China, what solutions the government should en-act, and what role Sino-U.S. relations should play in alleviating the pain caused by the crisis. During the panel discussion, Henny Sender, Senior Journalist of the Financial Times, expressed her optimism about the future of China’s economy. In her speech, she stated that the large human capital of China was
kets. Yao makes a good example of the Chinese government, which tries to cooperate with other countries by encouraging its domestic companies to go abroad to invest, even in this gloomy financial period. Since the U.S. is still one of the safest places for interna-tional investment in the world, Chinese companies continue to invest a large amount of money in their businesses here. However, when asked if Chinese investors will be likely to buy the American compa-nies, President of JPMorgan Chase Bank Houston Region, Martyn Goossen, doesn’t think so, not because of the decreasing val-ues of the U.S. companies, but because there are huge challenges to overcome, which mostly involve cultural barriers and management issues. On the other hand, in order to continue to attract investment from China and other countries, U.S. com-panies need to remain viable in this in-creasingly competitive world market. This panel discussion by Sender, Yao, and
Goossen provided many insights into Sino-
U.S. relations, and much agreement has
been reached among the experts. However,
this should not be the end. Both the Chi-
nese and U.S. governments need to take
action to strengthen cooperation between
the two countries, and to work together to
come up with solutions to the financial cri-
sis. There has never been a time in history
where cooperation has been so important.
As Xie Feng, Minister and Deputy Chief of
Mission of the Chinese Embassy in the U.S.,
put it, “We either swim together, or drown
without each other’s help.”
Facing Common Challenges, Shaping a Shared Future By Lindsay Zhang
China: The Resilient Dragon and the Savior of the Crisis? By Roger Song, Cornell University
Page 9 Owl Financial Journal
The international scope and severity of the American credit crisis was unforeseen by economists. Europe, which was thought of as a haven from the unstable, volatile American markets, is currently facing its own currency issues and the possibility of an interest rate cut. The Latin America and India markets have dark futures and un-certainty. Although the international financial markets have been in turmoil, there is one country that does pro-vide a shimmer of hope for investors: China. China with an interesting mix of communist govern-ment and capitalism has shown signs of slight recovery in re-cent economic reports. In November 2008, China announced a 4,000 bln RMB to sup-port China’s economic growth. Do these re-ports mean that China is going to be the first to recover from the credit crisis and rise as the world financial leader from this world recession? Or is the worst yet to come for China which will have to follow in order to recover? The recent rise in China’s January purchas-ing manager’s index (PMI) has given ana-lysts hope that the Chinese markets is bot-toming out and is on the upswing for recov-ery. Although manufacturing, one of China’s major export sectors, is contracting, the PMI rose from 41.2 in December to 45.3 in January. It is believed that the Chinese PMI has bottomed from its alarming read-ing of 38.8 in November. Although the manufacturing sector is contracting and not as vibrant as it was in the past, the contrac-tion has slowed down due to the announced stimulus package. The PMI reading sup-ports the analyst’s V-Shape recovery and the 8% GDP growth forecast in 2009. It also gives assurance to commodities market that demand for commodities could recover in 2009. This assurance caused a 30% rise in the Dry Baltic Index and in commodity prices. China’s recent PMI reading not only gives signs of optimism for China itself, but also to the international markets that de-pend of China’s economic growth. Signs of recovery for China is not only seen
on the macroeconomics side, but also seen in some company activity. Recently, Chinalco, formerly known as Aluminum Corp of China, has inquired about the declining assets of Rio Tinto, an Austra-lian mining company. Rio Tinto has re-cently struggled with liquidity and
needed to generate cash. The acquisition of the declining assets of Rio Tinto would not only provide Rio Tinto with the cash needed to meet its encumbering debt obligations, but also expand its interna-tional mines. In a time with uncertainty in the financial markets and acquisition of assets, the news that there is interest in acquiring declining assets is a beacon of hope. Chinalco is not the only com-pany that has inquired about acquiring assets abroad. According to Frederic Gits, an analyst at Fitch Ratings, “there is a long list of Chinese firms going abroad and acquiring material assets in the raw materials sector”. Maybe Chinese firms could be viewed as a savior for companies that struggle with liquidity. However, there is also economic data to counter the signs of optimism in China’s economy. After Chinese New Year, more than 20 million migrant workers were unemployed. The prospects of finding a job are very dim. This undermines the government effort to maintain employ-ment and unrest among rural migrant workers. For instance, Shuangyao’s workers annual income is $1,400 to $2,000 a year. Without this income, liv-
ing would be unsustainable for migrant workers families. This increase in unem-ployment not only implies a contraction in China’s economy, but also can shed light on a potential distraction from the Chinese government’s main goals.
Although the specula-tion of activity of Chi-nese miners to acquire assets of foreign mining companies abroad pro-vide a sign of hope in Chinese economy, Chi-nese companies still face financial problems. Many of the Chinese companies rely on cash to make fixed asset in-vestments. Capital spending accounts for 40% of annual output. With less cash, there would be less invest-ment and less money to buy equipment and expand its business. The outlook for profits of Chinese companies is very dark. This weak-ness in the private sec-tor shows that the solu-
tion is through government stimulus plans. In an uncertain volatile financial market
driven by economic data and investor
confidence, we will never know for sure if
a country’s economy is on the road to
recovery. It was in December 2008 that
America was declared to be in recession.
The future readings on China’s economic
data cannot be predicted on the past
readings. However, the Chinese institu-
tions and economic fundamentals do
provide a sense of realistic hope instead
of blithe optimism. Unlike America, a
country with a large current account defi-
cit and legislative red tape, China has a
large foreign exchange reserve and cur-
rent account surplus in addition to a
sound banking system. Maybe when the
world economy rises to prosperity again,
investors and the rest of the countries
will look up to China as the world leader.
For now, it’s only a matter of time.
Page 10 Owl Financial Journal
With the opening of the GSM Association’s Mobile World Congress on February 16th in Barcelona, Spain, the spotlight for the next week will be on the cell phone industry. The equivalent of the Con-sumer Electronics Show for the wireless indus-try, the event is expect-ing a declining atten-dance rate amid the global financial down-turn. For the industry as a whole, job cuts were announced across the board along with lower profit outlooks. In fact for the year 2008, the number of mobile phones sold is to have declined for the first time since 2001 by around 11 percent, led by Nokia’s 15 percent drop in the past quarter. As such, the out-look for 2009 is not very optimistic, espe-cially with companies slashing their capital
spending budgets. Without more capital, the current networks will not be able to grow as fast, further inhibiting growth. Yet, despite all of the warning signs,
more and more companies are eager to try to reap some of the profits and are releasing plans to produce new smartphones. For the past year or two, smart-phones have had astounding growth. First led by Research in Motion’s Black-berry, and then by the Apple
iPhone, many consumers have begun shelling out the extra dollars in order for more advanced tasks that their phone can handle. Now that Google is joining
the race for the best operating system with Android, a whole slew of new phones are entering the market with im-proved models. There is no doubt that smart phones have been hugely success-ful so far. In the year 2007, smartphone use increased by 9.9%, over double the 4.8% growth it posted the previous year. Additionally, personal use, as opposed to business use, increased by 10%, showing that smartphones have become more present in the ordinary consumer’s pock-ets. Even the application stores that the various companies run are big hits; Google’s release of its own application store is highly anticipated as it tests the capabilities of its OS. Now at this week’s Mobile World Congress, two companies, Acer and ASUSTeK, are showcasing their own designs, while the computer giant Dell also is rumored to reenter the phone market with a smartphone. (continued on next page)
Jumping Off the Smartphone Bandwagon By Naoki John Yoshia, Cornell University
In today’s market there are very few things which we as investors can count on. It seems that just when we think a rebound is coming, the market drops off the edge of a cliff and when we ex-pect a drop we get a 600 point rally in the Dow. This makes it at times discour-aging and very risky to be investing in the market with move-ments at such extremes. If only there was a way to invest in this constant volatility of the market and not the direction of it, it seems that one could make relatively safe bets while bene-fiting from our current volatile market. There is such a strategy which is actually much simpler than one might imagine: the long straddle. The long straddle is a strat-egy where investors purchase a long call
and a long put and the same strike price and expiration date. The great thing about the long straddle is that there is
limited risk which is only that of the price of the options, given the stock doesn’t move from its strike price, and unlimited profit poten-tial. With the long strad-dle, you benefit from a stock going
either sharply down or up, and profit as long as the price of the stock surpasses your options prices on either end. I personally believe that in the current market such strategy is one of the best ways one can profit. Obviously from the nature of the straddle, one would want the highest beta stock possible to ensure the greatest movement from a strike
price. Some great sectors where one might consider this strategy right now would be: financial stocks, automakers, alternative energy stocks/commodities, or even retail stocks. Limited Risk: Max Loss = Net Premium Paid + Com-missions Paid Max Loss Occurs When Price of Underly-ing = Strike Price of Long Call/Put Break Even Point Upper Breakeven Point = Strike Price of Long Call + Net Premium Paid Lower Breakeven Point = Strike Price of Long Put - Net Premium Paid Profit Profit = Price of Underlying - Strike Price of Long Call - Net Premium Paid Profit= Strike Price of Long Put - Price of Underlying - Net Premium Paid
How to Profit from a Volatile Market: The Long Straddle By Chris Kopczynski
Page 11 Owl Financial Journal
Last issue we discussed mortgages and looked at the difference between fixed rate mortgages and adjustable rate mortgages (ARMs). Though this is the primary way to separate loan types into categories, this week we will look at a different method, separating into prime and sub-prime loans. Prime and sub-prime mortgages are differ-ent in the interest rate that the users qualify to receive. Prime rates are like those dis-cussed last issue, normal conventional loans and according to diction-ary.com are “the minimum inter-est rate charged by a commercial bank on short-term business loans to large, best-rated customers or corporations.” Sub-prime rates are interest rates that are not the minimum rate, but some higher interest rate. These loans are de-fined by those that qualify to use them; they require a low credit score and offer worse rates than those of the market. If these sub-prime mortgage op-tions don’t offer as low an interest rate, then why would they be so prevalent? The answer is that a lower credit score qualifies a consumer for this loan option, usually a score of 600 on a scale of 300-850. Someone who has de-faulted on loans in the past, filed for bank-ruptcy or missed the payment of bills would not be able to get a normal loan (depending on the circumstance) but would qualify for a sub-prime loan. The price a consumer with a low credit score (defaulting on loans and the practices listed above cause a low credit score) pays is a mortgage with a
higher interest rate. According to the U.S. Department of Treasury guidelines issued in 2001, "Subprime borrowers typically have weakened credit histories that include payment delinquencies and possibly more severe problems such as charge-offs, judgments, and bankrupt-cies. They may also display reduced re-payment capacity as measured by credit scores, debt-to-income ratios, or other criteria that may encompass borrowers
with incomplete credit histories." Another defining factor of sub-prime mortgages is that there is an extremely diverse array of complicated types (many banks have no idea how to value all the packages of sub-prime loans that they create). One type, the interest only loan, allows the borrower to pay only the inter-est on the loan for the first 5-10 years. This may seem like a good deal, but it makes the borrower pay a lot more over
the term of the loan. The pay option loan allows the borrower to pay what they would like to pay whether it is the full monthly payment, only the interest, or the minimum (much less than the inter-est). Many of the other loan types fall under the “hybrid” category, which means they can really do anything. These loans are very dangerous, but are
often the last result for many borrowers.
Just because these are the only options
for some does not mean that they are a
good idea. These loans often expect the
borrower to fail, which is why they
charge such high rates. Sub-prime loans
prey upon those with the fewest credit
options and attempt to get as much
money out of the borrower as fast as pos-
sible. This means you pay a lot more over
the term of the loan and it ends up hurt-
ing you. If a sub-prime loan is your only
loan option choose a different path; live a
simpler and less expensive lifestyle pay-
ing down any other debt and increasing
your income. After some time on this
plan you should qualify for a normal
loan, this is the time to purchase a home.
Just because someone will give you the
money (in the form of a loan) does not
mean it is a good idea to take it, accept-
ing the loan can have very negative side
effects as the current economic climate
has shown.
Sub-Prime means Below Par By Paul Ernster
Currently, it is extremely difficult to carve
out any substantial portion of the smart-
phone market. Even Research in Motion
has fallen on tough times. Its new Storm
model, a direct competitor with the iPhone,
has faced massive criticism and is not sell-
ing well at all. It has announced lowered
expectations for its earnings for the current
quarter despite having predicted 3.5 million
more Blackberry users. This is bad news
not just for RIMM but for the smartphone
market in general. Already we see a huge
pressure on margins, if more Blackberries
are being sold but earnings decrease.
Now considering the three new compa-
nies that are entering the market, they
will experience an even tougher market.
The direction of the current financial
state is still in the balance, mostly de-
pending on the federal bailout plan and
its effectiveness. Additionally, as new
companies enter the market, the market
will get flooded by even more variety of
smartphones, further lowering margins.
The three aforementioned companies
are going to face criticism for their new
forays. In fact, the three companies, all
computer manufacturers, should con-
sider sticking with improving the net-
book market, which will have high
growth because it is a cheap, effective
alternative to bulkier laptops. There is no
reason for other companies to jump on
the smartphone bandwagon just because
every other company is; if it isn’t a feasi-
ble profit opportunity, they need to focus
on retaining the markets which they are
strong in right now.
Continued from page 10
pool of applicants at the beginning of each school term who have previous experience with investing and are eager to be part of a more challenging and intense program. Members of this private group col-laborate amongst each other to select stocks as they track and anticipate changes in the market and economy on a daily basis.
Owl Investment Society holds regular meetings in-viting all students who are interested in learning about the fundamentals and different methods of investing in the open stock market. These instructive sessions are interactive and interesting, as well highly informative, enabling par-ticipants to go on to invest independently in the fu-ture.
The newest addition to Rice’s Owl Investment Group, is that of the Owl Financial Journal. The Fi-nancial Journal will offer each of its subscribers a
The Owl Investment Group is a team comprised of dedicated undergraduate and graduate students, who partake in a diverse range of financial activities. The Owl Investment Group manages an active portfolio in the stock market, in ad-dition to educating the Rice student body and the greater Houston commu-nity about the economy through informational ses-sions, lectures and publica-tions.
The Owl Investment Group is a franchise of three separate entities; the Owl Investment Society, Owl Capital Management, and the Owl Financial Journal. Each organization is aimed at giving inter-ested participants an op-portunity to play a part in Owl Investment’s varied activities in the manner that most strongly appeals to them.
Owl Capital Manage-ment is a team selected by the club’s president from a
comprehensive overview of the nation’s economic state on a biweekly basis. The publication’s main goal is to share financial informa-tion with a diverse popula-tion, thus presenting arti-cles in an easily compre-hensible manner. The pub-lication will contain a wide variety of sections ranging from an educational cor-ner, to an opinion column; guaranteeing an article of interest for everyone.
Everyone is welcome to
participate, from the begin-
ner who wants to learn
what a "stock" is to the sea-
soned trader who just
wants to interact with other
students who share an in-
terest in investing. After
gaining trading experience
through our public club,
one may choose to apply
for membership into the
private partnership and
purchase real stocks in our
registered investment
group.
Who We Are
Owlinvesting.com
Primary Business Address:
99 Sunset Blvd,
Houston, TX 77005
The Owl Financial Journal is a
bi-weekly financial investing
publication that reaches
hundreds of students across
the Rice University campus
and over 8,000 students across
the globe. We cater to a
diverse, bright, and motivated
group of students interested in
investing and the business
world. We can offer a variety
of different advertisements
both in the publication itself
and on one of our websites.
Please visit
www.owlinvesting.com for
more information and e-mail
us at
Thank you and we would
really appreciate your
business.
President & Founder Co-President
Chris Kopczynski Pedro R. Silva
Editor-In-Chief Publisher
Oliver Peng Yan Zhou
The Writers
Kevin Beale Chris Kopczynski Oliver Peng
Arjune Bose Morgan Lefferdink Pedro R. Silva
Matt Carey Erin Noel Yan Zhou
Mark Cheng Prateek Malhotra
Paul Ernster Fahad Punjwani
External Representatives & Contributors
Samantha Dong Roger Song Kern Vijayvarjiya
John Yoshida Lindsay Zhang
Owl Financial Journal Team
Owl Financial Journal Page 12