The latest chapter in this hallowed story will be completed before April 27th. That date appears to be the deadline for GM’s planned all-equity offering for bondholders.

GM currently has a total of about 27.5 billion dollars worth of debt that is held by bondholders. Unfortunately for them, they don’t have the money to pay off these debts as they mature.

The bond market is already discounting this fact in its pricing. Take for example the GM bond that matures on July 15th 2033 and pays 8.375% annually. GM issued $3 billion worth of this bond back in 2003 and it currently trades on the market for 10-cents on the dollar, or a annual yield of about 82%.  Who wouldn’t want an 82% return for nearly 30 years?

However you won’t get that yield because GM doesn’t have the money to pay you. If they can’t pay the bondholders, they go into default and then bankruptcy. So now they want to convince the holders of all their debt to swap their bonds for shares.

How many shares per bond? Nobody knows.

Is it a good idea? They really have no choice.

It will be interesting to see how this pans out. If GM goes through with this proposal and offers debt holders equity, what percentage of GM will they own? If the amount is too low, debtors will be inclined to push the company into bankruptcy in hopes that they can more of their money through liquidation of GM’s assets. Or perhaps the government will step in and declare a value for the bonds. Will it be 10-cents to the dollar? 20? 5?

Get your gambling visor on, some one’s going to make a killing/go broke.

Dow Jones Industrial Average on April 15 2009

On March 6th 2009 the Dow Industrial Average (DJIA) bottomed out at 6,469.95. As we write this commentary, the Dow has risen to 7,960, an increase of 23% in just 40 days. Of course, compared to the 52 week high of 13,136.69, the Dow is still down about 40%. So the question is: Has the Dow peaked?

Looking at the attached chart, we can see that market has been in a defined downward trend. The technical analyst in all of us would then look to see if there is any evidence that the downward trend has been broken, in this case there clearly is no break, yet. The market currently sits atop a bear rally that has been losing momentum the past few days. Then again, we here at INVESTIZMO central are not big fans of technical analysis, so don’t forget your proverbial grain of salt.

Fundamentally, things aren’t that much better. Deflation, poor earnings, and overall lack of consumer confidence doesn’t usually equate to a strong equity market.

Question: So what can be done?

Answer: Hedge!

Besides selling all your stock to crystalize the past 40 days of gains, investors can look to alternative strategies to soften the blow if the market does a quick u-turn and tanks all over again.

DXD

The ticker DXD is a leveraged 2-for-1 inverse hedge against the Dow 30.  In plain English: for every 1 percent decrease in value of the Dow, DXD will increase by 2 percent. Of course if the opposite happens, you stand to lose a lot very quickly. The theory is that if the Dow rockets up, you’ll be happy taking a big loss DXD because the rest of your portfolio will be singing. DXD trades like a stock and is very easy to purchase.

PUTS

For the more advanced investor, now might be a good time to purchase a put option on your favorite index linked product, or even the index itself. A put option can give you many times more leverage with a fixed risk profile.

It should be an interesting few weeks to watch the Dow.

Education

At a minimum a University Bachelor in Commerce/Economics and preferably some industry courses. All the large institutions recruit at the major Universities in September for positions beginning after graduation in June/Aug. There are usually two types of positions, Analyst & Associate. Analyst is for Undergrads and Associates for MBAs. 

To be considered you’ll need to have a strong GPA, expect to be asked to include a transcript.

Ability

You have to be able to show your interest and experience in the field. There are both very important and an interviewer can see right through you if you aren’t sincere. It is also important to research what EXACTLY you want to do & why. There are many different positions and desks and too many people seem unsure why they’re even applying for the position other than a “desire to be a trader”.

Personality

If you posses the education and ability, the next important thing is personality. Traders work in very close quarters. There are no cubicles or offices, just long desks. You have about 3-4 feet of space separating the staff. Employers want to make sure you’ll fit in with the corporate culture and that you will be able to handle the lifestyle. There are no real breaks, lunch is eaten at your desk. There are many cases of the top student with the perfect CV not getting a second round interview because they didn’t have the right personality ‘fit’.

Drive & Luck

If you don’t get an offer through campus recruitment (and very few do) all is not lost. If you have the ability, education & personality, then all you need is a lot of drive and a little luck. Get experience working in different financial jobs, make as many contacts as humanly possible and don’t be afraid to set up information interviews with firms where you’d like to work. In time, you should land some interviews and if you meet all the criteria, eventually get an offer.

So that’s it, now just spend your summer preparing for your application in September.

You might be wondering what the heck is this CreditCrunch? There has been a lot written on the subject, but not too much explained at a basic level. So here goes…..

The current issues with credit is that it has become more expensive. What does that mean? Well, essentially it means that the funding of lower credit investments have become more expensive. Why? Because people were afraid of risk and wanted only the safest investments. Treasury Bills (T-Bills). 

T-Bills are government issued short term investing products (less than 1 year) that are virtually riskless as they are backed by the taxation power of the government. There is also a limited supply available to investors. So when everyone wanted these products, the price skyrocketted and the rate of return dropped like a rock.

Now lets look at what happened to a lower credit investments. Lets use GICs or CDs (Cdn/US equivalents). Banks love to sell GICs and CDs. They provide great liquidity for loans and they are easy to sell to investors as they usually have some form of insurance. However, when less people want to invest in the product because they prefer T-Bills, banks have to compensate by offering higher rates, increasing the difference between the rate of return of a treasury bill and GIC/CD. Since they are offering a higher rate of return to investors, the bank will also have to demand a higher rate of interest from lenders.

But wait! You might be asking yourself: “If this is true, then why the heck are my GIC/CD rates been so crappy!

You have to understand that everything is relative. Look at the following sets of rates:

• Set A: T-Bill Yield 2.2%  - GIC/CD Yield 3.00%    
• Set B: T-Bill Yield 0.5% – GIC/CD Yield 1.7%

Normally the market should function with Set A’s rates. During a credit crisis, we find the market spread, or the yield difference between T-Bills & GIC/CDs has widened to almost double the prior amount. So even though your GIC/CD rate of return in Set B is lower than Set A, the premium interest you receive compared to a T-Bill has increased.

Did I make it simple enough for you?

“[Citigroup] is so deep in a black hole that even renown physicist Stephen Hawking could not help the ailing company” – Banking analyst Meredith Whitney (via NY Post)

Ouch!

The first curious observation is that retail sales were up, even with the recent drop in consumer confidence numbers. This can partly be explained by strong sales in defensive retailers like Wal-Mart and Costco that were reported for the same period.

The second curious observation is not that car sales dropped, as that has to be a no brainer given gas prices and the auto industry’s snail pace at responding to changing market conditions.  It is that sales at filling stations also dropped. One would think that it would be very difficult to produce lower sales when your product is in-elastic and at record prices. This has to be the most compelling evidence that people are changing their driving habits. Specifically, they are driving less. Car companies should take note, as less driving will undoubtedly lead to even lower sales.

I was fooled by this cunning, seductive mistress. Technical analysis is the fools gold of finance. It is an illusion that is as real as Michael Jackson’s face. But to quote Levar Burton’s Reading Rainbow: “You don’t have to take my word for it”.

The most eye opening book I’ve ever read on finance is hands down Benoit Mandelbrot & Richard Hudson’s The (Mis)behavior of Markets. Who is Benoit Mandelbrot? He is the father of fractal geometry. A mathematician who looks at the markets as a form of organic randomness. But the markets can’t be random, can they? No. Markets are not random. However, understanding randomness is essential when judging technical analysis.

Technical analysis attempts to predict future price movements based on movements in the past. This is done through averages, equations and charts. This data is then used to determine when to buy/sell a stock.

There are a couple of problems with this philosophy.

Firstly, there are a large number of individuals who believe that the past does not reflect the future. Lets say you were thinking of buying 100 shares of Coca-Cola. What is important to you, what the stock did yesterday, last month, or last year? Or is it what the stock will do tomorrow? You probably care about the next earnings report, the next news article, the next executive decision. What happened in the past is done with and already built into the share price. The market is forward looking and all about future expectations.

The second problem with technical analysis has to do with human deficiencies in perception and randomness. It is human nature to look for patterns, even when patterns aren’t really there. In experiments conducted by Mr. Benoit, he created random charts using his fractal geometry and gave them to technical analysts with real charts using market data. The analysts were blind to the fact that some of the charts were computer generated, as they all had no identification, time, or price scales on the axis. The result? The analysts found trends in the random charts. How can randomness have trends?

They don’t. But we think they do.

Another example:

Our parent company runs a website called ConquerClub, an online game of world domination that involves “virtual dice”. When programming the dice they wanted to ensure complete randomness so the programmer turned to random.org as source for the data. Study after study has concluded that the dice rolls on ConquerClub are random. However, the largest complaint from users is that they are *positive* that the dice are in fact not random. They call them streaky.

Streaky dice & Stock trends.

It’s the same thing. An illution created by our brain in an attempt to understand randomness.

So now we know technical analysis is junk. Why is it still important?

It has become a self fulfilling prophecy. 

People are the ones making investment decisions. If many people believe that a stock will go up once it crosses a $35 dollar barrier, what happens? They buy the stock! When people buy the stock, it drives the price up and the system works! Another successful technical analysis prediction.

So go on looking for trends you crazy technical analysts, you control your own destiny.

Today we learn that both Wal-Mart & Costco reported sales data that increased more than analysts estimated. How does this show that we’re in a recession? (or at least acting like we are)

When consumers believe that times are tough, they will make decisions that help them build an economic cushion. Luxury goods will be cut, frivolous spending reduced, and penny pinching will begin.

Where do consumers go to penny pinch? Wal-Mart & Costco!

These companies are often coined as defensive stocks because they tend to hold their own during economic downturns. People still need to consume, just at bargain prices.

So ultimately this shows that consumers are tightening their belts and therefore behaving as if times are tough. And that’s the bottom line, isn’t it? Do you need an economist of government official proclaim that you’re in a recession to feel it? No. All that maters is how you feel and currently, Americans clearly feel like they are.

This probe is being carried out jointly by both the Securities and Exchange Commission in the USA and the Ontario Securities Commission in Canada. They allege that a US based law firm that advised on 11 merger transactions over the past two years had a connection to a Toronto business consultant who profited $1.1 million through purchasing shares in the target companies before the mergers were made public.

Insider trading probably happens a lot more than the regulators want us to believe. It’s just so easy. There are usually dozens if not hundreds of people who have access to information that can materially affect how a stock performs. All it takes is a quick phone call to a broker or accomplice and bingo-bango, profit!

OK, I know I made it sounds a lot simpler than it truly is. Having worked in the industry I know what compliance departments focus on and how red flags can appear on your account. I’m not about to start disclosing that for obvious reasons. What I will say is that for all the accounts that are caught, there’s a good chance many get through undetected. Those are the people who are smart enough to fool the system and keep their mouth shut.

Microsoft is turning into quite the hussy. Shortly after breaking up with Yahoo! before they even officially dated, Microsoft has been seen holding hands with Facebook…. and they might even kiss.

I never liked the proposed Yahoo merger. This one, however, might have legs.

Firstly, lets ignore the $15 billion valuation that Facebook claimed to have in October. That number is just silly. Facebook is still a new kid on the block, they’re still working on a business model that will work in the long run.

Although it is still growing like vile weed, I have noticed that fewer and fewer people on my Facebook account update their profiles in a regular basis. Facebook could just be an Internet trend. A flash in the pan. Not a $15 billion dollar company.

Microsoft could bring a lot of help to ensure that Facebook becomes a long term juggernaut on the Internet. They have the reach, the knowledge, the experience and most importantly, they are just as evil.

Facebook has built a reputation for having poor privacy controls and whoring out users to advertisers. Microsoft has a reputation for whoring out user’s rights to media lobbies. Together they can ruin your online experience and share it with the world.

Seriously though, these two firms would benefit from each other. Microsoft would gain a growing Internet database of consumer information, Facebook would get a grownup to steer it in the right direction.

I say go for it!