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8/6/2019 MICC Journal March 2011
http://slidepdf.com/reader/full/micc-journal-march-2011 1/4
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.”
8/6/2019 MICC Journal March 2011
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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.
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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
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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 .