SOURCE: Millennium Media Consulting, Inc.

October 31, 2006 19:11 ET

Millennium Media Consulting: Highlights From Fall 2006 Market Outlook & Investment Press Briefing

ARLINGTON, VA -- (MARKET WIRE) -- October 31, 2006 -- At a pair of New York City media conferences hosted by Millennium Media Consulting last month, a lineup of institutional money managers, mutual fund portfolio managers and financial professionals discussed their predictions for the future of the markets, the U.S. economy, the investment management industry and discussed current issues facing public companies. Highlights of these events are presented below.

Millennium Media Consulting is an Alexandria, Va.-based public relations and media consulting firm led by its principal, Scott C. Tanner.

Recession a Likelihood in Second Half of 2007

Where is the economy headed? According to Hugh Moore of Greenville, S.C.-based Guerite Advisors, the current 2006 environment is reminiscent of 1968, a similar period in which stock valuations were elevated yet market performance was flat, and which also saw a tightening of the money supply by the Federal Reserve. That led to recession in 1970, albeit a mild one, that lasted only 11 months and impacted Gross Domestic Product by only one percent.

Right now, the firm's proprietary Guerite Indicator is warning of a potential recession on the horizon for 2007. This quantitative model that includes 12 economic indicators and can identify a "high risk" environment likely to blossom into a full blown recession, has correctly predicted each of the seven U.S. recessions dating back to 1960. "Unless things are very different this time, there will be a recession in mid- to late 2007, and this next one is not likely to be mild," Moore noted.

The news is mixed for the longer-term. "We're in a multi-year, sideways moving market, with changing bull and bear markets through 2015," Moore commented. To navigate those hills and valleys, he suggested that investors will need more of a hedging strategy in order to gain return on the upside, and lose less on the downturns.

Putting Stock Options Under the Microscope

The true impact of Corporate America's rampant distribution of stock-based compensation and stock options to employees is beginning to emerge in light of new accounting regulations that require firms to expense those options. "Corporate profitability is taking a hit," said Albert Meyer, CPA, president of Bastiat Capital in Plano, TX. The secret is that stock options aren't the panacea they were once touted as being, largely because they have impacted corporate revenue, earnings per share and shareholder's equity. According to Meyer, stock-based compensation have been lauded as a 'gain sharing' relationship between shareholders and management, but instead stock options have turned out to be a one-way street. "My definition of gain sharing is that it's a euphemism for robbing shareholders blind," he chastised.

"If companies had shunned stock options, employees would have been better off, shareholders would have been better off and capital markets would have been better off," says Meyer. "I've crunched the numbers and looked at the revenue hit taken by Dell Computer, eBay, Yahoo!, Broadcom and others.

"In addition, while companies frequently announce stock buyback programs under which they buy back their own stock in the open market, this could be a red flag," Meyer added. "They may be buying back their stock because they genuinely think it's a bargain, or they could be buying back stock issued to employees to prevent future dilution of the company's stock."

Dividends are Back in Vogue

Back in the 1980s and 1990s, corporate margins were rising along with multiples and the Federal Reserve was easing up on interest rates. "Dividends were far from compelling to equity investors," said John Gould, executive vice president of Schafer Cullen Capital Management and co-portfolio manager of the Cullen High Dividend Equity Fund in New York. "Now with the yield curve changing, inflation back in the picture and higher interest rates, investors are starting to recognize the benefits of dividends."

Over the last 80 years, 46% of the S&P 500 Index stocks' total returns were from dividends, Gould noted. A Schafer Cullen study of each company begun on January 1 from 1957 through 2005 whereby each company was ranked from highest to lowest based upon its dividend yield showed that companies with the highest dividend yields produced better overall returns, he said. One thousand dollars invested in the top quintile companies and rebalanced annually resulted in a total of $584,000 versus $69,000 for the same investment made in the companies in the bottom quintile. Those returns included both capital appreciation and dividends. In addition, those with the highest dividend yields tended to decline 50% less than the overall index.

"While corporate boards of directors are now more likely to consider paying or increasing dividends in addition to allocating for capital expenditures and share buybacks, investors' appetites have decidedly increased," Gould said. "Investors' demand for dividends continues unabated. Right now, 390 companies in the S&P 500 pay dividends and last year there was a 16% increase in the dividends paid among those companies. This year we expect a 13% increase."

Hedge Funds and Mutual Funds Converging

"There's a convergence of mutual funds moving closer to hedge funds and hedged funds moving closer to mutual funds," claimed Eric Newman, a principal with TFS Capital LLC in West Chester, Pa. and co-portfolio manager of the TFS Market Neutral Fund. "The conventional thinking that hedge fund strategies cannot be employed in a mutual fund structure is being proven wrong."

In fact, according to Newman, many of the smaller, niche hedge fund industry participants are proving that they are the leaders and can do it better then traditional mutual fund managers for a variety of reasons. "We don't need to be a $5 billion firm; it's easier for us to generate alpha (outperformance of a benchmark), and compliance is easier, too," he said. "In addition small niche firms such as ours don't face the same challenges, such as conflicts arising when shorting a stock in a hedge-like mutual fund created by traditional fund companies while they have long positions in that stock and many others in their long-only mutual funds."

TFS Capital structured a hedge fund-like investment advisory fee of "0 and 50" within the TFS Small Cap Fund that it launched last spring. If the fund fails to beat its Russell 2000 benchmark, the management fee is zero. If the fund beats the benchmark, the management fee scales up, paying the advisor 50% of the outperformance (e.g.. a 1% fee based upon a 2% outperformance) but up to a maximum of 2.5%, even if the fund exceeds its benchmark by much more than that.

The Good, the Bad and the Truth About ETFs

Although Exchange-Traded Funds (ETFs) have become a very good alternative to mutual funds for the typical investor, there are factors to consider and myths to be dispelled, according to William J. Breen, Ph.D., founder of Breen Financial Corp. in Evanston, Ill. and co-portfolio manager of The Ovation Fund.

One of the concerns lies in picking an ETF on the basis of its name which can be misleading because funds that sound alike may have very different underlying components which effect both volatility and performance. "An investor has to look under the hood to see what is in that ETF portfolio," Dr. Breen said. In addition, ETFs do not all have the same diversification. While one ETF may have its top three companies representing a sliver of the overall portfolio, another ETF's top three companies may represent the majority of the portfolio. "Some ETFs are not as diversified as you think," Dr. Breen counseled.

"Individual stock risk may also be an issue if multiple ETFs have overlapping holdings," Dr. Breen noted. Holding the same security in more than one ETF introduces a greater risk if that single security tanks. "There are too many ETFs now and that is causing part of the problem in the perplexity of understanding too much specific risk," he added. Also, investors must be mindful to regularly rebalance their ETF positions. "As valuations of ETFs change, you can end up owning not the asset allocation you desired. Rebalancing keeps you within the risk/return profile you want," he explained. "You have to be careful not to allow yesterday's asset allocation to drive today's returns."

Free Flowing Cash Driving M&A Deals

"We are in the early stages of a mergers and acquisition recovery after a 5-year trough," said Howard Horowitz, director of Water Island Capital of New York and co-portfolio manager of The Arbitrage Fund. There are record levels of deal flow as corporate balance sheets are flush with cash, both in the U.S. and globally. That is driving acquisition deals as well as low interest rates and an increase in shareholder activism, he said. Global M&A hit $2 trillion in June.

"Over the last two years there have been myriad cross-border deals in Europe and Asia. In August, we saw the first intra-Japanese hostile takeover deal which, although it failed, signaled a major development there," Horowitz added.

"There is also a record level of private equity money, roughly $750 billion, available for buyouts. And lots of private equity firms are doing so-called 'club deals' in which several firms partner to make a single acquisition of a much larger firm," says Horowitz. "Merger arbitrage investors can profit from the spread on a deal, which is the difference between the target price of a company being acquired and what the shareholders receive at the close of the transaction."

Actively Pursuing What's Best for Investors

Acting within your fiduciary duty often means pressing for the sale of a company in order to maximize shareholder value, fighting to open-end a closed-end fund trading at a persistent discount or even challenging securities regulators when a rule makes no sense, said shareholder activist and hedge fund manager Phillip Goldstein, partner with Saddle Brook, N.J.-based Bulldog Investors. Goldstein has managed three hedge funds for more than 13 years and has been a shareholder activist and value manager who invests in closed-end funds and has instigated over 20 proxy battles and filed lawsuits as necessary. He also prevailed earlier this year in a court challenge that overturned the SEC's rule mandating that hedge fund managers register with the regulator and follow all procedures required of other investment advisors.

"The typical value investor will buy a stock for 50% of its intrinsic value and wait for a catalyst. Trouble is, some stocks are still cheap 10 years later," Goldstein noted. "Maximizing shareholder values can take awhile, but it shouldn't take forever. I believe a corporate director has a fiduciary responsibility to do something if a stock trades at a persistent discount to its intrinsic value."

"We see ourselves as a house in the casino. We won't win them all but with every spin of the wheel, the odds favor the house," he said of his activist investment strategy. "Just as we don't tolerate management abusing shareholders, I don't think any citizen should tolerate a Federal agency abusing its authority."

He noted that he expects to challenge the SEC once again, this time regarding securities law 13F which requires all institutional investment managers with $100 million in assets under management to periodically disclose certain securities holdings. Goldstein opposes having to reveal his best investment ideas, "intellectual property" as he called it, and vowed to challenge the rule in court if necessary.

"I have a fiduciary responsibility to my investors," he said. "If and when we get into court my argument will be that there's no good reason for this law."

For reporters and editors: To obtain more information about any of the mutual funds or companies noted above, or to speak with any of these investment professionals, or learn how your company can take part in a future Millennium Media Consulting media conference, please contact: Scott Tanner at Millennium Media Consulting toll-free 866.755.FUND (3863) / or 703.519.1922 / cell: 703.627.2417 / e-mail: SCTanner33@aol.com.

Contact Information

  • Contact:
    Scott Tanner
    Millennium Media Consulting
    toll-free 866.755.FUND (3863)
    703.519.1922
    cell: 703.627.2417
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