Tag Archives: time

Survival Skill: Distancing Yourself From Counterparty Risks

In a recent article entitled, Whatever You Do, Avoid Major Mistakes , I suggested that investors study-up on the subject of counterparty risk. Under a constructionist definition , the term equates to default risk as defined by the inability of a party to live up to its contractual obligations. The failure of a debtor to meet its obligations under a credit arrangement is a counterparty risk as is failure to perform under a swap or option agreement. A Broader Definition Needed However, for investors, a broader definition of the term is more appropriate to reflect that: a) counterparty risk arises when a major player(s) in a firm’s value-chain fails to perform whether contractually or not, b) the mere thought or mention of default gives rise to counterparty risk, and c) counterparty risk reverberates out from the source of the problem such that it can involve not just two, but multiple parties serially / simultaneously. This more encompassing definition explains a lot of what is going today: China’s faltering economy has seriously disrupted supply chain relationships beginning, notably, with miners as close as Australia and as far away as South America. For example, questions have been raised about Rio Tinto (NYSE: RIO ), Glencore ( OTCPK:GLCNF ) and Freeport-McMoRan (NYSE: FCX ) three of the largest mining companies in the world. The collapse in oil prices has now reverberated well away from drillers to servicing, pipeline, storage and tanker companies, landlords and hoteliers housing field personnel, banks, municipalities, states, and even countries. Take, for example, Kinder Morgan (NYSE: KMP ), the Royal Bank of Canada (NYSE: RY ), or Statoil (NYSE: STO ) / Norway. The gadget business that is over-saturated with products amid slackening demand has created problems along the value-chain including between the likes of Samsung ( OTC:SSNLF ) and Qualcomm (NASDAQ: QCOM ). Bricks retailers such as The Gap (NYSE: GPS ) and Aeropostale (NYSE: ARO ) are beating their brains out over fashion style and space utilization resulting in downstream impact to shopping center REIT’s as in the case of CBL & Associates (NYSE: CBL ). Distancing Yourself from Counterparty Risks It’s therefore understandable that some investors are scared. Stocks and bonds that they thought were fairly valued and perfectly safe are tanking. Moreover, fears are being whipped up by the likes of hedge fund managers who actually have lost their a$$ and are looking down the barrel at significant redemptions. Some would have us believe that the world is going to hell. It’s not. I personally see no reason to sell everything and to blow up an income stream in order to protect principle in these extremely volatile markets. BUT, if you haven’t already, the time is rapidly passing to put more distance between your portfolio and counterparty risks. This begins in one of two ways: a) By stepping back to consider macro changes that are developing / underway and how they may affect your holdings, or b) By taking a micro perspective and ‘looking back through’ your portfolio to ‘see’ what negative consequences may be coming at you from interrelated sectors. The idea is to get away, as quickly as possible, from ground zero. On my end, earlier this year, I took three actions to put more distance between our portfolio and counterparty risks: 1) I sold Corning (NYSE: GLW ) not because I don’t like the company – I really do – but because of concerns about the weakening gadget business, 2) I divested our positions in Chevron (NYSE: CVX ) and Royal Dutch Shell (NYSE: RDS.B ) even though as integrated companies they have fared a lot better than ‘pure plays’ in the oil production business, and 3) I bailed on JPMorgan Chase (NYSE: JPM ) believing that they have not been completely forthright about their exposures to oil and related sectors. In other words, I have concerns that, like other financial institutions, JPM may not have a handle on their counterparty risks. At the same time, I am sitting tight with positions in industries / companies that are more insulated from counterparty risks and whose demand for their products and services is relatively inelastic – military defense contractors, water management firms, and pharmaceutical companies. Also, I continue to make investments in what I feel will be growth areas such as in the fight against migrating tropical diseases. Two Directions to Alpha Like everyone else, I have suffered losses so far this year. However, by moving away from counterparty risks, my losses have been 3 to 4% less than comparable indices. Remember, just as alpha-level performance is doing better than the market when it is up, it is also doing less bad when the market is down. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. Editor’s Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.

The Bright Side Of Volatility

Stock markets around the world have had a bumpy ride so far in 2016. The CBOE Volatility Index (often called the “VIX”), a measure of expected stock market volatility, has doubled since early November , and US stocks have fallen more than 10% since the start of the year. These kinds of changes can be gut-wrenching and can make it difficult to maintain a long-term perspective. But for some investors who are able to do so, there’s a bright side to volatility. If you’re periodically investing money, such as putting a portion of each paycheck into a 401(k) account, volatility isn’t necessarily bad. When markets fall you’re able to acquire more shares, giving you “more bang for your buck.” This concept is similar to ” dollar-cost averaging ,” where the average price you pay for an investment will be less than the average of the prices at each of the times you’re investing (because you’re acquiring more shares when the price is low and fewer shares when the price is high). Compared to if markets just blandly moved in a straight line, the ups and downs allow your periodic investments on average to go farther. Of course, there are a few caveats to this volatility fairy tale. First, it assumes that the market will end up in the same place regardless of how much volatility there is. This assumption is clearly sometimes false; stock markets would almost certainly be higher right now if the beginning of this year had been a paragon of financial tranquility. But over the long term it’s approximately true. Stock prices 20 years from now are unlikely to be massively affected by how much stock market volatility there was in 2016. Second, the potential benefits of volatility only apply if you have a long time horizon for your investments. If instead you need the money in the near future and markets plunge, the fact that you can then get more bang for your buck won’t do much good. Perhaps the most important caveat, however, is that you need to be able to stick to your strategy of periodically putting more money into the market. When the kind of turbulence that’s characterized stock markets this year arrives, it can be tough to invest money knowing that one wild day of market moodiness might eliminate a chunk of it. But those who are able to continue making periodic investments can benefit in the long run.

Facebook Forerunner Myspace Still Alive, Under New Ownership

Facebook ( FB ) forerunner Myspace now has a new owner — Time Inc. ( TIME ). The New York-based magazine publisher of People , Sports Illustrated, Time and Fortune announced Thursday that it has acquired Viant, an advertising technology company that owns Myspace through a previous acquisition. No terms were disclosed. Founded in 1999, Viant owns and operates several digital ad technology and media companies. “This acquisition is game-changing for us,” Time CEO Joe Ripp said in a statement. “Marketers are selecting media partners that have either data-driven capabilities or premium content; we will be able to deliver both in a single platform and will stand apart from those that offer just one or the other. “In other words, we will be able to deliver advertisers’ messages targeted to optimal audiences across all types of devices, along with the ability to measure return on investment.” The social network and photo-sharing site then known as MySpace (with a capital “S”) launched in 2003 and quickly overtook another popular social site of the time, Friendster, to become the dominant social network. Then, in 2004, Facebook emerged and blew both social networking pioneers out of the water to become — and remain — the industry leader. Users and advertisers quickly left Myspace. Friendster “paused its service” as of last year. With the Time acquisition, Myspace has been sold three times. At its peak in 2005, Myspace was acquired by Rupert Murdoch’s News Corp. ( NWS ) for $580 million. In 2011, the fading social network was sold to ad network and Viant subsidiary Specific Media for $35 million. Specific Media enlisted music superstar Justin Timberlake to help it re-launch the renamed Myspace in 2013, with a focus on music and with a $20 million ad blitz. By early 2015, Myspace was attracting 50 million users a month. Time was down 9%, near 12, in afternoon trading in the stock market today , hitting an all-time low after posting Q4 EPS ex items that fell short of expectations. Facebook stock was up 0.2%, near 101, despite a down day for the market overall.