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The Year in Review - 2011

The Year in Review - 2011. A Pre-Occupied Wall Street waits. Distressed Investing 2011 Conf. – Steve Gidumal, Virtus Capital, LP November 28, 2011. A Pre-Occupied Wall Street. A Tough Year for Investors worldwide;

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The Year in Review - 2011

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  1. The Year in Review - 2011 A Pre-Occupied Wall Street waits. Distressed Investing 2011 Conf. – Steve Gidumal, Virtus Capital, LP November 28, 2011

  2. A Pre-Occupied Wall Street • A Tough Year for Investors worldwide; • The default of Greece and the potential collapse of the Euro weigh over world economies; • The debt ceiling negotiations and hyped fears of a US debt default send US markets reeling in August/Sept.; • Energy scandals in Washington – Solyndra, etc. signal to Wall St. not only that connections matter but that this Administration wants high energy and gas prices (ie, low growth). • The MF Global collapse comes just 2+ months after MF issues $325mm of 6¼% high yield bonds.

  3. Pre-Occupied Investing 2011: Comparison of Returns (YTD thru 11/25/11) • Dow Jones Index (ex dividends)-3.3 % • S&P 500 Index (ex dividends)-8.7 % • Nasdaq Comp. -8.8 % • 10 year Treasuries + 16.9 %(3.3% to 1.95%) • HY Index + 1.0 % • Distressed Funds -5.0 % • Gold+ 18.5 %

  4. The Macro EnvironmentWorld Economies: Fragile signs of Recovery (Economists are watching the 2nd Derivative – rate of change) Source: Bloomberg.

  5. The Macro EnvironmentThe PIGS: Dragging down Europe (No Growth here) Source: Bloomberg.

  6. A Pre-Occupied Wall StreetWhere does the Needed Wealth Come From?Three Words: “Efficiency, Efficiency, Efficiency” • Historically, “wealth” is created when humans are freed up from the mundane; wealth stems from greater efficiency; greater efficiency of natural resources, of time, of intellect. • Wealth can not be created from taxing citizens, as that is a transfer of wealth (in an economics sense). So a Gov’t can not really put “equity” into a business. • Cutting transfer payments allows more wealth to be put towards wealth creating activities. • Public spending (pensions, bureaucracies, non essential services) has become front & center on investor’s minds. • If pension obligations are not going to be reduced, then that country’s currency will need to inflate. Inflation could reduce pension obligations if voters will not.

  7. Update on the Corporate Cash Hoard Two years ago we focused on this topic; Now the press routinely talks about the $1 Trillion sitting on Corp Balance Sheets (here’s $700 B in just 30 Co’s) All dollars in Billions. * - Change from Sept. ’08 to Sept ‘11.

  8. Gov’t picks Winners ↓ Electric Cars, Solar Panels ↓ Key Gov’t Agencies ease [ EPA, DOE, ↓ *Raise MPG standards; * reduce dril ↓ No demand for electric cars; On No LNG and Coal plants pow … and by Implication: Losers ↓ US Car Mfgrs, LNG producers ↓ path or create hurdles DOJ, NHTSA ] ↓ ling permits; * Sue competitors … ↓ ly subsidized demand for solar er the Chevy Volt (in 15 states) A Pre-Occupied Wall StreetGovt. as Venture Capitalist

  9. A Pre-Occupied Wall StreetA Question for BK Professionals • Q: Is Failure Constructive for an Economy • or Must Industries/Companies be Subsidized • and/or Shielded from Failure? • Does the Bankruptcy Code encourage Rehabilitation? • Must we protect Industries so workers never lose a good • job? • If out-dated or inefficient Industries are to be supported • (subsidized) where does the capital come for new • Industries?

  10. The Solar Energy Industry Stocks hit hard in 2011 as Europe pulls back on Subsidies.

  11. A Brief Review on Your Personal Investmentin Solar Energy (courtesy of the DOE)

  12. Winners 2011 Stressed Situations * - IRR includes interest.

  13. Losers of 2011(A partial list)

  14. Fueling Problems?Airlines are having bad years again.

  15. Industry Bell Weathers of 2011A sense of how Industries are Reacting

  16. What to Watch For: • World markets will watch the US Presidential election closely. If Romney is the Republican nominee, markets could rally immediately. • Markets will rally strongly by November absent some gaff by the Republican nominee. Interest rates, expecting a return to growth and some defense of the US dollar will increase. • We expect 10-yr rates to move from 1.95% to above 2.50%. • Corporate profits of established companies have been rising and likely will continue to rise in 2012. When will P/E multiples go up? (A: post Nov. ’12) • Expect ObamaCare to be overturned by the US Supreme Court; could lead to a rally in healthcare stocks. • Investing in 2012 is all about the US Presidential election.

  17. In Conclusion: As the Presidential election season heats up, Investors will be watching closely and are expecting a change in Washington. We expect 2012 to be a year of optimism, transition and a good year for investors. Best wishes for Good Investing, Steve Gidumal

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