Risk/Return: Facebook Effect, Jazzed on Junk, Carlyle IPO, Einhorn vs. Green Mountain
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The Fiscal Times
October 24, 2011

Another Indicator to Consider
Earnings reports, consumer sales data, quarterly GDP, employment statistics… You’d think we had enough metrics to keep track of in our quest to wring respectable returns from volatile financial markets. Arthur O’Connor, an IT management consultant enrolled in Pace University’s executive PhD program, doesn’t agree: he reports a “statistically significant” correlation between the number of fans consumer-oriented companies like Abercrombie & Fitch and McDonald’s have on their Facebook pages and the companies’ stock price. The correlations are more straightforward for a company marketing relatively low-priced items directly to the consumer (e.g. Krispy Kreme Donuts) than when the product is a big ticket item requiring time to ponder (e.g. BMW and Dell), Pace and O’Connor report. Time to reprogram your stock selection models?

Junk Food to Junk Bonds
Junk bonds are also in favor these days. Lipper, a division of Thomson Reuters that tracks mutual fund flows, reports that the week ended October 19 was the second-strongest for inflows into junk-bond funds (excuse me, high-yield bond funds) since records began back in 1992. Finding yields approaching 10 percent irresistibly alluring, investors put a total of $2.2 billion into these below-investment-grade debt funds, including $600 million into high-yield exchange-traded funds. While that’s well below the August 2003 high of $3.3 billion, it’s a sign that investors finally are waking up to the fact that current high yields are more likely a sign of market paranoia than balance sheet fundamentals. “The high-yield index is now yielding more than 9 percent, which is just incredible, compared to an all-time low of 6.6 percent early in the summer,” says Mark Luschini, chief investment strategist at Janney Montgomery Scott. The high-yield investment team at Neuberger Berman says these yields price in a default rate of about 9 percent while the trailing default rate has been only 1 percent. The Neuberger Berman fund managers are buying bonds issued by companies like Ford and Chesapeake Energy, Luschini, for his part, is urging clients to jump on the bandwagon. “It’s extremely unusual to see this kind of valuation gap, with yields so high, and defaults trending lower,” he says. If the economy turns turtle, not to worry, Luschini says. Buying “good junk” – bonds rated single-B plus or double-B, just a few notches below investment grade, rather than triple C-minus will still be a reasonably safe strategy, as well as a lucrative one in these yield-starved days.

A Deal that could Underwhelm
Carlyle Group LP – the private equity firm that conspiracy theorists love to hate, thanks to its ties to Republican leaders and the defense industry – is planning to go public, the latest buyout shop to concede that maybe there is a point to public securities markets, at least in giving the founders a way to cash out some of their holdings down the road while providing the company with a permanent capital base. But while the IPO will be good news for Carlyle, is it likely to be a great investment? If history is any guide, investors should hope for an opportunity to invest in Carlyle’s funds (which have returned $2.60 for every dollar invested over the firm’s 24-year lifetime) rather than the stock itself, given that counterparts like Blackstone and Apollo have struggled. The harsh reality is that the private equity business model depends on the health of the public markets. To capture profits for its limited partners, firms like Carlyle have to find a way to sell their portfolio businesses at a profit, either through an IPO or merger or acquisition. These strategies require confident investors willing to take risks – a breed becoming more rare by the day. True, Carlyle has other businesses to offer – it has recently made a big push into the hedge fund universe – but to investors reluctant to make risky bets, and already souring on the idea of investing in the business of running funds, that may not be enough. The latest Carlyle filing shows it values itself at $8.5 billion for purposes of the IPO – about half the enterprise value of rival Blackstone, which has roughly the same amount in assets under management. Blackstone managed to capture a premium valuation up front, going public days before the financial markets began to crack apart in the summer of 2007. Carlyle has waited far too long to follow suit, and while it’s unlikely that the tough team of managers will pull back from the deal now, even if the stock market stays robust between now and the day the stock prices, this deal could end up the most underwhelming IPO of 2011.

Business journalist Suzanne McGee spent more than 13 years at The Wall Street Journal before turning to freelance writing. Author of the book Chasing Goldman Sachs, she has written for Barron’s, The Financial Times, and Institutional Investor.