iPhone Launch a Success

After much anticipation the iPhone was released on Friday. Most reports indicate that the devices are running smoothly, although roughly 2% of subscribers reported problems with activation. The activation delays -- which rest squarely on the shoulders of AT&T -- led those effected to refer to the iPhone as the iBrick. All told however Apple moved between 500-550K of the devices over the first weekend with many of the stores selling out on Friday. Apple's stock seemed to take the busy weekend in stride. Though down in mid-day trading the stock is only off 0.25% at 121.74 and has stabilized after briefly nearing $120.

Four journalists got to preview the iPhone for 4 weeks prior to its release. If there experiences mirror that of the 500,000 new users then things bode well for Apple. In addition many now expect Apple to mimic its iPod success by releasing new versions of the iPhone in the coming years that both fix current glitches and offer more attractive price points:

The Chosen Four: The Wall Street Journal's Walt Mossberg, David Pogue of the New York Times, USA Today's Edward Baig and Newsweek's Mr. Levy. Their initial reviews came out Wednesday and, for the most part, the four were pleased with the job that Mr. Jobs had done.

David Pogue had to learn to "use the force" while tapping out letters on the iPhone's virtual keyboard, but overall gives Apple its due: "As the ball player Dizzy Dean once said, 'It ain't bragging if you done it.'"

Walt Mossberg and Katherine Boehret said concerns about the lack of a physical keyboard "turned out in our tests to be a nonissue." After taking the iPhone to Starbucks, airports, and Fenway Park, the verdict: "Despite some flaws and feature omissions, the iPhone is, on balance, a beautiful and breakthrough handheld computer."

Edward Baig pointed out that the iPhone may not be for everyone: "It's pricey. It lacks certain features found on some rival devices… Your employer may prevent you from receiving corporate e-mail on the device." But he still reveres it as a "prodigy," and likes the idea of not having to schlep around with an iPod and a cellphone in your pocket.

Steven Levy was pleased he didn't have to crack a manual to use any of the iPhone features, and got a satisfying run of baseball scores, Neil Young concerts, YouTube videos and weather conditions before his battery ran out.

I am going to stick with my Blackberry for the time being. However, if Apple is able to make headway with getting the iPhone to work with corporate email and if I can stick with Verizon, I may be a late convert.

Long Beach Island

I just returned from a week long family reunion on Long Beach Island in New Jersey. It was a much needed break and in order to truly appreciate it I abstained from all internet usage during the week (okay I may have cheated once or twice on my blackberry, but who can resist that?). So after a week of not posting I am itching to get at it again. Expect regular posting to resume this week.

Blackstone Up, Fortress Down

Blackstone IPO'd today under the ticker symbol BX and was rewarded with a 13% gain on its first day in the market in spite of market forces heading the opposite direction. Investors seemed to shrug off the new tax proposal announced by Congressional leaders that could double the tax on carried interest. All in all the IPO was a success and Stephen Schwarzmann and Pete Peterson both made out handsomely.


An interesting sidenote to today's action was that Fortress Investment Group (FIG) had a terrible day. After opening 2.5% above yesterday's close the stock sagged in mid-morning trading before closing down 6.3% on the day. FIG is now trading close to the level it was at last week when I recommended it. In my mind nothing has really changed, this might just represent a second buying opportunity for FIG at a great price.

Worst Friday Since Mid-March

Friday's over the last few months have been spectacular days for the market. In fact since March 16th we haven't had a single down day in th Dow to end the week. That all came to an end today with the Dow off 185 points to close the week down more than 2%. (Hat Tip: Bespoke Investment Group) While too much shouldn't be read into the fall, it shouldn't surprise people that the market was off this week with all of the bad news surrounding Bear Stearns' hedge fund blow-up and the bloody subprime debt market. Unless we have a flurry of deals over the weekend next week could be a repeat affair. Click the graph below to enlarge:

Goodbye Terry, Welcome Back Jerry

In a widely anticipated move, Yahoo CEO Terry Semel stepped down today and will be replaced as CEO by Yahoo founder Jerry Yang. Why was Semel shown the door? Quite simply Semel hasn't been able to do much with Yahoo's stock in the almost 3 years since rival Google's IPO. In fact on August 18th 2004, the day before Google's IPO, Yahoo closed at $28.48. Today Yahoo opened at $27.72 still under its value from nearly 3 years ago. In the meantime Google has risen over 600% from $85 to $515. Needless to say many Yahoo investors have become quite frustrated. Recently there have been rumors swirling about the possibility of a Microsoft takeover as well as discussions with Time Warner and eBay. But, to date nothing has come of it. Maybe now with Semel out of the way Yahoo will make a move. After opening the day trading at $27.72 the stock will likely open tomorrow around $30. Where it goes from there is anyone's guess.

Here is Yahoo versus Google over the past 3 years. I think it was time for Semel to leave:

The Private Equity Tax Battle Rages On

On the eve of Blackstone's planned IPO a proposed private equity tax law could throw a wrench in CEO Stephen Schwarzman's plans. Private equity firms make their money via an asset based fee and a performance fee. This is typically* expressed as "2-and-20": the 2% fee is on all assets under management and is taxed at ordinary income rates up to 35% and the 20% is a cut of the firm's profits and is taxed at the 15% capital gains rate.

Under pressure to combat increased income inequality and increase tax revenue, Federal lawmakers had been tossing around the idea of raising taxes on private equity firms by re-characterizing "carried interest" as ordinary income. It appears that they have curbed that discussion for now.

However, since Fortress and Blackstone would both be publicly traded partnerships, Congress, led by Charles Grassley and Max Baucus (pictured above), could overturn a 20 year old tax law that taxes publicly traded partnerships at 15%. Instead these publicly traded private equity firms would be taxed at corporate rates of up to 35%. This won't effect private equity firms who stay private but it will certainly influence whether or not they choose to go public.

If such a bill were to pass Congress and avoid a presidential veto it would certainly dampen the valuations private equity firms have been receiving and create massive disincentives to going public. The law, were it to pass, would grandfather in Fortress and Blackstone for a period of 5 years.

Fortress Investment Group (FIG) was off 6.5% today on the news and is off nearly 30% since late March. I think investors may be overly pessimistic on FIG because of this bill. FIG's effective tax rate today is already somewhere near 25% and much of their income is not tax-advantaged. If, as I expect, this bill doesn't pass this might be a great time to pick up a few shares of FIG on sale. Heck even if the bill does pass, FIG is safe for 5 years and even with conservative growth projections and higher taxes, buying FIG at $23.50 with a PE of 21.5 is a steal.


* Some firms charge more, some less.

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Is Fred Thompson Our Next President?

Actor and former Tennessee Senator Fred Thompson hasn't yet announced his campaign for President, but that hasn't stopped him from quickly becoming the early Republican leader in the InTrade prediction markets. In just three months of trading he has passed McCain, Romney and Guiliani in rapid succession:


You can see his rise has been fairly steady and received quite a boost after asking to be released from Law & Order in May and forming an "exploratory committee" in June:


To be perfectly honest I don't know much about Fred's economic policies, though from a quick glance at his blog it looks like he is strong fiscal conservative. All I knew about him before that little bit of research was his stellar performance as Jim Robinson in the "Barbarians at the Gate" made for TV movie . . . but I digress . . .

Subprime Isn't Done Yet Folks

Yesterday a hedge fund managed by Bear Stearns announced their intention to sell $4 billion of mortgage backed bonds. The fund -- the High-Grade Structured Credit Strategies Enhanced Leverage Fund -- has been hurt by their exposure to the subprime sector and is allegedly down almost 25% this year. One way to track the damage in the subprime sector is to monitor the ABX Home Equity BBB Index. Here is some quick background on the ABX index courtesy of Nouriel Roubini's Blog:

“One way to measure the effects of problems in the sub-prime mortgage sector is to look at Credit Default Swaps (CDS). Remember that these CDS contracts effectively work as a kind of insurance policy for banks or other holders of bad mortgages. If the mortgage goes bad, then the seller of the CDS must pay the bank for the lost mortgage payments (alternatively ... if the mortgage stays good then the seller makes a lot of money).

The index that measures the CDS market for home equity is called the ABX.HE index. The sub-variation of this index that refers to risky sub-prime loans is called the ABX.HE BBB index.

I just checked the ABX.HE BBB index. It has dropped by about 5-7% since July of 2006. This is a substantial drop! Notably, there was a major plummet of the index starting in Dec 2006 when some of the dealers in risky mortgages started going belly up.

So what does this mean? It means that someone out there is now having to cough up the losses in the bad loans. It could be hedge funds, or maybe overseas lenders. But someone is starting to see some losses happening on their balance sheets, and the problem is going to grow significantly in 2007.”

Keep in mind Roubini had this on his blog back on January 11th, 2007. Back then the ABX Home Equity Index had fallen from 101 to 93 in 6 months, which at the time surely seemed like a "substantial drop." Since then the index has fallen precipitously. It now trades in the low 60's and looks ready to re-test its February lows. See graph below courtesy of Markit:


So who is paying for these bad loans? Well in this case its the investors in Bear's fund and perhaps the banks who helped Bear lever up 10 to 1 . . . it makes you wonder who is next.