2013 Financial Markets Newsletter

Edition 1 - Introduction to Careers in Financial Markets

Featured Financier
Welcome to the first edition of the Financial Management Association of Australias Financial Markets Newsletter. As people who have a bludgeoning interest in the financial markets, my colleague and I have taken it upon ourselves to educate and update our members on current financial news, market conditions as well as potential careers paths in financial markets. Name: Stanley Druckenmiller Alma Mater: Bowdoin College (B.A.) Occupation: Hedge Fund Manager Net Worth: $2.5B (as of 2011) Notable Positions: Chairman and President of Duquesne Capital, Lead Portfolio manager at A career in the financial markets can be commonly split Quantum for George Soros. into three simple categories, the buy side, the sell side and market makers. Druckenmiller was in the middle of completing Buy side firms such as Private Equity, Hedge Funds and other asset management companies use a variety of techniques such as statistical arbitrage, fundamental analysis or technical analysis to obtain profits for their clients and their stakeholders. A distinct difference between private equity and asset management companies are the types of investing and the length of investment. Private Equity firms tend to purchase private securities that are not publicly listed and mostly target company growth in the form of nurturing capital and restructuring management. The nature of these investments tends to be more capital gains focused in the long term. Asset management companies such as hedge funds tend to trade in publicly listed companies for the main purpose of achieving a positive average return greater than that of the market in a bullish or bearish market. Hedge funds employ numerous techniques that involve macroeconomics, arbitrage and public released news to obtain the best risk adjusted profit possible. Sell side firms such as Investment Banks act as broker/ dealer and have a focus on the sale of financial products such as debt and equity products to the buy side through research, advisory and facilitating large transactions. The sales and trading force of an Investment Bank will buy and sell securities on behalf of investors for profit and to facilitate large deals that would not otherwise be possible. The sell side also includes the Advisory and Investment Banking division that specialises in mergers and acquisitions as well as capital rising for its clients. Market makers provide liquidity by facilitating trade in a financial market through the holding of financial instruments or commodities. Their role is to match up potential buyers and sellers for an instant transaction by charging a minimal fee called the bid/ask spread. If transactions are not balanced for the buyer and seller, that is there are more sellers than buyers or vice versa, a market maker is able to use its own inventory to take the other side of the transaction in the short term.

his PhD in economics when he decided to forsake graduate school for the real world and take up as a position as an analyst for the Pittsburgh National Bank. From that early position he was promoted within a year to Director of Equity Research, before leaving at the age of 28 to start his own fund, Duquesne Capital Management. While managing his own fund, Druckenmiller was also managing seven funds at a company named Dreyfus. By the time he began working at Dreyfus, his trading style had evolved from simply holding stocks to trading a variety of instruments, including bonds, currencies and stocks going long or short. He soon caught the attention of Hedge Fund Giant George Soros. It was working for Soros where came up with the idea to short the sterling and Break the Bank of England, making a billion dollars in the process. Drucks returns since have been extraordinary, with his Duquesne Fund returning 30 percent annually since inception in 1980. Quotes from Druckenmiller: Ive learned many things from him [George Soros], but perhaps the most significant is that its not whether youre right or wrong thats important, but how much money you make when youre right and how much you lose when youre wrong. Soros has taught me that when you have tremendous conviction on a trade, you have to go for the jugular. It takes courage to be a pig. It takes courage to ride a profit with huge leverage. As far as Soros is concerned, when youre right on something, you cant own enough.

Market News The U.S market has been pulled up to its highest close since 2007 by continued speculation on Fed stimulus measures, a six-week low in U.S unemployment benefits, and confidence on Chinese growth rates. The Fed has stated its intention to press on with $85 billion in monthly bond buying, while Chinas explicit support of a growth target of 7.5 percent coupled with a planned 10 percent expansion in fiscal spending has investors confident in the support of central banks. While earlier in the week, markets stumbled slightly as a result of US lawmakers failure to prevent the imposition of $US85 billion ($A83.74 billion) in spending cuts and Chinese property developers hit by measures to cool the housing market, the market has been in a long bull run, rising 129 percent since the low in 2009. The S&P 500 has climbed 6.9 percent this year and is trading at about 3 percent below its record of 1,565.15 reached in October 2007. Australia has recorded its 7th consecutive quarterly rise in Gross Domestic Product (GDP). GDP for the December quarter rose 0.6% meting market expectations. This combined with an increase in consumer spending sends out a positive signal for the Australian economy. The RBA has also left the official cash rate at 3% leading to a rebound in the Australian dollar against its U.S counter from an eight-month low. The Reserve Bank of Australia still expects the results of prior rate cuts to work their way into the economy and believes there will be more scope for some other areas of demand to strengthen. The central bank has lowered its benchmark interest rate by 1.75 percentage points in the 14 months through December to the current level of 3 percent.

Current Deals Warren Buffetts company Berkshire Hathaway recently announced that they would be buying H.J. Heinz for $28 billion. The transaction takes place at a 20 percent premium over the announcement day price. The company has had 30 consecutive months of growth, hitting an all-time high share price and outperforming the S&P 500. In fact Heinz shares are up nearly 27% in the past two years, nearly doubling the return of the S&P 500 over the same period. Furthermore, the acquisition values the company at 20 times this years expected earnings, slightly high for a company posting 6% growth figures. Heinz was purchased for a similar price to Dell ($24.4 vs $28 billion), the weeks other big deal, yet having barely a sixth of Dells revenue. Considering Buffetts policy of value stock picking, the recent acquisition seems to be out of character for the Oracle of Omaha. Heinzs recent expansion has come primarily from emerging markets, increasing 17.6% this year to comprise 23% of company sales, with much room for further growth oppurtunities, leaving us with a possible explanation for the high price Warren has paid. However it seems that the financials of the deal provide vindication for Buffet. Berkshire is putting up $13 billion in exchange for half the company and $8 billion in preferred stock that will pay 9 percent a year. The investment firm 3G Capital is putting up the rest of the money and will run Heinz. A 9% yield on a well entrenched consumer brand that also provides opportunity for capital growth is a bargain, showing Buffett brought his A-game to the negotiation table. So while the company seems over valued on its fundamentals, the preference shares create a wide safety net for Buffetts income with terms that an ordinary retail investor could never hope for.

European stocks also rose, with the Stoxx Europe 600 Index rallying to a 4 1/2-year high, similarly based of speculation that central banks around the world will continue with measures to support economic recovery. However, Stanley Druckenmiller, has this to say about the economy and what he perceives as the main dangers I dont know when its going to end, but my guess is, its going to end very badly; and its going to end very badly because, again, when you get The Oracle has a habit of successful mega-deals and the biggest price in the world, interest rates, being we will be watching this one very closely. manipulated you get a misallocation of resources and this is going to end in one of two ways - with a malinvestment bust which we got in 07-08 (we Articles Written by didnt get inflation). We got a malinvestment bust Michael Aynbund and Jefta Ongkodiputra because of the bubble that was created in housing. Edited by Samantha Carberry and Christine Nguyen-Tran Or it could end with just monetizing the debt and off Layout by Jefta Ongkodiputra we go in inflation. So thats a very binary outcome- A special thanks to Nicholas Harrington-Johnson and Elaine Nguyen theyre both bad. Image courtesy of the Pittsburgh Post Gazette
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