General Body Meeting

1
General Body Meeting

• 09/21/2009

2
Welcome

• Agenda
• Announcements
• Sector Review News
• Shorting 101
• Past CIC portfolio decisions

3
Announcements

• Mock stock competition!
• You can win 50 (or more) and its free
• Usually no such thing as a risk-free
  investmentthis is!
• http//vse.marketwatch.com/Game/FindGameHighlights
  .aspx
• Alternatively, Google Virtual Stock Exchange
• GameID CIC_Competition
• Password cayuga

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Announcements

• Our new Director of Alumni Relations
• Ishan Chellaney
• ijc6_at_cornell.edu

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Sector Reviews News
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Industrials Emerging Markets

• Manufacturing output jumped 0.8 in August.
• Helped by jump in auto production
• Gold approaching record high of 1,030.80
• Dollar tumblesto one year low

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Industrials Emerging Markets

• China/ US trade tariffs
• Hu Jintao will meet Obama next week at G- 20
  meeting in Pittsburgh
• China will inspect the dumping of chicken and
  tires

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Financials Sector

• Samantha Dong
• David Shim
• Zachary Peskin
• Anesha Agarwal

9
Regulatory Reform?

• Senator Chris Dodd, a Democrat from Connecticut
  and head of Senate Banking Committee proposes
  ambitious plan to reform financial regulation,
  aiming to combine four regulatory agencies the
  Federal Reserve, the Office of Thrift
  Supervision, the Federal Deposit Insurance
  Corporation and the Comptroller of the Currency
• Proposed plan differs from Obamas plan and
  reduces powers of the Federal Reserve

10
Major events

• European leaders place pressure on US to pass
  regulations on banker pay/compensation practices
  ahead of G20 summit this week
• CME Group Opens Credit Default Swaps Initiative
  to Additional Partners and Focuses Solution on
  Clearing Services
• Goldman Sachs shares recover value lost since the
  collapse of Lehman Brothers one year ago
• Projected 2.3 billion profit
• Compensation pool at 11.4 billion after Q2

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New Trend Financial Wizardry or Greed?

• Life Settlement Securitization-Life settlement
  firms pay life insurance policy holders lump sum
  higher than cash surrender value for rights to
  policy
• Many of these policies bundled and sold to
  investment funds as securities
• Investors continue to pay premiums and receive
  the total sum of the policy when it expires

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Potential upsides

• 26 trillion worth of life insurance policies
• Predicted 500 billion market
• Opens new possibilities for financing
  mergers/acquisitions
• Credit Suisse and Goldman Sachs have set up
  groups to explore this opportunity

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Risks

• General Public anger towards complex financial
  instruments
• Moral issues
• Sudden change in life expectancies (ex. Cure for
  cancer)
• High transaction costs due to lack of knowledge
  and experience in field

15
Real Estate Update

• Meeting last week, Fed planning to continue to
  support the housing market and are still
  discussing the plans to wind down their
  programs
• More of the same weve been hearing the past few
  months aka
• Sales, housing starts continue to rise
• But, housing market continues to be held up by
  the Feds programs
• Foreclosures and bad loans expected to continue
  to rise
• FHA plans to tighten credit standards in order to
  repair its losses and prevent a rescue
• Home mortgage rates have continued to decline
  reaching near a low of 5 this week.
• Credit ratings on CMBS lowered as losses are
  projected to increase

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Macro/Healthcare

• Max Baucus, Chairman of the Senate Finance
  Committee, released his health-care bill.
• Will probably be a basis for any law that
  ultimately passes.
• U.S. raised the tariff on imported Chinese tires
  to 35.
• Trade War?
• China to take matter to WTO.
• Bernanke announces recession very likely over at
  this point.
• Concerns about lingering unemployment

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Technology Sector News

• Google Voice app rejection on iPhone.
• Skype founders suing EBay over Skype sale.
• Microsoft releases ZuneHD.
• Palm makes net loss but beats Wall Street
  expectations.

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Consumer Goods News

• Food Processing Industry
• Krafts largest shareholder, Berkshire Hathaway,
  called their 16.1bn offer a pretty full price.
  If CBY does not accept the offer? hostile
  takeover.
• Services Industry
• Blockbuster may close as many as 960 stores by
  the end of next year as it struggles to reverse
  its losses and fend off rapidly growing rivals
  like Netflix and Redbox.

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Consumer Goods News (cont)

• Auto Industry
•  Obama administration announced plans to impose
  steep additional duties on tire imports from
  China.

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Short Selling A Brief Overview

• Cornell Investment Club

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What is it?

• We usually go long on a stock (buy low sell
  high).
• Shorting means betting that a stocks price will
  go down (sell high and buy low).
• We are borrowing shares that arent ours and
  selling immediately.
• Then we buy back at a lower price and return it
  to the rightful owner.

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Short seller
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Reasons for Shorting

• Speculation
• Finding a company that is overvalued and whose
  price will drop.
• Hedging
• Insuring a long position against unwanted risk.
• Ex. We buy an ADR for a company based in Mexico.
  We short the Mexican Peso to insure against any
  currency price fluctuations.

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Strategies We Can Use

• Constructing a long/short play in a given
  industry.
• Ex. long Japanese cars, short American cars
• Shorting a fundamentally weak company who is over
  priced.
• Arbitrage opportunities
• Price differentials
• Merger arbitrage

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Arbitrage
LSE CIC Inc. 61.92 90/share
NYSE CIC Inc. 100/share
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Arbitrage

• NYSE CIC Inc, 100
• LSE CIC Inc, 90

Short NYSE CIC
Long LSE CIC
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Arbitrage

• NYSE CIC Inc, 100
• LSE CIC Inc, 90
• Scenario 1 NYSE goes down, LSE goes up
• Converge at 95

Short NYSE CIC
5
10
Long LSE CIC
5
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Arbitrage

• NYSE CIC Inc, 100
• LSE CIC Inc, 90
• Scenario 2 Both go down, but converge at 80

Short NYSE CIC
20
10
Long LSE CIC
-10
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Arbitrage

• NYSE CIC Inc, 100
• LSE CIC Inc, 90
• Scenario 3 Both go up, but converge at 110

Short NYSE CIC
-10
10
Long LSE CIC
20
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Risks

• Goes against long-run trends.
• Losses are theoretically infinite
• Must borrow money in order to execute trade
• Even if a company is overvalued, its price might
  not readjust soon enough

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Gamestop What Went Wrong?

• Original thesis
• Video game industry growing as a whole
• Maturing of current generation of systems
• Used-game monopoly
• Expansion
• Brand

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Atari Generation Factor

• We are energized by the fact that the video
  gaming has gone mainstream, with recent industry
  data showingthat nearlyhalf of newgamers
  areover 35 yearsold and 40are
  female.-Gamestop CEO Daniel Dematteo

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Why GameStop

• Market leader in used video games
• 22 of 2008 Sales
• 49 profit margin for used games vs. 7 hardware
• Bargain hunters looking to save during the
  recession

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Why Gamestop (Continued)

• Mid/Late Phase of 7th Generation platforms
• Xbox 360 Nov, 2005
• PS3, Wii Nov, 2006
• Nintendo DS(handheld) Mid 2004

Larger customer base for software, used AND new
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Pitch result Bought

• Bought on 3/3/09 at 26/share

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Then Came Amazon

• Amazon and Toy R Usenter in used game market
• Amazon on 3/5/09
• Toys on 3/27
• Video game sales flat in1st quarter of 09
• March sales down 17
• Resistance by Publishers

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Good work CIC

• Thesis breaks you get out
• Still made 12

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Life Technologies (LIFE)

• Originally pitched as Invitrogen before merger
  with Applied Biosystems
• Purchased on 9/30/08at 37.60

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Original Thesis

• Well-Diversified in Biotech
• Growth Potential in all aspects of the Company
• Strong Fundamentals, Mid Cap
• Insulation from Credit Risk
• Target of 46

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What happened?

• Purchased Applied Biosystems
• Took on 2 billion of debt
• Suffered a 50 loss through Dec. 08
• Market was declining, IVGN had high beta
• However, the thesis held
• Reported record earnings in Feb. 09

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Why did we sell?!

• Sold at a 20 loss in Apr. 09
• Summer strategy
• Risk aversion, biotech is more volatile
• Maryland considered a 6 bln tax credit cut for
  Biotech companies
• LIFEs customers relied on govt funding
• Recessionary environment
• Lacked a strong catalyst

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We werewrong?

• LIFE is up over 50 since we sold
• Most recent 10-Q
• Revenue up 465M a 126 increase
• However, 476M added from AB
• ABs last individual revenueswere 533M

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CIC History with America Movil

• Telecommunications companies based in Mexico
• Operations in 18 countries.
• Owned by Carlos Slim
• Longest owned stock in CIC portfolio

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Pitch Thesis and Target

• Strong company hurt by overall market decrease.
• Strong market share in one of the fastest growing
  sectors in Latin America.
• Looking for a long term investment.
• Price Target at end of 1 year 60 (22.4 gain)
• Hold for 1-2 years.
• Purchased on 9/8/08at 48.61/share

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What Happened Afterwards?
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AMX Performance

• Low of 23.18 per share.

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How did CIC React?

• 2 key review points
• 30.82 at beginning of Winter Break
• 31.32 at beginning of Summer Break
• Why hold?
• Fundamentally strong company poised to gain by
  any form of recovery.
• Peso depreciation seen as major cause.
• Good quarterly results beating expectations

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What Now?

• Continue to hold for the long term
• Further stabilization of macroeconomy.
• 1 Dividend yield that may increase.
• Labeled Outperform by Wells Fargo (9/16)
• Look forward to 10/26 Q3 Earnings Release!

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Thanks for coming!

• A man runs a mile south, a mile west, and a mile
  north and ends up back where he started!
• How did he do it?
• Meetings will be held every Monday, 6pm in this
  room (251 Malott)
• Find information/slides at our website
• www.cornellinvestmentclub.org