美联储导演的流动性假象：美元Libor创97年新低

美联储大力度、全方位提供流动性的努力至少在伦敦银行间拆借市场上有了成效。

到11月3日，美元Libor(伦敦银行同业拆放利率)各期限品种的下跌趋势已持续两周，三个月Libor比10月8日的最高点5.39%下降了2.5个百分点，而隔夜Libor更是创出97年以来的最低水平，至0.39%。

但尽管银行间市场对交易对手有了信心，市场人士仍表示，流动性的恢复并不像Libor表现得那样快，对经济衰退的担忧开始让银行不愿意对企业进行借贷。

第三轮美元流动性服务启动

在向银行开放各种窗口以及向欧洲各央行提供贷款后，美联储开始第三轮的美元流动性服务，向新兴世界国家提供流动性。11月4日，巴西、墨西哥、韩国和新加坡各获得300亿美元流动性。

“如果这些措施能够覆盖到各个主要国家，新兴市场国家紧缺美元的情况也会缓解，美元的借贷需求就暂时不会那么大。”中信银行市场分析部喻璠表示。

一家欧洲银行的资金部人士表示，联邦基准利率和Libor关系密切，一般隔夜Libor和基准利率的利差在20个基点左右。但金融海啸使银行间的信誉毁损，市场就把Libor价格拉得很高。

9月15日雷曼兄弟破产后，Libor的价格开始从4.96%的水平上节节攀升，10月8日达到了5.39%的价格。

“但即使以这个价格，银行也无法拆借到现金，而只能向美联储提供的短期标售等工具拍卖得到现金。”喻璠表示，由于担心其他银行破产，让银行在拍卖得到现金后囤在内部而不愿借贷。

而随着美联储通过短期标售、一级交易商信用工具(PDCF)、货币互换、商业票据融资、资产支持商业票据等手段，不顾一切注入流动性，各主要央行对困难银行实行部分国有化，市场信心逐渐恢复，Libor和美联储基准利率的价差缩小很多。

正如美联储在10月29日决定降息到1%后的表态，“这次降息和其他央行联合行动，将帮助信贷市场的恢复。”而德国一家银行的货币交易员则表示，美联储的降息对此有帮助，但更重要的是近段时间没有再传出其他银行陷入危机的消息。

流动性并未完全恢复

“ 但这两个礼拜Libor的变化，并不是说明市场的流动资金充足。”上述欧洲银行资金部人士表示。喻璠也认为，尽管三个月Libor已接近雷曼破产前的水 平，不过Libor价格本身不代表流动性，“市场的流动性确实在慢慢恢复，但没有Libor表现得那样快，代表流动性指标的三个月Libor和OIS(隔 夜指数掉期)利差的缩小程度则要缓慢得多。”

10月10日，Libor和反映市场降息预期的OIS利差曾达到364点的最高点位，目前则下降到在225点左右，但仍高于9月15日雷曼破产前后100点的水平。而在截至2007年7月31日的一年中，该利差平均值仅为8个基点。

在市场人士看来，这轮Libor的快速下降主要是持续的降息以及未来降息预期引起。伦敦拆借的价格在正常情况下只高于美联储基准利率15个基点，如果市场降息预期很强烈的状况下，短期内还可能低于Libor。3日OIS显示只有0.6%，意味着还会降息近50个基点。

上述资金部人士表示，Libor只是多家银行报价的平均值，很多银行在此次金融危机后评价被降低，这意味着如大摩这样的金融机构必须在Libor水平上加更多的点才能借到钱。

目前市场更严重的问题是，银行出于对经济衰退的担忧，开始不愿意向企业借贷。

企业的借贷成本已经大幅提升。以GE等高评级的企业为例，尽管过去其资金成本很低，一般发债的价格仅比同期美国国债高出二三十个基点，但现在其债券和国债的价格差已和商业银行一样高。

美联储11月3日公布的一项调查显示，各大银行负责信贷的主管都表示前三个月对企业的信贷处于紧缩状态。

喻璠认为，此后流动性会继续慢慢恢复，但三个月Libor可能到2%左右就会停滞直到再次降息。“整个市场流动性、借贷意愿的恢复可能是比较长期的过程，金融危机最坏时候已过去，但经济衰退刚刚开始。银行间的借贷意愿在几年之内再也回不到之前信贷非常宽松的状态了。”

The new capital raising move of Barclays and the rate cut of Japan Central Bank

Earlier this month, Barclays said it wanted to raise capital but would raise it privately rather than take UK government cash, as rivals Royal Bank of Scotland, Lloyds and HBOS are.

"There has been a significant shift in the availability of capital and economic power in the world over the last five years and we're ensuring we're aligned with those changes," said John Varley, Barclays' chief executive.

The Bank of Japan's move followed a rate cut from the U.S. Federal Reserve earlier in the week and likely presaged the same from the European Central Bank and Bank of England next week.

The Bank of Japan cut its benchmark overnight call rate to 0.30 percent from 0.50 percent, a slightly smaller reduction that the quarter point many had expected.

Inflation in the euro zone fell to 3.2 percent year-on-year in October, the European Union's statistics office said, data likely to ease any concerns at the ECB about rising prices.

Five Stocks to Buy When Cash Is King

We devised a simple screen to root out these firms:

1. Morningstar Rating of 5 stars
2. Debt/Total Capitalization ratio of less than 10% in the most recent year

We think these criteria are self-explanatory. However, in this environment, this screen may uncover a large number of candidates (56 as of Oct. 1, 2008). The art is in deciding which companies to research further. It's difficult to quantitatively screen for these other characteristics, but we'll do our best to outline a few ways in this article. It may require a little work, but the signs are easy to follow, even for relatively inexperienced investors.

For example, it's helpful if the company has a large healthy net cash balance. In today's world, the definition of cash can be hazy. Earlier this year, due to turmoil in the municipal and auction-rate securities markets, many companies took surprise losses on these supposedly solid cash-equivalent instruments. An investor would do well to scrutinize the balance sheet and footnotes carefully, making sure there are no similar land mines.

Furthermore, it's a positive sign if the company is the most powerful player in its industry. There are many easily discernable signposts here. Our premium members can gain access to a list of a firm's competitors in our Analyst Reports. This will shed light on several questions: Does the firm consistently earn superior margins and returns on assets or equity versus its competitors'? Or even better, does the firm have the most competitive advantages in its industry? Having a moat is important--it increases the chance that the company's rivals will be more distressed, thereby opening windows of opportunity.

Last, the company may have a history of taking advantage of downturns. Many giants today took advantage of recessions to snap up assets on the cheap. It may be helpful to look back on how the firm behaved during the last business cycle. Take note if it bought rivals, invested in production capacity when costs were low, or bought back significant chunks of stock cheaply, allowing earnings to multiply when the tide turned.

Counter Intuitive Trading ideas

One of the most important: When it comes to investing, "risk" is not what you think it is. Wall Street doesn't tell you this, but the investments you are told are "safe" may turn out very risky indeed, and the investments you are told are risky may actually turn out not to be.
An example? If I asked you to name areas of the US market that have actually risen during the crises of the past three months, here's two that most people wouldn't pick: Homebuilders, and regional banks.

No kidding. Out in the real world, these two industries are right in the path of the economic hurricane. But on the stock market, you'd think it was all sunshine and pina coladas.
The Dow Jones Home Construction iShare, an exchange-traded fund that tracks homebuilding stocks like Pulte Homes, Toll Brothers, and Lennar, actually rose 26% in the third quarter.
And KBW's Regional Bank exchange-traded fund, which tracks that shell-shocked sector, has soared 34%.

What's the reason for this bizarre paradox? Easy. Shares in both these sectors had already collapsed. Everyone had sold out in panic. So because the market thought these sectors were too "risky," they no longer were.

When itcomes to investing, risk is a function of price.

By the end of June, homebuilding stocks were down about 75% from their all-time peak. They were in the final leftover bin, in the lowest level of the bargain basement. History says an industry that isn't going to vanish completely is usually a good investment at these levels.

It's a similar story with the regional banks. At their July lows they were down 68% from their peak. I concede I still wanted to stay away. The shares hadn't fallen as far as homebuilders. They weren't as cheap. And it was impossible to know what you were buying.

Of course if you invest through a broadly-based fund that tracks the sector, you are at least spreading your bets. This is the way to do it.

There's another side to this story. A couple of years ago investors were being pushed into so-called "value" stock funds, which tend to invest in more stable and mature companies with lower growth, higher cash flow, and higher dividends. The argument: They were more "safe" than so-called "growth" funds, which tend to bet on younger, faster growing and more volatile companies.

Result? Value funds, which were supposed to shelter investors from some of the storm, have actually done worse.

Over the past two years, the S & P Growth index has fallen 9%. Value? Oh, 14%. And that includes the gains from those big dividends.

It isn't that the value companies are doing worse in the real world. It's that their share prices got too high. Everybody bought them because they were supposed to be "safe."

We saw something similar just last winter, when lots of people reacted to inflation fears by rushing out to buy inflation-protected government bonds. The result? They bid the price of these bonds up so high that people who bought at the peak were, in some cases, locking in no after-inflation return at all.

I pointed out the absurdity – and got waves of angry emails from investors, and financial advisors.

Well, some of those "safe" TIPS have now fallen as much as 13%. Even a broadly based TIPS fund, like Vanguard Inflation-Protected Securities, is down nearly 6% from the peak - and that includes reinvested dividends.

That may not sound like much, but it's quite a fall for an investment that always offered very little upside in return for supposed security.

There was nothing wrong with TIPS per se. It was just the price. Anyone who waited until last month to buy some TIPS, on the other hand, could get a much better deal.

What does this mean for you?

Successful investing is counterintuitive. When it comes to the stock market, there is no safety in numbers. And there is no such thing as a "risk free" investment.

Treat conventional wisdom with skepticism. Always be very wary of the most popular and "safest" investments. You may be better off taking a look at those investments that everyone is scared of, and no one wants to touch with a ten foot pole.

Analyze Cash Flow The Easy Way

http://www.investopedia.com/articles/stocks/07/easycashflow.asp

Analyze Cash Flow The Easy Way
by Richard Loth (Contact Author | Biography)
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If you believe in the old adage, "it takes money to make money," then you can grasp the essence of cash flow and what it means to a company. The statement of cash flows reveals how a company spends its money (cash outflows) and where the money comes from (cash inflows). (To read more about cash flow statements, see What Is A Cash Flow Statement?, Operating Cash Flow: Better Than Net Income? and The Essentials Of Cash Flow.)

We know that a company's profitability, as shown by its net income, is an important investment evaluator. It would be nice to be able to think of this net income figure as a quick and easy way to judge a company's overall performance. However, although accrual accounting provides a basis for matching revenues and expenses, this system does not actually reflect the amount the company has received from the profits illustrated in this system. This can be a vital distinction. In this article, we'll explain what the cash flow statement can tell you and show you where to look to find this information.

Difference Between Earnings and Cash
In an August 1995 article in Individual Investor, Jonathan Moreland provides a very succinct assessment of the difference between earnings and cash. He says "at least as important as a company's profitability is its liquidity - whether or not it's taking in enough money to meet its obligations. Companies, after all, go bankrupt because they cannot pay their bills, not because they are unprofitable. Now, that's an obvious point. Even so, many investors routinely ignore it. How? By looking only at a firm's income statement and not the cash flow statement."

The Statement of Cash Flows
Cash flow statements have three distinct sections, each of which relates to a particular component - operations, investing and financing - of a company's business activities. For the less-experienced investor, making sense of a statement of cash flows is made easier by the use of literally-descriptive account captions and the standardization of the terminology and presentation formats used by all companies:

Cash Flow from Operations: This is the key source of a company's cash generation. It is the cash that the company produces internally as opposed to funds coming from outside investing and financing activities. In this section of the cash flow statement, net income (income statement) is adjusted for non-cash charges and the increases and decreases to working capital items - operating assets and liabilities in the balance sheet's current position.

Cash Flow from Investing: For the most part, investing transactions generate cash outflows, such as capital expenditures for plant, property and equipment, business acquisitions and the purchase of investment securities. Inflows come from the sale of assets, businesses and investment securities. For investors, the most important item in this category is capital expenditures (more on this later). It's generally assumed that this use of cash is a prime necessity for ensuring the proper maintenance of, and additions to, a company's physical assets to support its efficient operation and competitiveness.

Cash Flow from Financing: Debt and equity transactions dominate this category. Companies continuously borrow and repay debt. The issuance of stock is much less frequent. Here again, for investors, particularly income investors, the most important item is cash dividends paid. It's cash, not profits, that is used to pay dividends to shareholders.

A Simplified Approach to Cash Flow Analysis
A company's cash flow can be defined as the number that appears in the cash flow statement as net cash provided by operating activities, or "net operating cash flow", or some version of this caption. However, there is no universally accepted definition. For instance, many financial professionals consider a company's cash flow to be the sum of its net income and depreciation (a non-cash charge in the income statement). While often coming close to net operating cash flow, this professional's short-cut can be way off the mark and investors should stick with the net operating cash flow number.

While cash flow analysis can include several ratios, the following indicators provide a starting point for an investor to measure the investment quality of a company's cash flow:

Operating Cash Flow / Net Sales: This ratio, which is expressed as a percentage of a company's net operating cash flow to its net sales, or revenue (from the income statement), tells us how many dollars of cash we get for every dollar of sales.

There is no exact percentage to look for but obviously, the higher the percentage the better. It should also be noted that industry and company ratios will vary widely. Investors should track this indicator's performance historically to detect significant variances from the company's average cash flow/sales relationship along with how the company's ratio compares to its peers. Also, keep an eye on how cash flow increases as sales increase; it is important that they move at a similar rate over time.

History of Free Cash Flow: Free cash flow is often defined as net operating cash flow minus capital expenditures, which, as mentioned previously, are considered obligatory. A steady, consistent generation of free cash flow is a highly favorable investment quality – so make sure to look for a company that shows steady and growing free cash flow numbers.

For the sake of conservatism, you can go one step further by expanding what is included in the free cash flow number. For example, in addition to capital expenditures, you could also include dividends for the amount to be subtracted from net operating cash flow to get to get a more comprehensive sense of free cash flow. This could then be compared to sales as was shown above.

As a practical matter, if a company has a history of dividend payments, it cannot easily suspend or eliminate them without causing shareholders some real pain. Even dividend payout reductions, while less injurious, are problematic for many shareholders. In general, the market considers dividend payments to be in the same category as capital expenditures - as necessary cash outlays.

But the important thing here is looking for stable levels. This shows not only the company's ability to generate cash flow but it also signals that the company should be able to continue funding its operations. (To read more about cash flow, see Free Cash Flow: Free, But Not Always Easy, Taking Stock Of Discounted Cash Flow and Discounted Cash Flow Analysis.)

Comprehensive Free Cash Flow Coverage: You can calculate a comprehensive free cash flow ratio by dividing the comprehensive free cash flow by net operating cash flow to get a percentage ratio - the higher the percentage the better.

Free cash flow is an important evaluative indicator for investors. It captures all the positive qualities of internally produced cash from a company's operations and subjects it to a critical use of cash - capital expenditures. If a company's cash generation passes this test in a positive way, it is in a strong position to avoid excessive borrowing, expand its business, pay dividends and to weather hard times.

The term "cash cow," which is applied to companies with ample free cash flow, is not a very elegant term, but it is certainly one of the more appealing investment qualities you can apply to a company with this characteristic. (Read more about cash cows in Spotting Cash Cows.)

Conclusion
Once you understand the importance of how cash flow is generated and reported, you can use these simple indicators to conduct an analysis on your own portfolio. The point, like Moreland said above, is to stay away from "looking only at a firm's income statement and not the cash flow statement." This approach will allow you to discover how a company is managing to pay its obligations and make money for its investors.

by Richard Loth, (Contact Author | Biography)

Richard Loth has more than 38 years of professional experience in the financial services sector, including banking, investment consulting and capital markets development, both internationally and in the U.S. He has worked with Citibank, Fleet National Bank and the Bank of Montreal. Mr. Loth is currently the managing principal of Mentor Investing, an independent Registered Investment Adviser based in Eagle, Colorado. Over the years, he has authored several investment education articles, publications, and books.

Using Consumer Spending As A Market Indicator

http://www.investopedia.com/articles/07/retailsalesdata.asp

Using various individual retail sales figures in December and January may be one of the best indicators available for how to predict the next five to nine months of retail economic activity. Read on to discover how retail groupings can be used as a market indicator.

Same Store Sales
Before getting into individual metrics, the single commonality that is defined among analysts and investors in the retail space is same store sales. This is simply a measure of the change in sales over a defined period - usually year over year - for all stores open for more than a year.

As with most stocks, earnings per share and revenues do matter and should be a point of focus, but it is just as vital to watch the important retail metric of same store sales. Retailers that produce strong and steady same store sales are often those that offer the best performance.

Important December/January Data Release
The holiday onslaught is not just confined to the shopping malls of America, but finds itself on Wall Street with the torrid release of same store sales data. It usually starts after the first week of December and continues through to late January, as retailers have differing release dates.

In the 1990s, before the advent of online shopping and gift cards, this time frame was late December to mid-January horizon, but online sales growth and the proliferation of Christmas gift cards has since widened out the holiday shopping season. (For related reading, see Capitalizing On Seasonal Effects.)

Retail chains have also standardized their release of same store sales within a few days of each other for consistency, which typically occurs on the first trading Wednesday evening and Thursday of January. After the release of this holiday sales data, the investment community usually tries to make its assumptions for the next four to nine months. The reason that analysts wait for one month's data to forecast six to nine months in the future is because the holiday season is the most critical quarter to retailers.

Gaining an Idea of the Overall Consensus and Outlook
For a forward fiscal year, retail analysts usually make their largest fiscal forecast estimate changes in mid-January to early February of each year right after most companies report earnings and all of the major holiday misses or surprises are apparent. Generally, they do not make any additional major changes until the summer, when the "back to school" effect can be seen. There are exceptions, such as a firm-specific changes or a major market event, but this pertains to the group as a whole.

Upon the release of Q4 earnings reports, which encompasses the holiday season, companies tend to offer their year-ahead guidance. Analysts will also shore up their previous forecasts and will often change their ratings on retailers, especially if large forecast changes need to be made. (For more insight, see Strategies For Quarterly Earnings Season, Surprising Earnings Results and Earnings Forecasts: A Primer.)

This helps to provide additional clarity in the projected strength of a company's sales looking forward, along with the overall retail climate. If several major retailers start to issue weak guidance, it is usually a sign of large-scale retail weakness and should be a warning sign to retail investors.

The Importance of Retail Grouping
There are a wide number of very different retailers in the market. To gain an overall understanding of the retail market along with distinguishing strength and weakness within retail segments it is wise to group similar retailers.

For broader-based retail chains, consistent leaders, such as Wal-Mart, Target and Costco Wholesale might be the key players to consider. Of course, the companies that top this list will vary and the list itself will change over time. While these are just a small segment of the wide retail sector, due to their size, the retail sales data of these companies are some of the most important to watch to be able to gauge spending health in the economy.

To gain an understanding of whether or not consumers are buying bigger ticket items, check out the consumer electronics, mainly brick-and-mortar companies like Best Buy, who sell big screen TVs. You can also look to online retailers, such as Amazon.com, to gauge the health of consumer internet spending.

To gauge how often people are going out for dinners, which is often a sign of consumer health, look to mega-chain restaurants like Brinker International and Darden Restaurants. However, chains such as McDonald's, Yum! Brands and other fast food or quasi-fast food chains should not be in the equation, because their products fall more into the range of consumer staples than discretionary goods.

The list can grow longer by the minute if you want to be very specific in your segmentation, but breaking down the retail space into just a few segments can still give you insight into how consumers are spending. The following chart provides an example of how your retail spreadsheet might look:

Retail Component December Guidance & January Reporting Guidance for Calendar Q1 Guidance for Calendar Q2 & more
Wal-Mart (WMT) - - -
Target (TGT) - - -
Costco (COST) - - -
Ralph Lauren (RL) - - -
VF Corp (VFC) - - -
Limited (LTD) - - -
Nike (NKE) - - -
Brinker (EAT) - - -
Darden (DRI) - - -
Kohl's (KSS) - - -
Federated (FD) - - -
JC Penney (JCP) - - -
Best Buy (BBY) - - -
Amazon.com (AMZN) - - -
UPS (UPS) - - -
Fedex (FDX) - - -
JB Hunt (JBHT) - - -
YRC Worldwide (YRCW) - - -
RailAmerica (RRA) - - -
Packaging Corp (PKG) - - -
Bemis (BMS) - - -

Which Retail Components Should You Ignore?
Not all retailers will shed light on the spending health of consumers, typically, these are the companies that sell life staples, which are purchased regardless of the economic conditions. Examples of these companies include basic-level food chains and drugstores.

Also, autos and other transportation-related sectors aren't a good gauge as U.S. auto manufacturing and sales since the '90s have been steadily less correlated to overall economic spending, partly because of foreign auto sales forging ahead into the U.S. and partly because of the perpetual woes of the Big Three and the incentives they use to lure new car buyers. As this has grown to be more and more of a problem each year, it is not likely that any sizable change would be expected there. (For related reading, check out the Industry Handbook.)




Housing product sellers like Home Depot and Lowe's also aren't the best indicator of consumer health because of the inherent ties to housing and the drastic swings that the housing sector tends to experience.

Why should investors care?
If the retail consumer's spending is going to slow down for three to six months, the rest of the economy has to operate on different assumptions. Housing is volatile, autos are volatile and durable goods are volatile, and the swings are often temporary, but systematic retail change can be longer-lasting.

What can alter these factors as an indicator?
A severe positive or negative global shock event can impact discretionary retail spending overnight. A drastic decision out of the Federal Reserve on its monetary policy or a rapid and unexpected interest rate cycle shift can change this scenario as well. Critical changes are rare, but when they unexpectedly occur, it changes the game.

Severe commodity or energy price changes can also drastically alter the cost structure of this scenario, although this is often well publicized. A severe bull market or severe bear market must also be taken into consideration.

Conclusion
General consumer discretionary spending and the related parts of retail are what define a good or bad economy, and catching this trend can be invaluable. Picking a year's high-flier or a severe laggard in each group does not usually help, because of overall index misrepresentation. Therefore, using the traditional, steady choices of stocks in each retail group can provide savvy investors with a wealth of information.

by Jon Ogg, (Contact Author | Biography)

Jon Ogg has been a financial news analyst since 1997. Some of his accomplishments include creating an audio squawk for active traders called TTN (it was sold in 2003 and became a news broadcast desk that became part E*Trade); working as a licensed bond broker to U.S. and E.U. financial institutions; acting as a financial advisor and portfolio manager in Copenhagen, Denmark; and gaining experience in private financings. He received a Bachelor of Business Administration in finance at University of Houston. Jon has lived in New York, Chicago, Copenhagen and Houston. To read more of his work, see his blog site www.247wallst.com.

Cashing In On Corporate Restructuring

Companies use mergers, acquisitions and spinoffs to increase their profits. Strategic mergers and acquisitions can help a company become more competitive in its field and improve its bottom line, while spinoffs are a way to get rid of underperforming or non-core business divisions that can drag down profits. While mergers, acquisitions and spinoffs can be great moves for companies, they can be even better for the enterprising investor willing to do a little research! If you do your homework, you can find profitable opportunities in these corporate actions - we'll take you through this process step by step.

Spinoffs
Why are spinoffs such a great investment opportunity? Typically, underperforming business divisions are loaded with debt. When they are cut off from the parent company, that company can become more valuable as a result. (For more insight, check out Conglomerates: Cash Cows Or Corporate Chaos?)

The Process
Here's how a typical spinoff situation works:

The company decides to spin off a business division.
The parent company files the necessary paperwork with the Securities and Exchange Commission (SEC).
The spinoff becomes a company of its own and must also file paperwork with the SEC.
Shares in the new company are distributed to parent company shareholders.
The spinoff company goes public.
Notice that the spinoff shares are distributed to parent company shareholders. There are two reasons why this creates value:

Parent company shareholders rarely want anything to do with the new spinoff. After all, it's an underperforming division that was cut off to improve the bottom line. As a result, many new shareholders sell immediately after the new company goes public.
Large institutions are often forbidden to hold shares in spinoffs due to the smaller market capitalization, increased risk, or poor financials of the new company. Therefore, many large institutions automatically sell their shares immediately after the new company goes public.
Simple supply and demand logic will tell you that such a large number of shares on the market will naturally decrease the price, even if it is not fundamentally justified. It is this temporary mispricing that gives the enterprising investor an opportunity for profit.

The Homework
Information is easy to find when it comes to spinoffs. Every parent company is forced to file paperwork with the SEC outlining everything that an investor needs to know (and then some). The most important form to look for is Form 10, which outlines the spinoff distribution terms. This document contains a few key things to look for:

Basic Company, Share and Pricing Information
Look at the new company's market cap. If it's smaller, large funds are more likely to sell it. Also look at the share distribution terms to see whether it makes sense to buy the parent company shares or to buy on the open market after the company goes public.

Distribution Type
Oftentimes, spinoff shares are distributed to parent company stockholders; however, in some cases partial spinoffs, rights offerings or other formats are used. This can provide increased leverage, or other advantages.

Insider Distributions
Insider holdings and activity are key when determining the value of a spinoff. High insider ownership gives management incentive to perform well and drives shareholder value. (For more on this, see When Insiders Buy, Should Investors Join Them? and Can Insiders Help You Make Better Trades?)

It is also a good idea to read press releases, related news coverage and other available media to determine how the public is going to react to the new spinoff. Press releases can be found under the company's ticker on Yahoo! Finance and company news can be found on Google News.

Overall, spinoffs outperform the market because of the inherent flaws in the spinoff process. Although not every spinoff opportunity represents an attractive investment, investors willing to dig a little deeper into SEC filings and press releases can find those that are with relative ease.

Mergers and Acquisitions (M&A)
Companies are notorious for failing at mergers and acquisitions - especially the mergers where two extremely large companies join forces. Add to that the fact that the M&A field is heavily dominated by arbitrage funds and other big players, and you may wonder how any small investor can make a profit. In fact, M&As can provide good opportunities for investors - it's just a matter of knowing how to find them. (For further reading, see The Basics Of Mergers And Acquisitions and The Wacky World Of M&As.)

The Process
While most M&A transactions are handled through stock and cash offerings, others are handled through the use of merger securities. These can include bonds, warrants, preferred stock, rights, and many others. Here's how the process works:

The acquiring company decides that it wants to buy or merge with another company.
It announces this intention either privately or publicly in a statement, hostile acquisition of stock, rumor, offering, or other means.
The company being acquired then considers the bid. The board of directors advises shareholders of the company's recommended vote and then sends out a proxy to all shareholders who vote on whether or not to sell the company.
If the merger is approved, both companies file the necessary paperwork with the SEC outlining the terms, time and other details of the sale.
The company is bought and integrated into the acquiring company, and the acquired company's shareholders are compensated.
The Homework
As mentioned above, these M&A transactions take place with cash, stock or other instruments. Cash transactions provide limited opportunity for retail investors because any value has already been taken away from arbitrageurs well before the transaction takes place. The same is often true with M&A's that take place with stock offerings because these provide the opportunity to short or buy the acquiring company's stock.




Merger securities are another story. Oftentimes, nobody wants to deal with merger securities for the same reasons they don't want to deal with spinoffs - because they aren't allowed to (as is the case for larger funds) or because they don't care for or understand the new securities. This presents another great opportunity for investors to profit.

The most important forms to look at when researching merger securities are:

Form S4 - This form covers any new securities issued as a result of a merger.
Schedule 14D - This form covers tender offers filed by public acquiring companies.
Schedule 13E - This form covers tender offers when a company is going private.
M&A deals vary greatly in what's offered; therefore, it is important to carefully analyze each deal. Mathematics can tell you the fair value of the securities being offered and a look at management can show how serious the company is about maintaining performance.

Overall, M&A deals involving merger securities rather than cash or stock present a great investment opportunity for the same reason as spinoffs - they are ignored by the majority of the public. However, like spinoffs, it is important to carefully research each opportunity before buying.

Conclusion
Both spinoffs and M&A activity present great investment opportunities for investors willing to dig in to the SEC filings and press releases to find the information they need. In best of situations, spinoffs continue to outperform the market, while mergers involving obscure offerings continue to cause unjustified selling.

Resources
-"You Can Be A Stock Market Genius" by Joel Greenblatt (1997) - This is one of the best books on mergers, acquisitions, spinoffs, rights offerings, bankruptcies and other unique investment opportunities for retail investors.

-Edgar Database - This is the SEC's database where investors can find all company filings free of charge.

-SECFilings.com - This is a free website that lets you sign up for email alerts whenever certain types of filings are made - an excellent way to have investment opportunities delivered to your inbox every day!


by Justin Kuepper, (Contact Author | Biography)

Justin Kuepper has many years of experience in the market as an active trader and a personal retirement accounts manager. He spent a few years independently building and managing financial portals before obtaining his current position with Accelerized New Media, owner of SECFilings.com, ExecutiveDisclosure.com and other popular financial portals. Kuepper continues to write on a freelance basis, covering both finance and technology topics.