Video Blog: Opportunity Potential in Technology Sector

By Nick P. Calamos, Co-Chief Investment Officer and President of Investments

Earlier this month, I was a guest on Bloomberg TV’s “Street Smart.” After the broadcast wrapped up, I recorded some additional thoughts on the technology sector.

The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass. Information contained herein is for informational purposes only and should not be considered investment advice.

Investing involves risk, including potential loss of principal. Diversification does not insure against market loss. As a result of political or economic instability in foreign countries, there can be special risks associated with investing in foreign securities. There also can be special risks associated with technology companies, given their potential for volatility.

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Video Blog: Today’s markets require global perspective

By Nick P. Calamos, Co-Chief Investment Officer and President of Investments

Following my CNBC “Squawk Box” appearance on January 7, 2010, I recorded some additional comments on the opportunity we’re seeing in the global markets.

The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass. Information contained herein is for informational purposes only and should not be considered investment advice.

Investing involves risk, including potential loss of principal. Diversification does not insure against market loss. As a result of political or economic instability in foreign countries, there can be special risks associated with investing in foreign securities.

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Markets rebound, but remain in a sideways-moving pattern

By John P. Calamos, Sr., Chairman, Chief Executive Officer and Co-Chief Investment Officer

Credit conditions have improved, and banks have resumed some lending activity (albeit at a measured pace). There’s been solid new issuance in the convertible and traditional debt markets. We’ve seen encouraging merger-and-acquisition activity, with capital moving from weak hands to stronger ones. Many companies have posted good earnings, including technology companies and other growth names.

Although global governments have flooded the world’s financial system with cash, inflation has been kept at bay (so far). Positive third-quarter GDP growth in the U.S. provided a counterbalance to continued weakness in employment data. Consumer activity remains muted, but has been rekindled. Low interest rates and government incentives for first-time homebuyers have given a boost to the mortgage and housing markets.

We continue to believe that the days ahead will remain volatile, but that good investment opportunities can be found even in slower economic growth and sideways-moving markets. This has led us to favor companies with cleaner balance sheets, high returns on invested capital, good cash flows and globally diverse revenue streams. Cyclical exposure may also be beneficial for the early stages of economic recovery.

We have invested in companies involved in cyclical industries, rather than purchasing highly volatile commodities. We’ve underweighted the financial sector and are avoiding the banking sector in favor of areas such as asset management. We remain concerned about the fundamentals of many banking companies, particularly given the unknowns associated with increased government regulation. In terms of credit quality, we’ve favored higher credit qualities over the most speculative issues because we believe they may be particularly vulnerable in a slow-growth environment. We’ve also found many attractive investments in non-U.S. markets. In fact, globalization offers the most exciting landscape we’ve seen in decades and extends beyond the developed markets to select companies in emerging markets such as China, India and Brazil.

Dow Jones Industrial Average (12/31/08-11/27/09)

After plummeting early in ‘09, the Dow, like many market benchmarks, has made up for lost ground. Markets now appear to be in a sideways moving pattern, with frequent dips and gains.
 

Source: finance.yahoo.com. The Dow Jones Industrial Average is an unmanaged pool of 30 large-cap U.S. stocks, often cited as a gauge of the U.S. stock market. The average is unmanaged, does not entail fees and expenses and is not available for direct investment.

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Lessons From the 1970s, Updated for the Global Economy

By John P. Calamos, Sr., Chairman, Chief Executive Officer and Co-Chief Investment Officer

One of the things I learned in the 1970s and 1980s is that you don’t sit around on your hands waiting for everything to be alright. There was a lot of opportunity in the 1970s and there is a lot of potential opportunity now. You just need to be careful and selective.

There are a lot of people doing very opportunistic development, even when the economy is very soft. If you wait until everything is okay–when all the ducks are in align, when all the stars are in align–that’s typically called the top of the market, not the bottom of the market. So, you do have to look for the opportunities.

We’re thinking more globally than ever before. Globalization is really the difference between now and the 1970s and the 1980s. In the 1970s and the 1980s, you did not have the opportunity to really invest anywhere else. You were really kind of stuck if the U.S. was not working; it was difficult to invest outside of the United States. Today, it’s easy to invest outside of the United States.

Domestic investments can also participate in this non-U.S. opportunity. Many of the companies we invest in today have almost half their revenues coming from outside of the United States and we think that’s positive.

Another piece of good news related to globalization: it can provide a check on bad government policy. If our government makes a policy mistake, money is going to flow out of the United States. As the saying goes, “money goes to where it is best treated.”

A number of countries in the evolving world—including China, India and Brazil—they’re really embracing capitalism. The middle class in these countries are growing. They’re a bit more volatile, but they’re no longer an “emerging markets.” They’re powerful forces in the global economy. We would rather term them as being part of the “evolving world” rather than as emerging markets.

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Did anyone say September would be a challenging month?

By John P. Calamos, Sr., Chairman, Chief Executive Officer and Co-Chief Investment Officer

September has the stigma of being a difficult month for equities, but heightened levels of investor confidence led the equity market this September to register the seventh consecutive monthly gain. U.S. equities returned 3.73%, as measured by the S&P 500 Index. Underpinning the streak of positive returns has been the perception that the global economy is stabilizing, supported by corporate profits surpassing near-term expectations. Specific market action has been typical of the early stages of a cyclical recovery: leadership has gravitated toward the industrial and materials sectors, growth investing has outperformed value investing; and small- and mid-cap stocks have performed better than their larger-cap brethren. Although this market dynamic has benefited Calamos’ portfolios in the near term, we stress that our investment approach is much longer-term focused.

When stock prices move higher, especially over a protracted period, the tendency to become more risk tolerant is quite common. Investors focus more heavily on positive aspects of a company, an industry or the economy as a whole. Rewards may become greater, but only at the expense of greater risks. Eventually reality catches up, and the reverse happens, leading to risk aversion. In the current environment, mounting consumer debt, a challenging employment situation and large and surging budget deficits constitute major headwinds for the market. We believe that intense volatility, rather than prolonged bear or bull market moves may be the distinguishing characteristic of equity markets over the foreseeable future. The approach we advocate and apply while constructing and maintaining portfolios is to adhere to a constant risk/reward posture throughout entire business cycles. This posture may vary from investor to investor, but we are convinced that disciplined risk management is very effective in helping our clients meet their long-term investment goals.

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Convertibles and Asset Allocation

By John P. Calamos, Sr., Chairman, Chief Executive Officer and Co-Chief Investment Officer

Coming out of last year’s sell off, convertibles have enjoyed a surge of renewed interest as investors have returned their attention to more defensive investments and to rebalancing. I’m heartened by this shift, having long believed (for 30-plus years, in fact) that convertibles can fill many vital strategic roles in portfolios—including as defensive equity, enhanced fixed income and market neutral allocations. Recently, I had the opportunity to write an article on this subject for Investment News, (“Vehicle Offers a Way to Control Risk,” September 13, 2009. ) You can read it by visiting investmentnews.com, and searching under “Calamos convertibles”. This article is a shortened form of my recent paper, “Convertible Securities and Asset Allocation Considerations”.

Key take-aways:

• Long-term investors who are concerned about participating in an uncertain market environment may want to consider convertibles as a potential way to buy time while seeking to lower risk. (The coupon feature of convertibles means that investors are essentially “paid to wait” for rising equity markets.) Of course, investors do need to keep in mind that convertible bonds are not without risks—including default risk and interest rate risk.
• In my experience, convertibles are best utilized as a part of a long-term plan, not a temporary tactic. Convertibles are extremely versatile—most definitely not a one-size-fits-all solution. With hybrid characteristics, convertibles lend themselves to be used in a variety of ways, with varying risk levels.
• Active management is essential. Without active management and rigorous valuation of the equity and bond characteristics of the portfolio, a pure convertible strategy can easily stray from the original objective (that is, fluctuating from fixed-income-like to equity-like depending on the phase of the current market and/or economic cycles).

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Perspectives on the Equity Markets

By Jeffrey Krebs, Portfolio Specialist

As the strong summer rally continues, investors are moving from a state of relief to concerns of “have we gone too far too soon?” Since its low established on March 9, the S&P 500 Index has surged over 52% through August 31, yet remains at levels below the September Lehman-crisis days. There is solid evidence to back-up these gains: corporate earnings have largely beaten lowered expectations, productivity continues to increase and housing data improves. Legitimate concerns remain, however, as consumer spending remains weak and inflation expectations rise, along with a rapidly expanding federal budget deficit.

While we remain cautious and defensive, we continue to participate in select opportunities that the market gives us. The latest rally in asset prices has been largely driven by lower-quality and higher-risk companies, yet we continue to believe investors will ultimately reward those firms with productivity-enhancement capabilities, cleaner balance sheets and diversified global revenues. We are prepared for a volatile market environment, which should present growth opportunities within areas such as technology, energy and materials.

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Convertible Opportunities

By John P. Calamos, Sr., Chairman, Chief Executive Officer and Co-Chief Investment Officer

The year-to-date performance for convertible securities showcases their unique risk/reward profile - the potential downside protection of bonds, with the upside potential of equities. In the first quarter, convertibles (represented by the Merrill Lynch All US Convertibles Index) held their value while equities (represented by the S&P 500 Index) were down significantly for the period. Convertibles did not jump as quickly as equities in March, but still delivered strong results as the rally took hold. In the second quarter, convertibles (led by Financials) outperformed equities during a strong rally for the S&P 500. Over all, convertibles have returned 21.01% in the first half of 2009 (through 6/30/09) versus 3.16% for equities. A portfolio that blends equity exposure with convertible securities may make sense in an era of uncertain markets.

Convertibles vs Stocks – Performance Comparison First Half ‘09

Source: Mellon Analytical Solutions LLC.
Click here to read read important information regarding performance and risk

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Don’t ignore convertibles as a long term investment strategy

By John P. Calamos, Sr., Chairman, Chief Executive Officer and Co-Chief Investment Officer

In late 2008, convertibles reached levels of undervaluation that we have not seen in more than 30 years of investing in convertibles. In recent months, valuations have rebounded off these unprecedented lows but remain at attractive levels – levels that we believe will eventually be corrected.

This ongoing valuation gap has created renewed interest in investing in convertibles. Some investors only desire to invest in convertibles until the gap closes (i.e., they use convertibles as a shorter term tactical strategy). However, the potential benefits of using convertibles within a successful longer-term investment strategy should not be ignored. Convertibles can fit into a variety of asset allocations and provide a potentially defensive way to invest in the US and global stock markets.

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Playing the same game with new rules

By Nick P. Calamos, CFA, Co-CIO

In John Sr.'s past blog posts, he touched on the importance of active management in what will likely be a challenging environment for years to come. But how can you win the active management game when things have changed so dramatically? Like any game, you better start with a firm grasp of the rules. Given the events over the last 9 months, here are the important ones we need to follow:

1. Washington D.C. is the new growth city
2. Valuations will not get as stretched in the equity markets and growth expectations will be revised down considerably
3. Old-fashioned dividends mean something
4. G7 competitive devaluations and protectionist legislation will become the norm
5. To grow, emerging nations must become consumption-driven and attempt to become independent of the developed nations
6. Knowledge is free, but capital may be much harder to get
7. Real returns after tax will take on new meaning
8. Baby boomers will reprioritize spending
9. The rules will change often!

Many market experts and economists speak of “green shoots” appearing in the economy. We believe that the most fertile seeds will be the ones that are cultivated with the highest degree of economic freedom. However, almost all activity in the current U.S. environment runs counter to encouraging the seeds of future prosperity. Until this begins to change at the margin, we believe it will be difficult for a new bull market to begin.

Unfortunately, we believe that broad wealth creation and improvements in living standards will not be substantial and that the overall economic picture will be sobering over the next decade. The sustainable level of economic growth will be lower than we have been accustomed to while unemployment will likely remain stubbornly high.

Yet, in our view, the markets continue to offer the potential for shorter- and longer-term wealth creation, albeit on a highly selective basis. We strongly believe that many investment opportunities will be available in the future — just as they were in the 1970s and even in the 1930s.

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S&P 500 Index gives back 5% in 6 days, now negative for the year

By John P. Calamos, Sr., Chairman, Chief Executive Officer and Co-Chief Investment Officer

Between March 6th and May 8th, the S&P 500 Index gained 36%. Aside from being a fresh reminder about the dangers of market timing (especially for those who went to cash in January and February), we had a pretty good feeling that the recent trajectory wasn't sustainable. Sure enough, between June 12th and June 22nd, the S&P 500 Index lost 6%.

Whenever I see moves like this, it reinforces a few of my beliefs:

• Timing the market is an extremely risky proposition. It's a difficult game where the odds are stacked against you.
• Sharp moves like this may become more common as market participants digest data points (many of which give conflicting signals) about economic recovery and our longer-term prospects given massive government intervention.
• Given the two points above, it seems irrelevant whether we're in the midst of a new bull or at the tail-end of a secular bear spike. For the foreseeable future, I believe success will be dictated by active management and investing in the 'right or good' companies (companies we believe have strong balance sheets, good cash flows and diverse revenue streams).

YTD, we've witnessed this success with many of our equity strategies -- and I believe the performance divergence between good growth companies and the broader indices may continue to become more pronounced in the months and quarters ahead.

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Convertible Issuance on the Rise

By Martin Coughlan, CFA, CAIA, SVP, Senior Portfolio Specialist

We wanted to share some numbers demonstrating the improvement in issuance over recent weeks in the global convertible market. Through the first quarter, global issuance for was a little over $5 billion, according to Merrill Lynch. Through May 26, global issuance has since risen to approximately $25 billion and more than 50 issues. For the most part, yields and conversion premiums are attractive for long convertible investors. We see this as a strong indication that conditions in the markets are normalizing and that companies are finding convertibles an attractive financing tool in this environment.

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Active Management vs. Indexing

By John P. Calamos, Sr., Chairman, Chief Executive Officer and Co-Chief Investment Officer

By and large, conditions continue to be moving in the right direction. The opening of the credit markets is a very positive sign. The correction that people have been calling for has likely been happening over the past two or three weeks. But, we could be in a sideways moving market for a number of years. I think it would be foolhardy to think that we’re looking at a V-shaped recovery where the equity markets bounce back to where we were a couple of years ago. I don’t think that’s in the cards.

Even so, my view of the market is very constructive compared to last year. But I’m looking at this as a bottom-up market. You need to do your homework on individual positions. Indexing strategies are not going to work well, because not everything is going to rise in tandem. There are good opportunities out there—in convertibles, growth stocks and high yield bonds. You’ve got to do the research on both the credit and equity sides.

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Bear Market Rally or Something More?

By John P. Calamos, Sr., Chairman, Chief Executive Officer and Co-Chief Investment Officer

A lot of investors are getting stuck on “is this a bear market rally or something more?” They’re forgetting about the opportunities of the market. My view is, “let’s look for opportunities bottom up.” We’re not going to worry about the zigs and zags of the market.

The fourth quarter of 2008 felt like the end of Western civilization. The first four months of the year have felt like a normal slowdown. In similar past periods, this has been a very opportunistic environment. The valuation gap in convertibles is closing, but they still offer tremendous value, especially as a conservative way to be in equity. The high yield market is responding very nicely, and growth stocks are doing very well in here.

Credit markets are open; convertible bond issuance is way up; bond markets are also up in issuance. All this is good news.

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Long-Term Growth Themes and Early Cyclicals

By Jon Vacko, Senior Vice President and Head of U.S. Research and Investments

We’re living through extraordinary days in the markets, but we’re staying focused—and focused on the long-term. We haven’t abandoned our secular long-term growth themes. In fact, they are like a beacon in these dark days—enhancing prospects for long-term outperformance. This is because these thematic biases, in our experience, promote an upward “reversion to the mean” during rough markets. Some of the themes that figure heavily in our strategies include:

• Improving productivity—just because the market is down and the economy is slow, it doesn’t mean that companies won’t try to be efficient.
• Globalization—it may have slowed, but it’s not going to stop
• Access to information—people are still going to want to be connected through their e-mail, Internet, wireless phones, etc.

Also, our current positioning across most of our strategies includes increased emphasis on early cyclicals—for example, on the energy side and the financial side. On the financial side, we’re looking at exchanges and asset managers. We’re also looking at industrials (early infrastructure names). We’ve also reduced some of the more expensive names in health care and consumer staples—these were helpful in 2008, but are now more expensive on an absolute and relative basis.

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Is Systemic Risk Behind Us?

By John P. Calamos, Sr., Chairman, Chief Executive Officer and Co-Chief Investment Officer

I don’t think that the systemic risk of the fourth quarter of 2008 (e.g., devastation of consumer wealth, collapse of the banking system) will continue. The good news is that the markets are beginning to function and corporate bond issuance is headed in the right direction.

I was talking with Mike Milken—whom I respect very much—a couple of weeks ago. I commented on how the banking system was falling apart. He reminded me of something important. “John,” he said, “Remember in the 1980s, we didn’t need the banking system.” Companies went directly to the market to raise capital, not to the government.

So far in 2009, we’ve seen something similar. February saw $76 billion of fixed-rate debt. Companies aren’t going to the banks. They are going directly to the market. This is good news. Liquidity is coming back.

Also, today, there are a lot of people out there wrestling with the inflation/deflation dilemma. Looking at the economy and markets today, I’d hate to give up the equity bias—because things could turn fast, especially with all the money out there. You’re not going to get a letter in the mail that says, “Everything’s better, get back in.”

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