Recommendations

At the beginning of 2001 the markets worldwide are struggling from receeding growth and look forward to positive influences from falling interest rates. As an outright recession in the US will be avoided the markets should find new strength when the exaggerated valuations and expectations come back to earth.

One of the best fundamental oriented investment ideas for the time being is to invest in Eastern Europe. Markets in Poland, Hungary, the Czech Republic, Slowenia are cheap and offer exceptional economic growth. The perspective to enter the European Union will lead to a convergence rally similar to the one seen in Greece and Portugal during the last decade.

C E E (NYSE – 12.9375 $)

Buying “The Central European Equity Fund” is an easy way to profit from the expected trends. Listed on the NYSE this fund managed by Deutsche Bank, closed the year end at $12 15/16. With an NAV of $17.66 the discount of 26.7 % is attractive and should sew on other funds as soon as the convergence rally starts in earnest. At the end of October 2000 the fund was invested in Germany 27.9%, Poland 28.4%, Hungary 20%, Czech Republic 12.6%, Austria 4.3%, Russia 2.7% and Croatia 4.1%. During the last months the fund sold all investments in Germany to increase the exposure in Eastern Europe. CEE is buying back sizeable numbers of their own shares but the fund up to now is not a major target of shareholder activists. More information and current updates about the fund may be found at http://www.germanyfund.com at http://www.trustnet.co.uk and at http://www.cefa.com

From time to time I offer investment ideas behind my major activities in the world of closed-end funds and Investment Trusts. At the start of the new year the following is my favourit.

Deut. Telekom (DT)/VSTR Arbitrage with 68% return (annualised)?

Deutsche Telekom (DT) offered to acquire all shares of Voicestream (VSTR) for a mix of DT-shares and cash. The exact conditions of the offer may be found at VSTRs Homepage. To make it simple, I assume that the deal will be consumated at the end of Q2 2001. VSTR shareholders should by than receive 3.2 shares of DT plus $ 30 per VSTR share. Despite some imponderabilities which arise from legal hurdles and specifics in the agreement between VSTR and DT the probabilities that the takeover will succeed as expected seem to be much higher than even. I calculate around 90%.

This said, its clear that the price of VSTR is closely correlated with the movements of DT. The spread between the takeover value of VSTR and its market price during the last weeks was frequently above 20%. On January 2, 2001 VSTR closed at $101 and the ADRs of DT at $29.5. Fair Value for VSTR if the deal would have been finalised that day, could have been above $124 ($29,5 * 3.2 + $30 = $124,4) meaning that VSTR was trading with a discount of 23.2% compared with DT.

The easiest way to profit from this spread is buying for instance 100 VSTR and selling short 320 DT. You invest $10100 (=100*101) and you receive $9440 from the short sale (=320*29.5). If the deal is consumated and the price of DT is let´s say $31 or whatever, DT will deliver you the 320 shares to cover your short position. You will end up receiving $ 3000 (100*$30) from DT in cash on your investment of $10100. A profit of 29.7 % with a probability of 90%? Assuming the deal is finalized on June 30, 2001 the profit p.a. would be above 68 %. The performance may be even better if you ride the unreasonable spread fluctuations successfully. Based on closing prices from Jan. 5 the ROI is already reduced to 26.45%.

More information and strategies about this deal especially for mathematically oriented investors are available on demand. To follow US-Arbs the Yahoo-Club under http://clubs.yahoo.com/clubs/investmentarbitrage may be of interest.

January 6, 2001

This page will be updated from time to time. If you are interested please send me an e-mail.

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Rainer Feix, Anlage- und Finanzberatung, D-61440 Oberursel, Dornbachstr. 11

E-mail: RFeix@t-online.de, http://www.feix.net