Lehman Brothers to be a “take under’’ candidate?
June 30th, 2008 | Posted by stockBy Matthew Goldstein
Shares of the battered investment bank took another beating on Monday on widespread speculation that a rival firm was going to make a bid for Lehman Brothers (LEH) at a substantial discount to its current price. Much of the speculation, traders say, focused around Barclays (BCS), the British-based bank. Lehman shares fell 11% to finish under $20.
The talk on Wall Street is that Barclays may be preparing to make a bid for Lehman at a severe discount from Monday’s closing price. Officials with Barclays had no comment, and a Lehman spokesman says, “no comment per our policy of not commenting on rumor or speculation.” In any transaction, Lehman’s most prized asset may be its Neuberger Berman asset management group, which it acquired five years ago for $2.6 billion.
Last week Barclays announced that it was raising $8.9 billion in capital through a sale of stock to a group of private investors. The bank, like many Wall Street firms, is raising capital to shore-up its balance sheet. But some have speculated that Barclays is raising more capital than it needs, given that it has not had as much in subprime writedowns as other financial firms. This has led to speculation that Barclays might also be raising capital to finance an acquisition.
Lehman shares have been under pressure for months because of poor earnings and soaring write-downs. But for the moment, the talk about Barclays or another big bank stepping in to buy Lehman is nothing more than Wall Street chatter. Lehman CEO Richard Fuld, on a number of occasions, has said the firm has no interest in being acquired.
June 27th, 2008 | Posted by stockWall Street has a love-hate relationship with its research analysts. On the one hand, equity analysts have a decidedly mixed record of accurately predicting the future. If you bought when your typical analyst rates a stock a “buy,” you’d probably be no better off than buying when he or she said “sell.”
Yet analysts do move stocks. Investors are clearly influenced by the daily upgrades and downgrades.
I would explain this by arguing that research analysts embody the Wall Street consensus.
A writer once observed, “How do I know what I think until I see what I say?” Many things don’t crystallize until you write them down.
Research notes serve this purpose for Wall Street. They demonstrate to the investment community what it is thinking about a particular stock or industry.
And in the past week, something has crystallized: The financial sector, especially the big banks and brokers, are in trouble. As I write here, I think this growing consensus contributed to stock’s big sell-off on June 26.
SPACs as a hiding place in bear markets
June 26th, 2008 | Posted by stockI’ve never been a big fan of special purpose acquisition corporations, or SPACs. Those are the publicly-traded pools of money raised to give some financier or other a source of funds to do one or more unknown future acquisitions within a set time, typically two years. If the dealmaker finds a target and shareholders approve, the funds are spent and the newly acquired company becomes part of the SPAC’s portfolio. If no deal comes up, investors get back their money plus interest (minus the costs of taking the SPAC public in the first place).
Reminds me of a closed-end fund. You don’t really want to buy at the IPO, when you may suffer an immediate 6% or 7% loss to the underwriting fees. You can avoid that immediate hit buying after the IPO.
There’s also sometimes a question about excessive fees and deals where funds from a SPAC are used to cover only a portion of an acquisition. You have to ask whether the SPAC manager’s interests are always going to be aligned with those of a SPAC shareholder. And after acquisitions are completed, SPAC share prices tend to be quite volatile. Generally, investors would be better off in a simple stock index fund. A Bloomberg article on the SPAC market noted that over the past five years, the vehicles provided an average annual return of just 6% versus the S&P 500’s 13% average annual gain.
So I was surprised and interested to hear fund manager John Osterweis, who runs the Osterweis Fund (OSTFX), at the Morningstar conference in Chicago talking about owning a SPAC as a good bet in a down market. Osterweis, whose fund has beaten the S&P 500 by 3 percentage points a year since 1993, was on a panel of undiscovered fund managers. Despite his stellar record, the Osterweis fund still has just $350 million in assets.
Osterweis likes the SPAC being run by activist hedge fund manager Nelson Peltz, which is called Trian Acquisition Corp (TUX). He was impressed with Peltz’s efforts to improve performance at H.J. Heinz (HNZ) and thinks the SPAC is a smart way to follow in Peltz’s footsteps.
But he also says a SPAC is a good place to hide in a tumultuous stock market, like we have so far this year. If Peltz makes an acquisition, the shares are likely to go up in price. Until then, Trian keeps the cash in trust. If no deal materializes, Trian gives the cash back plus any interest. “It’s a great bear market investment,” Osterweis says, breaking the pieces down as a surrogate cash holding plus an option on a future Peltz deal. “I can’t figure out how we could lose money on it,” he says. “But it’s not the kind of thing we would invest in in a raging bull market.”
Living in the Stock Market Moment
June 24th, 2008 | Posted by stockAre the stomach-churning ups-and-downs of the financial markets not quite thrilling enough for you? Do you crave instantaneous, immediate connection to the stock market? You’re in luck.
Today the New York Stock Exchange (NYX) announced it is providing “realtime” data on stock prices. In the past, most Internet sites offer stock price movements with a 20-minute delay. Only brokerage customers typically have received instant access to market data.
Google and CNBC are the first to offer NYSE’s instantaneous price information, though Yahoo Finance recently added instant data from electronic communications networks through NYSE’s upstart rival BATS Trading.
A Google exec is quoted saying this “is an important step towards helping investors make more informed and timely investment decisions.”
I’m not so sure. Unless you’re about to buy or sell a stock (in which case you would be using a brokerage site), you can probably afford to wait 20 minutes to find out how a stock is doing. The one exception is when major news breaks during the day, and you want to know how a particular stock is reacting in real time. Even so, is such second-by-second obsession really good for your mental health?
Don’t get me wrong. I’m not opposed to instant data; I’m just wondering who is going to find this particular innovation useful. If you find it helpful, I’d love to hear from you.
It’s hard to believe that less than a generation ago, the vast majority of investors had to wait for the next day’s newspaper to find out how their stocks were doing. There was no Internet, no CNBC, and most trades were executed by human beings on an exchange floor, not computers buying and selling shares in nanoseconds.
All the speed and technology has definite advantages. It’s more efficient and it’s harder for insiders to take advantage of amateur investors (like the old wire houses often did). But it can also make for a more excitable, turbulent stock market during times of uncertainty.
Most financial planners advise individual investors to avoid paying too much attention to the daily, hourly or minute-by-minute movement of their portfolios. It’s just too hard to remain emotionally detached amidst the tumult, and remaining calm is often the best way to avoid big mistakes.
Banks: Merrill Brings the Gloom
June 20th, 2008 | Posted by stockThis earnings season could be brutal for U.S. banks, the continuation of a banking crisis that could last for years.
That’s the implication of a new report from Merrill Lynch (MER) analysts, who say large regional banks could see 2008 and 2009 earnings per share nearly one-quarter below what analysts are now expecting.
The banks in question include Bank of America (BAC); Fifth Third (FITB), which announced plans to raise $2 billion in capital this week; KeyCorp (KEY); National City (NCC); Regions Financial (RF); SunTrust (STI); U.S. Bancorp (USB); Wachovia (WB); and Wells Fargo (WFC).
Several key points from this 54-page report, which is sending bank stocks plunging today:
1. It’s all about credit quality.
Banks’ borrowers are having a harder time paying off loans “across nearly all consumer and commercial loan categories,” the Merrill analysts, led by Edward Najarian, write. The worst credit quality will be in residential construction and home equity loans. Of those, the worst hit will be in areas hit hard by the housing slowdown, namely California, Florida, Arizona, Nevada and Michigan. Also, loans originated by brokers are in far worse shape than loans originated by the banks themselves.
2. “Bank stocks now appear to be in capitulation mode.”
The gloomy mood, risky credit, uncertain earnings, dividend cuts and capital raising have sent banks stock prices down more than a quarter in the past seven weeks, and could “trade below fair value in the near-term.”
3. This earnings season will be rough.
For large regional banks, Merrill is predicting median bank earnings in the second quarter of 18% below estimates. Wachovia and Bank of America could miss Wall Street expectations by the greatest percentage.
Last quarter, big banks benefited from profits from the initial public offering of Visa (V) (because they used to share ownership of the credit card network.) That revenue won’t be boosting earnings this quarter. The other problems will be “higher net credit losses” and a greater need to build up reserves for future losses. Revenue trends, however, “will be solid,” with strong commercial loan growth at most banks.
4. But the problem is long term.
“We don’t expect credit metrics to begin to recover until 2010.”
5. Cash is still king.
That’s the conclusion of the Merrill analysts , who expect more rounds of capital-raising and dividend cuts, as banks need cash to prepare for loan losses. Merrill predicts dividend cuts and/or capital-raising at Bank of America, Regions Financial, SunTrust and Wachovia in the second half of the year.
6. Raising capital will get tougher.
The problem with raising cash going forward, Merrill warns: Because stock prices have fallen so much since the beginning of the year, banks will have to issue more new shares to raise the same amount of money. This dilutes existing shareholders’ stakes even more than previous capital-raising efforts. Recently, the stock markets reaction to new issuances has been brutal, often cutting prices 20% to 25% on the day they were announced.
Some of my thoughts on the Merrill report:
It’s tough to predict how bad credit quality will get. It’s true that the full effects of a weak economy haven’t yet shown up in credit measures. The housing market does seem worse than at any time in recent memory, but the job market, with an unemployment rate of 5.5%, isn’t that bad compared to previous banking crises.
The report notes that as banking stocks fall, “we should get closer to fully discounting the credit cycle in bank stock prices and commencing a sustainable price recovery.” This reminds me that I heard a commentator say on TV this morning that he expects the financial sector to be a great investment in “three to five years.”
I’m all for a long-term investment horizon, but there are real dangers to making a long-term value bet on financials. A “sustainable price recovery” might have to wait for a long time, as other sectors could provide much better returns in the next few years. Also, even for long-term value investors, there is a big difference between a payoff in three years and a payoff in five years.
If you think credit conditions are better than these Merrill analysts’ assessments, banking stocks might be a great investment for you — if not now than later this year. But if these analysts are right, this sector will remain a no-man’s land for quite a while. After all, why invest in financial stocks in 2009 if the recovery in credit conditions won’t come until at least 2010? There are real dangers to being early, particularly if credit problems drag on even longer than expected.
Bear Stearns Fund Managers Indicted
June 19th, 2008 | Posted by stockBy Matthew Goldstein and David Henry
Ex-Bear Stearns hedge fund managers Ralph Cioffi and Matthew Tannin are now the first Wall Street executives to face criminal charges arising from the mortgage market meltdown. A federal grand jury in Brooklyn, NY indicted the pair on securities fraud charges on June 18, sources familiar with the nearly year-long investigation say.
Click here to see a copy of the indictment.
Prosecutors are set to announce the filing of charges against Cioffi and Tannin at an afternoon press conference on Thursday. Both men are already in custody and awaiting arraignment in Brooklyn federal court. The filing of criminal charges against the former hedge fund manager would be coupled with the filing of a civil complaint by the Securities and Exchange Commission. An SEC spokesman declined to comment. A spokesman for Eastern District of New York US Attorney Benton Campbell declined to comment.
Sources say attorneys with the SEC are planning to attend a joint press conference with federal prosecutors to announce the filing of charges. Lawyers for Cioffi and Tannin have hired a public relations firm to manage the expected flood of media inquiries. Andy Merrill, the spokesman, says he has no comment at this time.
The investigation is believed to be focusing on comments Cioffi and Tannin made to investors in the funds, as well as to the lending desks of the big Wall Street banks that lent the hedge funds money. In early 2007 the managers told investors and the Wall Street firms that the funds were performing well, even as the pair scrambled to keep them afloat. Prosecutors have focused on those statements as well as Cioffi’s decision to move some of his money out of the funds before they collapsed.
The failure of the Bear funds wiped out $1.6 billion investor capital and led to a spate of litigation. At one point, the two funds controlled nearly $30 billion in mortgage-related securities and were one of the bigger buyers of collateralized debt obligations. The demise of the Bear funds sparked the broader collapse of the market for securities like CDOs, a conglomeration of pieces of bonds that are backed by subprime mortgages, and set off a tightening of the credit markets that persists today.
Stock Buybacks Retreat in Q1 But Remain Strong
June 18th, 2008 | Posted by stockQ1 2007 S&P 500 buybacks at $113.9B vs. $117.7B Q1 2007; First Q-over-Q decline (-3.23%) since Q3 2003
Pullback by Financials that started just prior to the credit crunch continues; Q1,’08 12.35% of buybacks, Q1 2007 28.68%
10th straight quarter of $100B+ buybacks; highest Q dividend was Q4 2007 at $67.1B
Financial share count increasing as issues shore up cash accounts; dilutions from shares and future dilution from convertible instruments
XOM still the poster child for buybacks and SCR (Share Count Reduction)
Expect $100B to continue throughout 2008, but not at the record setting numbers; given the decline in Financial buying, the buybacks are strong
Non-Financial issues are still loaded with cash, Q1 was an 8.8% gain, with 7%+ cash-flow, Q2 EPS expected to increase 10%
Underlying demand for buybacks fed by employee option expiration that date back to the end of the bear market, holders still react positively; companies love them because they still own the asset and they increase EPS in the same quarter they are purchased
Buybacks are temporary unless companies retire the share
Financials have actually reversed their buybacks (12.35% of the action this quarter vs. 28.68% in Q1 2007) and increased their share count in order obtain capital
Dividends however are a check in the main that I will cash and more importantly that I will expect to get next quarter
Bottom line – I want to be a believer in buybacks, but dividends pay the $4 gas pump
June 16 quarterly update releasehttp://www2.standardandpoors.com/spf/pdf/index/061808_SP500_BUYBACK_PR.pdf?vregion=us&vlang=en
April 16 full report
http://www2.standardandpoors.com/spf/pdf/index/040708_SP500_BUYBACK_PR.pdf
Ready for a 300-point Drop in the S&P 500?
June 18th, 2008 | Posted by stockA Royal Bank of Scotland credit strategist, Bob Janjuah, rattled investors around the world today with predictions that the S&P 500, now trading near 1340, could plunge to 1050 by September, as “‘all the chickens come home to roost’ from the global boom.”
“A very nasty period is soon to be upon us — be prepared,” he said, according to the Daily Telegraph.
Bits and pieces of Janjuah’s warning to RBS clients seem to be floating around the Internet. However, RBS spokespeople said the note was for RBS clients only. They said they couldn’t provide me and other members of the media with a full copy of the report. An RBS representative implied Janjuah was definitely speaking for himself and not for the bank as a whole.
Based on what I have seen, Janjuah’s argument is that the European and U.S. economies will show a lot of weakness this summer. That will put the U.S. Federal Reserve and possibly the European Central Bank in a bind: If they raise interest rates, they would slow an already weak economy right before a U.S. presidential election. If they don’t hike rates, they would allow inflation to increase uncontrollably. Unchecked inflation would seriously disturb the world’s investors.
Janjuah reportedly wrote:
The Fed is in panic mode. The massive credibility chasms down which the Fed and maybe even the ECB will plummet when they fail to hike rates in the face of higher inflation will combine to give us a big sell-off in risky assets.
If that sounds a little overblown and hyperbolic to you (“panic mode,” really?), I agree. But it seems fitting for a guy who is predicting one of the biggest stock meltdowns of all time.
Should investors take this seriously? The dilemma for central bankers that he describes is real. Janjuah reportedly predicted the credit crunch in 2007, which gives him some credibility. But some are skeptical of him, namely the mysterious StockJockey at 1440 Wall Street: “While Americans have an addiction to oil, Bob Janjuah is addicted to making high profile market predictions that draw attention,” he wrote.
In the interests of a good night’s sleep, here are a few reasons Janjuah’s nightmare might not come true:
1. The price of oil could drop or even stabilize, easing inflationary pressures.
2. While oil and other commodity prices could continue rising in price, labor costs (which make up a huge portion of corporate expenses) could remain stagnant. Rising prices and stagnant wages will be no fun for American or European consumers, but that could keep inflation in check.
3. The European and U.S. economy could be growing fast enough to allow the Federal Reserve to safely raise rates later this year. Or the Fed would risk a mild recession to get a handle on inflation.
Anyway, Janjuah’s worries can’t be dismissed out of hand. But unless he’s a psychic, there are a lot of other ways the future could unfold.
UPDATE: I notice BW colleague Lauren Young simultaneously blogged on Janjuah’s warnings from a different angle below. Check it out…
Diversity: Don’t Innovate Without It
June 17th, 2008 | Posted by innovA white guy, a white guy, and a white guy walk into a bar…did we lose you yet?
Thought so. Nothing interesting was going to come from that joke. Humor works when you have an unexpected, compelling outcome. So does the innovation process. In fact, that’s the goal, and it’s often achieved by adding diversity—getting the ideas of people of different ages, genders, races, and ethnic backgrounds; people with varying perspectives, personalities, experiences, mindsets, etc.
But when most think about the topic of diversity, it is invariably in terms of “inclusion,” “multicultural acceptance,” and “global integration.” All of those have tremendous merit, but why the heck, when you hear the word “diversity,” are you suddenly thinking like someone who has Equal Employment Opportunity responsibilities? Yes, your company does, but you are responsible for hardcore growth results: marketing, and new product development.
So start thinking about diversity that way. And if you do, you will elevate the value of diversity far beyond the words in the employee handbook. In fact, you are bound to come up with: Diversity=Sustainable Competitive Advantage. (This, of course, is the Holy Grail.)
Don’t take our word for it. Some of the best, and most innovative, companies—Booz Allen Hamilton, Deutsche Bank (DB), DuPont (DD), Pfizer (PFE), and Raytheon (RTN)—believe diversity to be one of the invaluable ingredients that leads to sustainable competitive advantage.
The argument breaks into three parts:
1. Understanding. If your workforce mirrors the diverse demographics and cultural aspects of your customers, you are bound to have a better understanding of your audience. (Providing you encourage all those unique voices to contribute. If all you are doing is counting heads—”let’s see we employ 53% women, 11% blacks, 16% Hispanics…yep, we’re covered; now let’s have the same old people at the top make all the decisions as they always have in the same old ways”—you have not gained a thing.)
2. Credibility. If your workforce looks like the people you are trying to reach, you increase the odds of closing the sale. Let’s use a simple example to make the point. From whom would 22-year-old guys want to buy their $85 athletic shoes? A 63-year-old grandmother or a 22-year-old guy?
3. Connectedness. And if your workforce is the same as the people you are trying to reach, you are bound to be closer to them at all times, which give you a leg up on the competition.
The takeaway is clear: Diversity makes a company more capable—because you are adding more skills, and smarter—because you are drawing on more, and different, brains.
Innovation success is driven by the ability to make connections (BusinessWeek.com, 4/10/08). Most connections that lead to meaningful innovations are part of your current perspective or world view. (Want proof. Sit down and a draw up a list of all the things you have never thought of.)
That’s where the benefit of diversity comes in. It provides a different lens that allows us to see the world in a different way. The more (different) inputs we have to work with, the better chance we have to make connections.
So you can see how innovation can actually be fueled by diversity. Too abstract? Okay how about some numbers, courtesy of The New York Times?
Hispanics, African Americans, and Asian Americans now constitute almost 30% of the country’s population, or 85 million people. These three groups, taken as a whole, already represent the majority in the 10 largest U.S. cities. They are also the fastest-growing populations in 50 of the top urban areas. Since 1999 they have become, for the first time in history, the majority group in California, which is the largest and most powerful consumer market in the U.S. Across the country, they command over $1.5 trillion in annual purchasing power. By the year 2050, these same groups will tip the scale from minority to majority.
Wouldn’t you want to know what it’s going to take to get all those people to buy from you? Shouldn’t you be tapping into their thinking? Talent, brains, curiosity, and creativity are all race/gender/ethnicity agnostic, and an indispensable part of your innovation success. We recommend you don’t innovate without as many different viewpoints as possible.
That—and not some government mandate—is why diversity is important. (Sorry for the bad joke at the beginning.)
June 17th, 2008 | Posted by stockThe reference is a little dated, but you could call La-Z-Boy (LZB) a “Rodney Dangerfield” stock. From the perspective of long-term investors, the furniture company seems to be doing a lot of things right: It is reorganizing its distribution system, remodeling stores, introducing new furniture products, and, more controversially, moving much of its production to Mexico and closing a Utah factory. Yet on Wall Street, La-Z-Boy gets no respect.
The furniture firm is suffering from the terrible housing market, of course, for which it can blame the 9 cents per share loss it reported on June 17. However, analysts have told me that many of its problems — increasingly unfashionable products, higher costs than overseas competition — actually pre-date the housing slowdown.
La-Z-Boy is stuck trying to undertake an overhaul at a very bad time.
On June 17, traders actually sent La-Z-Boy stock 2.24% higher, to 6.84. They were perhaps pinning hopes on management’s projections of a small profit next year. However, La-Z-Boy execs still expect sales to fall another 3% to 7% in the next year. The stock is down 42% in the past year.
Until housing bounces back and furniture sales rebound, La-Z-Boy is unlikely to get much credit for even the best new products or the smartest restructuring plan.
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