Taxes, Regulation, Stocktwits, China
– Raising taxes in a recession, they tried it last in…..? 1937, how did that work out?
– This always seems to go overboard
– Will Wal-Mart’s “green push” end up enhancing the “Made in China” brand?
Disclosure (“none” means no position):
In a just released SEC filing…Sears Holdings (SHLD) Chairman Eddie Lampert’s ESL Investments and RBS Partners sold another 175k shares of AutoZone (AZO) and an avg. price of $157 a share
I will reprint a previous post here as to my reasoning for the sale
Remember this agreement from last year?
AutoZone also announced that it has entered into an agreement with ESL Investments, Inc. (with its affiliates, “ESL”) setting forth certain understandings and agreements concerning ESL’s continued investment in AutoZone. ESL currently owns approximately 36.2% of the outstanding AutoZone common stock. Pursuant to the agreement with ESL, the Company has agreed to use its commercially reasonable efforts to achieve at least the new 2.5x adjusted debt / EBITDAR leverage metric by the end of the Company’s second quarter fiscal 2009.
“We are very pleased to have reached this agreement with our long-term and significant stockholder, ESL, which was motivated, by our desire to continue to return excess capital to stockholders in the context of appropriate, mutually agreed governance arrangements,” said Bill Rhodes AutoZone’s Chairman, President and Chief Executive Officer. “We appreciate ESL’s belief in the Company and its management over the past eleven years and look forward to its continued involvement in helping us achieve our goals for the benefit of all stockholders.”
The agreement with ESL provides, among other things, that, should ESL’s percentage ownership of Company shares increase above certain thresholds, ESL will vote its shares owned above such thresholds in the same proportion as shares unaffiliated with ESL are actually voted. The initial threshold is 40%, which will reduce to 37.5% following the 2009 annual meeting of stockholders. The agreement also states the Company’s intention to add three directors in the near future, two of whom will be identified by ESL for consideration by the Company’s Nominating and Corporate Governance Committee, thereby increasing the Board’s size to 12 members. Thereafter, the Company expects to reduce the Board’s size to 10 members in conjunction with the 2008 annual meeting in December. The agreement also contains certain other protections for non-ESL affiliated shareholders as well as for ESL.
The agreement with ESL or certain of its provisions will terminate, except as the parties otherwise mutually agree, upon the earlier of the date upon which the shares (a) owned by ESL constitute less than 25% of the then outstanding shares or (b) owned by ESL constitute more than 50% of the then outstanding shares, provided that ESL has acquired subsequent to the date of the agreement additional shares representing above 10% of the then outstanding shares.
Then his news from last week?
AutoZone Inc (AZO.N), the leading U.S. auto parts retailer, said on Wednesday its board had authorized another $500 million to buy back common stock.
Shares in the Memphis-based company have gained almost 12 percent since the start of the year as the U.S. recession has prompted more consumers to drive cars longer and shop for better deals on replacement parts.
“AutoZone’s strong financial health has allowed us to continue to repurchase our stock while operating within our targeted leverage metric,” said AutoZone Chief Financial Officer Bill Giles said in a statement.
In late May, AutoZone posted a 9-percent gain in profit that topped analyst estimates.
Billionaire investor Edward Lampert and his ESL Investments owns about 43 percent of AutoZone (prior to recent sale). Lampert is also the largest shareholder in AutoNation (AN), the largest U.S. auto dealership chain.
So, Autozone is upping its leverage ratio and using it to repurchase shares. Lampert’s recent sale lower his ownership to below the 37.5% threshold so he may vote his shares as he wishes and maintains board representation.
What happens now? As Autozone completes their repurchase (approx $600m left) they will have reduced the outstanding shares (at today’s prices) by 7.5%. That sale also triggered a 6% drop in the stock price so that $600, will repurchase moire shares. In essence, Lamper sold shares for a nice profit and then Autozone will repurchase shares to increase his ownership once again back to the mid 40% range.
Why not hold them to get to the 50% threshold? The agreement above requires Lampert “to acquire” additional shares to the gain benefits from being at/above 50% in terms of voting. One can only assume he sees no “value” in shares at these prices (they aren’t) and therefore does not want to buy more. Doing it this way he can free up capital and have the company maintain his ownership level for him.
Nice….
On another note, Autozone, in my opinion is nearing an earnings peak. With auto sales at decade lows they have benefited from the repair biz. If “cash for clunkers” does increase sales as predicted by AutoNation CEO Mike Jackson, that will directly negatively impact Autozone’s biz. Perhaps another reason Lampert is not buying more???
Disclosure (“none” means no position):Long SHLD, none
Had a post from “Davidson” yesterday regarding inflation and bond vs equity returns. It illicited several responses on twitter that many folks, contrary to the results of the post would rather own equities in an inflationary environment than bonds.
True, and not. It goes to degree. In a low inflationary environment, asset inflation favors equities at the expense of fixed income bonds. BUT, as the post yesterday demonstrated, in times of “hyper-inflation” ie: The 1970’s, inflation’s destructive effect systematically reduces equity values, making the fixed income bond and its guaranteed return of principle more valuable.
My fried on twitter @zippertheory provided the following statistics:
Of the he stated:
As you suspected stocks get crushed in hyper inflation due to P/E compression (as you know discount rate increases dramatically killing all terminal values). I can only presume that if CPI is above 7% commodities/Gold and anything that resembles a natural resource would flying.
I’ve as included a handy chart from the book Unexpected Returns by Easterling that better illustrates my aforementioned point.
The chart (click to enlarge):
So the evidence is pretty clear that 4% inflation seems to be the magic number at which a weighting from equities to bonds ought to take place in one portfolio. The question then remains to be answered, “what effect will the unprecedented monetary expansion have on inflation”?
If you believe it will cause hyper inflation, it it time to begin researching bonds. With corp. bonds currently yielding 7% to 9% for very safe companies, it does put pressure on the return you need from equities when you consider the additional risk.
Note: A bond/stock hybrid can be also accomplished with high dividend paying stocks, for instance, a stock yielding 4% need only appreciate 3% to 5% to equate to the bond yields. Just make sure the dividends are safe….we have had a score of cuts the last year although it would seem the worst of them has passed
Personally I find it hard to believe the actions taken recently leave us with the rather benign 2% long term inflation rate the Fed predicted yesterday. It doesn’t match up with history.
That being said, for me it looks like 2%+ which means down the road I am going to be looking at some bonds….
Disclosure (“none” means no position):
“Davidson” submits:
First Read the following story from the WSJ:
China’s Iron Hand Comes Up Against Market
By CHUIN-WEI YAP
For China, there’s just seven points between national pride and market savvy.
Some of the bluest of China’s blue-chip steel mills have struck deals with major iron ore suppliers, accepting a provisional 33% cut to last year’s price.
This is the beginning of the end of an annual closed-door ritual that sets sale terms for one of the world’s most important industrial commodities.
This year, the negotiations have become particularly tortuous as China, the world’s biggest iron ore consumer, squared off with heavyweight miners, in hopes of getting a discount of 40%.
The acceptance of the smaller cut signals a fissure between the country’s steelmakers and the Chinese government, which together with the steel association heading the iron-ore price negotiations, has resisted any compromise.
The steelmakers say the latest deals are just temporary, and any difference will be refunded once China’s terms are set.
But their message is clear: Those who negotiated on their behalf miscalculated.
Analysts say the Chinese should have a struck a deal in February when the domestic economy was weak enough to warrant steeper discounts from miners. Steel prices in China have been rising for more than two months.
Certainly, Beijing’s decision to arrest four employees of the Anglo-Australian miner Rio Tinto hasn’t helped the country’s cause. The arrests are now widely accepted as linked to the iron ore price standoff.
As far as prices are concerned, Chinese officials are already softening their stance, saying they are willing to settle for a discount between 33% and 40%.
Now all the miners have to do is stand pat.
Craving certainty the Chinese market has spoken out — it is willing to settle for 33%.
Of the news, “Davidson” opines:
Free Market Continues to Take Control in China
This speaks volumes. The command economic tactic, i.e. dictated by political leaders, to negotiate iron ore discounts of 40% from suppliers has had to make way for the free market which dictated a 33% discount. Rather than following government guidelines the top steel makers seeing prices rise with world demand decided to take contract decisions back into their own sphere of influence and ignore the bureaucrats and the top down instruction.
This is what brings about democracy and free markets. That this happened in China speaks volumes as to the sea change which began in 1979 when Deng Xiaoping launched his economic reforms and continues. See the attached BusinessWeek article of September 27, 1999, “China’s New Capitalism”
Stories of single events such as this one which details the transfer of power from the political sphere to the free market have enormous impact to building free markets and democracy around the world for the long term.
For those who question the viability of the global economy, fear the future and the next bank failure, this report if read in the context of the BusinessWeek article should generate much enthusiasm for the future. When investing, I advise having both a “Top Down” and a “Bottom Up” methodology with the goal of grasping an understanding of as much of the global market as possible and with this the critical investment themes.
Disclosure (“none” means no position):
“Davidson” submits:
First Read the following story from the WSJ:
China’s Iron Hand Comes Up Against Market
By CHUIN-WEI YAP
For China, there’s just seven points between national pride and market savvy.
Some of the bluest of China’s blue-chip steel mills have struck deals with major iron ore suppliers, accepting a provisional 33% cut to last year’s price.
This is the beginning of the end of an annual closed-door ritual that sets sale terms for one of the world’s most important industrial commodities.
This year, the negotiations have become particularly tortuous as China, the world’s biggest iron ore consumer, squared off with heavyweight miners, in hopes of getting a discount of 40%.
The acceptance of the smaller cut signals a fissure between the country’s steelmakers and the Chinese government, which together with the steel association heading the iron-ore price negotiations, has resisted any compromise.
The steelmakers say the latest deals are just temporary, and any difference will be refunded once China’s terms are set.
But their message is clear: Those who negotiated on their behalf miscalculated.
Analysts say the Chinese should have a struck a deal in February when the domestic economy was weak enough to warrant steeper discounts from miners. Steel prices in China have been rising for more than two months.
Certainly, Beijing’s decision to arrest four employees of the Anglo-Australian miner Rio Tinto hasn’t helped the country’s cause. The arrests are now widely accepted as linked to the iron ore price standoff.
As far as prices are concerned, Chinese officials are already softening their stance, saying they are willing to settle for a discount between 33% and 40%.
Now all the miners have to do is stand pat.
Craving certainty the Chinese market has spoken out — it is willing to settle for 33%.
Of the news, “Davidson” opines:
Free Market Continues to Take Control in China
This speaks volumes. The command economic tactic, i.e. dictated by political leaders, to negotiate iron ore discounts of 40% from suppliers has had to make way for the free market which dictated a 33% discount. Rather than following government guidelines the top steel makers seeing prices rise with world demand decided to take contract decisions back into their own sphere of influence and ignore the bureaucrats and the top down instruction.
This is what brings about democracy and free markets. That this happened in China speaks volumes as to the sea change which began in 1979 when Deng Xiaoping launched his economic reforms and continues. See the attached BusinessWeek article of September 27, 1999, “China’s New Capitalism”
Stories of single events such as this one which details the transfer of power from the political sphere to the free market have enormous impact to building free markets and democracy around the world for the long term.
For those who question the viability of the global economy, fear the future and the next bank failure, this report if read in the context of the BusinessWeek article should generate much enthusiasm for the future. When investing, I advise having both a “Top Down” and a “Bottom Up” methodology with the goal of grasping an understanding of as much of the global market as possible and with this the critical investment themes.
Disclosure (“none” means no position):
Regular readers will not be surprised by this news. Is it over? Not by a long shot…
From RealtyTrac:
IRVINE, Calif. – July 16, 2009 – RealtyTrac® (realtytrac.com), the leading online marketplace for foreclosure properties, today released its Midyear 2009 U.S. Foreclosure Market Report, which shows a total of 1,905,723 foreclosure filings — default notices, auction sale notices and bank repossessions — were reported on 1,528,364 U.S. properties in the first six months of 2009, a 9 percent increase in total properties from the previous six months and a nearly 15 percent increase in total properties from the first six months of 2008. The report also shows that 1.19 percent of all U.S. housing units (one in 84) received at least one foreclosure filing in the first half of the year.
Foreclosure filings were reported on 336,173 U.S. properties in June, the fourth straight monthly total exceeding 300,000 and helping to boost the second quarter total to the highest quarterly total since RealtyTrac began issuing its report in the first quarter of 2005. Foreclosure filings were reported on 889,829 U.S. properties in the second quarter, an increase of nearly 11 percent from the previous quarter and a 20 percent increase from the second quarter of 2008.
“In spite of the industry-wide moratorium earlier this year, along with local, state and national legislative action and increased levels of loan modification activity, foreclosure activity continues to increase to record levels,” noted James J. Saccacio, chief executive officer of RealtyTrac. “Unemployment-related foreclosures account for much of this increased activity, and the high number of borrowers who find themselves owing more on their mortgages than their homes’ are now worth represent a potentially significant future risk. Stemming the tide of foreclosures is a critical component to stabilizing the housing market, so it is imperative that the lending industry and the government work in tandem to find new approaches to address this issue.”
Now, part of the surge is the floodgates being opened by to foreclosure moratoriums being lifted by Wells Fargo (WFC), JP Morgan (JPM), Bank of America (BAC) and Citi (C). The simple truth is those actions only delayed and did not prevent the inevitable action.
We know unemployment will continue to rise in the coming months, significantly. For that reason alone we will see increased foreclosure activity. Add to this the coming option-ARM reset and we have many more foreclosures in the future……many more.
The silver lining is for those looking to buy a property or a vacation place, prices are going to continue to become more attractive.
Disclosure (“none” means no position):Long WFC, none
Idiot, Google, Oil, Stocktwits TV
– What else is there to say about this?
– I’d use it…there will be a day not to soon where I tell Verizon where to stick their land line
– Demand expected to resume in 2010
– This is a must watch folks
Disclosure (“none” means no position):
Idiot, Google, Oil, Stocktwits TV
– What else is there to say about this?
– I’d use it…there will be a day not to soon where I tell Verizon where to stick their land line
– Demand expected to resume in 2010
– This is a must watch folks
Disclosure (“none” means no position):
Two things on this:
1- Target (TGT) management has proven once again to be a step behind that of Wal-Mart (WMT)
2- There are no altruistic intentions here…..
From Dow Jones:
NEW YORK (Dow Jones)–Target Corp. (TGT) may join Wal-Mart Stores Inc. (WMT) in supporting the U.S. government’s drive to require all large companies to provide health care benefits to their workers.
The nation’s second-largest retail discounter behind Wal-Mart supports the program “in concept,” but would have to see the final language of any legislation to formally back it, Target spokeswoman Kay Rubbelke said.
Target has met with a number of different groups throughout the Senate and House to discuss the employer mandate proposal, Rubbelke said.
Rubbelke’s comments follow Wal-Mart’s creating a firestorm at the beginning of July by breaking with most other retailers to support the congressional proposals, which are part of President Barack Obama’s roughly $1 trillion effort to see that just about all Americans receive health-care coverage.
The so-called employer health care mandate is seen by the retail industry in particular as too onerous, given retailers’ reliance on legions of low-payed employees and the industry’s high turnover rate. Retailers say that meeting the mandate could force layoffs to pay the extra expense of coverage.
The National Retail Federation, the retail industry’s main trade group, is strongly lobbying against mandated coverage and has already fired back at Wal-Mart, asking members to strongly oppose its support.
The NRF has also spoken with Wal-Mart about its move and would likely approach Target if the retailer went the same route, said Neil Trautwein, the NRF’s chief health-care lobbyist.
Target, which like Wal-Mart, is not an NRF member, would be “embracing an ideal that is bad for the rest of retail and the rest of the general community,” if it ends up supporting mandated coverage, Trautwein said.
Target currently offers a number of health care plans with different levels of coverage and the majority of its eligible employees participate, Rubbelke said.
Target, like Wal-Mart, also operates in-store health clinics and pharmacies that could benefit from greater healthcare coverage.
Wal-Mart also operates a prescription program for employees of Caterpillar (CAT) and wants to expand it to other companies.
The health care mandate the House of Representatives is looking at would require most employers to provide workers with basic benefits or pay 8% of their payroll toward helping the government get them coverage, with potentially a lesser percentage for smaller employers. Measures that two Senate committees are considering would penalize most employers that don’t participate in the mandated coverage, Trautwein said.
Like I said when Wal-Mart made the first forray into the debate,:
Wal-Mart provides health care to it employees. Much of the competition does not. Should they then be required to, their cost basis for their business suddenly rises…considerably. Should that happen, in order to offset their new cost increases two things must happen. Either they offset it with pay freezes or reductions for new hires OR increase their prices to consumers.
Either scenario aids Wal-Mart immensely as it slows growth in their payroll and/or increases their competitive price advantage over the competition.
The same hold true for Target.
Were I a Target shareholder, I would be more than annoyed, especially given the recent contentious proxy battle that management is still reacting to Wal-Mart, not taking a leading role growing the business.
How? Target and Wal-Mart both stand to benefit substantially with increase health care coverage. Yet it is Wal-Mart in the forefront taking steps on the issue to capture that business, with Target now tagging along in a “oh yea, we could make money in that” moment.
I am making no opinion as to the national program, its costs/benefits etc to the economy as a whole. Regular readers can probably make an accurate guess where I come down on it. It does seem likely something is coming and were I a Target shareholder, I’d like to think my company would be out in front of the debate as a possible huge beneficiary.
Sadly, that does not seem the case…
Disclosure (“none” means no position):Long WMT, none
For those who do not wish to read, here are the crib notes:
Disclosure (“none” means no position):
“Davidson” submits:
Below is a chart of the SP500 Index and that of Barclay’s Intermediate Term Corporate Bond and Long Term Corporate Bond Indices. The simple answer to which did better was bonds. This because 1) when investors panicked they sold stocks and went to bonds thus keeping values high/yields lower than the rate of inflation and 2) bonds have maturity dates on which principal is returned. Bonds preserved value.
Stocks’ response to inflation was to fall till the earnings yield rose to compensate.
During the ‘70’s stocks earnings yields rose to 14% causing stocks to fall from the 20 P/E level of the ‘60’s to 7 P/E. This equated to a 67% decline in valuation and thus stocks under-performed bonds throughout the ‘70’s. See chart.
Disclosure (“none” means no position):
So Sears Holdings (SHLD) and Eddie Lampert are trying something else unique.
Time Reports:
Sears Holding Corp., which runs both the Sears and Kmart department stores, is running a Christmas promotion a full five months before Saint Nick leaves the North Pole with his reindeer. On both the sears.com and kmart.com homepages, customers are invited to “Shop Christmas Lane,” and are directed to deals on holiday ornaments, stocking stuffers and other winter-related merchandise. The Christmas goods will also be on display in 372 Sears stores throughout the country; the promotion runs through July 25.
With temperatures simmering and families spending summer days at the shore, most customers aren’t exactly in the Christmas spirit. So what convinced Sears, which has seen nothing but annual same-store sales declines at both its namesake and Kmart stores over the past four years, that skeptical shoppers want to open up their wallets for Christmas gifts now? “After the last holiday season, customers told us that they wish they had seen some of our merchandise earlier,” says Natalie Norris-Howser, a Sears spokeswoman. “People are buying earlier today. Also, customers have grown accustomed to the Christmas-in-July terminology, so we wanted to leverage that.” Norris-Howser also pointed to the company’s generous layaway offers for bigger-ticket items as an incentive for shoppers to do their holiday buying today.
In today’s environment, any move that attracts attention might be worth it. “Overall, it seems to be a pretty smart strategy,” says Pete Blackshaw, a brand strategist for Nielsen Online. “Doing it on the Web makes a world of sense. They are clearly getting some buzz, there’s a novelty effect. At a time when everybody is going to be competing around November to get attention, this is a good opportunity to potentially get in front of the line.” Blackshaw, who monitors how brands are perceived in the social-networking sphere, says the Christmas marketing has gotten positive feedback on Twitter.
The first reaction I had was…..WTF? But after think it through for a bit, I then thought, why not? Christmas is always a shopping must for folks, why not provide them easy access to its specific items well before the event? Every year retailers begin the holiday shopping season earlier and earlier, Sears just got the jump this year.
Put it this way, what does Sears have to lose? Nothing. Here what the move also does, it gives Sears a unique place in the mind of consumers. It goes to “top of mind” awareness. What Sears is doing is pounding away the message “Sears=Christmas”. After consumers hear it enough, when it comes time to do the shopping for the big day, they then are more likely to visit Sears either in the stores OR online.
Given what Sears has done with its website, drawing people to it is sure to increase sales via that channel.
This is keeping with Lampert’s strategy. It is a cost effective way to differentiate Sears from the rest of the retail pack. If it flops, there is little lost and if it is a hit (like last year’s early entry into layaway) the upside is huge.
The easiest way to judge it success since Sears does not talk much to the press is to watch Wal-Mart (WMT) and Target (TGT). If they begin copy cat programs, it will only be because they see Sears having success with it.
Disclosure (“none” means no position):Long SHLD
For my money, this is the premier value investor event. Yeah, I know Berkshire (BRK.A) and Buffett have the “Woodstock for Capitalists” every year but let’s be really honest, by the time it is held, Buffett has been on TV 50,000 times that year and there isn’t really anything he says there that is “new”. Yes it is a great event (have been before) but as far as an event that provides actionable ideas in the value setting, it just isn’t it.
The Value Investing Congress in just that event.
Here is the current speaker lineup…
For the record, other than attending the conference and being a huge fan of it, I have no affiliation with it at all.
I plan on attending again this year and blogging/twittering about it live….
With any luck I’ll nab an interview with one of the more prominent speakers….. hint,hint out there…
Disclosure (“none” means no position):
Dow Ag (DOW) is not acting like a company that is up for sale…
The Indianapolis Business Journal Reports:
Dow Agrosciences LLC said today it is acquiring the majority of assets of Illinois-based seed corn company Pfister Hybrids.
A sale price was not disclosed.
Under the terms of the agreement, Indianapolis-based Dow AgroSciences, a subsidiary of Dow Chemical Co. in Michigan, will acquire the Pfister brand and the sales and marketing areas, as well as the warehousing and administrative services. The Pfister brand will continue, and the company still will be headquartered in El Paso, Ill.
Pfister President Linda Brown will assume the title of general manager.
The addition of Pfister Hybrids will further expand Dow AgroSciences’ current seeds business in the United States as it anticipates introducing insect protection and weed control, and herbicide tolerance, technology within the next few years, the company said in a written statement.
“At Dow AgroSciences investing in innovation is the key to our future, and we look forward to building upon the Pfister tradition,” said Stan Howell, vice president, North America regional commercial unit for Dow AgroSciences.
Dow AgroSciences has global sales of $4.5 billion.
Pfister Hybrids was founded in 1936.
I’ve been adamantly opposed to a Dow Ag sale since it was first broached back in May. Since then Dow has risen funds through alternative channels and seems to be backing off the outright sale talk. These are all very good development.
So, what would be acceptable? A partial IPO of Dow Ag would do should it be absolutely necessary. What would be even better would be if they offered it to current shareholders first then sold any excess to the public (there would not be any).
Anyway, not often do we see a company about to be sold making acquisitions. That is the good news. It says to me that the “sale” of Dow Ag is becoming a more remote possibility as each days passes….
Disclosure (“none” means no position):Long Dow
Romney, McDonalds, Netflix, Adam
– The Onion does it again….
Mitt Romney Defends Himself Against Allegations Of Tolerance
– Wasn’t there a rap song … “this is how we do it…”
– I love Netflix and an Amazon/Netflix combo is a perfect match. That being said, Adam is always on top of anything options
– Adam on the SPY
Disclosure (“none” means no position):